Any Irish company that is serious about growth has to look abroad, though they should do their homework as not all markets are the same

THE DOMESTIC market is so small that Irish companies looking to grow have little choice but to look overseas. This means that many local firms have to start out with global ambitions, according to PricewaterhouseCooper’s tax and legal services partner Joe Tynan and audit partner Damian Byrne.

“If you compare software companies in Ireland to similar ones in the UK or the US, the Irish ones might be exporting from day one whereas their US or UK counterparts can get to a very large scale before even considering it,” says Byrne.

“That gives those firms an initial advantage and places a hurdle in the path of Irish companies. But for companies here that can compete, there are great advantages to going global.”

Tynan points out that Irish companies wishing to grow internationally already enjoy some advantages. “If you look at FDI [foreign direct investment] in Ireland, it hasn’t come here for the Irish marketplace,” he says. “It’s come here because it’s a good place to export from and it’s a good place to base services. Such companies as Google, Ebay and Linkedin are here because they can provide services across EMEA [Europe, the Middle East, and Africa] from this country.”

Irish companies can benefit from the same advantages.

“The usual route followed by Irish companies is first to go to the US or the UK,” he says. “Then it fractures with some going for Asia, some going for South America or continental Europe. And once they are doing that, they have to compete internationally. They don’t get an easy ride because they are Irish companies – they have to compete on price, product, quality and availability.”

In many ways, this has become a given. Irish companies can do this, it is in other areas that they tend to fall down. So Tynan and Byrne have developed a checklist for Irish companies wishing to do business globally.

The first item on the list is choosing the right salesperson. “For a small business, getting the right salesperson is incredibly difficult,” explains Byrne.

“If you are selling a complex technology solution, it can take months for the salesperson to build an understanding of the product and then to build a pipeline of leads. If the person isn’t effective, it can be a very costly mistake.”

Tynan says that finding such a person is not as simple as it may seem at first. “Probably one of the biggest mistakes made by any business that is expanding internationally is getting the wrong salesperson,” he says.

“For example, if you take a salesperson who’s coming out of a big company where they led a large sales team, they will be very expensive and will appear to be well connected, but they may not be able to do it for you.

“And there will be very expensive termination costs involved as well. While it is true that firms are able to hire and fire quite easily in the US, most senior people have clauses in their contracts that make termination very costly.”

The next point on the list is having a proper understanding of the compliance burden in overseas markets. Many businesspeople mistakenly believe Ireland has a high compliance burden whereas the opposite is the case.

“Ireland, for all its faults, doesn’t have a high compliance burden,” says Tynan. “Ireland is the easiest country in Europe in which to pay business taxes and the seventh easiest in the world. Just about any other place you go to is going to be more difficult. Most people get a shock when they realise this. You have to check out what the compliance issues are before entering any new market.”

This leads neatly to the next item: assuming the rules overseas are similar to those in Ireland. “You can’t assume that any market is the same as any other,” Byrne says. “In many countries, you need a licence to trade, for example.”

Once you have familiarised yourself with the rules and regulations, it’s a question of moving onto more strategic issues and among the most important of these is deciding how the overseas office will be remunerated. This may sound quite technical and a bit on the trivial side for companies engaged in international expansion but it is crucial to the long-term health of the enterprise.

“When companies expand into a new market, they are just interested in selling; they seldom think through issues such as this,” Byrne says. “It often doesn’t matter that much in the first few years when the office is barely, or perhaps not even, covering its costs.

“But what happens in year three or four when it starts to make a profit? In all developed markets, you can’t simply jack up the price you are charging for the products or services. That would likely be in breach of transfer-pricing rules and leave you open to a much higher tax bill than you would have to pay if you had had a realistic pricing policy in place from the outset. There are ways out of this, but they are very costly.”

This brings us to what Tynan calls “laying the foundation for a tax monster”.

This happens where inadequate consideration is given to the international corporate structure to be used. “If careful consideration is not given to this matter, you can end up in a situation where the Irish company is making losses in a low-tax jurisdiction and the profits are being made in high-tax areas.

“In the worst-case scenario, we have seen a businessperson who was having software code written in Asia without any contracts agreed or companies set up over there and was selling into the US with no formal structures there either. He sold the firm a few years later for $10 million but ended up keeping none of the money because the tax authorities in the various jurisdictions took it all from him. If he had taken proper advice at the outset, he would have been able to keep most of it.”

Creating an unintentional tax presence overseas can be equally damaging. And it really is a case of just being careful, according to Byrne.

“If an Irish company lands a big deal and flies over to Manhattan for a formal contract signing with photos taken, this action may cause issues. It’s just a question of taking advice before doing anything that could possibly create a tax presence where you don’t want one.”

Huge opportunities await Irish companies that observe these basic ground rules. “What’s out there is a global market,” Tynan says. “The open sectors of the Irish economy are already very competitive. The world is not in recession; Irish exporters are not seeing their sales dropping. Their costs are dropping and they are becoming even more competitive. In most cases, Irish companies are within two or three connections of buyers in major companies in markets around the world. If the product or service is right, it will sell globally now. Ireland has good people, good ideas, and we have plenty of examples of good Irish companies that are trading globally. Other companies can follow them – the opportunities are out there.”