Doing Business Overseas Risks & Rewards
Operating internationally offers the potential for businesses to develop and expand, but this is not without its risks. Doing business overseas has its highs and lows, but can be intimidating, especially for SMEs and start-ups. It is important that a company researches the market it is trying to break into before making a decision.
While the risks of expanding overseas can be significant, the benefits can outweigh them if there is a clear and well executed strategy. This will be underpinned by rigorous research of the country, culture and people the business is ultimately targeting in a foreign setting. However, what is paramount is patience. Setting up any business overseas will take time to become successful.
Structuring of investment
Once it has been decided to commence operations in a new country, consideration needs to be given to how the investment should be structured. The optimum structure should seek to strike a balance between:
- Local company law provisions (i.e. company, branch, rep office);
- Transfer pricing requirements;
- Funding requirements for new venture; and
- Future exit strategy and remittance of monies.
Structuring of the initial investment may to a certain extent be influenced by local regulatory provisions. It may only be permissible for a new limited liability company to be incorporated, if it is with a local joint venture party. This requirement may not be workable for you. This could lead to deciding to operate by way of a branch.
Aside from the regulatory requirements, the decision to operate by way of a branch could potentially be beneficial from a tax perspective. If it is projected that the foreign operation is likely to be loss making, foreign corporate tax is unlikely to be a consideration. However, the losses may be taken into account for Irish purposes. This should reduce the taxable Irish profits and minimise cashflow implications. This would deviate from the treatment associated with a new company. The losses of the new entity would most likely be ring fenced and not able to be taken into consideration for Irish purposes.
Structuring is not only important for commencement purposes, it also facilitates an exit strategy. At its inception, a robust structure should accommodate the sale of the foreign business in an efficient manner. While it is possible to restructure at a later date, this is likely to come at a tax cost. This is due to the company having increased in value in the interim.
Relocation of employees
In order to integrate the international operation, consideration may be given to relocating key employees. This could be beneficial in helping to integrate the new venture and instil corporate culture. However, the employee issues extend beyond obtaining the correct visa. Consideration needs to be given to payroll tax issues, social security and tax filing requirements. If not correctly managed, the employee could be exposed to double taxation. Given Ireland’s ever expanding double taxation treaty network, it should be possible to mitigate a potential income tax exposure. The challenge however is with social security. Depending on the host jurisdiction, it may be necessary for local social security to be paid in addition to Irish PRSI.
If internationalisation is a new phenomenon, it is unlikely that there is a supporting HR policy in place. Its absence is likely to result in employee queries such as:
- will there be tax equalisation;
- what benefit will be provided (e.g. accommodation, school fees, car);
- will I be retained on the Irish PRSI system; and
- who will manage the tax compliance obligations.
As these are likely to be new, unresolved issues, their resolution is likely to come at a potentially significant employer cost if due consideration is not given. Having a clear HR policy in place prior to sending an employee abroad will generate employee goodwill as they will have certainty and this in turn will free up management resources.
As an alternative to employee relocation, local hires could be a viable alternative. The time and resources expended on finding the right candidate could be out weighted by the local knowledge and insight that person will bring to the business.
Successfully operating internationally requires a sound understanding of cultural issues. What works in the home jurisdiction may not work elsewhere and may even be interpreted as an insult. The challenge will be for your organization to develop an awareness of cultural issues and to disseminate and instill these insights into your employees.
As part of the strategic planning process, cultural differentiation's need to be taken into consideration. An ability to quickly and succinctly communicate in a manner which is congruent with local cultural norms, may be a source of competitive advantage. A firm needs to become progressively more aware of the foreign cultures when aiming for a successful future in an international business environment. Attitudes towards work and material possessions, entrepreneurship, willingness to accept risk, politics, religion, customs, and the role of the woman vary in different regions. How we react to and work with these differences are our challenges.
This article first appeared in the June edition of Accountancy Plus