Top 10 accounting mistakes firms make overseas
Date: Thursday, October 21, 2010, 11:02am MDT
Many firms head into overseas markets with great products, excellent business processes and a defendable strategy — only to learn that accounting misunderstandings and tax consequences can destroy that opportunity. They can avoid making the top 10 accounting mistakes easily with some planning and expertise. Here they are:
• Going overseas for the wrong tax reason — Why pay millions of dollars in taxes when there are countries that don’t require taxes? Many firms feel that offshore operations can be a tax-free haven. Firms might assume they would save money on taxes overseas, only to realize there are many other costs they didn’t think of.
One problem that arises is that the IRS learns about overseas revenues and taxes the company anyway. Also, when money is repatriated to the United States, it’s subject to taxes.
• Going overseas first and worrying about taxes later — Gaining tax and accounting advice should be proactive. Entering a new market should require new assumptions, as there are new rules to worry about, such as licensing and reporting requirements. Those costs need to be added to any market-entry plan.
• Planning only for income taxes — Many countries require goods-and-service taxes, value-added taxes, withholding taxes and social taxes (especially true if there are employees). Foreign-exchange risk often is ignored. Learn about the cost of doing business overseas from experts in human resources, finance, legal and marketing.
• Not understanding and planning for tax treaties — Tax treaties are sets of agreements between countries to determine the rules they’ll use to avoid double taxation of companies. If a U.S.-based firm has an operation in London, for example, than there’s a tax treaty in place to mandate which government gets what taxes, and how and when those taxes are paid.
• Using the wrong international accounting and tax experts — Ken Berkeley, a partner in the international tax services division of EKS&H in Denver, advises that firms spend some time “evaluating international tax professionals, as the field is highly complex and very specialized.” He says it’s important for tax professionals from the United States and abroad to work together and get to know one another, instead of just sending paperwork to each other.
• A poor transfer-pricing strategy and lack of transfer-pricing documentation — The price a U.S. firm might pay for a product manufactured overseas needs to be market-based. Yet firms that make their own products overseas and sell them in the United States can manipulate the prices they pay for those products to show more or less profit in whichever country they choose. (A firm can “raise” its cost of materials from China to show higher costs and thus less profit in the United States.)
“The No. 1 IRS audit concern is the use of transfer pricing to influence revenue and profits,” Berkeley says.
• Assuming our law is THE law — Not every country uses Generally Accepted Accounting Principles. GAAP is defined as “a widely accepted set of rules, conventions, standards and procedures for reporting financial information, as established by the Financial Accounting Standards Board.” Notice that the word “widely” is used, not “universally.” There are countries where debt isn’t listed on a balance sheet. There are countries that allow different types of deductions — even for bribing.
• Improper due diligence — When investing in an overseas operation, ask what they’re doing that’s so different from GAAP? An example might be the expense category “meals and entertainment.” In the United States, firms can deduct 50 percent of those expenses. In other countries, those expenses are 100 percent deductible. This can greatly skew the tax picture and thus the financial accuracy of a company.
• Parking money —The U.S. corporate tax rate of 35 percent is much higher than the 28 percent rate in The Netherlands. A U.S. firm with an office in Amsterdam may choose to keep its money in The Netherlands, and take advantage of the lower rate. However, the Dutch will have their own requirements for legitimate business activity with economic substance. Maintaining and demonstrating what that business activity is may cost more than the money saved.
• Thinking they do it our way — Firms with people overseas that perform accounting functions often are surprised to learn that there’s incompatible software, incompatible work schedules, an enormous need for training and difficult communications.
When my firm set up an operation in Russia, we supplied new software and expected the Russians to learn how to use it. When we visited our offices months later, we found the box of software hadn’t been opened, as the Russians were waiting to be taught how to use the product.
This last assumption applies to all areas of international business. Assuming they do it our way isn’t wrong just overseas, but in the United States as well.
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