tax and business plan for an offshore company

We always say taxes shouldn’t drive the business… don’t let the tail wag the dog. But, most clients take their business offshore because they want to lower costs – both tax and overhead. If you didn’t want to cut costs and improve the bottom line, you would stay where you are in the United States.

When considering your overhead, focus on employees. Most countries will have lower wages than the US. The issue will be finding quality English speaking workers. How difficult that will be will depend on the level of work you require.

If you’re running a call center, then finding workers will be easy. If you are moving a software development business abroad, or require skilled engineers, finding the right people will be a challenge.

Then there are two types of tax plans. One for small businesses focused on the Foreign Earned Income Exclusion and a second for larger businesses that uses a transfer pricing model.

The Foreign Earned Income Exclusion plan is relatively simple: live outside of the US for 330 out of 365 days, or become a resident of another country, and you get up to $101,300 in salary from your offshore business tax free. If a husband and wife both operate the business, then you get up to $200,000 free of Federal Income Taxes.

Taking a large business offshore is a complex matter. Companies with net profits of $1 million and up need a more robust tax plan. This is especially true if you will have offices in the US and offshore.

These companies go offshore using a transfer pricing model that assigns income to the foreign subsidiary based on the amount of value added by that division. Likewise, the US group is taxed on value they create.

Let’s say you’re selling a widget for $100 that costs you $10 to make. Of this $90 profit, half can be reasonably attributed to the work done offshore and half to the US team. Thus, $45 of the profit is “transferred” the the low tax jurisdiction and half remains in the US.

• For an article on taking your business offshore using the Foreign Earned Income Exclusion, see my post Move Your Internet Business to Cayman Islands.
• For an article comparing the FEIE to the transfer pricing methodology available in the US territory of Puerto Rico, see Puerto Rico Tax Deal vs Foreign Earned Income Exclusion.