Startup - Things to Keep In Mind When You Expand Globally
International expansion is becoming much more common nowadays. New tech and innovation in communication platforms make a global presence more accessible. But operating in multiple countries adds an extra layer of complexity. Let’s break it down.
What should you know when planning to expand internationally
Consider location, employees, financial reporting, taxes and compliance, cultural differences, language barriers, and several other factors we’ll discuss.
As you know, American perspectives differ from many countries around the world. But, as you also know, many products and services can do tremendously well with exposure to different markets (or are easily adjusted) and can access a larger pool of customers and potential revenue sources.
How to pay your international employees
Labor laws are complex. They differ from country to country, and oftentimes the penalty is severe if things aren’t done correctly. It’s wise to let the experts handle the payroll so you can spare yourself the hassle of registering with local governments, get an employment ID, pay payroll taxes and finally pay the employee. It’s worth the extra cost to save you the hassle and any distractions along the way.
Before registering as a foreign subsidiary, find a local payroll company to run payroll. You can take care of hiring a full time employee or contractor. This entity legally employs your workers and would process payroll on your behalf. Employees do the same work but instead of you paying them directly, you pay a fee directly to this payroll company instead.
Some founders have expressed interest in paying employees from a US company, but this is counter-productive and not cost-efficient. The cross-border tax implications alone should be enough to steer clear of that approach.
When forming a new legal entity, each country has different formation criteria. You’ll also need to consider financial reporting for the new entity when coming up with a balance sheet and P&L. One more curveball: you’ll also need to know when and how you will file the local entity’s tax obligations which are not only limited to a corporate tax return.
What to considerations with financial reporting
Prepare financial statements for each standalone foreign entity at both a local level and on a consolidated basis at the US parent company. Foreign countries have different accounting standards which consist of their own version of US GAAP, IFRS or other standards. Most countries are converging to following IFRS, but there are many exceptions to this rule. When in doubt, ask the government tax authorities in that jurisdiction.
Tax compliance obligations you should know when forming a foreign company
When forming a new company taxes are usually an afterthought. But most countries are focusing more on collecting taxes, which you’ll quickly learn if you decide to go down this route. When going into a new country there are consequences from both the US level as well as the local level. There are both tax compliance obligations at the US parent level as well as the local level (e.g. US Informational Tax Return for Canada and a Federal and Provincial Tax Return for Canada)
There are many different types of taxes at the foreign level that would need to be considered as follows:
· Corporate Income Taxes
· Indirect Taxes (VAT)
· Withholding Taxes
· Capital Gains
· Customs and Excise Taxes
· Property Taxes
· Stamp Taxes
· Payroll Taxes
· Social Security
· Other local taxes
From the US perspective there are also taxes that should be considered:
· Informational tax return filings
· Corporate Income Taxes through foreign earnings and profits
· Withholding Taxes
· Transfer Pricing
When thinking about a new foreign company, you have to consider when taxes are due to be paid to a government; when tax returns are due, penalties and interests will be charged; possibly even tax audits that can happen years after the tax returns are filed. However, there can also be beneficial tax treatments from local, provincial/state or federal governments in terms of tax credits and incentives to encourage your business to invest and operate in that country. Typically, you will want to consult a CPA or other tax professional who understands a particular country’s tax law before making decisions about how to structure your organization and operate.
Use Transfer Pricing When Transferring Products/Services in Multiple Countries
Transfer Pricing is about related companies doing business in separate countries. It happens when they each charge one another for business transactions and it ensures these prices are fair.
Transfer Pricing is about making sure prices are fair when it comes to foreign subsidiaries. It needs to be what you would charge a complete stranger in that country. If your prices aren’t set fairly, then you put yourself at risk of getting audited by the local government. If that happens, you will be asked to change the price to one that matches what’s been established locally.
For example, let’s say you’re a Delaware C-corp and you’re expanding to England to sell services and products you have developed in the US. The first thing you’ll need to do is to hire a local CPA in England to understand the local business and tax regulation and perform a transfer pricing study. The transfer pricing study will determine the proper price to charge in England for the products and services you will sell through your subsidiary there.
Transfer Pricing is becoming a hot topic for many foreign countries. Tax authorities are looking much closer at Transfer Pricing between foreign companies, and audit adjustments around the Transfer Pricing are occurring much more frequently. Most federal governments require companies to maintain documentation for cross-border, non-arm's length party transactions. It’s important to know penalties may apply if this documentation is not ready, and tax authorities can request the documentation at any time.
A CPA’s 2 Cents
When it comes to expanding internationally, the four main points to consider are: tax implications, proper employee pay methods, proper financial reporting of foreign entities and transfer pricing. It’s crucial to set everything up the right way from the start so you don’t risk wasting time and money to fix it later.
