Tax tips for doing business overseas

When considering doing business overseas, it is important to have proper planning at the start of the process. Generally, the purpose of tax planning is to ensure the structure is efficient for tax purposes (i.e. to get the lowest effective rate possible within the desired risk profile) and to make sure there are no hidden tax costs that have not been considered.

There are a number of tax issues to be considered and given the specific and general anti-avoidance provisions in Australian tax laws, it is valuable that you engage with a specialist tax professional when looking at tax planning opportunities and investing overseas.

Set-up

You will first need to determine whether you have a permanent establishment overseas and what type of entity should be set up (if any). This would not only have a tax effect in the foreign country but also in Australia. For example, a number of tax concessions for repatriating profits to Australia from overseas will only be available for company-to-company transactions or branch-to-head office transactions.

Financing

The funding mix (debt/equity) should be considered including what are the capital requirements and debt limits overseas. Both types of funding and source of funding can affect tax outcomes. Where the funding of an overseas entity is made by debt, transfer pricing provisions should be considered. Interest expenses incurred in Australia to earn income from foreign sources are generally deductible subject to a number of limitations.

In addition, foreign exchange risks should be considered (e.g. foreign exchange gains (fx gain) on repayment of foreign currency loan).

Provided certain conditions are met, you may be eligible for an export market development grant. This is a government financial assistance program which aims to encourage small and medium sized Australian businesses to develop export markets. This program reimburses up to 50% of eligible export promotion expenses.

Operating

To operate overseas, you may need to employ expats and consider structuring their employment agreements. For example, it may be possible to package non-cash benefits for expats overseas in different ways to achieve a better tax outcome. Likewise, the tax effect regarding individual employees and directors in Australia may need to be considered. For example, payroll tax may still be payable by the employer in Australia if Australian employees are spending only short periods overseas.

In addition, when the central management and control of a foreign company is in Australia, tax residency of the foreign company will also need to be considered to avoid potential taxation of foreign profits in Australia. Appropriate governance and processes should be in place in this regard especially since the recent Australian Taxation Office (ATO) Taxation Ruling 2018/5.

Moreover, although you could get a lower tax rate overseas, the Australian Controlled Foreign Company rules may apply. In certain circumstances, these rules aim to tax Australian owners on their share of tainted income, even where that income is retained by the overseas company and has not been distributed to the Australian shareholders.

You will also need to consider the specifics of the overseas jurisdiction and be aware of all taxes in the country (federal, state and local, direct and indirect) as well as plan for local compliance. Remember, while we may plan structures to achieve tax efficiency, one of the best ways of not paying more tax than necessary is to ensure full compliance with tax laws to avoid penalty taxes, fines etc.

Once you have a clear understanding of taxes overseas, it is also necessary to consider the effect on taxes back in Australia.

Profit Repatriation

Provided certain conditions are met, profits from an overseas company or branch may be flowed through to an Australian company free from Australian income tax.

For resident shareholders of an Australian company, dividends will be unfranked dividends so individual shareholders should be taxed at a marginal tax rate (with no franking credits). This can significantly increase the tax rate payable on profits earned overseas. Careful planning is required to mitigate the effects of this.

For non-resident shareholders, no Australian withholding tax on unfranked dividends should apply if the dividends are declared as conduit foreign income.

Overseas withholding taxes may apply on dividends payments, branch profits and other intra-group charges such as interest, royalties, management and services fees. Foreign income tax offsets (FITO) in Australia may be available in respect of certain foreign withholding taxes paid but there is no FITO for overseas corporate income tax paid.

When considering profit repatriation to Australia and inter-company charges, transfer pricing rules need to be considered in detail including the determination of arm’s length prices and preparation of related transfer pricing documentation.

Exit Strategy

On exit, and provided certain conditions are met, any capital gains realised by an Australian company from the disposal of shares in a foreign subsidiary may be disregarded in Australia. Tax treaties (if any) also need to be considered to determine the allocation of taxing right on the capital gain.

If you are considering doing business overseas or have any queries in relation to the above, please do not hesitate to contact our international tax team on +61 2 8646 6000. PKF is a member firm of the PKF International network with more than 440 offices globally operating in 150 countries across five regions.