As technology continues to make the world seem smaller, more U.S.-based companies are looking overseas for untapped opportunities. International expansion has traditionally been undertaken primarily by large, multi-national companies. Today, small, private companies are increasingly venturing outside the U.S. But seeking overseas opportunities comes with a different rulebook. What are the hazards and pitfalls that companies may encounter when expanding internationally?
We spoke with Greg Brown, tax partner at Sensiba San Filippo LLP, to discuss why more businesses are considering overseas expansion and what they need to know before investing in international markets.
Why are more and more companies looking overseas for opportunity?
In recent years, we’ve seen locally based companies looking into international expansion for two primary reasons: increased sales opportunities and access to new talent pools. Consumer markets are expanding across the globe, while Bay Area technology companies are increasingly looking to India, the U.K. and Asia for specialized talent. In both cases, in order to increase their probability of success, company decision makers need to educate themselves or partner with those who know about the geographies they are entering.
What’s the first thing a company should do prior to opening a foreign operation?
Most businesses considering foreign expansion already have a good idea where they want to go and why they are going there, but their certainty isn’t always the result of thorough planning. It is not unusual for a business to make a snap decision about entering into a contract with a foreign customer or to hire a talented foreign employee without doing its homework. While the business decision may make sense, the company may not know the operational or cultural challenges and the tax implications of the decision.
Companies venturing out should use qualified advisers who have local connections and experience in the country where they are considering doing business. These advisers can navigate through the applicable laws and provide valuable advisory services to the stateside leaders. Many law and accounting firms have international resources and can often connect their clients with these advisers through global professional affiliations.
How can culture affect the outcome of an overseas venture?
Cultural differences are often overlooked during international expansion. Without prior experience in a specific location or the luxury of a local partner, it’s easy to miss cultural differences that could significantly impact the success of a venture. An understanding of proper manners and etiquette are important and should be valued. A local adviser or business partner can help you understand cultural differences ahead of time and potentially avoid embarrassing faux pas.
How important are the tax ramifications of international business?
The tax ramifications of operating in a foreign country are an important aspect of the overall business decision. Businesses should consider what level of activity would cause them to come under the laws of another country, and what they’ll need to do to ensure compliance. Even having a few employees in a foreign country may require the company to file tax returns and possibly pay tax. Establishing a subsidiary comes with additional requirements, such as transfer pricing agreements.
Moving existing employees to another country or having them work overseas will more than likely require them to pay foreign and U.S. taxes. It is normal for companies to enter into agreements with these employees in order to equalize the financial tax burden and benefits that result from overseas employment.
Any other advice you want to share?
Have a clear vision of what you want to do, educate yourself and your team, and use competent legal, tax and business advisers. Start by talking with your lawyer and accountant. Many professional advisory firms have experience in foreign operations and very useful contacts in other countries that can help ensure that your venture has the greatest possibility for success.