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Global Expansion and the International Tax Challenges Businesses Face

April 13, 2021, 7:00 AM

The globalized sale of goods has occurred for centuries, from the ancient Silk Road to modern-day cargo flights carrying products around the world in mere hours. With advances in collaboration technology and the growing acceptance of remote work, the delivery of services is also shifting to a nonlocal model. The globalized economy and telecommuting bring the service provider access to a massive pool of labor and new potential markets.

This changing dynamic provides an opportunity for businesses that have previously only dreamed of global expansion. They’re enticed by the potential of a new customer base and additional revenue that they can realize by leveraging a seemingly infinite global talent pool. However, with this business opportunity comes risks—from complex regional laws, regulations, and taxes, to managing wages and benefits across borders. Firms making a global play need to understand the tax and liability implications they will face and the advanced technology solutions they will need to help them manage their workforce and provide for a seamless expansion.

Establishing a Global Business Structure

When a company decides to expand globally, it needs to determine how it will create its products or offer its services in each specific market. For instance, will it leverage third parties to perform its functions or develop its own workforce within those countries? Should it create a foreign subsidiary, which is often a requirement when the firm is managing value-added taxes, import taxes, and related items? How will it finance its foreign operations? This can impact the local entity’s legal structure and pose other implications.

Some countries allow companies to set up a “representative office” arrangement that is a middle ground between remote individual workers and a physical office location. This structure can avoid tax obligations that come into play with a physical presence, although the activities of the workers are also typically constrained by law. Companies also often make the mistake of assuming two countries operate similarly. For example, two countries might name certain business entities the same, but the underlying differences and legal and tax responsibilities could differ greatly.

To address these issues, companies can work with a provider offering global expansion solutions in the form of an Employer of Record (EOR), which essentially acts as the legal employer of a company’s employees in the destination country. Such a provider typically handles payroll and benefits administration, ensuring both the company and employees are always compliant with local tax and labor laws and removing that layer of complexity from expansion plans.

Further questions will then present themselves as a firm goes deeper into an expansion, including if the local company will function as a branch office or its own company. There’s also the question of how profits should return to the main firm in the most efficient and compliant manner. For instance, will these profits fall subject to taxation upon the time they are earned, or when they are repatriated to the company’s home country?

Firms need to have clear processes in place for performing this repatriation in the proper way that is appropriate for the specific operating country. These questions are always country-specific, as each country has its own rules for profits, incorporation, and labor. For examples of the various requirements and complexity of each country’s rules, consider:

  • Singapore: A person that has filed for bankruptcy or been involved in certain litigation cannot own a Singapore-based company. Planning a business in the country requires a formal plan that is submitted to the government for approval. Different business structures are available for those with permanent residency status or who have met investment criteria.
  • Austria: Many European countries require staff to receive considerable vacation and personal leave benefits. For example, Austria requires 16 weeks of paid maternity leave, there are 12 public holidays, and employees receive 25 days of paid annual leave after six months of continuous service.
  • Australia: There are two main types of employment contracts—a “workplace agreement” where the employer determines the main conditions, and “awards” where the conditions of employment are contained in a letter which function as legal instruments.

The nuances for every country underscore the need for outside assistance, including tax experts for both the company’s home country and the new expansion country or countries. Common mistakes during this process include corporate income tax issues, where it is not clearly defined if a “permanent establishment” is created in terms of a local business entity.

Value-added tax (VAT) is another tax obligation charged throughout a transaction chain in instances where “value is added.” Several country-specific VAT guidelines can impact nearly every part of a firm’s operations, from shipping to invoicing. Understanding these nuances before the firm begins functioning locally can head off major tax liability problems and potential fines.

As a company selects its entity type and begins working in another country, it brings a new range of tax implications. There are trademark usage taxes, import and export tax regulations based on the country of origin and receipt, and merger and acquisition challenges that frequently arise when an expanded firm buys a local operator. Again, there is always variability in the ways the tax code is written and applied for these different scenarios and the specific country.

Managing a Global Workforce

Firms expanding globally often jump into the decision too quickly, without considering the local labor and wage issues, as well as corporate structure decisions that can impact taxes considerably. Firms need tax guidance before expanding into new markets, so they understand when certain income or consumption tax scenarios are triggered. This type of analysis helps the finance department determine if the time is right for an expansion that does carry hard costs and risk.

Managing remote work situations on a global scale requires well-constructed policies. Firms should decide how compensation and benefits will be applied to these workers, or if they’ll typically function as contractors. A core consideration is how the firm can limit risk exposure in terms of tax and regulatory compliance. If they’re operating in multiple countries, then there is a significant amount of complexity to manage. A service provider with global experience can help firms navigate the details. For example, it will detail how different countries determine who is a contract worker versus an employee. Another consideration is how the country in question taxes citizens, foreign workers, and permanent residents, and what responsibility the parent company holds for these taxes.

Managing this complexity is best done through a robust human resources services provider that can leverage HR technology to streamline all these processes, ultimately overseeing and making it easier to calculate pay deductions, manage pension contributions, handle health insurance deductions, calculate taxes, and more. When relying on these service providers’ combination of expertise and HR tech, companies expanding beyond borders can confidently know that payroll is administered accurately and compliantly for every employee. It is the most cost-effective way to expand quickly to other countries while reducing risks and keeping track of personnel tax obligations.

Small and mid-size companies, as well as large corporations, share similar challenges, either when planning or in the process of expanding overseas. With global expansion, businesses face multiple obstacles surrounding tax compliance and local laws, which is a significant time and financial commitment and can distract the focus from growing the company. Business leaders also must identify ways to stay ahead of competitors and the best way to get to the market as quickly and seamlessly as possible.

The demands of managing a growing workforce are endless, from registering with the proper agencies and meeting individual country compliance rules to ensuring the necessary forms are on file for each employee. These complexities of expansion are manageable when working with experts that can offer guidance and solutions under one roof. A human resources partner with a strong focus on HR technology is one of the most efficient solutions for businesses expanding—whether it is growing their workforce or expanding to new markets. It allows business leaders to focus on the goals and objectives of the company while leaving the administrative and legal work to an Employer of Record.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Rick Hammell is chief executive officer of Elements Global Services, a human resources technology and services company.

Bloomberg Tax Insights articles are written by experienced practitioners, academics, and policy experts discussing developments and current issues in taxation. To contribute, please contact us at TaxInsights@bloombergindustry.com.

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