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What you need to know about taxes before expanding globally

Thursday, 30 January 2014   (0 Comments)
Posted by: Author: Ritika Puri
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Author: Ritika Puri (HSBC​Voice)

International expansion is an important step for many high-growth organizations. Top-performing firms will frequently have global opportunities knocking at their doors. It’s easy to jump in and start closing deals with vendors and new customers, but companies–especially ones that are evolving rapidly–need to take a step back to understand the tax implications of doing business internationally.

"Too often, businesses rush in without the appropriate planning,” said Robert C. Pedersen, partner at tax consulting firm BDO USA, LLP. "This can often place businesses into risks of financial losses and put strains on customer and vendor relationships if everything doesn’t go smoothly.”

Balancing structure with growth opportunities

One key challenge that growing organizations face is the ability to balance rigorous tax policies with evolving business objectives.

"Some businesses make tax planning the top consideration when, in fact, tax is something that enhances the opportunity, not drives the opportunity,” said Pedersen.

Chris Lynch, chief financial officer at social media management vendor Sprinklr, agreed. "Until you have critical mass and a meaningful business outside of the U.S., your tax strategy is pretty much irrelevant in the scheme of your other business challenges,” he said.

Sprinklr currently provides cloud services to a range of companies including Samsung, Dell, Virgin and Cisco. The company closed a $17.5M series C funding round in 2013, and is expected to show growth of more than 300% in 2013. The company has just launched the first of its overseas sales operations and is transitioning from a U.S. to a global tax system.

Lynch, who has spent the last 18 years working with high-growth software companies such as Bazaarvoice and Vignette, encourages business owners to validate their business models before implementing a global tax structure.

"Tax-efficient structures can be put in place at any time,” said Lynch. "Because they take significant time and financial commitments to set up, it’s generally a better idea to do that once you have proven your business model in a particular geography.”

Finding the right expertise

Tax law is a highly specialized field that requires geography-specific insight from experts. Indeed, some companies are surprised at the challenges they face when working to build a team that can adapt to an international business model.

Lynch encourages business owners to work with international compliance experts who deal with tax law all day, every day.

"Let the experts interpret the changes and give you guidance so you can focus on running your business,” said Lynch.

Steven L. Gill, associate professor of accounting at San Diego State University, explained that businesses can avoid unforeseen challenges by working with tax experts local to the area in which your company will be doing business.

"Most U.S. tax experts lack any substantial non-U.S. compliance training,” said Gill. "Using trusted U.S. tax advisers to help locate overseas tax assistance may be the easiest way to handle compliance and planning.”

The alternative is for businesses to build tax teams composed of international experts. This type of operation, however, may not be worth the investment.

"It rarely makes sense for a U.S. tax department to have an expert in each country,” said Gill. "It is simply too expensive.”

Getting started

As with so many things, one of the most effective ways to ensure success is to create a plan ahead of time.

"It’s never too early to plan,” noted Gill.

Regardless, businesses need to time tax structure changes to key initiatives in the business.

"Initial sales into foreign jurisdictions may ignite management excitement,” said Gill, "but may not warrant a half-million dollar tax planning structure.”

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