When considering cross-border mergers and acquisitions, companies spend a lot of time evaluating potential partners. They must also spend time understanding the target country’s laws, regulations, political environment and culture. Local knowledge can be the difference between the success or failure of cross-border transactions.
A report published recently by TMF Group, the 2018 Financial Complexity Index, aims to help companies with their due diligence of international markets. It compares countries in terms of the difficulty dealing with various local regulations, from taxes and accounting practices to reporting requirements.
Latin America is attracting more cross-border M&A, mainly due to the rapid growth rates of the economies in the region. But buyer beware: South and Central America accounted for five of the world’s 10 most complex countries, according to the FCI.
For the second year in a row, Brazil ranked as the No. 2 most difficult country in the index, as the country’s introduction of digitized filing for bookkeeping, tax, social security and labor obligations has caused headaches for companies. The reporting guidelines require an increase in both the quality and quantity of data shared with authorities. Essentially, every financial transaction must be reported to the government daily.
Local knowledge can be the difference between the success or failure of cross-border transactions.
Europe and the Middle East
Four countries from Europe and the Middle East, or EMEA, made the top 10: Turkey, Italy, France and Russia. However, EMEA’s business climate is sending mixed signals to foreign investors.
On one hand, France is working to stimulate its economy through a reform campaign under President Emmanuel Macron. The campaign is designed to encourage startups and attract foreign capital.
On the other hand, the European Union’s new data protection law will challenge any company wanting to expand in Europe regardless of how big the company is or where it’s based. The General Data Protection Regulation, known as GDPR, applies to any organization that holds or uses data on people inside the EU. Under the regulation, companies must follow stringent new data protection policies. They won’t be allowed to store personal data for longer than necessary and they must respond to requests from customers who want their data deleted. All of this means increased data monitoring and documentation, which will add time, complexity and cost to operations.
China remains a difficult place to do business, taking over the top spot in the index from Turkey, as Beijing rolls out the third phase of its income tax overhaul, known as the “Golden Tax System.” Despite its complexity, China still has one of the fastest-growing economies in the world and is making efforts to further open the nation to foreign investors.
Helping China’s case is Hong Kong, which is the easiest jurisdiction in the Asia-Pacific region for financial compliance.
Complexity is unavoidable in cross-border M&A transactions, but it shouldn’t undermine strategic plans. Technology has simplified the flow of communication and commerce, and countries are making their financial systems more transparent. With proper guidance and due diligence, companies can navigate the maze of legal, compliance and cultural issues without fear.
Jason Gerlis is the regional director of North America & Caribbean at TMF Group. He advises U.S. and Canadian businesses looking to expand overseas, as well as foreign companies coming to North America and the Caribbean.