Compliance and Overseas Expansion
Today we have another Radical Compliance podcast, this time talking about the more mundane compliance challenges that companies face when expanding overseas.
This is on my mind for a few reasons. First, the economy is going strong in both the United States and Europe, as well as many other regions of the world. So international business is a logical step for many companies.
Second, international expansion looks easier than ever these days. A mid-sized, rapidly growing business might recruit a sales agent in a new market, sign a lease for some office space, rent some IT infrastructure through the cloud — and then you’re off to the races, right? .
Well, no. The reality is more complicated. Aside from all the prominent compliance issues in the United States (the Foreign Corrupt Practices Act, anti-money laundering, and so forth) expanding businesses also have compliance obligations in those new countries: registering as a corporation, preparing tax disclosures, employment law and compliance.
To explore how companies can navigate that maze, I talked with Lee Sheehan, based in London and vice president of compliance at Radius. You can hear the full podcast (24 minutes) below or on SoundCloud, and let me recap the highlights.
Expanding overseas is easier, if you expand recklessly. Connecting with potential sales agents and customers is easy from an operational standpoint. You can even deliver many services through “the cloud” or outsourced shipping services. So companies can be lured into thinking, “Let’s just test the waters with one sales agent to see if we make money” and assume that compliance with local business laws isn’t important.
As Sheehan says, however, governments are aware of that change. They know their 19th and 20th century tax laws aren’t well-equipped to track the activity of 21st century e-commerce. “That’s led to increasing focus on this area,” Sheehan says. “Individual countries are introducing more and more obligations: notification filings, annual filings, registrations, et cetera. And the cost of noncompliance has become higher penalties, and a much more draconian approach to the levying of those penalties.”
What’s more, governments know that small and mid-sized businesses are more likely to misunderstand or ignore their compliance obligations, and therefore they are targeting those firms more than large companies. (Which, presumably, have more manpower and experience to throw at compliance obligations.)
“The reality is that small and mid-sized businesses tend to pick up the tab in e-commerce,” Sheehan says. That’s because while a government might shape its international tax policy based on experience with large companies. “So compliance obligations are driven by those macroeconomic, multinational approaches… but the small and mid-sized businesses get targeted because they’ll have the same obligations, but not necessarily the resources or the knowledge.”
How can companies try to alleviate those burdens? To a certain extent, you can prepare templates and processes to automate the disclosure: preparing a set of local accounts, local tax returns, or VAT returns (particularly in the European Union). You’ll have payroll obligations; they can be outsourced, as many companies already do in the United States.
Alas, those routines only go so far. Companies will still need to investigate their obligations country by country, to find out which ones have a few more filings you didn’t expect. (Looking at you, France.)