By Larry Harding
Welcome to Going Global, a new CFOZone.com column geared to the needs and concerns of CFOs dealing with the challenges of overseas expansion. In this first column, I offer a brief primer for those new to international expansion. Future contributions will discuss specific accounting, legal, HR and compliance matters involved in the management of international entities. My goal is to offer expertise on optimizing efficiencies and containing costs, minimizing the risks associated with local non-compliance, and identifying best practice. Going Global will also provide information on countries with a high level of expansion activity and location-specific complexity. I welcome your feedback, and invite you to contact me at
or 443-321-3643 if you have questions or suggestions.
The potential rewards of expanding a business into foreign markets are well advertised, but the lure of reduced costs, increased efficiency and access to new customers often masks a different reality for the headquarters finance staff. Every country has unique rules and regulations related to core business functions, and it's easy to incur unexpected costs and run afoul of confusing regulations. Here are a few things to keep in mind as you plan for international expansion:
Start early. The right time to start looking at expansion is long before you need it to hit your top and bottom line. Take time upfront to discuss why you are going, research multiple markets, and know what you hope to achieve. Whether you are heading overseas for new market opportunities, tax reasons, proximity to customers or in pursuit of a diversified revenue base, a clear set of objectives should be your number one priority. Do your homework and avoid the risks and costs associated with permanent establishment (PE) snarls (most notably a local income tax bill against all sales to local customers), withholding tax stings or transfer pricing errors.
Get internal buy-in. To make expansion a success, you need finance, HR, sales, shipping and other departments working in sync and complementing each other's focus and skills. Every department needs to understand what other groups are striving to achieve, and they need to understand that managing international business can take a particular toll on the finance staff.
Establish the right legal structure. When selecting the structure of the entity, optimize flexibility for the future. Don't let the tail wag the dog by allowing tax considerations alone to determine your decision, as that can be expensive and administratively burdensome to support if it is more sophisticated than your staff can handle. It is far better to select a structure that is easy to understand, simple and cost-effective to support, grants flexibility for future growth, while avoiding compliance risks as you grow overseas.
Understand the full cost of hiring. Don't overlook the "all-in" costs of doing business overseas. You haven't run a proper "cost-benefit" analysis on your expansion project if you don't know exactly what your budget needs to be per employee. For example, costs for employer Social Security (or equivalent) obligations, income and business taxes, and costs to ensure compliance with overseas regulations can have a dramatically adverse impact on both the bottom line, and (importantly) your administrative time. Other employee costs may include company cars, fees for full-time contractors and mandatory pensions. In your cost-benefit analysis, you need to incorporate all of these variables, which differ from country to country or even region to region. Be especially mindful of contractor vs. employee status overseas as well, and bone up on employment law, or get help when hiring.
Know your VAT (value-added-tax) obligations. If you are going overseas to sell a product or a service, be aware of VAT's many ramifications. The 27 European Union member states have a harmonized VAT system, and the non-EU countries follow similar principles. Rates are high, from 15 percent to 25 percent, and there is little margin for error. Don't assume that VAT works just like sales tax in the United States (it doesn't), that VAT doesn't apply to non-European businesses (it does), or that VAT isn't an inescapable part of doing business in Europe (it is). Penalties for mistakes and non-compliance abound, so getting it wrong can be costly. In addition, the cash-flow ramifications of running afoul of import VAT when shipping equipment cross-border can be hugely adverse, even if ultimately these fees can be recouped down the line.
Manage your employees' expectations. It can be challenging to keep employees on the same page when they are scattered among several continents and different time zones. Employees hired locally in subsidiaries may have a different view of performance benchmarks, corporate culture and acceptable business practice. Expatriate employees may require more time to achieve their goals, and they may encounter unforeseen snags. Keep communication strong, and lay out clear expectations of responsibilities and objectives. Assume that your U.S. office will likely outperform your newly formed overseas offices, at least in the beginning.
Whether your plans call for just a few employees overseas or operations in multiple countries, a clear strategy will help your organization avoid problems, putting you in a position to take advantage of the myriad opportunities that exist in foreign markets. Take your time, do your due diligence and seek out proper advice.
Larry Harding is president of High Street Partners, a firm which assists corporate finance and HR professionals operating in foreign markets.