Possible Tax Implications for Companies Rebuilding Iraq
Contractors should be aware of international tax issues and other costs when bidding to rebuild Iraq
Contractors should be aware of international tax issues and other costs when bidding to rebuild Iraq.
Visions of profits are dancing in the heads of most government contractors these days. The cost to rebuild Iraq will reach well into the billions of dollars.
Many of the contracts will be awarded through Bechtel, the U.S. government’s prime contractor for the project. However, some of the work will be conducted through direct contracts with Iraq or other foreign entities.
Contractors should understand the tax implications of the revenue they generate from work in and for foreign countries according to Steven M. Piascik, CPA, MT, President of PIASCIK, a certified public accounting and financial planning firm located in Richmond, Virginia.
PIASCIK said “There are significant tax consequences and often hidden costs when working in a foreign country both for the company and for their employees”. PIASCIK specializes in international tax services. PIASCIK, is a former Senior Tax Manager with KPMG LLP.
The first step is to see if the country the work will be performed in has a Tax Treaty with the U.S. If this is the case, then the tax treatment guidelines will be laid out in this treaty. Otherwise, the next step is to look at the length of time the company will be working in the foreign country. Often if the contract is brief, one to three months, in some cases up to twelve months, the company would simply report the income on their U.S. corporate tax return. For longer periods the company may be considered a creating a taxable entity in the country they are working in. For example, in Iraq, tax rates are progressive, up to 50% of net income according to PIASCIK.
Another key issue when companies are estimating costs for a contract is not only the direct taxes but also indirect taxes such as Value Added Tax on imported products (machinery, equipment, and other goods). Any income taxes paid in foreign countries may be eligible for Foreign Tax Credits in the U.S. If eligible, the company can only receive credits up to the amount they would owe at the U.S. taxable rate. However, they can carry forward unused credits for up to five years. These are the types of issues PIASCIK and his team of former Big Four accountants address with their international clients.
One such client is Secucontrol, Inc. of Alexandria, Virginia. The company manufactures test equipment for power companies and companies that design and integrate large-scale power distribution systems and facilities. Frank Hergeroeder, President of Secucontrol, which has a presence in the Middle East in Amman, Jordan and more recently in Qatar, the Persian Gulf state where the U.S. Central Command Headquarters is located, has dealt with some of these issues. The company’s headquarters are in Hettstedt, Germany and they have turned to PIASCIK as their international accounting and tax experts in the U.S. For more information on Secucontrol please visit: www.secucontrol.com or call 703.838.7677.
Companies that may have extended contracts in foreign countries may benefit from creating a new foreign entity, not only from a tax standpoint but also from a legal liability perspective. There are also other nuances to the U.S. tax code relating to income from work in foreign countries, such as an Export Exclusion on income for certain Engineering and Architectural services.
In and near Iraq there will also be additional security costs that companies do not normally factor in to bids. Find out from other contractors how they address security and get cost estimates. Finally, PIASCIK continues to state “employees earning wages in foreign countries also have tax issues to consider. For many there is an $80,000 income exclusion while working in a foreign country. Again, how much time is spent working in the country comes in to play”.
PIASCIK has built his international practice very deliberately. Not only has he hired Big Four International tax talent from Ernst & Young LLP and Deloitte & Touche LLP, but PIASCIK also has hired an International Specialist, Terri Kuhn, who speaks six languages to better communicate with his foreign clients.
PIASCIK has established clear expectations that are at the heart of PIASCIK & Associate’s core values: 1) Deliver more than the client expects, 2) Set high goals, and 3) Work hard to reach your goals. These values resonate with his clients like Secucontrol.
PIASCIK concludes “Companies considering foreign contracting should look closely at tax and other costs associated with this type of work before placing a bid.” Contact Steven M. Piascik or Ryan L. Losi at 866.501.4013.