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Going International: Selecting the Right Employer Corporation

CompassGUIDES - June 2006

By Diana Matwichuk, Assignment Planning Specialist

Hindsight is 20-20, so the saying goes, and this could not be more appropriate when applied to the context of setting up an international business. The temptation is initially very strong to just get over to the host country and start doing what you do best. Impetuosity, however, can come back to haunt a fledgling international subsidiary.

Discontent among assignee ranks over tax policy (or lack thereof), lawsuits over inadequate contracts, and wrangling with local taxing authorities can make any Canadian executive shudder and wish that they had taken a step back before making the great leap across the Pond.

Jumping on the International Bandwagon

In the current global economy, many businesses are looking to invest overseas. Labour is cheaper and more readily available than in Canada, natural resources are untapped in many parts of the world, and an increasing number of countries are sweetening the pot for international investors by offering enticing tax rates for businesses choosing to locate on their soils.

Benefits of an Employer Corporation Review

At CompassGUIDES, our mantra is to “plan, plan, plan”. This is absolutely key to fully realizing the benefits of both having a business presence in a country with lower tax rates than Canada, and optimizing corporate taxation at home.

Depending on the nature of the business, some typically low-tax regimes may be more suitable than others as potential locations for establishing a foreign subsidiary. In an Employer Corporation Review, we evaluate the business’ contractual and taxation requirements, and match these to a suitable host country, if flexibility of location is an option. Evaluation of the necessary steps for compliance to host country taxation and labour regulations is also included in this type of review, in order to ultimately determine project feasibility and ensure a smooth transition to the host country.

Corporate structure should also be designed in initial planning stages to benefit the organization from a tax perspective. Canadian businesses must consider how their foreign subsidiaries will affect their corporate tax filing position at home, and whether the establishment of an international business presence will raise any red flags with the Canada Revenue Agency (“CRA”).

Timing of the Employer Corporation Review

Establishment of corporate structure and selection of host country affect all other aspects of international business planning. Savings that are gleaned by tax-appealing foreign operations can quickly be negated if efforts must be made to retroactively “fix” an unsuitable corporate structure.

With an Employer Corporation Review, timing is of the essence - the earlier the better. A waterfall effect comes into play, as corporate structure affects, for instance, the number of days that an employee must remain in/out the host country in order to optimize their personal taxation and comply with social security requirements. This, in turn, affects the assignees’ residency status and raises contractual employment issues.

Consideration of all aspects of taxation at the outset, including add-on taxes such as VAT, can help to determine if the benefits of conducting business in the selected host country will outweigh tax burdens and allow for continued overall profitability of the international business venture.

Cautionary Note – the Canadian Tax Perspective

The CRA has been scrutinizing the foreign business activity of Canadian corporations (see “ CRA to Pursue Canadian Multi-Nationals: Is Your Company Prepared for a Tax Audit?” September 2005), and it is important that mind and management be kept out of Canada in order to avoid home taxation of foreign profits. This important factor is evaluated in an Employer Corporation Review.

International Assignment Tax Plans

Once high-level corporate business planning has been done, corporations should then also consider the development of an Assignment Tax Program (“ATP”), and communication thereof to international assignees.

An Assignment Tax Program provides clarity, assurance of compliance and optimal utilization of available tax credits. At CompassGUIDES, we assist multi-national corporations in the development of effective Assignment Tax Programs which include the following components:

  • Clear and concise Assignment Letters and Inter-Entity Agreements
  • Well-designed and clear Assignment Tax Policy
  • Individual Assignment Tax Reviews
  • Pre-departure counseling
  • Domestic and host country tax compliance

We also assist in the widespread communication of these Assignment Tax Programs through customizable Online Assignment Guides, delivered via the internet and accessible to any employee anywhere in the world.

No detail in an Assignment Tax Program should be open to misinterpretation, and all aspects of assignment tax policy should be addressed.

Summary

Investing in international business planning in the initial stages of an expansion of Canadian-owned business into foreign locations can pay for itself in the long-term through the avoidance of CRA involvement and corporate structures which be reversed for tax reasons.

At CompassGUIDES ™ , we conduct Employer Corporation Reviews to assist in the development of international corporate structures which align with international business objectives, favorable tax positions, host country business regulations compliance and reasonable employment contracts.

We also develop cost-effective assignment tax programs for Canadian companies sending employees around the world and bringing international consultant expertise to their Canadian projects. These Assignment Tax Programs provide detailed advanced tax planning, including policies, procedures and employment contracts, which serve to minimize costs and mitigate any risk of litigation.

In concert with this strategic assignment tax planning, we assist multi-national employers with their preparation and provision of assignment documentation, including the possibility of offering these guides online to employees anywhere in the world with internet access. Visit our International Assignment Planning Help Desk for more information about international assignment planning.

The author wishes to thank Peter Simpson, CA, for his contribution to this article .

 


Tel: (403) 531-2200 
Fax: (403) 263-1826


Web: www.compasstax.ca
Suite 600, 1333 8th Street SW
Calgary, Alberta Canada  T2R 1M6


Tel: (403) 531-2200 
Fax: (403) 263-1826


Web: www.compassguides.ca
Suite 600, 1333 8th Street SW
Calgary, Alberta Canada  T2R 1M6