Corporate Tax Considerations
While much of the university’s educational and research-related income derived in the United States is exempt from the U.S. federal and state taxes, its tax exempt status is generally not recognized overseas.
Permanent Establishment Risks
Taxation and reporting responsibilities in a foreign country are generally determined on the basis of whether an organization has created a permanent establishment (PE) in that country (i.e., a taxable presence). While each treaty will have different language, non-treaty as well as treaty countries usually look for similar criteria, such as:
- Conducting income-producing activity.
- Conducting educational programs and seminars, including executive education and study abroad programs.
- Conducting research activities with a fixed place of operation.
- Having faculty and staff working abroad.
- Hiring local workers, and/or using local facilities, such as leasing or owning physical office space, ranging from a permanent place of business to an individual’s private residence.
- Maintenance of a fixed place of business solely for the purpose of advertising, supplying information, scientific research, or similar activities may qualify for an exemption.
- Typical employment relationships or independent consultant status might be interpreted differently in foreign jurisdictions.
- Opening bank accounts.
- In some instances a PE may be triggered when an organization merely has one or more employees located in a foreign country for a period of time.
The creation of a PE in the foreign country is problematic because it exposes the organization to corporate income taxes applicable to for-profit entities in the foreign country. In addition, organizations with PE in a foreign country may be responsible for collecting and remitting value added taxes (VAT) and/or similar taxes levied on goods and services. Once a PE is found to exist, the organization may also be required to maintain books and records in accordance with local accounting principles in local currency, complete and file audited statutory financial statements with the local authorities.
Your project will generally avoid PE status if the activity is truly “representative” in nature, such as undertaking a marketing activity where there is no direct or indirect revenue created. However, some jurisdictions abroad may still attempt to regulate and tax these efforts. Distance-learning programs may also be subject to local scrutiny, especially blended or “hybrid” programs, with faculty teaching in-country for part of the program.
Given that the reporting and local compliance requirements vary greatly by country, local professional assistance must be engaged to ensure all requirements are being met timely and accurately.
Whether the university has a PE in a foreign country is based on all GW activities. Please share your business plan with your school/division’s Finance Director to make a request of Tax on a PE analysis.
Value Added Tax ("VAT") and Goods and Services Tax ("GST")
VAT and GST, also known as indirect taxes, are non-U.S. consumption taxes charged on the supply of goods and services. The university is generally not recognized as a tax-exempt organization overseas.
When purchasing goods and services abroad, the university departments are usually required to pay applicable VAT or GST. It is important that these taxes are appropriately budgeted for as additional program or project costs.