When a business expands globally, it’s important to understand the tax implications of that global expansion. There are many things to consider, such as whether to establish a subsidiary in another country or work with an Employer of Record (EOR).
Tax regulations vary from country to country and the global marketplace is becoming more complex. Thankfully, HR technology is making this issue much less complicated for organizations needing global expansion. In this article, we’ll cover three things you need to know about taxes and global expansion.
1. What is global expansion and why do businesses expand globally?
Global expansion is the process of expanding a business or organization beyond its current operations into new, international territory. A global expansion strategy involves understanding geographic, cultural, legal, and economic differences between markets.
There are many reasons why businesses expand globally: to increase revenue, reduce costs by utilizing global resources more efficiently, and diversify risk. Entrepreneur describes the benefits of global expansion as follows: “Global expansion creates myriad opportunities for savvy companies. Having workers across the globe helps you attract and retain top talent, approach new markets more easily, and increase your revenue possibilities.”
The problem with global expansion is that it’s especially risky from an HR perspective. If you’re an HR professional and your company is expanding globally, the potential for increased risks and compliance challenges may be cause for concern. To understand the risks associated with global expansion, check out our article, 5 Risk Management Strategies for Your Global Workforce.
Recent HR technology developments have made it easier and more affordable to do business internationally. Companies can now reach global markets in a matter of clicks and hours or days, instead of months and years. Businesses that expand globally can increase sales revenue by capturing new customers in different countries and reduce costs through competitive labor rates or tax incentives offered by countries looking to incentivize their workforces.
2. How do taxes play into global expansion?
Taxes are one of the biggest challenges when an organization is undergoing global expansion. Taxes can be complicated and confusing to navigate, especially in different countries with different tax laws. Businesses need an expert to help them understand how taxes affect global expansion so they don’t get caught up on something that could potentially ruin their global operations.
Bloomberg Tax writes: “Firms expanding globally often jump into the decision too quickly, without considering the local labor and wage issues, as well as corporate structure decisions that can impact taxes considerably. Firms need tax guidance before expanding into new markets, so they understand when certain income or consumption tax scenarios are triggered.”
When expanding globally, businesses need to be aware of the different tax laws in each market and how they will apply to their business. For example, failing to understand the in-country contribution list and payslip could mean being noncompliant with payroll. Incorrectly running payroll and failing to make required withholdings or contributions can affect the worker’s take-home pay and social security.
Compliant worker classification is a key factor in tax compliance locally and globally. Misclassification of employees can lead to significant fines, penalties, and back taxes. As global expansion becomes more common, the risk for misclassification increases. Businesses need to be aware of these risks and take steps to mitigate them by working with an EOR that specializes in global HR operations.
3. What is an Employer of Record (EOR)?
An EOR is the place to go for human resource operations and market access when international global expansion becomes necessary. So you don’t have to set up a local legal entity in the host country, the EOR is a third-party company that hires a local person on your behalf. EORs provide a more efficient and less expensive alternative for organizations seeking to employ foreign workers or contractors.
Taxes aren’t the only complication that comes from global expansion. Statutory benefits, such as PTO and minimum wage rules, also differ by nation. An EOR can help with all of this critical and sensitive information.
There are a few names for EORs and also similar companies that provide similar, but not identical, services. In this article, The Differences Between a PEO, EOR, AOR & More, we cover the differences between these terms and what they refer to.
Use the right EOR partner to reduce hassle, uncertainty, and risk while exploring these uncharted international areas so you can focus on the advantages of global expansion rather than the drawbacks. When you’re choosing one platform from among many, it’s most important to consider how active the platform is in the countries you’re looking to expand into.
How GreenLight Can Help Your Organization Expand Globally
GreenLight is an EOR operating in 23 countries and growing rapidly. We provide payroll and payment automation, flexible billing cycles, the world’s first AI-driven classification engine, API integration, and more.It’s a wise idea for businesses that want long term success with their global expansion to use an Employer of Record like GreenLight. Schedule a demo today so you can start hiring abroad with ease.