Venturing overseas is getting common as companies want to expand their business and reduce their operating costs. However, venturing overseas without conducting due diligence may lead to unnecessary cost arising. One particular area that was often missed out is tax.
In this article, we will discuss the tax issues that companies may need to consider before venturing overseas.
1) Local entity structure
Generally, there are 3 common structures: Representative Office, Subsidiary and Branch.
Generally, representative office is unlikely to attract any tax in that foreign jurisdiction as the entity is established to conduct market research. However, the foreign jurisdiction may have the rights to tax the company if it is deemed to be conducting business in the foreign jurisdiction.
Some countries impose branch remittance tax, on top of the prevailing corporate tax rate, when the foreign company remits branch profit back to the head office. It is important for companies to consider this if they are planning to establish a branch in foreign countries.
2) Financing the company
Setting up a new entity in foreign jurisdiction requires funding. This is done through capital injection via equity or via debt or both by the holding companies. Companies have to take note that some countries disallow deduction on excess interest expense if the company is financed through debt exceeding a certain level above equity. This is known as thin capitalisation rule.
The purpose of the thin capitalisation rule is to prevent profit earned in the foreign jurisdiction being siphoned away back via interest deduction.
If you wish to venture into a country with thin capitalisation rule, you need to consider striking a balance between debt and equity when financing the company.
Remitting interest and dividend income from overseas entities may attract withholding tax. Companies need to consider the possibility of using the Double Tax Agreement (DTA) to reduce or even exempt the withholding tax, if the foreign country has concluded a comprehensive tax treaty with Singapore.
3) Future profit repatriation
Profit comes in many forms: dividend, interest, management fee, royalty fee etc. Different types of income attract different withholding tax rate. As above, it is important to consider whether DTA can reduce or even exempt the withholding tax and decide the most suitable revenue for each country.
In addition, companies should plan the order of foreign income they should be remitted. This may affect the overall tax payable.
4) Base Erosion Profit Shifting (BEPS)
Most countries are gradually changing their tax legislation, in respect to BEPS. For related party transactions, countries have different threshold and requirement to prepare transfer pricing documentation. Preparing transfer pricing documentation is not cheap and companies need to consider the transfer pricing rules in the foreign jurisdiction.
Companies also need to consider if the foreign low-tax jurisdiction has robust anti-tax avoidance provision. For example, from 1 January 2019, Labuan entities with no substantive activities in Labuan will be taxed under the Malaysia corporate tax rate. Failure to consider this factor may result in answering to the tax authorities and in the worst case, companies may need to restructure their operation, which is a costly exercise.
5) Disposal of investment
Companies need to know how to enter a country and also how to exit if the investment is not viable.
Companies must consider exit strategy and the tax implications of disposing the investments. Some countries imposes capital gains tax and/or withholding tax. Companies should consider if the DTA can exempt the capital gains tax.
Other forms of tax may also arise. This includes Goods and Services Tax (GST) / Value Added Tax (VAT), stamp duties and other transfer taxes.
6) Group structure
If the group structure are not well-designed, inefficient tax structure may arise. It is important to get a tax adviser to design an efficient group structure to maximise your return.
It is important to conduct due diligence on prospective countries to venture. All factors and considerations should be considered to help you to decide on the best country to venture for your business.
The article is published originally here.