As an Australian business expanding into the US you will need to consider US, Australian and international taxation issues. Depending on how your business is structured it may be required to pay taxes in both the US and in Australia. As a shareholder, you may also face tax obligations in both the US and Australia.
The first issue to address with International Taxation is the issue of residency. Your residency, and the residency of your company, is the primary factor in determining which tax jurisdiction has taxation rights over your income.
Both Australian and US residents are taxed on their worldwide income, which means it is important to understand the ways in which double taxation is mitigated.
If you set up a US structure to operate in the US, you will face Australian taxation consequences if the owners and/or managers of the business are Australian residents, and for any interactions you have between your US company and your Australian company.
Conversely, if you use your Australian company to operate a business within the US, you will need to consider the US taxation consequences due to the source of that branch income being in the US.
The primary way that double taxation issues are mitigated is through the International Tax Treaty between Australia and the US. When it comes to an Australian business operating in the US, some of the key factors that this Tax Treaty covers include:
- Business profits of an Australian enterprise are only taxable in Australia unless the enterprise carries on business in the US through a permanent establishment there. This means if you establish a permanent presence in the US, your business will be taxed under US regulations. A permanent place of business can be a broad term and may include:
- A physical place of business including offices, factories, branches, workshops, stores, a place of management, or other physical presence for business operations.
- A sales representative of your business who has a permanent establishment who conducts business deals for your business.
- A permanent provision of services in a specified location, even without a physical presence in that location.
- Transfer Pricing Rules mean that if you have a US entity and an Australian entity, any fees paid between these two entities must be paid on an arm’s length basis. This means there must be a business reason for the fees and a market value basis for calculation of these fees.
- Double taxation is mitigated by both countries typically allowing foreign tax credits to be applied against local taxes.
- The treaty also includes provisions for exchange of information and mutual agreement procedures to resolve disputes.
- A non-discrimination clause ensures that nationals of one country are not subject to taxation in the other country that is more burdensome than that imposed on nationals in the same circumstances.
The Tax Treaty also deals with withholding tax requirements for certain types of income. In some cases, these withholding requirements limit the amount of foreign tax that can be paid on the specified income types.
If a US corporation pays dividends to an Australian company that owns 10% or more of the voting stock of the corporation, the rate of US tax on the gross amount of the dividend generally cannot exceed 5%. For other dividends, the rate generally cannot exceed 15%.
For any Australian resident shareholders, this means you will pay either 5% or 15% in US taxes on any dividends distributed to you from your US company. This income is then included in your Australian tax return and you claim the tax paid as a foreign tax credit to offset the Australian tax assessed on this income.
Interest arising in one of the countries and paid to a resident of the other country generally may be taxed in both countries. However, the rate of tax imposed by the source country generally cannot exceed 10% of the gross amount of the interest.
As an Australian resident any interest income you receive from a US source will be taxed in the US at 10%. The US sourced income then needs to be included in your Australian tax return and you can claim the 10% tax paid as a foreign tax credit to offset the Australian tax assessed on this income.
Royalties arising in one of the countries and paid to a resident of the other country generally may be taxed in both countries. However, the rate of tax imposed by the source country generally cannot exceed 5% of the gross amount of the royalties.
As an Australian resident any royalties you receive from a US source will be taxed in the US at 5%. The US sourced income then needs to be included in your Australian tax return and you can claim the 5% tax paid as a foreign tax credit to offset the Australian tax assessed on this income.
International Tax Planning Strategies
Due to the potential complexities involved in dealing with taxes from multiple countries, and the rules and regulations of managing income from multiple countries, it is important to seek appropriate tax advice. International tax planning strategies allow you to optimise your global tax position by factoring in your options around the types of structure, business, and interactions that your business has in the US and in Australia.