It is quite common for a startup to incorporate in their home country and quickly find the need to expand their operations to incorporate a second entity in another country, either as a subsidiary or as a result of finding an overseas investor who prefers a holding company structure in a foreign jurisdiction. Often the investment and cash flows into the holding company which is then used to carry on business transactions where the subsidiary performs the services and charges the parent who then sells the product or service to the end customer.
However, at this stage, the startups often do not have adequate awareness of tax and transfer pricing regulations and may not have any finance expertise in-house to approach the tax issues head on. Often the accounting is outsourced to two independent local accountants in each country where the transfer pricing strategy often falls through the cracks as being out of scope for the outsourced accountants.
Startups need to understand the complexities involved with cross border transactions especially in transactions between controlled entities. It is important to correctly identify the right transfer pricing methodology that needs to be deployed. Please refer to our post on Transfer Pricing Methods to learn more on this subject. Most countries are either members of the OECD (Organization of Economic Co-operation and Development) or model their transfer pricing rules that are closely aligned to globally accepted standards.
As the startups focus on growing the business and enter into various cross border transactions, the risks of non-compliance with regulations, Permanent Establishment (PE) exposures, and tax exposures start to increase while there may be a lack of awareness of what needs to be done to ensure compliance obligations are properly satisfied.
The problems usually surface at a later date. It is common for startups to have an extended first year of operations (depending on the incorporation date and year end date), with further delays in getting the financial statements prepared and filing tax returns and 2-3 years could go by before the tax and transfer pricing issues start to make an appearance.
Ezee Pte. Ltd. [CFO on Demand | Finance Advisory | Accounting | Tax | Corporate Secretarial] offers virtual CFO services that aims to address some of these issues for SME’s and startups, especially young companies that have a multi country foot print. Ezee is based in Singapore and our consultants have experience working with Singapore holding company structures with subsidiaries across the world but with a particular focus on India, and can provide timely and affordable advisory services on a part time basis. We work closely with local accountants, tax advisors and management to develop a sound strategy to address potential problems early.
Email us a firstname.lastname@example.org or call us at +65 97637904 for a no obligation discussion.