Is Your Multinational Startup Investing in R&D? Key Considerations for Structuring Your Operations
June 2, 2021
At a glance:
- International business = more tax liability: Though opportunities abound across borders, there is a host of tax considerations to watch for, which could potentially conflict with certain incentives, like the R&D credit, if they’re not planned for properly.
- Holistic advice is key: By structuring your operations around potential tax traps and opportunities from the outset, you can improve your overall tax bill and your bottom line.
- Expertise matters: Need a professional to help you navigate the tax implications of doing business overseas? Contact Aprio today.
The full story:
For many businesses in the United States and United Kingdom, the research & development (R&D) tax credit becomes a focal point after they’ve already completed their R&D activities. But did you know that if you structure your business around R&D and other, future tax opportunities from the outset, you potentially can obtain a much larger cash benefit, one that has a major impact on your tax bill and bottom line?
If you’re an aspiring entrepreneur or in the startup phase of your business, and you anticipate performing R&D to further your operations, here are the key considerations you should keep in mind to make the most of the credit, while mitigating future tax risks.
Structuring your operations around tax opportunities: why does it matter?
Businesses that operate in both the U.K. and U.S. are faced with a myriad of differences in tax law, and that includes the R&D credit. The rules on what qualifies as R&D, and for a business that has operations in both places, it becomes even more important to closely consider how to best structure their activities to make the most of the credit and improve their tax bill.
One small tweak in your operations and decisions — for instance, modifying the language and terms of your contracts, or adjusting the way you charge items between businesses — can make a significant difference across jurisdictions. In addition to the R&D tax credit, your future decisions inevitably may impact your tax liability and make you susceptible to other legal requirements; so you must have a solid understanding of, and approach to handling, how your tax liabilities interact with each other.
Many discrepancies could be avoided if businesses plan for current and future tax requirements from the very beginning. As a result, too many businesses miss out on valuable revenue and tax savings because they haven’t been advised on how to best handle overseas tax liabilities until it’s too late.
Doing business across borders triggers more tax complexity
One of the biggest tax liabilities multinational businesses need to consider is transfer pricing. This can become a challenge when it comes to dealing with business assets like intellectual property (IP).
Businesses that are significantly invested in R&D may opt to license their IP to their partners or affiliates across borders, as transferring an IP from the home country of its owner is a taxable event and treated as if the IP were sold at fair market value.
As a result, businesses must develop contracts to clearly outline the terms for how essential assets like IP should be used between affiliates. These contracts may take the form of the aforementioned licensing agreements for using patents or trademarks.
Those actions determine how much income tax a business pays by country, which means owners must develop policies that establish and thoroughly document how assets are priced across borders. Failing to have a concrete transfer pricing policy in place could result in significant and costly penalties. But what happens when you add in the extra layer of R&D? It then becomes even more critical for your transfer pricing policy to harmonize, not conflict, with your R&D activities. Ensuring that both activities work in tandem puts you in the best possible position from a tax perspective.
There is one more important note to keep in mind: If an affiliate who does not own an IP provides IP development services to the owner of the IP, the owner needs to compensate the affiliate at arm’s length for the services provided. This is critical since costs incurred by the affiliated company may not be tax-deductible if they are not incurred by the owner.
The bottom line
Expertise matters when you’re starting a multinational business. It’s essential that you work with a qualified and credentialed team of professional advisors — experts who are well-versed in both U.K. and U.S. tax law — to help you structure your startup operations around the various different tax liabilities that stand in your way, both now and in the future.
R&D is a key competitive driver for businesses that operate internationally, but you could wind up missing out on the rewards of your efforts if you don’t have a holistic tax strategy that encompasses the potential roadblocks you could face in the future.
At Aprio, we are proud to have robust International and R&D Tax practices with experts who are not only well-versed in international tax law and compliance, but also regularly perform R&D tax credit studies for companies with operations overseas. Together with Moore Kingston Smith, we can work with you to ensure that your startup is properly structured to obtain the most optimal tax benefits, particularly if you’re investing in R&D. Contact us today to learn more.
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About the Author
Carli is the partner-in-charge of R&D Tax Credit Services at Aprio. Carli has dedicated the last five years to performing R&D Tax Credit studies for clients in a variety of industries, with a specialty in the manufacturing and technology industries. She has worked to prepare R&D Tax Credits for companies ranging from startups to Fortune 500 businesses, performing technical interviews with subject matter experts, calculating complex credits and preparing technical reports.