Understanding tax and regulations on foreign remittance and your business

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Understanding tax and regulations on foreign remittance and your business

Business can be quite a juggling act. With a variety of intricacies, moving between aspects of people management and emerging industry trends to finances, when it comes to foreign jurisdictions, there’s also the added component of taxes and regulations. These revolve around the repatriation of profits and, if left unchecked, remittance policies can jeopardise the optimisation of growth and steady revenue, sometimes even causing the delay of payments to parent companies as well as creditors.

A wide range of components are related to regulatory stances, and these are determined by individual nations. A remittance policy can be considered one of the most crucial things to look at and can substantially impact a business’s growth in the market. Here are some tax and regulatory tips on the foreign remittance business that you should know. 

Pay attention to regulatory differences 

Remittance regulations form the foundation of international money transfers. Without them, laws involved in remittance could lose their structure. These rules play a huge role in ensuring that operations and innovation within the global remittance industry are verified and legitimate.

Expanding your business to new countries can be challenging because each country has its own unique set of regulations with regards to international transfers. Even looking solely at Asian countries, each nation has its own laws and rules for money service businesses.

In Malaysia, for instance, non-banks are allowed to offer remittances and mobile money services within the nation and remittance licensing will require a minimum paid-up capital of about MYR2 million. In Singapore, the minimum required capital is typically SGD100,000 and a company has to maintain a SGD100,000 security value.

And these are just two examples. If you are thinking about entering a new market, it is a good idea to consult local legal experts or set up a team which is familiar with local regulations.

Withholding tax is the most common tax type

When it comes to taxing remittances from a given country, the withholding tax is often the primary vehicle. This form of tax is also usually coupled with the corporate income tax rates which apply regardless of the final destination of the profits. 

The number of percentages withheld is determined by each country, and they are considered to be part of the transfer. Some countries apply a wider range of withholding taxes than others, and they depend on different variables (such as the given method of transfer). 

In any case, businesses that enter any market should pay attention to the fine print in respective tax laws, and build their operations strategy on that basis. They can then decide if it is feasible to enter a certain market given the “taxing” conditions.

Think double taxation 

Double taxation agreements (DTAs) reduce withholding rates. Singapore is known for a comprehensive network of arrangements, but many other countries throughout the region have DTAs. 

Simply put, double taxation agreements are signed between countries to “avoid or minimise double taxation of the same income by the two countries”. For a comprehensive explanation of double taxation, we find that ACCA has a great explanation without getting too complicated. 

Double taxation deters international trades so many countries do sign DTAs with each other, with a variety of terms and conditions. Research and consult experts before investing in various markets.

Compliance requirements are strict

Remittance compliance is needed before businesses are allowed to distribute and repatriate profits. It is an important part of the remittance process to curb money laundering and terrorism financing. 

In a typical money transfer process, due diligence process must be observed throughout, meaning your customer, yourself and your sending partner will have to be vetted for clearance, such as international sanctions lists, watchlists, etc.

In the case of a foreign-invested enterprise, an annual compliance requirements process must be completed. This can include an auditing phase, annual tax reporting and annual corporate announcements. There may be more items listed in the requirements but that depends on the country.

Loss prevention should be taken into account

Sometimes, businesses cannot repatriate all the profits and so they must be set aside as remedies for potential operating losses. This risk of loss is in addition to pre-remittance compliance. In other cases, foreign-invested enterprises might not be allowed to transfer profits abroad if their financial reports reflect substantial accumulated losses. This is a risk that money service businesses may face.

Foreign exchange restrictions may apply

This does not happen very often anymore, but there are some cases in certain countries where transfers are subject to denomination – meaning to say there are restrictions and exchange rates set at levels that are not consistent with the going market rate. 

This unorthodox issue can prove to be quite costly at times, which is why companies should consult specialists before they attempt market entry. Do some research on the policies of the region or nation that you are about to focus on. If you can’t devote significant resources to research a market, it is good practice to approach a third-party or local player who can provide multi-currency access. 

Conclusion

Regulations and imposed taxes on foreign remittances are factors that should be taken into account by businesses. Cross-border payments, transfers and other money service aspects should be thoroughly planned because good preparation could mean the difference between success and failure.

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