When expanding your business into different countries, there are many areas to consider, and cross border compliance is one of the most important things to get right, or else you may be faced with hefty fines and penalties that can halt your global business expansion journey.
With varying rules and regulations in each country, keeping on top of global compliance can be a minefield, so it’s vital that you prepare yourself ahead of your expansion.
To help you with this, one of our experts at HSP has discussed some of the core aspects of cross border compliance, and how to efficiently and effectively manage these areas to keep you trading without unnecessary complications.
What is cross border compliance?
There are two core aspects that define cross border compliance:
- Companies operating internationally – for example, a business that is based in the US that also operates in Europe, Latin America or Asia. Businesses that are operating outside their country of origin need to ensure their operations are compliant with local rules and regulations. All rules vary and are different from what the business may come across in their home country.
- When the companies within a group have transactions with each other – for example, when a US-based company provides services to international companies, or the other way around, they must ensure they are compliant with certain transfer pricing rules, meaning you cannot simply price these transactions preferentially – the price of this transaction should be the price you would get on similar transactions that you would undertake with third party suppliers or third party customers.
Key continents and countries to consider.
While supporting businesses with international expansion globally, HSP Group emphasizes closely considering specific continents and countries when examining cross-border compliance
Europe is the most straightforward across countries, making it understanding the various rules and regulations easeier. This is partly due to the European Union driving similar rules and regulations across member countries. These similarities make compliance more achievable.
For Latin America and APAC/Asia regions, the narrative is slightly different. For example, Latin America is one of the most complex regions for cross border compliance due to the local rules and regulations drastically differing from country to country. The tax and accounting reporting requirements, for example, are quite heavy and very specific, and with more frequent changes to rules and regulations, it’s easier to slip up without realizing.
In Colombia and Brazil, the number of taxes that a company needs to comply with is quite significant. Also, the required types of taxes in these countries are quite different from the US.
In Brazil, companies need to pay social contributions on billings and income, while in general, social contributions are paid in relation to payroll and employing people and are not levied on billings, sales or NET income.
APAC/Asia regions fall somewhere in between Europe and Latin America when it comes to complexity. The complexity here stems from the rules and regulations being different from country to country. For example, Singapore and Hong Kong are more straightforward jurisdictions, whereas India becomes more complex due to sales tax rules and specific accounting rules and regulations that you need to comply with.
What are some examples of cross border compliance activities?
There are three main layers of cross border compliance management activities:
First layer – understanding local representation requirements.
When talking about the legal entity itself, the first compliance activity to undertake is to understand what the requirements in terms of directors of the company are. For example, do they have to have local directors or regional directors? If they have foreign directors, do those directors need to be tax-registered in that particular country to be valid?
These director requirements are very important in terms of compliance.
Secondly, you should consider legal tax representation. Valid representation requires that companies understand local rules. For example, do they need a local tax representative? If such requirements are there, they need to comply with those, because if not, they are not valid and cannot undertake business in that particular country.
Second layer – understanding the accounting rules.
The next step involves understanding accounting rules. Are there specific requirements for accounting systems to be used? For example, in Israel, the accounting system needs to be approved and authorized by the local tax authority. This is a similar requirement in the Philippines, where you need to have your accounting system authorized by the local tax authorities.
A business must also understand relevant local rules and regulations to comply with, like local charge of accounts and specific local accounting reports that have a prescribed format.
It’s imperative to have local accounting systems authorized, know what the reports should look like, and invest in a local accounting system, or change the accounting system you are using at a central level, in order to be compliant.
Third layer – reporting
The third and final layer refers to reporting activities, whereby a business needs to report to the tax authority on tax returns it needs to file and understand the tax rules it needs to follow.
The requirements for electronic transactional reporting
Latin America is particularly well-known for this, with Brazil being the first country that introduced the requirement for electronic transactional reporting.
Therefore, in countries like Brazil, businesses must report back each and every transaction to local tax authorities in real-time. From a company perspective, this is quite complex – first of all, you need to make sure that you have the systems that allow you to do such reporting.
Additionally, real-time reporting requires having the right processes in place to check each transaction is correct before it is reported. In a normal system, you usually book transactions at month end and have a couple of weeks to review transactions, and only afterwards do you report to the tax authorities.
This requirement alone can result in increased pressure on businesses looking to expand into this region.
Are you confident in managing your cross-border compliance risks?
The tax world is changing on a global scale, and with changes being enforced on a local level, as well as changes that are enforced by the OECD, there are constant talks regarding the fairness of taxation, and especially today because of digital trading, there are always discussions that question what the right place to tax transactions is.
Because of these continuous changes, compliance becomes more complex in general.
Tax authorities are more concerned than ever about having a good grasp of transactions and making sure that companies pay their taxes, therefore it’s very important to have the right expertise in place.
Let’s Talk
For help with managing your cross-border compliance activities and reducing any risks associated with global expansion, get in touch with HSP today-
