The opening of new markets, potential for limitless growth and removal of barriers to free trade are increasingly making it appealing for businesses to go global i.e. expand operations in another country. This would require businesses to set up operations as well as use mobile workforces to fill the business need for talent. Before you launch into unchartered territories, it is important to consider some of the tax aspects in light of a global regulatory environment as well as far-reaching impact of some of the decisions made on the onset.
- Structuring of entity - Choosing the appropriate corporate structure and entity(ies) to run your international operations may have a bearing on many things including domestic and foreign tax, succession planning, and legal and business-related items. Careful consideration should be given to selecting this structure.
- Repatriation of funds – Repatriation can take many forms, all of which carry certain pros and cons. The method of repatriation selected should take into account the organization’s long-term business plans and be structured in a tax-efficient manner where possible.
- Withholding taxes and double taxation – Withholding tax on non-resident payments starts at the domestic tax level of each foreign tax jurisdiction. These domestic rates may be further reduced or eliminated where a treaty exists between the two applicable tax jurisdictions. It is important to be aware of both the domestic and treaty rates and how they apply to the non-resident payments you receive. Ensuring that the appropriate rates are being applied will help mitigate instances of double taxation from occurring.
- Permanent establishment – Whether an enterprise’s business profits are subject to taxation in a foreign jurisdiction is often determined by whether the enterprise carries on business through a permanent establishment in that foreign jurisdiction. Determining whether a permanent establishment exists is a question of fact and requires careful consideration of various factors. Understanding how these factors impact your permanent establishment exposure risk may influence how you go about expanding your operations globally.
- Value-added tax/sales tax – In addition to income tax, many countries around the world implement some version of a value-added tax (“VAT”)/sales tax regime. The applicability of these tax regimes on sales carried out by non-residents and remote sellers into those jurisdictions will vary greatly. As an example, recent changes in the U.S. has resulted in state sales tax regimes now applying to many non-resident and remote sellers where they previously did not. Careful consideration should be given as to how VAT/sales tax legislation in foreign jurisdictions apply to your international operations.
- Business travelers – Business travelers are the informal employee mobility in an organization that often unknowingly trigger individual tax obligations in the form of income or social security taxes. In addition to that, there is also a significant risk of corporate tax obligations as a result of the activities of these individuals which could potentially create a corporate tax nexus.
- Structuring of assignments – Employment structures are a critical step to support desired tax and risk management positions for both the employer and the employees who are deployed to manage business in international locations. The implementation of these assignment structures has to be complemented by adequate documentation.
- Payroll considerations - Payroll compliance is quite challenging for mobile employees as it entails complying with regulations in multiple countries. To top this, heightened scrutiny by tax authorities in this area has necessitated the need of setting up processes to compile compensation data and accurate reporting of payroll taxes.
- Tax equalization - Different countries have different tax and social security rates. If an employer sends an employee overseas for a work assignment, the new work location may result in different tax rates being applied so the take-home pay after taxes could be different. The purpose of a tax equalization approach is to neutralize this and ensure that the employee is no better or worse off from a taxes perspective. The administration of the process and drafting a policy around this is crucial for the success of employee international assignments.
- Social security taxes - Social security is part of the payroll obligations that an employer has and usually consists of an employee and employer component. When an employee from one country is sent to work in another country their compensation can be subject to social security taxes in both countries. To eliminate these dual costs, businesses need to resort to social security 'totalisation' agreements that provide a mechanism through which dual costs can be eliminated.