You've figured out that international expansion makes strategic sense for
your business and have established an ambitious plan for growth. Now
it's time to establish your global expansion strategy. But entering markets where
you have no experience operating feels overwhelming and knowing how to
move forward quickly is unclear.
You’re not alone. Figuring out where to start is often the most challenging
part of international expansion. It's important to keep in mind your
reasons for international expansion, as well as the benefits expanding
into new markets can bring.
Let’s explore some of the tactical steps you can take to put your plans
into action and what to consider when expanding a business
internationally.
Executing your plans for international business expansion
As you begin your expansion journey, you’ll realize there’s a long list of
priorities. It’s helpful to categorize your action plan by assigning
tasks to three main areas:
- Legal and regulatory compliance
- Taxes
- Accounting and reporting
Legal and regulatory compliance
Compliance varies significantly from country to country and is often the
biggest challenge companies face when they expand business into a foreign
market.
Most countries have a wide range of regulations at the local, state and
national level, so you’ll need a firm understanding of this legal landscape
before establishing an in-country presence.
How can you confidently tackle the complexity of international compliance?
Work with legal and HR experts who are familiar with the ins and outs of local
laws and customs and focus on the following steps.
1. Decide how you’ll set up in-country
This step is critical. When it comes to successful expansion, you’ll need to
maximize business opportunity overseas while minimizing operational
cost and risk. Finding the right balance starts with how you set up
in new markets.
Should you invest in a foreign entity? If so, what type of entity—representative
office, branch office, subsidiary? When you are setting up an entity abroad,
these are the questions you'll want to ask yourself.
Each option has its own unique costs, timelines and capital requirements
and will significantly impact how tax and finance infrastructure can be
initiated, so thoroughly research your options.
And keep in mind you may not need an entity to reach your expansion goals.
There are other options for market entry, like hiring talent through a
global employer of record (EOR).
2. Do your administrative homework
If you decide to establish a foreign entity, you ‘ll need to e valuate
license, tax and permit requirements in the area you're planning to do
business. In some countries, the amount of paperwork required to set up
operations can come as a surprise.
When opening a business in Brazil, for example, you’ll need 43 documents
and over 13 official procedures and timelines will likely be longer than you’re
used to in the U.S. Administrative offices close during the summer months,
between Christmas and Carnival , causing major delays for foreign companies
looking to operate there.
3. Evaluate how you’ll hire and manage local talent
Need further proof for why understanding the regulatory landscape of
international markets is so important? Consider the complexity of
international employment.
International employment contracts are typically 10 to 15 pages long compared
with two to three pages in the U.S. Why? Employee protections are much stronger
outside of the U.S.
To get employment right and serve the unique needs of global workers, you’ll
need resources and local expertise to uphold compliance and manage the
nuances of in-country laws and norms.
Taxes
As you expand business internationally, your tax infrastructure becomes
an essential element for success. In the words of Michael Patterson, Partner at Spencer
Fane, “you can make a lot of money in a destination country, but if you
didn’t plan it right tax-wise, it can really hurt.”
To effectively plan out your global tax strategy, you’ll likely need specialized advice from international tax consultants.
Additionally, it will serve your business to take the following actions.
4. Consider how your entity will relate to the parent company
If you decide to open a foreign branch, you’ll have a more straightforward
tax process. Creating a foreign subsidiary, however, can increase international tax issues.
On the plus side, a subsidiary protects your parent company from liability
when operating overseas and can have many economic advantages. But you’ll
need to understand international tax law and keep up with additional
filing and reporting requirements.
Here are some tax-related questions to work through when setting up a
subsidiary :
- How much of the subsidiary’s stock will your parent company own? (e .g., wholly owned or affiliate)
- How will your parent company elect to treat the subsidiary for U.S. tax purposes?
- What tax implications will your shareholders incur?
5. Develop a transfer pricing study
How can you achieve tax efficiency as you operate in new global markets?
By fully understanding the tax implications your business generates in
each region. Enter the importance of a transfer pricing study.
A transfer pricing study is a detailed economic study of your business,
service, products and intangibles. It serves as a planning tool for how
to structure your business overseas and can protect you in case of a tax
audit.
As you work through the process, focus on areas of risk. Which transactions
will have the most impact on your transfer pricing position? Track and
document the entire process in your general ledger.
Accounting and reporting
Maintaining timely and accurate financial reports helps improve both
large and small business decision-making and can differentiate you from the
competition. But regulators,and possibly investors, will also need access to performance data about your business, including:
- Annual accounts
- Consolidated accounts
- Quarterly updates
- Interim financial statements
- Other statutory reports
Working with international finance and accounting experts is advisable
(seeing a trend here?) because they can help you uphold compliance and
respond faster to market fluctuations.
But you should also add the following actions to your to-do list.
6. Re-evaluate financial systems and processes
Consolidated reporting is a challenge for many companies that are
going global. You likely need to re-evaluate financial systems and
processes to integrate your new subsidiary (if needed), meet statutory
reporting requirements, address changes in accounting standards (like
International Financial Reporting Standards used throughout the EU)
and manage the growing needs of your business.
For example, s ome jurisdictions require filing an audit on an annual basis
to meet statutory reporting requirements . You’ll need to adjust
financial processes to accommodate the local law .
7. Establish local banking relationships
If you’re planning to make payments internationally, like payroll for in-
country workers, you’ll likely need to set up a local bank account.
It sounds easy enough, right? Unfortunately, it can be more of a hassle
than you'd expect. Here's why:
- Large capital requirements may be needed
- “Know your client” procedures can be lengthy
- Finalizing an account is often done in person
Because foreign jurisdictions often have unique banking requirements, you’ll need
to establish local banking relationships to get a feel for what’s required to set up an
account and make transactions between entities.
Find key partners to help you expand business internationally
What’s the moral of the story here? Executing global expansion is
complex but not impossible, and you don’t have to do it alone—in
fact you shouldn’t do it alone.
Strategic partnerships are a valuable resource for helping companies
solve business challenges as they expand business internationally. Legal,
HR, tax and accounting partners not only help you navigate uncharted waters
and achieve your growth objectives more efficiently, but they also help protect
you from risk of fines and legal consequences for noncompliance.
A global employer of record is a prime example of a strategic partner. They understand
the ins and outs of local labor laws and norms and can protect you from non-compliance by:
- Creating compliant employment contracts for your workers
- Keeping you up-to-date with changing legislation
- Remitting employees' salaries, taxes and benefits in accordance with local law
If you’re interested in global outsourcing, but don’t know where to start, speak with a global solutions advisor
to learn if partnering with an employer of record is the right solution for reaching your expansion goals.
Schedule a free consultation
Meet with one of our payroll experts to discuss your current business challenges and how our solutions can help.