How to Manage International Taxes
With major subsidiaries in the United Kingdom, France, Germany, and Japan, and competitors close on its heels, Physical Acoustics Corp. (PAC), a manufacturer of computers based in Lawrenceville, N.J., is committed to finding the best international tax strategies it can. Below, chief financial officer John C. Heenan's blueprint for success:
* Use local tax advisers. "Every country has a different set of tax laws on everything from income taxes to duties," warns Heenan. When PAC's U.S. office bills its Japanese subsidiary for consulting work, for example, the fees are taxed by both Japan and the United States; a similar transaction with the company's U.K. subsidiary, on the other hand, is taxed only by the U.S. government. (See "How Foreign Income Is Taxed," [Article link].) Rather than expecting his U.S. tax advisers to keep current on all international tax minutiae, Heenan uses his American contacts -- including CPA and law firms, bankers, and industry sources -- to help find qualified tax experts overseas.
* Appoint a U.S. executive to coordinate international tax policy. At PAC, Heenan is point man on international taxes, keeping the company's overall financial interests in mind while consulting regularly with local tax experts. He relies on his foreign advisers to keep him informed of key changes by telephone and written reports.
When he must recommend international tax policies to his company's CEO and board of directors, Heenan's primary aim is long-term consistency. "It could become very costly if each local operation had the autonomy to change its tax course every time quarterly subsidiary results came in," he says.
Having local tax policies and updates trickle up to one U.S. office makes it easier to plan corporate activities to maximize overall tax advantages. "We sometimes get tax savings by developing our computer software in France," says Heenan, because the French subsidize local software development with valuable tax breaks.
* Look for tax-advantaged opportunities that don't exist in the United States. Heenan has found especially valuable ones on the employee-benefits front: "As you get to know the tax laws of different foreign countries, you see many ways to motivate and reward key employees that aren't permitted in the United States." PAC, for example, can give European managers trips and company cars without subjecting those employees to the tax liabilities they'd face in the States. "In the United Kingdom, if one of my managers spends enough time outside the country working on sales, he can qualify for a fairly significant income-tax break because he is seen as working to enhance the export market," Heenan says.
* Keep international taxes in perspective. Heenan stresses that international tax regulations should not direct a corporation's overall business activities. "International taxes are just another financial factor we have to keep in balance to achieve our most important goal, which is to manage a growing and profitable international business." -- Jill Andresky Fraser