But while new territories present plenty of new labor laws to digest, understanding local culture is equally important for buyers that want to get off on the right foot with new employees overseas. “Often, you can adhere to all the legislative requirements very carefully, but miss the one factor that employees in the office really care about,” says Perry.
In his experience, flexible work hours can be one such perk. “It’s easy for U.S. employees, in a car culture, to concentrate on arrival time as something important, but that’s not as easy when you’re dependent on public transportation,” as most UK employees are. “If you were to impose hours that were inconsistent with the train and bus schedules, for example,” he says, it could be a disaster.
4. Take Care with Taxes
Tax liabilities count among the greatest hidden risks of cross-border expansion, says Harding, who adds that “it often takes a while — up to three years — before such liabilities arise.” Tax issues fall into a couple of buckets, many of which a finance executive will be familiar with if the company already has a sales office or other presence in a country.
Transfer pricing, or the way the company prices the goods and services it receives from the foreign entity, is a major issue, and one that tax authorities are getting more aggressive about scrutinizing. In this case, “the proper documentation of the methodology is almost as important as the methodology itself,” says Harding.
While the documentation requirements vary by country, few companies have fully documented their positions, and the task only gets harder as the volume of transactions piles up, so Harding recommends starting early. Companies may also consider setting up an advance pricing agreement with local authorities to avoid later challenges, a strategy that is becoming increasingly popular.
Value-added tax (VAT) in European countries is another important topic to address early, since such tax is “hard to fix retroactively,” Harding says. (Rule number one is to never do business in Europe without a VAT registration number; rule number two — ideally and where possible — is to maintain that registration in only one EU country and clear all EU-based goods through customs there.)
One other VAT tip: explore the potential tax benefits of establishing a foreign subsidiary, rather than opening a branch office. The latter could face much higher tax liabilities.
Outside Europe, Brazil and India present particularly thorny tax requirements, “most of them not intuitive to U.S. finance professionals,” says Harding. Those countries, as well as China, also have strict rules about repatriating profits and other transfers of currency to foreign destinations, which can affect the overall tax picture.
And if corporate tax rules don’t offer enough complexity, potential buyers should also be aware of the personal tax implications for owners and executives of foreign companies. “Personal-compensation tax overseas can be significant, and you can create disgruntled employees very easily if you convert their tax status,” says PeopleCube’s Perry.