Four Common Risks of International Noncompliance for Higher Education Orgs
Most institutions of higher education have become international in their operations, and these global activities come with increased compliance obligations. If your college or university enrolls students from other countries, enriches your curriculum with study-abroad programs, or earns returns on foreign-domiciled investments, then you are beholden to a host of related regulations, many of which have steep financial penalties for noncompliance.
The institutions I work with generally have excellent in-house professionals who are proficient in U.S. tax and accounting rules, but even some of the most seasoned people get tripped up on international compliance. These are the top four areas of weakness that I continually see expose schools to the risks of noncompliance:
- Accounting for foreign currency transactions
- Hiring employees from other countries
- Conducting business with foreign vendors
- Filing tax forms related to international activities
It’s important that you understand the rules and risks in each of these issues to effectively manage your exposure.
Foreign currency transactions
PPC’s Guide to Nonprofit GAAP defines foreign currency transactions as follows:
“A foreign currency transaction is one that must be settled in a currency other than the reporting entity's functional currency. Foreign currency transactions arise from the following (FASB ASC 830-10-20):
- Purchases or sales, on credit, with prices of goods or services in a foreign currency.
- Borrowing or lending funds where the payable or receivable is in a foreign currency.
- Unperformed forward exchange contracts.
- Acquisition or disposition of assets or incurrence or settlement of liabilities in a foreign currency.
- A gain or a loss results if the exchange rate changes between when the transaction is recorded and when the purchase is made. This must be reflected in the statement of activities. This could result from leasing space abroad or paying vendors in-country in foreign currency.”
If your institution has any of those items on your list of activities, you must follow the GAAP guidance for your accounting and financial reporting. If you don’t, you run the risks of audit findings and further regulatory scrutiny. Perhaps more troubling could be the consequences of inaccurate financial data, such as faulty budgeting, misinformed decisions, and erroneous funding and grant information. A skewed picture of your organization’s finances can affect numerous departments and programs, so pay close attention to GAAP compliance related to foreign currency.
Foreign employees and contractors
Your international employees diversify your faculty and staff and help you operate across the globe. But when you hire people from other countries, you trigger a host of possible taxes abroad and at home (including those levied by states), both for your organization and the individuals you hire.
What is most critical is how these employment agreements are structured, which determines if your people are actual employees or independent contractors and if their relationship with your organization creates “permanent establishment.” Permanent establishment is a provision of many income tax treaties and most European value-added tax (VAT — the European equivalent of our sales tax) systems and can add to your tax liabilities.
Foreign employment is complex territory. Pay careful attention to each employment agreement to properly cooperate with other nations’ taxing authorities, as well as our own federal and state agencies. Strategically recruiting and hiring can help manage your tax exposure.
Most institutions do a great job of obtaining W-9 forms from their U.S. vendors. The process of obtaining W-8 forms from foreign vendors, however, is not as well established in the industry. The W-8 form shows the vendor’s country of residence and notes any applicable tax treaty obligations. Depending on the country and where the vendor’s work is being done, there could be a tax withholding of up to 30 percent required on each payment.
If your college or university neglects to document and withhold the proper tax amount from your vendor payments and remit to the collecting authorities, you’ll be on the hook for a tax bill as high as 30 percent of the total payments. This comes as an unpleasant surprise to the unprepared, and the hit to your budget can be painful. Don’t risk the consequences of noncompliance.
Foreign tax filings
Even at small, local schools, students and professors may learn, teach, and conduct research and business all over the world. These activities often come with tax filing requirements, and unless you have a firm grasp of all your international undertakings and their related paperwork at home and abroad, you run the risk of noncompliance. In these cases, stiff monetary penalties can be assessed.
Your organization should gather all of your international activities into one comprehensive list. Look for foreign-domiciled investments and bank accounts, as well as partnerships, S-corporations, estates, and trusts that send Schedule K-1 or equivalent forms — these always have tax filing requirements. This table shows some of forms that must be filed for these types of assets and transactions, as well as the penalties that can be assessed for failing to file.
|Form Number||Title||Noncompliance Penalty|
|Form 926||Return by a U.S. Transferor of Property to a Foreign Corporation||10 percent of fair monetary value of property up to $100,000|
|Form 3520||Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts||$10,000 or 35 percent of transfers to or distributions from trusts, whichever is greater|
|Form 5713||International Boycott Report||$25,000 per filing|
|Forms 5471 and 8858||Information Return of U.S. Persons with Respect To Certain Foreign Corporations||$10,000 per filing, with additional penalties of up to $50,000 per filing|
|Form 5472||Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business||$10,000 per filing|
|Form 8865||Return of U.S. Persons with Respect to Certain Foreign Partnerships||$10,000 per filing (categories 1 and 2), or 10 percent of fair monetary value up to $100,000 (categories 3 and 4)|
|Form FinCEN 114||Report of Foreign Bank and Financial Accounts||Up to $10,000 per filing|
How we can help
CLA’s international business and tax professionals and higher education practitioners have tremendous knowledge of regulations governing global operations and transactions. We can assess your institution’s internal controls and processes and help identify your vulnerabilities. Our people can work with yours to manage risk, fully comply with all regulations, and prepare the proper documentations and filings you need to stay on the right side of the rules.