Getting Paid: Repatriating Funds from Your Foreign Biodiesel Customer

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As a supplier of biodiesel plants and equipment, you charge your customers for various services that you provide. You charge them for the plants and equipment that you sell to them. You might charge a license fee for the right to use your technology to operate their biodiesel plant or equipment. You might even provide a loan to purchase a biodiesel plant or equipment. And you fully expect to get paid by your American biodiesel customers with little government involvement and few legal entanglements.

Not so, however, with regard to your foreign biodiesel customers. Receiving fees from them, and repatriating those fees to the United States, can present some rather thorny legal and financial issues. This article will highlight the problems that you might face in attempting to bring in and repatriate those funds. By its very nature, it cannot provide solutions to all of the problems that you might encounter in various countries around the world. The issues apply to different foreign jurisdictions differently.

Foreign Government Approvals and Licenses
In some countries, customers may not send currency out of the country without the approval of the appropriate agency or institution in their national government. In others, customers may send local currency out of the country without governmental approval, but may not send foreign currency (such as U.S. dollars) out of the country without approval. Such approval often must come from the main financial and/or banking institution in the customer's country.

Obtaining that approval can be a frustrating experience. Usually, your customer will be required to file a copy of the contract that you have entered into and application forms that require information about your company and your customer. More often than not, these documents must be translated, sometimes by an official government translator, into the language spoken in your customer's country before they may be submitted to the foreign institution for approval. In some cases, some or all of these documents must be submitted for approval each time your customer desires to send funds to the U.S. In other cases, a one-time "blanket" approval may be sought, which would allow your customer to remit payments to the U.S. as often as it wished for a certain period of time.

In many countries, the application process for remitting funds overseas can take weeks. Sometimes, government officials meet only once or twice a month to approve or deny such types of applications. Therefore, your customer must take an active role in preparing, translating, and submitting to the appropriate governmental institution the application to remit fees to you in connection with your customer's business operations. The customer must be responsible for monitoring the application process at the appropriate institution and providing the government with any additional information that it may require to reach a favorable decision regarding the application to remit funds to you.

Foreign Government Taxes
After your customer receives approval from the main financial and/or banking institution in their country, they may send payments to you for fees owed to you in connection with their business operations. However, simply because the customer is permitted to send these payments overseas does not mean that the payments can be sent tax-free. Many foreign governments impose a withholding tax on the payment of funds overseas, if such payments take the form of fees or royalties paid in connection with license grants. Since payments from your customer might be remuneration for license grants by you to your customer for the use of your biodiesel technology, these fees are usually categorized by the taxing authorities in the customer's country as license fees subject to withholding tax.

The amount of tax that must be withheld from the funds remitted overseas is often quite substantial, ranging from 10 percent to 25 percent of the amount of the payment itself; and it is you, not the customer, who is ultimately responsible for the payment of the tax. The customer simply acts as the agent of their government in deducting the amount of tax withheld from the payment remitted overseas, and sends the proper amount of withholding tax to the taxing authority in their country on your behalf. In practice, the customer is often prohibited from making any payment overseas until they can demonstrate they have deducted the appropriate amount of withholding tax from the payment, and have remitted such amount to their government.

Let's say, for example, that you have a customer in the Philippines that has the right to use your technology in the Philippines in connection with the operation of their biodiesel plant. Let's also say that the fee that you charged your customer was $100 per month. Since, under the current tax regulations in the Philippines, the payment is subject to a withholding tax of 25 percent, your customer would send you a payment of $75 per month and would remit $25 per month to the Philippine tax authorities on your behalf.

In an effort to reduce the foreign tax burden on American companies that find themselves paying foreign withholding taxes on the repatriation of funds to the U.S., the government has entered into bilateral tax treaties with many of our trading partners, which lowers the amount of tax withheld from such payments from 10 percent to 25 percent, to zero percent to 20 percent, depending upon the foreign country and type of payment involved. In Poland, for example, payment of typical license fees is subject to a maximum withholding tax of 10 percent. Absent a bilateral tax treaty between the U.S. and Poland on this matter, the payment of license fees destined for the U.S. would be subject to a withholding tax of 25 percent.

One way to eliminate the effect of a foreign country's withholding tax on the amount of funds you receive from your foreign customers is to "gross up" the payments that they make to you. In essence, "grossing up" means increasing the amount of your usual fees that are subject to withholding tax in a foreign country so that you receive the amount of fees to which you are accustomed after the withholding tax is deducted from the payments made by your foreign customers. Let's say, for example, that your usual license fee is $100 per month. Let's also say that your customer in India has informed you that any license fee they pay to you is subject to a withholding tax of 20 percent in India. If you simply increase your usual license fee from $100 per month to $125 per month, you will receive from your Indian customer your usual monthly payment of $100, after your customer deducts 20 percent of the $125 license fee, or $25, and remits that amount monthly to the Indian tax authorities on your behalf.

If, despite your best efforts, your foreign customers will not agree to "gross up" your usual license fee, your foreign tax may be credited against the amount of income tax which your company owes in the U.S. In order for American companies to obtain a certain degree of tax relief from the payment of taxes to foreign governments, the U.S. government has entered into bilateral tax treaties with many countries, permitting American companies to take a credit on their U.S. corporate income tax for a portion of the amount of tax that they pay to a foreign government. However, this tax credit does not apply to every situation or to the payment of tax to every foreign government; nor is the credit for 100 percent of the amount of the tax paid to a foreign government. Each tax credit situation must be analyzed on a case-by-case basis.

Currency Risks
In any analysis of the payment of fees from foreign customers, you must determine in which currency you will be paid: U.S. dollars or the currency used in your customer's country.

Your decision should be based upon your predictions concerning the future fluctuation of the exchange and inflation rates between the U.S. dollar and the currency of that country.

If you believe that during the term of your foreign customer's business operations, his country's currency will increase in value or experience less inflation than will the U.S. dollar during the same period, you might consider receiving your fees in the currency of your customer's country. If, for example, your customer is located in Switzerland, according to the above criteria, you might fare better financially to be paid in Swiss francs than in U.S. dollars. If, on the other hand, you believe that during the term of your customer's business operations, the currency of his country will decrease in value compared to the dollar and/or will, during the same period, experience greater inflation than will the dollar, you should probably be paid in dollars. Therefore, if your foreign customer were doing business in Mexico, according to these criteria, you would probably prefer to receive U.S. dollars, rather than Mexican pesos.

Getting Your Fees to the U.S.
There are, of course, several ways in which you can receive fees from your foreign customer. The two safest methods are by wire transfer and by irrevocable letter of credit. A wire transfer of funds is the most efficient and expedient manner in which you can be paid. You simply designate to your foreign customer an account in a U.S. bank a bank into which the fees must be deposited.

Receiving payment of your fees by means of an irrevocable letter of credit is more complicated and time-consuming. However, when payment by wire transfer is not available or desirable, payment by irrevocable letter of credit should be seriously considered. The letter is a payment mechanism by which your foreign customer establishes and funds an account at a bank in their home country, for the specific and exclusive purpose of paying your fees. At the same time, you designate a bank account at a bank in the U.S. into which those fees may be deposited. When those fees are due to you, you are simply required to present to your American bank certain, pre-determined documentation which your bank passes on to your customer's bank in their country, demanding that payment be made to your bank from their bank. If the documentation that you submitted to your bank was the type required under the irrevocable letter of credit and the transaction goes smoothly, the funds will be transferred from the foreign bank to your bank in the U.S.

There are, however, two disadvantages to receiving your payments by irrevocable letter of credit. First, the process can take several days or even weeks, depending upon the banks and the countries involved. You should carefully explore the procedure and length of time required for payment by a foreign bank before agreeing to payment of your fees by means of an irrevocable letter of credit.

The second disadvantage is that each bank involved in the transaction will charge you a fee for its services, regardless of how small or insignificant these services might be. These bank fees can be quite substantial however, you may be able to reduce the amount if both you and your customer use different branches of the same international bank to service your irrevocable letter of credit. For example, your British customer could establish a bank account at a London branch of Citibank, and you could open an account at one of Citibank's New York offices. Your British customer could then establish an irrevocable letter of credit in your favor at Citibank's London office, and could indicate that all payments under the letter of credit be made to your Citibank account in New York. Thus, when you are paid under the letter of credit from Citibank's London branch, Citibank presumably would not charge you two service fees for the transaction.

Repatriating funds from your foreign biodiesel customer can be fraught with danger. However, giving serious consideration to the issues discussed in this article, and finding a way to resolve them before any fees become due, will go a long way toward reducing most of the danger inherent in bringing your fees home. Advanced planning by you and your foreign customer could be the difference between a successful and an unsuccessful foreign business transaction.

Richard Weiner is an international biodiesel lawyer in the energy law department of Fredrikson & Byron P.A. Reach him at rweiner@fredlaw.com or (612) 492-7009.