As the service export industry evolves, businesses face many unique challenges to deliver them.  Some of these issues may look familiar to those experienced in exporting commodities, while others are tax considerations and compliance provisions that relate directly to the service exports industry.

Here’s what you need to consider when sending employees to represent your company by delivering services in person in foreign locations.

The 3 types of taxes you need to plan for

The three primary tax considerations are: 1. permanent establishment risk, 2. local withholding tax, and 3. personal income tax.

Let’s look at each of these in more detail.

1. Permanent establishment (or PE) risk arises when employees working for a company located in one country start doing things that trigger corporate income tax in a foreign country. Governments everywhere will try to tax productive activities whenever they can. Certain de minimis activities are allowed (usually spelled out by a tax treaty between the two countries), but once that threshold is crossed, local authorities will attempt to assess income tax on the local activities.

Among the 38 countries that are members of the Organization for Economic Control and Development (OECD), there is an agreed set of standards.  Typically, employees of an American or Canadian company (both are OECD treaty members) can spend a total of 181 days in a foreign country before a permanent establishment is created.

Beware that travel days are included, and the days do not need to be consecutive.  Some companies fail to track this, and fall into the PE trap when projects are extended or run into delays.  Other company activities in the local country may make this 181-day threshold less certain, so make sure you obtain good international tax advice.

2. Withholding tax arises when a foreign worker earns more than a maximum local tax withholding threshold in the foreign country. Even though this employee is paid by the company in their home country, the local foreign country will attempt to attribute a value to the services each foreign worker is providing in that country. If the value exceeds the local threshold, then the employer will be required to pay withholding tax on that amount.

It may be interesting to note that Canada has one of the lowest withholding tax thresholds in the world, a fact that has tripped up many U.S. companies who send their workers into Canada on projects.

If the destination country’s thresholds are exceeded, it may be possible to file for an exemption from this withholding tax, or file for a refund later.  In some cases, it will just be an additional cost of doing business that needs to be factored into project/services pricing.

3. Personal income tax can also become an issue. The situation is the same as an employee of an American or Canadian company who resides in one state/province but works a substantial period of time in another. The individual in this case will receive two state W2s, and therefore must file state/provincial income returns in both jurisdictions.

The difference in international cases is that the employee’s individual tax preparation will become far more complicated.  The employer will typically provide the employee with the necessary international tax advice to help them prepare these returns.

Thoughtful employers also ensure that the employee is appropriately compensated financially, as the tax rates in the destination country could be substantially higher than in the employee’s home country.

2 key rules to operate under

1. Involve your tax team early in the planning process; if you don’t have an in-house tax resource, help educate your finance team so that they understand the importance of getting good external international tax planning advice.

2. Be aware of key thresholds and closely track against them; make sure you have an alert system that lets you know when you are getting close, but have not yet exceeded them, so that you have time to explore and implement alternatives.

Export compliance still applies to services

Export compliance issues need to be considered if the service providers carry laptops, USB drives, or other portable media with encrypted software into a foreign country.  Depending on the destination country, there may be export restriction issues, or even licensing issues.  (Many times, these employees will access such software remotely, which also creates export compliance questions, but we’ll talk about providing services remotely in a future article).

In addition, the type of project and the destination country will need to be checked against country restrictions.  If the service supports a product, the customer should already have been checked against any list of denied parties or other known bad actors.  If there is no related product, the local customer should have been screened against these lists prior to bidding on, or contracting for, the project/services.

Sometimes, while actually executing a project, it becomes clear that some sort of assistance may be needed from a local firm. In this case, your company must have a process for ensuring this company and its principals are also screened. 

Key recommendations: 

1. If the services are related to any kind of product sale, make sure you consider all the necessary related services BEFORE you sell the product to a particular country. Do this so that you can consider any export issues related to the services as part of the product sale – don’t just evaluate the exportability of the product alone.

2. Have a system for checking the software on travelers’ computers for any export compliance issues.

Seek help from experts in the local laws

This is a broad category, and is difficult to generalize much because local laws vary widely from country to country, and are also highly dependent on your industry vertical.

Here are a few general recommendations:

1. Make sure your travelers are aware of driving restrictions and traffic laws. Make sure they understand what they need to do in the event of an accident.

2. Provide guidance to them on any specific laws that may affect them (e.g. chewing gum in public in Singapore), as well as cultural sensitivity training and local “do’s” and “don’ts”.

3. Make sure travelers understand what do if they need medical treatment.

4. Make sure your insurance broker is informed of the travelers’ activities so that the appropriate coverage is extended.

To address some of these risks, a good internationally-experienced travel agency, as well as a similarly-experienced insurance broker can be invaluable resources.

Someone who can provide detailed cultural training can also be helpful.  If you are regularly sending people overseas to provide services and you don’t have these resources at your fingertips, it may be time to re-look at your service providers to make sure they have the right skillsets to help you.

The service export industry is growing rapidly around the world, and as it does things aren’t getting any simpler for those involved. Companies sponsoring employees traveling to provide service exports will need to have strong compliance programs in place to make sure they follow the applicable laws and that the risks are properly managed.

The post What all export service providers need to know about taxes, compliance issues and intricate local laws appeared first on Trade Ready.

As part of NAFTA, the United States, Canada and Mexico (the “Parties”) have all agreed to reduce and/or eliminate tariffs on goods that originate from their respective territories.

However, the Parties continue to apply significantly higher tariffs to goods that do not originate in one of the NAFTA countries.

Maximum benefits (i.e. duty free entry into the NAFTA market) are only conferred upon goods that are said to “originate” in one of the three NAFTA countries. Rules of Origin are therefore extremely important, because they act as the mechanism that determines which goods can be properly classified as “originating” in the NAFTA territory.

Consequently, this decides which goods are entitled to preferential tariff treatment.

Why you need to know the rules

A proper understanding of the rules and their application is critical for any importer/exporter conducting business in the NAFTA region. This knowledge enables them to leverage available preferences and reduce the likelihood of stiff monetary penalties and fines.

As a start, the Rules of Origin inform what information an exporter will put on their Certificate of Origin, which is a necessary document to claiming and obtaining a NAFTA tariff preference for imported goods.

The Certificate of Origin requires that the exporter properly identify the Country of Origin of the goods they are shipping – in other words, the exporter is responsible for the correct determination of the “origin” of the exported goods.

Invalid Certificates of Origin based on an improper or incorrect classification of the “origin” of a good, have recently become one of the largest problem areas for exporters, often resulting in significant fines and penalties.

An invalid NAFTA Certificate of Origin will result in the denial of NAFTA origin duty free treatment. And be warned, duties can be applied retroactively.

The complicated world of determining origin

In an increasingly global marketplace, where final products are commonly composed of inputs from various geographic locations, it can often be difficult to properly determine the origin of a good.

As mentioned earlier, NAFTA tariff preferences will only apply to goods that are found to “originate” in one of the three NAFTA countries. Goods originating from countries other than the U.S., Mexico and Canada – that are merely shipped through, or go through minimal transformations in the NAFTA region – are not eligible for NAFTA benefits.

However, if inputs from non-NAFTA countries go through a certain amount of processing or transformation within the NAFTA region, they may qualify as NAFTA originating goods.

The predominant way in which a good, which uses non-NAFTA-originating inputs, can qualify as a NAFTA-originating good, is through what is called a change in tariff classification, otherwise known as a tariff-shift.

The tariff-shift serves as an indicator of whether sufficient processing or transformation of the non-originating inputs has taken place in the NAFTA region, enabling the final product to qualify as NAFTA-originating.

Determining origin through sufficient transformation – Consider biscuits

Sufficient transformation requires that the non-originating inputs be classified under one tariff provision before processing, but be classified under a different tariff provision after processing is complete.

As an example:
If biscuits (tariff number 1905.90) are being produced in Canada entirely from NAFTA-originating inputs except for the flour (tariff Chapter 11), which originates or is imported from Europe, can the biscuits, which contain non-NAFTA originating inputs (sugar) still qualify as NAFTA originating because a sufficient transformation has taken place?

The applicable Rule of Origin for biscuits states that a tariff-shift will have occurred if there is “a change to heading 1902 through 1905 from any other chapter.” Since the flour (tariff Chapter 11) is outside headings 1902 through 1905, the tariff-shift rule has been met and the biscuits would be found to originate in Canada and therefore qualify for NAFTA duty free tariff.

It is important to keep in mind that the rules are not always clear, and when multiple non-originating inputs are involved in the production of a good, the determination can become that much more complicated.

Exporters should err on the side of caution.

When in doubt, contact a trade professional and seek an Advanced Customs Ruling from the CBSA, an effective way of avoiding uncertainty and potential costly penalties.

CBSA Advanced Rulings can determine, before importation is made:

1. Whether an imported good properly qualifies as a NAFTA originating good and therefore qualifies for preferential treatment;

2. Whether a tariff classification change has been met for the good to qualify as NAFTA originating.

To sum it all up, if exporters are cautious and do their due diligence in research, consulting the rules of origin before exporting, they will gain access to the many benefits of NAFTA originating products and will avoid unnecessary and costly fines.

If you have questions about the Rules of Origin, NAFTA benefits, international trade law, business or investment, contact Woods LaFortune LLP.

Have you gotten caught in owing with unexpected fines and penalties because of your products’ origins?

The post Exporters and Rules of Origin: Get in on NAFTA’s benefits and avoid heavy penalties appeared first on Trade Ready.

But how do you find the right customs broker for your company? The following is a list of questions you should consider when selecting a customs broker or a consultant:

• Does the broker have an ISO certification?
• Does the broker specialize in certain commodities or shipping methods?
• How long has the broker been in business?
• What is the broker’s level of financial stability?
• Does the broker offer sole point of contact (SPOC) to reduce customs entry errors?
• What resources does the broker have to ensure speedy clearance and delivery of goods?
• How does the broker advise clients of delays in handling or clearance, and will the broker off suggestions on how to avoid such delays?
• What kind of physical facilities does the broker have?
• What kind of security systems and procedures does the broker have?
• What is the insurance coverage carried by the broker for facilities and operations?
• What assistance does the broker offer in terms of records maintenance?
• Does the broker have computerized or EDI systems that expedite document preparation and transmittal, and/or that expedite customs clearance?
• Can the broker’s performance bond be used to provide the necessary surety coverage?
• What are the terms of payment and financial arrangements?
• Where are the offices of the broker located?
• With what degree of interest and attention does the broker service small accounts?

The post FITTskills Refresher: Working with customs brokers appeared first on Trade Ready.