How to: deal with tax when exporting
Even if your early exporting efforts just amount to some visits by members of staff to assess a market’s viability, it’s useful to familiarise yourself with the tax environment in the country where you plan to do business. The further afield you go, the less familiar the tax system is likely to be, when compared to doing business in your domestic market.
The World Bank provides a comprehensive guide which ranks more than 190 countries by ease of doing business there. It is a very useful starting point for understanding at a high level the various tax regimes that operate in various markets. Encouragingly, its recent report suggests many governments worldwide are implementing business-friendly laws designed to make trade easier. Nevertheless, there is still a wide variance in the complexity of tax systems across the globe. For example, tax compliance in Brazil is estimated to take 2,600 hours, or more than one working year for a full-time employee.
Exporters are strongly recommended to seek professional advice at an early stage when planning to sell internationally. In many countries in continental Europe, notaries are commonly needed for tasks such as establishing a subsidiary company or branch office, and you may also need to work with an accountant who is familiar with the local tax laws when arranging to pay the appropriate taxes if required to do so. Take the time to consider carefully what company structure you want to set up in your chosen market, because this will have a bearing on the nature and amount of tax that you will pay.
More information on tax issues for exporters
There are a range of resources to help exporters better understand their tax obligations, no matter where on the island they are based. The tax authorities in Northern Ireland can be accessed at Dealing with HMRC. For companies from the Republic of Ireland, the Revenue Commissioners website at www.revenue.ie has information of interest to exporters.
Expert advice: Brian Keegan, Director of Taxation, Chartered Accountants Ireland
Entrepreneurs and business owners may know their product or service very well, but might not be as familiar with the tax implications of doing business in other countries. Brian Keegan, Director of Taxation with Chartered Accountants Ireland, outlines some of the main considerations.
At a high level, What does an exporter need to know about tax issues?
The compliance obligations for an exporting company are fundamentally no different to any trader or service provider. Exporters shouldn’t think they are in a special category as far as the Revenue or HMRC are concerned: you have the same compliance obligations, you have to register the existence of the company with HMRC or the Revenue and register for the taxes as appropriate, such as VAT, or PAYE if you plan to take on staff.
Start-ups should be aware from day one that registering should be straightforward, but you need certain documentation from the start. There can be considerable delays with VAT registration for instance. Don’t enter into a multi-million contract abroad without having it! You will have to think about how you deliver your goods and services. If, as increasingly is the case, you’re delivering goods and services electronically, you’ve got to think of the VAT consequences of that, and you’ve got to think of who you’re selling to. There are different VAT rules if you’re selling to consumers or business-to-business.
“It’s always much harder to fix a tax issue after the event. It’s better to get it right sooner rather than later”
There will be changes to the Vat regime in Europe from 2015. What implications do they have for exporters?
These changes mainly apply to businesses supplying to consumers. The rule had been that if you are supplying digital services to consumers, you charged VAT in the country in which you were established, irrespective of where the consumer was based. Now, a digital services exporting company must effectively register for VAT in every country in the EU into which it sells. So, for example, they have to separately account for French, Italian and Spanish VAT at the appropriate rates. Both the Irish Revenue Commissioners and HMRC have devised effective one-stop shop websites to help with the complexity. The fundamental concern for business to business sales is to ensure you have the VAT reference number of the company you’re exporting to.
If a company decides it needs to be closer to its customers and sets up an office in a particular market, what issues are they likely to face?
The first tax issue you will have to look at if you are contemplating establishing an office is whether or not your home jurisdiction has a double taxation with that country. You want to make sure you get the full benefit of any tax you pay in, say, Germany or France, against your ultimate domestic tax liability. Both Great Britain and Ireland have extensive networks of double tax treaties with other countries. You will get some form of benefit for the tax you pay in the other country, against the tax you pay here. In tax terms, it’s always more advantageous to set up in a country that shares a double tax treaty.
What is the most advantageous business entity from a tax perspective?
There are a number of different ways of doing it. You could have some kind of agency agreement with a commercial agent in a country, which mightn’t constitute you having a taxable presence in the other country. You could formally set up a branch or go a step further and incorporate an entity and there are slightly different tax consequences for both. There’s also a notion in international tax law of a “permanent establishment” which is the degree to which you have a presence in the other country, and which will bring you into the charge to tax in that country. You need to take advice to ensure you know if there is a charge to foreign tax. The term ‘permanent establishment’ often causes particular difficulty: a showroom might not be considered a permanent establishment, but if there are employed staff there who are authorised to carry out sales, then could have a tax liability. People need to be fully cognisant of the extent to which they have taxable presence in the other country.
How important is tax in the context of overall export planning?
If you’re designing your exporting presence purely on tax grounds, there’s something wrong. Be aware of tax consequences but don’t let tax consequences drive your business structure exclusively. Let the commercial considerations drive the tax consequences. Don’t let the tax consequences drive the commercial considerations.
Recently, I happened to be talking to someone in the digital technology sector; they took a decision to pay too much VAT in a territory, just to get set up quickly. They reckoned the cost of the extra VAT was less than the opportunity cost of a delay in getting started. To my mind, that was exactly the right kind of commercial behaviour. Otherwise, while you’re waiting for tax clearance, you could miss a business opportunity. However, as a general rule, It’s always much harder to fix a tax issue after the event. It’s better to get it right sooner rather than later. If you find at the end of year you haven’t been handling a withholding tax for example properly, that’s expensive to fix after the fact, so you need to think of the tax consequences before you start transacting.