How to manage compliance and finance when you expand overseas

Many exporters I talk to have ambitions to expand their businesses overseas. However they all have one thing in common, as they are all worried about how they will handle the increased compliance. They don’t know about the complexities of recruiting and paying staff, and they are worried about the cost and difficulty of dealing with overseas taxes.

In this article I’m going to give you a step-by-step guide on dealing with compliance and finance overseas. My goal is to ensure no business is deterred from expanding overseas by a worry about compliance. I’ll show you how to manage all the HR, accounting, tax, legal and HR rules and regulations so you can focus on growing your business in new markets.

Step 1 – Agents and distributors

What if I rely on agents and distributors overseas?

If you are selling overseas entirely through agents or distributors, you generally do not have to worry about setting up a legal entity overseas. You also typically do not have to file overseas accounts or tax returns.

Why is this?

If a third party is conducting all your business for you in a country, it is the agent or distributor, not your business, who has to file their own accounts and pay their own taxes.

Step 2 – Setting up your own operation overseas

The limitations of relying on agents and distributors

The problem with using third parties is that they are an expensive option, both financially and strategically. In finance terms they take a large share of the value your sales create. From a strategic perspective, an agent or distributor owns your customer relationships. This prevents your organisation building up its own presence in an overseas market. Your market position is vulnerable if your relationship with your agent or distributor changes for any reason.

This is why many businesses eventually decide to set up their own sales operation overseas once they have enough scale to support an in-house sales team.

The implications for HR, Legal, Finance and Tax

It is a general rule of thumb that, whenever a company employs staff in a new country, they face a whole new set of local compliance requirements. The new compliance requirements include the following items:

• Registration as an employer
• Local country payroll
• Drafting local employment contract and complying with HR legislation
• Creating a new legal entity
• Corporation tax return
• Registered office
• Filing statutory accounts

This list can look very daunting. However there are cost-effective options for resourcing these tasks which are affordable and manageable for SME’s.

Step 3 – In-house vs outsource?

One of the first decisions you’ll need to make is whether to undertake these tasks in-house or whether to outsource. Your initial preference may be to do these in-house, particularly if your domestic back office operations are all in-house. However in-house is likely to be the more expensive option unless you have a large overseas operation.

Pro’s and con’s of in-house

You are unlikely to find a single person who is up-to-date on all the latest overseas accounting, tax, HR and payroll regulations. So the chances are you will need to hire more than one specialist to perform these tasks in-house. You’ll also have to pay a premium for qualified staff. One other factor to consider is whether you have enough career development opportunities to develop and retain an overseas recruit. It can be a good option overseas to hire a part-time resource if you can find them, as this is more affordable for you and the risk of staff turnover is lower.

Benefits of outsourcing

My strong advice is to outsource any tasks which your existing in-house staff are not capable of doing. There are many expert local advisors who can do this for you more cheaply than you can do it yourself. In my experience these outsourcers are not only cheaper than an in-house option, but they also provide a better compliance service. This is because they provide access to multiple experts in different fields, and because they have structured training programmes to stay up-to-date on local regulations. They are also good communicators who will tell you everything you need to know

Step 4 Selecting an outsourcer

There are a large number of options for outsourcing finance and compliance work overseas. I’ll outline these below with their pro’s and con’s, to help you pick the best option for your business:

Major accounting firms

These firms will give you guaranteed access to high quality local experts. They are easy to find and to contract with. The downside is that they will be expensive, particularly if you require any ad hoc work. Also the major firms are made up of fairly independent local partnerships, so the standards and quality of service can vary considerably from one country and city to another.

Professional Employer Organisations (PEO’s)

These firms are an alternative approach. They will legally hire your staff member for you, and they will carry out all the local compliance for your new hire. This can relieve you of many administrative burdens and it is a flexible way of getting started in a country. However a PEO is expensive if your operation grows above a small number of employees, because you pay a mark-up on the employment cost. Also a PEO often does not prevent you from requiring a legal entity because in the eyes of the taxman the employee is still acting on your behalf. Therefore you will still need additional accounting and tax services.

Intermediary services

Some firms offer an intermediary service, which means that they find finance and compliance partners for you in each country. This makes life simple for you, as you do not need to find a local partner yourself. Also, many queries go via an intermediary, so you do not have to speak directly to the local partner. The downside, yet again, is cost. Each intermediary layer incurs additional adviser time that you will pay for. Also it makes it difficult to get answers quickly and accurately, as replies to questions have to go back and forth from the intermediary to the overseas partner.

Referral service

A new service has started this year which is designed to make it easy for SME’s to find high quality suppliers overseas at very competitive costs. It puts SME’s in touch directly with overseas local partners in 50 countries for accounting, tax and payroll work. It reduces costs by cutting out the intermediary and by using independent firms with lower overheads. It is run by industry experts who give you bespoke advice so that you only buy the services that you require. They will also help you get started. This is a newer service so it is generally less well known. However I know all about this service because I have created it!

Next steps

I hope you have found this helpful. If you need any advice about what to do next, or if you have any finance queries of any nature, please contact me directly at [email protected].

John Galvin MA ACA, has 20 year’s experience in CFO and other senior executive positions with multinational Blue-Chips and SME’s. He regularly contributes to international finance events and publications. His company, Galvin International, www.galvininternational.com provides international accounting, tax, payroll, HR and legal services in 50 countries.