United States: Managing Accounting And Tax Compliance In Foreign Markets

Global expansion is high in the agenda for many US companies but along with new opportunities it also brings tax and accounting challenges.

Faced with an increasingly competitive domestic market, many North American businesses are pursuing international expansion – often as a means to tap into the rapidly growing markets of emerging economies.

Our research shows 81.8% of Chief Financial Officers (CFOs) find opportunities to build market share as the key driver for offshore expansion. Almost one in two (48.5%) see foreign expansion as a solution to increasing competition in the home market; and 42.4% of CFOs still view global expansion as a way of capitalise on cost arbitrage through lower production costs.

Expansion brings significant challenges

Whatever the drivers may be, US companies setting their sights on overseas markets face multiple accounting and tax challenges. And some of the most appealing offshore markets can also be among the most problematic in terms of compliance.

The Global Benchmark Complexity Index 2015 ranked 95 jurisdictions according to their business compliance complexity; Argentina came out as number one followed by Indonesia, Colombia and the UAE. China, often seen as one of the world's most desirable markets for growth and expansion, is the fifth most complex nation when it comes to red tape.

Tax red tape and incompatible accounting standards

US CFOs are keenly aware of the challenges global expansion can bring. Our report, Corporate overseas expansion: opportunities and barriers, identified the main accounting and tax compliance issues facing North American businesses delving into offshore markets.

The most pressing concern is excessive bureaucracy in the local tax system. This is followed by problems matching local financial reporting rules with international reporting systems and standards. Rounding out the top three concerns are transfer pricing rules.

Top 5 concerns of US businesses when managing accounting and tax compliance issues in foreign markets

1. Excessive bureaucracy in the local tax system
2. Compatibility of local financial reporting rules with international reporting systems and standards
3. Transfer pricing rules
4. Level of payroll tax
5. Level of social security contributions.

Source: 'Corporate overseas expansion: opportunities and barriers' (Dec 2015) – Economist Intelligence Unit (EIU) sponsored by TMF Group.

Local nuances can impact business strategy

Despite the potential benefits of moving into new territories, coming to grips with the local regulatory, tax and compliance environment can be a time-consuming and expensive process.

As a guide to the complexity of foreign jurisdictions, especially emerging markets, Tanzania's taxation system is governed by over ten different Acts of Parliament. In China, accounts are generally classified by function as opposed to the international standard to classify them by their nature. In Thailand, companies are required to keep books and follow accounting procedures as specified in the Civil and Commercial Code, the Revenue Code, and the Accounts Act.

This level of complexity means that once established overseas, US companies can continue to face fresh challenges as they attempt to manage the many local variations that influence business strategy. Without careful consideration of local practices and customs, North American firms run the risk of commercial and reputational damage.

One in two firms tap into specialist support

That's not to say the accounting and tax challenges associated with offshore expansion cannot be overcome. There are a variety of approaches being taken to manage the hurdles associated with pushing into overseas markets.

US CFOs are especially likely to seek legal and/or compliance support from local governments and trade organisations such as chambers of commerce. Just under half of all CFOs are opting to take some of elements of international expansion in-house. A further 51.5% recognise the need to co-ordinate accounting and tax issues from both a central and local perspective, and so use specialist external services to complement their in-house resources.

Success can hinge on local experts

Partnering with reputable experts can make good financial sense. Relying solely on in-house accounting and finance teams to manage expansion can see these resources thinly stretched and enhance the scope for error. This is a particular risk for small to medium-sized firms, which may have far fewer in-house resources to begin with.

Navigating the challenges of doing business internationally can be easier and potentially more cost-effective when US firms partner with reputable experts who bring local knowledge and technical know-how to the table.

This valuable on-the-ground expertise can streamline expansion, ease the pressure on in-house teams and significantly reduce the possibility of errors in jurisdictions that operate in a very different way to the United States.

Need more information? Register for our 24 May webinar:Managing Corporate Accounting Compliance Abroad.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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