For cross-border companies managing their legal entities in multiple jurisdictions, an integrated, global and multi-disciplinary approach is the only truly secure route to compliance and good standing.
The pressure on general counsels (GCs) and their teams was the stuff of legend long before Covid-19 made their world a much more complicated place. Over the last few years those pressures have ramped up.
'Are we up to date?' used to be a perfectly reasonable question in entity management. Now it is unanswerable for most cross-border businesses.
GCs are trapped between a rock and a hard place. They need to expand the frontline business support they provide for acquisitions, restructurings, litigation and contracts, but their departmental budgets and staff numbers continue to shrink.
Something has to give. Too often that something is entity management. Boards need to be sure that the underlying global tax and corporate governance risks of the business are under control – but increasingly they simply aren't getting that assurance.
A kaleidoscope of local oddities
How can they be reassured? The good standing of every entity should be reviewed at least once a year. For most in-house legal teams that would leave no time for anything else – and still they'd fall short.
Making sense of today's fast-moving kaleidoscope of global trends, local idiosyncrasies, cross-border clashes and left-field complications is simply too difficult. Look at some examples of what they are up against.
- In Brazil, incorporating companies must register with every level of government – federal, state and city – and pay different taxes from one city to another and state to state.
- Foreign-owned businesses in Indonesia can unlock extensive business incentives and support but first they have to identify precisely, from a list of 386, which 'regulated sector' they fall into.
- In Colombia, if a company makes a single transaction in a particular municipality it must also complete a local tax filing. If it operates nationally that means more than 1,000 separate tax filings, one for each municipal sub-jurisdiction.
- High-tech Taiwan still loves tradition when it comes to incorporation – multiple application processes, in-person opening of bank accounts, official documents stamped with a physical company chop and paperwork translated into Mandarin Chinese.
- Even when the state bureaucracy has been streamlined, commercial bureaucracy can still be waiting to bite you. In Malta, Hong Kong and the Netherlands, where it takes a week to incorporate, opening a bank account from abroad takes more than six months.
Accounting and beyond
If entity management was purely a matter of narrow legal compliance, in-house teams might have a fighting chance – but it isn't. Complex local accounting, tax and HR rules often take corporate lawyers (not to mention their local advisors) deep into unfamiliar territory.
You might think global accounting standards like IFRS and US GAAP have conquered the world by now. Think again. More than half of all jurisdictions still insist that firms stick to a special, local version of GAAP. Nor is this a problem limited to smaller jurisdictions or commercial backwaters. France and Turkey are still challenging destinations for foreign investors because of their mix of complex accounting/tax regimes and strict local language requirements.
Somewhat counter-intuitively perhaps, even the move towards a global minimum tax rate will add complexity because cross-border companies that fall outside the OECD's definition of 'large' will still need to review and monitor their activities in low-rate jurisdictions.
Meanwhile, the target won't keep still. Normal cross-border business activity keeps adding new entities and unfamiliar jurisdictions while a constant tide of new laws and regulations steadily sharpens the teeth and extends the reach of the regulators.
Even though the EU, OECD and US are the engines of global regulatory trends, the way a jurisdiction implements them often adds a local twist or two, ramping-up complexity and uncertainty to keep foreign investors on their toes.
Widely-adopted examples include:
- Mandatory Disclosure Rules (MDR), requiring a legitimate business purpose in each jurisdiction
- automatic tax data sharing between jurisdictions under Common Reporting Standards (CRS)
- beneficial ownership registers, now in three-quarters of jurisdictions soon to include the US with its tough Corporate Transparency Act (CTA)
- OECD digital economy taxation rules are now domestic law in more than 60 countries but with widely differing detailed provisions for registration, coverage, non-compliance and tax reporting.
Tougher regulation of digital assets and cryptocurrencies, workplace whistleblowing (EU) and businesses reporting of climate risk (US) are all on the way and will doubtless show a similar pattern of local variation.
Just the odd hiccup?
Regulatory jeopardy often comes in concentrated form. The hardest to navigate jurisdictions are frequently the most punitive. Is your company among the many cross-order businesses already showing signs of stress?
- If you are already late filing things like company accounts, your existing processes clearly need attention.
- Beyond the usual random checks and surprise audits, if regulators' requests for extra information are becoming more frequent then alarm bells should certainly be ringing.
- And if you are already receiving penalties, the situation is urgent. Company fines are often just the start. Worse could be just around the corner.
From the regulator's point-of-view, whether you have assumed too much or understood too little is beside the point. Individual directors can frequently end up in the firing line. Commercial penalties can extend to total exclusion from the local market – as Uber in South Korea learned to its cost.
So what's to be done?
Muddling through while hoping for the best is a surprisingly common tactic – and a formula for disaster. Regulatory and legal failure becomes simply a matter of time.
Seeking help at the jurisdiction level is also common but brings its own dangers and disappointments. During acquisitions or expansions into new jurisdictions the need for local know-how can appear self-evident. But soon the resulting patchwork of single-jurisdiction providers comes to look a lot like a new version of the old problem you were trying to solve.
A fragmented approach inevitably contains so many gaps in its fabric and disconnects in its processes that compliance problems still fall through the gaps and the penalties keep coming. Equally inevitable are the duplications, overlaps and inconsistencies that continue to drain executive energy and inflate costs.
Worse, of course, is the fractured view still provided. GCs and legal department leaders continue to struggle with competing voices, perspectives and cultures. The transparent, certain, consistent compliance risk information they really need – information that can command the confidence of the business and its board – remains a dream. They can be forgiven for shedding a tear.
An answer to the unanswerable
The entity structures of a business are its legal foundations. Keeping them strong and well-maintained is no place for a piecemeal approach of patchworks and sticking plasters. Calm, rigour, consistency and order is what's needed – and delivered in a way that doesn't drain the life out of the company's own, precious legal talent.
There is a more elegant, holistic way to do this. It can bring simplicity, consistency and timeliness across the full range of entity management support services and in any, or every, jurisdiction.
And, fortunately, it is just a conversation away.
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.