COVID-19 has added a new layer of complexity for businesses across the world. It has threatened our health and safety and our livelihoods, as companies plunged almost overnight into totally uncharted territory.
The crisis will likely affect all aspects of business from how and where goods are sourced, to where they are bought and sold, to where work gets done, and to how it gets done.
Governments have also have injected billions of dollars into their economies and temporarily relaxed rules to reduce the business burden. TMF Group, a leading provider of international business administration services, has found 1,114 COVID-related individual government support programs available to companies worldwide. This represents a vast range of possible help for multinational firms – but processing and dealing with such volume is a complicated task.
As the global economy begins to emerge from the COVID-19 crisis, there is evidence that many companies will respond with international expansion. In a recent survey conducted on U.S. business leaders, more than a third (36 percent) of respondents replied that the experience had accelerated their plans for international growth. And when firms move abroad, they again face complexity. No jurisdiction is alike, so multinationals need to master a complex web of regulations, processes, and conventions to succeed.
To help navigate a diverse and rapidly evolving global business environment, TMF Group has published a report on business complexity. The Global Business Complexity Index ranks 77 jurisdictions according to the ease of doing business. The ranking is based in part on in-depth interviews with TMF’s experts in each of the jurisdictions. The surveys focused on three areas of business operations: accounting and tax; rules, regulations and penalties; and human resources and payroll.
While the consequences of COVID-19 for business rules and international trade are unclear, the report highlights issues that companies should consider when weighing foreign investments or allocating resources among global operations. Even before the pandemic, companies had their work cut out to operate safely within increasingly complex financial, regulatory, and employment rules for doing business.
Businesses must contend with both global and local forces while striving to be successful, and among the widespread and rapidly changing trends are the accelerating growth of technology and the focus on cross-border compliance. What’s more, individual jurisdictions have very particular ways of doing things that can be potentially costly — to multinational corporations.
Indonesia emerged as the most complex jurisdiction. Businesses are attracted to the country’s large population of 260 million and abundant natural resources, but there are numerous barriers to doing business there. TMF Group found that restrictive laws limiting foreign ownership and protecting workers are the biggest obstacles. The government, though, is taking steps to liberalize its economy, including deregulation and tax incentives for investments in special economic zones.
Similar challenges arise in South America, five of the ten most complex countries: Brazil, Argentina, Bolivia, Colombia, and Ecuador. For example, Brazil has dozens of tax regimes spread over federal, state, and municipal layers of government, different rules for international versus local companies, and employment laws that can heavily favor the rights of employees compared with employers.
At the other end of the spectrum sits the United States, the second-least complex business environment for multinationals. TMF Group highlighted a few factors key to the U.S. business-friendly environment:
● Its rules and regulations are stable and clearly stated, publicly available, and prone to sudden change or stringent check-ups. By and large, the U.S. economy operates on the assumption that companies are complying.
● Audits of financial statements are only legally required relative to publicly traded companies — compared with China and many other large economies, which still place a heavy administrative burden on multinationals relative to verifying compliance.
● It offers streamlined tax and accounting administration, as well as ease of hiring and firing employees.
Offshore financial centers, such as Curacao, the Cayman Islands, and the British Virgin Islands, also fared well. But they are becoming more complicated for businesses as they respond to public pressure to enact stricter rules and supervision related to tax transparency, money laundering, and beneficial ownership
Attractive destinations for foreign investment in Europe — Ireland and the Netherlands — also were among the least-complex jurisdictions.
Overall, TMF Group found that a global outlook, alignment of international laws and regulations, and increasing deployment of technology have given rise to a greater synergy in international business. These factors have combined to make jurisdictions less complicated for multinational companies.
The report also underscores that nations that want to attract foreign investment and create business-friendly environments have to find the right balance between three significant, broad trends:
Internationalism Vs. Localism
Expanding operations into new territories around the world offers substantial commercial opportunities. Governments are continuing to open up to international business by improving the processes for assimilating them into their local economies, sometimes through offering incentives. However, jurisdictions vary in their success at creating a more comfortable environment for foreign direct investment.
Modernization Vs. Tradition
Modernization is, broadly, about demonstrating a commitment to international standards and practices, whereas tradition is reflected in localized barriers to smooth operation. Some governments hold on to many traditions, whether they are actual laws or only standard practices. Such traditions make it more difficult for companies to operate because:
● they add to business complexity, as they are usually out of date and do not fit into the modern world, and
● they embody idiosyncrasies, which can add to the costs of what legislation demands of companies.
Technology Vs. Simplification
For a new jurisdiction to appeal to international business, it has to adopt new technology. However, this can lead to an initial spike in complexity as jurisdictions struggle to adapt to new digitized systems while trying to bridge the gap between paper and online solutions.
The business environment increasingly relies on the latest technology to run full throttle in a global economy. The least complicated jurisdictions have used information and communications technology to enhance their compliance mechanisms so that setting up and operating a business becomes much more manageable. Unification, technology, modernization, and simplification will be drivers that can help set the post-pandemic global economy back on its feet, allowing businesses to act in response to complexity in their markets more effectively.