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Keys for success in expanding your business outside of Canada

Depending on the nature of your business, expanding operations outside of Canada can take on many different forms.
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Depending on the nature of your business, expanding operations outside of Canada can take on many different forms. As a manufacturer, you may export Canadian-manufactured products abroad, or simply procure low-cost supplies from foreign manufacturers. As a service provider, you may send staff abroad to service the foreign operations of your clients.

Before expanding internationally, one should proactively address business, legal, finance and tax issues. A Canadian company wanting to expand internationally should consider the following:

·  Organizational structure

·  Legal structure, e.g. branch, corporation, etc.

·  Financing

·  Duties, withholding tax and sales tax

·  Employee mobility and payroll

·  Strategy for cash repatriation

·  Intercompany pricing models

Several of these points are related to transfer pricing. These concerns may arise when your business establishes enough of a presence in another country that the tax system applies to your business there.

What is transfer pricing?

Transfer pricing is the practice of establishing arm’s-length prices for related parties’ cross-border transactions. It allows the various countries in which your business operates to tax their “fair share” of the business’ income. Transactions may include the trade of supplies or labour between departments. Transfer prices are used because, for international tax purposes, individual entities of a larger multinational enterprise (MNE) are treated and measured as separately run entities.

For example, an MNE owns both Company A in Canada and Company B in the U.S. Under its transfer pricing policy, Company A pays $100 to buy a widget from Company B. The $100 is shifted from the Canadian tax base into the U.S. tax base. Either country or both countries could disagree with the MNE about whether $100 was the appropriate transfer price. If so, the MNE is faced with the risk of double taxation and penalties.

Consider your transfer pricing risks and opportunities

With tax representing a significant portion of many companies’ expenditures, it’s important to maximize value and free up cash wherever possible.

1.  Operational restructuring

Certain areas of transfer pricing have significant overlap with supply chain restructuring. As companies centralize or shift operations, they are essentially realigning functions, risks and assets. By properly aligning business and tax goals, the appropriate profits can be earned in the most favourable jurisdictions, thereby effectively managing the corporate group’s overall tax liability.

2.  Risk management

As the new global tax environment has heightened the importance of viewing transfer pricing from a strategic rather than an operational perspective, businesses should consider implementing transfer pricing risk management activities as part of an overall effort to bring about improvements in the corporate tax function.

Adherence to the arm’s-length principle. Performing thorough functional and economic analyses allows a company to establish policies that are reasonable, consistent and economically credible to a tax authority, which helps justify an organization’s transfer pricing activities.

Local tax requirements. While most developed countries have adopted transfer pricing rules, certain developing countries may not have fully developed transfer pricing legislation. An organization is well served when it stays informed about transfer pricing rules in each country where it has related-party transactions. This may be onerous at the outset, but becomes more routine with time.

Contemporaneous documentation requirements. A number of jurisdictions impose penalties in circumstances where a taxpayer has failed to prepare and maintain contemporaneous documentation supporting its transfer prices. As such, a proactive approach to analyzing and documenting intercompany transactions on an enterprise-wide basis is vital to managing transfer pricing audit risk for MNEs.

As governments strive to protect their tax bases, new regulations, new documentation requirements, increased information exchange, prolonged audits, enhanced enforcement efforts and significant penalties are the new transfer pricing reality that MNEs face. MNEs should identify jurisdictions in which they operate by level of risk, and focus their efforts on the jurisdictions and types of transactions that fall under the most scrutiny. Transfer pricing specialists can assist in reviewing a company’s current transfer pricing policies, implementing transfer pricing structures, and preparing documentation to minimize exposure to double taxation and non-deductible penalties.

For more information, please contact Angeline Chandra, CPA, CA, national leader, transfer pricing services, MNP LLP, at 604-637-1552 or [email protected].

Watch: Angeline Chandra and Katri Ulmomen of MNP LLP discuss what to consider when exporting beyond B.C.