The economic adjustments amidst the pandemic posed new obstacles for businesses’ overseas expansion. Globalization Partners and CFO Research surveyed CFOs in organizations for a better understanding. 45% of respondents were currently planning to expand their business to overseas markets.
If you’re reading this, you most likely think your business is ready to go out of bounds and expand worldwide. And you’re now only looking for ways to get started. No matter how exciting it is, going international is anything but child’s play.
Does your business indeed have what it takes to expand abroad? There are a lot of complex local legalities to consider, such as global taxes. This article will provide information on international taxes when expanding your business abroad.
Table of Contents
Corporate Income Tax
A corporate tax is a fee imposed on a businesses’ profits. The government levies taxes on a company’s tax liability. It means revenue less the cost of goods sold general and administrative expenses. Deductions include marketing, research and development, depreciation, and other operating expenses.
The rates of corporate taxes are relative per country. Different deductions, government subsidies, and tax loopholes can reduce corporate tax rates. Thus, the effective corporate tax rate is usually lower than the statutory rate.
The statutory rate is the rate your global business will pay before any deductions.
Corporate Income Tax Deductions
Corporations can deduct certain essential and regular business expenses from their taxable income. Companies could include the following deductibles to reduce their taxable income:
- Salaries
- Health benefits
- Tuition reimbursement
- Insurance premiums
- Travel expenditures
- Bad debts
- Interest payments
- Sales taxes, fuel taxes
- Excise taxes
- Fees for tax preparation
- Legal services
- Bookkeeping
- Advertising
All current operating expenses are entirely tax-deductible. As long as these intend to create income for the business, these are deductible.
Payroll Tax
A payroll tax is a rate from an employee’s pay that the employer pays to the government on the employee’s behalf. Employees’ wages, salaries, and tips are subject to tax.
Governments collect payroll taxes on top of income taxes. Tax deductions in payroll appear in an employee’s pay stub. These account for federal, state, and local income taxes depending on the country.
Payroll taxes fund social security, healthcare, and workers’ pay. They may levy a minor payroll tax to support the upkeep of infrastructure and services. It includes first responders, road repair, and park maintenance.
Payroll Tax vs. Income Taxes
Companies deduct both payroll tax and income tax from paychecks. But to avoid confusion here is a distinction between a payroll tax and an income tax. Payroll taxes go towards funding specific programs.
Income taxes flow into the general fund government treasury depending on the country.
Employees pay a fixed annual payroll tax rate. In contrast, income taxes are progressive, with rates determined by a person’s wages.
Value-Added Tax
VAT is a consumption tax on products and services levied at each level of the supply chain where value adds up. It goes from initial manufacturing to the point of sale. The VAT equates to subtracting the cost of the product from any taxed costs of ingredients.
Consumption is the basis for VAT rather than income. Unlike a progressive income tax, VAT applies to all purchases.
At each stage of the manufacturing, distribution, and sale of an item, VAT applies to the gross margin. At each stage are assessment and collection of tax. It differs from a sales tax system, where consumers only pay tax at the end of the supply chain.
VAT is a consumption tax on products and services levied at each level of the supply chain where value adds up. It goes from initial manufacturing to the point of sale. The VAT equates to subtracting the cost of the product from any taxed costs of ingredients.
It also impacts businesses’ global expansion in the countries it intends to operate. It affects everything from invoicing to contracts and mandates local registrations and rules.
Europe, having the most competitive economy, is a great place to start your expansion. The Netherlands, in particular, is a popular option. Click here to learn more about why it’s an excellent place to start your first overseas business.
Other Business Global Expansion Considerations
Other than the global tax considerations, there are still more things you need to learn. Here are some essential points to consider when planning overseas business:
Gross Domestic Product
The value of products and services you generate in an economy is the Gross Domestic Product (GDP). The GDP includes every ounce citizens of a country spend.
When GDP grows, it’s a good indicator for business. But if a country’s GDP isn’t growing with the population, GDP per capita isn’t rising. It means the people’s level of life and buying power aren’t improving.
Unemployment Rate
A high unemployment rate indicates that a country’s economy is in trouble. It will give you pause before investing. A zero unemployment rate isn’t always good for business either.
With low unemployment, companies must spend more to attract qualified employees. Consumers feel these expenses through higher prices. Higher prices result in inflation.
Always consider what the country’s unemployment rate could signify for your business.
Inflation
The rate at which an economy’s general price level rises is inflation. If you run a business in a country where inflation is rampant, the prices you pay for your inputs will increase. It will erode the value of any cash savings you have or money you owe others.
Even with these disadvantages, inflation can still be beneficial. It’s as long as you use a fixed-interest loan to start your business. Inflation is standard in thriving economies.
You’ll be able to plan for it in your budgeting and pricing selections as long as it’s solid and predictable.
Discover Global Taxes for Your Growing Business Today
An overseas business is exciting, but understand that it’s no easy job. There are a lot of processes and legal matters to consider. This article covered global taxes and other factors to note for business expansion.
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