Today’s digital revolution is making business more complicated as technology companies set up shop outside of the United States.
When it comes to worldwide expansion, even the simplest transactions—adding a customer, employee, contractor, or subsidiary, for example—can be complex, costly, and time consuming. Meeting the goal of establishing the most efficient and cost-effective expansion plan for your business requires a good amount of communication and planning in the beginning to avoid what can be an enormous expense to unwind or remediate later on, particularly when considering tax implications.
Part of that planning process includes strategic and tactical considerations tailored to your specific situation. These decisions will ideally find the right balance between implementation costs and tax exposure.
Identifying Jurisdictions for International Expansion
Prudent executives focus on overall objectives and long-term strategies that safely expand their overseas business where it needs to go—as opposed to chasing specific tax rates, whether in China, the rest of Asia, India, Mexico, South America, or Western Europe.
Ultimately, key decision makers need to feel confident that the domestic business is strong enough to manage the cost and complexity of an international move. This is a particular challenge for start-up and growth-stage technology companies that are often pulled to other continents early in their life cycles, before they have sufficient resources or knowledge to devise and manage a global strategy.
Permanent Establishment (Taxable Presence)
A company can be considered a permanent establishment with a taxable presence in a foreign country and subject to income tax in that country based on the following:
- Types of activities being conducted
- Profit attributable to that activity
- Income tax treaties between the United States and foreign countries
For example, the location of a server may or may not create a taxable presence in a foreign country.
The concept of permanent establishment applies to cloud computing—software as a service, known as SaaS, for instance. The facts need to be analyzed for each country to understand if permanent establishment has been created, whether a payment is subject to withholding, or the transaction is treated as a service.
Another key question, from a tax perspective, is whether a company is hiring employees, contractors, or consultants. This is a significant distinction because having employees in countries apart from the location of the employer can establish a taxable presence for the employer in that location. Furthermore, some countries view contractors as employees, which may inadvertently create a tax presence.
Expanding technology companies should be mindful of who’s hired offshore, how he or she is compensated, and what duties he or she performs. The United States treaty network may shield the company from creating a permanent establishment, but a company should still do its homework to assure a treaty exists with the relevant country and that the company meets the requirements of that treaty.
Intangible Property Migration
In the world of globalized commerce, the geographic location of intangibles—whether determined by planning, default, or the whim of a governmental tax authority—is often key to determining where corporate profit is generated and tax is paid. Because tax rates vary widely among jurisdictions, the location and value of intangibles can have a dramatic impact on the effective tax rate of a multinational business and its enterprise value.
Taxation of intangibles is one of the most volatile areas of international tax and transfer pricing because intangible property is difficult to define and locate. These transfer pricing arguments can lead to high-profile litigation between tax jurisdictions and corporations that involve large sums and potential penalties.
A common by-product of an international corporate structure, which may have an advantageous tax structure, is the accumulation of cash in foreign jurisdictions. The decision to hold funds offshore or to repatriate to the United States can be a complicated and potentially expensive decision.
With careful advance planning and documentation, however, the tax impact of bringing cash back to the United States can be lessened.
Most countries have laws associated with transfer pricing, and tax authorities around the world have intensified their focus on the price charged for intercompany transactions. As such, it’s essential for a globally expanding technology company to determine if it has set its transfer pricing appropriately and efficiently with its foreign-related party.
If your company is considering expanding its footprint beyond the United States, creating an international tax strategy that proactively deals with these issues can help your company lower its tax burden—and avoid costly litigation. Learn more in our Global Tax Strategies Guide.
Assurance, tax, and consulting offered through Moss Adams LLP. Wealth management offered through Moss Adams Wealth Advisors LLC. Investment banking offered through Moss Adams Capital LLC.
Roy Deaver has been in public accounting since 1996. He helps clients reduce their worldwide effective tax rate through tax-efficient financing, cash management, repatriation of earnings to the United States, and transfer pricing analysis. Roy can be reached at (206) 302-6401 or email@example.com.
Christine Ballard provides international tax planning and compliance services for businesses. She focuses on international tax planning, ASC 740 documentation and analysis, transfer pricing strategies, and due diligence reviews. Christine can be reached at (408) 558-4338 or firstname.lastname@example.org.