In January 2019, Academy Fellow and Hub Mentor Dr Liane
Smith, Director of Larkton and former Managing Director of Wood Group Intetech,
hosted a roundtable with Hub Members on exporting. We’ve compiled insights from
the session into this Q&A for startups and SMEs looking to export for the
first time.
How can Commonwealth First help me with exporting?
Commonwealth
First, based in London, can provide great connections, provide help with
getting your goods into countries abroad and they often hold events where you
can connect with facilitators.
What do I need to consider when manufacturing abroad?
Manufacturing abroad comes with its own set of challenges, with different laws and taxes for each country. Probably every entrepreneur has heard a story of, or has themselves experienced, being caught out by unexpected fees. Building a team of local experts who you trust and have a good relationship with is vital for navigating business customs in countries abroad to ensure that you're getting a fair deal.
How can you prevent other companies stealing your intellectual property (IP) once you start exporting?
While it's advisable to protect your IP and trademarks before you enter a new continent to sell your goods, it can be hard to enforce your IP rights abroad. Regardless, trademarking your company products is valuable when/if you sell.
To minimise the impact of someone stealing your IP, focus on building a strong and trusted brand in the country you're exporting to.
Should I set up a local subsidiary in the country I want to export to?
Whether it
is advisable to set up a local subsidiary depends on a range of factors, and
which country you want to export to – in some countries, for example, you
legally cannot trade unless you are a local company.
How best to set up a local subsidiary will vary country to country, but can include:
- Setting up a commercial intermediary (an agent) and paying them commission on turnover in the country. Find the right agent and they will be a valuable source of sales!
- Setting up a “subsidiary office”, which may have limited powers (e.g. it cannot raise invoices independently)
- Having a trusted local individual own 51% of the business in the target country (even if their contribution to the company is limited)
Trading as a local company has its advantages such as providing access to government grants and partnerships, and the local Withholding Tax (WHT) will be limited. (More details on WHT below)
It’s an
advantage to hire locals – it gives you legitimacy in that country, as well as
someone who is culturally aligned and who speaks the language. It is always
advisable to get local legal advice when setting up abroad!
Do I need to register my business in the country I'm exporting to?
Sometimes it's a requirement to register your business in your target export country to prove that you're a legitimate company, and to ensure that you're paying the required taxes in the UK. Doing so may reduce WHT. For example, registering in India will result in the company being issued with a Permanent Account Number (PAN) that reduces WHT to much lower levels.
Registration
is normally straightforward, but consider asking a local solicitor to handle it
for you, particularly if forms are in an unfamiliar language, or your responses
need translating to avoid any nasty surprises. You typically discover that you
need in-country registration when you are setting up a contract with a client.
What is Witholding Tax (WHT)?
WHT is when
a country charges you tax on your invoiced values (in-country turnover) because
you’re trading within their boundaries. This is separate from import tax, and
is a tax on revenue, not profit.
Let’s say you provide an invoice for $100 and the withholding tax is 20% in that country. The person paying you will pay $80 to your company, and $20 WHT to the local government. While most countries don’t require WHT, it does vary, and products or services and may change from year to year. It should go without saying, but always check for WHT requirements before you quote any prices to clients!
The country
will issue a receipt for the WHT paid and this tax certificate is submitted to
HMRC to offset part of your corporation tax bill for that year. So eventually
you will see some financial payback for the WHT (assuming you have made
sufficient profit to be paying more tax than you have pre-paid), but it will
still be a drag on cash flow.
If you are trading through an in-country entity (see above) then WHT does not apply, but local taxes on the profits of that business will.
Should you charge WHT to the client?
The short answer is yes, take no risks with your company's money. There's a risk that you will be out of pocket if you make substantial deals that don't include WHT in the costs, especially if it is as much as 20%. Factor the taxes into your costs, but don't break it down for the client in the invoice - they may demand that it's taken off.
Including WHT obviously raises your prices versus competitors who may not be required to pay this tax, so you might decide to exclude it (or part of it) from your pricing if you have sufficient cash to carry you through.
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