Dave Thompson participates in IR Global Guide: International Expansion: Building your Business Overseas

Dave ThompsonPartner, Hutchinson and Bloodgood LLP

Foreword by Andrew Chilvers

Despite these uncertain times, expanding overseas can be a key driver for future growth for an ambitious business. International expansion can breathe new life into a company, drive huge value and set it on a path of continued success.

Expanding a business overseas is a strategic opportunity that will help diversify revenue streams, revitalise product development and give high returns on investment. But expanding a business into different jurisdictions takes time – this is a long distance run, not a sudden sprint to the finish line. Furthermore, expanding operations into a new jurisdiction can be fraught with challenges and risks that need to be addressed long before the first boots are on the ground.

For any company turning up in a foreign country, a multitude of tax and legal issues need to be addressed. This can be a labyrinthine experience and not for the faint hearted – but then faint hearted businesspeople seldom set their sights on overseas expansion.

Tax and compliance have to be at the top of any board’s agenda, ensuring the correct steps are taken the moment the company representatives land in-country. It’s pivotal to learn these issues to avoid any costly mistakes from the start.

What are the main government incentives available in your jurisdiction to attract multi- nationals and FDI investment?

The US’ 50 states make up a very large community. With a population of over 320 million people with a high GDP per capita, its highly productive and educated workforce and access to strong capital markets make it an attractive place to invest.

The 2017 Tax Cuts and Jobs Act reduced the corporate tax rate from 35% to 21%, the sixth lowest rate among the G20. Some now consider the US to be a tax haven. In 2019, these competitive tax rates together with pro-business regulations and economic expansion helped the US to another year of leading foreign direct investment.

The Research and Development (R&D) Tax Credit is one of the more lucrative federal incentives for businesses to reduce their tax liability. Companies from a wide-range of industries can qualify for federal and state tax savings high enough to allow them to hire new employees, invest in new products and service lines, and grow their operations. Start-ups and small businesses may qualify for up to $1.25 million (or $250,000 each year for up to five years) of the federal R&D Tax Credit to offset the Federal Insurance Contributions Act (FICA) portion of their annual payroll taxes.

Consideration must also be given to location as each state has its own tax system with rates between 0-12%.

States and local governments’ incentive packages attract investment by offering millions to billions of dollars that can include grants, loans, tax incentives and job training/creating subsidies and/or credits. Just like taxes, incentives vary by state. A 2015 analysis by Upjohn research indicates that among the states with particularly high incentives (greater than 3 percent of value-added) are New Mexico (4.23 percent), New York (3.53 percent), and Louisiana (3.33 percent). Among the states with particularly low incentives (less than 0.5 percent of value-added) are Washington (0.09 percent), Nevada (0.23 percent), Virginia (0.27 percent), Maryland (0.36 percent), and California (0.47 percent).

What industries do you feel there are opportunities in for international investors / businesses in your jurisdiction? What factors do you think contribute to inward investment?

In 2018, the US was ranked number two in inward foreign direct investment globally by industry sector. Foreign direct investment in the US was concentrated in the manufacturing sector, which accounted for 40.8 percent of the position. There was also sizable investment in finance and insurance (12.1 percent).

Foreign multinational enterprises earned income of $208.1 billion in 2018 on their cumulative investment in the US, a 19.7 percent increase from 2017. Other factors that contribute to inward investment were:

• The US has a population of over 320 million people with a high GDP per capita
• The US has the first world economy, with solid performance in various sectors
• A dominant position in R&D
• A flexible and reactive employment market
• A very good quality of national statistics
• Public debt mainly held by Americans

• The American workforce has a comparatively high level of qualifications and is considered to be one of the most productive and innovative in the world
• The dollar is central to the world economic system
• Notably thanks to the shale gas, the country is on its way to energy autonomy
• The development of regional ‘clusters’ (collections of companies in the same activity sector in a geographic area) is very attractive to foreign investors.

Why is it important to hire a local firm to support international expansion? How can you help smooth the process for your clients and overcome common pitfalls?

Your business can take you all over the world. To remain competitive and profitable, it has become essential to expand internationally. But understanding the risk and opportunities involved can be difficult.

Local firms can play a critical role in a successful launch of an enterprise that includes foreign direct investment. The US comprises 50 states, District of Columbia and 14 territories and each have their own legal and tax rules and regulations. It is nearly impossible, if not impossible, to know all the rules and regulations of every potential jurisdiction.

A proper evaluation of who, what, where and when should include local firm support in the country of outward direct investment as well as in the country of inward direct investment. Consideration should be given to the appropriate location in that country designed to maximize the foreign direct investor’s opportunity for success. Access to skilled labour, education, standard of living will be key to putting together a strong team.

Local firms are in an excellent position to provide the necessary support, having a thorough knowledge base of activities close to home. Finally, local firms with international expertise are poised to provide assistance navigating international tax treaties, evaluating entity structures and vetting transfer pricing opportunities with their firm counterpart in the country of origin.

We can help. Whether you are an international company entering the US market, or you are a domestic company doing business globally, our local international experts can support you in expanding your business. Fortifying our capabilities, our affiliation with IR Global, Allinial Global, PKF International and ProVisors has helped our clients gain access to resources in countries including Australia, Brazil, Canada, China, Denmark, Germany, Greece, France, Korea, Japan, Mexico, Norway, Netherlands, Russia, South Africa, the United Kingdom and more.