A Guide to International Expansion
Cross Border Considerations
Legal and regulatory considerations for global expansion
When growing a business overseas, there are many legal and regulatory issues to consider – from adhering to intricate tax requirements, to understanding local labour laws and customs, to unravelling complex regulatory frameworks and labour codes.
Understanding the hurdles you may face from a legal and regulatory standpoint, and having the right knowledgeable partners in place to help you overcome them, will be crucial to successfully breaking into new markets abroad.
Legalities are involved from the very beginning and you’ll need to consider the most appropriate legal structure and business model best suited to your strategy and target market/s. Alongside local entities, options for possible structures include commercial agents, representation office, or joint ventures – and, while all are feasible options, all come with their own levels of risk.
All structure types also come with their own specific tax ramifications (taxation of profits, VAT, withholding tax, etc.), which may have a direct influence on your choice of entity.
In some jurisdictions, a representative office may be sufficient to meet local presence requirements for conducting business activity. However, other countries may require a legal entity to be incorporated, with its own set of compliance, tax and accounting requirements. And appointing a local director is also likely needed, as more and more countries require specific levels of ‘substance’. You’ll need experienced and knowledgeable directors who can assist with the ongoing governance and oversight of your entities. And they can offer advice and guidance on the new location, how local authorities operate, and the best local practices to adopt going forward.
You’ll also need to consider data privacy, intellectual property protection, and potential regulatory restrictions on foreign investment in your target market.
Another element is hiring employees and the subsequent employment laws. Finding the right people for the job is only half the battle – employing staff comes with an array of additional considerations, like social security and pension requirements, tax consequences, and laws around discrimination, health and safety, and specific remuneration.
Engaging local providers who are experts in local tax regimes, local labour codes, local best practice, and can provide qualified and knowledgeable directors will be a distinct asset for your organisation. A good third-party will also have strong relationships with legal partners and, together, can help you navigate local requirements for your international expansion with ease.
International regulations
The number of global regulations governing international business continues to rise, and also increase in scope and complexity. They can be hugely stressful for organisations to navigate, as complying with laws and regulations from multiple countries can be challenging for your in-house teams to deal with, resulting in unwelcome risk.
Organisations need to adhere to an array of global and local regulations, not the least of which being regimes such as AML, FATCA and CRS. Understanding the impact of the regulations applicable to your business operations is crucial. And you may also face other tax-related regulations, such as the EU Anti-Tax Avoidance Directive (ATAD), OECD’s base erosion and profit shifting (BEPS) and DAC6, on any cross-border transactions.
AML includes policies, laws, and regulations to prevent financial crimes and terrorist funding. Operating internationally, across different jurisdictions, can make complying with AML a challenge for your in-house teams to manage. Particularly when countries have differing AML policies with strict local rules to adhere to. Keeping track of and managing this complex regulation, which is often changing, is no easy task and having local partners on the ground to support you will be invaluable.
FATCA primarily targets U.S. residents and corporations who hold assets in other countries, but don’t declare them on their U.S. tax returns. This can also impact companies operating outside of the U.S. when interacting financially with a U.S. person or company. The launch of FATCA legislation has inspired similarly purposed laws across the globe. There are multiple reporting requirements to fulfil, and failure to meet these requirements can result in costly consequences. It’s also a regulation that is ever-changing – making it very complex to get to grips with.
The Common Reporting Standard, officially known as the Standard for Automatic Exchange Of Information (AEOI), is relevant for financial accounts on a global level. It’s designed to strengthen tax transparency and enable a smoother transfer of financial information for tax purposes. Understanding and complying with the rules and obligations of CRS can be extremely complicated, made only more challenging when operating across multiple geographies.
These are the most widely recognised, but there are plenty of more local, country-specific regulations to comply with. And failure to meet necessary requirements can result in significant consequences, including large fines, sanctions and reputational damage.
Therefore, outsourcing the administrative accounting, reporting, and payroll work to an expert third-party provider with in-depth knowledge and experience of international regulations can be a game-changer for your global expansion.
At Auxadi, our teams of international regulatory and tax compliance professionals have extensive experience and knowledge of both global and local regimes, and aim to ensure you remain compliant and can operate across multiple jurisdictions with confidence.
When a company is expanding overseas or is looking to acquire a business outside of their home country, it’s critical that the decision makers and operational experts keep in mind these key points.
1. You’re not in Kansas anymore
The number one issue our clients deal with when expanding or managing operations outside their own border is the adjustment to the different business culture in the other country. Customs and practices that are commonplace in America may not be so outside the U.S.
For example, in America, people seldom conduct business over a meal. In places like Latin America, business lunches and dinners are an essential part of the culture and failure to properly appreciate the host can be seen as a major insult. Also, it isn’t uncommon for local businesspeople to open their homes for these meals. Turning down an invitation to someone’s home can be seen as a huge insult.
Before venturing outside America, make sure to become acquainted with the local business culture and, when in Rome, well… you know.
“Foreign tax systems and the U.S. tax system rarely interplay well and proper appreciation for both is required”
2. There are no signs at the gate to the plane that say, “Check your common sense at the door.”
For some reason, some businesspeople, when doing business outside the U.S., are willing to take risks or do certain things that they would never even consider doing in America. Most commonly, some companies or investors are willing to undertake risks that they’d otherwise never take, under the assumption that “things are different here.” Well, they’re not. In a lot of ways, things that may not pose a significant risk in the U.S., can cause significant exposure overseas.
For example, the U.S. doesn’t have strict AML, thus, extensive due diligence on business partners is not required, however, most every other major country in the EU, Asia, and Latin America does have these regulations in place and failure to comply with them can result in significant exposure to the company and the executive team. It’s important to understand the legal and regulatory landscape of the host country and make sure you’re fully compliant. Remember, you’re not in Kansas anymore and common sense still applies.
“Having proper policies and procedures to ensure the integrity and safety of your personnel is critical.”
3. Death and taxes are also certainties overseas
One of the most difficult issues to navigate in cross-border business is the tax environment of the host country and its interplay with the U.S. system. While the U.S. has a very broad network of tax treaties around the world and these properly address the issue of double taxation, reality is that the foreign tax systems and the U.S. tax system rarely interplay well and proper appreciation for both is required.
Before venturing out overseas, and, if already there, as part of the management process, companies should always make sure that the operational structure is kept up to date with the current tax environment in both countries. Having a good cross-border tax lawyer on speed dial is a good idea.
Additionally, some countries can create additional political or safety risk to your management team. Having proper policies and procedures to ensure the integrity and safety of your personnel is critical.
4. Strong local management is critical
Now that we’ve established that your operations outside the U.S. are subject to different laws and regulations, that undue risks should be avoided under the same scope that you should avoid them in the U.S., and that proper tax and risk planning and management is of utmost importance, it’s imperative to note that a strong, integrated and capable local management team is mission critical for success.
Hiring the best management team and, most importantly, immersing them into your corporate culture as to making them feel an intricate part of the global organization, is an issue that should be addressed from the outset of your venture. Also, hiring competent cross-border legal, accounting, tax and HR advisors is paramount. This team will make sure you’re successful and stay out of trouble.
McDermott Will & Emery are a global, full-service law firm with unique expertise in the private equity, health care, tax, and private client sectors. They have offices in the major U.S. markets, as well as London, Paris, Frankfurt, Milan, and Singapore. If you’d like to discuss cross-border tax and transactional matters relating to U.S. and non-U.S. multinational entities, get in touch for more information.
Tax
Tax is one of the areas that can have the biggest implications on international expansion. 47% of respondents to our International Expansion survey noted tax to be their greatest concern. While the OECD’s agreed Global Tax Rate for Multinational Enterprises will make things a little simpler, there are always country-specific regulations to consider.
As we know, tax regimes and regulations differ country by country. And when undertaking a global expansion, the ramifications can extend further than you expect – tax can affect everything from your entity structure to chosen business location. On top of all this, ensuring your ongoing operations remain compliant can be even more challenging.
“There are often also tax breaks and benefits available in specific regions of each country, aimed at encouraging regional growth.”
Any new business needs an entity and, thanks to tax regimes, an entity type perfectly valid in one country may not be the most suitable in another.
In fact, one of the very first things you should do once you’ve identified your intended new location is to take early advice from local experts to ensure your structure is best suited to both your local operation and your global business, and be prepared to adjust your business model if local regulations require it. Tax regimes are constantly changing, constantly being updated, and local knowledge is key to navigating the minefield.
Another consideration is the impact of various tax leakages on the international journey of the money from the customer to the relevant vendor – which can jeopardise the profitability of a given project. For instance, suffering a withholding tax (WHT) of 30% on the gross receipts may simply create a huge loss where profits were expected.
Accurate and effective project finance is essential, as is identification of any hidden tax leakage – like non-permissible expenses, ineligible deductions, and WHT. Keep in mind that your international services, goods and invoicing will be subject to potential leakage for both WHT and sales taxes (VAT/GST), which you may not be able to recover in full.
On the other side, during your decision-making process, you will have checked out options available for grants, enterprise assistance or tax benefits that each country offers to encourage international business. Many countries offer sector-specific perks to attract specific businesses, like for Research & Development, technology or renewable energies.
There are often also tax breaks and benefits available in specific regions of each country, aimed at encouraging regional growth. These can vary greatly and can be important to take into account. You should be mindful that the resident population of the region with the best perks may not be big enough to provide the workforce you need. Carefully consider all the options in all the regions of your chosen country, including Free Zones or Freeports.
You should also be aware that, depending on the country, there may be sector-specific taxation in place. This is becoming more common, particularly for those sectors viewed as ‘destructive’ or ‘not climate-friendly’, and there are always additional taxes for property. And, given the global focus on climate change, your operation may be subject to additional ‘green levies’ or ‘carbon taxes’.
Consider, too, how the tax system works in your chosen destination – how are payments made? Is the process time-consuming? How about digitisation? – and, from there, carefully evaluate how you can ensure tax compliance.
Be aware that Tax Authorities can be aggressive with inspections, audits and requests for information, and often work hand in hand with regulatory bodies. The last thing your fledgeling cross-border enterprise needs is censure, fines or reputational damage that can affect both your local operations and your global business.
And you shouldn’t forget to check out any exit taxes or dissolution costs. You don’t want to be stung if things go wrong.
“The last thing your fledgeling cross border enterprise needs is censure, fines, or reputational damage that can affect both your local operations and your global business.”
Finally, having the right technology and processes in place can be costly, but vital to managing risk, maintain governance and oversight, and ensure data security.
There are various models to ensure tax compliance, generally combining internal and external resources by outsourcing local functions to third party providers. But you should ensure these partners have the most robust IT controls to ensure deliverables are accurate and timely, and data security paramount.
The most effective way to manage your tax compliance is by integrating the tax functions with the strategy of the company, clearly defining associated risks, and procuring adequate levels of resources (both internal and outsourced), all powered by intelligent IT solutions. Intensive use of integrated technology can manage data integrity through all your multinational tax compliance processes, from the accounting to the production and audit of your final tax return.
Tax is inevitable, but can be successfully navigated. Be aware and be diligent. Partnering with a local tax expert to assist with all your tax compliance challenges means you can expand your business across borders with a minimum of hurdles.
Auxadi are highly experienced when it comes to navigating the specifics of local tax regimes, executing and implementing various tax structures and taking care of any tax compliance requirements. In 2021, we submitted over 28,000 client tax returns across 50 different jurisdictions.
Our experts have deep local knowledge of their country’s regulations and legislation, across all different sectors. They understand their country’s tax system; they know where the pitfalls and traps are, and they know how to stay compliant.
Our mission is to make life easier for our clients. Our tax team does exactly that, every day.
Transfer pricing
Transfer pricing is a lot more involved than you may think, and you definitely can’t use the same rates for Head Office services across your global operations. There’s a lot to consider: the ‘arm’s length’ principle, comparability analysis, intangible property, intra-group services, cost contribution agreements, safe harbours, and administrative approaches to avoiding and resolving disputes.
The tax rules related to transfer pricing are as complicated as they are varied, and tax authorities are increasingly proactive in scrutinising organisations operating in multiple jurisdictions. This is to avoid Base Erosions or Profit Shifting (BEPS) from higher-taxed regions to tax haven jurisdictions. Auditing transfer pricing activities can be time consuming and stressful, and the penalties for breaching the strict tax rules can be significant.
Reviewing the OECD’s transfer pricing country profiles is a good place to start (and they’re being updated during 2021/2022) but we always recommend expert local advice.
Working with experienced partners like Auxadi, who know how to minimise the risks of falling foul of tax changes and penalties, will be hugely beneficial to your burgeoning cross-border business. Not only do we have the knowledge of local regulations and legislation, but we’re uniquely positioned to advise on best practice when it comes to setting up your transfer pricing policies.
Contact us for solid transfer pricing support and you, like our clients, can avoid headaches with the local tax authorities.
Cultural differences
One of the most important considerations when looking to expand across borders is the specific culture of your chosen location. In our increasingly global business landscape, every country is unique, with its own distinct culture, business fabric, and specificities.
And it’s not just the nationality-based cultural differences you’ll be dealing with. Every organisation within that country has its own culture; its own specific way of working and its own set of rules governing its interactions and behaviour. Cultural differences include more than just a change of language.
There are a few key points of consideration when navigating cultural differences: understanding your chosen location and its offering, knowing your decision maker and specific nuances of local business operations, communication, being aware of regional timelines, and the importance of building long term relationships. Seeking local guidance from trusted partners on the ground can give you a great advantage, and will help ensure you adhere to local laws, regimes, customs and cultural behaviours.
These are our top tips to navigating cultural differences.
Understand the country you’re investing in, including what it’s offering
One of the most critical aspects of cross-border investment is the attractiveness of the country for the business, particularly when it comes to overcoming complexities in regulation or tax. You’re going to spend a lot of time looking at your shortlist of locations, going through pros and cons, cost and regulatory comparisons, tax regimes, labour codes and more.
And you shouldn’t forget to check out any investment incentives, like free zone regimes, monetary grants or other available perks which might be available (like grants for offering local employment in certain regions, or support for sectors that the country wishes to grow, etc.). These grants usually sit alongside tax exemptions and can be one of a country’s most powerful attractors.
Being well-informed on various complexities and challenges and evaluating them alongside any legal, regulatory or monetary benefits is of the utmost importance.
Know your decision maker
Countries vary greatly in their business practices, and local companies will probably have a respected organisational hierarchy in place, particularly when it comes to decision making. Sometimes your initial meetings will be held with the decision maker and sometimes you’ll have to go through several levels of leadership, who’ll then pitch to those above before a decision is made.
Being aware of culture and business etiquette is also a big consideration; steps to identifying and addressing decision makers will differ from country to country. It’s important to understand who the decision makers are when engaging in cross-border deals and how best to get in front of them, be it officially or socially. It might be through a third-party introduction jumping you straight in, or you might just have to work through the steps.
Either way, you should be aware that these decision makers can drastically affect your expansion project time frame.
Communication
Communication is a vital part of any business, and never more important than when growing your business across borders.
For non-English speaking countries, partnering a local third-party on the ground can assist with any language barriers and ensure your message comes across correctly. They can help when it comes to operating in different time zones. Engaging a local provider can also provide additional benefits like relationship building, openness and proving credibility.
And don’t forget your internal communications. Getting your existing team enthusiastic about a cross-border expansion can go a long way to smoothing the process. It will help them grow more involved in the business, benefit their own professional development, and provide new challenges. You might even uncover your future leaders or identify progressive thinkers – you never know where that game-changing idea will come from.
Be aware of time and building relationships
International negotiations take time and a speedy resolution is rarely possible. Some stages may move relatively quickly, but regulatory approvals can take months. Plan for delays and difficulties; your timelines will be constantly changing.
Building long-standing relationships is key to business, no matter the country or business you’re in. It’s well worth taking the time to develop and nurture those relationships to foster trust and loyalty.
Every country has their own way of working, their own specific business fabric and practices. Every country is different, and – if you build good local relationships – every contact you make within a country can help you through the local challenges.
Local guidance
Having local knowledge and expertise is essential when looking to cross business borders.
Local partners are on the ground in the same time zone, allowing for greater responsiveness, and they speak the local language, meaning communication is seamless. They know their country, they know how it works and what’s required. Further, your local partner will be able to quickly identify and solve any potential barriers to your expansion, and may even be able to provide or recommend trustworthy and knowledgeable local directors or agents.
42% of respondents in our International Expansion survey said that connecting with the most suitable lawyers, accountants, and advisors, may be causing companies to delay their international expansion.
Not only can local third-party providers extend guidance and advice to help you through the complexities that come with international business, but they can also provide valuable introductions that bring you (and your business) instant credibility, helping during launch and also with your ongoing business. Your local expert will have relationships with creditors, suppliers, banks, governmental authorities, even regulators. Take advantage.
Expansion and FX
When planning or executing international expansion, foreign exchange can have a significant impact. FX market volatility can severely affect currency rates, potentially threatening budgets, operational expenditure costs, and profit projections.
Exchange rates move constantly, and while some are influenced by more factors than others, there are some universal elements that initiate movement:
- Economic data from each country shows how different areas of the economy are performing. Some of the most influential figures include growth, inflation, and labour market data.
- Political events can create significant market movement as uncertainty increases. When the Brexit referendum occurred, GBP fell by 20% against other currency majors.
- Natural disasters and unprecedented events can change risk appetite should an event occur. The Covid-19 pandemic is a recent example where there was a movement of flows into safe-haven assets as the global economy came under pressure and uncertainty rose.
When businesses are looking to expand into a country with a currency different to their headquarters, there needs to be consideration of how FX movements and currency volatility can impact those plans, and what tools they have at their disposal to mitigate or eliminate the impact of those movements.
Challenges for businesses
If a company domiciled in the UK, which has GBP as their home currency, decides to expand into Mexico—where most of the expansion expenses and the potential revenues are denominated in MXN—planning for possible currency movements is crucial.
For example, the UK company may have budgeted a total of £5m for the execution of the expansion plan, which on the date the budget was approved accounted for MXN 140MM at a GBP/MXN rate of 28.00. If during the year MXN begins to strengthen causing GBP/MXN to soften to 26.00, the budgeted £5m now equates to MXN 130MM, reducing almost 8% of their available cash and potentially threatening the success of the expansion or dramatically increasing its cost.
Similarly, the same company might have estimated a potential turnover of MXN 100MM in their first year, which at a rate of GBP/MXN 28.00 equalled roughly £3.5m profit. If the MXN depreciated to GBP/MXN 30.00, that would result in a reduction of the estimated revenues of over 7%.
The above examples are just the simplest version of how currency movements can affect budgets or estimated revenues. FX market movements are usually more complex and often unforeseeable, making potential consequences more substantial.
“FX market movements are usually more complex and often unforeseeable, making potential consequences more substantial.”
Solutions to strategically manage foreign exchange
It’s crucial to always work with professionals with the appropriate knowledge, experience, and expertise to guide businesses through the FX risks associated with international expansion.
Some of the potential solutions are:
- Timing trades: The FX market is the largest and most liquid financial market in the world. With dramatic intraday movements, the difference between booking a trade today or tomorrow can be substantial. Knowing in advance the events that might move the markets is the best option to optimise the execution of a trade where there is flexibility in timing.
- Forward Contracts: Through FX Forwards, companies can fix a rate in place for up to three years, offering protection against unfavourable currency movements. A Fixed Forward allows a business to secure an exchange rate on the day, for up to three years into the future. Window Forwards can give more flexibility around cash flow timings, allowing the ability to drawdown before the value date, in a specified window. While the market can move in both directions, Forward Contracts give a business certainty on exactly how much their currency will cost.
- Derivatives: These products can play an important role in foreign exchange hedging, complementing Spot transactions and Forward Contracts as part of a blended hedging strategy with more flexibility and complexity. Option products carry a higher level of risk that might not be suitable for all businesses.
Using a currency specialist
FX markets are highly volatile, and the consequences of that volatility on a company’s international expansion plans can be profound. It’s essential to have the correct insight and knowledge and understand the different products and services suitable for each company. While no one can predict the markets with absolute certainty, it’s possible to minimise or mitigate currency risk with the appropriate expertise.
If you’d like to discuss your FX requirements with a currency specialist, contact Global Reach Group.
Copyright 2022 Auxadi Contables & Consultores, S.A. | All rights reserved
Legal notice | Privacy and Data Protection Policy | Cookies Policy