International tax: 5 mistakes startups make

Startups that are doing business across borders have special needs when it comes to international tax compliance. And who isn’t doing business across borders these days? Most businesses have multinational founding teams, contractors abroad, and customers in multiple countries.

We know that entrepreneurs simply do not have time to figure out their tax problems, particularly when the company has 5 – 50 employees. At this state, all profits, if any, are reinvested in the product. Accordingly, we’ve boiled down 5 mistakes that are easy to avoid or fix for an international startup.

Mistake #1: Using a regular accountant to set up international tax needs.

Do you use an architect or a plumber when you want someone to design your house? The answer is obvious. But, time and time again, we clean up companies’ messes when they use their local accountant to set up their international tax structure. Now, we love accountants, but only after we have given them the structure they need from a legal perspective. And, when your tax attorney directs your accountants, all information is privileged.

Mistake #2: Assuming that your foreign contractor is a contractor.

This one can really hurt. In some countries, anyone that a foreign business hires in that country will be an illegal employment relationship. This can cost huge fines and painful procedures. And, you’ll have little in the way of protection against the employee’s employment law claims. Oh, and you can kiss you IP goodbye. In almost every country, someone who works on the ground is subject to local payroll tax withholdings that you–the employer–must address. This is much easier to set up than it is to clean up!

Mistake #3: Not filing for local taxes

This might seems obvious to the casual reader of an international tax blog post, but compliance professional and entrepreneurs understand. For tax professionals, we see screwed up and missed filings all the time. As entrepreneurs, we know that entrepreneurial plates are often too full to make room for the nitty gritty. That said, unmet local tax liabilities can snowball out of control.

Mistake #4: Keeping multiple sets of books

You know what we mean: you have one system for your big enterprise customer, multiple spreadsheets for your other customers, a napkin for other customers, and a couple in your head. At the end of the month, you (hopefully!) email your bank statements over to your accountant, who can now bill you extra. This is bad for a couple reasons. First, you’re paying more for your quarterlies by dumping a ton of accounting shit on your accountant. Second, you’re losing a ton of data that, when organized, can offer you a ton of in valuable information for operations and, perhaps, the ammo you need when you sit down and explain your numbers with a potential investor.

Mistake #5: Not taking advantage of deductions from international tax

Okay, so you’ve only got 5 – 50 employees and you’re not racking up profits, so why worry about deductions? Again, a couple reasons at first glance. First, you can almost always bank those deductions and use them in the future when you are profitable, which will save you a bunch on taxes. Second, this is a great opportunity to understand the stuff you need to know when you are ready to hire in-house CFO and accountants, who won’t be able to bullshit you on what they don’t know. It’s never too early to at least understand the power of deductions on your business’s after-tax bottom line.

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