Planning to expand your business overseas? You’ll need a robust international tax strategy to ensure compliance and mitigate multiple tax layers. Check out this post to know some of the most crucial aspects of an international tax strategy that organizations should focus upon before going global.
Overseas expansion could help businesses in many different ways. From assisting them to reach newer territories and consumers, diversification, foreign investment opportunities, competitive advantage, to access to new talent, overseas expansion can change the fortunes of a business.
But the execution part of the expansion process plays a critical role in determining the efficacy of this corporate endeavour. While successful execution depends on several factors, taxation is one that deserves your utmost focus. A business should have a robust international tax strategy to ensure compliance and mitigate multiple tax layers.
Here are some primary tax considerations that a business should focus upon while working on their tax strategy before expanding globally-
Your business structure, when you enter into a foreign country, abundantly impacts the tax treatment. It can help you reduce your tax liabilities and make the most of your investment. To begin with, you should first decide whether you just want to send your staff to a foreign country temporarily to figure out the opportunities or you are ready to have a legal presence in the country.
If a legal presence is what you are aiming for, you should then choose from structuring your business as a subsidiary or a branch. Right structure selection is crucial, especially when you are expanding to countries like the USA as they have one of the highest corporate tax rates in the world.
Multinational businesses lay significant emphasis on transfer pricing for reducing their global tax liabilities. In simple words, such companies get their products manufactured in a jurisdiction with low taxes, which are sold to the mother company, which then sells it in the target markets.
Foreign affiliation can generate substantial profits, and with the help of an effective transfer pricing strategy, tax liabilities could be kept to a minimum. But such strategies should be thoroughly documented as most countries now conduct audits to ensure that businesses are not using inflated transfer pricing for avoiding tax.
While transfer pricing is abundantly used by overseas businesses to reduce their tax liabilities, the profit has to return to the home country of the mother company at some point to finance operations, support acquisitions, pay dividends, etc. But the revenue that is classified as income from business operations has a higher tax rate in most countries.
For this, mother companies make their foreign affiliates pay more dividends or royalties to them as the revenue is then not treated as income from business operations. Global tax service providers are hired by businesses to help them handle revenue repatriation in the most profitable way possible.
Now that you are expanding to a foreign country, even your supply chain will mostly become more challenging with regard to taxation. You and your legal team members should focus on factors such as customs duty, foreign VAT, and maintaining healthy cash flow.
Needless to say, all of this should be managed in such a way that your supply chain only improves in efficiency and profitability. You will need global tax professionals experienced in international taxation to help you successfully manage the tax implications of your global supply chain.
Business taxation is already complicated and burdensome in almost every part of the world. Things only get more challenging when it comes to overseas expansion, as the business now needs to ensure compliance in more than one country. But if done right, it can help a business save a lot of money in tax payments.
Businesses should consider hiring professional tax consultants that excel in international taxes to help them make the expansion highly tax-efficient and successful.
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