Traps & Tips When Venturing Overseas To Do Business
By James Tng
Posted: 21st August 2014 09:04
The world is now a global marketplace, and technology has accelerated this. The barriers that used to apply to accessing skilled labour and selling into a country have been broken by outsourcing and selling online. Cloud technology has pushed the envelope on what can be done remotely and businesses are being forced to adapt to this change.
Many businesses have seen this as an opportunity to venture beyond their shores and take the step to do business overseas. In this article, I will cover some of the mistakes we have seen from our experience as global business advisors, and some specific tips for businesses looking to come to Australia.
Trap 1 – What are the practicalities of winning work in the other country?
Every economy is different and it is important for businesses to understand the culture of doing business in the other country, as well as social norms and “how” business is done.
Well developed economies generally have a process established for setting up business structures and payment of tax. But the accepted business practice can vary from country to country. You cannot necessarily take your experience from home and apply them to the new market.
In some countries, there will be a prescribed percentage of local ownership that is required to win business. You may even need to consider sacrificing majority ownership in order to win large contracts from government bodies in some countries. Then there’s “know how” vs “know who”; partnering with a well-connected business partner in the new country can sometimes be the difference between failure and success (this can particularly be the case in some Asian countries).
How long will it take to setup your business structure? Is some countries, no local business structure means no contract. If there is a long lead time to setup, the business opportunity may have disappeared by the time you are ready to go.
Trap 2 – How will I get people into the country to do the work?
In my introduction I wrote about lower barriers to accessing skilled labour through the use of technology. However, we are in a world filled with people, and what technology has shown is relationships still matter (just look at social networking). You will need to contemplate having people on the ground doing the work and building the relationship with existing and potential customers.
This is one area we regularly see businesses fall into a trap. To obtain entry to a country you need a visa, and to work the hurdles can be even greater. Many countries have very strict regulations on working, and there are grave risks in sending someone into a country on a tourist visa if they are found to be working. We know of cases where employees have been “stopped at the border” and sent home. Imagine the situation where you have a contract to fulfil and the key staff member to perform that work has been sent home before even getting through the gate!
Before you set foot in the country get advice on what the correct visa for your staff is, and what the conditions are. For example, some business visas into Australia are valid for investigating leads and new business only, and the employee must depart after a short period of time. We have seen this visa misused and the employee refused re-entry (for a number of years), when immigration notice a pattern of this.
Trap 3 – What are the taxes in the country?
This is such a broad topic, because taxes can be income taxes, employment taxes, social security and taxes on business in general.
Understand the tax situation and obtain expert advice. When businesses fail to do this they commit to a country and are sometimes shocked at the end of a contract if they make no money (or even lose money). Looking from afar some businesses might look at a country and see they have a massive cost advantage if they can enter it, but afterwards realise the reason for the large cost gap is cost of living and taxes in the other country.
Trap 4 – Who do I know in the other country?
Business is about relationships. When you go to a new country your contacts base often starts at the ground floor again. Business relationships aren’t just those you have with customers, these are relationships with bankers, accountants, lawyers, relocation experts, marketing consultants, etc. The key advisors you rely upon to help you drive and grow your business, and provide that expert advice when you need it are no longer around you.
Faced with this dilemma most businesses resort to a “well-known name” to help them. However, in a new country operations are fledgling and whilst the “well-known name” might have been appropriate in the home country where business is well established, in the new country their cost structure may not be appropriate for the fledgling business.
Tip 1 – Connect with good advisors
Good advisors will assist you through the minefield, but more importantly, good advisors should have good contacts. A good advisor should know when they are out of their depth and can refer you to the best professionals they know.
Furthermore, coming to a new country means you need to establish and build a network of business contacts again. A good advisor should be able to help with these introductions; leverage off the advisor’s network.
Tip 2 – Do your homework
Understand your market before you dive in head first. Research and planning is never time wasted; rushing and cutting corners can cost you in the long run.
The cost and commitment required to enter a new market as a complete business unit could be significant, especially if you do not have existing customers. We have seen businesses commit to this and 18 months later when they are still looking for work and hundreds of thousands of dollars worse off, seriously contemplate closing operations.
If the option is available, consider agency arrangements where a local agent sells your product and shares the risk. You may make less profit, but you have less commitment to the market, the agent is using their network of contacts and customers to push your product, and you may not have created a tax presence in the other country yet.
In some cases this might not be possible, so another alternative could be remote business using technology, again not setting foot in the other country but demonstrating you can do the work (without incurring massive costs).
In Australia, agency arrangements can work for the sale of goods. Services are a different matter and remote working could be the alternative. When the market is established or you are certain there is a “contract on the table” you can commit to establishing an entity. Generally, not setting foot in the country is a good first step to ensure you do not have a taxable presence in Australia (but it’s not a guarantee).
Tip 3 – Carefully examine as many foreseeable commercial issues as possible
Having done your homework and hopefully landed some work in the other country, take advice.
How will you fund operations overseas? Loans from a parent or associated company, or equity? Will interest be charged? Will withholding tax apply in the other country? Are there limitations on what can be claimed as a deduction for interest (e.g. thin capitalisation)? These are the funding questions you need to ask.
In Australia funding via debt from an overseas parent or associated entity means withholding tax will apply to any interest paid. If the withholding tax is not paid, the tax deduction is denied. Furthermore, you must 60% equity fund (for large debt) and you must have undertaken a transfer pricing exercise to determine the appropriate rate of interest if the debt is from a related entity. If you borrow from a bank, you should also consider the value of any parent guarantees provided as part of the facility and value these from a transfer pricing perspective.
If there are start-up losses can these be used in the home country? What structure should be used to achieve that objective? What kind of limited liability structures are available? How long does it take to setup a structure? What minimum capital requirements are there? What registrations are required to start business?
The ability to claim start-up losses is a question in both the home country and new country you are doing business in. In Australia, use of a company in Australia will mean the losses are trapped in Australia. An alternative is a branch office that, for tax purposes, is considered a Permanent Establishment (PE). This is taxed similarly to a company, but being an extension of the overseas company, in some countries the start-up losses can be used. The practical issue with the PE option is the timeframe required for setup (which extends to months, vs weeks for an Australian subsidiary company).
The advantage of Australia is there are no requirements for local ownership, and no minimum capital requirements. You must however have a local director that is a real person (not a representative office or company).
If you are buying goods or services from a parent or associated company or will you charge for these expenses?
This is another transfer pricing consideration; what mark-ups will apply and how are you pricing these? You should consider one of the accepted OECD models for transfer pricing if you are doing business in Australia, and documentation is the key. Your transfer pricing study needs to take into consideration the available methods and what the most appropriate method is, as well as any other specific considerations for the transaction that might be unique.
Are there other tax and regulatory requirements in the country?
Certain industries require specific registrations before work can commence. Insurance coverage is another issue, you may not win the contract without an adequate level of insurance coverage.
In Australia the same applies, but we also have some unique taxes like Payroll Tax (taxing employers who have payrolls over a certain level), Goods and Services Tax (which applies to most businesses with a turnover of more than $75,000 per annum), and Stamp Duty (which, you pay not just on land, but also purchase of businesses, motor vehicles and in some cases shares in companies if there is a land component).
How will I get people on the ground to do the work? What are my employer obligations?
There are a multitude of visas under which an employee can come to work in Australia. Most will be temporary visas which give the employee and their family full work rights in Australia. As an employer you will have obligations under the visa in terms of minimum salary, and their general welfare.
Employers in Australia have a number of obligations. Superannuation at 9.5% must be paid for employees, workers compensation insurance is compulsory and benefits provided are also taxed to the employer (not employee like most other countries). Where we see businesses come unstuck is inadequate consideration of these costs and how they should be structured, before the employee and their family relocate to Australia. This can lead to grief when employers try to re-align salaries that were originally too generous, or trim benefits that are proving too expensive after taxes are considered. We have seen employee packages blow out by 100% because of inadequate consideration of this nature.
Employee retention is also very important, and businesses should consider relocation consultants who also focus on the settlement of the family (most times, it is for family reasons a relocation does not work out and an employee leaves or returns home early).
What government incentives are available to me?
The Research and Development concession in Australia is one of the most attractive in the world. In Australia a “cash out” of the tax break is available at 45%, which is far more attractive than a tax credit. There are some conditions, but we do see a number of overseas entities using Australia for research and development, in particular clinical trials due to our specialism in that area.
UHY Haines Norton provides accounting, audit, tax and business advice for companies that look to grow their business internationally. We combine local knowledge with regional and international skill sets. Through UHY’s global presence across 275 business centres around the world we help foreign companies establish their presence in Australia as well as Australian companies expand their operations to foreign countries. Our advisers can assist you with your market entry strategy, implementing a tax efficient structure, handling operational issues and taking advantage of tax concessions available. Our aim is to help you exploit global market opportunities, and minimise risks for your business in international markets