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Doing Business Internationally

Posted on January 28, 2014 by

Clayton & Mckervey

Clayton & McKervey

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International Business

Companies of all sizes are beginning to realize just how flat the world really is. At the quarerly CFO/Controller Roundtable hosted by Tim Hilligoss, Shareholder of International Accounting Services at Clayton & McKervey, P.C. on December 12, 2013, participants were very much aware of both the increasing opportunities abroad and the increasing pressure to expand internationally. Many middle-market companies are faced with growing their operations overseas in order to secure contracts and purchase orders with their larger customers. They also may realize significant cost reductions when doing business globally. Regardless of the reasons for international expansion, companies must realize doing business in different countries will invariably present complexities and risks different from those encountered domestically. Following is a list of issues encountered by participants that companies should consider when expanding globally:

  • Value added tax (“VAT”) is a consumption tax often assessed by foreign entities on the purchaser of products. Companies should research applicable VAT taxes when sourcing from foreign corporations and consider it when performing a cost/benefit analysis. Companies should also be cautious when exporting product to foreign customers. They should ensure they include any applicable VAT tax in the price charged to the customer. This is a liability of the customer and should not be paid by the seller
  • Surtaxes and other duties may apply when importing and exporting material
  • International regulatory compliance, both domestically and overseas, and the implications of these regulations must be considered. International Traffic in Arms Regulations (“ITAR”), for example, controls the export and import of defense-related articles and services and can apply to a wide-range of products and services
  • Detroit is a notoriously challenging location through which to import foreign products. Many participants had experienced long wait times in customs due to extensive investigations into counterfeits, anti-dumping and other import restrictions. It is important to have a knowledgeable customs broker to guide companies through this process and ensure products are appropriately categorized to minimize wait times. Also, if imported products can arrive via air, Lansing or Flint may be faster alternatives to expedite the process as these ports may not be dealing with the same volume as Detroit
  • If a company is not ordinarily involved in foreign currency transactions, executing a sale or purchase in US dollars has the lowest risk. Companies selling/purchasing overseas should anticipate settlement in foreign currencies and any related bank transfer fees, and should mitigate any risk of loss (or share the risk with the foreign customer/vendor) whenever possible
  • Wiring money overseas may be different than wiring money domestically. One participant had a client that experienced significant delays when setting up operations in India because they lost the SWIFT code for a wire transfer from the US to India
  • Don’t be afraid to ask for payment from a foreign customer up front. It’s not unusual in international transactions for items to be prepaid or for a deposit structure to exist. It’s also important to understand general financing in other countries. In China for example, companies often do not have bank debt, but rather finance their operations with prepayments from customers and extended terms with vendors
  • Consider obtaining credit insurance when selling overseas. Understand that most domestic banks will not lend on foreign accounts receivable

Many participants at the roundtable felt starting a business overseas is complex with regard to licensing, permits, incorporation, and other required filings, but once setup, there are fewer barriers to running and maintaining smooth operations. Many felt this is the opposite in the United States, where just about anyone can startup any sort of business with few roadblocks, but once up and running, regulatory and legal compliance can often prohibit growth and obtaining the necessary help from governmental agencies can be more challenging.

Once business operations have been set up overseas, understanding the foreign nation’s business and social customs is imperative to successful results. For example, a signed contract in China may be the beginning of a relationship on which two entities can then negotiate and conduct business. In the United State, a signed contract typically defines the relationship and acts as binding agreement, based on previous negotiations. Understanding these differences will help prevent misunderstandings.

It is also important to recognize that enforcing contract terms domestically is much different than enforcing them internationally. Participants at the roundtable felt international business must be conducted with a meaningful ‘handshake’ or a genuine interest in helping both sides succeed. Many foreign entities reduce terms and conditions contracts from over 40 pages to three pages to simplify the arrangement. One participant mentioned that foreign firms may do five minutes of business in 55 minutes of chit-chat, whereas in the United Stated it is customary to do 55 minutes of business in five minutes of chit-chat. It is important to be prepared for these inherent differences when doing business internationally.

Employee Communication and Traveling

Recent advancements in international communication are possibly the most significant contributions to the flattening world. Electronic communication channels can alleviate the costs and time spent associated with international travel and often achieve the same objective. Virtual meetings can now be done through programs such as WebEx, JoinMe, or Skype. Free applications gaining in popularity include WeChat and Viber that can be used with a video phone, tablet, or traditional desktop/laptop and allow for voice messaging, video, chat, or text sharing as well as video conferencing.

Another valuable electronic tool is using a proxy to secure an internet connection by surfing anonymously online. This is specifically useful in a business context when a country such as China has firewalls prohibiting access to certain websites. For a company that uses a Cloud based environment, these firewalls may prohibit crucial access during business travel. There are free proxy VPNs that can be used to place a user on a server in the United States and allow access to websites and portals a specific country may prevent.

Although electronic methods of communication are becoming increasingly available and user-friendly, doing business overseas invariably involves international travel. Understanding the different travel requirements for different countries can be complex and challenging. Companies specializing in passport and Visa services include Troy-based International Express Services and CIBTvisas ensure the application process is complete, accurate, and fast. These services may prove to be an effective resource when there are time constraints or complex country-specific requirements.

Companies should advise employees to consider protecting their passports and visas when traveling, as the risk of loss or theft may be greater. Using hotel safes for storing and carrying copies of identification may be the safest method of international travel. Maintaining copies may be necessary as identification is often required when visiting foreign manufacturing facilities or corporate offices.

Another precaution to ensure safe employee business travel is to have a specified amount of the foreign local currency where the employee is traveling. Many attendants indicated they typically carry $200 – $300 of local currency for any items on which they are unable to use a credit card for purchases. Most banks carry certain currencies on hand, such as the Euro. Calling a bank in advance with the specified amount of currency needed will allow the bank to order any currency needed and is a low-cost method of obtaining foreign currency. Foreign Currency Exchange Services, a Birmingham-based company specializing in buying and selling currencies may provide a more timely solution to foreign currency needs. Additionally, airports typically have foreign currency exchange retailers, but often at a higher cost. Some travelers resort to using foreign ATMs and depending on the bank and country, fees may be low.

If employees plan to use their own credit cards for expenses overseas, they should be aware of potential fees charged to international purchases. If companies provide credit cards to employees, there are credit cards that do not charge currency fees that should be considered for employees who travel often. One participant at the roundtable experienced foreign credit card fraud. Their credit card was used in multiple countries in a short span of time. The credit card company was able to determine these purchases were fraudulent based on the location of multiple purchases. The card was then deactivated to prevent further purchases and the card holder was notified. Although this is a valuable service, being proactive and notifying your credit card company prior to foreign travel will prevent deactivation and allow for valid foreign purchases when necessary.

When sending employees overseas, both the employer and employee should ensure proper insurance coverage is in effect. Such considerations include the following:

  • Supplemental health insurance may be needed to cover a visit to a foreign hospital or a health evaluation overseas. Individuals should check with their current provider to understand the constraints of coverage overseas and if any supplemental travel insurance is available
  • Many overseas health agencies require cash at the time of treatment, even if the patient has travel and/or applicable health insurance. This is another reason why having local currency on hand is important when traveling internationally
  • If any safety concerns exist, an employer may want to consider kidnapping or ransom insurance coverage overseas depending on the situation and risk
  • Middle market employers are increasingly using foreign voluntary worker’s compensation insurance which provides international protection if employees are injured on the job

Although the above discussions on international business and the details therein are not nearly exhaustive in nature, they do begin to touch on some of the many issues faced when “going global.” International business for small- to medium-sized companies is no longer an abstract possibility; it is an everyday reality and absolute opportunity. Sharing the knowledge gained by others’ experiences and having the resources to enter foreign markets and compete globally are the ultimate keys to international success.

Clayton & McKervey

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