Many Scottish businesses are currently experiencing an increase in opportunities to export their products and services into new markets out with the UK. Whilst undoubtedly international growth will present exciting new opportunities for businesses, it is vital the necessary due diligence of any new market is undertaken in order to ensure the financial side of things is protected. There are many businesses historically that have been guilty of pursuing international growth without due consideration being given to the new overseas financial environment that they are entering – doing business in a new country will differ in many respects, compared to the UK operations which the business will be used to. One of the key considerations in this respect is in relation to the tax regime in that country.
For a business planning international growth, it is vital the possibility of becoming liable to taxes overseas is considered. Complying with an overseas tax system is not only a legal requirement, but such tax efficiency is critical to making international expansion a success and will help ensure the business can reap the financial rewards that should come from such growth.
In recent years, there has been an increasing push from organisations such as the OECD and the EU towards ensuring businesses pay tax in the locations they earn money. This drive towards preventing business from ‘eroding the tax base’ both in the UK, and overseas, will only continue. With increased technology improvements and information sharing, it is also increasingly easy for overseas tax authorities to have visibility as to the fact that a business has been in their location, and as such any argument of ‘we were only there for a short period of time’ cannot be taken. In a number of countries, for example Norway, Denmark and Brazil, taxes may fall due from the first day of working there.
So what should a business do to ensure successful international growth, whilst 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 and, whilst 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. If there is no awareness of the potential tax exposure and costs of overseas compliance, these will not be factored into contract rates. 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 that they may be able to follow. There are also different strategies that a business may take to their overseas operations in terms of structuring their establishment there, 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 businesses’ ultimate 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, including 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. By finding an advisor with a strong and active global network this 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 provide assistance in complying with the tax regime there. It can be extremely expensive and time consuming to comply with taxes retrospectively.
The local advisor will assist with the ongoing tax filings in a timely manner. They will also ensure the business pays any taxes due in line with the appropriate deadlines. By using a local advisor this will give the business peace of mind that they have complied with the tax regime which will avoid any penalties from the tax authorities. It will also ensure a good tax compliance record is held for working in that country, protecting the business during third party scrutiny during any tax due diligence, for example in an acquisition or merger situation.
Thirdly, find means of managing your tax compliance in a rewarding manner. It is possible to manage international liabilities in a way which can bring real benefit to the business. 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 these in real time, and allow the business to make strategic decisions in connection with their overseas project operations, will reap financial rewards.
Approached in the right manner, international expansion can result in rapid growth. With such growth into overseas locations, businesses will inevitably encounter an increase in overseas tax compliance obligations which should be managed effectively and efficiently. Having a rounded picture of all tax obligations, and managing this well, brings significant financial benefits to businesses which should not be overlooked in the pursuit of profitable growth.
By Neil Dinnes, International Liaison Partner at Anderson Anderson & Brown LLP (AAB)
To find out more about Neil and the International Tax Team, click here.