Transfer Pricing Principles For Expanding Outside The U.S. [Checklist]
Posted by Valentiam Group on June 11, 2019
For many businesses, international expansion is a natural step along the growth curve as new markets create additional revenue opportunities—but it’s certainly not without its fair share of challenges. There are so many things to consider: Which foreign market is the right choice for your company? How will the entity be structured? What are the organizational, legal, tax, and supply chain implications of expanding abroad?
These questions are only the tip of the iceberg. There are many more issues to consider and plan for, and while operational and commercial issues can occupy management’s attention, you shouldn’t ignore the tax and transfer pricing implications that come with a decision to go global.
If you’re responsible for leading an international expansion at your company, this transfer pricing checklist can help make sure you’re covering all your bases. (Tweet this!)
A Transfer Pricing Checklist For International Expansion
Choose a country wisely.
- Carefully consider your options: Which country would you like to expand to? From a commercial perspective, certain markets might be more viable for your organization than others. For example, the Netherlands is often seen as an attractive option for U.S. companies looking to expand to Europe—primarily due to its location, infrastructure, and favorable corporate tax rates. Alternatively, another country may have a more business-friendly tax environment, but the costs (e.g., customs, indirect taxes, transportation costs) of moving products in and out of the country may mean it’s not a viable option for expansion of your company into a foreign market.
- Jointly consider the legal, tax, and supply chain implications of expanding to the country you select, as these factors are interdependent. Does the country have a favorable and extensive tax treaty network with jurisdictions that you are considering for future expansion? Are banking laws restrictive, making it difficult to transfer funds into and out of the country? If necessary, can you conduct business in English?
- Consider the unique needs of your business. What’s your business case for expanding? Which international country has the best market for your product? Will proactive tax and transfer pricing planning enhance the ROI of the decision to enter a new market?
Select the entity structure.
- Consult with both U.S. and local country tax laws when considering the legal form under which the new entity will be formed. Will it be a partnership, a joint-venture or a stand-alone corporation? For U.S. income tax reporting purposes, will it be a “check-the-box” entity, or a Controlled Foreign Corporation? If a joint-venture or partnership, how much legal and economic control will the U.S. company have over its day-to-day operations?
- Understand the minimum capitalization required to set up the entity, as well as the ownership rights and business substance requirements mandated under local law. Will there be one or multiple owners and what amount of “local” ownership is required? What people and functions need to be present to meet tax planning objectives?
- Learn the local laws. Each jurisdiction has its own set of laws and business practices when it comes to doing business, even if the country is part of a broader coalition like the European Union.
Create & set up the new entity.
- Engage local counsel and in-country tax advisors to answer tax, accounting, and legal questions, as well as draft and file incorporation documents. If there will be any registration of intellectual property (IP)—such as patents, trademarks, and licensing agreements for proprietary products—you’ll also want legal assistance to ensure maximum protection of these critical assets.
- Use a local accountant to help secure business licenses and tax identification numbers so you can start doing business in that country. A good local accountant can also assist with setting up bank accounts, preparing financial statements, and similar financial disclosures.
- Consider both U.S. and foreign tax implications related to having a foreign division of your company. You need to be aware of both countries’ rules and compliance requirements. For example, when you open a bank account in a foreign country, you need to file a Foreign Bank Account Report (“FBAR”) as part of your annual U.S. corporate tax return. You may also need to provide audited financial statements or disclose accounting information related to the U.S. company.
Let’s discuss your business case for expanding outside the U.S. and work together to select the right country and type of entity for your organization.
Structure company operations.
- Ensure agents and employees understand which functions and activities can and cannot be conducted in the new foreign subsidiary. For example, can the local manager open or close bank accounts, sign vendor/customer contracts, or secure local financing to help operate the business? What local decisions require parent company approval?
- Determine how the entity will operate. Will the new entity function independently of the U.S. parent company or will it require U.S. parent approvals for key business decisions? Also consider the supply chain implications—what will the input and output demand be, and who will be responsible for managing the local supply chain activities?
- If IP is being transferred or sold to the new affiliate, what type of economic analysis is required to establish an arm’s length transaction?
- Identify the intercompany transactions that will take place. Once you’ve determined how the entity will operate, draft intercompany agreements that reflect the intercompany transaction and consider preparing a transfer pricing benchmark study to help establish arm’s length pricing terms for each intercompany transaction.
File required annual reports.
- Understand the various tax filing obligations for the new country to help you prepare a tax compliance calendar. This should include the frequency and due dates of tax returns, the information required for each filing, and procedures for payment of taxes.
- Consider engaging a local accountant to manage all of the tax compliance work in the new country.
- Consider preparing a transfer pricing benchmarking study prior to entering the new country to help establish arm’s length pricing of intercompany transactions. Prepare transfer pricing documentation that is consistent with what is prepared for other jurisdictions. Determine if the country requires a Master File or supplemental transfer pricing disclosures beyond a local country report.
- Download our free, templated work plan, complete with timelines and task lists, to ensure you’re meeting your OECD BEPS obligations on time and on point.
Final Advice On International Expansion
Expanding outside the U.S. can be a smart, lucrative decision for some businesses—but it can also be risky business when transfer pricing principles and best practices aren’t followed.
At Valentiam, our transfer pricing advisors have vast experience assisting clients with international expansion strategies, planning, and execution. Our firm is also a member of WTS Global, a leading global tax practice with representation in over 100 countries. All member firms of WTS Global are carefully selected through a series of quality reviews and are strong local players in their home markets. If you’re thinking about expanding outside the U.S. but are worried about the transfer pricing and tax implications, let’s talk about your unique expansion challenges—and how we can work together to resolve them.
Topics: Transfer pricing
There are no guarantees for avoiding transfer pricing audits, but taking these steps will reduce your risk—and ensure you’re prepared if you are audited.