Companies looking to expand their global footprint or invest for the first time in new, unfamiliar regions of the world may want to check out a new index that ranks countries by the complexity of their compliance requirements.
The TMF Group, a multinational professional services firm that specializes in corporate expansions, conducted the analysis by surveying its global team of accountants, lawyers, compliance experts, and other professionals across 84 jurisdictions. The overall aim, according to the report, was to get a detailed understanding of the changing compliance landscape globally.
The Compliance Complexity Index is intended to help legal, risk, and compliance professionals better understand some of the compliance challenges they can expect to encounter in various countries so that they can be better prepared to meet them. “Forewarned is forearmed,” says Jason Gerlis, managing director of TMF USA.
The 2018 Compliance Complexity Index comes at a time when the global push toward greater financial transparency continues to escalate, creating an increasingly complex regulatory landscape for companies entering new regions of the world. “We saw a number of different factors impacting this year’s study,” Gerlis says.
Some of those factors, from a global perspective, include the presence of the Foreign Account Tax Compliance Act in the U.S.; the introduction of a central register of beneficial ownership of companies under Europe’s Fifth Anti-Money Laundering Directive (which came into force July 9); and the multinational adoption of the OECD’s Common Reporting Standard, which calls on jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis.
According to the index, the five countries that ranked highest overall for compliance complexity are the United Arab Emirates, Qatar, China, Argentina, and Malaysia. The five countries that were ranked as having the lowest overall compliance complexity were Ireland, Denmark, Curaçao, Honduras, and Nicaragua. In the Asia-Pacific region, Australia and Singapore also ranked well from a compliance complexity standpoint.
“The two biggest drivers of complexity are uncertainty and change. Countries with unclear or complex legal systems, or where the rules frequently change, rank as more complex,” Gerlis says. “Additionally, countries that are introducing new rules, sometimes as a way of improving transparency, also increase their complexity in the short-term.”
APAC. In the Asia-Pacific region, the most complex jurisdictions from a compliance standpoint were China, Malaysia, Vietnam, Philippines, and India. The least complex from a compliance standpoint, based on TMF Group’s rankings: Australia, Singapore, and New Zealand.
China, for example, has historically been perceived as a challenging country for foreign companies to establish their business in—but the country is starting to make progress. The Chinese government began streamlining its administrative processes, and many policies have been enacted to reduce the time it takes to establish a business. “It used to be that five different certificates were required to incorporate a company, but, more recently, this has been condensed to one unified social credit code, dropping the incorporation period from four months down to two,” the index reports.
“These policies are going to streamline administration in the country ongoing,” Gerlis adds. The restructuring of multiple state departments in China will also contribute to increased efficiency.
Additionally, the Chinese government continues work to expand the application of e-government initiatives, with the aim of putting more of its government services online. “What it will also do is increase transparency, which is something that is increasingly important in the global context,” he says.
On the opposite end of the spectrum, Australia is ranked as one of the least complex places from a compliance standpoint to establish a business in the APAC region. “In contrast to its regional neighbors—such as China and Vietnam—the regulatory requirements for incorporating a company in Australia are relatively straightforward,” the index concludes.
Americas. In the Americas region, the most complex jurisdictions include Argentina, Brazil, Uruguay, Peru, and Venezuela. The least complex from a compliance standpoint were Curaçao, Honduras, and Nicaragua.
Three South American countries, in particular—Argentina, Brazil, and Uruguay—rank in the top 10 of the most complex jurisdictions for compliance. The reason, in part, is because they have not invested in a digital infrastructure and processes tend to remain more bureaucratic, according to the index.
Governments in the Americas region, however, have started to make strides. Argentina’s government, for example, is undergoing many political and economic reforms as it opens its economy to foreign investment. One significant change was the enactment last year of law 27.349, whose purpose is to “support the entrepreneurial activity in the country and its international expansion, as well as the collection of entrepreneurial capital in Argentina.” The law created a new corporate structure, the “Simplified Shares Company” (Sociedad por Acciones Simplificadaor—SAS by its Spanish acronym) that ultimately will help streamline the process for setting up a business in Argentina.
“This is one of many programs that will likely reduce complexity in the long-term—but in the short-term, the effect has been an increased complication for businesses while they adjust and adapt to the changes,” TMF Group's research states.
Uruguay has implemented several regulatory initiatives that are causing additional compliance complexity in the short-term as companies adjust to its new requirements. Last year, a new law entered into force that requires, among other things, that foreign companies that have assets in Uruguay with a tax value higher than U.S. $300,000 to identify their beneficial owners. It also requires banks in Uruguay to provide to the Tax Office information regarding their clients’ accounts—such as the balance of the corresponding account at the end of the calendar year, the annual average of deposited monies, and the interest accrued during the year.
The United States and Canada—ranked 55th and 63rd, respectively—find themselves in the middle of the pack in terms of compliance risk. Writes TMF Group: The mid-table ranking of the two North American countries suggests that "any reduction in complexity afforded by digitalisation is offset by an increased regulatory burden."
Europe, the Middle East and Africa (EMEA)? region. Overall, 10 of the top 20 countries that ranked high for their level of compliance complexity are in this region, signaling that it’s especially challenging, from a compliance standpoint, to establish businesses there. The most complex jurisdictions in the region were United Arab Emirates, Qatar, Lebanon, Poland, and Malta.
Among the reasons: the introduction on Jan. 1, 2018 of a Value Added Tax (VAT)—the equivalent of sales tax in the United States—in the UAE brings new compliance challenges to companies not just from the financial aspect of how they account for sales, but also from a legal and compliance perspective in terms of filing requirements.
With implementation of VAT comes growing pains. “It means people are going to have to scramble around for a while to figure out what the new rules mean in practice,” Gerlis says. “All of that is creating a lot of additional work.”
“Many of the UAE’s constituent Emirates have increased their filing requirements and are enforcing deadlines and penalties for late submissions,” the index reports. “Our experts report that the government is increasing checks to verify company substance and are taking extra measures to make sure companies are operating and are being run in a compliant manner.”
When investing in a new region for the first time, prudent legal and compliance teams will want to have a clear understanding of what compliance hurdles they may encounter along the way. To be better prepared, TMF Group recommends taking the following steps:
Understand and map the region’s compliance complexity. This can be achieved through audits, “compliance health checks,” or a risk assessment. The idea is to clearly understand the compliance risks and other issues the business may encounter and include these findings in business strategy moving forward, TMF Group stated.
Ensure a consistent and scalable global framework. Companies operating in multiple jurisdictions can best unify their compliance policies and procedures by complying with the most stringent compliance requirements of a jurisdiction, using that as the benchmark “and then emulating that standard of compliance everywhere else they operate,” the TMF Group states. “This not only serves to simplify the process, but also protects global businesses against any future tightening of compliance regimes in countries where regulation is currently considered lax from an international perspective.”
Establish lasting partnerships. Lastly, the TMF Group recommends that in the face of ever-increasing transparency obligations, multinational companies should liaise with regulators, partner with professional service providers, and align with stakeholders to effectively address increasing global complexity.