Doing Business Internationally: The Legal and Tax Effects
When I am speaking with international companies looking to do business in a foreign country (which sometimes means the United States), I like to start with their business plan. Most companies develop their business plans long before they decide to check with their lawyer to see where they might run into issues. They understand their markets, and it rarely makes sense for legal to be involved at the earliest stages.
What if My Company is Already Doing Business Internationally?
Many companies move forward with their international expansion without analyzing the potential legal issues they may run into. I often get called when companies are already in trouble with their business partner, their bank, or the applicable federal, state, or local government.
Recently I had conversations with two international clients that want to sell products and services in the U.S. and then use their U.S. entity as the base of operations for further international expansion. I explained to them that tax and legal matters are inextricably tied together. Many lawyers do not like to admit this, but tax issues often drive legal issues, not the other way around. There are comparatively few international tax attorneys in the U.S., and they generally spend the majority of their time dealing with IRS disputes and tax planning for large clients. This leaves SMEs wondering who to turn to for international tax advice.
Does My Company Need an International Tax Expert?
An experienced international transaction attorney can explain both legal and tax issues, though they will alert you when they run out of their expertise and need to bring in a CPA trained in international tax. Like international attorneys, there are many more “regular” domestic bookkeepers and CPAs than international tax accountants and CPAs. I have spent several years building my network of qualified and engaging domestic and international CPAs.
International CPAs are intimately familiar with general domestic tax issues: state and federal income tax (and analogous state quasi-income taxes), state and federal employment-related taxes, stamp taxes, and state and city sales tax and use tax, as well as applicable exemptions from these taxes. They are also familiar with less well-known international tax issues, such as income recognition, transfer pricing, and repatriating profits, as well as employee-specific issues relating to transferring local employees to new international markets and employing local individuals in new international markets.
How Do I Navigate My Company’s International Tax and Legal Risks?
From both legal and tax standpoints, wherever in the world you do business you will potentially incur legal liabilities and obligations, as well as tax reporting and payment obligations from your first sale. Setting up an entity in any country has both benefits and limitations. For instance, you can do some business in the U.S. without setting up a U.S. entity, but once you start doing business through dedicated agents or employees, you need to establish some type of U.S. presence.
Many companies do business internationally with as light a footprint as possible. That tactic is fine as long as you plan before taking that first step, rather than wait for a local government official to take notice based on your business or employment missteps.
Will My International Plan for the U.S. Be Different from Other Countries?
Many countries are similar in how they require you to do business, though each has its own set of parameters regarding when you need to register to do business there, get a local tax identification number, and hire local directors and employees, among many other issues. These issues will almost always be the same regardless of whether your parent entity or your local subsidiary does business in the new international jurisdiction.
You will need to take certain steps regarding registration and also declare income and pay taxes where that income is incurred. Where a double taxation treaty is in effect with your home country and the other country, you may have little to gain from a tax perspective by setting up a subsidiary company and having it establish another subsidiary in a foreign jurisdiction. That issue will matter when you start thinking about repatriating profits.
You may have business reasons for wanting to utilize a certain structure, such as market access, visibility as a “local” company, or preparing for a future IPO in the U.S. or an M&A transaction in one or more countries simultaneously. At the very least, you should strongly consider establishing one entity in each foreign jurisdiction so that you can keep each country’s general business liabilities in that country.
When Should I Talk to a Lawyer or International Accountant?
You should involve an international business lawyer and an international accountant or CPA as soon as you begin thinking about expanding abroad to a new market. Many lawyers and accountants would prefer to have a 20 minute conversation at your early stage to help you avoid many obvious and immediate issues rather than receive a frantic call six months later when you have run into trouble. You should get comfortable with asking these types of questions as early as possible.