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BUSINESS ABROAD
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Local Companies Need Accounting Assistance with International Expansion
A recent survey from an independent research and policy organization, The Brookings Institution, ranked St. Louis the fifteenth most internationally connected city in the United States. The survey’s findings, published in Peter Taylor and Robert Lang’s report, “U.S. Cities in the ‘World City Network,’ ” support what St. Louis entrepreneurs already know: the city’s businesses are growing. This growth has enticed, nudged and thrust St. Louis
companies into an unfamiliar, and often intimidating, ocean of foreign markets. To navigate the murky waters of business abroad, many international and soon-to-be international
St. Louis firms are seeking out local international accounting services for guidance.
In St. Louis, RSM McGladrey, a member of RSM International, the world’s sixth largest affiliation of full service tax, audit and consulting firms, handles hundreds of international accounting queries per year. Bill Major, Managing Director of International Tax at RSM McGladrey, heads the department that protects RSM clients’ against costly tax-related mistakes: “We work in a variety of mid-size organizations to do
specific tax planning when they encounter transactions that involve another party outside the U.S.”
Frank Lebihan, Director of International Services at RSM McGladrey, manages the office responsible for clients’ non-tax accounting concerns. “What our office is set up to do is centralize all of the inbound and outbound client projects that go in and out of the U.S.,” says Lebihan. Financial and risk management, internal auditing and transaction support number among his team’s tasks. One of the department’s duties, however, supercedes all others, says Lebihan: “A large majority of what we do is the external audit.”
 Frank Lebihan, Director of International Services,
RSM McGladrey |
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Both Major and Lebihan agree that their departments, and those of international accounting firms in general, are most effective when contacted before the client takes the leap into international business. If contacted early, an international accounting service can help the curious client plan the most profitable business structure in a target country. At RSM, this planning process begins with two questions, says Major: “The first question I ask [clients] is ‘Do you plan to make money from this partnership, and if so, what do you plan to do with the money?”
Many companies considering international status either fail to prepare a home for profits, or blindly follow the example of large, public companies that keep their profits off-shore, says Major. Companies should follow a fiscal plan tailored to their size and needs. When it comes to international profit planning, smaller companies, he says, ought to be wary of the recommendations of goliath accounting firms accustomed to doling out advice to equally-huge companies: “I can’t tell you how many times I’ve had to undo large firms’ advice
misapplied to mid-sized companies.”
In addition to the destination of potential profits, the size of potential profits is a determinant of a company’s level of international involvement report Taylor and Lang: “City businesses will enter markets at a variety of scales and will expand their activities at levels where they either make most profit or expect to make most profit. [sic]” An international accounting service can evaluate if expanding into a global market would be profitable for its client, then suggest the most advantageous global business structure—exporting, sourcing, joint venture, or subsidiary.
Exporting, says Lebihan, is a low risk, low profit way for domestic companies to get their feet wet internationally. Companies solicit his department’s help, he says, typically when their sales reach $15 million. The firms inevitably have myriad of questions: How do I finance receivables? What do I need to do for customs? How do I structure my distributorship network? Lebihan’s team is prepared to answer any exporting question, and more: “We can help [clients] with strategy assistance down to the implementation level.”
Once an exporter client establishes its business network, RSM McGladrey helps its customer take advantage of U.S. tax breaks, and avoid the tax pitfalls of international business. “One of the primary things that we first find [when working with an exporter client] is whether or not that exporting company is taking advantage of U.S. tax law-based incentives,” says Major. International tax accountants not only help their clients identify incentives, but fulfill the incentives’ requirements as well, which may be as simple as completing a specific tax return, or as complicated as establishing a company abroad.
U.S. exporters can also hire an internal accounting service to evaluate their tax posture in a foreign country. Unfamiliar with the tax laws of their foreign client’s country, many U.S. companies structure an exporting system that exposes them to
excessive foreign taxation, says Major. U.S. exporters can minimize their foreign tax liability by limiting their foreign presence. A domestic exporter can position a representative abroad, for example, says Major, but in order for the parent company to avoid foreign taxes, that representative may be restricted to
performing marketing duties only.
From a non-tax accounting standpoint, exporting and sourcing are similar, but opposite business structure says Lebihan. A U.S. exporter supplies a foreign country with goods, whereas a U.S. company that sources depends on a foreign entity to supply raw materials (sourcing) or fulfill a service (outsourcing). Lebihan’s team often establishes sourcing arrangements for clients, many of them manufacturers with few affordable, domestic resource alternatives. “A lot of our [client] companies have to source in lower cost countries,” says Lebihan. “These days it’s hard to ignore the pressures on manufacturers to at least source, either in Mexico or India, or outsource to China.”
When sourcing, U.S. companies’ should
follow a simple tax mantra, says Major: “Try to pay as little foreign transaction tax and income tax as one legally can.” Some transaction taxes, he says, can be passed on to a third party or absorbed to reduce U.S. federal income tax liability. Others are unavoidable. Major suggests that the U.S. firm that has hired a foreign company to fulfill its outsourcing read its contract carefully to assure it “doesn’t require the U.S. company perform a service in the foreign location that inadvertently causes the U.S. company to have the tax presence [abroad] that it was trying so hard to avoid.”
Any company receiving goods from or shipping goods to a foreign country should hire a lawyer, says Alan Witte, a shareholder at Polsinelli Shalton Welte Suelthaus PC. Witte, a corporate lawyer who has brokered numerous international business alliances, describes the post-9/11 global market as a sea of
suspicion. Though innocuous, international exchanges may require justification under U.S. law. A domestic chemical company solicited Witte’s legal services after one of its exports flagged a U.S. government’s terrorism alert. “We found that apparently it was a lubricant that was used in a high altitude spy plane years ago,” says Witte.
Even riskier than exporting and sourcing is the joint venture. “It can be profitable and have good results, but it can also be difficult to make work,” says Lebihan. Joint venture partners that share similar products and
business philosophies as well as trust, he says, usually form the strongest bonds. To increase a client’s chances of joint venture success, an international accounting firm will research a client’s prospective partner’s background and business record. “It’s a much slower and longer process than our clients like to deal with,” says Lebihan, but beneficial.
In addition to doing research, before a U.S. company enters into the partnership with a foreign firm, it must be aware of what the term “joint venture” means, and doesn’t mean, according to U.S. law, says Major: “In U.S. law ‘joint venture’ doesn’t really represent any specific type of arrangement.” A joint
venture arrangement can confer a company preferred supplier status or it may establish a 50-50 partnership. Tax liability, and consequently, the amount of international accounting assistance needed, says Major, depends upon the level of joint venture co-partnership.
Even in the most equitable and profitable joint venture arrangement, however, both business entities involved should stay abreast of the company’s operations and management. “Don’t just assume that your co-joint-venturer is taking care of everything for you,” says Major. An ill-defined joint venture can lead
to liability arguments, even the dissolution of
the partnership.
Joint venture liability disputes can be resolved before they start with the help of a strategic contract and an international
business-savvy lawyer, says Witte. The key to minimizing conflict, he says, is compromise: “It’s a question of negotiation and what you can get.” He suggests domestic companies create joint-venture contracts that are subject to U.S. law and signed in the U.S. Witte strongly recommends that U.S. firms have their foreign partners put up a letter of credit, a bond, or some other financial resource that can be tapped domestically so that the U.S. firm can get execution if a claim arises.
The most risky, and complicated, global business structure, however, is the subsidiary, says Lebihan: “When you set up a subsidiary abroad, you get into higher levels of administration and financial issues.” Even though RSM boasts accountants with matrix specializations—a tri-fold arsenal of foreign culture and language expertise, subject-specific accounting knowledge and U.S. culture familiarity—who can tackle tricky deals, Lebihan acknowledges that establishing foreign subsidiaries for clients has become more difficult in recent years. He blames Section 404 of the Sarbanes-Oxley Act.
The “new” trend of high-level corporate accountability is actually an old concept internationally, says Witte. In Europe, he says, accounting firms often have lawyers on staff to ensure compliance to the law. In many
foreign jurisdictions, corporate leaders, including executives of U.S. companies with subsidiaries abroad, can face prosecution and severe penalties if their company violates local statues: “There are a number of areas that you do have to be concerned about individual criminal liability in foreign countries that really don’t apply here.”
Often American subsidiaries encounter troubles abroad not because of poor compliance, but poor understanding of a foreign country’s business and social cultures, says Major. In addition to income tax, payroll tax, employer tax, and unemployment tax, many nations exact from businesses statutory payments that vary by country. “For example, in Italy,” says Major, “when [a business owner and employee] agree on a salary, the actual salary is 14/12 the amount you agree on because you are required to give an additional two months pay to cover things like vacation, holiday bonuses, etc.” Tax payment deadlines also differ by country. “If U.S. companies ever thought they had it bad, they should go to Mexico,” says Major. There, companies must file monthly tax returns detailing income, payroll and value added taxes. Language barriers can also be a problem, says Major, even if the foreign party speaks English. Like the word “football,” business terms like “audit” and “stock,” which in some countries describes a company’s inventory, have non-American definitions.
Business analysts, Taylor and Lang concede that initiating and maintaining an international business can be difficult: “The only sure thing we can say about globalization is that it has made cities and their
networks even more complex.” But they predict the future benefits to internationally-expanding cities like St. Louis will justify their present-day sacrifices. “As business conditions change, it is the more complex cities that are best able to weather
economic storms.” |
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