American Minimultinationals and their US Tax Obligations

Large companies that operate in several countries are known as multinationals. A company that is US-based and operates in several countries is identified as an American multinational company. However, most people are quite unaware of the existence of mini-multinationals. Indeed, an American mini-multinational is also a US-based firm working internationally but its scale of operations is smaller as compared to a multinational company.

Exposure to the Taxation

Evidently, the taxation rules and regulation imposed by the US are quite harsh for both the individuals and businesses. FYI, the Internal Revenue Service (IRS) of the United States has the responsibility to collect the taxes and ensure tax codes are followed properly. When it comes to mini-multinationals, these businesses also need to pay taxes on their worldwide incomes just like any other US citizen. Consequently, it becomes essential for such foreign business entities to prioritize tax planning for minimizing their overall taxes. Additionally, It is important to note that businesses owned by US residents are eligible to pay income tax to IRS even if they are completely operating outside the US.

The method through which the IRS charge taxes from a mini-multinational is quite strange. Instead of levying taxes on the salary or the income of the owner, the US charges taxes on all the profits earned by the company. The US owner of the company will have to pay taxes even if he is not taking any profit from his overseas business.

For tax purposes, the IRS assumes all the profits generated by the foreign company as the income of its owner. The main disadvantage of such taxation is that the Us mini-multinational company might have to pay double taxes on the profits, i.e. to the US and the country where it is operating.

What a Minimultinational Owner Should Do?

Before deciding to invest money in setting up a foreign business, the owners of the mini-multinationals should explore different types of business structure that they can opt for and analyze them. The main motive of the research is to decide the structure that best suits the long term objectives and requirements of the owner/owners. Taking the help of a professional who is well-versed in such work will be a great idea.

Many multinational companies have employed a specific team of legal tax advisors that handles all the tax issues of the firm. However, it is quite obvious that a mini-multinational cannot afford a dedicated team for tax management and in truth, they don’t even need one. Instead, hiring a couple of tax advisors who have sound knowledge and experience in dealing such matter is the most practical solution. Apart from managing taxes, the legal tax advisors can also help a mini-multinational company to achieve considerable tax savings in the long-run.

Irrespective of the size, all US-based businesses that are operating outside their home country have to pay taxes on the profits that they generate. As a result, it is quite important for American mini-multinationals to manage their taxes in an effective manner. Without proper tax planning, the owners of the US mini-multinationals firms might have to pay a significant portion of their profit as taxes.

MatthewLedvina works as a cross-border tax adviser, with US taxation among his specialities. He has worked with many high-profile clients and high-net-worth individuals.