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Clearing the Hurdles of International Tax Planning

19/03/2014


If you’re working in the oilfield services (OFS) industry, chances are you’ve considered taking your operation abroad. Typically speaking, most small-to-medium OFS companies will create a simplistic business structure, setting up a separate foreign legal entity to meet local regulatory requirements or to insulate the Canadian business from foreign liabilities. Ultimately though, this type of arrangement can lead to unexpected tax consequences or excessively high cash tax burdens – both in Canada and abroad.

Many companies that enter into foreign contracts will send employees or large-scale equipment abroad. Yet without the proper advanced tax planning, these standard business activities could force your company to get caught in that foreign country’s tax net. Typically speaking, there are three hurdles Canadian OFS businesses must consider when planning to expand their operations.

Hurdle #1: Canadian Tax
Canada’s system for taxing offshore income is actually quite generous. As long as your foreign income does not directly relate to activities carried out or assets that typically reside in Canada, the Canada Revenue Agency (CRA) shouldn’t come after you for tax. For example, if an international company is paying you for a service provided within their foreign borders by an employee in that foreign country, the profits from the transaction shouldn’t be taxed. The key then, is to ensure foreign contracts aren’t being fulfilled on Canadian soil.

Hurdle #2: International Tax Systems
When you take your business abroad, the complex rules of international tax systems may seem confusing or at odds with your overall tax strategy. Many jurisdictions you do business with may not have entered into double tax treaties with Canada. Without a treaty in place, they’re able to withhold taxes on payments of certain contract fees and will also attempt to tax most of the profits from your contracts at higher rates than what you may be expecting or used to.

Hurdle #3: Bringing Profits Home
While navigating the murky waters of where your international and Canadian tax obligations overlap can be challenging enough, the third hurdle of operating abroad may be the least intuitive of them all. Even though you may be carrying on international business with ‘yourself’ (i.e. through a foreign subsidiary), when dealing with multiple tax jurisdictions you must do so as if you were dealing with a third party. In other words, any ‘transfer price’ between Canada and a subsidiary you own in a foreign country must be done at an arm’s length rate. Repatriating profits from these jurisdictions home to Canada typically gives rise to an additional level of withholding tax, increasing your effective tax rate.

Clearing The Hurdles
With all of these hurdles to contend with, an international tax strategy is essential to minimize your liability. Ideally, you should start building a tax plan prior to starting on your first contract – but if you’re already operating overseas, it’s never too late to find tax advantages for your operation.

Your tax strategy should address how your business is actually set up, whether operating as an arm of your Canadian entity, through a separate, locally-based subsidiary or even through a regional subsidiary that has a better tax treaty arrangement with the country your contract is in. If you opt to create a separate legal entity, it’s also important to look at the funding structure of your foreign business. The right mix of debt and equity funding, as well as the use of holding companies, could not only reduce your foreign tax costs, but could also assist in the tax-efficient redeployment of excess cash to other related businesses, regardless of where they’re located.

The Canadian tax system allows for tax-free ways to restructure your business and take advantage of global tax savings. As your OFS company expands internationally, ensure your international tax strategy is addressed as part of that growth – the savings and benefits could surprise you.