Considerations for financial decision-makers
Today’s senior financial decision-makers are tasked not just with managing
cash flow and the balance sheet—they’re expected to drive growth and figure
out solutions to match the fast-paced progress the modern CEO expects.
For many organizations, business growth demands expanding globally and
establishing an international presence.
The role of finance executives
As a senior finance figure, you know that to see the benefits of expansion,
your organization must first navigate legal and financial intricacies. Sales
may be able to phone a prospect in Tokyo with ease, and IT can utilize
development teams in Kiev without a second thought, but it takes careful
planning to establish a new entity—in, say, Brazil or China—to facilitate your
organization’s growth.
Drawing on the experiences of CFOs at our client organizations, which comprise
a wide range of industries and range in size from 25 to 10,000-plus employees,
we’ve compiled the following overview for CFOs and financial directors to
conduct cost-benefit analysis of global expansion.
Evaluating global expansion costs
How many spare hours does your team have during the average workweek?
Establishing your organization internationally involves investing a
significant amount of your team’s time into process completion activities.
Overlooking areas that will require addressing as part of your global
expansion can lead to substantial costs for your company. Be sure to include
time and cost estimates for:
- Researching the country application process
- Engaging local legal, tax and accounting support
- Deploying capital
- Filing government registrations and company documents
- Identifying local HR and IT support
Conducting a global expansion cost analysis
How comprehensive is your understanding of the costs, benefits and risks of
establishing your business overseas? You’re a stickler for detail, and fully gaining an understanding
of all the areas involved during international expansion is no quick ask.
The reasons behind global expansion set the tone for your global expansion.
Once these have been identified, you can list the areas that will require
financial and personnel resources prior to going “live” in a new country.
These will typically include big-ticket items such as:
- Process of permanent establishment
- Legal representation
- Awareness of banking implications
- HR costs and considerations
- Payroll costs and management
Unfortunately, these are rarely one-time expenses. When evaluating costs, bear
in mind that many of these expenses will continue to hit your balance sheet as
long as you remain in that new country. Certain obligations, such as tax
filings, can even hang around for months or years after your withdrawal from a
country, denting your cash flow even further.
Establishing and maintaining an entity: illustrative costs
Determining the line-by-line costs of establishing and maintaining an entity
shouldn’t be intimidating. Dissecting one country’s costs can provide a solid
template for the level of detail required for every country in your expansion
track thereafter.
Let’s take Australia as an example. A regular on Forbes’ “Top Countries for
Business,” Australia ranks highly on many U.S. and U.K. organizations’
expansion shortlists. The illustration depicts the cost of utilizing an expert
professional services and consulting firm to manage your global expansion.
We’ve also accounted for the cost of maintaining compliance once the entity is
established, along with providing guidelines on the cost of tax, human
resources and employment law advice throughout the time the entity would be
live and operational.
Initial entity setup costs
Establishing an Australian subsidiary. Australian Tax Office (ATO)
registration: You will be required to register for an Australian Business
Number (ABN), Tax File Number (TFN) and PAYD withholding number. If you are
anticipating having a turnover greater than $75,000 AUD, you will also need to
register for GST. You can also opt to register for GST if you would like to
claim input tax credits.
Estimated time costs for registering entity with ASIC and ATO - $4,000
Registration with Australian Securities Investment Commission (ASIC). You
will likely be setting up as a branch or subsidiary, and your entity must also register with ASIC.
Fees for initial ASIC registration - $700
Employment taxes review. With your newly established entity in Australia,
you are now required to meet several employment tax obligations. These
include:
- PAYG withholding (income tax withholding)
- Superannuation (pension contributions)
- Payroll tax
- Fringe benefits tax
- Workers compensation
Estimated time costs for a memorandum of advice to identify tax obligation - $5,000
Ongoing annual tax compliance costs
Ongoing payroll compliance. When your entity is established, you’ll need
to run payroll for each of your employees. Unless you are willing to source
payroll calculation software and hire a dedicated resource to run payroll each
month, you will likely need to outsource this function. The cost of this will
fluctuate with your employee volume.
A one-time setup fee to calculate the employees withholding obligation and set
them up on the payroll system will typically cost around $250 per employee.
Monthly processing of the payroll, preparation of pay slips, and incorporating
the various PAYG calculations will typically cost around $1,600 per 10
employees.
You should also budget for the annual tax filings to the Australian Tax Office
– $250 per employee.
Annual payroll compliance cost for 10 employees - $24,200
Activity statement. Your employees are required to file remittance to
various legislative bodies, including the Australian Tax Office, on a monthly
and quarterly basis. This is done through an Instalment Activity Statement
(IAS) or Business Activity Statement (BAS).
The time costs of filing these statements on your company’s behalf are:
- $300 per monthly IAS
- $700 per quarterly BAS
Payroll tax return. Like the United States, Australia has multiple states,
each with its own payroll taxes and varying rules. Tax is levied on the
employee’s earnings dependent on their earnings, payable by the employer. For
example, in New South Wales once your annual salary and other benefit payments
exceed $850,000 USD you are now liable for an additional payroll tax of 5.45%
for that amount.
- Estimated time costs for registering the entity with each state - $750
- Estimated time costs for filing the monthly payroll tax return - $325 per month
Fringe Benefit Tax (FBT) return. FBT is a tax levied on certain benefits
provided to employees. It is levied on the employer and charged at the highest
marginal rate of tax on the gross value of the benefits provided.
Depending the number of transactions involved, you can expect to pay a minimum
of $3,600 for the required time to file this return per annum. This figure
would increase as the number of transactions goes up.
Corporate tax return. For an organization with medium complexity and
requirement to file an International Dealings Schedule (IDS) with the
Australian Tax Office, you can expect to pay around $11,000 per annum to have
this completed by a reputable financial auditor with substantial international
experience.
Further costs. As a CFO, you’re no stranger to hidden costs of doing
business—and global expansion is no different. Be sure to account for soft
costs such as potential time delays that your interactions with foreign
governments and other official departments will likely result in.
There are also several harder costs ready to hit your bottom line. As you
maintain your entity, consider what the cost of the following services will
run your organization:
- Annual audit costs
- HR consultancy fees
- Transfer pricing work
- Employment law advice
Making the decision to expand internationally
Once you’ve ascertained the costs of global expansion, it’s time to weigh them
against the potential benefits—and trusted cost-benefit and gap analysis tools
are a good place to start. Be sure to consider intangible benefits, even if
they don’t fit into a neatly defined box, and don’t forget your CMO and the
additional brand exposure your venture into a new country can bring.
As the financial conscience of your organization, you not only need understand
the intrinsic costs of global expansion, but also have a strong grasp on
factors such as market volatility, as well as potential exit costs and other
risks.
Let’s dive into some of the questions you should ask:
- Will I need to repatriate any revenues obtained overseas? Are there barriers that could prevent me from doing this, such as a local requirement for them to remain in the country of obtainment for a prolonged period?
- What is my confidence in the overseas market(s) that have been identified? Can I really justify a long-term establishment plan, or do we need to evaluate further?
- How much financial pain would be caused if we decided to withdraw from the country if the expansion didn’t go exactly as intended?
- Have I checked the news from that region lately? Are there any political or other factors, such as trade wars, that may affect our ability to recognize the full potential of the overseas market, or even conduct business altogether?
- Will the nature of our business call for any inordinately expensive employee insurance, or talent or recruitment costs?
- Do I need feet on the ground immediately? What are the local laws for having an in- country representative as part of our corporate ownership structure?
- Could I easily order a coffee in the new country? If not, is that foreshadowing how much of a challenge interacting with the local infrastructure and governmental bureaucracy will create on our internal teams?
Global expansion can be a hugely beneficial move for your organization,
spurring revenue growth and efficiencies through merger and acquisition.
However, before any benefits are realized, many companies encounter
challenges.
As the CFO, you can spearhead the global expansion process and identify
opportunities to keep costs down. Outsourcing core functions such as payroll
and HR is just one example that could improve your bottom line by thousands of
dollars per year.
For some global expansion scenarios, establishing your own entity will be the most appropriate route to market. But exploring alternatives to entity establishment—such as global employer of record providers—
should be high on your evaluation process. These alternatives can provide opportunity to
substantially reduce costs, eliminate risk of employment noncompliance and allow your
organization to start operations in a new country quickly.
Contact us today to speak with a global solutions advisor and learn how employer of record services, as an entity establishment alternative, can help your organization expand into new international markets.
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