• Offshore expansion

    Expanding into overseas markets is a major step for a growing business and is often accompanied by new commercial and tax implications.

    When your business expands offshore, you may encounter new circumstances that require changes to existing governance rules and procedures. International tax issues that attract our attention include attributable foreign income, transfer pricing, profit shifting, non-resident withholding tax, thin capitalisation, and dealing with secrecy and low-tax jurisdictions.

    You may need to seek guidance from tax advisers to understand the tax implications. You may also wish to engage directly with us for advice before you lodge your tax return. We can help you reduce uncertainty by clarifying how the tax law applies to your particular circumstances.

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    Consider the following issues when developing governance policies to manage international tax issues.

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    Offshore expansion – decision-making process

    Governance principles around decision making should apply when making decisions to expand offshore.

    The decision-making process should take into account the need to flag new tax risks. Document decisions made, including the underlying commercial reasons, the proposed initial structuring and any future plans.

    The immediate and future tax outcomes from your overseas expansion may depend on your choice of structure and financing arrangements (including the mix of equity, debt and hybrid instruments). The use of interposed holding entities in tax secrecy jurisdictions without a commercial reason or use of artificial financing arrangements to reduce tax may attract our attention.

    Example: Expanding your business to a low-tax jurisdiction

    You decide your business will expand offshore in a low-tax country and relocate some of its internal functions there.

    In line with your tax governance procedures, you document the decision-making process and commercial features of your plans. Your offshore expansion initially attracts ATO attention, but your contemporaneous documentation adequately explains your commercial decision and intentions and the issue is quickly resolved.

    End of example

    Overseas tax registrations

    Overseas jurisdictions have their own business registration rules that may vary significantly from those in Australia.

    Your tax governance procedures should ensure that foreign business registrations are fully completed and also provide for annual plans to meet offshore lodgment obligations. Procedures should also address appointing overseas tax advisers and auditors where necessary.

    New overseas tax issues

    When expanding overseas, your tax governance procedures should become increasingly well documented and formalised as the number of tax issues and stakeholders increases.

    Your international tax policies and procedures should be updated to fully address the wider range of tax issues that may arise, such as thin capitalisation, attributable foreign income, tax on repatriation of profits to Australia, non-resident withholding tax, foreign trust tax provisions, residency, low-tax jurisdictions and the impact of tax treaties. You may wish to do this in conjunction with your adviser.

    Procedures should also cover escalation of cross-border and multi-jurisdictional tax issues to appropriate professional advisers as they arise.

    Example: Using tax governance to identify international tax issues

    You recently expanded your Australian business to Europe by establishing a foreign subsidiary. To support the new European operations, some intellectual property is transferred to the European subsidiary and licenced back to Australia.

    Your tax governance procedures were updated to accommodate your international expansion. The procedures require that all international tax obligations be reviewed, which reveals that withholding tax applies to royalty payments made to your foreign subsidiary. You make a prompt voluntary disclosure of this to the ATO, which is now aware that you have improved your international tax governance policies, and will take this into account in assessing your future tax profile.

    End of example

    To further manage day-to-day matters, ensure that key staff and advisers have sufficient capabilities to deal with international tax issues. For smaller businesses, this may necessitate further developing your internal accountant's international tax skills, and ensuring any external tax advisers are appropriately skilled. For more complex businesses, this may mean hiring new tax staff, mandating an annual review of international tax issues, and greater use of specialist external advisers.

    When your overseas operation is established, responsibility for co-ordinating management of global tax issues, tax functions and multiple advisers should be allocated to a team or key individual. In a more simple business, this may rest with the Australian internal accountant. In a more complex business, this may be a specific role within the Australian tax function assisted by a designated external adviser.

    Establish protocols to ensure that accounting and tax information of overseas entities is reliable and supplied to the Australian business in time to prepare Australian tax returns.

    Example: Overseas expansion

    Your business decides to expand into three new countries over the next 12 months.

    Your governance processes require that your Australian financial controller, with the assistance of your tax agent, co-ordinates management of global tax issues, foreign tax filings and ongoing engagement of foreign tax advisers. These clear lines of responsibility have ensured that your financial controller understands all global tax issues, and these issues are fully addressed as part of your first year tax filings for each foreign subsidiary and for the Australian income tax return (including the international dealings schedule).

    End of example

    Related-party dealings

    From the start of an overseas operation, governance procedures should ensure that international related-party transactions are priced based on arm's length conditions.

    Transactions that are not based on arm's length conditions may attract our attention.

    Establishing a sound global transfer pricing policy is important for compliance with Australian tax laws. Your transfer pricing policy should:

    • cover all international related-party transactions
    • be prepared or reviewed by experienced external advisers
    • be fully documented
    • be reviewed annually to ensure it remains up to date.

    Accounting and other staff involved in pricing and invoicing international related-party transactions should be aware of the transfer pricing policy and ensure it is implemented.

    With transfer pricing at the centre of the current focus on international tax reform and compliance, governance policies should ensure that you're fully aware of your transfer pricing policies and the level of tax risk adopted.

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    Employing Australians offshore

    Your international expansion may involve seconding key Australian personnel overseas to establish your subsidiary.

    International secondment arrangements can be complex and involve residency, pay as you go withholding, superannuation, fringe benefits tax, transfer pricing and deductibility. We suggest that governance policies ensure adequate documentation is maintained in the Australian jurisdiction to support your arrangements for seconded staff. Most businesses require escalation of complex issues to external advisers.

    Corresponding procedures should be established in the secondment country to ensure foreign employer tax obligations are satisfied.

    Strong tax governance relating to international secondments not only protects your business from unanticipated tax consequences, but also ensures you comply with tax-related clauses in employment agreements and protects your relationship with key staff and your reputation.

    Non-resident beneficiaries

    Tax issues can arise when Australian resident individual shareholders, or beneficiaries of Australian resident discretionary trust shareholders, become foreign residents temporarily or permanently. These include liability for capital gains tax (CGT) on becoming a non-resident, residency consequences for corporate entities (including SMSF trustees) and liability for non-resident withholding tax.

    To demonstrate good tax governance and help meet the Australian tax obligations of both businesses and non-resident owners, tax procedures may need to address:

    • correctly determining and recording the date on which individuals ceased to be tax residents of Australia and documenting why this date was chosen
    • managing the CGT consequences of ceasing to be an Australian resident, including making any relevant elections and undertaking any market valuations necessary to protect access to the CGT discount
    • determining whether the tax residency of corporate entities or SMSF trustees is affected
    • identifying non-resident withholding tax obligations in relation to shareholders and beneficiaries of Australian companies and trusts
    • seeking advice where required.

    See also:

    Last modified: 31 May 2016QC 49171