Globalization in 2017
Private company issues and opportunities
Tapping new markets and customers. Reducing labor and production costs. Realizing tax efficiencies. Gaining access to new pools of talent. All of these reasons factor into private companies’ desire to take their business global.
Today, a supportive economic backdrop and a strong dollar are adding to the business case for international expansion and pushing the decision past the tipping point for more private company leaders. Our annual survey of privately held and middle-market companies found a significantly greater proportion—40 percent versus 26 percent—expect to generate more sales abroad this year. In addition, a higher percentage—58 percent versus 42 percent—predict their businesses will have 11 percent or more their workforce located outside US borders.1
Key uncertainties await private companies that have not done business in a select overseas market before. The time and cost associated with setting up new infrastructure may vary greatly depending upon variables such as the local regulatory regime or the local talent pool available. In addition, moving money and other resources may be slower, more difficult or more costly than similar moves made in the domestic market.
One given is overseas tax authorities’ increasing focus on tax revenues and foreign companies doing business in their home markets. At the behest of the G20 nations, the Organization for Economic Cooperation and Development (OECD) finalized plans in October 2015 on base erosion and profit sharing (BEPS), and tax authorities around the world have been aligning their policies and resources to comply. For instance, many jurisdictions are enacting unilateral legislation in light of the OECD’s recommendations. Further, tax authorities around the world have enacted tax legislation that requires more information reporting as evidenced by country-by-country tax data reporting that is being required under the rules of various jurisdictions as early as this year.
This means companies doing business abroad will face extra scrutiny of their global operations, as certain tax authorities seek to identify companies allocating revenue and profits to low taxed jurisdictions without significant people, assets, or local country sales. Many private companies may be impacted by this push for additional transparency, as evidenced by the fact that 84 percent of the respondents in our recent mid-market survey said global trade is important to their company’s supply chains.
“In the past, multinational companies would be able to set up operations without additional requirements being in place for reporting to various tax jurisdictions around the globe,” says Mike Fonseca, a partner at Deloitte Tax LLP. “In an era of tax transparency, it really behooves you to consider tax as you align your supply chain to determine that there is sufficient substance and functions in any specific jurisdiction to justify earning profits there and to understand the nature of the reports that may be required to be provided to the tax authorities around the world.”
Despite current uncertainties regarding US trade policies, Fonseca sees little argument for ceasing to consider investing abroad. “While there are certainly challenges and changes in tax rules to be cognizant of, it may still be an opportune time to be able to reach broader markets to fuel growth and access talented labor forces that are closer to these fast-growing international markets,” he says.
One reason is the historically strong dollar, which is increasing interest to invest abroad, Fonseca says. Second, companies can address mounting skills shortages—the issue was cited by more than a quarter of the respondents in our recent mid-market survey—by accessing talent in other countries. “You’re seeing more companies employ shared service centers where talent is available to conduct various functions in a consistent manner,” Fonseca says.
A third driver is the burgeoning middle class in large economies such as China and India.2 With US economic growth currently averaging less than 3 percent, emerging nations may offer access to consumers who have more discretionary income, allowing companies to utilize improved marketing to them through the Internet.3
Finally, although the new BEPS rules place a higher focus on tax considerations, some local jurisdictions continue to offer incentives for foreign companies to locate in their markets. Grants, property and indirect tax holidays, or research and development tax credits, in addition to other incentives, may be available to businesses that commit to establishing operations in these locales, much in the same way that economic development incentives exist across the United States.
Still, Fonseca says it’s important for private companies to fully understand the nuances of operating in an international market before they set up shop to put processes in place that address compliance with local rules and regulations. “The concept of having your business and tax structure aligned to achieve your desired business and tax objectives is becoming more important in this more transparent environment,” he says. “Accordingly, companies should ensure that they are set up to comply with various local country tax rules and regulations.” One step private company leaders can take is to ensure their enterprise resource planning (ERP) systems are set up to comply with local country and international tax rules and help support their tax-aligned business model.
Questions to consider
- Do you have a sufficient in-market presence in your company’s overseas markets to stay in compliance with BEPS guidelines?
- Do you have a deliberate process in place to identify local rules and regulations that may impact your company’s operations in every overseas market in which it operates?
- Is your ERP system designed to help your business comply with local country and international tax rules?
- If your company’s expansion target is an emerging market, do you have an up-to-date picture of where the market really stands?
1 “America’s economic engine – Breaking the cycle,” Deloitte LLP, January 2017, https://www2.deloitte.com/us/en/pages/deloitte-growth-enterprise-services/articles/americas-economic-engine-private-company-middle-market-perspectives.html