Why Your Overseas Operations Need a Clean Corporate Tax Record
By Juliana Staight, Director, Advisory Services
International tax laws are complicated. Many businesses that open offices abroad don’t fully understand their corporate responsibilities, relying instead on “common sense” assumptions that may be unexpectedly naive in the countries where they are operating.
Taking the time to research laws and documentation requirements for foreign countries can be challenging and time-consuming. But not doing so poses serious risks for your company’s pocketbook and reputation. Penalties for neglecting to file documents, reporting information incorrectly or failing to pay taxes can be severe enough to spark civil or even criminal legal proceedings against your company’s directors. And pleading ignorance of such obligations is no defense.
Don’t think it can’t happen to you. Company directors can be summoned to court for failure to pay taxes, and company executives asked to visit the local police station to explain noncompliance.
And even if such dramatic events don’t unfold, your company may be denied a certificate of good standing in the country where you operate. If you consider this denial a small risk to assume, take heed: many companies in that situation have to reconsider their global strategies when they later find they can’t regain good standing in those jurisdictions.
A poor record of corporate tax compliance can also affect your credit rating and lower your company’s valuation. Acquisitions and IPOs can be delayed because corporate records weren’t kept current. Your insurance rates could rise, and you may lose the chance of getting a loan or obtaining government or NGO contracts.
Problems with overseas tax authorities also create bad PR, making it harder for you to attract the best and brightest leaders and employees.
Finally, even if you operate in good faith while abroad and follow local tax laws, you could be leaving tax breaks on the table. Always determine if your home country and the host country have a tax treaty or double taxation agreement (DTA) in place, and determine how to optimize your tax position under that agreement, particularly in relation to withholding taxes.
Improve Your Corporate Recordkeeping
Obviously, it pays to understand the tax and reporting obligations of the foreign countries where you do business, and to know of any possible benefits and incentives under local and bilateral laws.
As a general point, it’s also a good idea to keep copies of all correspondence and filings. Plan for deadlines, giving yourself plenty of time for review and approval, and be sure you set aside adequate funds for in-country payments. Finally, make sure that you have the expertise you need to protect your company from being bitten by obligations you never dreamed of back home.
To read a related post on the most common types of equity reward plans, including typical related reporting and compliance requirements, click here.