GOING INTERNATIONAL - FOCUS ON THE BUSINESS, NOT TAX (abbreviated follow-up)

I am republishing this, an abbreviated combination of two articles that I wrote previously.? The thoughts I made then might be worth considering again in the post-Covid era. When I first wrote the initial version, I had been re-reading a good article in FindLaw, which advised: “It is the responsibility of lead counsel in an international transaction to determine the most tax-efficient way to have the money flowing both into a jurisdiction and flowing back out.” [“Managing International Transactions”, updated January 2018.]

Much of what the FindLaw article extract says is correct, but making tax structuring the primary focus can come back to haunt.? Tax regimes change, missteps happen, and businesses do not remain static. ?In addition, complex structures generally require more burdensome administrative efforts and high ongoing maintenance costs. ?Businesses need to be able to adapt and change as appropriate, which can be difficult if operating primarily within a complex tax structure.? In addition, focusing on tax often forces management to operate with a ‘looking over your shoulder’ approach, to ensure that all the detailed formalities are adhered to at all times.? Trying to avoid fiscal missteps involves ongoing effort; effort that could be better spent on the new international business venture.? International business is hard enough, requiring forward and surround vision, but not eyes in the back of one’s head.?

I am not saying tax issues are unimportant or that there is no place for the proper use of ‘tax havens’ or intermediary jurisdictions - far from it.? Although they are part of a number of elements that need to be considered on one’s ‘going international’ checklist, I believe that tax structures should not be the primary focus of most commercial cross-border ventures.? I instead advise companies entering the international arena to plan their businesses strategies first, planning how to earn the cash to generate taxable profits, and then consulting tax advisers.

Focusing on the business can also make it easier to negotiate your transaction with a foreign business partner. Frame discussions around securing important business concessions, rather than trying to fit the negotiations within a structure developed primarily with tax savings in mind.? I know several transactions that would have collapsed if accommodating one party’s optimal tax structure had been the core requirement at the heart of the negotiations.

I have participated in a number of vibrant, exciting business ventures that were developed when ‘business’ was the prime focus of international expansions.? Some of the transactions were initially considered impossible, yet were successfully negotiated and implemented; sustainable results followed and their operations ended up with optimal tax flows.? A successful transaction is exciting for all stakeholders, which often leads to growth in mutual trust, relationships and, of course, the business venture itself.