International Business is Special

I recently had occasion to work with a company that has international offices, and discovered that what I might have considered to be common sense was not being followed universally. As such, I decided to outline the particular issue that we encountered, and how it can easily be avoided.

In our case, the issue had to do with difference in tax law between Canada and the country in which this company had its headquarters. After a quick exchange of emails, this was cleared up, but what made me pay attention was the fact that the mistake had been made in the first place, and why.

Simply put, the accountant from head office was not an expert in Canadian tax law, and therefore assumed that the issue in question would be treated the same as in his country. This was an error, but the first mistake was in not using an accountant familiar with Canadian tax law in the first place.

In summary, when working across borders, a company needs to make sure that they are using appropriate experts in the rules governing the target company. This is necessary in order to ensure that not only are the rules being obeyed, but that the company is not going to be taken advantage of by someone more familiar with the laws.

As such, when getting involved in any level of negotiations across a border, even a friendly negotiation, try to find a local expert to help you. Whether this is an accountant, a lawyer, or some other professional, it can save you and your company a lot of regrets by following the rules from the onset.

As a second example of a negotiation gone wrong, examine the following case.

A company is looking to expand to North America. They create an U.S. corporation as a holding company, and decide that all North American business will be conducted via this corporation and all its subsidies. However, a majority shareholder in this corporation lives in Germany, which creates an issue of foreign interest. Complicating the matter is the fact that there is another corporation, this one Canadian, which is owned (60%) by the U.S. company.

When the company made an offer to a Canadian firm, they discovered that Canadian tax law treated the Canadian corporation as foreign-owned, subjecting it to certain rules. However, U.S. tax law considered it to be foreign-owned as well, since it was situated in Canada. As such, this corporation would have been taxed at incredibly high levels.

Fortunately, in that situation, there were ways to work with the laws of the two countries to bring about a viable solution. However, the fact that the question of tax law only came up during a negotiation indicates that the parent company had been ill-advised in terms of dealing with North American corporations.

The situation could have been avoided had they worked through an American or Canadian tax or law firm familiar with cross-border issues. Sadly, they had not done so.

So, if you’re thinking about doing business across a border, make sure you hire experts in your target country, not just your home country.