Imagine this scenario: It has been three years since you launched that killer product in the US. You’ve experienced exponential growth in sales. Your market research shows that demand for your product is strong in EU and ASEAN countries, and you consider expanding globally.
Make Sure You Understand Challenges Associated with Expanding Globally
Before you hop on a plane to London and Singapore to start looking for office space, evaluate and understand challenges associated with expanding globally. The main challenges associated with global expansion include the following:
- Establish a foreign entity to conduct your operations
- Hiring employees in foreign countries creates immigration and other compliance issues
- Payroll processing brings complex national, provincial and local employment tax issues
- Regulatory reporting and compliance
Entity Setup – Choose the Best Structure and Location
With regards to ease of forming a business entity, the World Bank’s “Ease of Doing Business Index” is a good place to start. Factors include costs to form an entity, capital contribution amounts required, and a foreigner’s ability to own and control a majority of shares in the entity. For example, in Hong Kong (4th easiest) there is no restriction on the citizenship of shareholders. Contrast this with Thailand (46th easiest), where, other than some exceptions, not more than 49% of company shares may be owned by foreigners.
Other important considerations relating to entity setup include the following:
- Some specific regions or provinces within a country may offer special tax incentives if you locate your company there.
- Make sure the industry you are entering is not restricted to foreign entities or individuals.
- If you plan to manufacture or conduct other business operations, does the targeted area have a well-trained, well-educated employment pool?
- Do labor laws enable you to obtain work visas and related permits for your staff to work in the target country?
How Do You Hire in a Foreign Country?
As you will be expanding globally in a new country, you will certainly want to transfer a core group of trusted employees to lead the ramp-up of operations and grow the business. These trusted members of your team will be “foreigners” in their assigned local country.
As a general rule, “foreigners” are required to obtain a local work visa or work permit in order to work legally. Each country has different regulations for companies which want or need to employ foreigners. General considerations for working in most countries include the following:
- Are the roles targeted for foreigners eligible for employment for the foreigner? Some countries preserve unskilled labor jobs for citizens and such jobs may not be eligible for foreigners to hold.
- What is the minimum salary required for a foreigner performing a defined role? This may vary depending on the home country of the foreigner.
- How long is the work permit valid for?
As you expand globally into a new country, you will certainly be hiring local employees to work for the newly formed entity. You will need to understand and comply with labor laws associated with these employees.
Is a minimum wage or living wage in effect?
What is the standard work week?
Are social security and/or pension schemes in effect?
Is medical benefit mandatory?
Is workers’ unions or works councils mandatory?
How do I procure workers compensation insurance locally?
Are there minimum annual vacation requirements locally?
What are severance laws in effect in the event of employee termination?
Payroll Processing – More Complex than May Be Apparent
Expanding globally opens a whole host of complexities from a payroll processing perspective. This is especially true for those “foreign” employees you transfer to the new country to work abroad. Let’s use Chris as an example. Chris is Product Manager of your killer product, and you’ve asked her to serve as Managing Director of your new overseas operation in Singapore. Chris has been working with your company since the beginning and has 7 years of continuous service with your company.
Consider the following implications with Chris and others like her who you will reassign abroad.
- Chris’ current salary prior to her transfer overseas is well above the required minimum wage of $3,600 SGD per month (approximately $2,600 USD per month) to support her work visa.
- Chris’ 7 years of continuous service all contribute to pension and stock option vesting.
- Chris benefits from the maximum employer contribution to her 401K plan.
If you simply transfer Chris to the new company, Chris could lose benefits associated with her time of service and related vesting. What some sophisticated companies do is pay the minimum salary to support the work permit onshore in the local currency. And the balance between the total agreed to salary and this minimum is paid “offshore” in the US in US Dollars. Related US taxes are withheld and deposited, and time worked is reported accordingly, resulting in no gap in continuation of service. Note, however, that this is the classic “split payroll” mechanism at work. While it is beneficial in helping the employee involved retain continuity with the home company, it creates complexity, partly due to the taxation impact in two or more jurisdictions.
Such structures need to be reviewed carefully with legal and accounting professionals both in the new company and in the US-based company.
In addition to specific implications associated with Chris and other “Foreign” employees, other considerations include the following:
- What national, provincial and local employee tax withholdings are required?
- What national, provincial and local employer taxes are required?
- What is tax employee tax reporting required in the new country?
Regulatory Reporting and Compliance
As with any business expansion into a new country, you will find a host of regulatory reporting and compliance requirements. This is best handled by qualified professionals in the country where you’ve chosen to expand.
Blueback Global can help you will all these challenges of expanding globally
Your primary objective is extending the reach of your killer product overseas. You need to develop and implement marketing plans to extend the brand in your new markets. You will also be busy recruiting and hiring the best talent you can find to expand into these markets.
Blueback Global keeps abreast of the latest developments in countries one might consider expanding globally. Are there any new tax incentives offered in specific countries or regions that make it more attractive than in the past? Perhaps there are major changes in employment and immigration laws which have a significant effect on the viability of employing foreigners.
Why spend energy and valuable human capital on administrative, legal and accounting tasks. And it’s impractical at best for you to keep abreast of new trends impacting foreigners looking to expand into a new country.
Blueback Global’s professional services team possesses the breadth and depth of experience to cover all the bases for you in a most professional and cost-effective manner.