Going Global: Business, Banking, Tax, and Accounting Considerations
If you’re thinking about overseas expansion or exporting products and services, you’re also thinking about how to get paid, how to protect your intellectual property, and how to simply operate internationally. Obviously, it’s important to understand the environment you’re entering. That’s because business, banking, tax, and accounting rules can all be very different than they are in the United States, and they often vary from country to country.
Multinational contracts can present a host of problems thanks to the many factors that can affect them. Even if you decide not to establish a separate legal entity, you will likely enter into a sales contract or hire someone to act as a contractual independent sales agent for your company. Therefore it is critical to understand and comply with local laws that can help ensure a valid contract.
For instance, some countries require contracts to be in their national language in order to be binding and enforceable. Consequently, any choice-of-law provisions will apply only if a valid contract exists.
Also essential is recognizing whether there are any overriding international or national conventions that might apply. Examples include the UN Convention on Contracts for the International Sale of Goods (CISG), Carriage of Goods by Sea Act (COGS), and Hague Rules. Such conventions can affect your international contracts, so it’s important to understand what’s mandatory and what you may be allowed to opt out of.
When selling or exporting goods, you should know the governing terms of the contract as well. Uniform commercial code (UCC) is generally the default law when selling domestically across the United States. In other countries, however, there can be localized versions of CISG. There are also internationally recognized standard trade terms known as International Commercial Terms (“Incoterms”) used in sales contracts.
All of these various governing terms may change the meanings of terms you’re used to and could alter your exposure. A term such as free on board (FOB), for example, could have different meanings under each of the above-mentioned governing standards.
Obviously, you will need to watch the currency denominations in your contracts and clarify what currency you’ll be paid. Some countries have strict foreign direct investment (FDI) requirements. As such, if your contract spells out payment in U.S. dollars, you may need to hire additional local government representatives to verify compliance with their FDI rules.
Another key issue affecting your multinational contracts and the items disclosed on your financial statements is the U.S. Department of Justice’s Foreign Corrupt Practices Act (FCPA). The act makes it unlawful to submit payments to foreign government officials for their assistance in obtaining or retaining business. The reality is that in some countries, “pay to play” is common practice, and who qualifies as a government official can also have a broader interpretation than you realize. Some of the biggest companies in the United States have gotten into trouble violating the FCPA, which only serves to reinforce its importance.
The Export Administration Regulations (EAR) are another set of applicable provisions enforced by the U.S. Department of Commerce and its Bureau of Industry and Security. The rules are not designed just for telecommunications, technology, or security companies either; they can apply to any manufacturer.
For example, you have a unique process or a patent, and you decide to begin manufacturing overseas using your intellectual property by setting up operations on your own or through a third party. Simply by transferring this knowledge, you’re essentially exporting intellectual property and thus could be subject to EAR rules.
While global markets are within easier reach for companies that wish to expand, banking in other countries hasn’t gotten any easier. Besides the complications of U.S. regulations, many countries strongly regulate the inflow and outflow of currency to foreign investors. For example:
- China has very strict FDI regulations. Its currency, the RMB, does not freely float; it is a fixed float. All capital injections are deposited in a separate bank account in China that generally needs an authentication audit by a local Chinese firm in years of balance change. Operating in China may require a U.S. company to have two or three different types of bank accounts based on currency uses and the country’s restrictions.
- India requires that many transactions be registered with the Reserve Bank of India.
- Brazil requires capital contributions and that loans be registered with the central bank.
As you can see from these examples, foreign jurisdictions often have unique banking requirements. Know what they are, so you can properly register money going in and avoid potential restrictions of money going out and back to you in the United States.
In addition to needing various types of accounts to operate in some countries, you will want to review and understand the covenants in your U.S. banking documents. Often documents supporting a borrowing base typically exclude items such as foreign receivables and intercompany receivables. With overseas expansion or exportation come more foreign accounts receivable in the mix, so you’ll want to ensure this doesn’t adversely affect your borrowing base. Or consider insuring your foreign receivables to satisfy your bank’s comfort level.
Realize that if you are going to guarantee a loan in a foreign jurisdiction or set up a foreign subsidiary that in turn is going to guarantee a loan in the United States, or when there is any cross-collateralization of U.S. and foreign assets, there are hefty tax ramifications. Understand what’s ahead and address your intent with your bank along with all upfront documentation and restructuring well before you make any moves.
Tax and Accounting Implications
The kind of entity you establish will certainly have tax repercussions and may trigger additional filing requirements. Yet no matter what kind of entity you choose, you will need to be diligent and cognizant of how your foreign and U.S. entities are structured and how they interact. The consequences could subject both your U.S. company and the foreign entity you’ve just established to taxes in the foreign jurisdiction.
Overseas expansion can be a significant investment and an important priority, which is why many companies send their top-performing employees to run operations. Recognize the personal tax impact on your employees and consider establishing an equalization agreement. It spells out who’s financially responsible for everything from foreign taxes to housing to the number of trips back to the United States. There are ways to structure the agreement to make things more tax efficient for all.
Keep in mind that sending employees overseas will likely trigger corporate tax implications as well.
Realize, too, that there are social security and pension implications from sending employees overseas. Canada and many European countries, for example, have mandatory pension programs. Depending on the amount of time your employees live abroad, they can elect to contribute to one country’s system over the other. Since many of those programs require matching company contributions, that can affect your cash flow.
Other impacts to your cash flow are the variety of local tax laws and registration requirements awaiting you, from business income or entity tax to gross receipts tax to branch profit tax. Even without a separate entity, you can still be subject to various sales taxes like value-added tax (VAT), goods and services tax (GST), or harmonized sales tax (HST; in Canada). Add to these import and export taxes, employment taxes, and duty taxes, and it’s clearly necessary to review and plan accordingly.
Because many foreign tax regimes are just as complicated and expansive as the U.S. system, consider creating a tax compliance calendar.
Be aware that many foreign countries require statutory audits. These often are required to be submitted to the country’s government, sometimes with a tax return. In addition, the ability to take tax deductions in some countries is dependent on proper documentation. That includes using proper invoices—in form and format. In some cases, specific invoices are required on purchases in Brazil and India. Fail to comply with a country’s required invoices and invoicing protocol, and your supporting tax return expenses could be disallowed under their tax laws.
When it comes to pricing cross-border goods and services, the concept of transfer pricing applies, and it varies by country. Basically, if you are going to do anything cross-border with a related party, most countries want you to operate at an arms’ length and conduct business as if you’re not related. That means a transfer price should be the same as if your two entities were unrelated and simply negotiating in a normal market.
Getting on Board With Overseas Opportunities
To improve your chances of international success, brush up on your documentation needs, be mindful of contracts, talk with your financial institutions, and consult your accounting firm to help you navigate the complex tax systems of foreign countries.