Going Global: Risks and Protections for SME CEOs to Consider
Despite the world economic recession, small- and mid-sized companies are “going global” at an earlier stage in their development than ever before. Expanding overseas involves the careful consideration of risk and cost. What are those potential hazards? And what can be done about them? There are several issues that CEOs should consider when doing business internationally. Several critical ones are outlined here.
June 20 2013 by Shan Nair
From a financial perspective, there is a risk of non-payment to companies in global business transactions, which can occur if, for instance, a business goes into liquidation. As a result, it’s important to carefully screen your customers/trade partners and, ideally, have them forward purchases in a compatible currency. For example, a maker of wireless networking equipment sold to a major Indian multinational that simply did not pay the last stage payment installment and declined to respond to our client’s attempts to receive payment.
Further, executives should be aware of increased regulations by tax and VAT authorities.It’s very important to have proper documentation of taxes on goods and services. In particular, it is essential to consider the rates of VAT and probability of increases in this rate in the current climate. For example, recently Spain announced an increase in VAT rates, but did not clarify the amount of the increase.
Case in point: a software and support services provider sold performed its services on EU soil and, as such, were subject to VAT. But the company recognized all revenues in US dollars and did not realize that some of the revenues were “VATable.” The company’s customer underwent a VAT investigation and from this the VAT authorities, who were in Italy, determined that all of the software company’s sales should have been VATable and that the Italian government was due approximately $1m of VAT. The investigation then expanded to transfer pricing matters since the software provider’s intercompany agreement did not allow the Italian subsidiary to perform VATable services. After 18 months, the investigation was concluded with a bill of $750,000 and the company’s intercompany agreements, supporting benchmarking and contract of sale having to be reworded to reflect the VATable services.
Similarly, political risks can have an impact on your business dealings. For this reason you may want to consider taking credit insurance. For example, if you have a contract to ship goods to Country A, and have an irrevocable letter of credit from a major bank in, say, the UK, there would seem to be no need for insurance. But if there is a significant political event in Country A, then the contract could be thwarted and the costs never recovered. A good example is when Argentina suddenly implemented tight exchange controls making it difficult for foreign currency to be released for international payments, resulting in significant payment delays.
In addition to these non-payment and political risks, among the most crucial considerations for chief executives are the increasing employee liabilities associated with global expansion. Dealing with Human Resources abroad covers compliance with local employment laws, visas/work permits, benefits and expat-related issues. One illustration of this is the Netherlands, where an employee can only be terminated with an order from a Court.
To protect your company, it’s important to hire talent in cost-effective, employer-friendly locations if you can. Conditions that help create this nexus include:
§ Low Social Security costs, including a low percentage defined contribution and an earnings cap
§ Low statutory minimums for vacation pay, overtime, sick pay and family leave
§ No mandatory collective agreements. For instance, last year China intensified its effort to implement collective wage bargaining practices, with multi-nationals being the first targets
§ Low forecast for future wage inflation
§ No short-term plans for government-enforced employer pensions
§ Countries that don’t operate using “just cause” termination. Companies can face an assortment of regulations as the “at will” employment concept in the U.S. clashes with “just cause” legislation and other rulings elsewhere in the world. U.S. businesses also need to be mindful of the impact of anti-discrimination laws, national treaties, collective bargaining agreements, consultation with work councils and privacy laws, among others.
For U.S. companies, expanding operations overseas can be a real plus for their business. The most important thing to keep in mind during these difficult economic times is to take the proper steps while doing so.
# # #
Since founding Nair & Co. in 1994, Dr. Shan Nair has grown the company from a small U.K.-based professional services firm to a global enterprise with offices in U.K., India, China, U.S., Japan and Singapore. Nair & Co. currently serves more than 750 client operations in over 50 countries. Dr. Nair began his career as a nuclear physicist, obtaining his Ph.D. from The University of Oxford. He was instrumental in developing a code which set the then U.K. standard for calculating waste arising from spent nuclear fuel. When the Chernobyl accident occurred, he was one of the two U.K. technical experts selected to assist the European Commission in its post-accident response.