International expansion strategy: maintaining international tax compliance

International tax frameworks have similarities. Learn which taxes to expect as you start selling in new countries.

24 May 2023 Jason Kaye

4 min

Reading Time: 4 minutes

Your tax liability increases as your business grows. That’s why launching any successful international expansion strategy also means thinking about global tax compliance.

But how can you ensure international tax compliance when your business is subject to different tax rates? More importantly, who do you have to pay and how much?

In this article, we’ll explore some of the tax issues you may encounter as your business expands so you’re prepared. We’ll also discuss how to avoid common accounting pitfalls so you’re not caught out by an unexpected bill later on.

International expansion strategy: international taxes to keep in mind

Although the specific rates may differ between countries, certain types of taxes can be found across borders. We’ve compiled a list of typical tax types you’ll encounter so you can factor them into your profit margins.

Sales tax (ST)

Sales tax (abbreviated as ST) is a consumption tax imposed by state and local governments in the United States on the sale of goods and services. The tax is usually calculated as a percentage of the price paid by the consumer and is typically collected by the seller at the point of sale.

Each state has its own sales tax rate, ranging from 0% to over 10%. Some states allow local governments to impose additional sales taxes, so the total sales tax rate can vary depending on the location of the sale. For example, if the state sales tax rate is 5% and the local sales tax rate is 2%, the total sales tax rate would be 7%.

EU countries have a minimum ST rate of 15%, meaning businesses charge an additional 19% on sales in Germany versus 24% on sales in Finland. Governments across Asia and the Pacific also charge differing rates, ranging from 13% in China to 10% in Japan and Australia.

Income or corporation tax

Depending on how you structure your business, you may also be subject to income tax or corporate income tax. As most international businesses in the US are limited companies, we’ll outline corporate income tax rates as they’re more relevant. Corporate income tax is applied to your net profits, so you may not always have to pay it if your business doesn’t perform as well as expected.

Corporate income taxes in the US are marginal, meaning that businesses pay specific rates at different income thresholds. The federal corporate income tax rate is a flat rate of 21%, but individual states may also levy additional corporate income taxes with varying rates. For example, California has a corporate income tax rate of 8.84%, while Texas has a franchise tax based on a company’s margin, with rates ranging from 0.375% to 0.75%.

Further afield, the figures are reassuringly similar. European corporations pay an average of 21%, while Chinese non-resident companies (as in international businesses) pay 20% to 25%.

Excise or import duties

Excise duties are taxes applied to goods such as alcohol, sugary beverages, tobacco products, gambling, or environmental waste services. Fortunately, if you do not sell products within these categories, you will not need to be concerned about them.

Excise duties also feature in countries like China, Australia, the UK, and other EU countries. 

How to maintain your international tax compliance

Make sure you’re aware that you will be sent a tax bill at the end of the fiscal year. Develop a smart international expansion strategy with the latest expert guidance, and follow our steps to ensure your international tax compliance.

Expect some amount of tax

Countries will expect your business to pay some tax: government departments don’t take kindly to companies playing dumb to avoid paying their fair share.

You’ll need to research to determine what your business is expected to pay for each type of tax you’re subject to. 

Watch out for changes and new tax terms

Not all taxes are referred to as “taxes” – as you can see from our brief list above, the terms used may range from “tax” to the more subtle “levy.” 

Even more common types of taxes like Sales Tax (ST) are known as “consumption tax” in Japan, “value-added tax” in the UK and Europe, or “goods and services tax” in Australia.

Therefore, it’s essential to be familiar with the local accounting language in the region where you operate so you don’t unintentionally avoid paying taxes simply because they weren’t referred to as “taxes.”

Trade deals and tax treaties

The US government is striking new trade deals with countries worldwide, helping businesses access new markets.

At the time of writing, the US government has comprehensive free trade agreements in force with 20 countries. The US has signed several Free Trade Agreements (FTAs) with countries and regions worldwide, including NAFTA, USMCA, TPP, KORUS, and US-Singapore FTA. These agreements aim to facilitate trade and investment by reducing or eliminating tariffs, quotas, and other trade barriers.

Have a clear accounting record

Keeping accurate and well-organized accounting records is essential for maintaining international tax compliance. Keeping your records up-to-date can improve the accuracy of your tax calculations and paperwork and can help you avoid penalties in the event of an audit.

Consider using modern accounting software to streamline your administrative tasks, easily track your transactions, and instantly calculate taxes for global sales.

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