Tax issues Australian scaleups must know when going global

Going global is often seen as a rite of passage for many Australian scaleups as it can provide the company with access to new overseas markets, a broader pool of investors or the ability to attract and retain key talent from around the world.

During this period of growth, founders often focus on product-market fit, customer acquisition, and operational challenges. While these priorities are vital, one area that too often sits in the ‘deal with it later’ basket is international taxation.

This oversight can be costly, both financially and strategically, even for loss-making tech companies. This is due to two key reasons:

• 1. Foreign laws will often ‘force’ your overseas operations to make a profit, usually resulting in a tax liability.
• 2. What you do now will have a long-term impact on the structure of the business when it is profitable down the track.

Here are some of the key tax considerations at a high level in order to help you begin a more tailored conversation with a qualified tax advisor.

Think about how you’ll structure

A fundamental decision to make before going global is the appropriate corporate structure. In the vast majority of instances, this will involve setting up either:

• A new overseas subsidiary that is owned by the existing Australian company; or
• A new overseas holding company that becomes the owner of the existing Australian company, often referred to as a ‘flip-up’.

Which of these structures suits you depends on your circumstances. If you’d like to know about the structuring and flip-up process in further detail, read our article on going global.

Don’t forget the Export Market Development Grant

If one of the reasons for going global is to expand into new overseas markets, you may be eligible for the Export Market Development Grant (EMDG ).

The EMDG is the Federal Government’s key grant supporting Australian businesses to market and promote their goods and services globally.

The program provides matched funding, currently up to $80k per year for costs relating to overseas travel, trade shows, engaging market consultants and other marketing-related activities.

Applications are open for a specific period each year. If you’d like to know more about the EMDG application process, including eligibility, read our article on changes to the EMDG.

International Taxation – what is it and why does it matter to startups and scaleups?

Once a business is operating across multiple jurisdictions, there will be transactions between the Australian company and the overseas company.

For example, there may be licensing fees for use of existing IP, management fees for use of assets and staff, interest on loans to fund business operations, service fees for R&D and development of new IP or revenue-sharing for new customer acquisitions.

These intercompany transactions will then be subject to the tax rules of Australia and the overseas jurisdiction, which usually have a direct impact on your bottom line, even for loss-making companies.

There are three international tax issues that commonly affect scaleups from day one of their global expansion journey.

1. Transfer pricing

Transfer pricing is the expectation from tax authorities that the related party dealings mentioned above must resemble normal commercial dealings between unrelated parties.

This means your overseas company is often expected to make a profit from its dealings with the Australian company, even if the overall business is loss-making—and vice versa.

The amount of tax paid on these related party dealings is something that influenced by how the business is structured.

2. Withholding tax

Withholding tax automatically applies to some transactions between different jurisdictions.

Common examples include fees for use of software and IP and interest on intercompany loans, which are common business dealings for scaleups.

If these exist within your group, then there could be a withholding tax liability that you don’t know about.

3. R&D tax incentive

The location of your IP and how it is being built affects your eligibility for the R&D tax incentive.

Should the IP be migrated overseas, that may jeopardise the company’s ability to claim the 43.5 per cent refundable tax offset for costs related to R&D activities in Australia if things are not structured properly.

In addition to these three most common tax issues, there are others:

• How to tax-effectively bring profits of subsidiaries back from overseas.
• Double taxation and the impact of any double tax agreement between Australia and the other
  country.
• Overseas indirect taxes, like U.S. State-based sales tax or Value Added Tax (VAT).
• Thin capitalisation rules to limit the tax deduction on interest expenses for heavily geared
  businesses.
• ‘Controlled foreign company’ and tax residency rules can treat an overseas company’s income and profits as taxable in Australia.

Other considerations

Besides taxes, there are various other considerations that founders should understand when looking to go global:

• Go-to-market strategy becomes crucial – founders should not expect success from using a ’copy paste’ model of what worked for them in Australia.
• Whether the Landing Pads program is available to support scaleup founders access to investor networks and coworking spaces in certain overseas markets (currently San Francisco, London, Singapore, Ho Chi Minh City, Jakarta or Bengaluru).
• The difficulty of preserving the company’s values across different locations, time zones and
  cultures.
•  Whether any existing Employee Share Scheme is still fit-for-purpose or a new scheme is required to cater for overseas employees.

Practical steps for Australian tech companies

First, map your expansion path. Consider where revenue will come from, where staff will be located, where IP will be held and where your exit event will likely take place.

Then, engage experienced advisors early. Tax is often a key factor for how businesses structure their affairs, and expanding internationally is no exception.

Having the right advisors in both jurisdictions is crucial.