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How can be identified the country to operate from, considering the desired market to approach?
It is not always necessary to have a legal entity physically in a country, in order to be able to sell services or goods in such country. A neighbour country might also be a solution in some cases, although the first solution, becomes the best one, when the volume of the activity is growing quickly, or when there is the need of a permanent direct sales or assistance/ production staff. Checking the different options, it should also be considered the possible alternative of 'employed or self employed staff': link to staff page. Each analysis in this case should be examined separately through local or international tax advisors.
- Permanent establishment or non permanent establishment?
You can link to this other page of our web site to have details about this: link to legal entities
- Are there some main guidelines advisable for international tax optimization, when a company needs to expand in country different from the native one?
With no aim to be exhaustive in such a complex argument, we believe that some key points should be of help when approaching expansion in a foreign country, independently from the employees number:
- A permanent establishment according to internationally accepted tax principles, means always payment of some kind of corporation tax in the country in which the revenue/profit is produced.
- Each country has peculiar local tax laws/procedures/rules which should be respected, requiring that accounting documents/mandatory accounting-corporate registers are nearly always processed in the local native language to allow possible tax inspectors audits at anytime.
- Original invoices, bank reports and accounting documents, should be preserved for inspection in the country in which the profit is produced, as tax inspectors might always need originals for their checks, and lack of such documents or delay in delivery, is often meaning heavy penalties.
- The entry of accounting data, especially account payable, in an international or local accounting software, implies always that accounting operators with such job, should be well skilled and trained according to the international and local rules they are using in order to enter such information in the accounting system; to apply for adjustments after the data entry, is always much more time consuming, subject to human mistake risk and less cost effective (considering also indirect correspondence costs), than a direct entry activity done from a skilled and well trained operator.
- In case what indicated at point D. would not be compliant with the currently diffused policies for services centralization in shared service centres, especially for multinational companies, it would be strongly advisable to foresee an adequate training budget for accounting operators in charge, for local tax rules and regulations.
4. How to best manage economic relationships between the mother holding company and the local legal entity according to transfer pricing international and local rules?
Transfer pricing is an item which is considered very important from many local tax authorities, as it is well know the basic market principle through which multinational enterprises are moving worldwide, trying to decrease/optimize corporate taxation. The intercompany agreements are therefore always a very sensible matter, which should never be underestimated, especially when new legal entities are being registered in new markets/countries. There are some basic guidelines that also in this case might be of help, for any decision maker in this process:
- An intercompany agreement respecting 'transfer pricing' rules, should be always prepared in written, signed, dates and delivered (possibly through registered letter or even better as notary act) before the real start of the new legal entity activity.
- Each bank transfer between the mother/holding company and the local new entity, should be including the indication of the exact title/reason of such transfer, possibly with the indication of invoice number and date, in order to facilitate reconciliation and accounting activities.
- Commercial and service activities, should be well distinguished in the agreement and in the following invoices, so that in case of different treatment for Value Added Tax purposes, the related tax planning might be better managed, avoiding related risks.
5. Which is the 'best practice' to manage local payments?
It is often advisable, due to high cost of international wire transfers, to use local bank accounts management, through remote banking connections. This is allowing several advantages:
- compliance with local banking and tax/social contribution payment rules.
- periodical forecasted transfers are also avoiding risk of penalties due to delays of funds arrival
- decrease of bank charges costs for wire transfers
- remote control in real time (if home banking is working only in local native language, as usually internal functions are quite user friendly, a support in English from local consultants, can always be of help or directly involved through a process of attorney)
- passwords can be managed to allow to internal company interlocutors and to external attorneys, always the customized level of confidentiality desired, between management or simple visibility of the account.
6. Would it be possible to have a general idea of the main tax rates in the most industrialized countries?
Having a general idea of the different tax rates, might hell brainstorming while taking strategic decisions while approaching a foreign market through a controlled foreign company (CFC), as often route correction are much more expensive than a longer but more careful planning and research before the start.
It is also important to consider that tax rate are NOT the only element used to process the amount of taxes due, but it must be CAREFULLY CONSIDERED that also the TAXABLE INCOME is at least as much relevant.
Italy is for this aim a very good example: IRES corporation tax is at 27.5% from 1.1.2008 + IRAP corporation tax at 4,25%, but applied on taxable incomes, cost of personnel, negative interest, are producing altogether a 'real' tax weight of over 42%!
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