• Aligning international tax strategy with global supply chain planning helps reduce tax exposure, capture incentives, and increase operational agility.

• Ignoring exit taxes, transfer pricing, or cross-border compliance risks can create multi-year tax liabilities, penalties, and restructuring costs.

• Involving tax leaders early in global supply chain restructuring leads to smarter decisions, improved timelines, and long-term business scalability.

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In today’s dynamic global business environment, aligning your organization’s international tax planning with supply chain planning strategy isn’t just a best practice — it’s essential. From shifting trade relationships and tariffs to increased scrutiny from global tax authorities, your company’s ability to make tax-informed supply chain decisions can directly impact cash flow, risk profile, and competitive positioning.

Here’s how your tax and operations leaders can collaborate to build a globally agile structure, and why international tax strategy must be at the core.

Why International Tax Strategy Must Drive Global Supply Chain Decisions

Mid-market organizations are rethinking their operational footprint — reshoring, nearshoring, or diversifying supplier bases. But without a clear international tax lens, these shifts can trigger unintended consequences: exit taxes, loss of treaty benefits, or transfer pricing risks.

A tax-aligned supply chain strategy allows you to:

• Forecast and manage global tax liabilities

• Capture incentives and avoid inefficiencies

• Make faster, more informed decisions across jurisdictions

Integrate International Tax Early in the Planning Process

Waiting until after operations moves are underway can leave your business with a fragmented tax structure that requires costly remediation. This is especially critical for mid-market companies operating across the U.S., EMEA (Europe, the Middle East, and Africa), or APAC (Asia-Pacific) regions, where cross-border structuring can create unexpected tax burdens. Tax should be involved from the outset — modeling scenarios across jurisdictions, projecting costs, and identifying risk exposure.

For example:

• Moving production from China to Mexico might avoid certain tariffs — but could expose your business to exit taxes in China or permanent establishment risk in Mexico.

• Relocating intellectual property (IP) from Ireland to the U.S. might trigger a deemed disposal event under local exit tax regimes.

Technology platforms and predictive models can help tax teams simulate these impacts before major decisions are finalized.

Strengthening Transfer Pricing and Global Compliance

Global tax authorities are tightening enforcement — especially around transfer pricing and cross-border restructurings. If your tax structure no longer reflects your actual operations, you may face:

• Double taxation

• Disallowed deductions

• Penalties and disputes

Update your transfer pricing documentation to reflect the new supply chain model. Intercompany agreements, economic analyses (including IP valuation), and jurisdictional reporting must all align with your post-transition structure.

Unlock Incentives Through Coordinated Strategy

Supply chain shifts aren’t just about avoiding risk — they’re also an opportunity to capture new value. Jurisdictions including the U.S., Canada, Mexico, and certain European Union countries offer targeted tax incentives for reshoring, green investment, R&D, or job creation.

If these incentives aren’t launched early in planning, your business could miss out. Tax should coordinate with operations and finance teams to explore:

• U.S. federal and state credits for manufacturing investment

• R&D credits tied to newly localized functions

• Foreign tax credits or deferrals available in new jurisdictions

Create a Globally Scalable Tax Playbook

Reactive tax planning doesn’t scale. As your organization enters new markets, integrates M&A targets, or adds new suppliers, your international tax model must be flexible and supported by a clear global tax governance framework.

A forward-looking playbook helps you:

• Align tax structure with business decisions

• Build global tax governance into location changes, IP moves, and new legal entities

• Reduce friction during rapid growth or operational transformation

The Path Forward: Strategy, Agility, and Risk Reduction

International supply chain restructuring can unlock efficiency, improve margins, and reduce geopolitical exposure — but only if tax is at the table from the start.

Organizations that treat tax as a strategic partner rather than a compliance function are better positioned to navigate volatility and create long-term value.

How MGO Can Help

At MGO, we help companies navigate the complexities of global tax strategies and cross-border operations. From international structuring and transfer pricing to tax technology and incentive optimization, we serve clients across manufacturing, life sciences, technology, and more.

We work closely with CFOs and tax executives to align tax planning with business transformation — supporting global agility, regulatory compliance, and strategic growth. Let’s talk about how your international tax strategy can support your global operations.

The post How to Align Your Global Supply Chain and International Tax Strategy appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Cross-border supply chain changes can trigger exit taxes, compliance penalties, and tax inefficiencies if not planned with international tax in mind.

• Proactive coordination between tax and operations helps reduce global tax exposure, unlock incentives, and speed of execution across jurisdictions.

• Country-by-country reporting (CbCR), transfer pricing alignment, and entity structuring are critical to avoiding double taxation and audit risk.

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Global supply chain changes are rarely just operational — they’re deeply connected to international tax exposure. From exit taxes and transfer pricing risks to missed incentives and compliance hurdles, tax leaders must be part of the decision-making process from day one.

6 Supply Chain and International Tax FAQs

In this FAQ, we answer the most frequent questions our clients ask when planning cross-border restructurings, relocations, or supplier changes — so your business can move faster, smarter, and with fewer tax surprises.

1. What are the international tax risks when shifting supply chain operations?

Relocating manufacturing, coordination, or key functions across borders creates exposure to multiple tax regimes. Common risks areas include exit taxes, transfer pricing, permanent establishment issues, and customs duties. Without early tax planning, these costs can result in long-term liabilities or missed opportunities.

2. How do exit taxes work, and when do they apply?

Exit taxes are levied when valuable functions, assets, or risks — such as intellectual property (IP), staff, or customer relationships — are moved between countries. For example, transferring IP from Ireland to the U.S. may trigger a deemed disposal under Irish tax law. These taxes can be significant and must be modeled early in any restructuring.

3. What should I know about transfer pricing when moving suppliers or functions?

Transfer pricing must reflect your current business operations. If you shift suppliers, relocate production, or move functions without updating your intercompany pricing, tax authorities may challenge the arrangement — leading to adjustments, penalties, and double taxation. All intercompany agreements and transfer pricing documentation must align with your post-change structure.

4. Are there tax incentives available when reshoring or nearshoring operations?

Yes. Countries such as the U.S., Canada, Mexico, Ireland, and Singapore offer targeted tax credits and incentives for domestic investment, clean energy transitions, and R&D localization. Examples include:

• U.S. federal/state manufacturing credits

• Job creation and infrastructure grants

• R&D and capital investment incentives

However, these must be planned early to capture their full value.

5. How can technology help manage international tax complexity?

Tax technology platforms help model jurisdictional impact, manage data for compliance reporting (like CbCR), and simulate the tax effects of operational changes. Integrated enterprise resource planning (ERP) and tax systems also improve visibility and reduce risk in real-time decision-making.

6. What role should international tax play in supply chain strategy?

International tax teams should be involved from the start of any supply chain realignment. Embedding tax early helps you find risks, unlock incentives, and structure deals for long-term compliance and flexibility. A reactive approach often results in avoidable costs, delays, and exposure.

Next Steps for Smarter Global Planning

Successfully navigating international tax risks requires more than compliance — it takes a forward-thinking approach aligned with your global operations. At MGO, we support CFOs and tax leaders with international tax planning, transfer pricing analysis, and incentive identification to help reduce exposure and drive business agility.

Learn more about our International Tax and Transfer Pricing services or contact us to discuss how we can support your global growth strategy.

The post Frequently Asked Questions About International Tax and Supply Chain Realignment appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Choosing the right investment structure is essential for successful U.S.-Canada cross-border transactions.

• Financing strategies can help improve cash flow and support tax efficiency.

• Managing tax compliance with strategies like proper transfer pricing and exact foreign reporting can help reduce risk and increase profitability.

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Expanding your business between the United States and Canada is a strategic move that can unlock new markets and revenue streams. However, the complexities of cross-border transactions can be daunting. From tax structures to financing strategies and compliance obligations, every move requires careful planning.

We recently hosted a webinar with Canada-based CPA Solutions designed to help businesses confidently expand into the U.S. from Canada or into Canada from the U.S. Here are some key takeaways from that discussion.

Making the Right Investment Structure Choices

Choosing the right investment structure is fundamental to successful cross-border transactions. The three primary structures to consider when entering Canada from the U.S. are:

1. Corporation: The most common structure, where a U.S. corporation sets up a Canadian corporation or acquires an existing business. These entities operate as separate legal entities, meaning that each pays taxes in its own jurisdiction. This structure helps minimize tax intermingling. However, when repatriating earnings, dividends are generally subject to withholding tax. You can also move money through management fees and interest expenses, but it’s important to understand the tax implications of each approach.

2. Branch: An alternative to forming a corporation, a branch allows a U.S. company to operate in Canada without creating a separate legal entity. This possibility can be efficient for businesses wanting to expand operations without setting up a new corporate structure. Retained earnings that are reinvested in Canada typically aren’t taxed. However, repatriating funds without reinvestment triggers withholding tax. This approach can be beneficial if your goal is to keep earnings within Canada for growth while avoiding unnecessary tax burdens.

3. Unlimited liability company (ULC): A hybrid entity that is treated as a corporation for Canadian tax purposes but disregarded for U.S. tax purposes. ULCs can present significant tax benefits, but they come with increased complexity due to hybrid mismatch rules. For example, some transactions may be deductible in Canada but not treated as income in the U.S., or vice versa. Navigating these nuances requires a thorough understanding of both tax codes and how they interact under the Canada-U.S. treaty.

Choosing the right structure requires balancing your business model, growth ambitions, and tax planning strategies. Consulting with knowledgeable professionals who understand both sides of the border is important to avoid costly pitfalls.

Financing Strategies to Fuel Your Expansion

Funding your cross-border investment efficiently is crucial to keeping profitability. There are three main approaches to financing:

1. Equity financing: Investing in shares to create paid-up capital, which can be returned tax-free. This approach is especially beneficial when your goal is long-term growth, as future capital gains from selling shares may also be favorable. You can also pay dividends back to the U.S. without withholding tax, provided you meet treaty requirements. However, equity financing may limit your ability to extract surplus quickly.

2. Debt financing: Loans offer tax-free principal repayments and allow interest charges to move surplus across borders. To deduct interest in Canada, the debt-to-equity ratio must not exceed 1.5:1. If the ratio is higher, excess interest is treated as a dividend and subject to withholding tax. Maintaining the right balance is necessary to preserve tax efficiency while using debt’s cash flow benefits.

3. Debt-equity mix: Combining both equity and debt to balance growth potential with tax efficiency. This approach provides flexibility while keeping favorable tax treatment if ratios are carefully managed. A common strategy is to set up a 1.5:1 ratio, allowing interest deductions while keeping equity growth potential.

Tax Compliance Implications for Inbound Canada/Outbound U.S.

When conducting cross-border transactions between Canada and the U.S., it’s important to navigate tax compliance from both perspectives to avoid unexpected liabilities. Here are key considerations for inbound Canada/outbound U.S. transactions:

• Permanent establishment (PE) status: Determining whether your business activities in Canada create a permanent establishment is critical. If no PE exists, profits may not be taxed in Canada. However, proper documentation is important to support a non-PE status, as failing to file can result in penalties.

• Withholding tax obligations: Repatriating earnings from Canada to the U.S. — whether as dividends, interest, or royalties — may trigger withholding tax. The standard rate is 25%, but treaty benefits can reduce this to 5% or even 0% for certain payments, like interest. Always file the necessary forms to claim reduced rates.

• Transfer pricing considerations: Make sure that intercompany pricing aligns with arm’s-length principles to avoid disputes. This includes loans, royalties, and service fees between U.S. and Canadian entities. Documenting the rationale behind your pricing strategy is important to meet compliance requirements and avoid penalties.

• Foreign reporting requirements: Canadian tax law mandates the disclosure of foreign ownership and payments to non-residents. This includes management fees, royalties, and interest payments, as well as transactions exceeding $1 million (CAD) annually. Failing to report accurately can result in fines and audits.

• Employee movement compliance: If employees cross the border to conduct business activities, understand the regulations that apply to payroll taxes, social security, and reporting obligations. Both countries may impose requirements on income earned while working abroad.

Proactively managing these compliance aspects can help you minimize tax exposure and keep smooth cross-border operations. Working with experienced advisors familiar with both tax systems is important to avoid costly mistakes.

Transfer Pricing Considerations

Transfer pricing is a critical tool for managing cash flow between U.S. and Canadian entities. Besides dividend payments, transfer pricing allows for efficient cash repatriation while minimizing tax liabilities. Implementing well-planned transfer pricing strategies can provide immediate cash flow or support long-term financial planning.

Key transfer pricing considerations to improve your cross-border transactions include:

• Interest payments: Charging interest on intercompany loans can be an effective way to move surplus funds from a Canadian entity to its U.S. parent. However, it’s crucial to analyze the credit risk associated with the borrower and perform a credit rating analysis at the time of loan initiation. Interest payments may qualify for reduced withholding tax rates under treaty benefits.

• Royalty collections: If intellectual property (IP) is held by the parent company and utilized by a Canadian subsidiary, charging royalties can be an efficient way to transfer cash back to the U.S. Prepayments on future royalty obligations can accelerate cash flow, but it’s important to calculate the present value of these prepayments based on projected revenue.

• Management service fees: If the U.S. parent company provides services — such as administrative or management support — to its Canadian subsidiary, charging management service fees can be an effective strategy. The U.S. tax code outlines detailed rules for what costs can be included, so be thorough in finding which expenses help the foreign entity.

• Other cross-border charges: Beyond interest, royalties, and management fees, other intercompany charges, such as cost-sharing arrangements or distribution charges, can help manage cash flow across borders. Adjusting intercompany pricing to reflect market conditions while keeping arm’s-length standards allows for flexibility in moving funds.

It’s important to keep comprehensive transfer pricing documentation to support your approach — including economic analyses and risk assessments. Proper documentation helps mitigate audit risks and shows compliance with both U.S. and Canadian regulations.

Your Path to Successful Cross-Border Transactions

Unlocking cross-border transactions requires a strategic and informed approach. With careful planning and the right guidance, you can use international opportunities while minimizing risks and staying compliant.

How MGO Can Help

At MGO, we understand the challenges and opportunities inherent in cross-border expansion and are here to help you navigate the complexities with confidence. Our International Tax team offers the guidance you need to manage tax and transfer pricing effectively and prevent or resolve any issues.

Have questions about your cross-border expansion? Reach out to our team today.

The post Strategic Tips for Your U.S.-Canada Business Expansion appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• New proposed dual consolidated loss regulations introduce changes to calculation methods and a disregarded payment loss rule, impacting how losses are treated for U.S. tax purposes.

• The Tax Court ruling in YA Global Investments LP v. Commissioner highlights the risk of foreign investment funds being deemed engaged in a U.S. trade or business through their U.S. managers.

• Pillar Two global minimum tax rules are being implemented by numerous jurisdictions, requiring multinational enterprises (MNEs) to address compliance burdens and potential top-up taxes.

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Proposed Dual Consolidated Loss (DCL) Regulations  

The Department of the Treasury and the IRS on August 6, 2024, released proposed regulations on the dual consolidated loss (DCL) rules and their interaction with the Pillar Two global taxing regime. The proposed regulations also make several changes to how DCLs are calculated and introduce a new disregarded payment loss rule.

DCL Rules

The DCL rules apply to ordinary losses of a dual resident corporation (DRC) or a separate unit. A separate unit for purposes of the DCL rules is a foreign branch or hybrid entity that is owned by a domestic corporation. S corporations are not subject to the DCL rules, and domestic corporations will be treated as indirectly owning a separate unit that is owned by a partnership or grantor trust.

Subject to certain exceptions, such as certifying no foreign use, under Section 1503(d), a DCL of a DRC or separate unit generally cannot be used to offset U.S. taxable income of a domestic affiliate (no “domestic use”). This means the DCL may be used only for U.S. federal income tax purposes against the income of the DRC or separate unit that incurred the DCL.

Proposed Regulations

The proposed regulations provide guidance in the following areas:  

• DCLs and the interaction with Pillar Two
• Calculation of DCLs, including the following:
  • Removal of U.S. inclusions, dividends (including under Section 1248), gain on the sale from stock, as well as deductions (including under Section 245A) attributable to such income 
  • Intercompany transactions, such that if a member of a consolidated group is a DRC or a U.S. member that owns a separate unit, the counterparty consolidated group member’s income or gain on the intercompany transaction will not be deferred  
  • Clarification that items that are not (and will not be) on the books and records of the separate unit are not included in the separate unit’s income or DCL calculation
• New disregarded payment loss rule

Disregarded Payment Loss Rules

A significant development in the proposed regulations is the introduction of a new set of disregarded payment loss (DPL) rules, which operate independently of the DCL rules. To address certain deduction/non-inclusion outcomes, the DPL rules would apply to some disregarded payments (interest, royalties, and structured payments) that are deductible in a foreign country but are not included in U.S. taxable income because the payments are disregarded.

The DPL rules would require a consenting domestic owner of a disregarded payment entity to include in U.S. taxable income the amount of any DPL, subject to certain calculation requirements, if a triggering event occurs within 60 months. The new DPL rules will likely have the significant effect of creating deemed income recognition in the U.S. without any corresponding deduction or basis increase.

Since no express statutory authority exists for the new DPL rules, under the proposed regulations, Treasury would implement the DPL rules in coordination with the entity classification election rules under Treas. Reg. §301.7701-3(c), which means that when a specified eligible entity either elects to be disregarded for U.S. tax purposes or defaults to a disregarded entity under the general rules of Treas. Reg. §301.7701-3(b), the domestic owner would be deemed to consent to the new DPL rules.

Effective Dates

The proposed regulations would generally apply to tax years ending on or after August 6, 2024.

The DPL consent rules would apply to the acquisition and formation of new entities, as well as entity classification elections filed, on or after August 6, 2024. For entities already in existence, the DPL consent rules would apply as of August 6, 2025, which would allow taxpayers time to restructure their existing operations before the DPL rules enter into effect.

The intercompany transaction regulations would apply to tax years for which the original U.S. income tax return is due without extensions after the date the final DCL regulations are published in the Federal Register. This means that if the final regulations are published by April 15, 2025, they would apply to calendar year 2024.

Once the proposed regulations are finalized, taxpayers can choose to apply them retroactively to open tax years, subject to consistency requirements.

Although still in proposed form, the DCL proposed regulations are lengthy and complex and many of the changes will apply retroactively to calendar year 2024 once the proposed regulations are finalized. Taxpayers will need to closely monitor disregarded payment losses arising from interest, royalties, or other structured payments to determine timely certification, as well as potential income recognition.

Additionally, taxpayers will need to consider adjustments to DCL calculations going forward to take into account the new rules regarding removing items that are not on the separate unit’s books and records and U.S. inclusions, among other items. The removal of these items could have a significant effect by unintentionally creating a DCL or increasing the amount of any existing DCL, among other possible upshots.

We can help you consider the impact these proposed regulations could have on your DRCs or separate units before the regulations are finalized, allowing time for restructuring operations if necessary.

Tax Court Ruling on Foreign Fund’s U.S. Business Raises Planning Issues

The Tax Court in a November 15, 2023, decision held that a non-U.S. investment fund partnership was engaged in a U.S. trade or business through the activities of its U.S. investment manager that acted as its agent. Consequently, the partnership was liable for withholding taxes for the portion of its effectively connected income allocable to its foreign partners (YA Global Investments LP V. Commissioner, 161 T.C. No. 11).

Based on the court’s rationale, investment funds with foreign partners should consider the following to reduce the risk of being subject to taxation because they’re deemed to be engaged in a U.S. trade or business:

• Existing investment management agreements between U.S.-based asset managers and offshore partners and investors should be evaluated and possibly restructured in light of the YA Global case. New investment management agreements should not allow the investment fund to give interim instructions to the investment manager.
• Neither the investment fund nor the investment manager should receive any type of fee from a portfolio company. The investment fund should derive only a return on the capital invested. If an investment fund would receive fees from portfolio companies, care and consideration should be given to the implications of this case.
• The taxpayer should maintain documentation demonstrating reliance on tax advice, the basis for such reliance, and the specific date in which a prior filing position is modified and the reason for such modification. MGO can assist clients to determine the existence of a U.S. trade or business in cases where there might be exposure under the enumerated principles of the YA Global case.
• Because the partnership in YA Global failed to file the required Forms 8804, Annual Return for Partnership Withholding Tax (Section 1446), it was left open to assessment despite the fact that the statute of limitations had run out for partnership Form 1065 and the partners. MGO can assist clients evaluate whether to file a Form 8804 when there are foreign partners and potentially effectively connected income and a U.S. trade or business, perhaps even on a “protective” basis.

Preparing for the Impact of Pillar Two Implementation

In December 2021, the Organization for Economic Co-operation and Development (OECD) released the framework for the Pillar Two global minimum tax. These rules — known as the global anti-base erosion (GloBE) model rules — are intended to verify multinational enterprises (MNEs) with global revenues above EUR 750 million ($800 million) pay a 15% minimum tax rate on income from each jurisdiction in which they operate.

This minimum tax is imposed either on the ultimate parent entity through the income inclusion rule (IIR) or on another operating entity in a jurisdiction that has adopted the rules through the undertaxed payments rule (UTPR). Additionally, many jurisdictions could impose a qualified domestic minimum top-up tax (QDMTT) on profits arising within their jurisdiction.

Common structures likely to be impacted by the IIR and UTPR:

• Tax havens, low-tax jurisdictions, and jurisdictions with territorial regimes 
• Notional interest deduction regimes 
• Intellectual property (IP) boxes and other incentives regimes 
• Low-taxed financing, IP, and global centralization arrangements 

Every global organization within the revenue scope needs to address Pillar Two, with a differing landscape depending on that organization’s profile and footprint. Even if an MNE is not subject to a top-up tax, it will still need to demonstrate that it falls below the threshold. Therefore, large MNEs should expect a significant increase in their compliance burden, as the rules require a calculation of low-taxed income based on the accounting income by constituent entity on a jurisdictional basis and reporting of the Pillar Two calculation to the tax authorities.  

Implementation Timeline  

The OECD does not legislate or implement laws. However, at least 25 jurisdictions have enacted laws adopting the OECD’s Pillar Two rules into domestic legislation, and more are expected to follow. Many of these laws are effective January 1, 2024; some jurisdictions — for example, some EU member states — back-dated the effective date to January 1, 2024. 

Significant markets that have yet to implement Pillar Two include Brazil, China, India, and the U.S.; however, the rules may still apply to MNEs headquartered or otherwise operating in these jurisdictions if they have operations in a jurisdiction that has implemented the rules.  

The OECD published additional administrative guidance on the application of the Pillar Two rules on June 17, 2024. The new guidance supplements the previously released commentary and the first three installments of administrative guidance.

Key issues addressed by new OECD guidance:

• The application of the recapture rule applicable to deferred tax liabilities (DTL), including how to aggregate DTL categories and methodologies for determining whether a DTL reversed within five years.
• Clarification on how to determine deferred tax assets and liabilities for GloBE purposes when the rules result in divergences between GloBE and accounting carrying value of assets and liabilities.
• The cross-border allocation of current and deferred taxes, allocation of profits and taxes in certain structures involving flow-through entities, and the treatment of securitization vehicles.

The new guidance provides additional detail on how the GloBE rules are intended to operate for MNEs. This administrative guidance will be incorporated into the commentary to the GloBE model rules.

Now that the GloBE rules are in effect in a significant number of jurisdictions, MNEs that may be within the scope of the rules should consider the following steps:

• Undertake an impact assessment to determine high-risk areas and identify the potential impact on effective tax rate (ETR) and cash tax.
• Keep ongoing communications with the board of directors and other stakeholders.
• Assess the impact on compliance and design a roadmap to implement a plan for Pillar Two compliance.

Our experienced team can help you assess the location of your people, functions, assets, and risks and adapt your strategies.

Section 987 Regulations Expected To Be Finalized Before Year-End

The Treasury Department and the IRS have announced their intention to finalize the 2023 proposed regulations under Internal Revenue Code Section 987 by the end of calendar year 2024. This will have significant implications for taxpayers that have a qualified business unit that uses a functional currency different from its owner (a “Section 987 QBU”).

Terminations After November 9, 2023

The 2023 proposed regulations provide that the effective date will be accelerated regarding any QBU that terminates after the date the proposed regulations were issued, November 9, 2023. The effective date will be immediately before such terminations. Generally, gains upon termination would be recognized immediately, while losses may be deferred or potentially lost depending on the facts. Any Section 987 termination after November 9, 2023, and before the proposed regulations are finalized should be reviewed to determine the consequences of any gain or loss.  

Transition to Final Regulations  

The 2023 proposed regulations provide a transition rule that will require all QBUs to be deemed terminated and the calculation of a pretransition Section 987 gain or loss as of 12/31/2024 for calendar year taxpayers. The methodology used to calculate the amount of pretransition Section 987 gain or loss is determined based on whether or not the taxpayer has historically applied an eligible pretransition method.  

The 2023 proposed regulations provide that eligible pretransition methods include:  

• The 1991 proposed regulations.  
• The 1991 proposed regulations applying an “earnings only” method, as long as that method has been consistently applied to all QBUs.  
• Any other reasonable method consistently applied that results in the same amount of Section 987 gain or loss as the 1991 proposed regulations.  

No Eligible Pretransition Method 

If a taxpayer has not applied an eligible pretransition method (including doing nothing) then the 2023 proposed regulations require the pretransition Section 987 gain or loss to be computed using a “simplified method.” This method is generally a simplified foreign exchange exposure pool (FEEP) computation that requires taxpayers to determine the net equity of each QBU for the initial year of each QBUs existence translated into the functional currency of the home office owner of such QBU.

Such net equity is compared to the Dec. 31, 2024, net equity value, also translated into the home office functional currency. The difference between these amounts is then adjusted for Section 987 gains and losses recognized over the life of the QBU to determine the amount of pretransition gain or loss. 

The source and character of the pretransition Section 987 gain or loss is based on the tax book value (asset method) of Treas. Reg. §1.861-9. Taxpayers may make an election to recognize the pretransition loss over 10 years. Alternatively, without the election, pretransition gains will be treated as unrecognized Section 987 gain or loss that will be recognized upon remittance, and pretransition losses will generally be treated as suspended losses and recognized to the extent that section 987 gains are recognized in the future. 

Eligible Pretransition Method  

If a taxpayer has been applying Section 987 using an eligible pretransition method, then that method should be followed to determine the amount of pretransition Section 987 gain or loss. The source and character of the pretransition Section 987 gain or loss is based on the tax book value (asset method) under Treas. Reg. §1.861-9. Taxpayers may make an election to recognize the pretransition loss over 10 years. Alternatively, without the election, pretransition gains and losses will be treated as described above. 

Once the proposed Section 987 regulations are finalized, the effective date is expected to be Dec. 31, 2024; however, some determinations may be made before the regulations are effective. For example, determining if an eligible method has been established will be important in calculating the amount of pretransition Section 987 gain or loss. If an eligible method has not been established, then taxpayers will need to complete the calculations as described above over the life of each QBU. Taxpayers need not wait until 2025 to complete these calculations and may get started on the calculations immediately. 

Once the regulations are effective, the FEEP approach requires taxpayers to acquire balance sheet information for each QBU. Obtaining this balance sheet information may involve leveraging multiple accounting systems and taxpayers may want to start reviewing how this information will be obtained sooner rather than later. 

How MGO Can Help  

MGO can help businesses navigate the complexities of the proposed DCL regulations, OECD Pillar Two rules, and Section 987 regulations by providing guidance on compliance, tax planning, and financial reporting requirements. Our team is well-versed in assessing the impact of these changes and can assist with DCL calculations, Pillar Two compliance, and Section 987 transition planning.

With a deep understanding of international tax frameworks and industry best practices, we support you in managing tax liabilities, mitigating risks, and maintaining compliance with evolving global tax regulations. Whether you need assistance with restructuring operations, addressing withholding tax concerns, or preparing for new documentation requirements, MGO is here to guide you every step of the way.

Contact our International Tax team today to learn how we can be your trusted partner in navigating international tax complexities and safeguarding your global operations.

The post Navigating New DCL Rules: International Tax Updates and Pillar Two Impacts  appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Expanding internationally brings tax complexities, but strategic planning helps businesses reduce liabilities, stay compliant, and improve operations.

• Working with an international tax professional provides industry-specific insights, cross-border structuring strategies, and opportunities for tax savings.

• Ongoing tax planning helps businesses adapt to regulatory changes, mitigate risks, and position for sustainable global growth.

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Expanding your business across borders is an exciting opportunity — but international growth also introduces complex tax challenges. In a recent episode of her podcast, Evelyn Ackah, founder and managing lawyer at Ackah Business Immigration Law, spoke with MGO International Tax Partner John Apuzzo about navigating global tax complexities. Drawing on John’s insights, this article explores the importance of international tax planning and how having knowledgeable international tax professional on your side can help your business.

Bringing a Global Perspective on International Tax

John Apuzzo’s journey into international tax began in Montreal, where he was born and raised by Italian parents. With citizenships in three countries, John’s multicultural background has uniquely positioned him to understand and navigate the complexities of international tax laws. His career took off when a professor at McGill University encouraged him to become a certified public accountant (CPA). John went on to obtain his CPA license in both Canada and the U.S., teaching and practicing tax law across multiple countries.

Why International Tax Planning Matters

Whether you’re a high-net-worth individual, a multinational corporation, or a growing mid-market business, strategic international tax planning is critical to:

• Reduce tax burdens through proper structuring and treaty benefits.

• Avoid costly penalties by ensuring compliance with cross-border regulations.

• Optimize global operations with efficient tax strategies tailored to your business.

How International Tax Professionals Support Your Business

Varying tax laws, evolving regulations, and compliance risks can quickly become overwhelming for businesses expanding internationally. However, with the right tax strategies in place, businesses can not only remain compliant but also unlock significant financial advantages.

Here are a handful of ways working with an experienced tax professional can help support your business:

1. Cross-Border Taxation Strategies

Expanding internationally means dealing with multiple tax jurisdictions, each with its own rules and compliance requirements. International tax professionals bring extensive experience in structuring global operations, mitigating risks, and improving tax strategies tailored to your business.

2. Improving Tax Efficiencies

Leveraging tax treaties, transfer pricing strategies, and available credits and incentives can significantly impact your bottom line. Tax professionals help find these opportunities, keeping your business competitive while supporting compliance with global tax laws.

3. Tailored Strategies for Your Industry

Every industry has unique tax considerations, and international tax professionals understand the nuances of different sectors. Whether you’re in technology, manufacturing, entertainment, or another industry, they can provide insights and strategies specific to your business needs.

4. Long-Term Compliance and Growth

International tax planning isn’t a one-time effort — it requires continuous monitoring and adjustments as tax laws evolve. With ongoing support, tax professionals help you stay ahead of regulatory changes and position your business for sustainable growth.

How MGO Can Help

Unlock the full potential of your business with strategic international tax planning. Whether you’re expanding globally or restructuring your existing operations, our professionals provide tailored cross-border solutions to help you stay compliant and increase savings. Don’t let the complexities of international tax hold you back — reach out to our International Tax team today to navigate challenges and position your business for success.

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• Tennessee recently repealed the franchise tax property measure, enabling taxpayers to request refunds for overpayments from tax years ending on or after March 31, 2020.
• Franchise tax filers may qualify for refunds for up to three years; refund claims must be filed between May 15 – November 30, 2024.
• Taxpayers using the property measure to calculate estimated payments should contact their tax advisor for further guidance.

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On May 10, 2024, the Tennessee legislature signed into law Public Chapter 950 (2024), which repeals the property measure (“minimum measure”) of the franchise tax for tax years ending on or after January 1, 2024. For a limited time, Tennessee taxpayers who used the property measure to calculate tax liabilities for tax years ending on or after March 31, 2020, may request a refund to the extent those liabilities exceeded the amount of tax that would have been calculated using the net worth measure.

What to Consider…

Refund Claims

• Refund claims must be filed between May 15, 2024, and November 30, 2024.
• You may request a refund if you paid franchise tax using the property measure for tax years ending on or after March 31, 2020 (“FT-13 – Property Measure Repeal – Tennessee Department of Revenue”).
• The amount of tax you may be refunded is based on the portion of taxes paid using the property measure that exceeds the amount you would have owed under the net worth measure.
• Any credits (e.g., jobs tax credit) in excess of the amounts allowed on the amended returns will be reinstated with applicable carryforward rules and will not be refunded.

Refund Procedure

• The Tennessee Department of Revenue issued Franchise and Excise Tax Notice #24-05 providing detailed guidance on the procedure to request a refund.
• The two-step process to claim refund:
  • 1) Amend return according to state guidance, and
  • 2) File refund claim form
• A completed Report of Debts should also be included with the refund claim if you are requesting a refund of $200 or more.
• Refund claims must include a statement waiving the right to file a suit alleging that the franchise tax is unconstitutional for failing the internal consistency test.
• If you would like to address other issues outside of Public Chapter 950, those issues should be handled through separate filings.
• The Department strongly encourages taxpayers to file refund claims using TNTAP, Tennessee’s online website for filing taxes, to expedite the refund process.

Public Disclosure of Taxpayer Information

The Tennessee Department of Revenue must publish the names of taxpayers who receive refunds and the applicable range of refunds received. Specific refund amounts are not published. The refund ranges will be the following:

• $750 or less,
• more than $750 but less than or equal to $10,000, and
• more than $10,000

The information will be published May 31, 2025, and remain on the website through June 30, 2025.

Estimated Payments

If you are a taxpayer who has been using the property measure to calculate 2024 estimated payments, you should adjust your remaining estimated calculations and payments to account for a lower apportioned net worth base.

Alternatively, the state allows taxpayers to make an annual election to continue to use the minimum property measure if it results in a higher tax. Taxpayers with credit carryforwards should consider this election if there is a risk the credits will expire. If the election is made, the taxpayer waives any claim that the minimum property measure base is unconstitutional by failing the internal consistency test.

How MGO Can Help

Our State and Local Tax (SALT) Team can help submit your refund claim in accordance with state guidelines and procedures, in a timely manner. Need assistance requesting your Tennessee franchise tax refund? Reach out to our team today.

The post Tennessee Approves Franchise Tax Refunds for Limited Time appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• In April 2023, the U.S. Tax Court made news when it ruled in favor of businessman Alon Farhy, who challenged the Internal Revenue Service (IRS)’s authority to assess penalties for the failure to file IRS Form 5471.
• IRS Form 5471 is the Information Return of U.S. Persons With Respect to Certain Foreign Corporations.
• In May 2024, the U.S. Court of Appeals for the D.C Circuit reversed the Tax Court’s initial ruling — underscoring the significance of context in assessing penalties for international information returns.

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UPDATE (May 2024):

Recent developments in the Farhy v. Commissioner case have captured significant attention in the tax and legal sectors. On May 3, 2024, the U.S. Court of Appeals reversed the Tax Court’s initial decision, highlighting the importance of statutory context in penalty assessments for international information returns. This ruling emphasizes the need for a closer examination of statutory language, altering perspectives on penalty applicability for non-compliance.

The implications of this case extend to taxpayers and practitioners, as detailed in analyses by MGO (see below). The decision underscores the need for meticulous compliance practices and adept navigation of the complexities of U.S. international tax law, along with a deep understanding of judicial interpretations of tax regulations.

MGO’s professionals are well-positioned to assist clients in navigating the complexities arising from the recent Farhy v. Commissioner decision. With a comprehensive understanding of the changing landscape in penalty assessments for international information returns, we provide guidance to help companies adapt to new judicial interpretations and maintain compliance with evolving tax regulations.

ORIGINAL ARTICLE (published June 8, 2023):

On April 3, 2023, the U.S. Tax Court came to a decision in the case Farhy v. Commissioner, ruling that the Internal Revenue Service (IRS) does not have the statutory authority to assess penalties for the failure to file IRS Form 5471, or the Information Return of U.S. Persons With Respect to Certain Foreign Corporations, against taxpayers. It also ruled that the IRS cannot administratively collect such penalties via levy.  

Now that the IRS doesn’t have the authority to assess certain foreign information return penalties according to the court, affected taxpayers may want to file protective refund claims, even if the case goes to appeals — especially given the short statute of limitations of two years for claiming refunds. 

Our Tax Controversy team breaks down the Farhy case, as well as what it may mean for your international filings — and the future of the IRS’s penalty collections.  

The IRS Case Against Farhy

Alon Farhy owned 100% of a Belize corporation from 2003 until 2010, as well as 100% of another Belize corporation from 2005 until 2010. He admitted he participated in an illegal scheme to reduce his income tax and gained immunity from prosecution. However, throughout the time of his ownership of these two companies, he was required to file IRS Forms 5471 for both — but he didn’t.  

The IRS then mailed him a notice in February 2016, alerting him of his failure to file. He still didn’t file, and in November 2018, he assessed $10,000 per failure to file, per year — plus a continuation penalty of $50,000 for each year he failed to file. The IRS determined his failures to file were deliberate, and so the penalties were met with the appropriate approval within the IRS.  

Farhy didn’t dispute he didn’t file. He also didn’t deny he failed to pay. Instead, he challenged the IRS’s legal authority to assess IRC section 6038 penalties.  

The Tax Court’s Initial Ruling

The U.S. Tax Court then held that Congress authorized the assessment for a variety of penalties — namely, those found in subchapter B of chapter 68 of subtitle F — but not for those penalties under IRC sections 6038(b)(1) and (2), which apply to Form 5471. Because these penalties were not assessable, the court decided the IRS was prohibited from proceeding with collection, and the only way the IRS can pursue collection of the taxpayer’s penalties was by 28 U.S.C. Sec. 2461(a) — which allows recovery of any penalty by civil court action.  

How This Decision Affects Your International Penalty Assessments 

This case holds that the IRS may not assess penalties under IRC section 6038(b), or failure to file IRS Form 5471. The case’s ruling doesn’t mean you don’t have an obligation to file IRS Form 5471 — or any other required form.  

Ultimately, this decision is expected to have a broad reach and will affect most IRS Form 5471 filers, namely category 1, 4, and 5 filers (but not category 2 and 3 filers, who are subject to penalties under IRC section 6679).  

However, the case’s impact could permeate even deeper. For years, some practitioners have spoken out against the IRS’s systemic assessment of international information return (IIR) penalties after a return is filed late, making it impossible for taxpayers to avoid deficiency procedures. The court’s decision now reveals how a taxpayer can be protected by the judicial branch when something is deemed unfair. Farhy took a stand, challenged the system, and won — opening the door for potential challenges in the future.  

It’s uncertain as to whether the IRS will appeal the court’s decision. But it seems as though the stakes are too high for the IRS not to appeal. While we don’t know what will happen, a former IRS official has stated he expects that, for cases currently pending review by IRS Appeals, Farhy will not be viewed as controlling law yet.  

The impact of the ruling is clear and will most likely impact many taxpayers who are contesting — or who have already paid — IRC 6038 penalties. It may also affect other civil penalties where Congress has not prescribed the method of assessment in the future. 

How You Should Respond to the Court’s Decision 

You should move quickly to take advantage of the court’s decision, as there is a two-year statute of limitations from the time a tax is paid to make a protective claim for a refund. It’s likely this legislation wouldn’t affect refund claims since that would be governed by the law that existed when the penalties were assessed. Note that per IRC section 6665(a)(2), there is no distinction between payments of tax, addition to tax, penalties, or interest — so all items are treated as tax.  

If you’ve previously paid the $10,000 penalty, it’s important to file your protective claim now, unless you’ve entered into an agreement with the IRS to extend the statute of limitations, which can occur during an examination. Requesting a refund won’t ever hurt, but some practitioners believe the IRS may try to keep any penalty money it collected, even if the assessment is invalid — because, in its eyes, the claim may not be. Just know, you can file your protective claim for a refund, but may not get it (at least not any time soon).   

The Farhy decision could likewise be applied to other US IRS forms, such as 5472, 8865, 8938, 926, 8858, 8854. Some argue the Farhy decision may also be applied to IRS Form 3520.

How MGO Can Help

Only time will tell if the court’s decision will open the government up to additional criticisms for other penalty assessments. If you have paid your penalties and are wondering what your current options are, MGO’s experienced International Tax team can help you determine if you’re eligible to file a refund claim.  

Contact us to learn more.

The post How the Tax Court’s Ruling on Farhy v. Commissioner Could Affect Your Penalty Assessments appeared first on MGO CPA | Tax, Audit, and Consulting Services.

Alternative Paths to U.S. Exchanges

There are a variety of reasons companies would prefer to avoid a traditional IPO. For those entities we provide tailored solutions during the entire go-public process — or portions of it — including the pursuit of alternatives such as a Regulation A+ offering and reverse mergers. We help each client find the path that’s right for your unique needs.

Bridging Cultures

Our China practice has the language skills and cultural understanding to navigate market complexities. Call or contact us online to find out how we can help you.

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