The day of accounting firms handling exclusively regional business has passed. As our small world becomes smaller, firms must be prepared to perform accounting for international businesses, especially ones with U.S. subsidiaries. For these companies, U.S. entity structure and tax planning are key to effectively managing global tax exposure. To stay ahead in the game, accounting and tax professionals must keep up in several key areas.
U.S. tax laws are a complicated puzzle
In many ways, the United States is a unique country because it includes 50 self‐regulating states that also fall under a common umbrella of federal regulations. This arrangement results in heightened complexities when a subsidiary of an international business has branches in different states, or uses remote and contract workers.
Given our country’s unique structure, it’s important that companies comply with federal and state tax codes. According to the Office of Management and Budget estimates, 36% of 2023 tax revenues will come from payroll taxes; 50% from individual taxes, including taxes from pass-through entities; and 9% from corporate tax.
If a business wants to be compliant and avoid issues, legal teams and accountants need to be on the same page. For example, the last thing firms want is to have to scramble to determine if a remote worker’s payroll tax in California for a subsidiary based in New Jersey was filed correctly.
Modern accounting requires fluency in U.S. GAAP and IFRS
While U.S. based accountants are familiar with U.S. generally accepted accounting principles (GAAP), more than 110 other countries follow International Financial Reporting Standards (IFRS). The high-level differences between the two practices are that IFRS is more principles‐based, flexible, and requires fewer disclosures. In this regard, international businesses might be unprepared for the detailed, rules‐based nature of GAAP.
Companies need an accounting team that is well versed in GAAP and IFRS when working with U.S. subsidiaries of international organizations.
Identifying the right one‐stop shop is critical
Clearly, there are many important considerations for handling an international subsidiary’s U.S. accounting. To be compliant, some companies establish an accounting department. However, a more agile and cost‐effective approach might be to outsource. This approach is particularly beneficial for matters such as implementing appropriate transfer pricing strategies for cross‐border intercompany transactions.
When international businesses take this approach, they often prefer a one‐stop shop that understands accounting, payroll, and federal and state tax issues. For example, a new U.S. subsidiary might quickly realize new revenue growth prior to finalizing its tax registration. This company could benefit from a low-cost provider that can assist with federal and state tax identification numbers.
It is also important to consider the options for capitalizing the startup operations of a U.S. subsidiary. These should be reviewed early on to manage the return on investment and impact on U.S. taxable income. It is difficult to overstate the value of working with a professional who has deep international tax expertise. Such expertise can minimize the risk of expensive penalties assessed for reporting deficiencies.
A quick setup is especially important for tech companies operating in a fast-moving industry. These businesses need to choose the right firm—one with experience, expertise, and tools to help their clients navigate domestic and foreign tax laws, international currency conversions, and other considerations. Even better is to find a firm that is cost effective and scalable.
Cloud‐based platforms: They’re safer than you realize
To successfully play in the international accounting arena, companies might need to rely on cloud‐based technologies. While that might seem like a risky proposition to many professionals outside the IT world, an on-site server in a company’s closet might be less safe than a secured cloud platform. Even sending physical checks can be riskier than using trackable online payments.
Beyond increased security, firms that currently rely on desktop software need to be ready to move to the cloud for another reason: Software companies increasingly are dropping support for legacy technologies. As a result, cloud-based accounting software developers are taking steps to make software more compatible with changing technology and security protocols.
DEI is key to success
Today’s companies might want to work with firms that demonstrate a commitment to diversity, equity, and inclusion (DEI). Such firms understand the value of a more diverse workforce, have access to a deeper talent pool, and offer a wider range of fresh perspectives and ideas. Embracing DE&I can build positive client-provider relationships by demonstrating the value of diversity to a multinational client base.
Firms of the future, today
No longer are traditional borders a limitation. Firms that are prepared to perform accounting and tax services for international businesses can better situate themselves for success.