Taking your business global? 10 important indirect tax issues to consider.

• Author: Walsh, Chris

Introduction

The last 15 years have seen a paradigm shift in the ability for even the smallest business to reach across national borders and become global in its trading model. If they have not already done so, many business owners are actively considering expansion to other countries and continents, and it has never been easier to accomplish this goal. With 95 percent of the world's population residing outside the United States, it is no surprise that U.S. businesses are looking to the global marketplace. That overseas markets are physically accessible, however, does not necessarily mean that the act of "going global" is easy. For companies looking to leverage expansion opportunities, the associated tax implications related to their operations, pricing, delivery, and selection of office location can be daunting.

How did this shift to a global marketplace come about? The rise in globalization has resulted from the evolution of two broad business phenomena: (1) the immense reduction in the cost of going to market, primarily aided by the growth of the Internet, and (2) the increased use of outsourcing for manufacturing, packaging, and service delivery. India and China provide not only sources for inexpensive labor and products but also supply a large number of potential consumers. Helping to fuel globalization is the improvement in international freight movement, which has become quicker, cheaper, and easier.

Globalization brings with it many risks as well, risks that are mainly economic in nature but that can also be potentially damaging to a company's reputation. Entries into new markets require sufficient infrastructure to support the sales activity. Along with establishing infrastructure, companies need to understand the cultures and social norms of the countries they enter. This entails going well beyond understanding language and currency; it includes fully absorbing the legislative environment of the local country regarding:

* Business registration

* Contract and employment law (which often does not conform to U.S. or even European standards)

* Consumer protection measures

* Import and export restrictions and licenses

* Consumer protection measures

* Banking regulations (which have been tightened significantly since 9/11, making even the opening of a bank account a tedious and time-consuming process)

* Principal vs. Agency legislation

* Accounting and Tax law (it is important to understand both U.S. and local legislation, as well as the global network of tax treaties) Of all the tax types that a U.S. company is likely to encounter as it ventures overseas, the Value Added Tax (VAT) is by far the most widespread of the transaction taxes. With more than 140 countries employing such a tax system, it is difficult to avoid contact with it once the business steps beyond the U.S. borders. Business owners need to ask themselves: Do I have the knowledge and the resources to cope and comply with other countries' taxation rules and regulations? What types of taxes will apply to my business? The tasks of collecting, reporting, audit, and defense are not insignificant and require constant vigilance.

Managing Indirect Taxes in a Global Business

Studies from leading consulting firms confirm that indirect taxes, such as VAT or general sales tax, will play an increasingly important role in respect of the resources that multinational corporations will devote to their global compliance effort in coming years. From a study of 500 large corporations in 22 countries, KPMG reports:

* 75 percent of global businesses anticipate a growing governmental reliance on indirect taxation over the next five years;

* 50 percent of global finance directors rated VAT errors and compliance as a top tax risk;

* 66 percent of global businesses expressed the need to increase employee awareness of VAT through additional training; and

* 42 percent of global businesses see a need to invest in improved VAT systems and technology.

Similarly, in a study titled "Paying Taxes 2008: The Global Picture," PricewaterhouseCoopers notes:

Transparency around the tax contribution has therefore never been more important, to ensure that the impact on business and society in general is fully understood.... To consider the full impact of the various business taxes, both their tax cost and their compliance burden need to be considered. Indirect taxes and consumption taxes can add substantially to compliance costs. For U.S. companies, the learning curve regarding VAT and other indirect taxes can be steep and expensive. Nevertheless, it is important to understand the tax landscape of a company's expanded market reach in advance of the first sale or the establishment of any form of local presence.

The Top 10: Important Tax Issues to Consider

The term "indirect taxes" covers a broad spectrum of tax types and, as such, presents numerous business risks and exposures. What are the top indirect tax issues to consider when expanding into other countries? The following checklist captures the major tax scenarios and provides further information the tax executive will need to manage a multinational tax position.

1. VAT Registration: What Are Your Obligations?

   The first and vitally important thing to understand is that registering a business in a country is not necessarily the same as registering it for VAT purposes; the two processes do not always go hand-in-hand. Registration for VAT is often a separate activity and it is incumbent upon the seller to register for, collect and remit tax, and report on VAT transactions. In some cases, VAT registration can take three to six months to be processed, so thinking and acting ahead of time is critical if deadlines are to be met.

   A company's VAT registration position is normally dependent upon the specifics of the business. Some of the factors taken into consideration are:

   Revenue level--Most countries have a revenue threshold that dictates whether VAT registration is necessary. If expected annual revenue is below the country's threshold, VAT registration may not be compulsory, a company may still want to seek advice on whether to register voluntarily in order to reclaim VAT that is charged by local suppliers. As a general guide, registration thresholds can run from a very nominal sum up to $100,000 or more in some locations such as United Kingdom and Singapore.

   Nature of physical presence--Issues surrounding permanent establishment are not dissimilar to those encountered under income tax law. Again, the position differs from country to country, with some territories maintaining that a physical presence alone (e.g., an office or members of staff) will require a local VAT...