One of the first things to consider is whether a business is trading with or, more significantly, within a given jurisdiction. The latter presents a much greater challenge and risk, and accordingly it is recognition of this distinction at the outset which is critical.
Typically, problems can relate to where contracts are agreed – whether in one location or another. Issues can also arise if employees are spending increasing amounts of time in another jurisdiction or, through a combination of factors, it can be established that an entity has unwittingly acquired “a place of business”.
The more these issues are prevalent, the greater the risk that the tax authorities will assess tax on any relevant profit. They may impose a withholding tax on a proportion of an employee’s remuneration or levy a sales-based tax on any relevant transactions.
Where a business has a definitive intention to set up in new territory, it is a priority to analyse properly the tax consequences of all aspects of the planned commercial arrangements.
Areas of greatest importance include the financing of the new entity, its structure, the trading relationships with other entities within the group and the determination of the basis of intergroup transactions. In addition, the repatriation of profits to the parent entity is a key area to consider, as well as how you will deal with the transfer of employees from the host country to the new jurisdiction, if that is deemed appropriate to facilitate the set-up.
Proper planning at the outset by any business seeking to expand abroad will always pay rewards
The relative significance of each of these will depend on the commercial objectives and, in particular, the business plan. Most businesses will want to retain as much flexibility as possible, but typically will want to ensure they minimise the impact of double taxation between relevant jurisdictions. You will also want to ensure that, if the venture is successful, you can expand without incurring unanticipated tax cost and, above all, avoid overcomplicating any structure.
Many jurisdictions will impose detailed processes for dealing with these issues. Failure to recognise regulatory and administrative requirements at the outset can cause significant problems, not only in consequence of a higher compliance cost than might not otherwise be necessary, but more importantly, many tax jurisdictions impose penalties for failure to comply and deliver appropriate documentation within defined time limits.
Compliance is now a heavy burden to business. Given the increasing use of electronic reporting by jurisdictions around the world, the requirement to deliver timely information to relevant authorities must be assessed carefully and planned as part of the process in any set-up.
Businesses need to ensure their professional advisers are appropriately linked so that the set-up is consistent with the parent company’s own profile, as well as dealing with the issues referred.
The challenge for professionals in advising internationally active businesses is to ensure they can deliver this co-ordination so that their clients’ objectives are fully achieved, enabling them to concentrate on business priorities rather than their tax obligations. Global networks work well here as teams have historical experience of working with each other, and can deliver advice efficiently and at sensible cost. Frequently they will have established co-branded systems that serve their clients seamlessly.
As ever, proper planning at the outset by any business seeking to expand abroad will always pay rewards.
If you are considering international expansion or are already operating cross-border and would like some uncomplicated tax advice, contact RSM at internationaltax@rsmi.com or see our website www.rsmi.com
