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The manufacturing industry is currently navigating a turbulent sea of changes and challenges as it grapples with supply chain disruptions, rising costs and the need to diversify operations beyond China. As supply chain disruptions continue to impact the industry, many companies are looking to adopt new strategies to help them reduce costs and streamline their processes. In particular, the need to move operations out of China is becoming increasingly urgent as companies seek to mitigate the risks posed by rising costs and the country's fragile political relationship with the United States.
For some companies, bringing manufacturing back to the U.S. is a viable solution. However, this is not feasible for many others due to logistical challenges. Instead, these companies are taking a more thoughtful and strategic approach to identifying the best locations for their operations.
Through a careful analysis of the best logistical environment for their operations, coupled with collaborative efforts alongside seasoned tax professionals to uncover potential tax savings and benefits, CFOs and executive leaders can confidently steer their companies towards a trajectory of success.
Take a Look at Your Operations
While it may seem alluring to chase after the most favorable tax incentives when relocating your manufacturing operations, the reality is that this approach may not always be feasible or practical. Rather than simply focusing on tax savings, it's critical first to determine which location aligns best with your company's specific needs.
For instance, while a landlocked country may offer attractive tax breaks, the expense of shipping by air or trucking the product across thousands of miles to the nearest port could ultimately outweigh those savings. Moreover, if the country you select doesn't have an adequate pool of workers with the necessary skills, you may be forced to outsource production, rendering your move unviable. Ultimately, a comprehensive and strategic approach is needed when considering potential relocation options.
Here are some major operational factors your organization must consider:
- Annual costs of maintaining and operating the foreign subsidiary, including accounting and reporting requirements
- Applicable corporate law provisions include requirements regarding shareholder and director meetings, flexibility regarding corporate governance, level of sophistication of corporate and contract law, etc.
- The banking and regulatory regime
- Time zone and language
- The political and legal stability of the jurisdiction, including the extent to which other companies use the jurisdiction
- Labor pool meeting your specific skillsets
- Accessibility and proximity to your supply chain routes
- Logistics and transportation options and costs
After narrowing down your selection to a few viable countries or regions, the next crucial step is to consult with a knowledgeable international tax professional. By doing so, you can better understand the tax and financial reporting compliance requirements and potential challenges that may arise when relocating your manufacturing operations to each location.
Understand the International Tax Pros and Cons
Navigating the intricacies of international tax laws can be an immensely challenging and complex task, given the multitude of regulations and obligations across different jurisdictions. As such, enlisting the assistance of a seasoned international tax professional is paramount in ensuring that you fully understand the tax landscape of your chosen countries or regions for manufacturing relocation.
Beyond simply identifying tax incentives, these professionals can help you unravel the complexities of the tax system, anticipate potential challenges and develop effective strategies to mitigate risks and maximize opportunities. Ultimately, partnering with an expert in this field is a wise investment in securing your business's long-term success and profitability.
As you consider relocating your business operations to a foreign jurisdiction, your international tax expert can assist you in identifying and analyzing the critical factors that will determine the most suitable location for your company's needs.
Some of those factors are:
- The corporate tax rate in that jurisdiction (including the availability of any local country incentives and associated substance requirements)
- Whether gains derived by U.S. shareholders on the disposition of shares in the foreign subsidiary are taxed in the foreign subsidiary's jurisdiction
- The rate of any withholding tax imposed on dividends or other flows from the foreign subsidiary to the U.S. shareholder(s) (and whether tax treaty provisions could apply to reduce or eliminate any such taxes)
- The existence and extent of any stamp duty, capital duty or other similar taxes
- The extent to which thin capitalization or other debt/equity rules impact the financing of the foreign subsidiary (e.g., limitations on interest deductions)
- The tax consequences associated with a subsequent unwinding of the structure and/or a sale of the subsidiary's assets
- The taxation of employees who are residents or non-residents of the country
- Whether there is sufficient substance in the foreign subsidiary to avoid taxing the subsidiary in any other jurisdiction (e.g., if managed outside the jurisdiction)
- The tax treatment of operating losses (i.e., whether they can be carried forward and if limitations apply)
An experienced international tax expert can also help you identify and evaluate potential areas adjacent to your chosen locations that may offer even more significant tax advantages while still considering your operational logistics. By carefully analyzing and weighing all relevant factors, you can make an informed and well-educated decision that positions your company for long-term success in your new international business landscape.
At CBIZ, we understand the complexities of relocating your manufacturing operations to a foreign jurisdiction. With our team of seasoned manufacturing and international tax experts, as well as our trusted network of legal professionals, we possess the expertise and resources necessary to help companies meet their unique needs and identify significant cost savings opportunities. Whether you are seeking to diversify your operations outside of China or simply exploring new growth markets, our tailored solutions can help you navigate the challenges of international business with confidence and ease. Contact us today.
Copyright © 2023, CBIZ, Inc. All rights reserved. Contents of this publication may not be reproduced without the express written consent of CBIZ. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.
CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).