Navigating the Tax Implications of Offshore Resources: What Technology Companies Need to Know

At a glance:

• The main takeaway: Outsourcing to resources offshore can save cash-strapped companies a lot compared to hiring their fellow citizens, but there are tax implications and other considerations to be aware of before taking this crucial step.
• The impact on your business: Understanding both the benefits and potential complications and tax implications of offshoring resources is an important first step as you consider whether or not to outsource.
• Next steps: Learn about the best ways to leverage offshore labor while reducing the potential for regulatory headaches, unexpected tax bills and other potential roadblocks with the help of Aprio’s Global Mobility Team.

Schedule a consultation with Aprio’s Global Mobility Team today.

The full story:

Shifting some of your more repetitive, low value-added tasks offshore to countries with lower costs of living and much lower expected wages can be a great way to reduce your labor costs without sacrificing too much in terms of product quality. Of course, there are the odd and inevitable headaches that come with working in different languages, time zones and occasionally work cultures, and it simply isn’t practical or prudent to outsource some parts of your business, but successful offshore outsourcing can be a legitimate option for companies who are looking to lower their costs.

The most obvious uses for offshore resources are in manufacturing, customer support and other arguably commoditized functions, but that’s changed in recent years. Now technology companies can look to foreign workers for information technology, web design and development, application development, social media marketing and even accounting services. It’s become increasingly feasible for even smaller businesses to offshore some of their work when they’re too cash-strapped to hire their fellow citizens at the prevailing market rate.

Offshore resources can be a vehicle to accelerate growth for companies of all sizes, but it’s important to understand the potential costs, tax implications and complications that can come along with offshoring resources.

Establishing Foreign Entities

One of the first steps for firms looking to expand their global mobility strategy and outsource some of their labor should be to establish foreign entities in each of the countries they’d like to set up for work. These offshore subsidiaries will function as foreign headquarters which will register for the necessary permits, operate their own payroll systems, keep their own records, and file and pay their own taxes. Though it is theoretically possible to own and operate offshore resources without splitting them off as their own subsidiaries, operating offshore is much easier and potentially less expensive with foreign entities than without.

The first major consideration that comes with establishing a foreign entity is one of liability. Operating offshore facilities or maintaining a workforce in a foreign country can open your firm up to a number of legal issues depending on the country in question. Therefore, separating your domestic operations from your foreign operations by establishing a wholly owned subsidiary is as protective as it is pragmatic.

The next major consideration is the power and utility that comes from establishing a foreign entity with the help of a foreign partner. Firms like Aprio and their Global Mobility Team can access and leverage their connection to the Morison Global Alliance to identify and contract with trusted partners who can help shepherd you through the process from start to finish, which may prove invaluable to you as your company attempts to expand its scope from local to global business operations.

Engaging with a foreign partner comes with a whole suite of benefits that can transform an attempt at offshoring resources from an uncertain proposition to an unqualified success. It is possible to establish a foothold on your own, but having an on-the-ground native liaison with the requisite knowledge can make navigating and complying with the local regulatory environment, managing the necessary permits and tax filings, and recruiting the best talent nearly as easy as handling all of the above in your home country.

On top of the organizational, regulatory, and legal benefits of foreign entity establishment to manage your offshore resources, creating a foreign subsidiary also comes with both potential benefits and tax implications of offshoring.

Tax Implications for Tech Company Offshoring

The tax implications of operating offshore without using a foreign entity can be significant. Depending on the country, hiring, and paying employees in another country may constitute a taxable presence for your company, potentially making some or all of your company’s profits subject to foreign taxation.

Operating as your parent company in a foreign country may also open your firm up to any number of rules and regulations as stipulated by various trade treaties between the US and most other countries.

Many of the tax implications associated with offshore resources follow a similar dichotomy; there are smaller, easier to manage costs associated with a foreign entity versus the likely larger, more complex implications associated with operating as an American company operating foreign branches.

Assuming your firm chooses to establish and operate separate foreign entities, most of the tax implications will be dictated by the tax laws in the country in question. A foreign subsidiary will be beholden to the same income, payroll, sales, and other taxes as any other local company. Complying with all local tax laws is imperative to ensuring the continued operation and success of any foreign entities, which is part of why it is so helpful to have firms like Aprio connect you with trustworthy partners who can either shepherd you through the entire process or handle the necessary filings themselves.

Most of the tasks a tech company would offshore aren’t necessarily revenue-generating, but it’s still important to keep repatriation taxes in mind if you do plan to establish revenue generating operations in foreign countries. The Tax Cuts and Jobs Act of 2017 significantly reduced the tax levied on foreign earnings brought back into the US, but it can still constitute a significant tax expense for companies trying to bring revenue earned in foreign countries back to US soil.

Local to Global in One Call

Establishing a foreign entity and offshoring resources isn’t as easy as it sounds without the right partners. Collaborating with the right firm(s) as you navigate the process can decrease the spend and the number of headaches by order(s) of magnitude, and the potential savings in time and money spent can more than legitimize the cost of contracting with business advisory and CPA firms like Aprio. Partnering with Aprio’s Global Mobility Team and entrusting the process to them can turn an insurmountable challenge into a simple set of meetings.

For more information on offshoring resources, operating internationally and navigating foreign and domestic regulatory environments, call to schedule a consultation with Aprio’s Global Mobility Team today.

Related Resources:

A Financial Checklist for German Companies Crossing Borders to the US

How Partnering with a PEO can Transform Your Business

Case Study: Securing Tax Savings During a Multinational M&A Transaction