Defining a business plan is an essential part of running a successful company. Your plan should include considerations for different economic outlooks or uncertainty, including economic downturns, recoveries, and expansions.
Your company’s recovery plan is an opportunity to prepare for the future, and there’s key international tax strategies that should be considered as you’re drafting that plan.
Our article covers the following:
What 4 International Tax Strategies Should Be Included in a Recovery Plan?
Initial reaction to a disruption or downturn often forces many companies to focus on the basics to help reduce expenses and maintain cash flow.
As your business shifts from immediate response to recovery, consider focusing on the following international tax strategies:
- Cash repatriation
- IP valuation and transfer considerations
- Transfer pricing arrangements
- Global indirect tax
What Is Cash Repatriation?
Cash repatriation is the process of bringing accumulated cash from a foreign jurisdiction back to the headquarter country of operations.
Cash repatriation can take many forms, from dividends paid by a foreign subsidiary to its US parent company, to related party loans, royalties, and management fees.
What Is the Benefit of Cash Repatriation?
If your company requires an influx of cash at home, repatriating cash back to the United States could prove advantageous, particularly because most foreign earnings could be repatriated tax-free from foreign subsidiaries.
For companies closing or restructuring foreign operations, the repatriation of remaining cash may give rise to significant ordinary loss opportunities.
Local currency fluctuation could decrease liquid asset values abroad, and the added foreign exchange uncertainty could make maintaining significant assets in foreign currency riskier.
Other cash flow management considerations include:
To read more about how to balance financial, operational, and tax considerations during cash repatriation planning, please see our article.
Should Your Company Transfer Its IP as a Result of Decreased Valuation?
During times of disruption, like a global pandemic, intellectual or intangible property (IP) values are likely to decrease due to declining income or loss forecasting. However, this could provide opportunity to consider migrating or realigning your IP.
What Is the Importance of IP Valuation?
In the world of globalized commerce, the geographic location of IP is often key to determining where corporate profit is generated, and tax is paid. Taxation of IP is one of the most volatile areas of international tax and transfer pricing because it’s difficult to define and locate.
Valuing IP is the basis for making these determinations, and these transfer pricing arguments can lead to high-profile litigation between tax jurisdictions and corporations that involve large sums of tax and potential penalties.
Additionally, countries are starting to impose separate taxes on IP being used in their country.
How Is IP Value Calculated?
Business enterprises generally derive their perceived value from measurable tangible attributes:
- Value of land, buildings, and equipment on their balance sheets
- Skill associated with their workforce
In recent years, however, IP has begun to dominate the market value of many of the largest corporate enterprises. There are many kinds of intangible assets, but they can generally be grouped into the two broad categories of intellectual property and brand.
Technology and life science companies often derive their value from intellectual property; consumer goods companies often derive their value from brand. Some companies do derive their perceived value from both types of intangible assets.
What Is the Benefit of Transferring Your Company’s IP?
If your company transfers its IP to a foreign jurisdiction through a controlled transaction, the income derived from the transaction could benefit from the foreign-derived intangible income (FDII) provision, for all or part of the consideration. The resulting tax rate would be 13.125%.
Alternatively, if a US-based multinational group repatriates its IP from overseas, the same FDII incentive permits a lower tax rate at 13.125% on profits generated by the US IP until 2026.
To read more about the final regulations on FDII deduction, please read our article.
Should You Revisit Transfer Pricing Arrangements?
As your company shifts operations and conditions deviate from previous business expectations, it might be necessary to update your intercompany transfer pricing arrangements to reflect changes that occurred during the disruption or downturn.
Some action items include:
- Conducting a supply chain review from a risk-bearing perspective
- Updating the corresponding transfer pricing methodology
- Reviewing force majeure clauses in contracts
What Is the Benefit of a Supply Chain Review?
As the profitability of comparable transactions likely declines, it could be possible or even necessary to adjust pricing to take market fluctuations into account.
For example, a limited risk entity could potentially operate at break-even, or share value-chain losses, based on updated methodology and comparables. Additionally, transactions subject to advanced pricing agreements (APAs) could be impacted and may need to be revisited as the pandemic could significantly affect the profitability of global operations for years to come.
For additional information on the transfer pricing opportunities a recession could present, please read our article.
What Is Force Majeure?
Force majeure is broadly defined as an event no individual can reasonably foresee, often referred to as an act of god, that prevents either party from performing obligations under contract.
A disruption or downturn could, in some circumstances, be used to invoke force majeure clauses that are often overlooked within contracts.
A review of possible effects under each jurisdiction in the existing supply chain, for both related and unrelated party transactions, should be considered in the event that force majeure is invoked.
What Are Benefits of Reexamining the Impact of Global Indirect Taxes?
VAT, sales tax, customs duty, and other similar worldwide indirect taxes typically have shorter reporting and payment time frames than direct taxes.
During disruption and downturn, US businesses should review their non-US supply chain to ensure simplifications are being applied and costs, including taxes, are minimized.
In addition, indirect taxes that are incurred outside the United States on large purchases should be reviewed to ensure they can be recovered in a reasonable time.
It’s also important to work with your vendors to minimize indirect tax cash flow issues. Indirect taxes can make up a significant proportion of working capital requirements, and managing them properly can allow you to use free cash to fund other critical business needs.
We’re Here to Help
To learn more about how you can prepare for tax filing and create a robust recovery plan, contact your Moss Adams professional.