Five key tips to consider before expanding your tech company overseas
As Australian technology companies mature, there is often a desire to grow operations into new markets. While Australia has a booming tech industry, our population size means that it is a relatively small market for most tech companies. Therefore, the most effective way that tech companies can achieve rapid expansion is by entering overseas markets where companies can find new customers in new jurisdictions.
This can be a more complicated process than it appears as each region or country can have its own unique operating environment. Here are five key things tech companies should think about before looking to set up operations overseas:
1. Understand regulatory requirements specific to that country
While there may be a strong understanding of the regulatory requirements within Australia, it is essential to have a strong understanding of the requirements in the country that is planned for opening new operations. There will potentially be requirements for a local Director, registrations with regulators/tax bodies, and mandatory compliance or audit. If there isn’t sound knowledge in this space prior to establishing operations, there is a risk of non-compliance with local laws and regulations.
2. Understand taxation requirements
Each jurisdiction entered is bound to have its own set of taxation requirements, which needs to be understood prior to committing to establishing operations. The relevant income tax rates and legislation, as well as indirect tax laws such as sales tax or payroll tax will have a direct impact on the profitability / success of these operations. Further to this, potentially missing taxation requirements can lead to future tax obligations to repay missed lodgements, as well as potential for fines and penalties.
3. Cyber security compliance
As cyber security and the storage of customer data continue to grow in significance, governments globally are regularly considering and implementing new laws and regulations around data security. An example of this is the General Data Protection Regulation within the European Union. Put into effect in May 2018, this law is far-reaching and will result in severe financial penalties should its privacy and security standards be breached.
Whilst company executives would generally have sufficient background knowledge to ensure compliance with Australian requirements, it is essential to build knowledge of the regulatory requirements of the location of potential foreign expansion prior to commencing operations.
4. Consider foreign exchange implications
While businesses in the technology sector in Australia will generally have overseas suppliers and therefore a degree of foreign exchange risk, expanding operations overseas will increase the risk of losses (or gains) being incurred due to foreign exchange differences. It is important to understand the level of foreign exchange exposure, and to have policies in place around hedging where necessary. It is also essential to check that your accounting software is adequately set up to have a foreign subsidiary and that the accounting is aligned with the requirements of local accounting standards.
5. Transfer pricing
On establishment, it is possible that an overseas subsidiary may generate significant revenue while not incurring similar costs with many of these initial liabilities covered by the Australian parent entity. In such instances, it is essential to understand the relevant transfer pricing requirements. If not considered, tax may be underpaid in Australia. Implementing the appropriate cost-sharing or cross charge agreements is a key element of initially setting up a subsidiary overseas.
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