Optimizing your tax position in cross-border transactions

By minimizing your business’s tax exposure and reducing risk, you can maximize cash flow and overall profitability. However, for those engaging in cross-border transactions, this path to value creation is often more complicated.

Navigating tax requirements in multiple jurisdictions can be accompanied by risks and challenges. With myriad international tax changes that have occurred across the world in recent years, multinational enterprises pursuing global expansion encounter substantial challenges when working toward global tax efficiency and optimization.

Here are three tips for overcoming common tax challenges of cross-border transactions to achieve maximum value:

Establish a process for understanding and navigating multiple global jurisdictions

Those engaging in global expansion will need to know, understand and navigate the tax landscape of each jurisdiction where their business is being conducted. This is critical to identifying opportunities for tax savings and minimizing tax exposure, especially for businesses unfamiliar with global taxation issues such as transfer pricing, value-added tax and the developing global minimum tax initiative.

“Every jurisdiction has its own tax rules,” said Crystal Golob Lindholm, partner in RSM’s international tax mergers and acquisitions (M&A) practice. “That can result in costly complications, such as double taxation or the disallowance of deductions.”

Understanding the rules upfront provides stakeholders with an opportunity to take appropriate action and position the business for a more efficient tax outcome. For example, a private equity company may not be able to take advantage of treaty benefits in certain flow-through structures. This can result in increased withholding tax rates on cross-border payments received from a foreign subsidiary. To mitigate this tax burden, the company could explore alternative entity or transaction structures to achieve an operationally aligned tax-efficient structure.

According to Golob Lindholm, understanding these challenges and opportunities prior to closing the transaction is ideal, as there is more flexibility to alter the business structure before the transaction is complete. However, many options for optimization remain after a transaction has closed.

Adjust global legal entity structure to benefit both operations and tax

By evaluating your global legal entity structure and ensuring it is appropriate from both a tax and operational perspective, a business can optimize its global day-to-day operations, improve cash flow, form synergies globally and reduce its worldwide effective tax rate.

Taking the time to evaluate your global legal entity structure can help you form efficiencies and reduce expenses related to taxation. Undoubtedly, strategically structuring your legal entities can generate cash savings.

For example, a U.S. company in the process of acquiring a multinational business group may have the ability to combine, dissolve or reorganize entities prior to, during or after the transaction in a tax-efficient manner. By doing so, the buyer can reduce tax exposure and create a tax-efficient operating model.

Any structuring changes should align with the company's financial projections, exit strategy and strategic plans for global operations and expansion. Yegorov noted it’s important to carefully review any global tax planning to ensure there is no negative impact on global business operations.

“Often companies focus on optimizing their operational performance, but that might not align with tax efficiency,” she said. “Your operational goals should ultimately drive your business decisions; making sure that the operational goals are accomplished in a tax-efficient manner is where value can be created.”

Consult with a global tax advisor

One way to maximize value while navigating the challenges of cross-border transactions is to work with a dedicated global tax advisor.

Different tax issues can arise depending on the location and tax position of a business. Tax advisors can assist with the integration of new business segments with an understanding of how they will affect your global operations from a tax perspective.

Additionally, there are numerous global tax law changes that have been recently enacted, with more expected in the coming years. These regulations bring changes to all aspects of international tax, from broader requirements for tax transparency to more stringent transfer pricing policies to greater scrutiny of business substance. The nuances and scope of these changing regulations can make existing tax planning strategies less resilient.

“If you're not ready for these changes, you might find yourself in a position where you have tax leakage that you didn't expect and you didn't plan for,” said Golob Lindholm. “Your global tax may increase, which is not something any business strives for.”

By working with a global tax advisor that has strong resources and collaborative teams in jurisdictions where you do business, you can not only be prepared for the changes, but preserve or even optimize your tax position.