Many technology companies are looking to expand internationally, both to extend their customer base and also to access top talent. Whether this is your first foray into international operations, or you are already entrenched in foreign markets, it’s imperative to understand how your current business model will affect expansion. You may need to adjust your financial structure and accounting methods to compete on a global scale.
International expansion poses complex tax considerations and it is vital to properly structure transactions to reduce your tax liability and adhere to regulations. Each country has its own tax rates and regulations and often taxes products differently — from tangible goods and software as a service, to software support services.
Prepare your company with the following considerations in mind.
Plan for withholding taxes
Advance planning is required to reduce your foreign withholding taxes for countries in which you plan to do business. Companies that fail to consider and proactively minimize withholding taxes on international software transactions can see their after-tax income erode quickly.
Withholding taxes can be 30 percent or more of gross software licensing income in many countries, and tax rates will vary for dividends, interest, and royalties. Careful and strategic planning are necessary to reduce your tax burden. It may be in your best interest to retain tangible property in a country with low tax rates. Additionally, U.S. companies may be eligible to claim withholding taxes as a credit against their U.S. income tax liability on their U.S. income tax returns.
Analyze transfer pricing regulations
If you have intercompany transactions, be mindful of transfer pricing, which directly affects your after-tax income. It’s important to analyze the transfer pricing rules for the countries on both sides of the transaction. Traditionally, domestic and foreign related companies use an “arm’s length” standard for intercompany transactions to properly report taxable income in each jurisdiction. In theory, this price should match what you would charge an independent, arm's length customer.
Transfer pricing is a focus for many taxing authorities around the world, and proper planning and documentation are required to avoid adjustments and significant penalties. While this can be complex, having an effective transfer pricing policy between related companies that is reasonable and complements the company’s structure and treasury goals can reduce audit risk and help lower your worldwide effective tax rate.
Explore tax credits and incentives
The foreign tax credit area is complex but can offer a number of opportunities for you to reduce your global tax burden. There are many countries with specialized tax regimes or tax credits for the development of new products or software. However, these countries may not necessarily be a source of top talent.
Areas with low tax rates, such as Ireland with a 12.5 percent tax rate, are popular. Other places, such as the Netherlands or the United Kingdom, have created an IP-Box tax regime which creates a lower tax rate (5-15 percent) on profits derived from intellectual property developed in the country. Countries with these regimes hope to attract research and development activities by incentivizing innovation.
These regimes usually require a certain number of in-country employees or investments.
Additionally, if you’re a U.S.-based multinational expanding overseas and plan to invest significant capital into a foreign country, there are structures which allow deferral of revenues to be reinvested. You may pay far less than the 35 percent corporate income-tax rate due to various tax breaks, including the option of deferring the payment of U.S. taxes on foreign earnings until they are brought to the U.S.
Mind your intellectual property
If you have staff developing software in international markets, be sure to properly structure contracts with intellectual property rights in mind. In order to keep your profits in the U.S., you’ll want to ensure the contract clearly states who owns the intellectual property. Additionally, contracts should define who is responsible for the development costs. This is an important consideration as it will affect your taxes on a global scale.
There are a variety of tax-related concerns you must understand prior to going global. Yes, they can be complicated, but the right professional can help navigate the complexity to arrive at the best solutions for your company.