Globalization

With a relatively weak Canadian dollar in 2016, international acquisitions particularly in the US were challenging for many Canadian companies. Yet expansion abroad continues to represent an attractive means to achieve business growth, and many Canadian companies pursued such a strategy. We can expect these efforts to continue in 2017. The challenges will be numerous and varied; organizations intent on foreign expansion must go in well prepared. Thorough research and careful consideration will be key in accounting for variables that can affect expansion plans.

Issues

One of the biggest challenges of expanding abroad is selecting the appropriate target market. There are myriad factors to consider, including physical location, currency volatility, tax and legal environments, economic outlook, availability of local labor, and more. In certain cases, private companies may not have the appropriate infrastructure and resources needed to perform extensive due diligence on international markets and account for variables that can make international investments unprofitable.

Expanding into foreign markets often means complying with rules and regulations that are different from, and in many cases less transparent than, those in Canada. There are also Canadian regulations that could affect the success of a company’s expansion efforts, particularly when it comes to taxes. Executives of private companies need to understand and consider all sides of the tax equation both here at home and in the target market to determine if international expansion is feasible.

“Given our relatively small market, global expansion is a key driver of business growth and can be an attractive prospect, but making it work successfully requires asking some tough questions,” says Brian Brophy, a partner and Deloitte Private National tax leader at Deloitte. “Private companies must be able to move quickly to seize opportunities, but must also be aware of the risks and pitfalls that can make a difference between success and failure.”

Privately held companies can also take steps to address the increasingly complex regulatory environment in key overseas markets.

Opportunities

For private companies willing to perform the due diligence necessary for a successful international expansion, the opportunities are vast. Expanding into global markets can offer companies access to new customers, new labour markets, and new sources for materials. An expanded customer base may provide opportunities to explore different products or service offerings. Entering a new labour market may open the door to a pool of resources that can enhance local market economies and help establish a company’s reputation for supporting the local economy. Finally, identifying new sources for materials may lead to better efficiencies, less expensive manufacturing processes, and new supply chain options.

Privately held companies can also take steps to address the increasingly complex regulatory environment in key overseas markets. Tax leaders may be able to reduce their Canadian and international tax exposure through efforts such as increasing the use of foreign tax credits, adopting tax-efficient financing strategies, and effective utilization and repatriation of offshore cash. In addition, they should plan ahead to identify foreign initiatives that may affect certain important tax benefits. In some cases, private companies may want to consider restructuring their overseas operations to form more tax-efficient operating entities.
Privately held companies can also take steps to address the increasingly complex regulatory environment in key overseas markets.

Questions to consider for 2017

• What strategies are you using to educate yourself about new markets, and to understand the objectives of key regulators and policymakers?
• How are you planning to handle the transfer of knowledge from development teams to the production floor in international markets?
• Is your tax-reporting structure positioned to address enhanced scrutiny from outside regulators?

Author

Brian Brophy
Partner and National Tax Leader Deloitte Private
bbrophy@deloitte.ca