SafeGuard REC business partner offers REC members advice on What to Expect When Your Business Grows Abroad
As a business grows, different parameters come into play with regard to issues such as compliance and regulations. As you tier up and beyond, the rules under which you operate will typically change.
In this article, we’ll look at a few prominent issues you need to consider as you grow into foreign markets, and how to prepare to ensure your business continues to flourish.
Assess Your Potential New Market Entry Strategies
New markets have the promise of significant revenue, but many factors also come into play that can bring significant corporate risk. A failure to remit taxes in Japan could land one of your executives in jail. Profits in Brazil must be reinvested within country or taxed at a very high rate. Misunderstanding labor laws could result in reputational damage due to devastating strikes that could disrupt your company. Assessing any market barriers of entry, understanding the risk and taking appropriate precautionary measures will define your success.
With the vast amount of information available, the political realities of the new territory are fairly obvious— but you must truly understand the government’s attitudes toward business, protectionism, collective agreements and taxation. Consider the tale of Uber, who remains in a heated battle with officials in France, Germany, Spain and the Netherlands. These countries have stated that Uber’s highly attractive business model creates an unfair competition against traditional taxi drivers, halting one of Uber’s business lines in the European Union.
International tax risk is another factor to assess. International tax risk can come from multiple sources such as transfer pricing in cross border transactions or unknowingly creating a permanent establishment, which gives local authorities the power to assess income or a value added tax. In France, you can set up a representative office to recruit or deploy a worker to France (who will be subject to certain local taxes and social security contributions), under the condition that it does not conduct any commercial activity. Doing so may lead the tax authorities to reclassify it as a taxable permanent establishment.
Many successful multinationals develop a beachhead strategy, where they deploy proven, successful leaders to the territory. Many countries have protective labor laws to encourage organic job growth; therefore, you may be required to have a defined, if not majority, of local nationals employed. If your intention is to expatriate key leadership to develop the new market, be aware that some countries have a defined expatriate-to-local-national ratio. For example, Mexico requires 10 employees to be Mexican nationals for every one expatriate deployed in country, whereas Brazil requires two-thirds of the workforce to be local nationals.
Finally, ensure that the government—or at least the framework of government itself and its financial institutions—is a stable and safe environment for your business and your employees. Findings may result in further risk mitigation plans beyond traditional disaster recovery and business continuity. Natural disasters can happen anywhere, but your investment strategy should consider personal and property security, travel and liability insurance, and crisis response policies such as methods to pay employees or physically evacuating workers during times of political unrest, terrorism, natural disaster or pandemics. Protecting one’s employees and their interest can have an overwhelming impact on employer brand and employee loyalty.
Growth brings a Change in Regulations Rules and regulations that are applied when you initially entered a country can and will change over time. Remaining compliant in the territories you’re moving into can become a full-time job as things change very quickly as you grow.
The U.K. is a great example. In the U.K., if a company has one employee, the benefits and the pension that employers have to provide are far less than if the company has 50 or more employees. There are also significant differences in taxation and other employment laws—all things that need to be researched with reliable sources before you set foot in a new market.
As you grow, staying informed on the changes in compliance requirements is vital. Otherwise, you could be making your organization liable for a range of punitive damages—which can be crippling, especially for smaller companies—simply for not understanding what the specific requirements are for a company of your size.
It is also important to emphasize here that the bigger your organization, the more visible it becomes to the local authorities. If you’re a very small organization, you might fly under the radar, but mistakes can be costly as fines and penalties have the potential to be retroactively applied for years.
This means that, while smaller companies might have an easier time when it comes to legislation and compliance, as you grow you will become more visible to tax authorities and other regulative bodies.
The One key to Success in the Global Marketplace Business success takes many shapes and forms, and it’s almost impossible to identify exactly which factors will allow one company to thrive as others fail. However, as the world shrinks and new markets open up to international trade, one trait grows in importance: flexibility.
Approaching each new market with a flexible mindset—in essence, being prepared to adapt and change to fit in with the unique legislative, financial, social, and political requirements of each new territory—will give any business an instant advantage over more traditional, less flexible competitors. If you want to succeed in the new global marketplace, be prepared to learn, adapt, and grow.
This article is only a guide and is not intended to provide legal or tax advice to any organization, nor should it be considered legally binding.