Expanding overseas? Make sure you understand the tax implications.
With the world becoming a much smaller place, it is easy for businesses to find themselves trading overseas without too much consideration. However, there are a large number of complex tax issues which should be considered when dealing internationally in order to ensure that there are no adverse tax consequences or unexpected tax bills. Having a clear idea of how you will operate is key to getting the best structure in place, and it is important to review this regularly as things change and the business evolves.
When a business operates in multiple countries, it is likely that it will become taxable in both countries if it has some sort of presence in each country, referred to as a permanent establishment. A permanent establishment can be created in a number of ways, such as having a branch, an office, a place of management, a factory or a building site. The permanent establishment could be part of the original company, or the business could form a subsidiary or a sister entity in the new country. There are pros and cons for each operating structure which need to be considered in the light of all of the facts of each individual case. If this is not considered, then the original company could find it has unknowingly created permanent establishment in the new country. The applicable double tax treaty should be considered when determining what will constitute a permanent establishment.
For tax purposes, a permanent establishment is not necessarily a new entity; it can be created by simply having a presence in another country. When a permanent establishment has been created for tax purposes, the permanent establishment is required to account for tax in the way that any other company in that country would do so, in relation to the activities undertaken in that country. This can include that country’s equivalent of income tax, GST, fringe benefit tax, PAYE, payroll tax and any other applicable taxes. It is worth noting that this can have flow on effects with other laws such as employment laws. If the company was not aware of this, it is likely to have accounted for tax only in its home country, meaning it is likely to have over-returned there while failing to return in the overseas country.
Another point that is almost always overlooked is the tax status of the staff that might be working overseas. It is possible that where staff are spending time overseas, there will be overseas tax obligations for the individual staff member as well as for the company. If the individuals are working for a permanent establishment while located in that country, then it is more than likely that the overseas withholding rules will apply to that proportion of their wages, and the individual will be subject to tax in that country. The staff member’s tax residency status should always be considered, but even if they do not become tax resident in the overseas country, they will still need to return income sourced in that country. Again, this can mean that the individual has paid too little tax in the foreign jurisdiction, and possibly too much in the home country. There are a number of ways to structure for these situations depending on the commercial considerations and other facts.
Transfer pricing also needs to be considered and a transfer pricing agreement should be put into place. Transfer pricing rules require associated parties that transact cross-border to be conducted on an arm’s length basis. This is to ensure that tax is paid in the correct jurisdiction. Transfer pricing agreements are put in place to show the decision making process behind the inter-company charges, and provide support for the charges being arm’s length.
I have seen cases where a permanent establishment has been formed in NZ by the overseas head office company staff members spending time in NZ and working out of the NZ company office. Those staff members of the overseas head office company had NZ mobile phones, and business cards which showed the NZ address and contact details. They also had access cards to the NZ company premises, and had a space in which they were able to work from (either hot-desking or an office). This, combined with the presence of the high level staff in NZ, meant that the overseas head office company was also considered to have a permanent establishment in NZ. The implications of this were that the group had a NZ company, as well as a foreign company with a NZ branch. Both the NZ company, and the NZ branch were required to register with IRD and file income tax returns, GST, PAYE, and any other applicable taxes. The head office staff were also subject to PAYE withholding for work undertaken while they were in NZ. They also had to consider their tax residency status under NZ law as well as their home country. An international tax specialist is able to assist with structuring international businesses to ensure they are operating both legally, and tax efficiently.
For personalised advice on all tax issues please contact Julia Johnston at Saunders & Co.