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moreThe CFO Standard
Three tax questions every CFO should answer before entering a new market
Business growth can take many forms. Organisations may seek to expand through a new product line, service offering, different customer segment or, increasingly, by taking their business overseas.
For many businesses, international expansion represents a significant growth opportunity, providing access to a broader customer base, new sources of revenue, specialised talent and greater diversification. However, successful expansion requires more than identifying an attractive market.
The tax consequences are often embedded in decisions about how the business will enter and operate in the market. Many expansion strategies fail not because demand is absent, but because the cost, complexity and operating model required to support growth were underestimated. Tax is rarely the sole reason an expansion succeeds or fails, though it often reveals whether the operating model was designed appropriately from the outset. Long before the first customer is secured, decisions are being made regarding how the expansion will be structured and operated, which can influence the group's effective tax rate, compliance obligations and ability to repatriate profits for years to come.
Success requires recognition that tax is a strategic input that should help shape the expansion itself.
CFOs do not need to understand every tax rule in every jurisdiction. They do need to ask the right questions early enough so tax supports the expansion, rather than becoming an unexpected cost or constraint.
Where will value be created and taxed?
One of the most common assumptions organisations make is that tax obligations begin when revenue is generated in a new country. In reality, they often arise much earlier.
As businesses enter new markets, customers, employees, assets and decision-makers become distributed across jurisdictions. Tax authorities consider not only where an entity is incorporated, but also where activities are undertaken, decisions made and commercial value created.
Activities that may appear straightforward can therefore create an unexpected taxable presence. For example:
- Employees negotiating or concluding customer contracts.
- Local management making strategic decisions.
- The use of distributors or dependent agents.
- The establishment of a warehouse or project site.
- Each of these can trigger local income tax, registration and filing obligations.
Indirect taxes should also not be overlooked. GST, VAT, customs duties and other transaction taxes can arise from the first sale and may affect pricing, margins and cash flow.
Understanding where value will be created, and which jurisdictions may seek taxing rights over that value, is one of the first and most important questions to address before entering a new market and will often underpin the group's transfer pricing model.
Practical example:
How should the expansion be structured?
The operating model and structure chosen to support an expansion will often influence commercial and tax outcomes for years.
The following decisions may appear administrative at the outset but can materially affect the group's effective tax rate, transfer pricing model, cash flow and operational flexibility:
Should the new market operate through a branch or subsidiary?
- Which entity should own key intellectual property?
- How should the expansion be funded?
- Will the existing Australian entity continue to contract with customers or will a newly established local entity transact directly with local customers?
- How will profits ultimately be repatriated?
Many organisations understandably focus on minimising friction during market entry. However, a structure that works in the first year may become problematic as operations scale, profitability increases, the group raises external capital, or a future sale is contemplated.
The most effective structures are designed with the full investment lifecycle in mind. That includes future growth, funding requirements, the use of losses, potential acquisitions, profit repatriation and ultimately an exit.
There is rarely a single correct structure. The optimal model will depend on the group's objectives, risk appetite and operating model. There is, however, often a significant difference between a structure that merely works today and one that remains commercially and tax-effective over the long term.
Practical example:
Modelling the operating structure and transaction flows upfront can help avoid costly restructures as the business grows.
Can the group defend its global tax position?
As organisations expand internationally, tax authorities increasingly expect profits to align with where economic activity and value creation occur.
This is particularly relevant where goods, services, intellectual property or financing arrangements cross borders between related entities. Transfer pricing rules require these dealings to be priced on arm's length terms and supported by appropriate analysis and documentation.
Tax transparency measures also continue to increase globally. Just because a tax position is technically permitted under the law does not mean it's the only consideration anymore. Organisations need to demonstrate that their tax profile aligns with their business activities and is supported by appropriate governance, agreements, data and documentation.
Achieving that outcome is rarely straightforward. International tax is often an exercise in balancing competing risks across jurisdictions, each with its own rules, expectations and enforcement priorities. A transfer pricing position that appears conservative in one jurisdiction may be viewed very differently in another which can create the potential for disputes, double taxation and increased scrutiny.
Organisations should seek to develop a globally defensible tax position that aligns profits with value creation and can be consistently supported across the jurisdictions in which they operate. The ability to defend the group's tax position with tax authorities and other stakeholders has become a critical component of international expansion.
Practical example:
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The bottom line about entering a foreign market
International expansion creates significant growth potential, but it also introduces complexity. For businesses expanding overseas, the tax consequences often arise from decisions made early in the market entry process that can become difficult and costly to unwind later.
Before entering a new international market, CFOs should consider the target market, market size, competitive landscape, barriers to entry and what the market requires for their product or service. From a tax perspective, three fundamental questions should guide a successful market entry:
- Where will value be created and taxed?
- How should the expansion be structured?
- Can the group defend its global tax position?
The success of an international expansion is often determined less by the tax rate in a target jurisdiction and more by how effectively these questions are addressed from the outset. Mistakes rarely result in a single unexpected tax bill. More often, they manifest as delayed market entry, duplicated compliance costs, transfer pricing disputes, restricted profit repatriation, or management time spent restructuring an operating model that was never designed for scale.
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Thinking about a new market?
RSM helps growing Australian businesses design the structure before the expansion, so tax supports the strategy rather than surprising it. Speak with our International Tax and Corporate Tax specialists to pressure-test your plan.
Thinking about a new market?
RSM helps growing Australian businesses design the structure before the expansion, so tax supports the strategy rather than surprising it. Speak with our International Tax and Corporate Tax specialists to pressure-test your plan.
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