Today’s guest blogger is Tim Bell, Chief Revenue Officer at People 2.0, a full-service Business Process Outsourcing (BPO) company offering a best-in-class universal worker platform and complete Employer of Record platform for deployment of a global contingent workforce. People 2.0 is an NPAworldwide Alliance Partner.
Deciding to expand business operations into another country is never done lightly, and the hard choices and requirements for careful planning continue once you enter your new territory. The secret to a successful expansion is remarkably simple: effective planning. Effective planning is the bedrock of your global expansion and should receive your organization’s complete attention.
As you set up in a new country, there are a variety of decisions to consider, each one having potentially significant effects throughout your organization. Decision trees can help you see the potential consequences and causal links between decisions within your company’s infrastructure. With multiple factors to consider, it is imperative to have all options clearly presented before making final decisions.
In this article, we look at the issues a company should consider when setting up in a foreign market—and how to avoid the common pitfalls when beginning to operate overseas.
Forecasting Your Global Expansion Costs
Asking the right questions, compiling the most relevant data, and forming a complete understanding of your new market are essential if you are to succeed in your expansion. Central to this is understanding and accounting for your global expansion costs. Address critical questions and issues to know exactly what you’re getting into.
Your financial team should be asking questions such as:
- Can your investment dollars be sent back to your home market or do they have to remain in the country in which you’re operating?
- What are the corporate taxation costs in your new territory?
- How expensive is it to relocate employees to your new office?
Your legal team should consider issues such as:
- Are you required to have a local representative as part of your local company ownership structure?
- Are the trade laws prohibitively complex?
- Do you need specific trade licenses to operate in this new territory?
- Are there specific employee insurance requirements?
Permanent Establishment
You must clarify whether your business activities within your new market create a permanent establishment for your corporation in this territory. A typical definition of a permanent establishment uses the following two tests:
- “Whether the corporation has a fixed place of business within the target country, as defined under the language of a specific treaty
- Whether the corporation operates in the target country through a dependent agent that habitually exercises the authority to conclude contracts on behalf of the corporation in the target country”¹
This is important because if your business activities in your new territory do create a permanent establishment, then your business is subject to a higher taxation. By avoiding the permanent establishment definition, taxation is applied at a lower rate, depending on any tax agreements or treaties between your home country and your new territory.
Legal Representation
Once you have a presence in another country, you will need to ensure that you have high-quality legal representation there. Many corporations make the mistake of assuming that their current legal representation will be sufficient for their new office. However, local legislation and legal requirements will almost certainly differ greatly from the laws and legislation back home. To ensure that you’re operating in a way that conforms to local requirements, your best protection is to partner with someone who has a thorough knowledge of local employment laws.
Some jurisdictions require that a foreign business must hire a local employee to be their fiscal representative. This can mean that, in order to register as a company or open a bank account in that jurisdiction, you are required to hire a local national who will then have a measure of ownership or fiscal responsibility above and beyond a normal employee. Placing that much responsibility in the hands of a relatively unknown foreign worker carries obvious risks.
“The Department of Justice and SEC have been very clear that if a company has not done reasonable due diligence background investigations on third parties it will receive no credit for having a compliance program when a third party working for it violates the FCPA.”²
On top of this, you will need a local tax advisory expert for the exact reason you need local legal representation: local tax laws require someone who understands the system to ensure they’re being followed correctly, factually and in the spirit of the law. This kind of understanding only comes with local experience.
Banking Implications
Setting up bank accounts always incurs additional costs. Some territories, for example, insist on an automatic investment of at least $100,000 on start-up, and/or a local representative in order to open the account. Additionally, you will need to consider how to compliantly move funds in and out of the country to ensure smooth operations, as some countries only allow certain types of payments, such as employer payroll obligations, to be made with in-country source of funds or funds from designated countries only.
As an example, in the UK, 90% of workers are paid via Bankers’ Automated Clearing Services (BACs), which is also the preferred method for making HM Revenue and Customs payments. In China, a local bank account is required to pay employees’ salaries. In the UAE, the bank must be approved by the Central Bank as outlined by the Wages Protection System and cash payments to employees are now illegal.
HR Cost Considerations
As part of your due diligence prior to moving into a foreign market, you may have acknowledged HR costs in your global expansion forecast. Ensuring that you have structured your HR process correctly may take significant extra funding.
Make sure you do thorough due diligence when filling essential positions in your foreign office: “it is likely that you have no Americans in your organization with the cultural, language and business skills to ask the right questions or understand the answers to adequately assess candidates in other countries. You need to build or hire that expertise.”³ Without that expertise, costly—and possibly catastrophic—errors can be made. If you intend to expatriate key managers to help jump-start your new market, you could find yourself in a growth quandary.
Employment legislation in a significant number of countries outside the U.S. provides more protection to workers than to employers. This makes it imperative for a new operation in a foreign territory to ensure that they have structured their HR processes correctly for that country’s legal requirements. It is quite commonplace to develop hiring, leave, and termination policies based on your home domestic market. However, these simply won’t work and can lead to:
- Non-compliant employment contracts that put your company at risk
- Terminations with expensive settlements
- Fines for incorrectly categorizing a worker status
Payroll Costs and Management
After your corporation is established as an employer in your new market, you must then register with the various local tax, social security, workers’ compensation, other insurances, and additional relevant third parties.
In certain countries, for example, a new company must register as an employer with the regional tax offices, then apply for an employer ID with the National Office for Social Security. Additionally, employers may be legally obliged to insure all employees for accidents on the way to and from work from the first day of employment, as well as all other work-related accidents.
Payroll processing cannot commence until employer registrations have been completed to enable social security and other third-party payments to be submitted without penalty. Additionally, new hires and terminated employees in many countries are required to be registered or deregistered within a specific time frame (e.g. 3–5 days prior to start date). Non-compliance could result in penalties for the company involved, and on-the-job accidents without appropriate registration could result in the company being directly liable for loss-of-work payments.
There are always costs associated with managing payroll, and these costs can become significantly inflated once foreign offices are factored into your payroll system. There are options to support corporations with complex, multinational payroll requirements: you can, for example, outsource to a local vendor or keep payroll processing in-house. Either way, you need to be aware of the costs that will accrue during your time operating abroad. And, it’s worth stressing once again, ensure above all else that those responsible for doing payroll in overseas offices understand the relevant laws and requirements.
Why Employment Outsourcing Could Be the Solution
Setting up an office abroad requires many separate and seemingly unrelated factors to be combined and considered together. When forecasting costs of your global expansion, it’s imperative to consider all costs together and ensure that every eventuality is covered when it comes to potentially hidden financial “surprises.”
This is why many companies choose to outsource global employment-related responsibilities to an Employer of Record (EOR). The EOR model is in most situations the best solution for growing companies seeking to engage talent in new markets quickly, compliantly, and flexibly. Companies may choose an EOR for short-term engagements, as an interim solution while establishing permanently, or as a long-term solution where the business activities do not justify the effort and expense of maintaining a permanent establishment.
An experienced EOR partner can be a wise choice in your growth strategy. You will be able to approach your new market with a clear idea of the costs and legal requirements of operating locally. Look for an EOR partner that is comfortable working in multiple territories and has local expertise. The right partner can help you navigate the complexity, and help you locally on the ground to jump start your business. Through their experience and understanding of local conditions, your new venture will be in a strong position to succeed, even in today’s competitive international markets.
If you’re considering global expansion, look to a partnership with People 2.0. We support a global network of clients in the Human Capital Services industry that are seeking services to achieve improved growth, profitability, and value. Call 888-270-3579 or visit www.people20.com.
¹. http://www.bakertilly.com/insights/what-is-a-permanent-establishment/
², ³. http://www.acc.com/legalresources/publications/topten/ttdadfucdbi.cfm
