With the rapid expansion of e-commerce, business owners can find they have created an overseas market with little or no extra effort, often taking overseas orders on-line.
The temptation may then be to open an overseas office to capitalise on, and expand, this interest, but serious thought is needed before such moves are made.
Getting it wrong can be an expensive business lesson that may result in an entrepreneur losing everything. Some considerations include:
Operating in more than one country means exposure to more than one tax jurisdiction. Managing the overall tax burden as legitimately possible means the structure of the overseas operations needs to be considered before expansion begins.
The first step is to determine whether Australia has a Double Tax Agreement (DTA) with the country selected. A DTA determines which country has the right to tax the operations.
Under the tax treaties, if there is a ‘permanent establishment’ or a fixed place of business in the foreign jurisdiction, then the business will be taxable in that country. In theory, if Australia has a DTA with the other country, the business profits earned in that country will be taxed in the foreign jurisdiction and not in Australia.
Rather than rely on theory, each situation needs to be assessed to determine the Australian tax consequences of the operation. If there is no DTA, then the tax laws of both Australia and the other country come into play and may trigger an unintended consequence of double taxation.
Depending on the entity used to operate the business in Australia, it may be possible for it to operate in the foreign jurisdiction. While this is the simplest way of operating overseas, it may not be the best way from a strategic, operational, taxation, asset protection or risk mitigation perspective.
For instance, a foreign subsidiary may reduce the business risk of the venture by limiting any downside of the overseas operations to the Australian business, but it may result in higher tax being paid when the profits are repatriated.
Repatriation of profits is another factor in choosing a structure. Whether the Australian business requires the profits to be transferred back to Australia or whether they are to be kept for growth in the overseas jurisdiction will impact on the choice of structure.
Determining the most important issues for the business will influence the type of structure used.
Once the structure has been determined, it’s also necessary to find out what types of registrations are required. The types of authorities that may require registration include the equivalent of ASIC where corporate entities are used, the taxation authority, and the equivalent GST authority.
Funding the operation
When establishing a business in another country, the decision needs to be made whether the funding is by way of debt or equity. If the funding is from debt, some jurisdictions have ‘Thin Capitalisation’ rules which may limit the tax deductibility of the interest payments on such debt.
Another issue that must be considered is the ‘transfer pricing’ regime which applies to businesses that transact internationally with a foreign branch. Under the legislation an appropriate price is required to be charged for goods, services, assets utilised or use of funds between related parties doing business across borders. Documents must be kept to show that the prices being charged are arm’s length.
In determining whether the prices are arm’s length, factors such as the functions being carried out, the risks, the contract term, nature of the support and the arm’s length price equivalent, are to be considered.
Each country has different working and immigration requirements which need to be researched early on. Before jumping on the plane, sending employees to work in the new market, or employing people there, information should be obtained to ensure that your intentions are in keeping with the legislation.
There are also many other practical considerations to be taken into account such as location, pricing, promotion, product sourcing and distribution.
Considering these issues before branching out into new international markets will help make the most of available opportunities and mitigate some of the risk.
Janelle Manders – HLB Mann Judd