WHENEVER a Malaysian company branches out to a foreign land, a natural reaction is to cheer it on as another step towards our local businesses becoming globally competitive. However, reality eventually sinks in and we have to acknowledge that such a venture is not without major potential pitfalls.

Margins for overseas contracts can be unforgivingly thin. Given the unfamiliarity and differences when conducting business abroad, the execution risk is higher. Changes in government policies may have devastating consequences.

And here is another hazard not often talked about ¡V poor tax planning for foreign enterprises can lead to cashflow disruptions and lower-than-expected returns.

The problem is, when some companies diversify abroad, they tend to focus almost exclusively on winning business. As a result, they do not pay enough attention to other important aspects such as the impact of the laws of the relevant countries.

Says Deloitte KassimChan Tax Services Sdn Bhd executive director Yee Wing Peng: ¡§ Typically, they go in with the emphasis on securing jobs. It’s only after getting the contracts that they worry about the details. This is not the most advisable approach to planning.¡¨

This is an important factor given that the trend of Malaysian companies investing overseas is gaining momentum.

Malaysian businesses going abroad is nothing new, of course. Over the past two decades or so, there have been a lot of such investments in Indonesia and China, mainly in plantations and manufacturing. What has changed in recent years is the diversity in destinations and industries.

Yee points out that we now see more Malaysian companies undertaking construction projects and property development beyond our shores. Some are providing services in fields such as engineering, information technology and telecommunications.

The Malaysian presence is now increasingly felt in the Middle East, South Asia, Africa, and closer to home, in Thailand and Vietnam.

Many of these Malaysian companies are novices at setting up shop in another country, and are therefore more likely to underestimate the importance of tax planning. They may not appreciate the fact that tax legislation in one jurisdiction can be vastly different from that of another.

¡§The Malaysian tax system is fairly straightforward. Our rules and regulations are quite clear,¡¨ Yee says. ¡§Some countries have more sophisticated and complicated tax regimes. For example, India has federal and state taxes, and they sometimes overlap.¡¨

Also, many countries have value added tax, which Malaysia has yet to introduce. Getting to grips with this may be a challenge to Malaysian companies.

The key, says Yee, is to understand the foreign tax laws and to factor in the correct tax costs when crunching projection numbers for the foreign ventures. Failure to do so may prove to be a fatal oversight.

He adds that we can learn a lot from the multinational companies from the developed nations, which routinely conduct thorough studies of the Malaysian tax structure before deciding to invest here.

He warns: ¡§If you do not take into account tax costs adequately, your project costing may go haywire. Sometimes, this can wipe out your margin and erode profits. And if the companies are making losses, they suffer a double blow.¡¨

A common complication is when foreign businesses have trouble getting back the withholding tax that they have paid.

Yee explains: ¡§In Thailand and India, should the tax withheld from contract payments be higher that the actual corporate tax exposure, it can be a real challenge to claim withholding tax refund. This has an impact on cashflow projections.¡¨

Sound cross-border tax planning is not just about avoiding snags, but also about maximising efficiency and returns.

A grasp of the tax legislation of the host country is vital when it comes to formulating profit repatriation strategies. Usually, profits are repatriated via dividends. However, this may not be the most efficient route.

In Thailand, for example, on top of a corporate tax of 30%, profit repatriated as dividend attracts a withholding tax of 10%. As such, the effective tax rate on the profit works out to a relatively high 37%.

In addition, Yee recommends that Malaysian companies consider the tax incentives available in Malaysia and the host countries before committing to overseas ventures. This will help lower costs and improve returns on investments.

At the same time, the Malaysian companies should look at the tax position of Malaysians working overseas because many of these employees will be deployed in the foreign ventures. This has a bearing on employment terms and the companies’ costs.

Deloitte Tax Academy, the tax learning arm of Deloitte, is holding a public seminar on Tax Strategies for Overseas Projects and Investments in Petaling Jaya on June 27 and 28. Drawn from the international Deloitte network, the five speakers will focus on updates, risks and opportunities in Thailand, Indonesia, India, the United Arab Emirates, Bahrain and Qatar.