Is an independent contractor in the target country the best approach for my business?
Southfield, Mich.—July 24, 2019—Susan Tuson, CPA, a shareholder with Clayton & McKervey, a certified public accounting and business advisory firm helping growth-driven companies compete in the global marketplace, encourages U.S. manufacturers and entrepreneurs to know their options when it comes to overseas business expansion.
“When the idea of expanding a business overseas is considered, the first questions are typically, ‘What’s the best way to start?’ ‘Should I set up an office immediately or use an independent contractor familiar with the country?’ As with all business decisions, the answer depends on the nature of the business goals,” Tuson said.
Tuson addresses the following questions when determining how to best approach an overseas business expansion analysis:
- Is the expansion to service an existing customer?
- Is the expansion to reach a new population of customers?
- Does the expansion serve a marketing purpose, such as the ability to say, “We have manufacturing in country X a low-cost jurisdiction?”
“The business goals will drive the process,” Tuson said. “Sometimes a company is looking for a way to test market conditions prior to making a substantial investment. They may do this by considering the use of an independent contractor in the target country. The advantage is there are very little, if any, capital investment or administrative compliance costs to hiring an independent contractor. However, many of the independent contractor issues that exist in the U.S. are similar overseas.”
Tuson outlines three key considerations when using independent contractors to test the waters overseas.
- What are the duties of the independent representative/distributor?
“Many countries have rules similar to the U.S. that would examine whether the ‘independent’ contractor is truly independent. If not, the independent contractor could be considered an employee, thereby making the U.S. company subject to all the employment laws, taxes, and payments of an employer in the jurisdiction,” Tuson said.
- What type of authority does the independent contractor have? Can they execute contracts on behalf of the U.S. Company?
“If an agent regularly exercises the authority to enter into contracts, they are likely to be creating a taxable presence in countries where the U.S. has an income tax treaty. The threshold may be lower for non-treaty countries,” Tuson said.
- Will you have enough control over an independent contractor to protect your brand and customer list? “It is important to understand the local laws related to the status and rights of an independent contractor/distributor. An iron clad contract should be in place that protects the company and supports its subcontractor versus employee status, as well as the rights and obligations of each party,” Tuson said.
If, after the exploration process has been completed and it is determined to move forward with overseas expansion, Tuson urges business owners to use international tax and accounting specialists and legal counsel well-versed in global business operations.
About Clayton & McKervey
Clayton & McKervey is a full-service CPA firm helping middle-market entrepreneurial companies compete in the global marketplace. The firm is headquartered in metro Detroit and services clients throughout the world. To learn more, visit claytonmckervey.com.