PwC Canada's cannabis series

To move beyond the short-term market growth expected in Canada, LPs must take advantage of international opportunities. This process starts with a global strategy and a playbook – which, designed and executed effectively, could produce dominant global players with proprietary technology, products and brands.

Thanks to a Good Manufacturing Practice (GMP) agreement between Canada and Europe, Canadian LPs whose products meet GMP and ISO certification enjoy a competitive advantage in European markets.

Canadian cannabis companies also benefit from the absence of major competitors from the United States. As long as cannabis remains federally illegal in the United States, US multinational companies are reluctant to enter the industry and be unable to dominate as they do in so many other industries.

It is important that LPs’ tax and legal structures are designed in such a way as to satisfy the requirements for receiving foreign investment incentives as well as avoiding inadvertent Canadian and foreign tax implications. Extra attention will need to be paid if global production reaches a level that leads cannabis to become an exchange-traded commodity.

A properly designed global strategy will provide operational synergies and the chance to invest in jurisdictions that offer favourable tax rates and tax incentives. Although the global tax environment is in a constant state of flux, there are established strategies that cannabis players can adopt to provide substantial tax savings on profits earned abroad.

For example, Cannabis companies will want to maximize the benefits of the locations of their R&D activities, as well as ownership of their proprietary technology and intellectual property (IP). Specifically, IP that will be leveraged in foreign jurisdictions need not be located in Canada, and can be offshored to leverage foreign investment incentives. It is imperative, however, that there is real substance to the operational activities required to support the development and ownership of IP and that these activities be permitted under local laws.

As markets mature and industry players look to redeploy cash, creating strategies for repatriating earnings will become important. The process should include the design and implementation of tax-efficient operating models, foreign holding structures and international financing structures. The cost of procrastination will be significant, with corporate income tax rates and withholding tax costs each amounting to 30 percent of earnings or more depending on the jurisdiction.

With time, businesses may also want to consider the segregation of operations from real estate ownership as another way to create value for investors, in much the same way as retail and other industries have successfully accomplished.

An initial checklist for companies venturing abroad is:

• Understand the local laws and regulations in the foreign jurisdiction.
• Consider all the incentives offered by local governments at all levels.
• Realize that capital and banking arrangements may be limited in other jurisdictions and have alternative financing arrangements in place.
• Engage early in strategic operational and tax structuring to develop a playbook for international investment or expansion.
• Create an inventory of the company’s IP and assess how it can be best leveraged internationally.
• Consider the accounting implications of investments and other business relationships.
• Understand how investments and contracts will be accounted for, and how they may affect financial results and valuation models used by industry analysts.
• Consider where cannabis supplies may be located in the future and whether trading company functions can be centralized to drive efficiencies, improve margins and reduce taxes.
• Consider the other costs (e.g. transportation), risks (geopolitical, environment etc.) and regulatory requirements of moving abroad.