“Gavin, what are some of the tax implications of expanding internationally?”
There a number of tax considerations that vary depending on how you are targeting customers outside Canada. Is it via the Internet or are you considering a physical presence in another country?
Let’s take the U.S., our largest trading partner. It can be a great time to begin selling or to expand sales to American customers, given the current value of the loonie.
In the U.S., there are federal tax laws, and there are state tax laws that vary by state.
Take software as an example. A cloud-based vendor can sell software to anyone in any state, without having any physical presence there at all.
How does U.S. sales tax apply to Internet software sales? Although sales tax is collected from the customer, some states can put the onus on the seller to remit state sales taxes, even if it was not collected – regardless of where they are located.
But how, you ask, would the tax man in a U.S. state discover there was a sale in which local sales tax was not collected? If your customer is audited, and the auditor finds an invoice with no sales tax on it.
If the needs of your business are best served by establishing a physical presence somewhere in the U.S., additional tax considerations arise.
“If the needs of your business are best served by establishing a physical presence somewhere in the U.S., additional tax considerations arise.”
Staffing a sales office south of the border, for example, creates a taxable presence in the U.S. that requires federal, and likely state, income tax filings. But even if you don’t have employees on the ground, your level of business activity may be great enough to impose U.S. tax obligations on your business.
Understanding your obligations and creating the right structure is key to reducing direct and indirect taxation as much as possible so that you can focus on your business needs in the new market.
For example, is it better to report profits out of the U.S. office, or only from the Canadian HQ? Should you set up a U.S. corporation or a branch? Generally, Limited Liability Companies (LLC)are treated differently for tax purposes in Canada and you should be aware of their implications. Understanding and implementing the right structure for your circumstances will allow your business to minimize its U.S. tax expense.
Before expanding your sales channel anywhere outside Canada, take the time to discuss strategy with an experienced cross-border tax specialist.
Gavin Miranda CPA, CA is the regional tax leader for Ottawa. His experience with private enterprises and public companies includes both international tax and Canadian tax planning.
To discover how MNP can help your technology business thrive, contact Gavin Miranda, CPA, CA, at 613.691.4224 or gavin.miranda@mnp.ca.
