As U.S. companies expand their global footprint, international tax considerations are increasingly becoming part of everyday business decisions. Hiring a foreign contractor, selling products into an overseas market, or paying interest expense on a loan from a foreign lender can each trigger reporting obligations and compliance requirements, making early planning and communication with advisors essential.
In this Tax Insights conversation, Joseph Vellone, CPA, MBA, Principal, and Jackie Honeycutt, CPA, Director in Grassi’s International Tax Practice, break down their key takeaways from the 2025 filing season, the missteps they’re seeing most often, and how businesses can plan more effectively for the year ahead.
Q: What’s one international tax issue U.S. companies with global operations should be paying attention to?
Jackie Honeycutt: Certain foreign earnings may be required to be included in U.S. taxable income before cash is distributed, which can create differences between book income and taxable income. With state treatment of Global Intangible Low‑Taxed Income (GILTI) continuing to evolve, companies should assess the potential impact on both the business and its shareholders as part of 2025 compliance and 2026 planning.
Joseph Vellone: I find that business owners tend to focus on operations and often overlook what happens when business activities take place in a foreign jurisdiction. Operating abroad can create a Permanent Establishment (PE), which allows the host country to tax profits attributable to that activity.
PEs are defined within income tax treaties. This typically includes a fixed place of business — such as an office, branch, factory, or warehouse — that creates a taxable presence for a company in a foreign country. PEs can also be triggered by the physical presence of U.S. employees working in that country, dependent agents concluding contracts, or business projects lasting over a certain period (often 6-12 months).
Q: What’s a cross‑border tax issue you’re seeing more frequently this year?
Joseph Vellone: One of the most significant cross-border issues that I’ve seen in the last cycle has been the unexpected discovery of Passive Foreign Investment Company, or PFIC, status. Many U.S. individuals and businesses invest in foreign mutual funds or ETFs that the IRS classifies as PFICs, which are subject to punitive tax rates and complex reporting.
Jackie Honeycutt: I agree with Joe that PFICs can be a real issue for U.S. investors. I also want to point out that the negative tax consequences can seriously erode the return on investment, making it critical to stay current with the annual filing requirement.
Q: What’s a common tax mistake you’re seeing right now, and how can it be avoided?
Jackie Honeycutt: A common mistake is ignoring cross‑border transactions, even when there is no physical footprint outside the U.S., such as selling products into a foreign jurisdiction.
Foreign jurisdiction indirect taxes (such as value‑added tax and goods and services tax) generally have much lower thresholds for reporting than income taxes. Companies need to be aware of foreign compliance requirements. In addition, the U.S. has information filing requirements for foreign transactions, many of which carry significant penalties for non-compliance.
Joseph Vellone: A common error we see in tax return reviews and financial statement reviews is Withholding Tax (WHT) not being applied to overseas payments.
WHT on overseas payments is generally applied when U.S. persons or entities make payments of U.S. source that are Fixed, Determinable, Annual, or Periodical (FDAP) to foreign parties. A common example of this would be interest expense paid to a foreign lender. When a foreign company makes a loan to a U.S. entity, the interest paid on that loan is generally treated as U.S.-source FDAP income. As a result, those interest payments are subject to U.S. withholding tax and must be withheld and remitted to the IRS by the U.S. payor. The default withholding rate is 30%, unless a lower rate applies under an applicable income tax treaty, provided the payor has the proper documentation in place showing the recipient is entitled to the lower rate.
It is important to remember that the payor becomes the withholding agent and is jointly liable for the withholding tax. If the required withholding is not made, the IRS can pursue the withholding agent for the tax that should have been withheld. U.S. partnerships may also be withholding agents in certain circumstances.
The moral here is to reach out to your advisors and ask questions earlier rather than later.
Q: What’s one thing taxpayers can do now to make next year’s tax season smoother?
Jackie Honeycutt: Take note of foreign transactions. When gathering sales data by state, it is helpful to break out sales to foreign jurisdictions by country. This can help identify when foreign tax compliance obligations may arise and, for C-corporations, whether the company may qualify for the foreign‑derived deduction eligible income incentive.
It is also important to review vendor lists. Any vendor, shareholder, or creditor with a foreign address should have a Form W‑8 on file, or a Form W‑9 if the entity is U.S.‑based. The documentation determines whether withholding applies and at what rate. In some cases, withheld amounts must be paid to the IRS as soon as 3 days after withholding.
I would also recommend updating the entity organizational chart annually. Sharing the organizational chart with tax advisors can help to avoid confusion and confirm that all filing requirements have been identified — a picture is worth a thousand words.
Joseph Vellone: I agree with Jackie. Many smaller U.S. businesses are now operating globally. We encourage clients to organize records early, clarify whether income and expenses are U.S.‑ or foreign‑sourced, and communicate early and often with tax advisors.
Changes to business structure, operations, acquisitions, or sales should be discussed as they happen. Early communication allows for better planning and fewer errors.
Q: What’s a tax topic you wish more clients asked about proactively?
Jackie Honeycutt: Transfer pricing, without a doubt. The penalties for transfer pricing adjustments can be significant. Being proactive is helpful not just in mitigating penalties, but also in helping management document the company’s functions, assets, and risks and assess appropriate benchmarks.
I think of transfer pricing as good housekeeping. A company’s transfer pricing policy helps identify the legal documents that need to be drawn up, what recurring journal entries may be needed, the timing and type of any transfer pricing adjustments, if applicable, and general compliance with information reporting requirements. Ongoing assessment helps ensure the policy continues to align with the company’s global strategy. It is not just a compliance exercise. It can also be a useful management tool.
Joseph Vellone: I agree completely. Transfer pricing has really been a hot topic over the last decade as businesses have become more global and operate across multiple jurisdictions.
The IRS has specialized teams within its Large Business and International unit that use data analysis and advanced technology to evaluate whether companies are charging appropriate pricing among related parties. Business owners and finance teams should be thinking about how goods and services are priced within their organizations and discussing that methodology with their tax advisors. Addressing transfer pricing proactively can help keep companies in a safer position and avoid some very costly penalties.
Practical International Tax Planning Considerations
While wrapping up the 2025 filing season, it’s natural to start thinking about what can be done earlier and more proactively in the year ahead. Keeping advisors informed as cross-border activity evolves throughout the year is one of the most effective ways to avoid surprises at filing time.
Looking ahead to 2026, businesses with international exposure should keep the following considerations in mind:
- Track the cross border touchpoints that create obligations, including where employees work, how contracts are executed, and whether projects abroad run long enough to create a taxable presence.
- Review overseas payments and foreign address vendors, confirm the right documentation is on file (Forms W8 or W9), and validate whether 30% withholding or a treaty rate applies so Form 1042 reporting is straightforward.
- Treat transfer pricing as a standing annual check in: document functions, assets, and risks, confirm benchmarks still fit how the business operates, and address issues early to reduce penalty exposure.
- Set up a year round cadence with advisors: organize records early, clarify U.S. vs. non U.S. income and expenses, and communicate business changes, acquisitions, and sales as they happen.
Navigating International Tax in a Global Business Environment
Grassi’s International Tax practice supports U.S. companies navigating cross border operations, compliance, and planning considerations. With a team of international advisors and access to a network of over 120 countries through our membership in PrimeGlobal, Grassi helps businesses minimize exposure, maintain compliance, and support international growth at every stage of expansion.
