For Gino Zabeo, companies are spurred to pursue new export opportunities by two main drivers: talent and access to markets. As Senior Director, Enterprise Account Management, at Vistra – an operational partner for businesses – Zabeo helps corporates pinpoint and go after such opportunities, with the aim of widening their global reach.

“Exporters typically expand their global footprint when they’re looking for talent and will then harness that talent to adapt their product or service to local markets, and create new opportunities for themselves,” he says. “Others will build infrastructure deliberately to pursue opportunities in foreign markets. There’s either a cost advantage to be had, or some kind of technical advantage that will benefit their product or service – which will give them confidence that they can stand out from the competition.”

Another group of exporters, Zabeo explains, will seek to follow established, multinational pioneers into specific territories by supporting them as part of the supply chain.

In parallel with these well-intentioned groups are companies that act in bad faith. “In a recent BBC interview, Superdry CEO Julian Dunkerton called out companies that head into new markets specifically to exploit tax loopholes,” Zabeo notes. “Now, that’s legitimate – after all, those loopholes do exist. But for Dunkerton, it’s not in the correct spirit. I agree. It can choke out good-faith traders striving to comply with regulations.”

Tipping points

Indeed, as Zabeo points out, regulatory compliance is the greatest cost burden that any business exporting to a new territory is likely to face. As such, companies can adopt an approach not unlike prospecting, which enables them to test the waters. “You can set down an initial foothold,” he explains, “or a temporary presence that serves as a beachhead. Once you’ve developed your new market and have begun to operate at scale, you can review that foothold and see whether it’s still suitable – and still adequately mitigates the risk exposure you’re facing by being in that jurisdiction.”

However, Zabeo cautions that direct employment of local workers to run your foothold may pave the way for the decisive step of permanent establishment – and all the compliance risks that go along with it. There are other tipping points, too. For example, if your foothold grows and competitors learn that you are operating in their jurisdiction via solutions that are not 100% establishments, they may encourage local tax authorities to investigate your books. That would tend to necessitate formal incorporation, plus registration for the payment of corporation tax.

Zabeo points out that you can preempt those risks by upgrading voluntarily. So, in many ways, the early-stage process of setting up an export outpost in a new territory is a finely balanced seesaw between buying time and making committed decisions.

“It’s very strategic,” he says. “It’s about knowing whether you have a runway to land on and build from.”

Territorial quirks

Zabeo stresses that, all by itself, direct employment incurs “a whole bag” of compliance requirements. Then, if a company does fully commit to the market it has been testing, it must set up a subsidiary – instantly triggering a further wave of compliance obligations. At that point, he notes, from a strategic evaluation perspective, the greatest risk becomes not the cost of employing someone to manage the compliance requirements and related filings but from the cost of getting it wrong.

“If you miss a filing or under-report, it’s going to be expensive,” Zabeo warns. “If you haven’t got all your requirements straight, you’ll almost certainly be subject to an audit. That could open up a huge can of worms, because it’s likely to be backdated – perhaps by as long as five or six years. I’ve seen companies go out to Australia and get audited, and officials’ scrutiny can start from as early as ‘Day One’ of remuneration for local staff. From there, authorities can calculate revenue and expected tax – and if you’ve fallen short, you’ll be hit with penalties, including double tax and interest.”

For Zabeo, being aware of how compliance varies from one territory to the next is mission critical, but he stresses that many businesses are unprepared for the scale of the requirements they trigger. One area of often unexpected complexity lies in the US. “As soon as you set foot there, the IRS will send you a letter,” he says. “If you have an employee in Colorado, another in Michigan and another in Massachusetts, you’re obliged to register, comply and file in each one. You’re dealing with all the states you’re touching.”

Businesses looking to establish themselves in either India or China should expect minimum incorporation and hiring lead times of around six months, Zabeo warns. But it isn’t just the bureaucracy of getting in that companies need to worry about. Getting out presents equally challenging hurdles. “Winding down in India takes at least three years,” Zabeo says, “which means that, for all that time, you must still be constantly filing, employing local directors and having all the board meetings you’re required by law to have. Dealing with a market of India’s size can be absolutely bone-crushing.

Another unusual, territorial quirk that Zabeo has seen is that if a business in Germany misses a payment of corporation tax and fails to respond to official letters of inquiry, authorities will simply delve into the company’s bank account and help themselves. “Having a registered office where someone actually reads the post becomes essential, here,” Zabeo says.

For all these reasons, Zabeo surges corporates with exporting ambitions – even those that have already established foreign presences – to harness the expertise of specialist consultants. “Cross-border operations are a complex matrix,” he says. “Essentially, you need to hire one person to look after each jurisdiction – then someone with oversight of those employees who understands all the correlations and interconnections between the different territories. It’s big.”