Global Recession — How Can Your Company Weather the Storm? : Co-Founder of Nair & Co. Advises Executives on Steps to Maximise Cash Flow Relating to Foreign Operations

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With the world markets in a downturn and credit hard to obtain, preserving a company’s cash flow is a top line concern for executives, offers Dr. Shan Nair, Co-founder of Nair & Co., a leading global integrated solutions provider helping companies expand internationally.

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VAT can be a huge hit, for example, if you are importing $10 million worth of goods, and the VAT rate in the UK is 17.5 percent. That is a lot of cash sitting there. You'll reclaim it up to three months later but the cash flow is hit

In hard times maintaining cash flow is often as critical as profits. A direct cash flow hit is faced when a company is exporting goods to multiple locations. Many countries require Value Added Tax (VAT) or its equivalent to be paid at the port of entry and reclaimed later. It's like blocking your cash in a fixed deposit, except that you earn no interest and you may also need multiple VAT registrations, which increases your accountant's fees.

Companies can leverage significant cash flow advantage by re-examining their export structures to take advantage of benign locations that allow VAT to be paid and reclaimed at the same time. Netherlands is just one of the countries offering such incentives. Nair & Co. has global knowledge, and the expertise to help companies design an astute shipping structure that minimizes the VAT related cash flow hit.

"VAT can be a huge hit, for example, if you are importing $10 million worth of goods, and the VAT rate in the UK is 17.5 percent. That is a lot of cash sitting there. You'll reclaim it up to three months later but the cash flow is hit," Dr. Nair said.

Centralizing the point of further export into Europe also minimizes the tax registrations and compliance required. Also, in some situations, companies may also be able to split a foreign operation into two separate subsidiaries along functional lines, the advantage being that the one subsidiary may be able to recover VAT before the other subsidiary is due to pay it.

This is also a good time for companies to use the dramatic falls in profits of businesses to their advantage by recalibrating their intercompany or transfer pricing agreements.

These agreements are meant to be at arm's length, so when corporate profits are dropping worldwide, a new benchmarking exercise can result in significant savings on profits declared abroad and the taxes paid thereon.

"You can reduce your profit markups abroad, and therefore the tax you pay on these by recalibrating the intercompany pricing," Dr. Nair said.

This is also a good opportunity to consider if your operations can be restructured to take advantage of low-tax but respectable jurisdictions such as Cyprus, Hong Kong, Singapore and Ireland.

Countries also frequently offer tax benefits aimed at specific business sectors. For example, Australia recently introduced very attractive tax breaks for companies conducting research and development on behalf of qualifying foreign companies within the same group.

"The rules work out such that where the group has not had any presence in Australia for at least 10 years, then all of the R&D expenditure in the first year may be claimable at a 175% rate," said Dr. Nair. "Look carefully at the type of work your group or company is carrying out to see if it can be structured to take advantage of such rules."

Dr. Nair cautioned companies to be careful of their client's credit reference, even if the client is a Fortune 500 enterprise.

"You may think you are selling to a Fortune 500 company but you could be contracting with one of their foreign subsidiaries. In the current volatile markets, be cautious of the credit reference of the subsidiary you are doing business with. It is strongly advisable to carry out a full credit check on that subsidiary," he said.

If the credit check is not an acceptable option, companies should consider seeking guarantees from their client's parent company, he added.

Many companies have bank operations worldwide. Executives may wish to consider biasing their banking operations towards countries whose governments provide unlimited guarantees on the security of cash held within in-country bank accounts.

"At present time, the Irish Republic is a good example in Europe and Australia in APAC," said Dr. Nair.

Dr. Nair further stresses on the need to examine purchasing structure. Companies may find that a number of subsidiaries or branches may be placing orders with the same supplier.

"In this case, centralizing the purchasing function across all countries may enable them to obtain the maximum discount and terms of credit from the supplier," he added.

About Nair & Co.

Nair & Co. provides businesses an integrated solution geared to making your company's thrust to expanding business overseas less risky, stress free and more strategic in the finance, tax, HR, compliance and legal arenas. Specialized in working with the unique challenges of U.S.-based technology companies, Nair & Co. has headquarters in the U.K. and offices in India, China, U.S.A. and Japan and acts for nearly 700 foreign operations in over 40 countries. Nair & Co. employs highly qualified international specialists as your one point of contact client service directors to support your international registration, tax, accounting, compliance, HR and payroll needs. Our unrivalled knowledge base, attention to detail and superior work ethics protect your company's operations more effectively and save you time and money. For more information, including awards won, visit our web site at http://www.nair-co.com.

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