Business leaders typically jump at the opportunity for international expansion. But many make the costly mistake of not fully considering the tax implications of global activities.
Without a well-planned and properly executed international tax strategy, you may not capture the potential benefits of your multinational footprint. Worse yet, global tax missteps could create excessive risk, limit your overall profitability and strain your cash flow. Here’s why a comprehensive tax strategy needs to be part of every cross-border business activity — and the red flags that signal it’s time to overhaul yours.
Global tax laws vary widely, creating compliance challenges even for the most well-resourced companies. For lower to middle-market organizations without an in-house tax team, navigating the rules around international transactions can feel nearly impossible. But even small mistakes can lead to financial penalties, regulatory consequences and reputational damage.
International taxation is also costly. If you have global operations, the combined tax burden can become problematic — and constant changes to tax laws make compliance even more difficult when you’re trying to reduce costs.
It’s surprisingly common for companies to launch international activities without a clear tax strategy. Leaders may think it’s not necessary and move forward with business plans without considering 8. the tax ramifications. The reality is that you need an intentional approach to managing global tax if any of these factors apply to your business:
Leaders also may hesitate to tackle international tax needs due to concerns about cost or complexity. But without an international tax strategy, your business may face hidden tax inefficiencies, unexpected penalties and missed opportunities – all of which can quietly eat into your profits. Many organizations don’t even realize they have a gap in their tax strategy until it’s too late, and fixing the issue often proves very costly.
Business challenges like cash flow shortages, compliance hurdles and expansion roadblocks can stem from a wide variety of issues. These subtle warning signs may signal an urgent need to revisit or create your international tax strategy:
If your business is paying tax to two different countries on the same income, it’s time to take a close look at your tax strategy. Income taxes you pay to one jurisdiction should offset your liability in another, but that doesn’t happen automatically. Double taxation can happen when you’re unfamiliar with the relevant laws and tax savings opportunities in either country (such as utilization of tax treaties or foreign tax credits). It’s a clear sign you’re wasting money you could be using for your business.
Double taxation isn’t the only reason you might be paying an excessively high effective tax rate. Tax laws are complicated in every country. If you don’t know how to use them to your advantage, you’ll miss out on tax credits, deductions, incentives and strategies to move your cash efficiently to a desired jurisdiction. Leaving too much profit in a country with a high tax rate can create the same problem. Do you have a well-reasoned policy and process for moving profits from a high-tax country to one with a lower tax rate or one where funds are most needed for business purposes? If not, you may be paying more tax than necessary.
It’s common to have too much cash trapped in a foreign entity. For instance, you’ll owe significant foreign tax on income from a highly profitable foreign subsidiary you created to manage foreign operations, without adequate intercompany payments that can qualify for tax deduction. As a result, distributing the after-tax money back to the U.S. often means you’ll have to pay another layer of dividend withholding tax unless you have a solid repatriation strategy. Addressing international tax planning before you expand helps you avoid this situation.
Spoiler alert: In many cases, you’re better off skipping the foreign entity and doing your global business through contractors, sales reps or exporters.
Wrangling the tax code in your home country is one thing, but you’ll need a local representative to help you figure out the rules in another country. From missing tax IDs and overlooked local deadlines to sales taxes (e.g., VAT or GST) you didn’t register for, doing business in a foreign country comes with an endless maze of potential regulatory compliance pitfalls. Do you have to pay estimated taxes? Have you made the proper elections to keep the books in U.S. dollars? Are you charging your customers enough sales tax, if at all? Without knowledgeable guidance, your venture into global markets could trigger audits, fines and penalties that ding your reputation and slash your bottom line.
As an experienced business leader, you may think you’re doing everything right in your foreign operations, only to see a steady stream of unnecessary losses and costs. Your international tax strategy could be the weak link, because paying extra tax lowers your margins. Even if you know your business inside out, profit-reducing inefficiencies can go undetected and erode your business performance. Maybe you’re underusing tax treaties that could lower your withholding taxes on dividend, royalty or interest payments. Perhaps it’s a missed opportunity to align with Tax Cuts and Jobs Act incentives. The fact is, successful leaders don’t have time to master international tax laws.
Do your intercompany accounts payable and accounts receivable seem overly complicated? Is cash flow unpredictable because you regularly need to loan funds to foreign affiliates? Do currency fluctuations create unexpected taxation when you fund loans or intercompany transactions? Cash flow problems can arise for many reasons, including a suboptimal choice of legal entity, an overcomplicated business structure that creates basic operational inefficiencies or an inadequate transfer pricing strategy. Unintentionally paying too much tax or building a complicated web of intercompany debt can reduce your company’s financial stability and introduce unnecessary complexity for your business. Whatever the cause, it’s a red flag that indicates your international tax strategy needs an immediate upgrade.
Have you been told that you MUST set up a foreign entity to expand? If so, be sure to review the current rules around effective tax rates. You may be surprised to discover that due to a lower U.S. corporate tax rate, without a specific business need it’s often better to avoid having a foreign entity at all. You may pay a little more tax here and there, but the net gain is worth it: lower fees to run your entity, fewer audits, no local tax filing fees and a business that’s much easier to manage in terms of accounting and tax compliance. Complexity costs money, so keeping your expansion plan simple can often be a winning strategy unless the added complexity is truly necessary.
Does your tax pro understand today’s international tax rules? Your advisor should offer strategies to help you simplify international transactions, adapt to changing tax laws and reduce your overall tax burden, all of which ultimately aligns with your business strategy. They should also address concerns like tariffs and customs, transfer pricing and global tax risk. If they aren’t asking about these issues and are only reaching out to you during tax filing season, you’re likely paying too much tax and risking penalties, reputational harm and missed opportunities. Sticking with the status quo may feel comfortable, but it’s not always a wise business decision.
If you’re seeing any of these warning signs, it’s time to consider how a strategic approach to international tax could help you cut costs, boost efficiency and reduce cross-border risks. Find out how our international tax experts can help you start or overhaul your global tax strategy to reap the full rewards of your foreign operations.
Get a free one-on-one consultation to assess your needs and next steps to help you reach your strategic tax goals.
