Nigeria: Bringing Your Business Global When You Least Expected
In this article, Dunni Segun-Oki discusses the possibility for Nigerian companies to establish subsidiaries in foreign countries, as a solution to mitigate the negative impact of the Covid-19 pandemic which has seen many companies downsizing. , while others have closed. It explains some of the factors that should be considered before taking such a step, and the benefits that can be derived from having a subsidiary in a foreign country.
As governments around the world struggle to save their economies from the negative economic impact of the Covid-19 pandemic, private companies must also find ways to navigate these new, uncharted waters. Businesses have been forced to shut down, and those that have survived so far must find out-of-the-box solutions in order to thrive.
A new subsidiary
To mitigate the adverse effects of the pandemic, one obvious solution might be to expand your business and investments beyond Nigeria’s borders, incorporating a subsidiary or subsidiary in a foreign country. This new subsidiary would act either as a holding company for all your investments or as an entirely new entity looking to provide services to a new set of clients in an ever-growing global market. The benefits of such a strategy would depend on your strategy or organizational goals. These strategies may include increasing your brand’s presence globally or in a targeted market, accessing new and emerging markets, using tax incentives from a foreign country, or raising capital. internationally. The option of a foreign affiliate can be a necessary tool for the growth of your business in these difficult times.
Once you’ve identified your goal, the next step is to determine which foreign country best suits your needs. For a subsidiary, certain factors must be seriously taken into account before incorporation. These factors include, but are not limited to: the legal and regulatory climate of your new host country and its fiscal framework, especially with respect to any tax treaties or agreements between Nigeria and the host country. Some host countries treat foreign companies as national entities and apply the same obligations as their local companies. Other host countries offer foreign companies tax incentives to establish businesses in their territory, while others simply function as tax havens charging 0% tax.
So what are these laws and regulations that must be taken into account before finalizing the incorporation of the subsidiary?
a) International treaties and agreements that regulate and provide for the treatment and protection of foreign companies in the host country, regulate the tax regime and reporting structure between Nigeria and host countries, protectionist laws that regulate the activities of companies in their new host country and the nationality of your new subsidiary. At the time of writing this article, Nigeria does not have a global tax policy which is a tax paid on all income earned worldwide. This means that the main issues to be considered become the tax regime of the new host country and any tax treaties that Nigeria may have entered into with the new host country. A combination of these and other factors will determine your overall tax exposure.
b) The labor laws of the host country which govern the rights and obligations of employees and employers, compulsory working hours, minimum wages, social charges, insurance requirements, etc. Most countries tend to have protectionist laws that protect the economic well-being of their citizens, for example. for example, a cap on the number of foreign nationals that a company can employ, the obligation to use only local service providers, etc. A thorough understanding of these requirements will provide guidance on the viability of establishing a branch in the proposed host country.
c) Taxation: A thorough assessment of the potential tax exposure of the proposed subsidiary in the host country is also an essential consideration in deciding to locate your business abroad. Your subsidiary will be subject to the rates of the host country for corporation tax, payroll tax, value added tax and withholding tax. If your organization is designed in such a way as to ensure that profits generated in the host country are repatriated to Nigeria or elsewhere, the calculation rates of income tax and withholding tax become very relevant. Depending on the host country, local taxes, bank charges, transfer pricing rules and property taxes may apply.
Once the decision has been taken to set up a subsidiary, the next step is to constitute a team of professionals including lawyers and accountants who will be in charge of the responsibility of the forum shopping, that is to say of the revision of the laws and regulations of the countries of interest. , and by designing a tax-advantageous path to the constitution of your subsidiary.
So what are the advantages of setting up a foreign affiliate?
a) Ability to attract international funding; one of the requirements that potential investors take into account is the nationality of the entity in which they are seeking to invest. This country’s track record in protecting investor rights, a strong and efficient legal system, strong and clear financial and banking regulations, an index of corruption and whether this country can guarantee a return on investment. In other words, if their investments will be expropriated by the government of the country where the subsidiary is incorporated. Unfortunately, Nigeria does not meet most of these requirements; as a result, Nigerian companies are unable to attract international finance. Those who have done so generally join a subsidiary in a country that reassures investors.
b) Entry into the world market on an equal footing. Companies in developing countries generally find it difficult to compete on the world stage, due to some of the economic policies implemented by their home countries. For example, monetary policies that restrict access to foreign currencies thus making trade difficult, or cumbersome bureaucratic processes that regulate the export of goods and services.
c) Depending on the host country chosen, there is the secondary benefit of the founder or CEO of obtaining a second passport. However, it depends entirely on the requirements of the host country.
Fictitious case study
Wazobia Limited is a leading company in the Nigerian textile industry. As one of the few local manufacturers of dyes in Nigeria, Wazobia Limited has earned a reputation for providing quality products at reasonable prices. Wazobia Limited’s strategic plan has been to supply quality dyes to global textile manufacturers at reasonable prices from its factory in Lagos. Its mission statement is to be the number one supplier of dyes to all textile manufacturers around the world. Mr. Usman Alani Uzoma is the CEO of Wazobia Limited, and under his leadership, Wazobia Limted’s market share has grown from 1% to 20% in 10 years.
Raw materials used in the manufacture of dyes are imported from various global suppliers, requiring payments denominated in dollars. As such, a volatile forex market is detrimental to one’s business. Before the pandemic and despite struggling to find dollars to pay their suppliers, Wazobia Ltd had an annual turnover of 100 million naira. However, the post-pandemic global economic slump and a volatile local currency market saw Wazobia’s costs increase by 100%. Faced with an uncertain future and wishing to keep the activity going, the Board of Directors of Wazobia Limited has chosen to reduce both its production capacity and its workforce, while trying to meet the minimum obligations of its existing customers. The board considered applying for a dollar denominated business loan, but the repayment amount cannot be fixed due to the volatility of the forex market. Their customer base is shrinking rapidly, as few can afford the new product prices.
Desperate, Mr. Uzoma consults his team and outside lawyers to find a viable solution to their many problems. One of the solutions that presents itself is the incorporation of a subsidiary of the company in a foreign country, as a form of diversification of its existing commercial interest. Immediately, the team worried about the costs of running the branch, and what that would entail. After investigation, the team discovers that some countries do not require the physical presence of the subsidiary at their borders. These can be virtual companies that allow operations and the opening of bank accounts within and beyond their borders. In addition, some countries will offer residence permits to employees of these companies, paving the way for citizenship. The team also considers the formula used in the production of their dyes to have been patented and owned by Wazobia Limited.
The team is then responsible for determining how the business will be conducted by the branch. Options on the table include, but are not limited to; outsource certain functions to trusted international companies, reduce or relocate their factories in the host country or elsewhere, franchise their patented formula or production method to others, look for countries that will offer tax incentives for establishment from a smaller factory within their borders, explore new markets for their dyes, etc.
To take full advantage of the opportunities available, Mr. Uzoma and his team are advised to sit down with experienced lawyers and tax specialists to determine the most efficient way forward.
– Note that this fictitious case study illustrates the difficulties encountered by certain companies in the manufacturing sector. However, the same solution is applicable to all companies in different sectors of the Nigerian economy.
This article has highlighted one way a Nigerian business can survive the post-pandemic era.
However, the use of foreign companies is not limited to the above. Foreign companies can be used as tools for wealth preservation, asset protection and estate planning. We will discuss these questions in future articles. I am happy to answer any questions readers may have.
Dunni Segun-Oki LLM with specialization in international and commercial law; MA Islamic Societies and Cultures (SOAS), lawyer, Lagos. Email: [email protected]