Planning for Growth – A Tax Perspective
While many challenges remain, there is growing evidence that domestic businesses are finally emerging from the economic doldrums. This impetus stems not just from new export oriented enterprises but also from many traditional businesses, which have adopted very conservative strategies in recent years but are now primed to take advantage of investment and expansion opportunities, writes Dermot Reilly from PwC.
Many businesses, particularly in the food and tech sectors, are focusing on overseas markets and not just on traditional locations such as the UK, the US and Germany. Many Irish companies have extended their compass to explore the opportunities offered in such diverse markets as China, India, Indonesia, South Africa and Brazil. The potential rewards are enormous but special challenges often emerge when local regulatory and tax considerations are taken into account. Apart from the absolute necessity of conducting a thorough commercial due diligence of the opportunities available, expert guidance and support is essential when trying to navigate around what are often complex and unfamiliar rules and regulations.
The appropriate structure to use when expanding overseas will aim to achieve the lowest overall level of tax on total profits. This can only be achieved in the context of such matters as the prevailing transfer pricing rules, withholding tax obligations and indeed the terms of relevant double tax agreements. A critically important element in any structuring will also be to ensure that a possible disposal of the business in the future will not involve unnecessary capital gains tax exposures.
At a local level, businesses need to be structured so as to be able to avail of the benefits inherent in Irish tax legislation. The precise manner of structuring a business may, for example, have a significant influence on whether tax relief for financing costs is maximised. Also, having regard to the difficulties many businesses now encounter in raising finance, the potential availability of such incentives as Research and Development tax credits and tax efficient investment by third parties should not be overlooked.
For owner-managed businesses, a priority may be to reward key employees on the basis of the performance of the business but without any dilution in family equity. Aligning reward to outputs in a tax efficient manner is important. Managing succession is another area of focus for family businesses and the agenda here should extend far beyond the immediate tax consequences. It is important to establish ground rules between family members in order to limit the potential damage to the business in the event, for example, of a death, divorce or indeed a major conflict within the family.
The terms of an individual’s Will can have a profound impact on the tax costs, which may arise when a business transfers on death. Even in circumstances where there is a clear succession plan in place, relatively minor adjustments to a Will can produce substantial savings without in any way affecting the core succession plan.
As businesses grow and mature in the recovering economy, they will encounter a myriad of opportunities on the one hand, and pitfalls on the other. In order to meet the challenges presented, it is essential to stand back regularly from the day to day business activities and plan strategically to achieve the longer term goals.
Written by: Dermot Reilly, Tax Partner, PwC
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