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International invoice format for non-profit organizations

[Music] excellent well good morning everyone my name is Shannon LeMond as Amy mentioned and I'm the partner in charge of our international tax services group here at Bailey today we're going to talk about nonprofit considerations for going global and of course this may seem a little bit like a stretch in these interesting times but I think that it also may require or it may be really a catalyst to going global so I hope that you are all doing well and we are going to talk through this these considerations we'll talk about just considerations in general sort of the non tech side of things for a bit and then also the tax considerations and of course I focused in the tax area international tax area and I support our not-for-profit group and in the work that they do as well and also get often get questions about the various topics that we will cover today of course if there are any topics that I do not cover I would love to get your feedback and see what else we should be covering in this presentation so please do let me know in the comments or ask your questions as we go along and then we'll also talk about compliance considerations especially given the very hefty penalties that couldn't come along with those so we'll cover those as well so I always like to start with thinking about well if the if you're not for profit is engaging in international activities what type of activities will there where it will there be the reason because is is that the tax considerations really are dependent upon what you are doing and so the different types of activities that we see are items such as hosting seminars or providing operational support or other NGOs outside of the US making grants as well and also licensing so all of those can have some some type of international implications in addition we've seen NGOs that are that need education for instance and so it requires that they set up an entity in a foreign jurisdiction and that can create some major complications and considerations both on the US side and to the foreign side and so we oftentimes will get involved with helping with the considerations there as well some considerations really on the non tax side that I wanted to talk through first of all we've talked about what products or services you you know you might be considering moving offshore or using offshore and so but there are a lot of other things that need to be considered so there'll be a lot of balls in the air so what we often find is that it's really important to consider what who is going to be involved so the people side of things what I find is that companies and not-for-profits are most successful when they have a key point person that is responsible for the expansion or that activity outside of the US somebody that's going to be involved from start to finish and getting everything set up managing all of the various other service providers that you might need such as attorneys accountants etc also location that's usually driven by whatever costs or whatever activity you are needing you made often times it is a demand from a certain jurisdiction and so you would look for that look at that location or it could be thinking about if you are expanding globally what would make sense in terms of where you can find talent etc as you move to another country you also need to make sure that you're covering the regulatory framework around your product or service that is moving to other country so making sure that things like licensing is done correctly that you've set up in the most appropriate manner manner for your organization and also you'll need to want to make sure that you have a good financial system to keep track of the activities of your organization outside of the US both for local purposes so if you end up having some sort of filing requirements in another location but also for the u.s. to properly report that on your 990 and I always always like to caveat here that really it's super important that you have legal counsel involved both in the u.s. and in the local country we've seen some some people stumble in thinking that the US attorneys can cover most of what they might need or what they need to be thinking about in the local country and that is not the case of course every country's laws are different and so it's really important to get good local country advice as well so thinking about grant making private foundations may either exercise the expenditure responsibility or obtain an equivalency determination when making grants to foreign NGOs and so I like to point out that public charities also are not subject to the same requirements but their boards have a responsibility for exercising reasonable care in making grants so in part to ensure that the grants are not diverted from their charitable purpose so ingly many lawyers representing public charities also advise that they follow the private foundation rules so I just wanted to point this out for those of you that are just looking at grant making outside of the US to make sure that you're involving the appropriate attorneys to make sure that you're covering your duty of care with respect to grant making all right so next I would like to talk through some of the test tax risks in considerations for expanding outside of the US for NGOs or not-for-profits so I even for for-profit and not-for-profit clients I like to bring up this triangle it really just solidifies the three prongs of considerations for moving into another country the first one being indirect tax so in the u.s. we have sales and use tax and outside of the US we have v80 or value-added tax and sometimes GST which is this and services tax both of those are very similar in their administration also individual tax so you have people likely that are going to another country or spending time in another country maybe to serve or maybe to provide administration etc and so you need to be thinking about their considerations and how that would impact them and that also ties into corporate tax so you know typically not-for-profits aren't going to pay corporate income tax unless they have some you be unrelated business income but unfortunately the not-for-profit status doesn't extend to if the if the not-for-profit or the company takes on an activity in another country and they do not have that same status there so well the ones the two that are gonna almost always need to be considered are the indirect in the individual tax and of course we need to be careful about corporate income tax and whether we can avoid it in some way or by you know planning it correctly or having the right activities or whether we can potentially even get enough for profit status in another country so the first usual step for a company to expand their activity into another country is to send people and I always like to think about okay that's usually the first step and what type of exposure could that reveal so when organizations are sending employees we need to be thinking about whether the employer has to withhold or foreign income tax and report foreign income or the employee also whether the employee has to file for an income tax return and pay foreign tax foreign tax also whether the organization has to register for business in foreign country and usually if you have employees in another jurisdiction you do and then also whether they need to comply with foreign tax filings and one of the things that I always want to be cautious about is creating a taxable presence that corporate income tax piece and sending employees overseas is one of the key ways that that happens and so we need to be very mindful of that so we'll cover corporate income tax first all right so the first step is determining whether your activity will cause a taxable presence in another country this varies by country and whether we have a treaty with that country so oftentimes number prophets are doing business or carrying on their activities and countries that we don't have a treaty with because that's really a lot of times where the needs are so the standard threshold to use for that is called a permanent establishment it's a term that is defined by income tax treaties but also applies without one in a lot of countries adopt this in their local law so that's a good term to become familiar with really a permanent establishment is a fixed place of business through which the business is carried on and the standard of PE seems to be changing a bit and it's there's a desire because there is a desire to tax based on where the consumer is or that because the economy has also gone digital they're trying to attract revenue and tax revenue based upon that other than having that fixed place so most of the US treaties will say that in order to create a permanent establishment or we call it PE for short you have to have that fixed place of business so you have to have you know some type of office it depends it could be that a home office would create a PE it's not typical but it could just depending on the country but keep in mind that this is changing very rapidly so it could be that in a few years other things could create a PE such as well they're calling it sort of that economic Nexus which is a term that's been used a lot for sales and use tax purposes but they're looking at that from oacd perspective they're looking at whether it makes sense have economic Nexus for a permanent establishment in our taxable presence or corporation tax purposes as well so in order to make that determination it's helpful to envision or your organization what activities will happen outside of the outside of the US in the short term but also having a view on the long term so it could be that you're you know providing those services or or you're providing materials for instance and whether you think that's going to be a long term or short term play plays into how we want to think about the set up for corporate income tax purposes so we talked a bit about the tax treaty application in this concept of PE or permanent establishment I also wanted to point out that there are certain countries such as Canada that also have a services PE concept meaning if you were to generate a certain amount of revenue from services in the country that could create a fixed place of business or create a PE also one of the things to consider in terms of PE and one of what can create a PE is if you have employees in the country that have the authority to and regularly enter into contracts on your behalf so we need to be careful even if there isn't a fixed you know physical location if you have that they can create what we call an agency relationship or a permanent establishment so that even if it's a you know they they don't have an office there you know maybe working from home but if they're concluding contracts on your behalf in representing you in that country that could create a taxable presence risk as well also I wanted to mention that there are other agreements to consider when you're entering into a new country in addition to tax treaties there are there are also agreements that can talk to whether an activity for governmental purposes for instance or educational purposes could create taxable presence or doesn't create taxable presence for sure so some of those agreements that you'll want to check into our technical cooperation agreements there's one with India for instance that says certain employees working for governments are not taxable strategic objective grant agreements also memoranda of understanding and there's also some NGO bilaterals so those are the types of agreements that you would want to do some digging into you oftentimes the if you're working with an attorney they can help manage whether any of these would apply for you as well some organizations are have developed a wonderful concept here in the US maybe it's an educational platform etc and they are looking to license it so we want to be even though you're not maybe physically going to have people or locations we want to be mindful of whether a licensing agreement could create taxable presence as well oftentimes those license fees that an organization would pay to you to use your platform are subject to withholding tax and that withholding tax can be as much as 30 percent for instance unless there would be in unless there might be a tax treaty to reduce it so it's something that you would want to think about if you're going to be licensing your platform your services to another country and they're making payments to you that could be subject to withholding tax and I say licensing but also this could apply to services so in many South American countries for instance if a resident organization is paying a service fee to a non-resident then there's a withholding tax and it's sort of their way of taxing that income even though you don't have a presence there and we don't have treaties with currently any South American country so that's something to me my mindful of when you're putting together those agreements to check to make sure to see whether the withholding tax might apply and if you're not paying tax in the u.s. of course that could mean that that is a cost to the organization and that brings us to our next polling question what type of activity do you foresee your organization engaging in if you are or planning on I'm going internationally alright so next I wanted to talk about the other side of the triangle one other side of the triangle which is indirect tax and I'm going to use the example of v80 because it's what most of the countries outside of the US have there Canada and Australia and New Zealand's have a GST so I'll use vit as my example but just note that a lot of these rules are similar for GST very similar for GST but of course they they all do vary by country so VI T is or VAT is similar to sales and use tax except in its administration so sales and use tax in the u.s. you generally think about that being applied only at the end consumer so if you are a business and you are doing a business business transaction generally you would not be required to collect sales and use tax on that transaction because you could get a resale exemption certificate the VI T is different in that it is collected all along the supply chain so let's say you are purchasing materials from a vendor and then you are selling them to a another organisation outside of the US in if the first transaction was also outside of the US in that case then it would be likely that you would have to pay the VI T to the supplier and then you would have to charge VI T to the customer so that is different than the u.s. and oftentimes that this is the part that trips people up keep in mind also that one difference is that sales and use tax generally isn't applicable to services but VI T is so you'll pay it on all the services and digital products that you encounter outside of the US so I'm going to just walk you through an example and this is an example really from a corporate perspective or a profit profit organization perspective but it also applies for not-for-profit so one of the questions we get off in our while we're selling to an NGO or we're providing this service to an NGO wouldn't that be exempt because their government and that's pretty typical for sales and use tax but not the case for v18 so keep in mind that that consumer there could be you know another NGO and outside of the US so this is how it would work we would have a say supplier provides goods to them to a manufacturer and in this case maybe it's brochures or something else that your organization needs to fulfill its mission and they would as they they as the supplier provides those supplies to the manufacturer they would add on to their invoice let's say that that rate is 20 percent $200 then what happens is that supplier then invoices the 1200 in remits 200 200 of it back to the government and then the same thing happens where the manufacturer has paid the $200 of di T so they have they have already paid it to the supplier they have they then sell their goods to a retailer they charge dat again 20 percent on the value of the goods at that point so it's increased they've add five hundred dollars of value to that good then they have to put on their invoice then the $300 so the net of those two the three that they have collected from the retailer and the difference between that and what they have already paid to the supplier gets remitted to the government so this goes on until we get to the end consumer so what would happen is at the end of the day what gets collected ultimately and paid back to the government throughout this whole process is the full 20% on the value of the goods that ends up in the consumers hands so then the next question that we ask ourselves is when will that indirect tax apply so keep in mind that it does apply to charities the treaties are not applicable to v80 so remember we talked about you would be required or potentially subject to corporate income tax if you had a permanent establishment or you had a physical presence those treaties are not applicable to indirect tax so the GST and the DAT also NGO goods and services may be zero or reduced rated so the these rules are very specific to the country and to the goods and services so just some examples of 0 rated Goods meaning you still have to register for and administer the vit but you would place a zero rate on honey's items those are things such as medical supplies and equipment Goods and AIDS for disabled people rescue equipment in vehicles such as ambulances and lifeboats scientific equipment advertising and construction and building work but keep in mind that these are just some examples and it's always best practice to in in up front find out whether your goods or services are going to be subject to DAT how they would be rated and then keep in mind that even though you may not have created a corporate income tax responsibility in another country the obligation to register and administer v80 happens generally way before corporate income tax so each country unfortunately has its own rules there are some very specific rules related to the EU and we could do a whole presentation on that it's it's quite complicated but just know that if you're going into a new country one of the first things that you will encounter is this indirect tax or vhe and you may be obligated to register collect and remit the vit even though you don't have a taxable presence therefore corporation tax purposes so next we'll talk through some of the individual tax considerations and I find that this is usually well vit is probably the most prominent but this is the second most prominent issue that we need to think about for the organisations as I mentioned before if you're sending individuals to another jurisdiction or it could be meeting with meeting with customers or other organizations some countries it's you know a very small threshold you could have an obligation to withhold just like you would if your employee was here in the US and report their foreign income so that's usually the hardest part about thinking well do I need an asset an entity or organization there in that country often times this is the consideration that drives that because the organization is going to have to register for income tax withholding for employees and then withhold and if that happens likely that's also going to come and bring into play the employees obligation to file for an income tax return in pay or income tax one thing that is very helpful is if you are doing business in your a jurisdiction where there is a tax treaty this can be helpful because in general if you go into a country where we have a tax treaty an individual would not be subject to income tax you would not be required to register with holes administer employee taxes if the employee is not there for a specified number of days and usually is 183 but every tip on that every but most treaties have little nuances about how they count those days or whether it's 183 or 180 so you would want to have some sort of mechanism to track the days for an individual and in times like these where things are uncertain you might not be able to get out within 183 days that can cause some issues as well in order to qualify for this treaty provision however the employer must not have a taxable presence in the country which bears the cost of the services so let's say that you need to set up an entity for some reason and that cost is then charged back to the entity in the foreign jurisdiction then this 183 day rule does not apply so you need to be careful about whether that is the case and that could cause this application to not apply one problem with this is that the employee then could have an obligation because maybe there was a misunderstanding about whether that chart whether there was going to be a cross charge and that can be an unpleasant surprise for the employee as well with individuals in organizations in the in your sector oftentimes we run into issues related to those short-term business travellers so as I mentioned the hundred eighty three day rule is there but many countries that you're probably going to be working in doesn't don't have treaties with the US and so you need to be cognizant about where they are traveling and how how you would determine where they're traveling so what tracking has mechanisms do you have in place oftentimes organizations are using expense reports travel agent reports and also if it's a very high volume number of people that are traveling it's probably best to get them into a calendar tracking system there are apps for that so if that's something that is applicable to you and talk about what apps might be available for you next I want to talk about something that's more on the long-term side of things which is global mobility so keep in mind that if you do have employees that are going to be staying in another country for a longer term so they're gonna create a taxable presence for themselves then there's a whole host of things that we like to talk through make sure that there's a policy in place for instance so it's really at the at the base of it starting to develop a company policy of the types of things that the company needs to consider for each assignment and the oftentimes one of the things that companies will do organizations will do is enter into a Sakonnet agreement that is going to provide the details of what the individuals role is how they will get paid whether they will be equalized which I'll talk about and what the employer employer will provide such as housing car etc well on assignment a sec on demand agreement is really a transfer of the employee to another organization and the agreement between the two organizations you also likely have an agreement with the employee as well so the company can decide to equalize with what does that mean usually what happens is if you send an employee to another country they are likely gonna have more of a tax obligation than they would if they stayed in the US why because in general the u.s. individual tax rates are lower than they would be in a foreign country it could be that there's no tax and in foreign countries so that wouldn't be a bookable but what you are doing is a tax equalization policy is really helping the employee to be put in the same position that they would have been had they not taking the assignment tax-wise so at the end of the day what happens is we do a tax return showing what it would have been if they haven't hadn't left and what their taxes since they did take the assignment and the company then will make the employee whole for the additional taxes that are paid now why else would the taxes be higher because there are certain things that are included in taxable income in the US and perhaps in the other country such as housing car and things of that nature so that could also cause a discrepancy in the tax taxation so the company makes the individual whole and then they you know aren't adding an additional taxation burden to themselves by taking on the assignment also we need to think about the company's management of the payroll and withholding we need to decide where the individual will be paid from either the home or the host country so sometimes it is necessary to keep the individual even though they're being paid out of another jurisdictions payroll it might be important to keep them on US payroll and do something that we call a shadow payroll or we're essentially acting as if they're being paid from the US company and paying in the proper taxes etc and that makes sense in a number of different circumstances which we can also do a whole session on just the global mobility aspects here so and then generally when companies put employees on assignment they take over the obligation of helping to get the tax returns filed why not that they want to get into the individuals business and know all of those things but it minimizes risk it minimizes risk for the individual and also for the company that they don't get in trouble and have to be you know something has to happen with them in the local jurisdiction so generally what happens is that company engages a firm we provide the service as well where we would engage with a local firm to provide the wherever they're you know living tax return and then we would also file the US tax return taking into consideration any exemptions and foreign tax credits that might be applicable all right so next we're going to talk through the compliance aspects of international activities and I'll start with some of the u.s. tax reporting requirements and this is not an exhaustive list at all um so just some high-level things to think about one is if there is a foreign entity set up there's definitely US reporting for that and those forms are for corporations 5470 ones or 8850 eight in the case of a disregarded entity and then an eighty eight sixty five sir if the organization is entering into a partnership or joint venture with another organization one thing that's not on this side that I wanted to point out is that if you are making payments to non-residents that's you know it can happen it could be for services or for licensing royalties type things those payments are generally subject to reporting and withholding the form that you're looking for there is form 1042 and they could be also be subject to income or withholding tax so I wanted to mention that because that some sometimes organizations are doing that without actually having a lot of activity so be mindful of those forms as well they're very similar to the 1099 it's just there for payments made to non-residents also form 990 Schedule F is going to list out the activities outside of the US then F bars the foreign bank account so sometimes organizations need to set up a bank account in another jurisdiction in order to make the the operations more efficient also if you set up an entity a wholly owned entity in another jurisdiction their bank account is also subject to reporting for you in the u.s. then there's a form 5713 and that is an international boycott report every year they publish the the countries that are part of a boycott needs to be reported as part of this international boycott report so if you are doing business with a lot of countries in the Middle East are subject to this reporting do take a look at that and see if it might be applicable to you that could apply without having any presence outside of the US so if you're you know providing something to them from the US even and one of the reasons I like to highlight all of these forms is that in general a lot of these are subject to a failure to file um penalty regardless of whether there's tax due and those generally start at $10,000 so you want to be thinking about those and making sure that you're asking your your tax advisers you know what what obligations you might have all right then I also like to just mention if the organization is engaging in some foreign investments which this happens quite often there may be a an issue of reporting issue with that and the reason is that we have a regime called the P thick regime which is really an organization that is mmm has a lot of passive income so the test to be a P ' is 75% of gross income is passive or 50% of net assets or passive if the order if your organization doesn't have any unrelated business income then you're not subject to this reporting but or if the value of the P fixed stock that you own that you invested in is less than 25,000 for a direct investments or 5,000 for indirect and there's no recording so just something that we can we need to be mindful of them are looking at compliance if you are entering into transactions where you're investing in foreign companies then let's have a talk about whether that might be subject to the P thick regime and then other compliance requirements that you should be thinking about our a registration so just like in the US if you start if you start doing business in another jurisdiction you may not have a corporate context or individual tax obligation but you may be subject to business registration so make sure that you're being mindful of that also licenses in permits so similar comments there there are also some anti-terrorism things that you need to think about under the u.s. Patriot Act and there's also Foreign Corrupt Practices Act so if you're making improper payments to obtain government licenses registration special tax or custom treatment which allow your organization to operate in a foreign country this could be subject to that act as well or if you there are other things that could make this apply like false characterization of improper payments on the company's books and records things like that so just make sure that you're engaging with your attorneys and they ensure a that the people that are going outside of the US on your behalf are really knowledgeable about these types of things that aren't allowed to help keep you out of hot water there and then finally there is a if you do set up an entity in another country there's also some FinCEN filings one of them called ab10 that's actually due in a few days for this year it's a something that happens every five years and that's something that you'd want to be knowledgeable about as well and make sure that you file that all right well finally I just wanted to explain a little bit about I Bailey and how we are able to assist organizations internationally i Bailey belongs to a network of firms called HOV International and we are essentially a group of firms that are similar in size and similar in client base that assists each other when we want to go into another country so if I have an organization that is looking to do something in let's say the UK then I would reach out to my colleagues there within the HOV network and they would be able to assess my clients so while I'm knowledgeable at a very high level and some of the taxation aspects in other countries we really rely on our network to help our clients so if you ever had a question needed something related to another jurisdiction what what we need to be thinking about I'm happy to make those introductions for you and with that that is the end of our presentation and I'm happy to answer any questions see don't see any questions alright if you do have any questions you can use a Q&A box little kid on the menu bar or you can use a chat feature or you can just contact Shannon directly yes there is my email and my phone so happy to have a discussion with you about what you're considering in the international space and since there are no other questions we'll give you back 11 minutes of your day all right well thank you all so much for attending and thank you to Shannon for presenting and everyone have a great day [Music] you