Plante Moran advisors can assist your company with selecting a global structure that minimizes international tax rates while meeting your overall growth strategy.
Businesses should determine if any remaining activities in a foreign jurisdiction will give rise to an income tax presence and assess tax treaties and local laws in order to mitigate risk.
Transfer Pricing
Companies often utilize transfer pricing to allocate profits between divisions within an organization in a manner that maximizes tax savings, helping prevent tax evasion and guarantee accurate financial reporting. Unfortunately, transfer pricing poses its own set of issues for multinationals including hindering compliance with international guidelines for tax compliance.
Tax authorities across the globe abide by an international standard known as the arm’s length principle when setting prices for transfer of goods, services or intangible assets within corporate groups. According to this principle, controlled transactions should reflect prices realized if uncontrolled taxpayers engaged in these types of activities.
There are various economically accepted transfer pricing methods that companies can employ to determine whether their prices conform with the arm’s length principle, such as performing a functional analysis to analyze business functions, risks, and related party transactions. Implementation of such methods will reduce the chance of costly transfer pricing adjustments from an IRS or foreign tax authority audit.
Offshoring
Companies offshore their operations for various reasons, including cost considerations, talent access issues and global strategy needs. Accounting studies indicate that tax rates in foreign countries influence offshoring decisions as do transportation costs and tariffs.
Businesses operating overseas may face many hurdles when expanding into foreign markets, including time zone differences and managing remote teams. Furthermore, regulatory issues and cultural norms may impede production quality.
No matter its challenges, offshoring is usually beneficial to both countries involved in its implementation. Labor costs can be reduced, driving growth and competition forward and yielding greater profits for stakeholders; its downsides include job loss domestically as well as lower production standards which may pose safety concerns to consumers. A company can ease some of these concerns by charging management fees or dividends back home as this allows it to avoid paying taxes in foreign jurisdictions on profits earned there.
Closing a Subsidiary
As companies expand into new markets, they must make decisions regarding how they will operate overseas. One option for doing this is creating a subsidiary; this separate legal entity provides tax and regulatory purposes with increased clarity for parent companies who wish to establish either wholly-owned subsidiaries or joint ventures, depending on their needs.
When expanding into foreign markets, companies may find it simpler and less risky to establish a subsidiary in that country rather than build from scratch. A subsidiary can also help companies bypass a nation’s restrictions on intellectual property rights; keeping companies separate can reduce financial liability for wider corporations while potentially leading to more favorable tax rates in its host nation. As subsidiaries often report their finances independently from parent companies’ statements, parent companies can consolidate these statements for a fuller picture of operations and finances.
Tax Presence
Your employees’ movements, whether at home or traveling for business, may incur tax liabilities for your company. Taxable Presence rules in different countries vary significantly and it is wise to consult your tax advisor in regards to potential liabilities before taking action.
US law recognizes foreign employees’ days of presence as meeting a “substantial presence” threshold when they fulfill certain criteria (31 or more days in any one year plus 183+ in two preceding years), yet the rules surrounding expansion into new jurisdictions remain less clear.
Businesses should take great care when operating abroad and seek advice from an international business professional before expanding overseas. Failing to pay taxes in another country could bring serious penalties that harm both your reputation with regulators and public alike – plus additional liabilities such as back taxes and interest. A knowledgeable international tax professional can help your company avoid these risks.
