The complexity of international markets can be daunting for many US companies. This is because every country has a different set of compliance requirements and tax rules. Tracking and adhering to these requirements can be a major challenge, the more the countries a company is in. In this article, we discuss some of the difficulties companies face in these circumstances and how they can overcome them. We also summarize one spectacular own goal.
Complexities of Global Compliance
Are you allowed to offer your product or service in the foreign country?
This may be an obvious question but it is surprising how often the question is not asked. Many major countries have limitations on foreign owned businesses operating in specified strategic sectors. The consequences of not doing this as the first step can be horrendous. A client of ours spent in excess of USD1m hiring employees and doing business in China without first checking its activities in China were allowable and was then forcibly shut down a year later.
What type of entity should you setup?
It is crucial to setup the right type of entity from the beginning. The choice is often driven by the nature of the activities of the employees you intend to hire and whether these are core or non-core activities of your business. Sometimes the choice is driven by customer dictate.
Most countries have a choice of 3 registrations – Representation Office (RO), branch or subsidiary, all in ascending order of weight. Non-core activities can usually be accommodated in an RO while core activities require a branch or a subsidiary. Sometimes the presence or absence of a double tax treaty can impact the choice between branch and subsidiary as is the case between US and Taiwan for example.
If the wrong choice is made or if the type of entity is not regularly evaluated as the local country operation expands, then again issues can arise. For example, a client of ours setup an RO in Mexico but then once hires exceeded three employees, needed to upgrade to a subsidiary. They did not want to incur this cost but four years later were deemed to have a subsidiary and were charged back taxes and penalties, all of which could have been avoided.
The importance of a comprehensive compliance calendar
Compliance requirements naturally span payroll, accounting, corporation tax and indirect taxes. However, they also include corporate governance related filings – many countries today have a minimum requirement to annually file details of the Ultimate Beneficial Owners (UBOs) of the business. There are also requirements related to the need to hold Annual General Meetings (AGMs) and record Board Resolutions especially on important matters. On top of this, if some employees are being given equity related compensation, this must be factored into payroll and there will usually be additional filings. Finally, in some countries, there are also HR related filings – a good example being the POSH (Prevention of Sexual Harassment) filing in India.
Depending on the country, some of the filings above depend on the year end of the business, the financial year of that country and sometimes even on regional filing dates that can vary.
Given the above, it is absolutely critical for companies to develop and use a comprehensive compliance calendar spanning all disciplines and customized for the specific circumstances of the business. Without this, companies will be solely reliant on local personnel to do the needful without any level of control or supervision from HQ.
Compliance is not just Calendar Based
Sometimes compliance can impact not just filings but how we do our work. I refer here to a business’s internal procedures when handling sensitive personal data. The European GDPR (General Data Protection Regulation) represents a formidable level of oversight, the non-compliance to which can generate huge penalties. It impacts companies operating in the EEA. The UK, while no longer part of the EEA, also has similar regulations. The laws covering GDPR have a convoluted history but companies now rely on other mechanisms for controls on the transfer of impacted data such as Standard Contractual Clauses (SCCs) and Binding Corporate Rules (BCRs).
A True Horror Story
A US company had 23 contractors in Brazil, some for as long as 15 years. The contractors were carrying out core activities of the business, but the company did not wish to incur the cost of setting up and operating a Limitada, which would have employed them. Instead, they asked each contractor to set up their own personal Limitada and they paid these 23 Limitadas every month. The contractors each had only one customer, the US company. The Brazilian tax authorities finally caught up and after a year’s investigation, they “deemed” the company to have a Limitada going back 15 years, levied back taxes and penalties and ordered the business to set up a Limitada forthwith. The total bill for all of this – circa USD2 million!
Summary
Navigating compliance in a global market can be tricky. However, with proper organization, focus, and expert external help, it can be handled well and liabilities avoided.