For many Canadian CEOs, success in their domestic market is only the first step in a longer journey of business expansion. The more lucrative target can be international markets—often beginning with the U.S. (most Canadian companies’ natural next step for global growth) before looking further abroad. When they make that cross-border leap, however, business leaders soon face a host of international tax compliance obligations.
This is an overlooked consideration, but not due to some sort of C-suite negligence. It’s really about entrepreneurial priorities.
When trying to expand abroad, most CEOs are laser-focused on understanding and delivering their products and/or services to a new market(s), developing new sales or supply chain channels, marketing their brands and building awareness, dealing with various export-related concerns and building business relationships. They often underestimate the sheer complexity of international tax compliance. In the case of the United States and some other countries, those obligations even exist at the state and municipal level, further complicating tax reporting and compliance for Canadian organizations that already face challenges when working to establish an international foothold.
If your objective is to take your business international in the coming year, there are a wide range of points to consider. The most important is to build an experienced team that can help accomplish the task. That will include:
- An experienced Chartered Professional Accounting firm with an international tax practice (both in Canada and in the markets to which you’re expanding)
- An international tax lawyer (to help you understand everything from industry-specific regulations to rules governing considerations such as data protection)
- International HR support (to understand local employment laws)
- International business consultants, as needed
- In-house managers who are equipped to handle your organization’s growth (both at home and abroad)
- And, potentially, contacts with the federal government (e.g., the Trade Commissioner Service) or government officials in your target market who are tasked with supporting foreign businesses as they establish an overseas presence
At Adams + Miles, we have the added advantage of being a member of AGN International, a global affiliation of leading accounting firms. Our AGN membership helps us connect our clients with international partners and additional professional services support, while also providing accounting and advisory services to companies expanding into Canada.
With that in mind, here are some of the most important tax-related points to understand—and manage—to make your international expansion a success:
Local tax laws
Simply analyzing and understanding tax laws and regulations—everything from withholding taxes to corporate income tax rates and other applicable levies, along with filing requirements (such as value-added tax (VAT) and corporate income tax returns—in your target market is critical to mitigating risk and achieving full compliance. AGN International produces an annual series of Tax Cards such as this one that provide a comprehensive overview of tax rules in major markets across the world. They’re a good point from which to begin assessing foreign tax rules that can differ substantially from Canada’s.
In addition, be sure to develop a calendar that highlights tax-related compliance deadlines both in Canada and in the foreign jurisdictions where you operate.
Transfer Pricing Policies
As this definition explains, “Transfer pricing is an accounting and taxation practice that allows for pricing transactions internally within businesses and between subsidiaries that operate under common control or ownership. The transfer pricing practice extends to cross-border transactions as well as domestic ones.” By making a deliberate effort to set transfer pricing policies between your Canadian operations and overseas subsidiaries, you can potentially minimize your organization’s tax burden, while complying with transfer pricing rules on both sides of the border.
Permanent Establishment Risk
This can be a major challenge, especially when doing business in multiple U.S. states. Work with your lawyer(s) to understand whether your activities in a target market could potentially meet the legal definition of a permanent establishment (in the U.S., the term ‘nexus’ is often used in a similar way). If your organization is deemed to have a permanent establishment in a country (even if it lacks a physical presence there), those activities could potentially trigger tax reporting and compliance obligations in that jurisdiction.
Double taxation is a significant financial risk for Canadian companies expanding abroad. The good news: Canada maintains tax treaties with many countries that can mitigate or even eliminate that risk—and, in some cases, can even deliver tax incentives that help ease the cost of expansion. This could include claiming foreign tax credits in Canada for taxes paid overseas. Work with your accountant and tax lawyer to understand any relevant tax treaties when developing your global expansion strategy.
Tax matters can become complicated for Canadian employees working overseas. From withholding tax to residency status, tax remittance and compliance can add a layer of complexity for businesses going global. Work with your team of advisors to understand your obligations and consider engaging a payroll management firm with international expertise.
Currency Exchange Risk
Currency fluctuations—particularly in developing countries—can have a significant impact on your organization’s bottom line. Consider implementing strategies designed to manage currency exchange risks, such as establishing a forward contract with your bank or foreign exchange service provider or setting up a foreign currency bank account to manage overseas transactions.
Some larger Canadian SMEs could be required to file Country-by-Country reports with the federal government. Ottawa shares these reports with various international partners to enhance global tax transparency and ensure multinational compliance. This is yet another reporting obligation that needs to be fulfilled in order to avoid running afoul of the Canada Revenue Agency or equivalent tax authorities abroad.
As we noted in a previous blog, international expansion is not a process that should be taken lightly by a CEO and their management team. Seek experienced support, build a strong team of international advisors and professional services providers and put tax strategy at the top of your priority list when going global.
Tony Sokic, Managing Partner
For assistance with your global growth initiatives, contact an Adams + Miles International Tax and Growth partner today.