Finding the smoothest path to global opportunities
A new Deloitte & Touche survey looks at expansion trends among SA companies, writes CIARAN RYAN
The survey was based on responses from 47 companies, 93% of which claimed to have offshore investments or operations. The average size of investment financing from SA sources was R35-million, and from foreign sources R28-million. Nearly all companies said they expected to increase their offshore investments within the next three years, with Africa emerging as a priority region, followed by Asia-Pacific, Western Europe, North America, South America and Eastern Europe.
"Intended countries for investment are even more diverse than current investment locations, suggesting movement away from traditional investment countries such as the UK," said the survey.
Establishing a sales presence in these regions was regarded as a priority by a quarter of respondents, followed by manufacturing and mining. The average size of planned future investment funding was R35-million from SA sources and a further R35-million from offshore sources.
The most common route of entry into offshore markets was through wholly-owned entities, followed by acquisitions and joint ventures. Three-quarters of respondents felt their offshore investments were structured tax-efficiently.
In future, however, SA companies expected to enter foreign markets through joint ventures for the most part. Wholly-owned entities and acquisitions appear to have lost favour. Joint ventures were preferred because they allowed SA companies to gain from the partner's knowledge and international experience and was often the only way to get into Africa.
Wholly-owned entities were preferred by some because they allowed the company to retain control, minimise risk and because joint ventures were "too difficult". Acquisitions had the advantage of being able to move into an established operation, tap into past experience, gain control and avoid the pitfalls of starting from scratch.
The strongest motivations for international expansion were to reach new markets and to become internationally competitive. Lesser motivations were profit, hedging against the rand and gaining exposure to technology. Exchange control was perceived as the single greatest barrier to international expansion, followed by political stability and limited knowledge of the market being entered.
Market size was the dominant issue in selecting an offshore location, followed by political stability and the tax environment. Respondents gave proximity to markets the highest weighting in location decisions, followed by political stability, the tax regime, infrastructure and accessibility from the home country. Low corporate tax rates, the regulatory environment and low labour costs were high on the list.
Ray Eskinazi, international tax partner at Deloitte & Touche, said the survey findings highlighted concerns as to whether international structures were maximising tax opportunities presented by the new tax treaties recently concluded by SA as well as changes in the tax regimes of foreign jurisdictions.
Another concern was whether SA companies with offshore operations were maximising opportunities presented by recent Reserve Bank relaxations on offshore expansion and the financing and retention of profits abroad. Two-thirds of survey respondents were not entirely convinced their offshore investments were structured in the most tax-efficient way, said Eskinazi.
"Indeed, the survey highlighted a self-perceived lack of knowledge by most participants, suggesting there is a corresponding need for education in this field," he said.
Respondents doubted the SA Revenue Service's ability to police the issue of transfer pricing - which relates to the cross-border pricing of goods and services between multinational group companies.
Some 47% of respondents were not aware of the transfer pricing methods generally accepted by the SARS and 57% were unaware of methods accepted by tax authorities in other jurisdictions.