EXPORTING ESSENTIALS: SELLING PRODUCTS AND SERVICES TO THE WORLD SUCCESSFULLY (2014)
Chapter 3. Prepping For Exports
Legal, Financial, and Logistical Considerations
This is the company of the future. Forget about “outsourcing.” In today’s hyperconnected world, there is no “in” and no “out.” There’s only “good, better and best,” and if you don’t assemble the best team you can from everywhere, your competitor will.
—Best-selling author and New York Times columnist Thomas Friedman (2012)1
Now that you’ve set up your business plan, it’s time to delve a little deeper into assembling your export company. The next step is tackling the essential details of a sound legal, fiscal, and logistical operation. You’ll be faced with obstacles ranging from expanding your enterprise, protecting your company, and choosing a product name and other intellectual property to opening a bank account in your home country, sourcing financing, and dealing with special tax situations. Not all of these issues will come into play immediately, but you will do well to familiarize yourself with the framework in which you will be operating right from the start.
Although the expansion of any business tests us on numerous fronts—from hiring the right people to covering fixed expenses and revenue generation—expanding internationally through exports performed primarily via the Internet challenges us in a whole new way that could potentially interrupt the viability of a business. When reengineering your business from local to export-ready, you must take into consideration bullet-proofing processes, additional laws governing intellectual property, hiring and firing, contracts, and marketing and financial management, as well as settling international disputes.
Prepping for export success boils down to careful planning (refer back to Chapter 2 on crafting a business plan), being proactive in seizing opportunities, and holding transparent discussions with trusted advisors on where you are headed to ensure every move you make is done with confidence and leads to greater growth and prosperity for your business.
Note I am not an attorney, banker, logistics expert, or accountant. The information in this chapter is based on experience and extensive research and should not be construed as an official plan on how something is done. Before proceeding with an action plan, consult with a specialist, just as I would.
Line Up Your Export Dream Team
One of the first things you should do before officially setting up your export business, or if you are an established enterprise and haven’t done so already, is to find yourself a good lawyer, a knowledgeable accountant, savvy banker, and logistics expert, each of whom should specialize in international transactions. They are your export dream team (EDT). You may feel that you can’t afford to pay for these professional services, but in truth, you can’t afford to do without them.
The Fab Four: Lawyer, Accountant, Banker, Logistics Expert
A qualified lawyer, well versed in international trade and the Internet, will protect you from those who would take advantage of your inexperience in the global marketplace or from unknowingly perpetrating violations yourself! Any one of the big national law firms, such as Baker & McKenzie; Skadden, Arps, Slate, Meagher & Flom; Foley & Lardner; and Latham & Watkins, will be able to advise you on intellectual property issues, the Internet, mergers, acquisitions, and reorganization. The larger the law firm, the greater the overhead and the higher the hourly rates you will be expected to pay. Be aware of this starting out, and if you can’t afford it, go elsewhere to make your investment more cost effective.
Tip To find a good lawyer, ask around and research, research, research! You’d be surprised at how asking a simple question to your accountant, banker, or successful small business peer group—“Who do you use for legal representation?”—can help you home in on following up and getting a solution. Strike a balance of likeability, specialized experience, and affordability that meets your needs. You can also find additional assistance from FindLaw.com and Lawyers.com.
A good accountant specializing in international taxation will help maximize your cash flow, limit your eventual worldwide tax exposure, and protect you from double or triple taxation scenarios. The big accounting firms such as EY and Deloitte have offices in nearly every country in the world and can offer you a broad variety of global services, but they’ll cost you. A work-around is to find a smaller accounting firm that specializes in international accounting and taxation matters for small businesses.
A well-versed banker can help you finance an export sale, guide you in structuring competitive payment terms (including online options), or even advise you on risk factors before you transact business in a new overseas market. The large banks such as J.P. Morgan Chase, Bank of America, BMO Harris Bank, PNC, and Citicorp have an unmistakable identity and usually have small business banking divisions as well as branch offices worldwide.
Tip Even though the thought of using the big bank guys might intimidate you, once you are a customer—and that could be only the basis of depositing $250 to open an account—you are entitled to free consultations with the international banking experts to help you better manage your export business.
A seasoned logistics expert (refer to Chapter 9 on transport options) will help you minimize the risk, complexity, and cost of transporting products worldwide. Big logistic firms such as UPS, DHL, and FedEx transport products worldwide, prepare specialized export documentation, build shortcuts in standard export shipping processes, monitor shipments, and offer guidance on regulatory issues involving compliance and trade. Freight forwarders often serve the same purpose, but they do so on a more-niche basis (by industry or geographic location). They too organize shipments to get goods from one point to a final destination. Any of these types of organizations are effective and serve as an architect for transport. Before you send your product off on a boat, get comfortable with one point person to help you navigate the choppy waters and ask her about her resources and whether she has people on the ground in the country where you desire to conduct business. And, as always, have a backup logistic provider in case something goes awry in a country where business is booming.
For your legal, accounting, and banking needs, I suggest you start out with a smaller firm that can attend to you on a more personal and economical basis. Many founders of small boutique law firms, for example, acquire their experience working for a number of years at a big international law firm prior to starting their own business. To keep overhead costs and client fees low for small business owners, they focus on the highly specialized practice areas that are in high demand, such as Internet law, global trademarks, and international franchising. The benefit of contracting a smaller firm to satisfy your needs is threefold: prior big corporate experience at a fraction of the cost, affordable rate structure, and specific expertise.
When a question is too tough for your small firm to handle, let them outsource it to a larger firm with a more developed international presence. That way, you can stick to your budget and your small firm will stay in charge of your legal or accounting operations. But when you reach the point where you’re outsourcing more than in-sourcing, it’s time to make the jump to one of the big guns! The large international firms employ individuals of many nationalities who are well versed in the laws, professional ethics, and regulations of the countries in which they operate and well positioned to serve your interests. Expect to require more extensive and sophisticated information about the countries you export to as your business grows, particularly if you do a lot of business in any one of them.
Your lawyer, accountant, banker, and logistics expert are vital to the success of your export strategy. They should be considered the charter members of your EDT. As you will see, they often work in concert to keep your new enterprise in the most advantageous legal, financial, and logistical position possible.
Tip I strongly encourage you to set up an export advisory board (EAB) at your company to help you tackle tough challenges, cut costs, expand rapidly, get key introductions that lead to significant business down the road, and solve problems before they fester. Unlike a board of directors, an EAB does not have authority over your business. It is purely there to offer advice that you can take or leave. If you don’t know how to establish an EAB, conduct an Internet search with the keywords “How to create an advisory board.” Then, follow the suggestions pertaining to exporting. The advisory board will serve in addition to your EDT because it will not charge you for consultations nor does it have any vested interest in your business other than to help you grow. Your attorney on the EDT should draw up a simple contract. What’s in it for people that will encourage them to join your EAB? Perhaps a small annual fee (stipend), gift card, occasional dinner, or excellent connections to high-level people with common interests will motivate them to jump on board!
Protecting a trademark in the United States—whether it’s your own company name, a product, or your supplier’s product name—is a very complicated procedure best handled by a very competent attorney.
Protect Your Intellectual Property
When you are considering adopting a trademark, you or your attorney must perform a search to see if anyone is using that mark on a similar product or service. If you discover that someone has beaten you to it, you then have to find out when the other party began using the mark and if it is currently in use. If it is not, you have to determine if you can have the rights to it. You may find out that another firm is using the same mark but on a totally different product or service. For example, you might have trademarked the name Violetta for your line of purple bird feeders, only to find out that another firm has trademarked Violetta for their line of candles. In either case, you’ll need legal advice as to your right to use the mark.
Most trademark and patent registrations are made through the commissioner of patents and trademarks in Washington, DC. After you have taken the necessary steps to protect your design or mark on the domestic front, you will have to start the process all over again in the country in which you are about to do business. Particularly if you are registering marks in multiple countries, it will be crucial to have an attorney who specializes in international intellectual property management. Always discuss fees in advance because this process can be very costly.
Patents and copyrights need the same attention. You never want to see anyone, anywhere in the world, take what you have created and put their name on it.
Legal Protection in the Online Environment
International domain name protection requires specific skills, experience, and legal governance, so it is best to find a lawyer who is familiar with Internet Corporation for Assigned Names and Numbers (ICANN). You should manage domain names as carefully as any other intellectual property within the firm.
Domain Name Protection: Part of Your IP Protection
You can secure a domain name on your own in minutes (try NetworkSolutions.com or GoDaddy.com), but the international use and scope of it may not apply worldwide. Furthermore, registering a domain name does not necessarily create rights to a trademark. For example, let’s say I register laurelpizzas.com as a domain name in the United States. After securing the domain name, I cannot assume that I also own it as a trademark and that the same domain is available in China (laurelpizzas.com.cn). That is where an international lawyer becomes invaluable for protection, maintenance, and enforcement of the domain name as it relates to your international business brand.
Well before deploying an attorney, a good exercise to go through when you start up or launch a new product or service via an established enterprise is to ask yourself two questions: How important is the domain name or mark to me? Is it a part of my core business? You’ll be surprised at how those two questions force you to home in on what really matters to you on legal protection (think along the lines of Twitter, Facebook, and Apple—they all started out small). If something is central to your organization’s growth, you better protect it, patrol it, and keep it updated and scalable.
A lot of online legal-environment protection will come into play based on where you are headed with your business and how the Internet factors into your overall business strategy (all the more reason to deep dive into Chapter 2). Budget accordingly and allocate resources to get the appropriate legal protection you need. To avoid the “I never saw it coming” experience, discuss with your international attorney in great length about protecting your products and services, including online properties and Internet strategy, and all aspects of trade dress—which refers to the look and feel of a product—before exporting them overseas. You’ll be glad you did.
Tip The Guide to Law Online, published by the Library of Congress, is a portal of Internet sources of interest to legal researchers. It also serves as an annotated compendium of Internet links. It’s an excellent source for laypeople who don’t have a legal background but want to develop an understanding of a country’s legal system before entering into it and contacting their own attorney for advice. Every direct source listed in the guide was successfully vetted before being added to the list. To access it, head to http://www.loc.gov/law/help/guide/nations.php.
Other Legal Considerations: Labor Laws, Contracts, and Agreements
Labor laws can vary overseas. You may find your export business growing by leaps and bounds, which is the goal of this book—to allow you to hire more American employees to support your exports and possibly even hire more people where your customers are: overseas. If that is the case, consult with your attorney and accountant to determine the best course of action based on the labor laws of the country you are contemplating entering and to fully understand the legal and tax consequences.
I would be remiss if I didn’t highlight the fact that it is nearly impossible to run an export business without creating some form of contract or agreement covering the following: exclusive distribution and supplier agreements , a joint venture, partnership, or licensing agreement, to name just a few. Think of it this way: every time you are about to enter into a relationship overseas that requires a long-term commitment and your company is on the line (e.g., could help you grow or take you down), consult with an attorney to compose one of these items to protect your interests.
Opening Your Bank Account
Opening up your company’s first business bank account is as simple as 1-2-3—just don’t forget to mention that you plan to export. If you are an established enterprise, skip this section unless you want to be sure you’ve got everything covered. You’ll want to set up and maintain your account in an organized fashion, because once you begin to receive money and pay bills, your statements will become the foundation of your accounting system.
Find a bank in your home country that has an international department (preferably one with extensive expertise on letters of credit), a strong worldwide presence, and that can provide strong personal service because you will need it. Further, look for a bank that offers twenty-four-hour online access from your desk or from a secured Internet line anywhere in the world and a mobile-payment feature with industry-leading security, including proven state-of-the-art encryption software. Online banking allows you to quickly view account balances, monitor transactions, identify current foreign exchange rates, and send and receive payments—all specifically designed to increase efficiency and cost effectiveness at your business. Before you visit your bank, call or e-mail the branch and ask what you need to bring with you to open an account. Here are some of the documents you will typically be required to bring: personal identification, such as a driver’s license or passport; business papers showing your type of organization, such as a copy of your business license, certificate, articles of incorporation, and corporate seal or corporate resolution; and a copy of one of your most recent utility bills (to verify your mailing address). It is also helpful to have several hundred dollars or so for the initial deposit, so that you can get your account activated right away.
Be sure you have good rapport with your banking officer. He will play a very important position on your EDT!
Banking in and with different countries can be a challenge. Choosing an international bank that is networked to branch offices worldwide and has relationships with other banks in the countries you intend to do business spares you having to open an overseas account and allows you to transact business in the currency of your choice. Further, choosing an international bank with a relationship to a bank in Japan will also allow you to save money by hedging extreme Yen–US dollar fluctuations. There will be also be times when you are unsure as to what currency you should pay in or be paid in (see Chapter 11). Other times, you might make a payment to an independent contractor in one country via PayPal or Square and not know if you should withhold taxes. In some circumstances, the issue of withholding taxes may be reduced or eliminated altogether by a tax treaty between two countries. How will you know? That’s where your team of export specialists, in this case your international banker, is ever so vital in keeping you informed and handling all that comes before you on a case-by-case basis.
Maximizing Tax Benefits for Your Multinational Business
Once you’ve got an organization set up and an accounting system that makes sense for the way you want to run your business, you’ll discover that your global growth will affect your financial planning. Depending on your form of organization, overseas business will present you with a whole new set of accounting and tax issues. Yet the name of the game will remain the same: minimize taxes, maximize profits.
At some point, ambitious as they may now seem if you’re new to the export scene, scenarios like the following will become your reality:
· You generate income through a salaried employee who resides in the country in which you do business.
· You generate income from an export intermediary who conducts business in a foreign country.
· You generate income from exports worldwide.
· You generate income through the writing of an export-success article for a highly acclaimed blog in China.
· You generate income through your e-commerce site from individuals the world over.
· You generate income through a service export you are providing to a company in Bangladesh.
· You generate income from mobile payments made through PayPal, Google Wallet, and Square.
You are probably beginning to see how an accountant with international expertise becomes indispensable. You wouldn’t want inappropriate accounting either to diminish the income you derive from any opportunities like these or to cause you to run afoul of tax laws. Don’t think for a minute that you can apply domestic tax rules to international transactions. For each case, you and your accountant must ask the following questions: How are these business arrangements treated from a tax standpoint? Are you required to pay any domestic taxes? Are you required to pay any taxes on profits earned in a foreign country? Are you required to pay taxes online and, if so, where and to whom? If you need to transfer assets to a foreign entity, how do you do it? Will your exports involve any intercompany pricing rules or complex foreign currency provisions? Are you better off, from a profit or cash-flow standpoint, seizing a particular opportunity or passing it up? And, a very important question to ask you accountant, when you are involved in large cross-border transactions, how do you avoid double taxation? In the United States, for example, as a boost to businesses operating overseas, the government offers a reduction on national taxes based on the taxes you pay abroad, which is referred to as the US Foreign Tax Credit. Use the list as a discussion point with your international accountant. It will serve you well as you explore virgin overseas territories.
More Ways to Guard Your Bottom Line
Be aware of the several other traps (and opportunities) awaiting exporters that follow.
Trade and Customs Duties
Planning and managing customs duties plays an important role in pricing your export product so that it is profitable. First, pay attention to how your product is classified (see Chapter 10 to find out how to determine your product classification), because that classification will affect what duties are imposed and thus make or break your chances of exporting it at a profit. Be sure to get your classification in writing from transportation and logistics experts and then check with them later on to see if there is ever a time when you can reduce or defer duties or even have your products cross borders duty-free.
US customs duties vary widely based on where a product is primarily made, the valuation of the goods, and the destination country. The duties raise revenue for the federal government and protect domestic producers. There are three different types of duties: ad valorem, specific, and compound.
· Ad valorem duties are assessed as a percentage of the value of the goods, in the form of either a transaction value or what you would pay in the country of origin. Always try to keep your invoice value at a net sales price. Don’t write up your invoice with commissions or transportation factored into your selling price or you may end up paying a much higher duty!
· Specific duties are assessed on a fixed-basis per-unit price, such as ten cents per kilogram or forty cents per item, regardless of the transaction cost.
· Compound or mixed duties combine the bases of ad valorem and specific duties. For example, a shipment might be assessed at 5 percent of the transaction plus ten cents per unit. This works well on very high-priced items.
Keep in mind that certain countries offer privileges on some imports. Before you export, check with US customs or your local department of commerce to find out the duties for your product and if your product is eligible for any breaks.
You should also inquire with your tax accountant about foreign trade zones (FTZs) and how they might help you reduce or eliminate customs duties. An FTZ is a domestic US site that is considered to be outside the country’s customs territory and is available for use as if it were in a foreign country. A US company can accelerate the process of duty drawbacks or tax rebates in one of these zones or even have a product imported, assembled on site, and reexported without any duties, taxes, or local ad valorem taxes being charged. In addition, there are duty drawbacks, which allow you to recover duties paid to US customs on exported merchandise, but you must perform feasibility studies to determine how this procedure might apply to and benefit your business.
For example, if a product is manufactured in the United States out of imported raw materials and then exported back out of the country, the imported materials used might be eligible for a duty drawback, less 1 percent to cover customs costs. The passages of US Free Trade Agreements enacted in more than twenty countries (i.e., the North American Free Trade Agreement [NAFTA]; the Dominican Republic-Central America-United States Free Trade Agreement [CAFTA-DR]; and the Trans-Pacific Partnership [TPP, in negotiation]) along with bilateral free trade agreements (i.e., Singapore, Australia, Jordan, Israel) have brought about many favorable developments in the area of customs duties as well. Your accountant should keep you posted.
Interest-Charge Domestic International Sales Corporation
An interest-charge domestic international sales corporation (IC-DISC) can increase your cash flow, provide a reduced taxable base at the export level, and even in certain instances provide a lower effective tax rate. To qualify for an IC-DISC, you must form a corporation (such as an S corp or a closely held C corp) that exports and produces or manufactures US export property (e.g., fabricated metal products and electrical machinery equipment) inside the country. It must consist of a minimum of 50 percent US content, which is sold primarily outside the country. IC-DISCs are “paper” entities and can defer commission payments of up to $10 million, a limitation that was intended to restrict IC-DISC activity to smaller businesses. According to Joseph Englert, president and founder of Export Assist, the IC-DISC acts as a commission agent on the export sales of the parent company. The commission income of the IC-DISC is calculated based on the combined taxable income and expenses related to the export sales of the US exporter and the IC-DISC.2 Consult with an international accountant to determine whether you should look into an IC-DISC for your business.
From the time you start out to the time you reach the mature stages of your export company, your EDT of international legal, accounting, banking, and logistic experts can add value and help create and maximize profit opportunities for you and allow you to succeed in the dynamic worldwide marketplace. Our discussion here is only an introduction to the legal, financial, and logistical issues that will affect your export business, a starting point for your long-term planning and a demonstration of the absolute urgency of getting the very best advice. Do not be bashful about consulting with your experts! As your business expands, the issues that impact it will become more complex and sophisticated. The more questions you ask, the more you will build your own expertise—and become a valuable export player in your own right.
Now that you have seen how to line up professional advisory support and build a solid management foundation from which to grow, let’s turn to a practical concern: picking the best foreign market for your product or service.
1. “Thomas Friedman: Hyperconnected,” Gawker, last modified January 31, 2013, http://gawker.com/5980150/thomas-friedman-hyperconnected.
2. Joseph Englert, “Interest Charge Domestic International Sales Corporation,” AICPA Store, last modified October 27, 2011,http://www.cpa2biz.com/Content/media/PRODUCER_CONTENT/Newsletters/Articles_2011/CorpTax/InterestChargeDomesticInternationalSalesCorporation.jsp.