Globalisation : Going Global

Pat Billingham is a former UK Inspector of Taxes and has been a partner in Ernst & Young for five years. Pat is Head of Foreign Direct Investment in Ernst & Young’s Entrepreneurial Services London Office. She has a wide range of experience in advising inbound clients on their tax affairs, including corporate structuring, cross boarder employee issues and UK tax compliance.

Pat’s team of FDI specialists consists of 60 financial and tax specialists, plus a group of experience project managers to facilitate the expansion plans of international businesses.

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There are a plethora of issues facing companies who decide to take the plunge and expand their businesses across international borders, not simply for those exporting goods or supplying services to overseas customers, but for those setting up a business in the overseas jurisdiction.

My own expertise is in the area of tax, but my experience with my clients demonstrates that tax is only one of the myriad of issues facing a company as it embarks upon global expansion. I have focused on four vital areas:

  • People
  • Property
  • Corporate structure
  • Local compliance

People

An area that often presents a major pitfall for the unwary is that of the right to work in a particular country. This is often forgotten, as the sales director is focusing on the business and finding the right person for the job, and no thought is given to work permits. While this is not an issue within the EU, if your star recruit is detained at the airport and sent back on the next plane, your financial forecasts may have to be revised ! Work permits must be resolved in advance of the arrival of the individual, as opposed to some of the other matters I will be commenting on later, where timing may not be so critical. 

It is also necessary to be aware of local labour law and employment practices. I work with a large number of US owned companies who find some of our European practices extraordinarily generous to the employee and who can alienate their key local recruit if they say so ! The practice of providing cars, pensions, length of holiday entitlement vary from country to country and again local knowledge and advice is essential to get it right.

Property

It is often the case that a business start up will have humble beginnings with a small initial workforce of maybe 2 or 3 people. It is clear that the investing company will not want to sign a long lease - Americans in particular are unused to the UK’s property laws and are not at all keen to commit to leases of 5 years or more from day one.

In the UK, it is now more common for short term commercial property to be available on terms much more akin to the US model i.e. weekly or monthly lettings of one person offices upwards. These vary in price from fully serviced offices with reception facilities to basic accommodation available for rent by the day or week that are fully electronically equipped single units with no frills. Such arrangements allow flexibility to expand or contract without taking on a long-term financial commitment.

Similar serviced accommodation providers in the residential market are also starting to appear in the UK market. Such accommodation is useful both for ex-patriats coming to the UK to start-up a local business or for employees seconded to a UK based client. Where the time in the UK is going to be too long for a hotel to be palatable, but too short to take on a 6 or 12 month residential lease, such serviced lets are particularly attractive.

Corporate structure

It is often assumed by companies that it is necessary to set up business through an independent legal person such as a limited company. This is not the case. All developed countries will have a local tax system that deals with how to tax foreign businesses operating in their jurisdiction. The double tax treaty network provides relief from double taxation where more than one country has taxing rights. However, if the overseas company is not carrying on an activity that renders it taxable at all, then no formal legal entity is required. For example, if there are 1 or 2 people on the ground locally, exploring the market and feeding back information to the home country, this will not generally give rise to a taxable activity. There are likely to be local payroll tax withholding requirements on individuals’ salaries, but no corporate income tax. This will not be the case if a local company has been incorporated. In these circumstances most Revenue gathering authorities will expect to see the company making a profit and will apply transfer pricing rules to make sure that it does. What determines tax nexus is activity - companies should avoid creating it by imposing an unnecessarily elaborate corporate structure over a simple local activity.

It should also be noted that there is often a link between the type of local entity used and the domestic employment laws. For example, you may find yourself being required to employ a quota of local lines to match which market your ex-patriat numbers, if you operate through a company, irrespective of your need for these local employees.

It is usually easier, to build a corporate empire than to dismantle it: make sure you examine the facts carefully with an experienced advisor before building your edifice.

Local Compliance

Irrespective of whether your overseas start-up is going to stay small or be your vehicle for flotation, you will need to comply with local filing requirements e.g., payroll taxes, VAT or similar sales taxes, property taxes, accounts and business registration. You may not create corporate tax nexus by doing any of these things, but you will run the risk of penalties for non-compliance. In my own experience, I have seen a flotation pulled at the eleventh hour when a very large exposure to tax interest and penalties was identified on employees’ travelling and subsistence expenses.

If you are going to float your overseas investment, you want to be the one to choose the timing, not the Revenue authorities.

The above looks like a minefield, but you should not be deterred from making your investment. Do take advice at the outset.

In addition to professional advice, which must be paid for, it is a good idea to explore the possibility of free advice from the country’s government or regional development agencies. For example in London, London First Centre ( LFC ) is the inward investment arm of London First. London First is an organisation, which is a public/private partnership whose aim is to promote London as a place to live and work and to lobby government on issues impacting on Londoners. LFC’s advice is free and they will introduce you to their members who can then provide specialist advice and expertise. However, you should be aware that such agencies are committed to promoting their own region. In the same way, tax advisors like myself, love their subject and will come up with a whole range of interesting possibilities; you should ensure that your main driver is your business. Your commercial aims are paramount: it must be the commercial dog that wags the tail, not the agenda of your advisers.

Good luck with the global expansion !


© Copyright Pat Billingham 2004

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