How to manage tax and accounting when you expand overseas
There are more than 200 countries in the world, each with unique cultures, languages and histories. However you should assume one thing for certain when you expand into any of them. Each of them will have a local tax authority waiting to scrutinise your new business and ensure that you pay all your taxes due. In most countries you will also face requirements to file local financial statutory accounts using local accounting rules (GAAP) and local prescribed formats.
It can be complex, costly and time-consuming to comply with all these international tax and accounting regulations. It can also be hard to find good, plain-speaking advice to help you navigate through this maze when you expand overseas. In this article I will try to make this easier for you. I will highlight common linkages between tax and accounting based on my experience in over 25 countries across EMEA, APAC and the Americas. I will also give some practical tips on how to manage tax and accounting to save you money and time wherever you expand overseas.
To set the scene, it is useful to remember why tax and accounting are fundamentally linked. Taxes are designed to generate revenue for countries in line with local regulations. Accounts are required to ensure that these revenues are calculated correctly, again in line with local regulations. Think of it in reverse. Can you imagine how much tax would be paid if corporations could file tax returns based on profits calculated using their own self-made accounting rules?
This explains why local accounts form the basis of Corporate and Income (CIT) tax returns in each country. The infographic below shows in simplified form how companies can use this principle to create international statutory accounts and tax returns from their regular management accounts. This process can be replicated for more than one country, making an efficient global or regional shared service model possible.
How to produce International Accounts and Tax returns
In Step 1 the management accounts are finalised. This model assumes the company has a standardised accounting policy which is used for day-to-day accounting worldwide. If so, then all the management accounts will be produced using the same GAAP worldwide. E.g. a US company may produce management accounts that are US GAAP compatible.
In Step 2, the finance team make any adjustments that are required to convert into local GAAP. For example, in German GAAP the rules on fixed asset depreciation differ greatly from US GAAP. Once the adjustments are made and the required accounting notes are added, these form the local statutory accounts.
Once the statutory accounts are finalised, in Step 3 the tax team take these as a base on which to make any adjustments required. Conversion from accounts to tax will include items such as adding back non-deductible expenses and replacing depreciation with capital allowances. Once these and any other adjustments are made, the tax return can be filed.
The links between tax and accounting are also evident in some other key areas:
The deadlines for filing accounts and tax returns and paying taxes differ widely between countries, though they are generally less tight than the US. For example in many EMEA countries accounts can be filed 12 months after the end of the Period. Tax returns are due after the accounts, so the tax team should schedule their work to start only after the accounts are finalised.
Legal entities play a critical in international tax and accounting. The legal entity is the ultimate corporate body legally responsible for making contracts and commitments. Its directors carry heavy legal responsibilities, e.g. in Brazil a legal entity director can be liable for the debts of an insolvent company. There are strict rules to ensure that tax and accounting is correct at the level of each legal entity, even if there are more than 1 in each country or there is grouping of profits and losses between legal entities.
This is relevant for our article because the legal entity is the basis for both accounting and tax returns. Important tax items, e.g. transfer pricing agreements, will need to be signed by the legal entity and reflected in the accounts as well as the tax return. If such legal agreements are not baked into the routine management accounting structure, e.g. intercompany transfer pricing recharges, they will need to be manually inserted at year end for the statutory accounts.
As much of the data needed for the tax return comes from accounting, many parts of the tax return can be taken straight from the accounts without adjustment. Therefore data should be automatically interfaced between accounting and tax wherever possible.
The close links between tax and accounting explain why there is no golden rule in my experience for how to resource each item. Sometimes the two areas are handled by separate teams, sometimes they are performed by the same people. If you are outsourcing your finances internationally and if your business is not huge in terms of numbers and complexity, then in my experience it usually makes life easier and cheaper to have one outsourcing supplier handling both tax and accounting.
If you have a separate payroll supplier, you need to watch for cross over between employee and CIT tax issues. In Spain for example, the same withholding tax return can include both employee and contractor taxes. If you outsource, the employee taxes will be provided by the Payroll supplier, while contractor taxes will be sourced by your accounting supplier.
I hope this article has helped clarify how international tax and accounting are linked and how you can use this to manage them effectively. While I have focused on Corporate & Income Taxes (CIT), there are many other elements to international tax. Obligations such as property taxes, withholding taxes, employee taxes and VAT/Sales Tax all require separate approaches as they have e.g. different data sources and filing structures.
I discussed this topic during a webinar hosted by the Global Expansion Alliance on 2nd June 2015.
If you would like advice on any of the above, contact us on email@example.com
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