Going Global: What Tech Leaders Need to Know
A few years back, a client of ours attended a tech trade show in Dallas.
The cross-border trip reflected sound business strategy. While Austin leads the Texas tech rivalry by a wide margin, its big-money neighbour to the northeast has begun to flex its startup muscle, fueled by scores of schools and lots of capital.
Fast-forward to today. Our client has not returned to Dallas, but that one trip has affected their business in surprising ways. Like all states, Texas levies tax according its own tax code. In this particular case, the trip made all future revenues taxable by the state government. Our client, which now generates significant revenue from Texas, has a tax burden befitting of the “Everything’s Bigger in Texas” proclamation.
An Expansion by Any Other Name
For tax authorities worldwide, a company’s international expansion takes place sooner than an entrepreneur might expect. How soon depends on the target market: either very early (when you generate a “taxable presence”) or early (when you create a “permanent establishment”).
The bottom line for entrepreneurs is that if your company has any customers outside Canada, you need to ask how those customers were acquired, as understanding the sales cycle could define your global tax footprint.
The international tax landscape continues to change. Measures developed by the Organization for Economic Co-operation and Development in 2015 have complicated international tax planning for many global companies moving abroad. This Base Erosion and Profit Shifting (commonly referred to as “BEPS”) initiative was embraced by many countries–including Canada, which has taken action on several of the BEPS initiatives.
The Tech Difference
While all companies need to exercise caution when pursuing this exciting step, tech entrepreneurs should step especially lightly. The agile, cloud-driven nature of tech encourages quick moves across borders. Where manufacturing requires large capital investments in a plant and equipment, tech companies can pick up and move, unencumbered by tangible assets.
The reality leads to a different mindset, common around the globe but especially here in North America. For many Canadian tech entrepreneurs, borders barely exist. Their tendency to see the two countries as almost one unified market is also supported by the close ties binding the business and tech communities. It generates tremendous agility.
There is a downside: tech’s greatest asset can morph into a risk as the business develops. Because companies can move so easily, they are more likely to short-change their planning needs. If that happens, they often face consequences that were avoidable.
Still, startups often lack financial resources, so they may resist investing dollars in the tax expertise they need, despite the real international issues on their doorstep. The best course of action is finding advisors who know their industry and can devise practical solutions to minimize their risk.
Getting with the Plan
As important as they are, tax considerations only form one part of the larger business strategy. Instead of leading a plan, they should follow and support your overall business objectives.
Those business considerations are best formulated through a SWOT analysis, which breaks down the strengths, weaknesses, opportunities, and threats facing the organization.
When taking the plunge to a new market, these three issues are sometimes forgotten:
• Local market expertise. As UK-based taxi-hailing app Hailo’s experience in North America showed us, what works in one market may not work in another. To thrive in your new environment, do your research, define success, generate metrics to measure that success, and evaluate your progress. Then, treat your company like a startup by remaining ready to pivot if you need to adjust business strategy.
• Legal. Local legislative requirements demand more than just tax expertise. Different countries around the world have varying requirements for a myriad of legal issues. Consider partnering with experts familiar with the jurisdiction, using external resources for your non-core functions.
• Company culture. As companies grow–internationally or domestically–they often need to add policies and procedures, sometimes for the very first time. Bureaucracy—which is anathema to many tech employees—can change company culture. If you want to maintain your company values, stay forewarned and plan your HR response.
Planning, the first step of any expansion, sometimes receives the short stick. From tax to legal to going local, founders and other tech leaders can be tempted by their considerable abilities to adjust on the fly. A word to the wise: even the best iterations need a prior plan to set the stage.
Brion Hendry is the GTA Technology and Life Sciences Leader for BDO Canada.
