Complex cross-jurisdictional governance is challenging business

ICSA and TMF Group survey shows opinion is divided over the difficulty of European governance frameworks

Ensuring good governance is a challenging enough process in one jurisdiction, let alone across multiple countries. Each jurisdiction seems to have taken a slightly different approach to its regulatory framework and staying on top of these nuances and complexity can be difficult, and a burden on both time and resource.

In fact, nearly half (44%) of governance professionals surveyed feel that the complexities of different international jurisdictions’ governance requirements are a handicap to business, according to a new poll by ICSA: The Governance Institute and professional service providers, TMF Group.

Less than a fifth (17%) feel it has no impact, with the remainder unsure.

Do the differences between international jurisdictions’ governance requirements hinder business?

‘In recent years international corporate compliance has become both more transparent and more complicated, costly and nerve wracking for global players, all in the aim of levelling the international playing field,’ comments Leila Szwarc, global head of compliance and strategic regulatory services at TMF Group.

‘A large number of new international regulations have been implemented across the globe, which in general promote visibility but the way and speed in which they are implemented differs from country to country, meaning the overall complexity picture is far from uniform.

‘The most visionary firms are responding by creating global frameworks – focusing on raising the standards to meet those of the most complex countries in which they operate. Certainly not an easy task, but definitely a smart one.’

Germany

When asked about the most challenging regulatory frameworks in Europe to operate in, Germany came top, with over a sixth (17%) of respondents name-checking it. However, in a new report by TMF Group, the country only received a mid-range complexity ranking for corporate compliance, coming in 42nd globally (of 84), or 16th out of the 33 European countries ranked. The ‘Compliance Complexity Index 2018’ assesses jurisdictions globally, based on how difficult it is for companies to adhere to local business regulations and associated issues, including the time taken to set up and comply with reporting requirements.

Outside of the UK, which jurisdiction in Europe has the most challenging regulatory framework?

Explaining why there may be perceptions of Germany as a complex regulatory jurisdiction, Johannes Schoenfeldt, senior lawyer at TMF Germany, comments: ‘The complexity that does exist in German corporate compliance relates mostly to local language reporting requirements, strict checks before opening bank accounts and small-but-important differences to other jurisdictions such as the involvement of a notary when setting up a German corporation or making changes.

‘Also, many countries allow the principle of a corporate director, however, in Germany the managing director of an entity can only be an individual that must accept the possibility of personal liability, in case of non-compliance.’

The increasing demand for financial transparency globally has also increased the level of required reporting for companies in Germany.

“In Germany the managing director of an entity can only be an individual that must accept the possibility of personal liability, in case of non-compliance”

Ursula Rutovitz, managing director of TMF Germany explains: ‘The challenge of movements such as FATCA (foreign account tax compliance act), CRS (common reporting standard) and BEPS (base erosion and profit shifting) lies in that they are still very new requirements that companies must adjust and adhere to.

‘The bureaucratic burden is further intensified by GDPR (general data protection regulation) as well as additional requirements set forth in the new German Data Protection Act (BDSG – neu).’

However, Schoenfeldt adds, ‘once a company has determined the right form of entity, the process of setting up a business and maintaining it in Germany is pretty clearly outlined in the company law, and can be completed swiftly.

This helps explain why Germany also featured in second place on our poll of the best regulatory frameworks in Europe, with 14% of respondents mentioning the country.

The Netherlands

The Netherlands came top in that question of the survey, with a fifth (20%) of respondents identifying the jurisdiction as the best in Europe. Again, there is a marked difference here compared to TMF Group’s Compliance Complexity Index, where the Netherlands came in as the 17th most complex jurisdiction globally, or fourth out of European countries.

Outside of the UK, which jurisdiction in Europe has the best regulatory framework?

Explaining this contrast, Priscilla Schraal, corporate secretarial services team leader at TMF Netherlands, comments: ‘When it comes to establishing a new entity, most procedures in the Netherlands are quite straightforward. However, complexity levels for foreign companies skyrocket when it comes to official processes, which require paperwork to be in Dutch. It can be extremely hard and very time consuming for businesses to understand what is being requested of them, and why.

‘Added to this are the numerous requirements that must be adhered to when an entity becomes operational; for example, country-specific VAT rules, submitting benchmark reports to the Dutch Central Bank, mandatory questionnaires from Statistics Netherlands and deadlines for certain filings, which carry possible consequences for non-compliance.’

Of course, ‘challenging’ and ‘best’ are not mutually exclusive, so perhaps the reasoning behind the Netherlands position as best regulatory jurisdiction, notwithstanding its apparent complexity, can be found in the sentiment of governance professionals – who recognise and reward the Dutch attempts to improve governance through increased transparency, despite the added regulatory burden.

“Complexity levels for foreign companies in the Netherlands skyrocket when it comes to official processes, which require paperwork to be in Dutch”

Explaining the Dutch approach, Andre Nagelmaker, managing director of TMF Netherlands comments: ‘Regulatory compliance obligations are growing around the world, and we also see in the Netherlands the global trend for more transparency from multi-national companies with regard to financial data, economical and decision-making ownership of businesses.

‘All of these factors increase complexity, and make it ever more essential for growing companies to ensure they have a consistent – and scalable – compliance framework in place.

‘For international firms scratching their heads over these issues, and how to incorporate them into their strategy; complexity mapping through audits and entity health checks are a great place to start.’

Ireland

Ireland was ranked as the least complex jurisdiction on TMF Group’s index, sitting in 84th, and final, place.

However, in our poll, it also featured near the top on both the ‘most challenging’ and ‘best’ lists of regulatory jurisdictions, coming in as the third-best jurisdiction and fourth most challenging.

‘Ireland has worked very hard in recent years to provide certainty on how to operate in a business-friendly manner,’ comments Kevin Butler, managing director of TMF Ireland.

“All Irish-registered companies are required to maintain an internal UBO (ultimate beneficial owner) register”

‘One of the most significant recent changes was the introduction of the Companies Act 2014, which simplified and modernised Irish company law, making it much easier to register and operate a business in Ireland. The act also set out clear responsibilities for directors.’

While Ireland is leading the way for ease of corporate compliance, the country is not complexity-free, which helps explain why it featured so highly on our respondents ‘challenging’ ranking.

‘All Irish-registered companies are required to maintain an internal UBO (ultimate beneficial owner) register, and there is more EU legislation to be transposed into Irish law,’ explains Butler.

‘The authorities are also starting to act against companies and directors who fail to file annual returns within 180 days of a missed deadline. New developments such as these demonstrate how important it is to understand and adhere to local market regulations.’

As these contrasting views on the complexity of regulation in Europe show, running cross-jurisdiction operations is Europe requires attention and resource allocated on subsidiary and regulatory compliance. Companies with European operations should make a call if they hire in country local compliance experts or outsource the work to a third-party service provider. Local complexities can benefit from local expertise and execution; managing everything from a centralised location is not always the best option.

Read the TMF Group’s Compliance Complexity Index 2018 full ranking.