Global expansion costs for international expansion of business

Prabhat Nigam

10 Sep, 2022

Modern-day senior finance executives are required to manage the business’s cash flow^[1], drive the growth, and find solutions for fast-paced progress. Many organisations want to achieve this growth internationally by making a global presence. Before taking the business overseas, it is necessary to assess the benefits of such expansion of business. It is incumbent on the senior finance executives to navigate through the legal and financial intricacies before the global expansion of the business. This article discusses areas of global expansion costs in order to tap the overseas markets.    

What are the global expansion costs for a business?   

The global expansion costs to take the business overseas include:

1. Researching the application process of overseas jurisdiction
2. Taking advice from jurisdictional legal experts, tax and accounting specialists
3. Investing capital in setting up the business presence
4. Filing the prescribed documents for company registration
5. Identifying and engaging local legal specialists and HR support     

Evaluating the Global Expansion Costs for taking business international  

Before making the mind for international expansion of business, the management should be clear about the specific reasons for such expansion, which will further determine the deployment of financial and personnel resources of the business before starting business operation within the other jurisdiction. Evaluation of global expansion costs of a business involves factoring the costs and risks involved in overseas business expansion with its benefits. Following are some of the big ticket global expansion costs for any business:

• Leasing a permanent establishment for official premises
• Hiring legal experts to incorporate the business vehicle
• Obtaining advice about banking implications
• Human Resource costs involved and the working environment
• Management and payroll costs     

It must be noted that the above-mentioned costs may not be a one-time expense for the business. While calculating global expansion costs, the finance team must remember that many of these costs may appear again on the company’s balance sheet.

• Initial entity set-up cost    

The business must initially assess the cost involved in establishing and maintaining an entity. Services of expert professionals must be engaged to manage the entity’s global expansion. The assessment of the global expansion costs ranges from meeting the compliances after the establishment of the entity to the cost of the tax burden, human resources and advisory on employment laws throughout the time when the entity remains operational.

Cost of establishing a subsidiary: the subsidiary company needs to register itself with the company’s registrar of a particular jurisdiction. Thereafter, it is required to obtain the business registration number, tax identification number and bank account number in the business entity’s name. Further, if the entity expects to have a turnover more than the threshold amount, then it also needs to obtain the GST number. All these registrations are made on payment of registration fees at the appropriate office.

Compliance with several employment taxes: the newly incorporated entity is also required to comply with several employment tax obligations. These include payroll taxes, pension contributions, worker’s compensation etc.    

• Ongoing compliance costs to the company     

Payroll Compliances: on the establishment of a new entity, the company must undertake payroll compliance for each employee. Unless the company takes the benefit of payroll compliance software or hires an expert to take care of the payroll compliance, this function will be outsourced to another entity. The cost of outsourcing the function varies depending on the number of employees of the company. The payroll compliances include the one-time fee of setting the name of the employees on the payroll system, monthly preparation of pay slips and the annual tax filings at the respective tax office.

Remittances to legislative bodies: the employees are required to file remittances to the legislative bodies monthly and quarterly through respective activity statements. Time costs of filing such statements are done on the company’s behalf.

Tax return on payroll: There are some jurisdictions that have their own set of rules on payroll taxes. An additional payroll tax is required to be paid on behalf of the company if the annual salary, including other benefits of an employee, exceeds the given threshold.

Tax returns on benefits to employees: Some taxes are also levied on the employer for providing certain kinds of benefits to the employees. Usually, these taxes are charged at the highest rate of tax on the gross value of the benefits provided to the employee.

Additional costs: One should always take into account the soft costs that may be imposed on the business due to reasons such as late fees or penalties after delays in coordination with the government officials of the foreign government.    

Apart from the soft costs, a business should always keep a cushion against hard costs that may be imposed on your business due to statutory reasons. Such hard costs can be the result of the following services such as:

• Employment law advisory
• Transfer pricing cost
• Expenditure incurred in the annual audit
• HR consultancy fee

Conclusion 

Having discussed the global expansion costs, it is crucial to weigh the potential benefits to take a final call on the international expansion of the business. Such benefits should also include intangible benefits too. If the potential benefits of the international expansion of the business outweigh the expected global expansion costs, then one should go ahead with the said business. If you want advice on potential global expansion costs to take your business overseas, get on a call with global incorporation experts at Enterslice. 

Read our Article: Introduction, Drivers and Benefits of International Business