- Legal Risks Arising from International Expansion
- September 7, 2012 | Authors: Kenneth R. Hannahs; Aisha S. Sanchez
- Law Firms: Ford & Harrison LLP - Atlanta Office ; Ford & Harrison LLP - Tampa Office
Although global markets today face numerous challenges, U.S. headquartered companies increasingly turn to international expansion for growth. The decision to embark beyond the security and known risks of the U.S. border requires careful strategic analysis including factoring in the costs and the risks related to laws and regulations that apply to multinational entities such as the following:
- Foreign Corrupt Practices Act ("FCPA"): The FCPA prohibits any direct or indirect payment to a foreign government official or entity for the purpose of influencing any act or decision in order to obtain or retain business. Additionally, inaccurate accounting and record keeping of such activities may violate the FCPA. Any company (along with its subsidiaries and employees) with operations in the United States as well as operations outside the United States is subject to the FCPA.
- The SEC and DOJ are aggressively pursuing prosecutions against companies as well as individuals in several high profile cases. The law is very expansive in defining a government official or entity. In many areas of the world, entities that are actively transacting business are government controlled (e.g. large telecommunications companies in the Middle East) and thus subject to the law.
Ensuring compliance with the FCPA requires significant investment in designing a policy, training and due diligence. The training should be companywide and driven by the executive leadership team. Due diligence requires thorough vetting of business partners, agents, distributors and potential acquisitions. Failing to ensure compliance by these third parties places the company at risk of violating the FCPA.
- Export Issues - Restrictions on Sales to Embargoed and Sanctioned Countries and Individuals: U.S. export law imposes prohibitions on sales to certain countries (e.g. Syria, Cuba, and North Korea) and named persons as well as sanctions that require exemptions or licenses. Additional laws address the sale of controlled items that may require a license or other exemption that varies upon the buyer of the product. Thus, depending upon the products sold as well as the customers and their location, companies need to ensure compliance policies are in place and monitored.
The scope of these laws requires careful training of relevant stakeholders to ensure they do not make affirmative and inadvertent disclosures. Any training program should include concepts such as deemed export (where delivery of items to foreign nationals in the U.S. constitutes export).
- Permanent Establishment Issues: Countries may impose income and value added tax liability on U.S. companies that create a "permanent establishment" in that country. As its name implies, permanent establishment arises from the opening and maintenance of "permanent" offices, warehouses and factories. However, limited activities in a country for purposes of sales and limited services over short durations of time are normally permitted, although the determination must be made on a country-by-country basis. As a result, it is very important to obtain professional tax advice prior to engaging in active business in a country to determine the scope of activity that creates permanent establishment.
As a company's international business expands, creation of a permanent establishment in certain strategic countries is necessary to operate and manage its international business. Doing so requires active participation of tax, finance, legal and sales leaders to ensure that locations are selected for their strategic importance, while monitoring the tax and regulatory effects. Although business decisions should not be driven solely by these issues, careful planning often allows companies to address both strategic and tax goals.
While these low rates are beneficial, the U.S. income tax costs of bringing those profits back to the U.S. may result in the decision to keep the cash off-shore. International companies must create strategies that ensure stranded capital is put to efficient use (for example, funding international strategic alliances and acquisitions).
- Repatriation of International Profits: Companies may find that international tax rates around the world are substantially lower than in the U.S. As a result, these low tax locations (e.g. Ireland, Luxembourg, Singapore) are often the sites of large operations and headquarter offices of U.S. companies oversees.
- Cultural Issues in Ensuring Compliance: As countries embark on the journey of international expansion they must confront cultural impediments to implementation of policies and procedures that ensure compliance with U.S. laws. For example, a U.S. company acquiring a company that sold to companies located in embargoed countries under U.S. law needs to address this issue immediately while not causing undue disruption of the business. Bringing the acquired companies into compliance requires a deft touch that, if handled successfully, ensures achievement of the strategic goals of the multinational company.