U.S. Companies operating their business abroad may also have an increased tax burden due to Indirect taxes, such as value-added tax (VAT), goods and services tax (GST), or local sales taxes. Unlike income taxes, these indirect taxes are generally not covered by tax treaties between the U.S. and other countries.
Whether a company needs to register for indirect tax depends partly on the extent of its business presence in the foreign country. Companies should work with local tax consultants early in their expansion to determine when registration is required and to understand the proper procedures for issuing compliant invoices and filing tax returns.
Once registered for indirect taxes, companies should ensure they claim all available input tax credits in the foreign jurisdiction. These credits can offset indirect tax paid on local services, import duties, and capital expenditures, significantly reducing the net amount of indirect tax owed. Failing to claim these credits essentially means paying unnecessary taxes.
Indirect tax payments generally cannot be claimed as foreign tax credits against U.S. taxes.