[Podcast] Critical Global Expansion Checklist: Part 1

[Podcast] Critical Global Expansion Checklist: Part 1

In this podcast with partner Globig, we talk about some of the key elements to consider from ‘The Critical Global Expansion Checklist’ and things you’ll want to prepare for and understand before you expand your business into a new country. We’ve split this topic into 2 podcast sessions because there are quite a few areas for us to discuss. We won’t cover everything but you can download the helpful checklist in the resource section at the bottom of this podcast blog page.

Our guest expert is Linda Lim, Director of Client Services at Global Upside. She manages all aspects of international expansion and has over 20 years’ experience in international finance and operations starting her career with KMPG Singapore and subsequently in senior Finance management roles in China, Hong Kong, UK and USA.

Some of the topics we explore on this podcast are listed below.

Corporate Set-Up and Governance

  • Is a local corporate presence required for the activities in question?
  • If so, is a subsidiary required or would a branch or representative office be sufficient?
  • What is the timeline for forming a subsidiary, branch or representative office?
  • How many directors are required for the entity?
  • Are there any local resident director requirements? If not, any resident/local agent required?
  • How long will it take to get a bank account, and how will you operate in the interim?
  • How long will it take to get credit? Will your company representative be personally responsible for any debt incurred?

Regulatory Issues

  • Are export licenses required in order to “ship”
    the technology and/or products outside the US?
  • Are import/customs licenses required in order
    for the technology and/or products to be received by the new entities?
  • Are there any other regulatory issues?

Taxes

  • What are the tax implications of different entity formation alternatives (e.g., subsidiary, branch, rep office, etc.)? Would one entity formation provide a more favorable tax result than others?
  • What would be the most appropriate operational model to be utilized in this jurisdiction from business, transfer pricing and tax perspectives?
  • What would be the operational guidelines/ best practices in this jurisdiction to mitigate a taxable presence/permanent establishment risk for any other affiliate entity in this jurisdiction as well as taxable presence / permanent establishment risk in any other foreign jurisdiction?
  • What are the tax (corporate income tax, VAT/GST, etc.), transfer pricing, financial accounts reporting requirements in this jurisdiction and their associated deadlines?


TRANSCRIPT

Introduction

Welcome to the Globig podcast where we talk to international expansion experts from around the world to make it faster and easier for you to take your business global.

Hello everyone. I am Anke Corbin, your host today on this Globig podcast. Our hot international expansion topic is – The critical global expansion checklist part 1 which is going to be corporate setup, governance, and taxes.

Our guest today is Linda Lim, the Director of Client Services at Global Upside. She manages all aspects of international expansion and has over 20 years’ experience in international finance and operations. Starting your career with KPMG Singapore and then subsequently in senior financial management roles in China, Hong Kong, UK, and the US.

Linda welcome to the Globig podcast.

Linda:

It is great to be here and I am really looking forward to speaking about this topic today.

Anke:

Fantastic. So, you know, we are gonna talk about just those key elements to consider which are on the critical expansion checklist. I know that this a pretty broad topic and what I want to make sure is that we are just covering those kind of things that haven’t forgotten but things that are just so important to prepare for and understand before you expand your business into a new country. Now we have also split this podcast into two sessions because there are quite a few areas for us to discuss and we want to make sure that these podcasts are just so long. I won’t be able to cover everything but you are gonna be able to download the checklist in the resource section when we post this podcast.

All right, so after a company has to assess the market to verify that their company and products would add significant value and they have something special to offer in that market. There are really specific regulatory and logistical procedures to work through and we are gonna talk about those today.

So, let’s start our conversation with exploring the concept of corporate set up and governance and as I mentioned before you can download the checklist for a broader list from the Globig blog on this podcast. So, while each country is different and how they handle things so what do you find are some important things to prepare for in advance?




Corporate Set-Up and Governance

Linda:

For many countries it sounds simple, it is actually not that easy to set up a business entity and there are times, there are different unique requirements for various countries typically when we, you know, go through about clients, there are some checklist questions that we usually guide our clients through relating to corporate set up and governance.

So, for example, before anything starts, typically we will ask the clients whether they have a business plan or strategy in place. What is their business intention? What is their business purpose? Is it just a vehicle that they have created just to try out a new market or was there a larger plan that intends to develop this business, such as a huge recruitment plan away or here?

So these are the types of questions, even before we start anything to lay out the road map. We will usually ask our clients some of these questions and for example, we will ask them if you will prefer a simple branch set up which does not really have any tax implications or it can be just a rep office or it might be a full-fledged entity that they would like to incorporate.

So, these are the things that companies will have to think through before they make a decision or set up how they would like to, you know, branch out outside the United States or in certain countries they wanted to enter. And for a subsidiary, you know, as compared to a branch or representative office, typically it takes a longer time and it might not be as cost-effective. It’s a company that’s not planning to expand further that wanted to hire one or two headcount that may be a branch or representative office as an option.

There is also some corporate governance required in different jurisdictions in different countries. There are countries that might need a local resident director and some that do not need local directors. This varies for different countries depending on the specific local requirements that each country might have. There are also some countries they have requirements for shareholder meetings to be held, you know, locally.

There are some that can be conveyed digitally over the phone or internet; it depends on where it has been set up or where you had some structure and always, you know, I have to think through even before each company actually plans to set up the structure that they want.

There is also an important factor whenever that, once the entity is opened they need to make sure that there is a higher chance that you can get a bank account opened because a lot of times payroll needs to be paid off of a local bank and it is something that is actually not easy to do set up.

Especially of the entire time money boundary requirement, compliance, actually more in recent years especially more in Europe and Asia that they specifically requirements due diligence that they need to go through in order to even have, open bank account set up.

And I would say for you know set up usually for branch or representative office then on average it takes about. It can as fast as within a week or it could be as long as always depending on the time, the documents submitted, whether there’s any holiday conflict, you know, the local office agencies that are now open for operations on all days. Fact is that we are actually limit timeline of completion for a full-fledged entity set up, will take much longer time but some countries can be as far as for Canada you just need one working day but there’s also China could take as long as six months to a year depending on which industry, for each client as you enter into the market.

Anke:

Perhaps you know we have been seeing companies specially forgetting that they don’t really have credit and that they don’t have accounts in, and even that has taken up to a year  in certain markets because they don’t have all the background checks that they can do and that sort of thing and then all of a sudden they can’t pay payroll and things that actually have to, you know, go through local accounts so there are all sorts of things that companies just need to really do in sync to assume the right order and make sure that they prepare for it. Right?

Linda:

Yes, and it is actually quite common because many of our clients actually would not. It is actually their first time going into a market they have no knowledge of how this market works how the business model runs in that specific country and that’s why some times after entities have been set out, they actually have more challenges than they expected because it was not brought to their attention or it was something that was brought up after the company had been set up and it could be due to some compliance issue or it could be due to the directors not being there and not being able to sign some documents to open a bank account. So, these are the, you know, realistic challenges. Some of our clients have encountered and Global Upside actually helped them to overcome these obstacles in order for their business operations to start working.




How to Prepare

Anke:

You know when a company is thinking about expanding abroad they don’t always realize that they may not even be able to. They may not be in technology or in an industry that is not simple to jump through some usual hoops and do things that are outside of what they would expect for them to expand into a foreign country so let’s talk a little bit about that. What do companies have to prepare for just to even know whether they can even take their technology or services into a foreign country?

Linda:

Sure. So, companies work before they even branch out into a market into a new one especially. They need to check if they have an appropriate business license to actually run their businesses whether they have appropriate export, import licenses for their product, technology. So, for example, I have a client who is in the property market and operates fully online on the website. So basically that corporate outline if all done through, you know, the virtual online basis and there is no physical office to actually have to deal with the clients. They wanted to venture into China and China is one of the largest economies in the world and of course, their country is actually welcoming foreign companies to invest, but there were problems with even entering the market because of the nature of the business.

In fact this client who is in the technology business will have to apply what we call internet content provider license which we call in short ICP and this is a specialized license they will need to obtain or apply from the Chinese ministry of industry and information technology which actually allows you to run your business on China-based websites and basically if it is a very specialized license that requires, the only permit you to run business in China and without that basically they will not allow you to actually run e-commerce websites and the intention is actually they are trying to restrict what kind of content their residents are able to access through the website and that is why their restriction is very tight and they actually do all the diligence before they approve a license for this.

So, the whole process could still take time and it could take at least 3 months to a year depending on how fast the authorities approve it and how fast they provide the information and all these would add up to the time there. What’s the actual time that the client might have planned for their business to set and typically actually not many times actually meet the business plan that they have already in place. Also, we have other clients that are in the pharmaceuticals industry and again because it is a specialized industry pharmacy because you affect, you know, someone’s life they actually have more stringent compliance restriction for you to run a product that’s in the pharmaceuticals industry that it would actually acquire the medical industry compliance before they actually allow you to run a business there.

So, these are the things that a company has to actually take note before they even go into a new market. Whether they need an import customs license, as for export customs required. Whether there are any regulatory issues once they get into the market. So, these are the questions I encourage, you know, all companies to actually think through before they actually embark into a market that can be quite high quality from the start you know.




Taxes

Anke:

So, yes, while they may be able to expand rather quickly they might be better off in doing some of this homework really maybe even up to couple of years in advance and I know in our next podcast we will talk about IP and trademarking and all those of this takes quite a bit of time so on top of that with regulatory preparation, if you will, go as fast, probably not the right move but preparing well in advance makes a lot more sense.

You know one area that companies often neglect and then I think they feel the pain and that they need to button up and prepare for our you know how this will impact their current business in the area of taxes and how do taxes work in different countries, in different entities and then, you know, of course that really  important one is with their current businesses potentially could really impact them as well so you know lets talk a little bit about this really often neglected area that becomes really really significant when they look back once their business is moving fast internationally.

Linda:

Yeah, right, so those I agree. So, taxes, are definitely an important element that companies need to at least think through because once you done wrongly or perhaps not even done it, it can actually lead to a pretty heavy penalty because you know even for not being able to enter that country on a permanent basis. So that’s we have clients you know different taxes rules, this or that include value-added taxes, includes income taxes, includes payroll taxes so all have to be taken into the consideration, it’s not just limited to corporate taxes.

All these tax rules vary for different countries, each country has its own rules and I would say tax rules change constantly. There are rules that change, updated every year, the tax rate can vary, the tax deductions can vary, the criteria varies for different countries as well. So, for example, I have a client that being who entered into the Netherlands and just set out a full-fledged entity and they did not know that, you know, they need to register for value-added tax which we call VAT.

So, they start off asking us to help them to set up entity regards having a VAT registration because they did not think there is a need to. As you do not foresee them generating revenue in the first few initial years. The good news is to generate revenue but unfortunately because they did not set out the VAT structure much earlier at the beginning, the way that they have, you know, stopped sending invoices until the VAT is set up and that actually takes time and in the long run its actually affecting their business because they have kind of put their revenue or their clients will stop until the VAT structure is set out. So, this is one of the examples. we also have clients who have not done the tax returns properly.

For example, Brazil is one of the countries that are very strict about compliance. They have already had in place as mandatory for all companies to keep their local books in their local system which all the transactions in and outgoing are monitored by local authorities. So, there is no way, you know, they can get away without having to go through the local authority and with that they actually monitor every single transaction so you could call your victims, not on a timely basis or inaccurate data has been submitted, they are actually penalized for every single month thing they miss or for every returns that has been delayed in filing. So, all this actually affect the way that the business has been run and we have also heard cases whereby the returns are being managed wrongly because of the wrong entity set up. There are very different implications for tax, for different clients you know, for wrong entity set up forms. For branch office basically there is a direct extension for different companies, typically the parent company would take on the tax liabilities based on their home country and technically because of that reasons there is no tax implication for the new country that they actually rollout because all taxes and liabilities are being taken up by the parent company in the home country.

For a subsidiary, you know there are shareholdings, and basically, they have their own set of liabilities held locally. There is a huge responsibility for their entities to file their tax returns properly and on a timely basis, even though if it’s a foreign subsidiary being set in a foreign country and sometimes it really depends on the various reasons why the business is structured in a certain way. When a companies want to try out corporate set up whether it’s a branch or subsidiary very much on the business purpose of their new entity, is it long term is it short term, how much do companies grow, what is their recruitment plan. I would say if the plan is just to hire one to two headcount in that country, limit the business to in terms of expansion then I would say a branch office would be ideal because first of all, it is faster to actually to set up, so more cost-effective for a parent company.

However, if the company decides to hire more than five employees down the road and they will expect this market to actually grow especially over the years then it makes sense for them to have a full-fledged subsidiary being set up and set up accounts and then it makes sense for them to actually set up a subsidiary.

Anke:

It’s not that simple to jump from one to the other so as much information you have from the very beginning that it is pretty critical to consider.

Linda:

Yeah, so one of the key things to I would also like to highlight is transfer pricing. Many times, non-financial executives have not taken into their consideration because it’s a very technical topic.

It’s more tax and accounting experts that discuss more on this topic because basically, it takes care of a lot of intercompany transactions and many times transfer pricing is either neglected or even forgotten.

So even being one of the factors to consider but I would say transfer pricing is very important to even start an entity because it actually decides you know some of the tax implications. How much to mark up in that country, how much profit is being sent back to the parent company. These are the considerations that must be consistent with the company policy across the board vs something they customize for their country because you actually will run into the risk of being audited for non-compliance reasons so because of that, I highly encourage clients to actually think through that before they even decide to start a business in a foreign country.

VAT or GST or what we call value-added tax these are some of the things that they need to think through when they enter the new market. Their revenue size is will determine what kind of VAT or GST that you need to pour into the market. There might not be a need for registration if the revenue size is below a certain threshold so it really depends on the business plan, on how much they actually budgeted for these entities to grow in revenue size and determining whether they need to register for GST or VAT.

Yeah and even I imagine it is hard if that right very having, I know VAT management is. It just takes a lot of work so they need to prepare for ‘what does that look like for ongoing reporting, it isn’t just one time and it isn’t, it’s really complicated to manage all the different countries and all the different percentages and requirements.

Linda:

Yeah, that’s true and then many clients actually consult with tax advisors and think through the whole group pay structure why it’s the best structure they should have in order to optimize their tax position as a group basis vs individually for each country. So, for example, like for China, many companies would set out open in Hong Kong before they even enter into China because it is probably easier for them to manage talent in Hong Kong where they may do other recruiting to actually work in China or there are tax incentives for different industries in Hong Kong different from China.

So, these are the things that typically most companies will actually discuss with their tax advisor before they even put in place and decide which set up they will actually enter into a certain business market they like to.




Closing Thoughts

Anke:

Now there’s a lot to consider. Is there anything I know this is such a broad topic but is there anything else that business should know and on governance and regulatory and taxes. But now we are now going to have a second part of the podcast with other things such as IP and trademarking you know thinking about the privacy and other things that are on the side.

Linda:

Oh, I think we had a good comprehensive discussion today about that and I certainly will be open to discuss further and go over any questions we have discussed today.

Anke:

Fantastic. So, Linda thank you so much for joining us for this part 1 of this podcast series. It was a pleasure to have you as our guest.

Linda:

Well, thanks for having me on the podcast and if anyone has any questions about what we discussed today, feel free to reach out to me on my email linda.lim@globalupside.com.

Anke:

Fantastic. For our listeners don’t forget to join in for part 2 of this global expansion checklist and make sure then to join the free resource we have on globig.co. If you are serious about doing business internationally. The Globig international business, HR, data privacy connects you to great expansion services such as global upside and makes your day to day much much more productive so you can also subscribe to this podcast channel for more fantastic international expansion podcast.




Resources

Critical Global Expansion Checklist