Every international expansion plan should be flexible rather than reactive. While there’s no one-size-fits-all approach, the first step could be to consider big-picture strategies that find a balance between your tax exposure versus the cost of implementing and maintaining your plan.
There are two main tax strategies to consider for international expansion.
- Cash repatriation
- Intangible property migration
A common byproduct of an international corporate structure, which may have a beneficial tax impact, is the accumulation of cash in foreign jurisdictions. The decision to hold funds offshore or to repatriate them to the United States has both business and tax considerations, the latter having changed significantly since Tax Cuts and Jobs Act (TCJA) of 2017.
Prior to the TCJA, a US company could generally defer foreign income from US taxes by retaining earnings indefinitely in a foreign subsidiary. Upon repatriation, the earnings would be subject to those taxes with an available credit for the foreign taxes paid. The repatriation could result in a net US tax obligation because the US tax rate would often be higher than the foreign tax rate.
After the 2017 reform, a US company is more likely to pay US tax on foreign earnings each year. This change has effectively removed a US company’s ability to defer foreign income from US tax and shifted the timing of the tax burden from when cash is repatriated to when income is earned.
With careful advance planning and documentation, you can generally achieve a lower US tax impact when repatriating income after being subjected to US taxation.
- Consider repatriating funds to the United States through dividends, royalty payments, intercompany management fees, intercompany advisory fees, or intercompany loans.
- Analyze each method to understand which is most tax efficient for repatriation. This can be based on several factors, including the international structure, the amount of foreign earnings previously taxed in the United States, and the specific foreign jurisdiction housing the cash. The most favorable route may be a hybrid model that involves several options.
- Review options and the associated tax consequences in both the foreign country and in the United States.
Intangible Property Migration
Since the beginning of the industrial revolution, business enterprises have generally derived their perceived value from measurable tangible attributes:
- Value of land, buildings, and equipment on balance sheets
- Skill associated with workforce
In recent years, a different type of asset class known as intangible property (IP) has begun to dominate the market value of many of the largest corporate enterprises.
Types of Intangible Assets
There are many kinds of intangible assets, but they can be generally grouped into two broad categories:
- Intellectual property. Common for technology and life science companies
- Brand. Typical of consumer goods companies
Some companies derive their perceived value from both. In the world of globalized commerce, the location of intangibles—whether determined by planning, default, or by the whim of a governmental tax authority—is often the key in determining where corporate profit is generated, and tax is paid.
Because tax rates vary among jurisdictions, the location and value of intangibles can have a dramatic impact on the effective tax rate of a multinational business and its enterprise value. This is especially true after new tax laws were introduced in December 2017. Prior to 2017, the US corporate income tax rate could be as high as 35%.
These newer rules reduced the corporate income tax rate to 21%. This change places the United States in more comparable tax rates to other jurisdictions with tax rates lower than 20%. For example, Singapore has a tax rate of 17%, and Ireland has a tax rate of 12.5%.
Taxation of intangibles is one of the most volatile areas of international tax and transfer pricing, because IP is difficult to define and locate. These transfer pricing arguments can lead to high-profile litigation between tax jurisdictions and corporations involving large sums of tax and potential penalties.
Additionally, countries are starting to impose separate taxes on IP in their countries. It’s also important to analyze the potential implications from the new provisions of global intangible low taxed income (GILTI) and foreign derived intangible income and compare the pros and cons of IP migration strategies.
Other important strategical factors include the following.
- Determine the location of existing intangibles
- Analyze the alternative locations for future development of intangibles
- Manage that development, document the results, and defend those results against aggressive tax authorities
We’re Here to Help
For guidance on international tax strategies, contact your Moss Adams professional. You can also visit our International Tax Services page for additional resources.