Top 10 mistakes businesses make when expanding overseas
Tax Alerts - May 2022
By Emma Marr & Lucy Scanlon
If you are planning to grow your business and be successful on the international stage, tax is something you need to get right, wherever you trade. We often talk to business owners who have chosen to fly under the radar, thinking their business is too small for any revenue authority to worry about. But the tax risk only increases the bigger you get, and the more visible you are (not to mention that revenue authorities can always look backwards).
Exposing your business to avoidable international tax risks also has real consequences beyond revenue authorities. If you are planning a significant capital raise or an eventual exit from your business, you can expect investors to conduct some due diligence on how well your business has complied with tax rules. We know from years of experience that it is far cheaper and easier to tackle your international tax compliance right from the start…and that with the right advisor next to you, international tax can be managed both efficiently and effectively. Read on for the top ten mistakes we’ve seen businesses make when expanding offshore.
1. Not thinking or planning strategically for growth
If you are expanding offshore, you need to think about what success looks like and how to plan for this in your company and group structure, i.e., is your current structure adaptable and flexible enough for the commercial growth offshore? Is your structure fit for purpose? Will the structure work when you are importing or exporting products, when you are providing services internationally, when intellectual property is being utilised internationally, when you have people spending time in other countries, or when you are making and receiving international payments? Does the structure allow for a capital raise, another liquidity event, or the efficient payment of dividends? Have you thought about succession planning? Are there changes you’d been planning to make one day, but haven’t got around to yet? The best time to think about this is at the outset of your overseas expansion, but if you missed that opportunity, the second-best time is now.
2. Not getting appropriate advice
We understand why companies do this – you’re focussing on building your product, finding an in-market sales team, following up leads, and battling logistics nightmares. Tax falls down the to-do list, and before you know it, the year is over and you didn’t think about tax at all. There is the temptation to file your return the same way you did last year but doing that only works if your business is actually the same as it was last year…and if you’re growing overseas, it isn’t. Start with a gentle conversation with your tax advisor, get an idea of what they recommend, the next steps and estimated costs for advice. Start early and talk to your advisors whenever something changes. Let your advisors take the burden of understanding how the tax rules apply to you in every country you operate in, leaving you to focus on doing what you do best – growing your business.
3. Ignoring the advice you did get, or following the wrong advice
If you’ve gone to the trouble to get advice, we’d love to see you follow through on it. If you don’t know how to, ask your advisor, and keep asking until it makes sense. Getting advice and ignoring it is almost worse than not getting advice at all – if Inland Revenue or another tax authority finds you’ve underpaid tax and is considering imposing a penalty, you don’t have a great case if all the answers on how to do it right are sitting in an unread email in your inbox.
In a similar vein, don’t rely on tax advice provided to someone else you know who started trading overseas, advice you got at your last company, or something you read on the internet.
If you’ve seen something similar before, that’s interesting and a useful place to start, but it doesn’t replace getting your own advice. Tax law changes every year, and your current business is not the same as the last one, or your friend’s one. Getting advice specific to your situation is your best bet.
4. Overlooking indirect taxes
Your business can create an indirect tax liability, such as sales tax, VAT or GST, simply by selling products or services in another country. The threshold is often lower than it is for creating an income tax liability, and the rules can vary greatly between countries and within a country – every state in the United States has its own sales tax. Sales and value-added tax rules can depend on whether you are selling direct to consumers or to other businesses, the number of transactions and the value of the transactions, and the type of product or service being sold. Customs duties are also an important focus for exporters of products.
5. Not realising you’ve created a taxable presence overseas
It can be very easy to have enough people or equipment or products on the ground in a country to create a taxable presence. The rules are different in every jurisdiction, so you need to check them for each new country you enter. Having a taxable presence doesn’t necessarily mean you need to pay tax – you might just need to register with the tax authority and file returns – but ignoring the problem and waiting for the tax authority to find you can be a very expensive mistake (think late filing penalties, late payment penalties and interest). Having a quick chat with a tax advisor will ensure you are making informed decisions about the best action to take and will be a far cheaper option in the long run, not to mention providing peace of mind that you have your offshore obligations in hand.
6. Ignoring transfer pricing rules
The transfer pricing rules are international rules that require associated parties to pay arm’s length or market prices for the associated party cross-border transactions. Transfer pricing is a key focus for every revenue authority and getting the transfer pricing right is critical to managing your international tax obligations. Transfer pricing is really just a set of rules that overlay the commercial operations of your business to make sure each entity, and therefore each country, is getting the right return for what that entity actually does (ideally as part of the structure conversation at number 1). However, more often than not the perception is that transfer pricing is too complex and is therefore avoided for as long as possible, a scenario that never turns out well and invariably leads to paying the wrong amount of tax overseas with detrimental long-term impacts for the profitability of the business. Talking to your advisor about transfer pricing at the outset of the journey to expand offshore is by far a better option than ignoring transfer pricing and hoping it goes away…no matter what size your business.
7. Overlooking the tax effect of having people travel the world
As well as creating a taxable presence for your business (see above), having people travel the world can create other tax issues, both for your business and for your people. Your business might have to register for payroll taxes in other countries, and your people might have a personal tax liability if they spend long enough in another country (noting employees will likely require you to provide the necessary assistance to manage any tax obligations). There are international treaties that can prevent double taxation, but you need to check whether you meet the criteria, and then correctly claim the benefits.
8. Not using tax losses as effectively as you can
It’s very common for a company to incur tax losses during the growth phase. The hope is that by carrying forward the losses, the losses can be offset against taxable income as the business becomes profitable. If you are correctly pricing your cross-border transactions, and depending on your business model, you may find you are paying relatively little tax overseas, and most income is made by the New Zealand company, which can use up historic tax losses. We’ve seen businesses over-report their taxable income overseas, leaving profits trapped and subject to double tax when they bring them home, while losses sit in New Zealand, unused. Taking the time to think about the overall strategic group structure and the transfer pricing implications upfront, with regular review along the way, can help the losses to be used more efficiently.
9. Confusing a tax group with a reporting group
A business setting up foreign subsidiaries will often prepare group accounts, which makes a lot of sense for shareholders. This doesn’t mean it can file a single New Zealand tax return for the whole group. New Zealand companies can be grouped for tax filing purposes, but this requires a specific election and doesn’t extend to dual resident companies. This brings us to the next mistake.
10. Not knowing a company can be a dual tax resident
A company incorporated in another country can still be tax resident in New Zealand if it meets one of the three residency tests other than place of incorporation (i.e., its head office, management, or director control are located in New Zealand). In many cases, a newly-incorporated foreign subsidiary with limited functions could be a dual tax resident which means the offshore company will need to file tax returns in both countries. Where tax rates are similar in both countries then generally if a foreign tax credit and/or a loss offset is available tax would only be payable in one country. Where tax rates are different, a tax liability may arise. Either way, there could be a tax filing obligation in New Zealand as well as the country of incorporation.
This list is by no means exhaustive, there are unfortunately many, many ways to mess up tax just in New Zealand, let alone the rest of the world. The good news is there are many tax experts in the world, and we can help connect you with them.
If you want to talk about anything covered in this article, please get in touch with either of us or your usual Deloitte advisor and we can have a chat about how Deloitte can help.