The recent volatility experienced in global markets has prompted U.S. businesses to reevaluate and refine their investment and growth strategies. This is visible in emerging markets like China, where a decrease in foreign investment is notable and a contributing factor to the country’s economic slowdown.
Yet, there are still bright spots in the global economy, such as emerging European markets and the fast-growing economies in Sub-Saharan Africa. The fundamentals of the U.S. economy are also strong.
We are seeing the same steady, albeit not spectacular, growth that the U.S. economy saw last year. Businesses are continuing to signal optimism by hiring and investing in the future. According to the U.S. Department of Labor statistics, the nation is creating an average of just over 200,000 net new jobs each month. A second signal of optimism is a strong investment in research and development and leading-edge technology, which are the building blocks for future growth.
Mid-market companies—long considered America’s economic engine—are also feeling optimism about their future prospects. The number of executive respondents to our 2015 Mid-Market Perspectives survey who were extremely or very confident that the economy would improve in 2015 increased four-fold – from 10% to 40% – since last year.
The survey also found that 44% of the 525 executives at U.S. mid-sized companies who were surveyed completed three or more deals over the past 12 months, compared to 22% a year ago. Forty-four percent of companies are also likely or very likely to purchase another company in the coming year. With transactions on the rise, companies willing to look outside the box should see this as an opportunity to venture into global markets.
For companies willing to invest the time and resources into carefully mapping out a strategy for international expansion, the payoff may be significant. This is particularly true for mid-market companies, which have traditionally shied away from globalization in favor of domestic transactions. However, navigating the multitude of policies and regulations across different countries can be daunting, and it can be easy to lose sight of the big picture.
If your company is ready to manage the associated risks, here are three recommendations to help mid-market executives prepare for possible tax, legal, treasury, and business missteps that can complicate global expansion plans – whether through organic growth or strategic M&A transactions:
1. Have a global tax plan that aligns with your overall business strategy and legal entity structure. As your company’s footprint expands, you will need to consider regulatory issues of doing business abroad, as well as tax laws in each new country. Trying to navigate through the maze of legal and tax issues, reporting obligations, and planning considerations can be challenging enough here in the United States. Trying to do it in a different country – possibly in a different language – can be even more so. It can be very easy to focus so closely on the steps necessary to comply with each country’s unique laws that you risk losing the forest for the sake of the trees. By keeping a global perspective, you view your overall tax burden as a single line in a bigger plan and are better able to view each individual country as a part of the whole effort.
2. Closely align your global business strategy and tax planning with your treasury function to effectively manage your cash flow. As a unified enterprise, you need to be able to fund the parts of your business that need it the most. As a global enterprise, you risk incurring significant tax costs for doing so across multiple international jurisdictions without a legal and business structure that is linked up with your cash-flow management. Your strategy for cash flow needs to address the requirements of each individual country and be viewed holistically in order to reduce incremental tax costs and increase value. Further, U.S. companies have a number of added complexities to consider, such as U.S. tax law that taxes a company’s worldwide income but mitigates double taxation with the foreign tax credit.
3. Invest in risk management to confirm that your global tax and business strategy can withstand scrutiny. You aren’t just expanding your business into new markets. You’re expanding into new cultural norms, political structures, and expectations for how businesses should act. There are risks inherent in any transaction, but those risks are multiplied as you navigate this new landscape. This is the step that trips up most companies when they first go global. By doing your homework and understanding the context of the country into which you want to expand, you can reduce potential roadblocks while improving your cash flows.
For instance, if you are exploring the option of acquiring a company in the European Union (EU), you are entering an environment with heightened sensitivity to corporate tax behavior. There are stricter rules and new regulations governing all aspects of tax and audit activities. While there are many valuable opportunities to be found across the EU, you risk running afoul of regulatory agencies without a firm understanding of the current regulatory environment and the substance that may be required to support tax-efficient structures. This could leave you facing not only costly tax assessments but a loss of reputation among the valuable new consumer base you were targeting in the first place.
Moreover, the Organization for Economic Cooperation and Development is in the final stages of its work – known as Base Erosion and Profit Shifting (BEPS) – to ensure multinational companies aren’t using existing tax laws to move profits to lower-taxed jurisdictions even though there is little economic substance in the arrangements.
Some countries have already adopted unilateral legislative changes or pursued tax assessment in adherence to BEPS principles. For example, the United Kingdom has introduced the diverted profits tax, and other countries, including Australia, have broadened or are considering broadening their general anti-avoidance rules. The extra scrutiny and transparency expected to result from these efforts make it increasingly imperative that your tax planning and cash flow strategies are closely tied to your business objectives, irrespective of whether operating in a deferral or flow-through structure.
The strength of today’s dollar makes U.S. companies more competitive in the international M&A market. Further, more countries are looking to incentivize foreign investment. In emerging markets, trade restrictions are being loosened and pro-growth incentives are being implemented. In developed markets, there is an eagerness to attract new businesses and curb the economic downturn.
By preparing effective tax planning and cash-flow strategies that are aligned with the overall business strategy, and dedicating time and effort to managing the risk inherent in each new location, you can increase the value of each transaction and achieve growth as a global enterprise.
Carl Allegretti is chairman and CEO of Deloitte Tax LLP.