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Don’t believe the pessimists. This is a great time to get into exporting

There has been considerable discussion in the media recently that the odds are firmly stacked against exporters because of the soaring New Zealand dollar.

With our dollar reaching post-float highs of more than US80c, New Zealand goods and services have become more expensive to overseas customers. Consequently, exporters are feeling the pain from fewer or reduced orders, or having to lower their margins and absorb costs.

And although Kiwi businesses won’t experience the same currency pressures exporting to Australia, this hasn’t translated into growth in sales due to the greater choices of Australian consumers. That’s because their dollar is even stronger against the greenback than ours. 

In reality, though, the debate about currency rates is something of a red herring – it is one of those factors that none of us can control and it’s best for businesses to focus on issues that they can influence.

Yet, if Kiwi businesses do their homework, they can derive real value from exporting the goods or services they produce. As always, success begins with careful planning and strategy.

For instance, when the exchange rate is high, it is the perfect time to invest in marketing and research offshore, so your business can reap the rewards later. If you are entering a market for the first time, it is critical to invest in marketing and research, including investigating the price that customers are prepared to pay for your goods or services. 

This will involve researching how to do business in the country to which you are looking to export, making connections that help you to succeed, and understanding that country’s trading environment. Part of your planning needs to consider how you are going to interact with your customers efficiently, in particular, marketing and advertising, customer service and support and order fulfilment and billing. Travelling to the country in the initial planning stage could be a little easier financially when our dollar is high.

You will need to develop a model for the pricing of your goods or services and test this against your competitors’ pricing and potential customers. In particular, it is important to look at ways you can optimise your price, and project potential impacts on profit margins if the value of the New Zealand dollar continues to rise.

It can take between 12 and 18 months to receive returns from a new export market, so concentrating on marketing and research now will enable you to make the most of the high New Zealand dollar.

The first steps in any exporting process should include a careful review of your company structure. The rules around taxation of foreign earnings are extensive and can be bewildering, so seek professional advice before entering an overseas market.

You will need to initially consider whether you are just going to export or establish a business operation overseas. Basically, there are four broad options for operating an overseas business activity:

• exporting – where the revenue and costs reside in NZ
• commission seller – you engage a third party overseas to resell the product
• branch – the New Zealand company operates a division overseas but records all of the revenue and costs
• company – a new company is created overseas and is owned by the New Zealand company (which will record the revenue and costs from the overseas company in its tax return).

In general terms, the income tax treatment for both a branch and company are similar. Commercial factors such as legal liability, compliance requirements and the cost of establishment will guide you in making this decision.

For example, if you were looking at these options in Australia, it may come down to the contacts and individuals with whom you have business relationships. Under a company structure, you will need to consider who will be your directors, secretary and the public officer as well as where the company will have its registered address. You must have at least one resident director, secretary and public officer.

When establishing a branch in Australia, there is significantly more documentation and information required compared with the process in setting up a company, and a local agent must be appointed.

When making a decision about structure, it is important to seek professional advice, consider all the requirements and then work out which option will work best for your new business venture.

If the company structure in the country you are exporting into is the right option for you, setting up a holding company in New Zealand will help manage risks and maximise profits. A holding company will allow exporting activities to be split away from regular business activities by creating a series of companies under the holding company group for each stream of activity.
The holding company structure allows a partial sale of any one of the companies if, for instance, you need an equity partner, or to bring additional skills or knowledge into the business. You can manage tax risks more effectively by ring-fencing the revenue and expenses of each business activity.

If you do decide to use the holding company structure, you must be aware of certain cost and compliance issues. Having multiple entities in multiple jurisdictions can certainly be more expensive to run.

Another significant issue that many exporters may encounter relates to the transfer pricing applied to transactions between companies within the group. To avoid issues with the IRD, the ideal is that the group should charge ‘market’ prices, thus demonstrating that profits are not being shifted to lower tax environments via the inter-company transactions. This can be a very difficult feat if you are dealing in a unique product or service, and this is best undertaken with the help of a professional.

There will always be issues and risks involved in exporting, but if you know how to maximise the returns of your efforts and seek the appropriate advice, then exporting can open up enormous opportunities to grow your business.

So forget all the hype about the high dollar; if you are gutsy enough, this might be the very time to start exporting or to develop your export markets even further.

Bridget Musker
www.deloitte.com