From PLANT’s print edition: Where in the world…?
Plant your entry into global markets.
Are you scouting global opportunities? If so, you’re part of a rapidly growing trend as Canada’s manufacturers seek new markets for their products. International business is no longer the purview of large companies. More small, early-stage manufacturers are now selling into multiple countries.
In 2011 exports increased more than 12% over the previous year while trade to the US declined by more than 13% since 2002, continuing the diversification trend in Canada’s export destinations. After the US, the UK, China and Japan were the top export destinations.
Canada is well positioned to become a specialty manufacturing power. It has a diverse multi-cultural population that knows what products are in demand in many countries – and how to sell into them. Meanwhile, the federal government is paving the way for expanded global trade by initiating new treaties and free trade agreements. FTAs currently in negotiation include: the Andean countries (Bolivia, Colombia, Ecuador, Peru); Caribbean Community; Central America Four (Honduras, Guatemala, El Salvador, Nicaragua); Dominican Republic; EU; India; Japan; Korea; Morocco; Singapore; Trans-Pacific Partnership (Australia, Brunei Darussalam, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, the US, Vietnam); and Ukraine. Others are in exploratory discussions. These free trade agreements offer Canadian manufacturers unprecedented opportunities for expanded markets, diversification, resources – and tax planning.
In fact, tax and market planning are equally important when expanding overseas. The federal government is taking further steps that would allow Canadian companies to earn their overseas profits more tax-effectively, but don’t believe cocktail banter about how you can virtually eliminate taxation by setting up a company in a low-tax offshore locale and running your contracts and profits through it. Now that governments are cooperating on a global basis, taxation is focused less on where a company’s legal entities are located and more on where business activities take place.
Keep more cash
Establishing a company offshore does not enable income to be taxed offshore. Governments and treaties generally impose tax on the basis of where profits are earned. While you may not have a legal entity in a particular country, this doesn’t mean your activities aren’t taxable there. If you have representatives in five countries selling products and entering into contracts in each of those countries, you could become taxable in five different jurisdictions, which is why advance tax planning is essential when expanding your business overseas. It allows you to keep more cash in your business while minimizing taxes payable on a worldwide basis.
Conducting business internationally has implications for income taxes, customs duties, commodity taxes, transfer pricing and sales taxes, which prove to be problematic for many globally expanding entrepreneurs. Why? The threshold is often significantly lower than it would be for income taxes because treaties don’t govern them.
Simply selling into other countries without proper tax planning will lead to notices of assessment from around the world. This can result in hefty penalties, arrears interest on transactions and demands for tax returns. As well, with international rules around transfer pricing becoming standardized, more countries are investing in enforcement, making tax authorities increasingly sophisticated and aggressive.
The good news for ambitious manufacturers is a little advance tax planning will help you avoid such problems. Start by visualizing what you’d like your business model to look like a few years down the road. Do you want to sell into the Ukraine? Establish a joint venture in Abu Dhabi? Set up a manufacturing facility in Singapore?
Establish the most tax-efficient ways to structure your activities and the best ways to conduct day-to-day business (especially selling and signing contracts). This is what one manufacturer did.
Within only three years of launching his company, and with just $4 million in sales, he is now selling tax-effectively and profitably into 15 countries. Planning ahead allowed this entrepreneur to use treaties and free trade agreements strategically to reduce risk, legitimately manage the allocation of profits between high and low-tax jurisdictions and to facilitate favourable tax treatment for the distribution of profits and redeployment of cash.
Ready to take on the world? Integrate international taxation into your plans and you’ll soon have the best of both worlds: new markets for your products and more cash for your expanding business.
Glenn Fraser is the leader of the GTA region Food & Ag Manufacturing practice of MNP and Tim Bloos, is an international tax advisor with MNP.
This article appears in the March 2013 edition of PLANT.