15th November 2018
Your company has reached stability and profitability. Growth has been steady and you’re established in the UK market. Where to next? It’s here where the lure of international markets comes in
These days, we live in a global economy. Smaller businesses can now expand into international markets earlier in their development than they might have in the past. And why not, the rewards are potentially enormous and can launch your growth to new heights.
The UK’s businesses have traditionally had a fairly red tape free route to international expansion: the EU. The UK is (until March 29, 2019 at least!) a part of the European customs union, and the movement of goods and people are unfettered.
That privileged access will still be the case if a deal is struck, but a ‘no-deal’ scenario is a possibility. In that event, international expansion -- even to our closest neighbours -- becomes a more complex, but still manageable project. It means that due diligence becomes more important, alongside the normal prospecting that accompanies international expansion.
“The steps to expanding your organisation overseas can unlock massive opportunity in terms of growth,” discussed David Cleverly, Propel by Deloitte’s Advisory Lead. “As a fledgling business owner try not to be put off by the scale of the task ahead. Yes, there are tricky pieces of legislation and cultural implications to navigate but by accessing expert advice and really committing yourself to seeing the task through, it’ll make the path ahead feel far more achievable.”
Overseas expansion is an exciting step, but it's also a daunting one as businesses encounter an unfamiliar commercial, regulatory and legal environment. Especially with a no deal European exit on the cards, let’s examine how British businesses can continue to flourish internationally.
As a business owner, you have an intense familiarity with your product and service. But until now you’ve operated in a UK context. Translated into another country and culture, new layers of nuance are added to your business and how you operate and communicate.
What negotiation entails, for instance, differs between cultures. Calling others by their family names in the UK is a friendly gesture, but doing so in Japan or Egypt is a sign of disrespect. Navigating these cultural mores is part of your personal journey as a business owner, and can be rewarding.
Other differences, however, can simply be frustrating and expensive (not to mention, entirely avoidable). Any new territory comes with its own compliance and regulatory challenges. Indeed, in some countries, like Saudi Arabia, many laws aren’t codified, making local market knowledge invaluable.
In other markets, like the US, the difficulties are more familiar. That is a notoriously layered and tricky tax system that spans over federal, state and local levels. For corporate income tax, there are filings required at federal, state and often city level. Add to that the recently implemented US federal tax reform and all 50 states updating their tax rules as we speak, the tax puzzle becomes even more daunting. Sales tax (America’s equivalent of VAT) may require returns in multiple states and this will expand quickly as the company grows.
Before moving into a market, you need a watertight understanding of local taxes - corporate income tax, sales tax, social security, legal and any other requirements - so you don’t incur fines and waste precious time and money. Your business may be able to benefit from reduced tax withholding rates on crossborder eligible payments under existing tax treaties, but you first need to understand if your business qualifies under the complex limitation on benefits clauses.
Navigating these new systems means preparation. The legwork can be done beforehand, and will make the experience altogether more seamless.
This isn’t only about tax, either. You need to choose how to finance and structure your overseas company. Generally, there are two ways to finance a subsidiary – capital contribution or intercompany financing (i.e. a loan). Debt financing allows for interest deduction and so is often utilised in intercompany setups, however, there can be complex tax rules for financing through intercompany debt.
Here's a quick checklist of what you need to consider when it comes to international expansion:
• Familiarise yourself with the culture and customs of the country you’re expanding into. What’s polite here could be an insult somewhere else.
• Find out what the tax and compliance requirements are. The big ones are corporation tax and some variant of VAT.
• Decide on how to finance and structure your overseas business. Generally, this involves some transfer of cash and assets between your business and the overseas entityif possible, consult an expert before you act, or, even better, consult while your business is still small and growing.
International expansions will change your arrangements in the UK, as well. As a relatively complex entity, with a subsidiary and inter-company transactions, it will be be necessary to consider whether your companies are required to adhere to the transfer pricing rules.
Transfer pricing operates by substituting ‘arm’s length’ terms in place of actual terms on transactions between connected parties, to ensure that taxable profits are not being artificially reduced.
It’s all about determining profitability for each company and within each country you operate. There are prescribed methods HMRC and other countries’ tax authorities allow, and your accountant or adviser can help you navigate these requirements, and shape the policy as your business grows.
Get in touch with the experts at Propel for support and advice if you’re thinking of expanding your business overseas.