Building International Tax Structures
Business decision makers are often perplexed by tax issues, especially international ones. While “keeping it simple” is often desirable in business the reality is that some aspects of running an enterprise inevitably require leaders to embrace and resolve some complex issues. International tax is one of those issues.
How the Conversation Begins
I often receive questions from foreign companies who are either entering the US market for the first time or whose previously established US presence is taking off with accelerating sales. They want to know about how to structure their operations to achieve tax efficiency.
The questions I typically receive go something like this:
“Is our international company structure really the most tax efficient? Shouldn’t we insert a holding company into our group setup in a tax advantaged jurisdiction to achieve a better effective tax rate?”
Each situation is different depending upon the type of business being conducted, the intellectual property assets being utilized and the stage of development of the enterprise. The complexity mounts as we look at title transfer of goods, customs duties and transfer pricing to name but a few items that come to mind.
Back to that knotty complexity question. Why is international tax so fraught with it you ask? The answer is that most of the rules in international were written in response to some clever planning ideas that tax attorneys and accountants used to dramatically lower the effective tax rate of multinational corporations. Thus understanding international tax requires an accumulation of knowledge over time from working with the concepts and provisions and developing historical perspective about how they came to pass. Without that perspective they often just seem inexplicably complex and the solutions inscrutable.
How to Manage the Complexity
What an emerging business typically needs is an internal coordinator (or tax issues manager) to coordinate the planning process plus a team of external international tax consultants to execute it. Note that international tax consultants tend to be very expensive. Due to the complexity their expertise is not easily acquired. As a result their billing rates tend to be some of the most expensive you will encounter. However, getting it right at the outset is so important that the benefit of obtaining good advice tends to far exceed the cost of cleaning up a mess if you just ignore the issue and are forced to deal with it as a result of some tax authority audit disaster.
I saw one emerging company many years ago decide to go cheap with a tax avoidance structure suggested by a practitioner who clearly did not know what he was doing. He prescribed a holding company structure set in a Latin American country that would completely eliminate, he said, all US taxes. That of course proved to be untrue. The cost of cleaning up the mess, negotiating a big settlement with the IRS and then putting a reasonable structure in place was several times what doing it right from the outset would have cost. The cautionary tale here is that governments, whether you like it or not, are going to be your partner in any business through their tax regimes. Setting up a structure that conforms to applicable laws while legally minimizing your tax liability is just good business.
As Bill Amon of WTAS, an international tax expert, says “As the world rapidly shrinks, an emerging enterprise goes global more readily and sooner than in decades past and thus must address international tax needs earlier in a company’s lifecycle. Getting it ‘right’ from the outset saves time, expense and makes the enterprise just that much more tax efficient. As such, it is important to address the commercial international strategy at the start. In my view this exercise is ‘mission critical’ in order to align the firm’s commercial goals with a tax efficient structure and, maybe most importantly, avoid ugly mistakes.
We couldn’t agree more!
Doug Kennedy is a senior member of the International Practice group and serves numerous foreign companies as they set up U.S. operations and U.S companies as they set up foreign operations. He advises on the topics of payroll, taxation, and general areas of governmental compliance.
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