Tax Strategies for International Business Expansion

International business expansion is something that many business owners think about doing in order to not only increase their annual revenue, but also to expand their products into markets that they have yet to explore. However, successfully expanding to another country is a challenge many businesses have a hard time dealing with, especially when it […]

International business expansion is something that many business owners think about doing in order to not only increase their annual revenue, but also to expand their products into markets that they have yet to explore. However, successfully expanding to another country is a challenge many businesses have a hard time dealing with, especially when it comes to the extra paperwork and administrative work that is required to expand peacefully. Among this heavy administrative work, there is taxation. Expanding your business globally means that a thorough international tax strategy is required. Whether you are planning to bring your profits back to your native country right away or have a deferral strategy that will leave your profits into the country you have expanded into is an example of the things you will need to consider before even starting your international business expansion plan. Other things such as whether or not your presence in another country will be taxable (and therefore might come with other tax liabilities) is also something you will have to wonder about.

While tax regulations on an international scale can seem too complicated and draining to even start trying, they can be managed strategically if you plan well beforehand. Among all the things you will put in your international business expansion strategy, business structure as well as local presence will be some of the most important, especially when it will come to international tax issues.

Business Structure:

Different countries have different tax rates for companies who will be operating into a new country. The U.S has one of the highest corporate tax rates in the world for instance, and additional layers of taxation can be encountered such as:

• Foreign income tax in the country in which you will expand into and therefore earn income

• Withholding taxes related to payment of a dividend or other income stream from your company’s foreign subsidiary

• U.S income tax on foreign-sourced income when it is repatriated to the U.S.

Thorough planning when it comes to international tax will be required in order to repatriate your profits to your native country in order to avoid paying disparities between your native country’s and foreign’s tax rates.

Here are two questions you will need to be able to answer:

• Should your company be a corporation or a branch of the U.S parent?

• How can the profits be transferred efficiently to the U.S parent?

Taxable Presence:

Creating a company that is permanent into the country you want to expand can be an issue as it might mean that your company will have to pay taxes there. And while you might not think that your company is permanent, some of the activities you do within the country might put you in the “permanent company” category. Having employees (even a few) in the foreign country for instance might require for you to file tax returns and even pay some taxes. Additionally, establishing a subsidiary entails other requirements such as transfer pricing agreements.

Even though the IRS (Internal Revenue Service) does not define “permanent establishment” in a foreign country, relevant tax treaties between your country (assuming it is the U.S) and the one you plan on expanding into might exist.

Allocation of income between the U.S and the foreign country might be leaning more in favor of the local jurisdiction depending on the location you are in.

The tax aspects of operating in a foreign country are a primordial aspect and a big influencer of your overall business decision. It will be very important for your business to consider the level of activity you are going to have in the country you will be expanding to as well as what you will need to do to make sure that you are complying to everything that is required. Getting this administrative work right is very important and even critical if you want to protect yourself and your business from different layers of fines and taxes from not only the U.S government but also the government of the country you will be expanding to.

Transfer Pricing Considerations:

In relation to tax strategies for international business expansion, transfer pricing is also something you will have to take into account during your business expansion strategies. Indeed, many governments are now examining the different transfer pricing practices with a particular scrutiny to make sure that profits are properly aligned with the value created. Additionally, several tax reform provisions in the United States could create adverse tax consequences for related-party transactions but they also can now present planning opportunities as well. In order to stay on top of the administrative work that will be required, you will need to know and understand the different key transfer pricing considerations.

1. Properly assessing the level of transfer pricing risk:

It is very important for you to have a clear understanding of what your transfer pricing risk is as well as where it lies to mobilize resources appropriately in order to deal with these risks. Some factors include different things such as:

• The size of the transaction: Transactions with higher amounts will have greater scrutiny. Therefore a $1 million transaction will not be looked the same as a $100,000 one.

• The nature of the transaction: Intangibles represent a higher potential for abuses than sales inventory according to tax authorities. The transaction will therefore be looked at differently depending on its nature.

• Tax attributes of the taxpayer: If you continuously report losses, you will more than likely attract tax authorities’ attention since they are constantly on the lookout for taxpayers will faulty and questionable transfer pricing.

• Impacted jurisdiction: Transfer pricing regulations will be different from one jurisdiction to the next because some jurisdictions will be more aggressive when it comes to enforcing their regulations while others will be a little bit more lenient.

2. Looking at your transfer pricing policy:

Transfer pricing rules can be challenging and require several documentation requirements, but they also present a lot of opportunities for taxpayers to minimize their burdens. An economic study will unearth opportunities to adjust transfer pricing practices in order to reduce the company’s global tax burden. A thorough and effective analysis will therefore be necessary because without it, these opportunities might be lost.

3. Looking for the appropriate support:

Depending on the level of risk related to the pricing, taxpayers need to make sure that they have the appropriate level of documentation in order for the intercompany pricing to be justified. This support may need to be in forms such as a full transfer pricing study, a benchmarking analysis, or an analysis of similar transactions entered by the taxpayer with third parties. Taxpayers should also be aware of the change of documentation that are required; prior transfer pricing documentation might not be compliant with new regulations anymore.

4. Looking for putting intercompany agreements in place:

It is primordial to remember the terms and conditions of several related-party transactions through formal intercompany agreements in order to decrease the risk that the tax authorities will recharacterize underlying transactions. This is specifically important related to intercompany financing arrangements of intangible property, as well as service transactions.

Because of the many layers and complexities involved with international business, consulting with experts regarding these matters to make sure that you are doing everything properly will be something we would strongly recommend you.

They will help you from the very beginning of your international business expansion process when it comes to putting together an efficient strategy that will minimize the company’s tax rate as much as possible, as well as other administrative matters that can be complex and that many business owners wanting to expand globally do not necessarily always think about.

Among these experts, ORSIM Consulting can help you from the beginning to the end of your international expansion journey.