Risk & Economy » Brexit » What should CFOs consider when doing business, post-Brexit?

What should CFOs consider when doing business, post-Brexit?

Despite Brexit, UK firms must invest and operate around the world in some big and fast-growing markets, says Mark Weil, CEO of TMF Group.

There is no topic more likely to polarise the boardroom, or family breakfast table, than Brexit. Regardless of your view of the case for Brexit, business leaders have had to live with the probability of the UK’s exit from the EU since the referendum result emerged on 24th June 2016.

Most will have prepared as best they can for a worst case outcome with respect to on-going trade relations with the EU 27. That includes the possible establishment within the EU 27 to reduce some of the complexities of trading from the UK as a third party with EU countries.

One part of the case for Brexit was the opportunity for firms based in the United Kingdom to increase their trading relationship with faster growing economies around the world. That is partly about future trade deals that the UK government hopes to forge.

Even in the absence of trade deals, firms can of course pursue those opportunities as, for example, the high level of imports from US and China into the EU and reciprocally of German exports to both demonstrate. The question then is how UK businesses should think about international opportunities post-Brexit with the possible tail wind of bilateral trade deals organised by the UK government.

Managing complexity

Even with trade deals, countries come with a complex web of non-tariff barriers including the softer factors around business rules whether accounting, regulation or employment law. Some of those factors fall directly on the finance function – the rules around raising money or to the proper filing of accounts for example.

Others are indirect in that they raise the cost and complexity of doing business and the financial implications of investing, operating and, if things don’t work out as planned, exiting. Whether direct or not, these will carry and operational cost and risk that the finance function needs to be on top of to help ensure the right decisions are taken.

TMF Group provides companies with an integrated business support capability in over 120 offices around the world, doing accounting, tax, compliance, payroll and other administration necessary to invest and operate compliantly. We produce an annual Global Business Complexity Index that captures the difficulty of doing business in countries based on everything from the time and cost of company formation to filing requirements and labour rules.

The overall case for setting up in some of the world’s largest and fastest growing markets will of course be driven by bigger issues than administrative complexity. But ignoring them can lead to unrealistic business cases and in the worst case, regulatory breaches that hit reputation and wallets hard.

A broad conclusion of our complexity index is that, regrettably, some of the world’s most attractive markets are also the most challenging to do business in. The BRIC nations, for example, have been heralded as dominant future economies and this year marks a decade since their inaugural meeting.

They are the kinds of places that a UK government looking beyond the EU would seek to do business with. Yet all save one of them rank in the top half most complex jurisdictions on our index. Even the US, a beacon of free trade (at least historically) and the most likely country for the UK to establish a trade deal with post Brexit, is outside the top 10 simplest countries on our index, reflecting factors such as a myriad of state-level regulation that a pan-US business plan will need to deal with.

In specific areas of complexity, we found that managing accounting and tax was deemed to be “very” or “extremely” complicated in almost one in five (17%) of the world’s jurisdictions. Similarly, reporting formats are not standardised around the world.

In 70% of jurisdictions surveyed by TMF Group, countries prescribed the format of accounting reports. So any firm moving to a new country beyond the EU will have to adapt to that country’s reporting format which in turn often requires the use of prescribed accounting tools.

Another factor to consider is the way people are paid and its crucial impact on cashflow. Many countries – especially Latin American countries – mandate a “thirteenth-month salary”, or a requirement to pay an annual bonus, often a fixed amount at a fixed time of the year. Thirteenth-month salaries are a prime example of the kind of complexity which could trip up an unwary British company, and can add large amounts to labour costs.

The consequence of these kind of complexities is partly in their direct cost. The bigger consideration is the cost of mistakes ranging from reputational damage to loss of license to financial sanction. In 85% of countries we surveyed, we found that businesses which do not register for tax, risk significant finessed.

Similarly, non-compliance with regulations can lead to significant fines in 83% of jurisdictions and possible imprisonment in 48%. Given the scale of sanctions taken in particular by banks in areas such as anti-money laundering, these kinds of mistakes can become the major determinant of the success or failure of the whole investment.

Seeking new horizons

So given complexity of doing business as a factor, what does it say about where UK companies might look to invest? The latest Office for National Statistics figures on foreign direct investment show that in 2017 – the latest year for which the ONS provides figures – the Americas was the top non-EU FDI destination, followed by Asia (although Asia surpassed the Americas in 2016). Another place to look is the World Bank’s Doing Business Report 2019, which rated China and India amongst the most improved business regulation regimes, with 13 reforms between them.

What our work on complexity reinforces is that even firms who follow the herd and move to the Americas, China or India, should anticipate challenges. For example look at the Americas. In both 2017 and 2018, TMF Group research found that together North and South America housed half of the world’s top 10 most complex countries for accounting and tax compliance. Many of the businesses investing in the Americas will focus on the USA – but as demonstrated, even the US is a complicated place. It is the world’s most litigious society – 2.2% of GDP is spent on litigation, a higher proportion than any other country in the world. Firms who have previously worked exclusively within the EU will not necessarily find the US easy.

Likewise, despite its reforms cited by the World Bank, and despite many improvements, TMF Group’s Global Business Complexity Index found China to have the ninth most complex complicated business environment of any jurisdiction surveyed.

Regardless of Brexit, your feelings about it and whether and in what form it will happen, there are tremendous opportunities for UK firms to invest and operate around the world in some big and fast growing markets. Those opportunities are there today and do not need to wait on trade deals that may anyway be slow in coming and limited in their effect.

Unfortunately, many of the best opportunities will also be the most complex to do business in. That is not a reason to hold back. It is a reason to be prepared so that you have costed for and are ready to deal with that complexity. In particular having a firm grip of how local rules across finance, legal, HR and other functions work and how they may change should form part of your plan along with the most efficient operational solution for managing them.

The Finance function can provide an objective view of whether those factors have been properly addressed in a realistic level of cost and management plan that will allow the business to focus on clients and growth, rather than getting bogged down in dealing with unforeseen administrative challenges.

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