With the increasing globalisation of business, more and more SMEs are doing business overseas either directly by establishing a presence in another country or more commonly over the internet.
When dealing overseas, SMEs need to be aware of international tax issues, particularly the transfer pricing laws.
Transfer pricing laws are in place to ensure that cross-border transactions between related entities are conducted in a commercial arms-length manner, so that the right amount of tax is paid in Australia.
The arms-length rule requires that transactions are priced in a manner comparable with what independent parties would have done in a similar situation.
For global businesses there is often a temptation to move profits to a related entity in a lower tax jurisdiction. This could be done in a number of ways.
One example is where the offshore entity charges the Australian entity for goods or services. In another example, intellectual property (such as software, patents, ideas or business models) developed in Australia might be transferred to the offshore company, which then licenses use of the IP back to the Australian entity by charging a royalty.
While the laws apply to any business with offshore operations, innovation and technology businesses, financial services providers, distributors and online businesses are typical companies that are likely to have operations subject to these laws.
Research and development businesses wanting to take advantage of changes to the R&D tax incentive laws, which now allow you to claim the incentive where the intellectual property is held by a foreign company, could also find themselves caught out.
Recent media on the issue involving several international tech giants, combined with a historical view that transfer pricing laws only affected large multinational companies, could lead SMEs astray in believing they are not subject to these laws.
However, recent changes and additional draft legislation currently under review will provide broader powers to the ATO in line with our foreign tax treaties and bring our laws in step with international best practice.
When passed, they will allow the ATO to pursue businesses that fail to understand and implement arrangements with offshore companies that adequately meet transfer pricing laws.
The ATO have also made it clear that they will be targeting both large and small businesses with international dealings.
Here are my top five tips if you have international dealings:
1. If you trade in a foreign country, understand the tax laws of that country, how they interact with Australian tax laws and how they might apply to your business. For example, is there a tax treaty between Australia and the foreign country? Tax treaties will set out which countries have taxing rights for certain types of transactions.
2. Understand the Australian international tax laws and the tax reporting requirements. There could be significant penalties for non-compliance or lodging returns that are false and misleading.
3. Documentation is the key. If you are transacting with an offshore entity make sure you have adequate documentation to demonstrate that the transactions are commercial and priced in an arms-length manner.
4. International tax is complex, so get advice from experts. It could save you from unintentionally breaching laws that result in additional tax and penalties.
5. Make sure that when you are dealing in a foreign country you are structured correctly, so that you are not exposing the Australian entity to unnecessary liabilities and commercial risks.
Marc Peskett is a partner of MPR Group a Melbourne based firm that specialises in providing tax, business advisory and funding services, to fast growing technology and innovation businesses.
You can follow Marc on Twitter @mpeskett