Tax structuring for global expansion: What retail and eCommerce brands need to know
Tax structuring for global expansion: What retail and eCommerce brands need to know
For many growing Australian retailers and eCommerce brands, expanding to international markets is a natural next step. Whether this is done through opening stores abroad or using cross-border eCommerce platforms, overseas expansion offers valuable opportunities and exposure to new markets. However, the tax implications are complex and, if not managed properly, can erode profits and expose your brand to significant risk. Understanding the essentials of tax structuring for global expansion is critical for long-term success.
Why tax structuring matters
Expanding overseas is not just about shipping goods or signing a foreign lease. The structure you choose for your international business can have a direct impact on your bottom line so it’s important to choose correctly. The right tax structure must balance commercial objectives with compliance, cost efficiency and long-term flexibility.
Key tax considerations for global expansion
When planning to take your retail or eCommerce brand into international markets, be aware of the key tax considerations that can influence your global expansion strategy.
Below are the key tax considerations for global expansion:
- Choosing the right legal entity
When expanding internationally, choosing the correct legal entity for your business is essential. Operating through a foreign subsidiary, branch (permanent establishment) or another structure will each have different tax outcomes, including rates, access to local incentives and compliance obligations. It is important to select a structure that aligns with your commercial objectives and long-term plans.
- Permanent establishment
Even if you don’t establish a legal entity overseas, having a physical presence overseas can nonetheless create a ‘permanent establishment’, with profits attributable to that permanent establishment normally taxed in that overseas country. Identifying what triggers a permanent establishment and understanding how profits are attributed is essential.
- Tax residency
Where a local entity is set up, the location of your board level decision making function, known as central management and control, can affect the tax residency of your company. It could result in a company registered overseas being treated as Australian tax resident and risk double tax.
- Franking credits and shareholder tax outcomes
Not all tax paid is equal. A company paying Australian tax generates franking credits which can reduce the tax payable by your shareholders. By contrast, foreign tax does not create franking credits, and this can increase the overall tax burden when profits are distributed.
- Controlled Foreign Companies (CFC) rules
In some cases, the profits of your overseas subsidiary may be taxed in Australia as they arise. Whether this applies depends on the jurisdiction of the subsidiary and the nature of its income. Understanding these rules early can help avoid unexpected Australian tax liabilities.
- Funding global expansion
Funding your overseas operations and returning profits to Australia requires careful planning. This includes considering the business model, whether finance is treated as debt or equity for tax purposes, the impact of transfer pricing and interest deduction limitation rules, whether withholding tax applies, and how returns are taxed in Australia. This will help ensure your expansion stays commercially viable and tax efficient.
- Transfer pricing and cross-border transactions
International transactions between related entities must be conducted on arm’s length terms - meaning they should be priced as if the parties were unrelated. Robust transfer pricing policies are vital to avoid double taxation and disputes with tax authorities.
- Indirect taxes and tariffs
Retailers should also be aware of GST implications. Selling goods or services overseas may trigger registration and compliance obligations in the overseas country. Import duties and customs tariffs can significantly affect the final cost of goods, so understanding the rates, codes and rules is essential for compliance and protecting your margin.
- Employment tax obligations
Sending Australian staff abroad or hiring overseas can trigger additional employment-related obligations, like local payroll taxes and superannuation.
- Intellectual property and global tax efficiency
Where your brand IP, patents and know-how are held can influence the tax you pay globally. Intellectual property strategies should be aligned to commercial realities and tax laws in each jurisdiction to maximise value and minimise risk.
- Repatriating profits
Taxation of sales, dividends, branch profits, interest on loans, support fees and gains on an ultimate exit should be planned in advance to ensure commercial viability and tax efficiency.
Common pitfalls and how to avoid them
The opportunities for retailers expanding globally are matched by the risks of getting it wrong. Here some common tax pitfalls expanding overseas and practical ways to avoid them:
Pitfall |
How to avoid it |
|
Double taxation |
Without clear structuring, profits may be taxed twice once overseas and again in Australia, eroding your returns. Set up the structure appropriately from the start to make sure your overseas expansion is efficient and doesn’t create a headache for the future. |
|
Unexpected tax liabilities |
Inadvertently creating a permanent establishment, failing to fully cost taxes, or having losses trapped overseas can lead to unplanned tax bills, interest and penalties. Proactively seek Australian and overseas tax advice to understand the tax consequences of your expansion and how to manage them. |
|
Regulatory scrutiny |
Tax authorities are increasingly focused on cross-border business and transfer pricing. Poor documentation or aggressive structuring can result in costly audits and can be difficult rectify. Make sure your operating model reflects economic reality and maintain robust documentation to be globally compliant. |
|
Cash flow pressures |
Inefficient tax structuring can lock up profits overseas, restrict access to cash, and curb expansion benefits. Carefully modelling cash flows, including customs duties, and planning profit repatriation strategies can help avoid shortfalls. |
|
Brand and reputational damage |
Non-compliance with global tax rules can affect your standing with investors, partners and customers. Be mindful of global compliance and governance to protect your brand. |
Take a simplified example of profits earned overseas. An Australian company sets up a foreign subsidiary to grow its retail business. The overseas subsidiary earns $100 profit and pays tax at 25 per cent overseas. It then pays the remaining $75 to the Australian parent company as dividends, with no withholding tax. Australia does not tax the dividends, but when those profits are eventually paid to the Australian individual shareholders, they are taxed at 47 per cent tax without any franking credits. That means total tax paid of $60 on the $100 of profit. With such high tax potentially at stake, it’s crucial that tax isn’t an afterthought.
How BDO can help
Expanding internationally creates opportunities, but it also introduces complexity. BDO’s retail team are here to help you through every stage of your global growth journey, offering practical advice tailored to the realities of retail. BDO has offices around the world, so we’re here to support you wherever you go.
Get in touch with our team or explore our retail services to see how we can support your global expansion with practical, tailored advice.
