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Business briefing series
20 issues for businesses expanding internationally
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All information is current as at October 2010
This discussion paper p resents the op inions and comments of the author First p ublished Octob er 2010and not necessarily those of Ernst & You ng, the Institute of Chartered
This communication provides general information which is currentAccountants in Australia (the Institute), or their memb ers. The contents areas at the time of production.for general information only. They are not intended as professional advice for
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Busin ess briefing series: 20 issues for businesses expan ding internationallyAll rights reserved.
First edition
ISBN: 978-1-921245 -62-6
AB N 5 0 0 8 4 6 4 2 5 71 Th e I n sti tu t e o f C h ar te re d A cc o u n ta n ts i n Au s tr al ia I n co r p o ra te d in A u st ra li a M e mb e rs L i ab i l it y L im it ed . 0 9 10 - 3 7
ABN 75 288 172 749 Ern st & Young.
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Business briefing series
20 issues for Anyone who has made the bold step of starting their own business has at somestage dreamed about taking that business of fshore in a bid for increased expansionbusinesses expandingand to generate additional revenue.
internationallyAlthough ambitious and potentially very lucrative, such a move could alsoprovevery costly if not donecorrectly.To assist business leaders with the process of taking on globalisation, theInstituteof Chartered Account ants in Australia (the Institute), in conjunction with Ernst&Young (EY) has produced this thought leadership paperentitled
Business briefing:
2 0 issues for businesses expanding internationally .
T he publication is the third part of the Institutes Business Briefing series
designedto help businesses to successfully navigate challenging issues. Thecommentaryin the report is divided into three key phases of an international expansionproject: Planning for
expansion Choosing your location
Conducting businessoverseas.
Business briefing: 20 issues for business es expanding internationally has been written
and presented in such a way as to maximise the readers understanding oftheissues. Each of the three sections contains a series of pull-out boxes whichguidethe reader as to the types of questions that they should be asking with regard
to the business. These questions are consolidated into a detachable checklistatthe back of the publication which can be used when consulting the
paper.I trust that you will find this thought leadership paper interestingandworthwhilereading.
Michael SpinksFCAPresident
Institute of Chartered Accountants inAustralia
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B u s in es s b ri ef in g s er ies :2 0 i s s u es for b u s in es s e s e xp an di n g in te rna tio n al ly4
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Contents
Introduction
6...................................................................................................
Planning for
expansion
8......................................................................................
1. Strategy 8................................................................................................
2. Global trends 8. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . .
3. Marketresearch
9........................................................................................
Choosing the
location
10......................................................................................
4. Political and socialclimate
10..............................................................................
5. Local tax and regulatoryenvironment
11...................................................................6. Legal system 12.................................................................................
.........
7. Innovation andincentives
12..............................................................................
8. Location andinfrastructure
13.............................................................................
9. Culturalcompatibility
13..................................................................................
10. Local workforce 14.......................................................................................
Doing business
overseas
15. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . .
11. Global managementteam
15..............................................................................
12. Global human resourcesconsiderations 16. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . .
13.Financing
17.............................................................................................
14. Choosing the operatingstructure
18.......................................................................
15. Implementing the operatingstructure
18...................................................................
16. Foreign exchange management and currency risk/controls
18...............................................
17. Business and internationaltaxation
19.....................................................................
18. Supply chain, transfer pricing and intellectualproperty
19...................................................
19. Risk management
20.....................................................................................
20. Exit or wind- down 20.............................................................................
........
Checklist
21.....................................................................................................
Contact details Back cover
................................................................................
........
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Introduction
In August 2010, China overtook Japan as the second largest economy in the world, and it is closing thegapon the United States. The world is changing at a fast pace, driven by globalisation. Throughout theglobalfinancial crisis, agile organisations continued their quest to participate in and prosper from thetremendousgrowth in the emerging markets. Very few Australian organisations can afford to ignore this growthmomentum,nor the other benefits that can be achieved from investing in emerging and internationalmarkets.
The Globalization Index supports many marketindicators
Regardless of the size of their international footprint,1
that the trend towards ambitious internationalexpansion
the research identified the top five drivers for
will continue. This research depicts a global
landscape
businesses expanding internationally as overall
growthwhere organisations execute their international
opportunities, profitability, access to materials, access
expansion strategies at a rapid pace. This speed of to human resources, and the ability toinnovate.expansion may indicate the strong desire by
companiesto be the first-to-market and/or the imperative toBenefits for international
companiescapitalise on new marketdevelopments. from
globalisationThe survey was conducted in August 2009, with520
In which of the following ways hasglobalisationsenior executives worldwide. 38% of
respondents
had a positive impact on your business overthepast threeyears?
indicated that they currently derive over half oftheirrevenue from overseas operations. As indicated inthechart below, by 2012 more than half of the respondents
8 6 %
Overall growthexpect this to be the case, with one in four respondents 8 0 %5 3 %
expecting to derive more than three quarters of
theirrevenue from overseas. 6 8 %Profitability 5 1%
Only one in 50 executives surveyed believescontaining
3 2 %
their operations within their home country orearning
3 5 %
Access to materialsless than 10% of their revenue from overseas markets 2 7 %3 9 %
by 2012, to be a viable option.4 2 %
Access to 2 7 %human resources 2 1 %
What proportion of your companys revenues isderivedfrom its overseas operations (i.e. outside yourcompanys
27 %
Ability to innovatehome market) currently, and in three yearstime?
* 3 3 %
3 1 %
Proportion of3 0 %
revenue fromInvestmentNow opportunities 2 7 % international clients:13 10 17 23 20 18
2 9 %
25 75%Three1 6 %
years 2 7 15 21 2 8 26 Access to finance 10 24%2 0%time
15 %0 9%
0 % 1 00 %
Sou rc e: T he Glo bal iz ati on I nd ex S ur ve y 2 009
Proportion of revenue:
0 9% 15 24% 50 75%
10 14% 25 49% Over 75%
Sou rc e: T he Glo bali zat i on I nd ex S urv ey 2009
* Fi gu res m ay no t ad d up t o e x act l y 10 0% , d ue t o ro un di ng .
1. The Globalization Index 20 09 is a report written by Ernst & Youn g with th e Economist Intelligence Unit. The 2010 edition of the report is expected to be
released in January 2011.
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This report, the 20 iss ues for businesses expanding and incentives, location and infrastructure,culturalinternationally , focuses on the core issues that you compatibility and the local workforce. These i ssuesareshould consider when formulating and executing
yourlooked at from a strategic point of view rather than a
international expansion strategy. It does notprovide
country specific angle. Whilst for example legalsystemscountry specific analysis, however, common
themesare not examined in any detail, we raise thequestionhave been identified that can be applied regardless of whether your business is equipped to deal with a legal
your targetlocation.
system based on civil or Muslimlaw.
The commentary in this report is divided into thethree
The last section deals with issues associated withdoingkey phases of an international expansion
project:business overseas. An existing globalmanagementteam would make it easier to set up your footprint1. Planning for
expansion in a foreign location. Would your management
team2. Choosing yourlocation know how to deal with a request by a high
ranking3. Conducting businessoverseas.
official asking for a facilitation fee? Does your global
workforce need security protection in addition tootherincentive payments? Will your business befundedThe planning
funnelby an intercompany loan or do you need toconsidermore innovative funding arrangements such asIslamicfinance? Will you acquire an existing local businessto
Planning for expansion reach a certain market share quickly? Foreign
exchangemanagement and currency risk/controls, businessandChoosing the
locationinternational tax, supply chain and intellectual propertyand risk management issues are also looked atinmore detail.
Doing
business Finally, we consider exit and wind down issues.Agile
overseas
organisations will go through the process described
above at regular intervals. Based on the findingstheymay decide to wind down operations in onelocationand commence operations in another. This maymakeperfect commercial sense, however, broader brand and
reputation issues must be considered. For example, ifThe diagram above depicts the import ance of you have become an important employer in a
particularfunnelling your ef forts to ensure the bulk of your country or region your exit must be carefully plannedtoenergy and resources are spent setting up
successfulmitigate socialbacklash.operations. The first two phases focus on identif ying
potential locations and selecting the mostappropriatefor your operations.
In the planning for expansion section we examinetheimportance of a clearly defined strategy, global trends
driven by changing demographics and marketresearch.The planning phase is vital to avoid wasting resourcesinassessing investment locations that should neverhavebeen considered in the first place.
The detailed assessment under the majorheadingchoosing your location involves looking atthepolitical and social climate, the local taxandregulatory environment, the legal system,innovation
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Planning for expansion
1.
Strategy
changes that arise from this growth that will affectbusiness practices and profit ability in the future.In
Clearly define and stress test your strategycountries such as China and India, populationgrowthWhat are the implications of international
expansionis accompanied by increasing affluence and agrowingfor your existing business operations? middle class consumer base. Therefore, thetraditionalcharacterisation and perception of emergingmarkets
Very few organisations can afford to ignore theas predominantly low cost manufacturing centresis
increasing trend towards globalisation.Entrepreneurial quickly changing. Emerging markets are also
becomingorganisations that are the first to move often have
strong consumer driven societies where the demandfor
the most startling success stories. However,those products and services is increasing faster than in
moreorganisations that do not stress test the financialand established and mature
markets.operational impact on their existing business, may
losemore than their dream of becoming a global player. The implications for your business are clear. Youcanbecome a participant in these markets and tapinto
Before expanding internationally, you should havea an ever increasing consumer base to help
secureclear picture of what you are trying to achieve. Areyou your future profitability, or you can watch others
fillsearching for a new and cheaper source of capital,
that space. Those business leaders that do notact
market leading talent, more cost ef fective production,risk watching others reap the benefits and maybe
new markets, or all of the above? Can you execute yourchallenged when those first-movers turn theirattention
strategy alone or do you need strong partners bothto Australia. Seen from this perspective,international
from an advisory as well as a business perspective?expansion is also an opportunity to help strengthenyour
You should consider the pressure global expansionmay business at home in the medium to long
term.have on your domestic operations in terms offinance,management time and human resources. Will youenter
The flow of foreign direct investment (FDI) into acountrythe identified market(s) through acquisition, joint
venture,
is an important indicator of the economic viability
ofa partnership or a green field development? Ensure you that location. Similarly, demographic trends such asthetest your assumptions and have a clear understanding
ofage and education profile of the population may also
how long it will take to turn aprofit.
indicate future economic vitality and the growth ofaconsumer base. An example of this is Vietnam,wheremore than 70% of the population is 30 years or younger.2. Global
trends Vietnam is currently attracting significant FDI incertainIs your organisation exposed to new and industrysectors.emerging
markets?Has the composition of yourmajorcompetitors
changed?Global foreign direct investment witnessedamodest, but uneven recovery in the first halfof
Is foreign direct investment in yourindustrysector clustered in locations where you
do
2010. Developing and transition ec onomies
nownot have a presence? absorb more than half of globalFDI.
It is important to monitor and to be aware of global World Investment Report 2010
trends, particularly in relation to demographicchanges.
United Nations Conference on Trade and Development
Australias population is estim ated to grow to 36millionby 2050. To put this into perspective, that isequivalentto the bi-monthly combined population growthofChina and India. World population growth is notanew phenomenon; however it is thedemographic
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3. Market research
What research is available to provide youwithinformation on market and industry
conditions?Is this information up-to-date and what is the
future outlook?
Create a short list of new and emerging markets,
tap into existing networks, talk to youradvisorsand visit your short listedlocations.
Market research is very important but can becostly;however there are numerous resources available free of
charge to help you uncover useful information aboutthestrengths and challenges of global markets. Muchofthis research can be done from your home base andwillhelp you in generating a short list of potentiallocationsfor expansion.
Reliable statistical data or reference materialcansupplement but should not replace a field trip. Theworldis moving and changing fast. What may have beenagood investment location historically, may notpresentthe same opportunities in the future. Tap intoexistingnetworks via chambers of industry and commerceorother organisations representing an investment
location,visit trade fairs, talk to your advisors, visit your t arget
locations and meet the local people. This willgreatlyassist you to make an educated and informeddecisionabout whether that market is right for yourbusiness.
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Choosing the location
4. Political and social
climate
An assessment of your target locationspoliticalenvironment, including the potential for social unrestor
Is the political system stable? How doyou regional instability is relevant for determining the risk
ofassess sovereign risk?
any potential investment. This has been animportantDoes the country suffer under high levels of issue in South East Asia, where variouscountriessovereign debt? have been affected by social unrest in recentyears.Is there likely to be social unrest or are
workers To support this, the graph below illustrates theorganised in powerful unions?importance investors place on political stabilityinassessing emerging market locations. Almost 60%of
The pace of change of the global political landscape
respondents rated political stability as the most important
is accelerating due to globalisation. Politicaldecisions government-related factor to consider when deployingin one country may have far reaching implications
for FDI. Before entering a new market, you shouldevaluate
trading partners or the globalised business community the risk based on the future outlook for the country or
theat large. The response to the global financial crisiswith region, not just the status quo or historic events.
Ensurestimulus programs around the globe illustratedthis. that you take note of any early signs of social
unrest.Most governments appreciate that globalisation isthemotor of economicexpansion.However, as the graph below illustrates, concerns are If you were to plan a foreign direct investment
indeveloped or emerging markets over the nextyear,
now emerging about new protectionism,regulations which of the following would you consider to be
theand trade issues. More than 5 0% of Globalization Index
most important government related-factors?respondents believe that major economies will
adoptlimited protectionist measures in certain keysectors. Po lit i c a l st a b il it yFurthermore, the burden of sovereign debt may force
a country to abandon business friendly
programs.
Ma c r o ec ono mic st a b il it y
Cu r r enc y st a b il it y
Ho s t go ve r nme nt su pp or tWhich of the following asser tions about theimpact
f or i nw a r d f o r e ign i nv e s t me nt
of protectionism in coming years most closelyreflects
H os t go v e r nme n t a t t it u de
your view? (% who agree with eachstatement)
t ow a r ds dome st i c e nt e r p r is e s
C or p or a t e a n d o t he r
r e l e v a nt t a x e sM a jor e c on omie s wi ll a do pt
C la r i t y a nd pr edic t a b il it yl imi t e d p r ot e c t io nis t me a s ur e s
o f t he le g a l s y s t e min c e r t a in k ey s ec to r s
S t r e ngt h a nd f a ir n e s s ofG l oba l ma r k e t s w i ll r e ma in or
le g a l s y s t e mbe c ome m or e o pe n a s g ov e r nme n t s
Ri s k of n a t ion a lis a t i on ort r y t o r e s t or e e c ono mic gr ow t hex prop riat io n
Do mes t ic p ol it ica l ex p edie ncy
w il l ov e r r id e c l a ims b y w or ld 0% 20% 4 0% 6 0%le a d e r s t o r e si s t pr o te c t ion is m
Dev elo pe d Em er gi n g Ti t - fo r- t a t p r ot ec t i onis m
w i ll t r igg e r a da ng e r ou s
So u rc e: T h e G lob ali zat i on I nde x S urv ey 2009
do wn wa r d s pi r a l in glo ba l t r a de
Th e w or ld e c o nomy w ill r e p e a t t he
pr ot e c t i oni st e r r or s o f t he 1930 s
D on t k no w
0% 10 % 2 0% 3 0% 40 % 50 %
So u rce : T h e Gl ob aliz at io n In dex Su rv ey 2009
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5. Local tax and regulatory environment does not rule out the possibility of government support
for certain industries to protect domestic marketsagainst
Is the tax regime business friendlyand/or foreign competition, through subsidies or other forms ofcompetitive
? protection. An extensive double tax treaty networkmayDoes the country have free trade agreements likewise look impressive; however it is necessary tolook
or double tax treaties?beyond withholding tax rates and test how thetreatiesDoes the regulatory regime set the scene for deal with mutual agreement procedures andarbitrationa sound corporate governance framework? around transfer pricing, permanent establishmentissuesand a global work force. Not all double tax treaties areA low headline corporate t ax rate is always appealing .2the same and some countries may try to asserttaxing
However, this can also be deceptive due tomany rights beyond what investors would ordinarily
expect
factors including the existence of state based taxes,
under OECDguidelines.
withholding taxes and consumption taxes such asavalue added tax (VAT). Your market analysisshould
A countrys regulatory framework will beconsideredinclude commercial discussions with a local
marketopen to FDI, if it can strike the right balancebetweentax expert taking into account your specific facts
andcreating a secure environment for effectivecorporatecircumstances where
possible.governance across all industry sectors,withoutstifling entrepreneurial freedom ordiscriminating
Free trade agreements generally indicate an open and
investment friendly economy. However, theirexistence
against foreign investors.
Legal systems around the
world
Ci vi l L aw
Co mmo n L aw
Mu sl im L aw
Cu sto ma ry L a w
Mi xe d Sy ste m
S o ur ce: Leg a l s y s te ms a r oun d t he w or l d, U ni v er s it y o f O t t a w a : ww w. ju ri g lo b e. ca /e ng / i nd ex. p h p
2. Ernst & Young Passport (in cludes the 2010 Worldwide Corp orate Tax Guide , the 2010 VAT Guide , the 2009 Global Executive
and the
2009 Transfer Pricing Glob al Reference Guide )
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Choosing the
location
(continu ed)
6. Legal system 7. Innovation and incentives
Is it a common law system? If not, areyou
Should you develop your products inemergingsure you understand the
outcomes?or fast growth markets?
Do the laws and the legal and judicial Should you have a presence at global
system provide support for and protection innovationclusters?of commercial
activities?Are generous grants and incentivesavailablefor innovative organisations?
An effective legal system that provides a balance
between protecting the commercial interestsof
Maintaining an environment that supportsinnovationbusiness, whilst also protecting the consumer,
canis critical for future business growth. Innovationcanprovide you with a level of confidence that you
can
be centralised, or decentralised and driven locally.
Aslegally enforce your commercialagreements.
demonstrated in the chart below, organisationswitha centralised strategy are just about as likely asthose
A common law legal system can be a hugeadvantage with a decentralised approach to regard it as essentialas you will be much more likely to understandthe to apply innovative ideas from local
markets.framework and outcomes. The map on page 11 shows
however that the number of countries with apurecommon law system islimited. Innovation is critical to growth
whetherCivil law is the prevailing system in much ofEurope
centrally or locally
drivenand in many of the emerging markets, while Muslimlaw
Please rate your agreement with the followingstatementregarding innovation activities within yourbusiness
may be encountered when doing business in theGulfStates, the Middle East and parts of Africa and Asia.
Ma i nt a in ing a n env ir o nmen t6 5 %
The legal system will af fect every aspect of your w he r e pe op le c a n be i nno v a ti v e i s 6 8%c r i t ic a l t o f u t ur e b us in e ss gr ow t h
international expansion. Forexample:
4 8 %We a da p t pr o duc t s an d se r v ic e s
It will affect merger and acquisition activity
to t he ne e d s of loc a l ma r k e t s 6 7 %
W e b e li e ve pr o c e s sitself and will set boundaries through anti-trust
58%inn ov a t ion i s a s imp or t a n t
61 %or competitionlaw
a s pr od uc t i nno v a ti on
A p pl y ing in nov a t i on ide as f r om 4 4 %
It will be instrumental for theprotection
lo c a l m a r ke ts is e s s e nt i a l5 2 %
of trademarks, commercial design or plantW e c r e a t e pr od uc t a n d se r v ic e s 3 6 %
innovations (including copyright ordistribution
s pe c i fic a ll y f or loc a l ma r k e t s 4 9 %
law, data protection and privacy)
In nov a t i on c ent r a l is ed in he a dqu a r t er s It will set the scene for litigation,arbitrationor mediation In nov a t i on dec ent r a li se d t o lo c a l ma r k et s
It will provide guidance with respectto
Sou rc e: T he Glo bal iza ti on I nd ex S ur ve y 20 09
information
technologyL abour law will regulate employmentmatters For many businesses, the decision to relocate
researchThere is real estate, planning andconstruction and development activities to an emerging market
willlaw to consider.
be influenced by a number of strategic and business
drivers. These may include using the target locationasa strategic hub for market expansion into thatregion.Conducting research in emerging and fastgrowthmarkets can drive new ideas by tapping into a new pool
of innovative and market leadingtalent.
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An understanding of the various governmentincentive
of potential considerations such as the targetlocationsregimes ranging from tax holidays and
incentives,size and accessibility, transport, utilities andinformationto discretionary government grant support may
helpsystems, access to financial services and otherfactors.sweeten the deal for many organisations . In
addition
3
to any formal programs, the host countrysgovernment
9. Cultural compatibilit
ymay be interested in attracting your investmentin Are there significant cultural differences that
mayorder to boost the local economy and create jobs in
impact the way you conduct yourbusiness?
strategic sectors. In most jurisdictions,governments Are there likely to be language barriers?may be receptive to specific negotiatedconcessionsand incentives, depending on the circumstancesand Entrepreneurial organisations through their very
naturethe nature of the investment. It is important toconsider can achieve growth and develop a global footprint
these possibilities at an early stage before committing relatively quickly. However, it can take a long timetoto the target location. This ensures that an
effective create a diverse workforce that reflects the variety ofstrategy can be developed that places your organisationmarkets in which the organisation operates, andculturalin a strong bargaining
position. customs can impact significantly on businesspracticesin the chosenlocation.8. Location and infrastructureWithout early at tention to these issues,yourIs economic infrastructure secure and
reliable?management team may be left behind in termsofcultural awareness and diversit y. This can generatea
How would you deal with power outages,
telecommunication down time or trafficcongestion?
competitive disadvantage as the management teamwillbe required to make rapid decisions, while at the sameIs the location central to your regional
markets, time ensuring that they have a clear understandingof
suppliers of goods and services?the local customs and operating
conditions.It is import ant to understand the infrastructure thatwillbe at your disposal in the target country and assess its
reliability and the positive or detrimental impact itmay
Cultural business etiquettehave on achieving success in your targetmarket.
Bringing your host in Tokyo a bottle ofAmericanwhi skey is a thoughtful gift. Its a major offens
e inParticular attention should be paid to the targetcountrys Dubai. American whiskey is revered in China
andcommunications infrastructure. In the digital agethis
Japan. But in the Islamic Middle East, andamongis arguably more critical than ever before, given
theMusli m hosts i n Asia, alcohol is strictlytabooimportance of information technology to the
effectiveIn the Mi ddle East and Asia, gi fts must alwaysbeoperation of modern businesses. You should
considergiven at the end of the meeting so they arenotregarded as bribes . In Latin America,however,
the capacity and efficiency of telephone andmobile gifts are a great icebreaker and can be given
atnetworks, and also data delivery mechanismssuch the start of a
meeting
as fibre optic cable and broadband internet. Is theBusiness cards in Japan, China and other partsof
infrastructure modern, reliable and safe? How vulnerableAsia are considered a representation of ones selfis it to being compromised for example from power offer and receive cards wi th both hands, andalwaysfailures and cyber at tacks, and are there
emergencylook at it as i f youre s tudying itcarefullysystems and disaster recovery plans in
place?In mos t of the Is lamic Middle Eas t, its the normtokeep visitors waiting. This is not considered
rude,When expanding into the target location,consider
but an extension of the Middle Eastern customtowhether the attributes which have made you
successfulmix business with pleasure. It is alsoacceptableat home can be leveraged to drive success abroad.
Yourto ask about your hosts children, especially sons,but never their wives .
ability to shift wealth, products, people and information,
will be heavily dependent on accessing adequatesocialand commercial infrastructure. There are a widerange
F o rb es: ww w. msn b c. m sn .c om / i d / 35 9 8 60 24 /
3. Ernst & Young, R&D incentives in the new tax landscape.
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Choosing thelocation
(continu ed)
10. Local workforceIn this respect, the importance of language cannotbeoverstated, as it will underpin everything thebusiness
What is the availability, skill-set and coststructuredoes in the target location. Effective
communicationof the local work force?
(or the lack thereof ) has the ability to make or break the
business. It is a key foundation upon which thesuccess
When expanding into a global market, yourhumanof the business may be built. Your management
teamresources can mean the dif ference bet weensuccesswill need the language skills to communicate
effectivelyand failure. As your organisation grows off-shore,
with those who will interact with your businessincluding
get ting the right people in the right locationcangovernment, regulators, financiers, suppliers, staf f and provide a vital competitive advantage. The qualityofcustomers. Even in countries where English is
commonlythe local workforce may often be the deciding factor
spoken or is the language of business, regional nuances in determining whether to expand your businessto
can be a source of misunderstanding and can lead to that location and also in determining howsuccessfulmore serious problems. such an expansion willbe.
As demonstrated in the diagram below, the level of
tolerance and understanding of cultural andethnic
Companies are viewing the labourmarketdifferences and language barriers in foreign markets more through a global lens, and in manycases,ranks highly
amongstGlobalization Index respondents off-shoring decisions, especially in higher,
when asked about the most important culturalfactors
value- added functions, are being driven bytalentwhen conducting business internationally. The
topshortages at home as much as by cost-cutting.
ranked issue related to the level of international
experience of the workforce is discussed below. A.T Kearney , Global Services Location Index 2009
Which of the following cultural factors do you
expect toWhen set ting up a local workforce in yourtargetbe most important when conducting your
international location, there are numerous practical issues toconsider.
business over the next year? (% ofrespondents) You will need to think about the education level
andexperience of your prospective workers and howmuch
L e ve l o f in t e r na t io na l
you will need to invest in training. You will needto
e x p e r ie n c e o f w or k f or c e
determine the terms and conditions ofemployment
De g r e e t o w hic h pr o duc t s
a n d s e r v ic e s n e e d t o b e a d a pt ed and you may need to negotiate with individuals,
labourt o s uit f or e ig n m a r k e t s
unions or other bargaining agents. There may belocal
L e v e l o f t ol e r a nc e a nd
und e r s t a ndi ng of c ult ur a l/ e t hic
legislation or regulations concerning workinghours,
di f fe r e n c e s in y our fo re ign m a r k e t s
weekends and public holidays and there mayalso
La n gua g e b a r r ie r s in
f or e ig n m a r k e t s be local customs or practices that will impact ontheoperation and activities of your workforce. Inaddition
To le r a n c e of f or e ig n b us in e s s
i nflu e nc e in hos t m a r k e t s you will need to consider your global
remunerationapproach and whether short term and longterm
Cu lt ur a l s imi la r i t y t o
ho me ma r k e tincentive programs will be offered to your overseas
employees, as well as the tax and regulatoryimplications
D e gr e e t o w hi c h a dv e r t is i ng
a n d c ult ur a l i ma ge r y c a n be
associated withthis.
u nder st o od int ern at ion ally
P r e s s a nd me di a f r e e dom
in f or e ig n m a r k e t s
Op e nne s s t o f or e i gn c ult u r a l
infl ue nc e ( e .g. th r oug h
t e le v i si on, c ine m a e t c .)
0 % 1 0% 20% 30 % 40 % 5 0%
So u rc e: T h e G lob ali zat io n In de x S urv ey 2009
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Doing business overseas
11. Global management team Will some members of your managementteambe required to spend a lot of personal time in the
Who will negotiate with government,customers, new location?suppliers and business partners? How should
you Will Australian expatriates be sent to runthe
manage risks such as bribery andcorruption? business or can the services of local
managersWho will be responsible for the recruitment of staff? be relied upon?
Do you have an international management teamor To be prepared, you must consider the challenges
yourdo you need to build one?
business will face during the start-up phase, and who
Commencing business operations in a new marketcan
from a management perspective is best placed to deal
involve significant risks, and therefore it is import antto
with those challenges. In determining this,considerhave a strong management team that understands
the
any potential negotiations with the government or
otherchallenges ahead. Having established the business ina
local officials in the host countr y. Negotiations mightbenew country, a variet y of issues may present
themselvesrequired over issues such as licensing arr angements,taxsuch
as:concessions, labour conditions and local jointventurepartners. The right negotiating technique will beessential.
How to ensure that your businessoperationsrun
smoothly?Does your organisation have sufficient knowledge of the
How much hands on involvement is requiredby
host country and expertise to conduct negotiationsoryour management
team?will you need specialists with expert local knowledgeto How much time and resources will it
consumenegotiate on your behalf? The graph on page 16 shows
setting up your operations? that organisations that operate in more than 10countries
Corruption Perceptions Index2009
9.0 10
8.0 8.9
7.0 7.9
6.0 6.9
5.0 5.9
4.0 4.9
3.0 3.9
2.0 2.9
1.0 1.9
0 0.9
T he Co rr up t io n P erc ep t io n s I nd ex ( CP I) me as u res t h e p e rcei ve d le vel o f t h e co rru p t io n in 180 cou n t rie s a nd t erri t or ie s ar ou nd t he wo rl d. Th e CP I is a s u rv ey of
s u rve ys , bas ed o n 13 d if f eren t exp er t a nd b u s in es s s ur veys . S co res ran g e f rom 0 (p e rcei ve d t o b e hi gh ly c orr up t ) t o 1 0 ( pe rce ive d t o h ave lo w le vel s o f c orr up t i on ).
Tran s p aren cy I nt ern at i on al. Al l rig h t s r es er ved .
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Doing business overseas (continu ed)
12. Global human resources considerationsare highly likely to have a diverse managementteamwhilst those with only domestic operations areunlikely
What benefits will you provide to expatriates andto have a significant proportion of senior management
what are the tax consequences? Do youremployeesfrom another
country.require securityprotection?
Do you have a team that can deal withassignmentMore global companies are more
likelymanagement, immigration and taxcompliance?to have international
managementShould these functions beoutsourced?Roughly what proportion of senior management
arenationals of anothercountry?
Although expatriates know your business andmayenjoy the opportunit y to work overseas; they mayalso
F orei gnlack local knowledge. Relocating and
remunerating
o perat i ons in3 0 1 6 1 9 9 2 6
11 or more expatriates can be more expensive than localhires,
cou nt rie s
so you should first consider the objectives of theF orei gn %o perat i on s
5 5 2 2 9 6 5 assignment and your desired return on investment.If
in 1 10
cou nt rie syou decide to use expatriates rather than local hires,you
Do mes tic must also consider what happens when the
assignment
o perat i on s 88
5 1 4
o nlyis finished. A repatriation plan should beimplementedso the knowledge and skills gained on assignment are0 % 10 0%
retained within your organisation. You must alsoensure
Senior management from another country:
that you have the resources to manage the relatedlocal
Less than 5% 5 14% 15 24% 25 49% 50%+and international compliance obligations, particularlyifS o ur ce: T he Glo bali zat i on In dex Su rv ey 2 00
9 you are expanding into more than onecountry.* F ig ure s ma y n ot add u p t o ex ac t ly 100 % , du e t o rou nd in g.
To ensure your expatr iate st aff are not distracted fr om
the job at hand, organisational suppor t will be requiredHave you also considered the possibilit y ofcorruption
to deal with relocation and immigration issues. Thislevelin your host country? Is it common for local
officialsof support will vary from organisation to organisation;
or business people to demand bribes, facilitation fees however this along with the development of anincentiveor kick-back payments? How will you deal with
suchplan should be factored in, even if the new host location
demands while protecting the interests and integrit yof
is attractive. Generally, most organisations developformalyour business? Will the local authorities be of
assistancemobility policies that consider issues such as the levelofor will they be complicit in the process? Failing
toremuneration, relocation benefits and otherincentives.identify and deal with such risks can bring
seriousIncreasingly organisations are also linking theirmobilityconsequences; as such practices may be
criminalprograms with their t alent management strategy. Thetaxoffences under the laws of both Australia and the affair s of your employees will also get more complicated
host country and punishable with heavy finesand/or
with tax exposure in more than one location,
specificallyprisonsentences. due to the revised rules in Australia for the taxation ofemployment income. Benefits provided to yourAustralian
The map on page 15 illustrates the perceived levelsworkfor ce whilst working overseas could potentiallybe
of corruption in countries around theworld. assessable both abroad and domestically. Tax equalisation
arrangements are a common mechanism usedforemployees who work abroad for a period of time.
Another important consideration (and cost) willbethat of security for your employees. In somecountries,expatriate employees may be the target of extortion
threats, kidnapping attempts or other forms of violence.
They will need to be assured of their safet y, which
may include specific accommodation,
transportand protection arrangements as part of their overallremuneration and benefitspackage.
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13. Financing The map below depicts how Islamic financeisavailable worldwide.
What are the cash flow needs of your business?
What is your projected revenue growth? Areyour
How you manage your ongoing finance raisessignificantfinancial models sound or overly
optimistic?taxation considerations both in Australia and yourtargetcountry. You should test your assumptions byusing
Do you need strong partners to finance yourfinancial modelling to determine if you can achievethe
expansion? Have you considered Islamicfinance desired debt to equity ratio recommended by your
financialas a source of funds?
advisors. You should confirm that your treasuryfunction
What is the debt equity mix of funding? Whatare is per mitted under local and Austr alian law to ensure
thatthe taxconsequences? the ter ms of your finance arrangements do not breach
theIt is import ant to stress test your financial models
and
transfer pricing rules or thin capitalisation thresholds.
Hybridrevenue targets to ensure you can service yourdebt.
financing arrangements, changes to the non-port folioThis testing should involve hypothetical parameterssuch
dividend exemption and withholding taximplications,as an interest rate hike, currency deflation or dif
ficultneed to be reviewed carefully from a tax perspective.
market conditions. During the global financialcrisis, You should stress test assumptions made in
financialsuccessful businesses continued their growth pathdue models to ensure that you can still service
theto the establishment and implementation of realisticand recommended debt levels if certain factors turn
toeffective business models that had been stress tested. the worse. You should also confirm that theproposedThere are many options available for raising finance debt to equity ratio on both the Australian and foreign
for your global expansion. There are, of course, well entity balance sheet is permitted under therelevantestablished conservative options including bank
ortaxation law as potential breaches of the transfer
intercompany loans, however, you may wish toconsider
pricing or thin capitalisation rules can result intheemerging financing options such as Islamic
finance.
denial of tax deductions.
Global Islamic Funds by Hom e Country of Asset Manager (QI
2010)
5
8 3 4 21 4
8 1
4 5
3
1
13USA 6
~ 2 .7 2 1 0 02
2 4 2 771 2
8 21 8 1 6
4
Malaysi a
~ 5 .1
1KS A K uw ait
~ 2 2 .8 ~ 4 .0 17 7
133
B ah ra in U A E
IslamicAuM
~ 1. 2 ~ 6 .1
2 6
by Country
(US$ billion):
10+1
1 10 9
0.5 1
0.1 0.5N o t e:Fu nd s pe r c ou nt ry in cl ud e t ho s e m an ag ed b y
p la yers h ead q uar t ere d i n t ha t re s p ect i ve ju ri s di ct i on .0.01 0.1
I n di cat e s t o t al A uM of I s lam i c f u n ds in US $ b il li on
Sou r ce : E ur ekah e dg e, Zaw ya Fu nd s M on it o r, E rn s t & Y ou n g an aly s is I n di cat e s t he n um b er of f un d s
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Doing business overseas (continu ed)
14. Choosing the operating
structure
16. Foreign exchange management and
currency risk/controlsAre you looking for slow organic growth?
Will you start out with a sales office or are you Is the local currency stable orvolatile?looking for a green field development?Is currency hedging available at a reasonablecost?Are you looking to establish an immediate
localCould currency restrictions inhibit or evenprohibitpresence? If so, will you set up a joint venture the flow of international funds?
or will you acquire an existing localbusiness?
Organisations generally can hedge internationalinternalThere are a number of factors that will determine
thetransactions effectively without adverseoutcomes,method of entry into your chosen location. The
marketalthough the tax and accounting treatment canbeconditions and the opportunities to capture
immediate
complicated. The risk and commercial exposure
risesmarket share will impact the design of yourinitial
exponentially where transactions with externalsuppliersbusiness model and structure. For example, you
mayand customers areinvolved.have time to establish various operating entities
and The diagram below illustrates the fall of the Euro againstbuild up your infrastructure such as factories or, youmay the US Dollar initially triggered by the sovereign
debtonly have time to set-up a simple representative office
crisis in Greece. The fall of the Euro acceleratedwhen
from which you can immediately negotiatecustomer the crisis spread to other European countries. The
risecontracts. These factors may in turn drive yourchoice and fall of a currency can impact the economics of
anof legal operating structure and also the method you
entire project or production set-up. It cansignificantly
adopt to gain a foothold in the market. For example,
alter the margins of goods sold on the world market, aswill you establish a joint venture with a hostcountry well as the cost of overseas sourced inputs. The hedgingpartner or operative and/or set-up various contracts
of cross currency supply or loan contracts mayremove
to establish your operations? T here will be costs and
some of the risk but will also come at acost.
benefits associated with these choices which mustbeconsidered, including those concerningcommercial,legal, regulatory and tax issues.
1 . 5 5
15. Implementing the operating
structure1 . 5 0
What are the legal and administrativeprocedures
1 . 4 5
and regulatory requirements for setting upthe 1 . 4 0operating structure and starting thebusiness?
1 . 3 5Should you outsource the set-up tocorporatesecretarial service providers?
1 . 3 0
How easy is it to start-up your business in thehost
1 . 2 5
country? What is the level of red tape and howwill1 . 2 0
you go about cutting through it? You may havelocalaccounting and reporting obligations and otherlegal N ov Dec J a n Fe b Ma r A pr Ma y J un J u l A u gstatutes that you must comply with at start-up andon
2009
20 10
an ongoing basis. Penalties for non-compliancemay S ou r ce : Y aho o F in anc ebe severe, including criminal prosecutions andprisonsentences. How will you make sure that youhaveidentified all obligations and how you will satisf y them?
In addition to foreign exchange management, youneedIt may be cost effective to outsource your
corporate to ensure that the target location does not imposesecretarial, accounting and tax functions to localexperts. limitations on the movement of currency in and out
ofthecountry.
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17. Business and international t axation 18. Supply chain, transfer pricing and
intellectual
propertyAre you aware of how the new Australianattributionregime in relation to controlled foreign
companiesHave you identified all possible supply
may allow you to take better advantage of chainefficiencies?efficiencies overseas?
Have you considered potential AustraliantaxHow will profits be taxed in your target location? issues as you move functions,
intellectualWhat is the treatment of losses? property and risk offshore? Is yourintellectualproperty and data protected?
Consider how tax is assessed and paid in the host
country. The timing and quantum of taxpayments
The development of an effective supply chainprocesswill impact your cash flow. Ensure that start up
losses
is vital to establishing ef ficient operations and
achievingcan be carried forward to reduce future tax liabilities. maximum profitabili ty. You should consider localandPayment of withholding taxes will typically be
requiredinternational commercial contracts, the adequacy oflocalon cross-border payments of interest, dividends and physical infrastructure beyond that which wasassessedroyalties. In cert ain jurisdictions, taxes will be
triggeredduring start- up and the reliabilit y of associated services
on the payment of technical services fees andother
on which the business willrely.payments to non residents. Double taxation
agreements You could also explore the possibility ofverticalmay operate to allocate taxing rights bet ween the
host integration such as the acquisition of key suppliersorcountry and Australia. Detailed tax due diligence
is distributors. However in doing this, you shouldgiverecommended if you are acquiring a foreign
business. consideration to any potential infrastructure,regulatoryor other constraints that may hinder such anexpansion.If you have operations in multiple countries, youmayThe reform of the Australian CFC rules
willconsider the suitability of the target location for a shared
improve the competitiveness ofAustralian services centre. An example may be movingyourbusinesses expanding overseas. Overallit
existing production or other business functionsfromwill be the c atalyst for better efficiencies
inAustralia and/or other locations to your targetlocation.foreign operations. Such decisions may result in the shifting of riskand/orintellectual property from the target location toanother
Daryn
Moore
, Ernst & Young Australia, Partner
location. This may have an impact on the coststructure
Oceania Leader International Tax Services
and profitability of your business from aninternationalperspective and give rise to transfer pricing and other
Australian international tax rules such as thecontrolled
tax issues. Revenue authorities often focus ontheseforeign company (CFC), thin capitalisation and transfer types of transactions.
pricing rules must also be considered. Australiahasand is continuing to reform the CFC rules toensurethat Australian organisations are not disadvantagedincompeting overseas. Non-portfolio dividends paid by the
foreign organisation to Australian corporate shareholders
are not taxable in Australia at the corporate level and also
do not generate franking credits. Australia does allow for
certain tax deductions for a loss or outgoing incurredinderiving foreign dividendincome.
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Doing business overseas (continu ed)
19. Risk management an emerging market for example, moved from rank 12
in 2009 to rank 5 in 2010. You should also recogniseHave you identified areas of risk and how you
that in such an environment, to manage existingand
will address them?newly emerging risks, an effective riskmanagementAre your foreign operations susceptible to fraud? strategy and process should be implemented.Obtainingappropriate insurance in your selected host countryis
There are a number of business risks that should bean important consideration to mitigate againstpotential
considered when entering an emerging orinternational business
risks.market. To identify these risks, Ernst & Youngconducted You should also consider your organisations
exposureresearch to ascertain the top 10 business risksfacing to potential fraud. Are you at greater risk if the control ofmultinationalfirms. your organisation resides in only a handful of managers,
The Ernst & Young Business Risk Report 2010 is based rather than a structure with a board of directors and4
on interviews with industry executives andanalysts
policy and process around corporate governance,
representing 14 industry sectors. T he surveyasked
internal/ external audit and other externalcontrols?each interviewee to identif y and rank the top
businessrisks for 2010. Aggregating the results worldwide20. Exit or wind-
downand across industry sectors, resulted in thefollowing Will you continue to maintain a
presencetop 10 business risks for multinational firmsranked in this
location?byimportance: What are the legal and commercial
issues1. Uncertaint y around regulation andcompliance associated with terminating
business2. Access to credit and the impact of risinglevels and employment
contracts?of government debt
What is your strategy for redeploying3. The withdrawal of global stimulusprograms your resources?
4. The global war for talent and compensationThere are different ways to exit or wind-down yourstructure
s operations in a host country. You will need to t akeinto
5. The strategic imperative of succeeding inan account local laws, tax and financial issues. You
mustemerging market, as these markets continueto also determine if you wish to maintain a presence in
thedrive global growth
host country. Options may include liquidation, thesale6. Increased cost pressures as the result of
commodityof shares or even floating the business. The exitstrategyprice inflation and low cost
competitorsshould be part of your overall business plan.
7. Incumbent firms in transitional sectorsadjusting There are also reputational risks to consider,
particularlyto non-traditionalentrants if your business was an important employer in a
country8. Staying ahead of consumer preferencesand
or region. To avoid costly litigation orcompensationgovernment regulation on environmental
issuespayments you must also be aware of the
industrial9. Political backlash and reputational riskstriggered
relations environment. Consider whetherlocalby corporate social responsibility
breachesregulations restrict the transfer of funds overseas.
10. Rescue mergers and regulatory changes thatmayforce new
transactions.
The above list has changed considerably in bothorderand content from the 2009 report, which demonstrates
that businesses operate in a dynamic, ever-changingglobal environment that requires constantmonitoring.The business risk associated with not succeedingin
4. Ernst & Young Business Risk Report 2010
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20 issues for businesses expanding
internationallyTable based on the top 20 issues and relatedquestions.
Planning for expansionYes
No
1. Strategy Clearly define and stress test yourstrategy
What are the implications of your international expansion foryourexisting business
operations?
2. Global trends Is your organisation exposed to new and emergingmarkets?
Has the composition of your major competitorschanged?
Is foreign direct investment in your industry sector
clusteredin locations where you do not have apresence?
3. Marketresearch
What research is available to provide you withinformationon market and industry
conditions? Is this information up-to -date and what is the future
outlook? Create a short list of new and emerging markets, tap into
existingnet works, talk to your advisors and visit your short listedlocations
Choosing the locationYes
No
4. Politicaland
Is the political system stable? How do you assess sovereignrisk?social
climate Does the country suf fer under high l evels of sovereigndebt?
Is there likely to be social unrest or are workersorganised inpower ful
unions?
5. Local tax and Is the tax regime business friendly and/orcompetitive?regulatory
Does the country have free trade agreements or double taxtreaties?
environment Does the regulatory regime set the scene for a sound
corporategovernanceframework?
6. Legal system Is it a common law system? If not, do you understand theoutcomes?
Do the laws and the legal and judicial system provide support forandprotection of commercial acti
vities?7. Innovationand
Should you develop your products in emerging or fast growthmarkets?incentive
s Should you have a presence at gl obal innovationclusters?
Are grants and incentives available for innovativeorganisations?
8 Location and Is economic infrastructure secure and reliable?infrastructur
e How would you deal with power outages, telecommunicationdown-time or traffic
congestion? Is the location central to your regional markets and supplier s of
goodsand ser vices?
9. Cultural Are there significant cultural differences that may impact the wayyoucompatibilit
y
conduct your business?
Are there likely to be languagebarriers?
10. Local workforce What is the availability, skill-set and cost structure of the local workforce?
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20 issues checklist (co ntinued)
Doing business overseasYes
No
11. Global management Who will negotiate with government, customers, suppliers andbusinessteam partners? How should you manage risks such as bribery and
corruption? Who will be responsible for the recruitment of
staff?
Do you have an international management team or do youneedto build
one?
12. Globalhuman
What benefits will you provide to expatriates and what are thetaxresources consequences? Do your employees require securityprotection?considerations
Do you have a team that can deal with assignmentmanagement,immigration and tax
compliance?
Should these functions beoutsourced?
13.
Financing
What are the cash flow needs of your business? What is your
projectedrevenue grow th? Are your financial models sound or overlyoptimistic?
Do you need strong par tners to finance your expansion?Have you considered Islamic finance as a source of
funds?
What is the debt equity mix of funding? What are the taxconsequences?
14. Choosing the Are you looking for slow organic growth? Will you start outwithoperating
structure
a sales office or are you looking for a green fielddevelopment?
Are you looking to establish an immediate local presence? If so, willyouset up a joint venture or will you acquire an existing localbusiness?
15. Implementingthe
What are the legal and administrative procedures andregulatoryoperating
structure
requirements for setting up the operating structure and star
tingthebusiness?
Should you outsource the set-up to corporatesecretarialser viceproviders?
16. Foreignexchange
Is the local currency stable orvolatile?management
and Is currency hedging available at a reasonablecost?
currencyrisk/controls
Could currency restrictions inhibit or even prohibit theflow ofinternational
funds?
17. Busine ss and Are you aware of how the new Australian attributionregime ininternational ta
xationrelati on to controlled foreign companies may all ow you totakebetter advantage of efficiencies
overseas? How will profits be taxed in your target location? What
is thetreatment of losses?
18. Supplychain,
Have you identified all possible supply chainefficiencies?transfer pricing and
Have you considered potential Australian tax issues asyou
intellectualproperty move functions, intellectual property and risk
offshore?Is your intellectual property and dataprotected?
19. Risk management
Have you identified areas of risk and how w ill you addressthem?
Are your foreign operations susceptible tofraud?
20. Exit or wind- dow n Will you continue to maintain a presence in thislocation?
What are the legal and commercial issues associatedwithterminating business and empl oyment
contracts?
What is your strategy for redeploying yourresources?
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Contact details
Ernst &
Young
The Institute of Chartered
Accountantsin
AustraliaErnst & YoungCentre680 George Street,Sydney
33 Erskine Street, Sydney, NSW2000GPO Box 9985, Sydney, NSW2001
GPO Box 2646, Sydney NSW2001 Service 1300 137
322Phone +61 2 92485555 Phone 02 9290
1344
Fax +61 2 9248 5959
Fax 02 9262 1512www.ey.com Email
[email protected] Frank,Partner
charteredaccountants.com.auAsia-Pacific Chief Operating Officer
Tax LeeWhite
Phone +61 2 92484810 Executive General Manager
[email protected] Phone + 61 2 9290
5598Daryn Moore,Partner
Email [email protected] Leader International Tax
ServicesPhone +61 2 [email protected]
Greg Logue,PartnerOceania Leader Strategic Growth
MarketsPhone +61 2 [email protected]
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