Business innovation is essential for generating revenue into the future, for without revenue, a company is not a business. Tax minimisation and cost cutting are irrelevant for obsolete businesses.

Companies are increasingly short-lived. Over the last 50 years, the average lifespan of S&P 500 companies has reduced from 60 years to about 18 years.[1] The nature of business itself is rapidly changing. It is projected that 40% of current jobs in Australia will disappear in the next 15 years due to automation.[2]

Electronic commerce has increased access to foreign markets and brought foreign competition, often with lower cost structures. Many Australian businesses have offshored costs to bring them into line with competitors. There has been increased focus on tax efficiency, with internet-based ordering and delivery enabling many businesses to sell globally while avoiding international tax issues.

Vision and adaptability will lead to your business being commercially relevant into the future. Investment in evolving the business is ideally supported by networks, legal protections and commercialisation assistance.

A base in another country may provide a great platform for later access to other markets. Moving into a lower-taxed country may enable greater reinvestment into developing the future of the business. However, selecting a market on tax-efficiency alone may leave you short changed when the wider context of value creation and support are considered. Consider what else a country offers for your business to thrive:

• Strategic and trusted networks to mitigate the risks of operating in new territories.
• A workforce that adds value to the business and the state of industrial relations
• A marketplace that is an adopter of new ideas and products
• Legal protections, business ethics and levels of corruption
• Ability to obtain finance and credit
• Acceptance of foreign ownership
• Government support for your industry, including grants, tax concessions and their eligibility criteria.

With new opportunities come new risks. Before you start foreign operations, planning and knowing whether a market exit would be difficult – should risks come to fruition – will help you to decide whether they are risks you are willing to take.

At one level, tax is a cost of doing business. However, it also creates much administration, and absorbs management time and money, especially if a tax dispute arises. International tax compliance can be a disproportionately high cost for smaller business, such as transfer pricing compliance, which is required when there are transactions with related parties in other countries. Evaluate the total cost of tax and its administration, not merely the headline tax rate.

Your type of business and the way you go about it can affect where and how you are taxed. For example:

• How does setting up an office or shop compare with using agents to make sales?
• Should you set up a factory overseas or use a contract manufacturer?
• Should you sell software, sell a license to use it, or offer a service which utilises the software for commercial advantage?
• What mix of debt and equity should be put into a foreign subsidiary?

The answers to how these factors alter after-tax profits will vary for each business, and will include other commercial and regulatory considerations. Optimal market engagement may require methods that are not highly tax efficient but if a method expands revenue and after-tax profits, strict adherence to purely tax-effective strategies may be questionable.

Many tax questions need answers quick enough for commercial negotiations. The answers are imperative to control tax costs and profit margins. Each country has its own different tax rules. Assumption is highly risky.

Having long-term plans for the business and its exit strategy enables pathways to be developed early on. The pathways put down for developing and selling a business may be different to shaping a business intended to attract larger investors to fund expansion.

Knowledge of what triggers tax helps an enterprise understand how its international operations affect where it pays tax, how and when. However, where tax minimisation draws necessary resources away from optimising the commercial offering or exposes the business to unaffordable risks, it may be the undoing of the value proposition and the ability to thrive.

[1] https://hbr.org/2014/04/the-art-of-corporate-endurance

[2] http://theconversation.com/australia-must-prepare-for-massive-job-losses-due-to-automation-43321 “Australia’s future workforce? June 2015”, Committee for Economic Development of Australia.

 

Copyright © 2015 Tax Scope