Five stages of a U.S. manufacturer’s foreign operations & their tax considerations

U.S. businesses are taxed on their worldwide income, and prior to the tax reform law passed in 2017 — commonly referred to as the Tax Cuts and Jobs Act (TCJA) — earnings of foreign subsidiaries were generally deferred from U.S. tax until repatriated to the United States.

That’s no longer the case. TCJA enacted various rules and regulations, including the global intangible low-taxed income (GILTI) tax. As a result, the opportunity to defer U.S. tax through the use of foreign companies when selling outside the United States has been significantly limited. TCJA also created new opportunities, however.

In this article, we’ll discuss the international tax considerations for the five stages of a U.S. manufacturer’s foreign operations:

1. Engaging in international sales
2. Using a salesperson in a foreign jurisdiction
3. Creating a foreign sales and marketing organization
4. Conducting distribution activities
5. Establishing foreign manufacturing

While not every company will follow these five steps, they represent a possible progression pathway for a U.S. exporter increasing its foreign presence. With each change in business, there are tax opportunities and challenges to be taken into account. While some of these are particular to a certain activity, others exist regardless of activity type.

Engaging in international sales

Typically, a U.S. company’s first international expansion involves selling U.S.-manufactured goods directly to a foreign customer. When initially selling outside the United States, there are three key opportunities to consider.

Creating an IC-DISC