With the anticipated re-opening of our national border getting tantalisingly closer, furloughed cross-border business opportunities are coming back on the agenda.
We’ve had to become proficient at using different videoconferencing platforms over the last two years, such that it’s probably fair to say the teleconference call is dead. And good riddance to it. Disembodied voices – with the added difficulty sometimes of simultaneously absorbing what someone is saying and trying to recognise who’s speaking – was always a clunky way of trying to have a productive conversation.
However, although videoconferencing is a vast improvement, we’ve all probably thought on more than one occasion that it’s still no substitute for meeting face-to-face. And it’s certainly no substitute for actually being there to see a factory with your own eyes, to understand the nuances of a distribution process, or breaking bread with a potential new business partner.
At the time of writing, Australia had just moved to Phase B of the National COVID-19 Response, surpassing a 70% vaccination rate. That would mean Phase C is right around the corner (80%+ vaccination rate), whereby border restrictions start relaxing further. And Phase D is when there will be virtually no border restrictions for vaccinated people. There is no specific milestone marking entering Phase D, but it ought to be only a matter of months.
When considering any cross-border business venture, it’s essential to understand the foreign business environment into which you are stepping. That equally applies to anyone from overseas considering opportunities in Australia. The regulatory and political environment in different countries – and the business culture – can vary significantly.
Doing business across national borders brings a number of taxation issues to the fore that generally aren’t of concern for businesses operating solely domestically. These include:
Residency – a company can be a resident under multiple countries’ domestic laws, each claiming primary taxing rights at first instance. That then requires consulting tie-breaker rules in any Double Tax Agreement in place.
Cross-border structuring – there are alternative ways to structure a business expanding across borders (eg, branch, local subsidiary company, etc). The optimum choice is driven by commercial efficacy as much as tax effectiveness.
Source of income – even where you are not captured as a resident of another country, certain income sourced from that country can still be subject to tax. This typically includes interest, dividend and royalty income. The tax is usually imposed by way of withholding by the payer, and a credit is usually allowed against your Australian income tax liability on that income.
Transfer pricing rules – these seek to curtail base erosion and profit-shifting through non-arm’s length pricing for goods, services and finance between parties on either side of a national border.
Thin capitalisation rules – limit deductions, mostly for interest, where an entity’s debt-to-equity ratio exceeds certain limits. Applies to both foreign entities investing into Australia and Australian entities investing overseas.
Foreign exchange rules – these set out the rules for translating amounts of foreign currency into Australian dollars, and the taxation treatment of foreign exchange gains and losses.
Controlled foreign companies (CFC) rules – Australian-resident shareholders of Australian-controlled foreign companies located in low-tax jurisdictions are effectively taxed on unremitted profits on an accruals basis.
ATO’s New Investment Engagement Service – commenced 1 July 2021, this is for foreign businesses coming through the Global Business and Talent Attraction Taskforce with plans to invest in the vicinity of $250 million or more in Australia. It provides an opportunity to engage with ATO specialists – with our guidance, of course – prior to the execution of significant commercial transactions.
The impending re-opening of our national border means we can re-start a deeper consideration of opportunities that perhaps have had to be put aside for almost two years. Talk to your trusted Nexia Edwards Marshall advisor about ensuring those opportunities are pursued in the most commercially efficacious and tax-effective manner.