As a business is successful and grows, its footprint will more likely reach across a national border, either through following good customers to where they are, or by rolling out a good business model to other regions.
However, complex tax issues can arise and can result in unintended tax consequences, for any size business. You can take initiative to ensure that tax outcomes are a result of deliberate structure design rather than default. In some cases, there could be a deferral of tax, which may look like a saving but results in a future liability being carried forward.
A normal principle of international tax is this:
1. You pay tax in your country of residence on global income;
2. You pay tax in non-resident countries only on income sourced in that country.
The country of residence often allows a credit for foreign tax paid to avoid double taxation. However, it is complex and without adequate planning, foreign-sourced income could result in double taxation.
Permanent Establishment (PE)
Where a PE exists, a business will be regarded as resident and income tax will be payable. But a business can sell goods into a country without being regarded as a resident of that country. It is not always clear when the line is crossed; and it is possible that the PE provisions could be triggered unwittingly. Where a clear PE exists, the structuring of the business in the foreign country is important. Different tax outcomes will result if your local company trades in the foreign country, compared to setting up your own entity in that foreign country.
If a foreign entity is established, consider who owns the shares, to allow tax planning when profits are made available to the owners in their home country. Particularly where part of the foreign business is owned by an investor resident in that country. Tax treaties exist between many countries, so be aware of these and plan accordingly.
Transfer Pricing (TP)
Governments are aware of tax minimisation by profit-shifting through adjusting the prices charged between related businesses. The issue is known broadly as Transfer Pricing (TP). All businesses are required to properly document their TP policy and keep adequate records. Businesses must be able to prove that all transactions have been conducted at fair commercial value.
Final responsibility for advising in relation to tax outcomes should rest with your tax advisor in your country of residence. Good advice will also be needed in the foreign country, but the final test will be how much after-tax income can be made available to the owners in their country of residence. Timing issues will also need to be considered, ensuring that the structure suits the commercial requirements of the owners.
International business brings a fresh set of challenges, and it is important to plan carefully and take advice to avoid anything unexpected.