While companies expanding into new territories often rush to streamline operations, Emine Constantin explains why a considered strategy and a steady pace is the key to success.
Becoming operational from scratch in 20 countries within two months is quite a challenge.
Time and time again executives underestimate the complexities of international expansions, tripping up as they rush to achieve consistency and standardisation from day one. Overlooking just one area of compliance can lead to devastating consequences, including fines, suspensions and even long-term bans from doing business.
As the world begins to emerge from the COVID-19 crisis, and businesses reboot their expansion strategies, taking these factors into account has rarely been more important. Being thorough from the start and taking a measured approach – allowing six months to a year to get everything in place – will pay dividends.
Before the pandemic, TMF Group was called to help with a carve-out from a large pharmaceutical company that was nearing completion. The new entity had already designed its operational processes and was committed to a particular accounting software, aiming to be fully up-and-running within eight weeks.
The company was spread across Latin America, Europe and Asia. It was local-language expertise that brought them to TMF Group, since they thought the software would do most of the other heavy lifting for them. However, when we started working on the countries' different compliance prerequisites, it became clear that the chosen software was not equipped to deal with the complexities.
The client had to radically revise the aim of going live inside two months and prioritise facing, assessing and quantifying the non-compliance risks and potential costs.
TMF Group research shows 83% of jurisdictions impose significant fines for non-compliance; around a third might force a long-term suspension of business activity or licence suspensions; and a quarter may even prevent further business. The resulting reputational damage might well have a long-term adverse effect on profits.
The lesson is: don't rush into a deal without enough due diligence.
Three keys to success
For me, there are three key considerations: tax registrations, local compliance, and timelines.
Understanding tax requirements is paramount but, surprisingly, this is often overlooked or inadequately considered. In many jurisdictions, tax registration is run as a separate process and must come after full incorporation. In others, VAT and other types of tax registration should coincide with company incorporation.
In their haste to get going, some companies assume that the standard processes of their home country can be replicated around the world, but this is often not the case.
Understanding what needs to be done to meet local requirements and the length of time it is likely to take will influence many decisions: from choice of accounting software to the provision of whatever further information the authorities want.
Timing is everything
Official timelines for registering and filing tax returns are usually strict. In more than 60% of jurisdictions, deadlines for tax audits and filings cannot be postponed. These rigid timeframes highlight the necessity of a local presence and deep understanding of official requirements.
While digitisation is transforming reporting in many countries, making processes easier, more efficient and more transparent, complying can take a lot of effort, especially when the processes are frequently updated.
Tax registrations, local compliance and timelines underscore how critical it is to set up meticulously with everything in place at the right time before going ahead with operations.
With acquisitions or carve-outs the pressure to perform from day one can be even more acute and we recommend taking time to reach a more stable stage before pursuing operational streamlining and consolidation.
The COVID-19 pandemic left few countries in the world untouched, and many businesses irreversibly changed. As life goes on, and the green shoots of growth emerge, so will new opportunities to expand internationally.
Choosing a partner such as TMF Group can take away the stresses of having to provide information in a way that meets local requirements, and that can be converted into global reports for boards.
TMF Group has deep local knowledge and connected, on-the-ground experts, which makes for easier tax registration and compliance, smoothing the way to a successful expansion.
Failure to get this right could well result in significant fines in 85% of jurisdictions and long-term suspension of activity in 40%. In almost half of jurisdictions, company directors could face prison sentences.
In 70% of jurisdictions, local authorities prescribe the format of accounting reports which can change with little notice. An on-the-ground local presence, local knowledge and language skills are essential to get to grips with local reporting formats.
In more than 60% of jurisdictions, neither tax audits nor
filings can be postponed.
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.