Enterprises doing business in more than one country are confronted by a new set of tax problems, because their presence in a second country could make them liable for taxes on profits earned in that country. This gives rise to the possibility of double taxation, because the company's home country may try to tax the same income. This is where international tax planning comes in, because careful planning is required to ensure that a company is not penalized for doing business in more than one country. It may be necessary to pay other taxes, such as sales tax or value-added tax, in the second country, and planning can ensure that no penalties are incurred. An international group may need to comply with regulations imposed by both countries in respect to transfer pricing, thin capitalization or controlled foreign companies, and these rules need careful monitoring in each country.
A business trading in another country is normally subject to taxation on business profits in that country if it has a permanent establishment there. This could be a fixed place of business such as an office or factory, or it could be a dependent agent in the country who exercises the power to conclude contracts there. The foreign country will want to tax payments leaving the country in the form of dividends, interest or royalties. The sale of assets in the other country may render the business liable to taxation on any capital gains made. The home country may give unilateral relief for foreign tax paid or the taxing powers of the home country and the source country may be regulated by a double taxation agreement.
Where a company is doing business in more than one other country, detailed international tax planning is necessary to ensure that the supply chain is rationalized and does not give rise to unnecessarily high taxation. The company may consider forming regional holding companies to hold the shares in regional distribution companies. These may be located in a jurisdiction that has a favorable tax regime for such holding companies and a wide network of double taxation treaties that enables efficient management of tax liabilities in the region. Regional managers may gain a detailed knowledge of regulatory and tax requirements in the region, giving them the ability engage in international tax planning and react to regulatory changes.
International tax planning involves a detailed knowledge of the activities of the company and of the latest regulatory requirements in each country in which the company operates. The company may be in a position to take advantage of tax reliefs or free-trade zones within the other country. Transactions must be planned and documented so they comply with the requirements in each country relating to accounting and tax records, and appropriate documentation must be prepared to justify transfer prices on sales of goods and services within the group.
