Companies looking to expand overseas need to consider their potential tax liabilities and compliance obligations as they target international growth, writes Neil Dinnes.
Many Scottish businesses are currently experiencing an increase in opportunities to export their products and services into new markets outwith the UK.
While international growth will undoubtedly present exciting opportunities, it is vital to carry out due diligence of any new market to protect the financial side of things. Historically, many businesses have pursued international growth without considering the financial environment they are entering – doing business in a new country will differ in many respects to UK operations. And a key consideration is the new country’s tax regime.
For a business planning international growth, it is essential to consider potential overseas tax liabilities. Complying with an overseas tax system is not only a legal requirement, but tax efficiency is critical to making international expansion a success and helping the business reap the financial rewards that should come from growth.
In recent years, there has been an increasing push from bodies such as the Organisation for Economic Co-operation and Development (OECD) and the European Union (EU) towards ensuring businesses pay tax in locations in which they earn money. This drive towards preventing business from ‘eroding the tax base’ both in the UK and overseas, will only continue. With technological improvements and information-sharing, it is increasingly easy for overseas tax authorities to be aware when a business has operated in their location.
A business cannot argue, “We were only there for a short period of time” – and, in some countries, for example, Norway, Denmark and Brazil, taxes may fall due from the first working day. So, what should a business do to enable international growth while ensuring tax regimes are adhered to?
Firstly, start planning early. It is crucial that the business knows what to expect in terms of tax liabilities and compliance obligations. Each country has specific rules when it comes to tax. While some countries may tax the business and their personnel from day one of arrival, others may allow a significantly longer period before taxes are due.
Being aware of the potential tax exposure and costs of overseas compliance means they can be factored into contract rates. Conversely, if there are surprise tax liabilities further down the line, it may be too late to amend contract prices, meaning the business is left running an unprofitable contract.
Early planning can also allow the business to consider any possible tax mitigation strategies, as well as how to structure their overseas organisation, for example, is a new company or branch appropriate? Each can have different costs and tax outcomes, which should be fully explored in order to support the business’s goals in that location.
As an example, if a long-term presence in a country is desired, then a new company may well be the most appropriate route, but there are numerous considerations here, such as, what is the corporate tax rate? Is there any further tax on profit repatriation via dividends? If loans are required, is there any withholding tax levied on interest payments? Is a local payroll and social security withholding mechanism required? What are the costs of establishing and maintaining an entity? The list goes on.
An experienced international advisor, who understands the sector in which the business operates, should be approached for support. They will be able to deliver focused and tailored advice, relevant to that
particular country, which the business can reliably use to support their overseas operations.
Secondly, find a local tax expert and tap into their expertise. Having an advisor with a strong and active global network will allow the business to obtain in-country advice, ideally in conjunction with the same international advisor from the UK side. In doing so, the local expert can advise on the in-country realities and assist in complying with the country’s tax regime. It can be extremely expensive and time-consuming to comply with taxes retrospectively.
A local advisor should assist with timely ongoing tax filings. They should also ensure the business pays any taxes due, in line with the appropriate deadlines. Using a local advisor gives peace of mind that the business has complied with the tax regime and will avoid any penalties from the tax authorities. It will also ensure a good tax compliance record is held for working in that country, which will protect the business during third-party scrutiny for any tax due diligence, for example, in an acquisition or merger situation.
Thirdly, it is possible to manage international liabilities in a way which can bring real benefit to the business, so it is worthwhile looking for rewarding ways to manage your tax compliance.
The old adage of “tax doesn’t have to be taxing” rings especially true when it comes to overseas growth. Working with an advisor who embraces technology solutions can
bring efficiencies to the business and save money. Technology solutions which help businesses visualise their overseas liabilities, and manage them in real time, will allow the business to make strategic decisions in connection with their overseas project operations and help to reap financial rewards.
Approached correctly, international expansion can result in rapid growth. This will inevitably result in an increase in overseas tax compliance obligations which should be managed effectively and efficiently. Having a rounded picture of all your tax obligations, and managing them well, will bring significant financial benefits to the business and should not be overlooked in the pursuit of profitable growth.
Neil Dinnes is international liaison partner at Anderson Anderson & Brown.