Authored by RSM US LLP
Managing your global tax exposure is critical to creating value for any transaction.
By minimizing your business’s tax exposure and reducing risk, you can maximize cash flow and overall profitability. However, for those engaging in cross-border transactions, this path to value creation is often more complicated.
Navigating tax requirements in multiple jurisdictions can be accompanied by risks and challenges. With myriad international tax changes that have occurred across the world in recent years, multinational enterprises pursuing global expansion encounter substantial challenges when working toward global tax efficiency and optimization.
Here are three tips for overcoming common tax challenges of cross-border transactions to achieve maximum value:
Establish a process for understanding and navigating multiple global jurisdictions
Those engaging in global expansion will need to know, understand and navigate the tax landscape of each jurisdiction where their business is being conducted. This is critical to identifying opportunities for tax savings and minimizing tax exposure, especially for businesses unfamiliar with global taxation issues such as transfer pricing, value-added tax and the developing global minimum tax initiative.
“Every jurisdiction has its own tax rules,” said Crystal Golob Lindholm, partner in RSM’s international tax mergers and acquisitions (M&A) practice. “That can result in costly complications, such as double taxation or the disallowance of deductions.”
Understanding the rules upfront provides stakeholders with an opportunity to take appropriate action and position the business for a more efficient tax outcome. For example, a private equity company may not be able to take advantage of treaty benefits in certain flow-through structures. This can result in increased withholding tax rates on cross-border payments received from a foreign subsidiary. To mitigate this tax burden, the company could explore alternative entity or transaction structures to achieve an operationally aligned tax-efficient structure.
According to Golob Lindholm, understanding these challenges and opportunities prior to closing the transaction is ideal, as there is more flexibility to alter the business structure before the transaction is complete. However, many options for optimization remain after a transaction has closed.
Adjust global legal entity structure to benefit both operations and tax
By evaluating your global legal entity structure and ensuring it is appropriate from both a tax and operational perspective, a business can optimize its global day-to-day operations, improve cash flow, form synergies globally and reduce its worldwide effective tax rate.
“Do you have multiple legal entities where you don’t need them? Do you have a tiered structure that doesn’t add value? Are there synergies between the entities that could be formed?”
Anna Yegorov, International tax M&A senior manager
Taking the time to evaluate your global legal entity structure can help you form efficiencies and reduce expenses related to taxation. Undoubtedly, strategically structuring your legal entities can generate cash savings.
For example, a U.S. company in the process of acquiring a multinational business group may have the ability to combine, dissolve or reorganize entities prior to, during or after the transaction in a tax-efficient manner. By doing so, the buyer can reduce tax exposure and create a tax-efficient operating model.
Any structuring changes should align with the company’s financial projections, exit strategy and strategic plans for global operations and expansion. Yegorov noted it’s important to carefully review any global tax planning to ensure there is no negative impact on global business operations.
“Often companies focus on optimizing their operational performance, but that might not align with tax efficiency,” she said. “Your operational goals should ultimately drive your business decisions; making sure that the operational goals are accomplished in a tax-efficient manner is where value can be created.”
Consult with a global tax advisor
One way to maximize value while navigating the challenges of cross-border transactions is to work with a dedicated global tax advisor.
“Involving global tax advisors early in the process is crucial in ensuring cross-border transactions run smoothly and successfully. There should be a consistent and collaborative dialogue so tax issues can be considered prior to any decision making.”
Anna Yegorov, International tax M&A Senior Manager
Different tax issues can arise depending on the location and tax position of a business. Tax advisors can assist with the integration of new business segments with an understanding of how they will affect your global operations from a tax perspective.
Additionally, there are numerous global tax law changes that have been recently enacted, with more expected in the coming years. These regulations bring changes to all aspects of international tax, from broader requirements for tax transparency to more stringent transfer pricing policies to greater scrutiny of business substance. The nuances and scope of these changing regulations can make existing tax planning strategies less resilient.
“If you’re not ready for these changes, you might find yourself in a position where you have tax leakage that you didn’t expect and you didn’t plan for,” said Golob Lindholm. “Your global tax may increase, which is not something any business strives for.”
By working with a global tax advisor that has strong resources and collaborative teams in jurisdictions where you do business, you can not only be prepared for the changes, but preserve or even optimize your tax position.
This article was written by Anna Yegorov, Crystal Golob Lindholm and originally appeared on 2023-07-12.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/services/merger-acquisition/optimizing-your-tax-position-in-cross-border-transactions.html
The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.
RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.
Lauterbach, Borschow & Co. is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.
Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.
For more information on how the Lauterbach, Borschow & Co. can assist you, please call us at (915) 544-6950.
