When a startup goes international, there arises the need to analyze, fix and document the transfer prices. Where should I pay the income tax? Since the corporate tax rate is different in each country, it would not be surprising for startups or tech companies to try and keep their earnings in the country with the lowest rate. That is why it is important to understand that implementing a Transfer Pricing policy may determine the profitability of the different entities that make up the economic group. If said policy is correct and effective, it will not only prevent tax-related contingencies, but will also be useful to achieve greater efficiency.

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As pointed out in the summary, transfer pricing documents are prepared or presented annually before the tax authorities of the corresponding countries.  In the case of Argentina, formal requirements are manifold, but other countries in the region (such as Chile) usually establish fewer requirements or require that the reports be prepared but not presented. 

Complying with the presentation of the required information is important because, nowadays, there is a fluid exchange of information between tax authorities around the world. At the same time, numerous countries have decided to follow the recommendations on documents given by the OECD’s 2014 BEPS (Base Erosion and Profit Shifting) Project, which demands the utmost transparency in operations.

Transfer pricing: Where to begin

The general idea is to analyze the company’s situation at a particular moment. Thereafter, it’s best to start by correcting the mistakes (if any) for the future. Prospective analyses are ideal when it comes to thinking about operations with affiliates abroad. The initial analysis will tell you not only the price of the operation to be carried out, but also whether it is feasible or not.

The advantage of analyzing the company’s situation is that it is a worthwhile investment, because the process will be useful when it comes to submitting the pertaining documents. Something to highlight is that the analysis must never be done for each company independently, but must consider the whole group, focusing on the taxpaying duties of both each company and the Group as a whole.

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Why is a good transfer pricing policy necessary?

A transfer pricing policy may determine the success or failure of inter-company transactions. There are many matters which you may be tempted to solve considering only one viewpoint, but our experience has taught us that underestimating or disregarding the transfer pricing question may lead to serious material losses for either party in the international transaction.

Taxpayers who adapt to tax compliance faster and better will have a competitive advantage over those who fail to adapt to the rules of the game.

La entrada The ABCs of Transfer Pricing for a Startup se publicó primero en CFOstartup.

However, let us not be fooled. Even though we are talking about new companies, the analysis and application of traditional methodologies provide solid metrics that attract investors and are useful when dealing with other less certain metrics. One of the most recurring financial indicators to know a company’s value is EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), which consists in calculating — as evidenced by its name — the earnings before interests, taxes, depreciation and amortization.

6 Items that Will Affect the Value of Your Company

Market size

This indicator may justify higher valuations because an investor will be willing to take a bigger risk if the market size suggests that potential earnings in the future are worthwhile. Considered together with this are customer acquisition, retention and monetization, used specially in non-traditional valuation methods.

Revenue

Obtaining revenue from the beginning shows a business’s sales capacity and evidences the existing demand in the market. This valuation method provides the best picture of the free cash flow and how that metric will generate an incremental value for the buyer.

Monthly growth

This metric can be used both for revenue and for startups with subscription or SaaS (Software as a Service) models. Although this is not necessarily the case with every SaaS company, projects are expected to show a steady 20% intermonth growth.

Active users

This indicator depends on the type of product or service, but, in general terms, “active users” are paying customers, not only because they represent the company’s revenues, but because they show their degree of commitment and the rising or declining trend for future revenues.

Team

This is one of the subjective assets of your business. It measures your team members’ expertise (education and experience) and, above all, attitude (the entrepreneurial nature of these people which will determine a company’s capacity to penetrate the market). Here, it is important to show a track record of enterprise, failure and attempt. Above all, show your capacity for resilience, perseverance and vision.

Notwithstanding, since this may be problematic for investors with little experience in valuating intangible aspects, it is possible to obtain a purely mathematical valuation based on the market volume that can be gained.

Comparable valuations

An investor willing to contribute capital to the project will probably want to learn about the performance of different companies within the same industry. This means studying the value of other transactions in the industry. In order to do this, the investor will take as a reference the company’s business model, billing figures, operating margin, age and size. A downside to this approach is that a startup’s valuation may change drastically depending on the market conditions.

La entrada HOW TO VALUE YOUR STARTUP FOR INVESTORS se publicó primero en CFOstartup.

8 Indicators which are Allies to your Business

Customer Acquisition Rate

The number of new service users or product buyers acquired during a period. This indicator is usually measured monthly. The information is collected from billing and/or accounting platforms.

Churn Rate

This is one of the most important indicators when it comes to forecasting a business’s continuity and identifying the reasons why customers choose to leave. The result of this KPI offers information that can be used to optimize the product and avoid further losses. The churn rate is obtained from accounting information or from the CRM used by the company and it is calculated by dividing the number of customers lost during a period by the number of total clients at the beginning of said period. The result is multiplied by 100 and this gives the churn rate.

Customer Acquisition Cost

It reflects how much it costs a company to acquire a new customer. It is measured for longer cycles, generally, six months. It is obtained by dividing marketing expenses by the number of total new customers gained from that investment. Therefore, the Customer Acquisition Cost or CAC is effective to assess how much you can spend to attract customers, calculate returns on investment (ROI) and demonstrate that your business model is viable.

Monthly Recurring Revenue

Monthly Recurring Revenue or MRR is used by SaaS companies. It is calculated by adding up the value of all your customers with an active subscription (regardless of the price plan and subtracting discounts). In this way, it becomes easy to follow trends and get a much-need picture of how your business is growing (or not). This indicator is better used together with another one: the Annual Recurring Revenue or ARR, which is the annual measurement and represents the revenue in one calendar year.

Average Revenue per User

It measures the average revenue from a service’s or product’s user. The reference period is usually one month. A good practice is to measure this indicator by separating new and existing customers, so as to get a picture of how they are evolving or of whether new and existing customers behave differently. This indicator helps to identify which areas generate the most added value for customers and which services are in a bigger demand.

Operating Expenses

These are the expenses an organization incurs through its normal operations. They include salaries & wages, rent & leases, advertising, legal and professional fees, etc. Accountants become “strategic partners” when it comes to this indicator, and they help entrepreneurs define a suitable cost structure that will allow them to meet their obligations and, at the same time, grow.

Customer Lifetime Value

Customer Lifetime Value or CLV is a very important piece of data for investors. It consists in the average amount of revenue that each customer will generate for your business. It is not about associating a user’s value with the monthly value of the plan they’ve bought. It is also incorrect to compare the ROI of your marketing efforts against a customers first purchase. Therefore, what must be done is consider the average revenue associated with a user during their lifetime. This is calculated as follows: 1/cancellation rate x average revenue per user.

Brand Reach

Brand reach is the estimated size of the audience reached by your brand through marketing campaigns, the press, social media presence, etc. This metric usually consists in the monthly number of people who have visited your website (monthly single visitors), seen your Google or Facebook Adds, opened your e-mails, etc.

La entrada THE 8 INDICATORS YOU NEED TO BE FAMILIAR WITH FOR STRATEGIC DECISION MAKING se publicó primero en CFOstartup.

In the 90s, entrepreneurs started their expansion process and put together the business conglomerate as needs arose. They then realized that this was a costly way to expand, due to the restructuring service and high tax contingencies.

Time, however, has brought about new opportunities, and today’s trends move in a different direction. Entrepreneurs who dream big think globally and launch their expansion after having conducted tax planning, which is sustained in time and minimizes all sorts of contingencies. Although this may seem like a risky step to take, with proper planning, having a branch abroad today has become a simple task which, generally, does not require large budgets for offices and/or personnel, but simply incorporating a company and operating from the country of origin. Nonetheless, this decision calls for careful prior analysis and validation by the financial department, because it’s not simply studying tax matters from the stance of the parent company, but also from the position of the operating companies, thus harmonizing the tax and financial circuit of the global structure.

Tax burdens to look for

Although there will always be taxes which are specific to a particular jurisdiction, there exist a few that are common to all countries in the region. Some of them are the Income Tax, the Value-Added Tax and withholdings for services provided between countries. NOTICE: what usually changes in each country is the tax rate. If the entrepreneur is at an advanced stage in the expansion process, i.e. if it is operating in more than two countries, it is essential to consider the income tax at the global level.

The good news is that the tax impact is coordinated by countries through treaties to avoid double taxation (i.e. so that taxes on earnings are not levied twice) or to lower the tax rates. States make specific agreements to the benefit of companies.

Another advantage that must be considered is Promotion Laws which grant tax and fiscal benefits, such as Argentina’s Knowledge-based Economy Law (in Spanish, LEC). The countries in the region are talent hunters and they seek to offer incentives for companies — especially tech companies — to set up within their borders, so as to facilitate the process. Other noteworthy examples are Chile’s “One-Day Company Incorporation Law” and the recently passed Entrepreneurs’ Law in Uruguay, both of which offer benefits similar to those stipulated in the Argentine Entrepreneurs’ Law.  We should mention that in these three countries there exists the Sociedad por Acciones Simplificadas (Simplified Joint-Stock Company), a business structure under which a company can be incorporated with fewer requisites and lower costs than those of the Sociedad de Responsabilidad Limitada (Limited Liability Company) or Corporations.

La entrada GROWING ABROAD: WHAT TAXES TO CONSIDER DURING BUSINESS EXPANSION se publicó primero en CFOstartup.

1. Find the right professional service providers for your needs (accounting and law firms):

It’s very important to seek advise from colleagues that have already undergone the process of opening a new market, so as to reduce the risk of not finding someone that suits your needs. Besides having those references, it would be ideal if you could travel and meet their team of professionals and offices, in order to get a good impression of who will be taking care of your operations. 

2. Before opening a bank account, analyze the services and costs involved in the different choices available in the country where you are landing.

A common mistake is opening an account in the first possible bank, which may bring up a few problems when it comes to launching operations. Even though banks may be the same as those in your country of origin (Santander, BBVA, Itaú), they frequently use different platforms in different locations. 

There is a likelihood that Bank A may have an automatized process to handle your wire transfers whereas Bank B only allows transfers through batch payments. Or it may be case that one bank charges a commission on every transaction, while other banks have monthly flat rates. 

3. Tax planning:

We we decide that we want to start operating in a new market, it’s usually so because we already know that there’s a new source of income opening up. Due to the nature of these processes, the costs incurred by companies are centralized in the country where the company was founded (management payroll, platform development, etc.), whereas the costs in the new country are usually much lower than the income, which at times leads to a taxable basis that is larger than expected. This may affect the profits in one country and even tax losses in another; therefore, careful tax planning before the start of operations is fundamental to optimizing the company’s regional/global tax expenditures.

4. Appoint a local person with sufficient powers to handle matters before the various local authorities and regulatory entities.

Depending on the size of your company, it is usually the case that you embark on an expansion process without employees in the new country and delegate administration to the parent company. However, it is essential that you have a person residing in the new country with sufficient powers to handle all the paperwork and procedures that may be required during the process. In several Latin American countries there is still a lot of red tape involved in procedures to be conducted before authorities. A local who address and respond to the authorities is therefore essential.

5. If there is a chamber that brings together firms of your sector, become a member and do your best effort to be a part of its activities.

Our region is experiencing tremendous growth in the technological sector (e-commerce, FinTech, InsurTech firms, etc.). At the same time, because this generally involves new business models, the sector’s activities are not yet regulated and/or they are “unknown” to the regulatory authorities in each country. That is why being a member of the chambers that group together these types of companies (e.g. the FinTech Chamber, the Chamber of Electronic Commerce, etc.) offers the chance to be in the loop about any action regulatory entities may seek to carry out, and thus enables you to have a voice during the regulation drafting and implementation process. It will also help you be aware of the benefits your company may qualify for in a particular country (tax benefits, social security benefits, etc.).

La entrada Five things any CFO must keep in mind when beginning a startup’s internationalization process se publicó primero en CFOstartup.