Q, PLEASE TELL US ABOUT THE FORM OF OVERSEAS EXPANSION, SUCH AS A LOCAL SUBSIDIARY OR A BRANCH OFFICE.

Introduction.

Cross-border e-commerce (E-commerce) has been expanding worldwide with Amazon, eBay, Rakuten, Shopify, WooCommerce, and Corona Vortex, and is now the focus of attention by all companies. Cross-border e-commerce has been introduced with the positive aspects of being able to start selling within minutes of creating a site, and new sales opportunities from markets around the world. On the other hand, local taxes and various other costs are not shared much: local taxes such as VAT are levied and collected by the seller on the local buyer, but even in the case of cross-border e-commerce, there are cases of taxation, collection, and reporting.

Not all tax accountants, lawyers, and other domestic professionals have knowledge of overseas tax and legal affairs.

IN THIS COLUMN, OPTI CORPORATION, WHICH HAS EXTENSIVE EXPERIENCE IN THE TAX ASPECTS OF CROSS-BORDER EC, PROVIDES A "CROSS-BORDER EC TAX NAVIGATOR" IN A Q&A FORMAT. WE HOPE THAT THIS CROSS-BORDER EC TAX NAVIGATOR WILL BE OF HELP TO VARIOUS COMPANIES CONSIDERING CROSS-BORDER EC.

Q] I HEARD THAT THERE ARE SEVERAL FORMS OF OVERSEAS EXPANSION. FOR EXAMPLE, THERE ARE SUBSIDIARIES, BRANCH OFFICES, REPRESENTATIVE OFFICES, ETC. I AM NOT SURE WHAT THE DIFFERENCE IS. I AM NOT SURE OF THE DIFFERENCE, SO COULD YOU PLEASE TELL ME?

A] "Overseas expansion" cannot be discussed in the same way.
For example, there is a form of local incorporation in which a company establishes a corporation overseas, and there is another form in which a company sells goods on Amazon overseas.In this article, we would like to discuss the various types of overseas expansion and explain the advantages and disadvantages of each.

• Digital Sales
• export
• turnkey
• license out
• franchise
• Rep Office)
• VAT Registration, Sales Tax Registration
• JOINT VENTURE/JV
• FDI

Each of these methods of overseas expansion is described below.

Digital Sales

In the case of so-called digital services, such as iPhone applications and cloud services, it is possible to increase sales without the need to physically hire people in the first place. For example, some iPhone game app companies have worldwide sales exceeding several hundred billion yen, but they do not necessarily have offices around the world.

Data sales and cloud service sales require an initial investment before development, but once developed, most of the profit is made afterwards, except for fixed costs such as server fees. This makes it one of the newest and most efficient forms of overseas expansion.

Google, Facebook, Apple, and Amazon are GAFA, with high growth rates and exploding revenues, and IT-driven data sales/cloud service sales is definitely one way to expand overseas and the least expensive form of overseas expansion. It is the least expensive form of overseas expansion.

Facebook users have surpassed 2 billion worldwide as of July 2017; Facebook is now also the largest country in the world with the largest population, surpassing even China, which has the largest population in the world. Thus, while sales in data, cloud, etc. can be hit or miss, overseas expansion of digital services seems to be the most profitable way to expand overseas if it hits the mark.

However, even in the case of sales of digital goods, it does not mean that you can escape the obligation to register for taxation and file tax returns in each country. For example, if you sell digital goods to European consumers, you must register for a VAT number and file a VAT return, as described below. Although it is now easy to make money overseas, you will still need to file local tax returns, so it is necessary to understand the tax rules of each country.

Reference Article: Mixi's Monstar Sales Surpass 200 Billion Yen, Undeterred, but North American Sales Fail

Reference Article: Web Industry Leaders AGFA (Apple, Google, Facebook, Amazon) 2016 Financial Results and Characteristics of Each Company

export

Many manufacturing companies export as the first step in their overseas expansion. Subsequently, as the value of exports increases, the means of sales are changed. Exporting is a method of selling goods from Japan to foreign companies.

This naturally leads to the sale of tangible items. (In the case of sales of intangibles, as noted above, only data can be sold.)

One advantage is that it saves the cost of establishing a manufacturing base in the destination country. Conversely, a disadvantage is the cost of transportation (including customs duties). In addition, when sales are conducted through local partner companies, such as distributors, it is difficult to manage marketing and other aspects of the business.

Trade is also a method often used in phases such as test marketing prior to establishing a local subsidiary, etc.

Reference: What is Trade (JETRO)

(Reference Information) Export through overseas e-commerce site sales

turnkey project

Turnkey refers to a service in which the ordering party undertakes the entire process from specifications to the completed state of the facility. This refers to a contract in which a single company or a group of companies undertakes all operations from the design and construction of the project facility to its commissioning, and delivers the project facility to the ordering party ready for immediate operation.

In plain English, a turnkey contract means that the car is ready to go when you lock it. A turnkey project in plant construction is the export of process technology to a foreign country, which can be thought of as a kind of export.

There are two types of turn-key contracts: full turnkey contracts and semi-turnkey contracts.

In recent years, the term "turnkey contract" has been replaced by the term EPC (Engineering, Procurement, Construction) contract. There is also an EPCM contract that includes management of construction. These terms are expected to become more commonly used in the future as they more clearly describe the scope of the seller's work and responsibilities in a "lump-sum equipment contract.

In a turnkey contract (or EPC contract), the seller assumes the responsibility for installation and commissioning of the facilities and delivers them to the buyer. The choice is up to the buyer. The choice will depend on two factors: the availability and ability of the buyer's engineers and managers to administer the factory construction, and the buyer's profitability decision.
Source: JETRO https://www.jetro.go.jp/world/qa/04A-010930.html

The advantages and disadvantages of a turn-key contract are as follows

Advantages

• THIS IS BEST DONE WHEN FDI IS RESTRICTED BY THE LOCAL GOVERNMENT.

• This is valid for countries with high operational country risk.

demerit

• There is a risk of technology leakage.

• Customers may become competitors.

• VARIOUS TAX ISSUES NEED TO BE CLEARED UP, EVEN IF IT IS NOT FDI (DIRECT INVESTMENT). (PE, ETC.)

This turnkey method is very common in some industries and is often used in plant construction.

license out

Licensing out is the granting of a license by a licensor to a licensee. In other words, the company sells the right to use its license to another company. Franchising and licensing businesses are different, but they also appear to be similar.

In the case of a licensing business, the licensee (licensee) has more freedom to develop the business than the party who has acquired the franchise rights (franchisee).

Licensing Business Compared to Franchising On the other hand, the disadvantage is that it is difficult to acquire know-how because there is no backup system from the head office. In this respect, franchises have an advantage. In other words, the license holder does not need to provide as much support on a regular basis as a franchisee when expanding overseas, which makes it easier for the license holder.

As with franchising, out-licensing is effective for businesses in countries where direct investment is not possible. It is also effective for businesses that do not want to incur the costs of expansion.

Conversely, a disadvantage is that it is more difficult to manage overseas operations. In addition It becomes difficult to manage technical know-how. You may be competing with a stronger licensee even if your company tries to expand in the future, because they will be doing the same business overseas under a different company name than the licensor.

franchise

In a franchise agreement, the franchisee is bound by the terms and conditions set forth by the franchisor. The advantage, however, is that the franchisee is taught the know-how to follow up and attract customers until he or she becomes independent, thusreducing the probability of failure.

Some well-known franchise companies include McDonald's and 7-Eleven. (see below)
In many cases, companies that franchise domestically also have a different type of expansion when expanding overseas.

Because of this initiative, when a Japanese company becomes a franchisor, it does not have to bear the same risks and costs of expansion as a license-out company. In addition, the franchisee can also use the franchise brand, and if successful, both the franchisor and the franchisee can quickly expand their business.

However, it is difficult to maintain a uniform brand and quality in different countries, and various country-specific factors must be satisfied. Franchise agreements are often used in the service industry, for example, but in the Muslim world, halal food must be halal to be successful. In addition, the franchisee does not always ensure that the quality of the franchise is maintained, so these quality and brand management issues are probably the most difficult to overcome.

Rep Office)

A representative office is an office that can conduct activities such asinformation gathering,market research, purchasing goods and services, and advertising, but it is an initiative that cannot conduct revenue-generating activities or direct sales activities.

In practice, there are many representative offices that conduct sales activities and make sure that when contracts are signed, it is through the head office.

One advantage is that there is no need to register a corporation or hire employees when establishing a joint venture or a wholly-owned subsidiary.

One disadvantage is the lack of sales activities. However, as mentioned above, some companies do in fact conduct sales activities by going through the head office when signing a contract.

In addition, there are cases where business activities are conducted in a hotel room due to a long-term business trip. In such cases, it should be noted that this is considered a Permanent Establishment (PE).

VAT Registration & Sales Tax Registration

WHEN SELLING GOODS OR PROVIDING SERVICES IN EUROPE, COMPANIES ARE REQUIRED TO OBTAIN A VAT NUMBER AND FILE PERIODIC VAT RETURNS IN THE RELEVANT MEMBER COUNTRY. SINCE THE REGISTRATION AND FILING OF VAT NUMBERS ARE MANDATORY, EVEN NON-EU JAPANESE COMPANIES CANNOT ESCAPE THESE TAX OBLIGATIONS.

ON THE OTHER HAND, EVEN IN THE CASE OF A NON-RESIDENT JAPANESE COMPANY, AS LONG AS IT REGISTERS FOR VAT AND FILES A VAT RETURN IN ONE EU MEMBER COUNTRY, IT IS POSSIBLE TO AVOID OBTAINING A VAT NUMBER IN OTHER COUNTRIES BY USING A VAT NUMBER IN ONE COUNTRY.

Joint Venture

A joint venture is a method of establishing a company overseas in which a Japanese company invests together with a local company in a foreign country. The percentage of ownership varies from country to country, but there are some protected industries in which Japanese companies are not allowed to take a majority stake (e.g., finance, defense, education, etc.). （Examples include finance, defense, education, etc.)

Wikipedia states the following

When a nation or a company is involved in a new field, a single organization can face a variety of risks, so multiple organizations work together to compensate for each other's weaknesses, thereby diversifying risks and increasing the certainty of success.

Joint ventures are often used in business activities, mainly to enter into new projects or to establish a foothold in a new overseas market. In both cases, a new company ( joint venture or joint venture company ) is established with investments from multiple companies to achieve a specific objective, and the investors agree on the investment ratio, profit sharing, and corporate control (e.g., which company will be represented by a representative director, etc.). Even if the joint venture is a stock company, it is very unlikely to solicit new investors from outside.

A joint venture can use the resources of a local partner, reducing the risks and costs of expansion. However, it can be problematic if disagreements arise among shareholders.

Wholly owned subsidiaries can be acquired either by establishing your own foreign corporation or by acquiring a foreign company.
Although you bear the costs and risks, there is no outflow of technology and know-how.
In addition, because it is a wholly owned subsidiary, the company can control its own strategy.

Find the right overseas expansion plan for your company

As this article has shown, there are many forms of overseas expansion. We believe that understanding all of these forms and utilizing different methods on a case-by-case basis will increase the success rate of your overseas business.
We hope that you too will advance your overseas business with a strategy that fits your company's needs.