Effective international tax planning is a complex balancing act
Understanding your risks, markets and goals in an evolving tax world
Establishing and maintaining an effective tax strategy for an internationally active business has never been easy. It requires tracking the constantly shifting tax landscape in multiple jurisdictions and building a cohesive structure that:
- Appropriately times your tax and cash needs
- Takes full advantage of tax deferral opportunities
- Seizes foreign tax credit opportunities
- Avoids double taxation
- Appropriately controls your overall tax exposure
The right international tax structure must balance the flexibility needed to adjust to the constant changes inherent in operating internationally with the predictability and sustainability necessary to run your business.
Flexibility and sustainability
Establishing and maintaining a robust international tax structure is an ongoing project. It requires the foresight to adapt tax strategies that fit your future plans, not just your current realities. It also means building a structure that suits your operational needs as well. Ideally, your international tax structure should be revisited every three to five years to ensure that it is still aligned with your corporate strategy and with changing international tax realities. But significant changes affecting your international tax position, such as entering new markets; major changes in tax regulations in jurisdictions where you do business; or a cross-border merger or acquisition, should all trigger a re-evaluation of your international tax strategy.
Minimizing your overall global tax exposure is another key concern. International businesses can pursue a variety of strategies to manage their effective global tax rate. Common business strategies often involve locating assets, risks and key business functions in taxpayer-friendly jurisdictions, which can reduce your overall business tax burden and retain more capital for the business.
BEPS means major changes
International tax planning strategies are experiencing heightened scrutiny. Many previous approaches to managing a business’s global tax profile will result in a different consequence in the future because a number of tax jurisdictions are making changes to increase their tax base and limit certain deductions. The foundation for this rapidly changing landscape is the Organisation for Economic Cooperation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) project.
The BEPS project action plan identified 15 Action Items aligned along three fundamental pillars:
- Establishing coherence in the domestic rules that affect cross-border activities
- Reinforcing substance requirements in the existing international standard
- Improving transparency
While countries are moving at varying speeds to implement BEPS, the BEPS initiative is driving the most significant changes in international taxation in decades and will affect virtually all internationally active middle-market companies. It will drive increased transparency and heightened reporting requirements and will almost certainly mean increased compliance costs and higher effective global tax rates for most international enterprises.
Technology plays a key role in international tax planning strategies
Increased reporting requirements under BEPS underscore the key role your information technology should play in supporting your tax strategy. How your assets and transactions are defined, captured and reported by your systems will play a role in your ability to meet evolving compliance requirements. The ability to access, organize and report data is also vital to your tax and operational planning and management capabilities. As with every other aspect of your business, technology is vital to managing your tax responsibilities.
Your business strategy must inform your tax strategy. For example, a company that is anticipating an initial public offering (IPO) or merger will be more focused on an uncluttered international tax picture, free of any controversies that might complicate the deal. A company focused on aggressive organic growth might be less concerned with those issues and more focused on building the international structure best aligned with its growth goals. Taking a risk-based approach to international tax planning will help you decide where best to focus your resources at any given time.
Local experience matters
Even the best international tax strategy is only as good as your ability to execute it in every jurisdiction where you operate. Each jurisdiction brings not only its own tax issues, but unique banking and legal environments as well. Navigating all of these concerns means building effective relationships with local advisors with the depth of understanding necessary to understand and address the idiosyncrasies of their local markets. It also means being able to coordinate with those advisors globally. Building that network of relationships takes time.
International tax planning strategies are complex and constantly shifting. Managing this ongoing challenge requires mastering both the big picture and the details that comprise it.