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The US market may be tempting, but make sure your growth strategy includes the ability to handle regulatory requirements.
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Why overseas expansion must factor in foreign tax regimes
17 November 2023
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13 minute read
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Having a business that is profitable and growing is our number one goal. Our full attention is given to our go-to-market strategies and investments to increase turnover and take our business to new levels.
As our business expands, the focal point quickly shifts to our ability to operate at this new level while maintaining, or even enhancing our customer service. It is imperative that we also ensure we meet the new demands that arise because of growth. Whether this growth comes from increased sales, expansion into new markets or scaling our operations, it is often overlooked to align this expansion with tax considerations, leading to the risk of being unprepared for the associated tax responsibilities.
In today’s digital age, establishing a new online business and selling goods and services worldwide has become remarkably accessible. Results can materialise rapidly, thrusting businesses into unfamiliar markets or necessitating rapid scaling. Yet many businesses fail to comprehend the importance of operationalising tax requirements that are persistently present and become even more critical as revenue numbers grow, potentially triggering tax thresholds imposed by certain countries for specific types of goods and services.
Let us delve into some of these crucial tax considerations. Whether you use accounting solutions like Xero or have graduated to entry-level ERP systems like NetSuite, these tools are primarily designed for accounting transactions and possess only rudimentary GST capabilities.
Now, however, we must broaden our awareness to encompass digital services tax, e-invoicing, sales and use tax (including VAT), invoicing, tax ID validation and tax return submissions.
How can we seamlessly integrate these requirements into our back-office systems or online e-commerce and point-of-sale solutions? Selling or purchasing goods now mandates accurate real-time tax determination to meet regulatory and customer requirements. Our underlying accounting software is not equipped to keep global tax rates up to date.
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We must be prepared to issue invoices to customers with precise tax calculations as they complete their purchases, whether online or at physical locations. When operating internationally, the equivalent of the Australian GST is not straightforward to manage within our legacy solutions.
We are now accountable for issuing invoices that comply with the legal requirements of the countries we sell to. In some countries, these invoices must be submitted electronically to the respective regulatory authorities, and this does not entail sending a PDF copy. New e-invoicing requirements are part of a broader shift towards digital tax compliance aimed at streamlining tax reporting, minimising errors and combating fraud. Businesses need to ensure they use certified e-invoicing software and adhere to the specific mandates of each country they operate in.
Hence, we must recognise that business growth gives rise to more “operational taxes” that must be seamlessly integrated into our technological landscape. The question we must pose is whether we are factoring tax considerations into our strategic business decisions. How often do we convene discussions about where and how to expand our business while considering the tax implications?
Here we are not referring to tax optimisation strategies. If we aspire to boost revenue while controlling expenses, venturing into a country like the US, despite its vast customer base, may result in unexpected costs and erode potential revenue gains due to the myriad of tax challenges.
In contrast, our back-office systems should already align with the tax requirements of countries like New Zealand, incurring no incremental costs for doing business. Tax considerations must be a prominent item on our agenda, as they impact revenue, directly affect expenses and may incur fines and penalties for failing to meet tax requirements.
The silver lining in all of this is that tax technology is readily available to support these emerging operational challenges. Tax engine vendors offer software that can facilitate entry into new countries, the launch of new product lines and compliance with local regulatory requirements.
Think of a tax engine as your ticket to play. When integrated with an ERP system, sales software or billing system and kept up to date with global tax requirements, you can now make strategic business decisions based on market and customer needs with the confidence that your back-office operational tax requirements are expertly managed.
The only question that remains is: when should you invest in a tax engine? When does size matter, and what constitutes the tipping point?
The simplest way to assess this is by evaluating your business’s footprint. If you are solely conducting business in Australia or New Zealand, there may be no immediate need to invest in a tax engine. However, when the decision is made to enter the North American market, it must be an integral part of the strategy, as tax regulations are too intricate to manage with existing systems. Furthermore, reaching specific thresholds such as transaction volume will thrust you into a new tax regime with complex compliance obligations.
Ben Scull is the director of Sculls Advisory.
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