5 Mistakes Made by Entrepreneurs Going Internationally


(This article was originally published in Forbes by Jimmy Sexton. Link to the article here.

To go big in this day and age, you have to go global. Going global has many potential advantages for your business, such as increased market share, high-value customers, lower labor costs and lower taxes, to name a few. And in the world of remote workers, digital nomads and virtual everything — including currency — doing business internationally is no longer just for the behemoth conglomerates of yesteryear. Businesses of all sizes now have access to international markets and their benefits.

I know, I know, this all sounds great and you are ready to start your international expansion right now. But you need to plan first, then act. I can’t tell you how many entrepreneurs’ businesses I have had to restructure and/or get out of trouble over the years because they acted without proper planning.

Before you start…

Before you start your global adventure, remember that every country your business interacts with has its own laws, and you better know what they are and how they impact your business. The consequences of not knowing can be detrimental. At the most basic level, you need to know what is legally required to conduct business there — e.g., required licenses, local office requirement, tax registration — and how they’ll tax you.

The first step for any international business venture is to determine exactly what you plan on doing and then figuring out the best way to do it. Will you be exporting goods and services to a country, or do you need a presence there? If you need a presence there, what kind? A branch or subsidiary? Do you need an office? If so, dedicated or shared? Do you need workers? If so, contractors or employees? If employees, part-time or full-time? What will the workers be doing? The answers to these questions will help determine what the legal requirements and tax implications are, which can vary widely from country to country.

Here are the top five mistakes I see entrepreneurs make when expanding internationally, as well as what you should avoid in your own planning phase:

1. Not Getting Proper Advice

It never ceases to amaze me how many entrepreneurs start doing business in a foreign country without getting proper advice. Some rely on the advice of a friend, whose expertise is inevitably limited to having been to that country one time. Others rely on the advice of their local tax or business advisor, who generally is not competent to advise on the laws of another country. And others get no advice at all.

2. Inadvertently Creating A Branch

A branch, also known as a permanent establishment, is generally defined as a fixed place of business through which a company’s business is conducted — e.g., an office, factory or workshop. What constitutes and does not constitute a branch varies from country to country. You could, for example, inadvertently create a branch by renting a shared office, hiring an employee or contractor who works from home or even having your e-commerce site hosted in the country.

Income attributable to a branch is generally taxable in the country in which the branch is located. Additionally, branches generally must register with various government agencies in their host country. Failure to do so — i.e., having an illegal branch — can result in penalties and back taxes, at a minimum.

3. Creating A Subsidiary Without Knowing The Requirements

Time and time again, I meet entrepreneurs who incorporated companies in countries they do business in for administrative purposes; for example, to open a local bank account, rent an office or get a phone number.

Many of these entrepreneurs, however, never thought about what goes along with owning a company in the country, e.g., annual company renewal fees, tax compliance, audit requirements, withholding tax, currency controls, etc. Often, once an entrepreneur finds out what the requirements are, they wish they’d never formed the subsidiary, especially because there are usually simpler, more cost-effective, alternatives.

4. Not Reporting

Many countries, especially in the developed countries of the OECD, have complex tax laws governing the taxation and reporting of foreign operations. Failing to comply with these tax laws, like failing to comply with any tax law, usually results in severe consequences. Compliance with international tax and reporting obligations can also be quite costly because you generally need a highly specialized tax advisor, accountant and/or lawyer.

I can’t tell you how many entrepreneurs don’t find out about their reporting obligations until they have already been operating for several years. This requires a lot of costly cleanup, especially if the tax authorities get involved.

5. Violating Transfer Pricing Laws

Transfer pricing laws were put in place to end one of the oldest tax tricks in the book. The trick works like this: You form a company in a country with a low (or no) tax rate. Your company in a high-tax country then sells goods to it at a low price, which generates low profit in the high-tax country. Then your company in the low- or no-tax country sells the goods to your customers at a high price, thereby capturing the bulk of the profit in the low- or no-tax country.

Transfer pricing laws require related parties (e.g., your companies) to conduct business with one another at arm’s length. In layman’s terms, your company in the high-tax country has to sell goods to your company in the low- or no-tax country at the same price it would sell to an unrelated third party.

You’d be surprised how many entrepreneurs have never heard of transfer pricing and think they have found the best tax structure ever. No, you are not the first and there are laws against it.

International markets are essential to businesses today. As entrepreneurs, we should reap all the benefits they have to offer. But remember to plan first before making a move.

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