#5　Building Business Systems Overseas: What Tax Systems and Legal Frameworks Should You Know?

In the previous article, we introduced methods for resolving frustrations between headquarters and overseas subsidiaries and leading projects to success. This time, we will look at the tax systems and legal frameworks you need to know when building business systems overseas.

System Construction Aligned with Each Country’s Tax and Legal Systems Is Essential

Not limited to ERP, when building business systems overseas, implementing tax and legal systems becomes a major challenge. Even just changing the consumption tax rate within Japan requires considerable man-hours when including testing and verification.

This is a case study from when Company T fully deployed their global accounting system to India. In the first column, I mentioned that German tax filing and auditing are very complex, but India has even more types of taxes, plus there are input tax credits and advance tax payments that need to be offset. Reports are also complex with detailed display differences by tax type.

Therefore, ERP implementation in India requires cooperation from consultants well-versed in the Indian tax system.

Responding to legal systems is equally important. A recent regulation that could impact systems is the EU General Data Protection Regulation (GDPR), which came into effect on May 25, 2018. This fundamentally prohibits the transfer of personal data from within the EEA (European Economic Area) to outside the region.

Since The EU General Data Protection Regulation (GDPR) remains an important consideration for global system implementation projects. Since 2019, the EU and Japan have maintained a mutual adequacy arrangement for personal data protection. Nevertheless, organizations should continue to review applicable data protection requirements in each country where they operate. Japanese companies need to take various measures such as establishing binding corporate rules or concluding standard contractual clauses. System-level responses are also necessary, of course.

Regarding server locations and security associated with system implementation, laws change with the times, but can also vary by city, so caution is required. In China, internet blocking is also conducted by the government, so careful consideration must be given to where to place database instances and other matters.

Participation of Experts Well-Versed in Laws and Rules Is Essential

When laws differ, commercial flows are also affected, and documents change significantly. This is of course an important item in business system implementation. In any case, projects need to proceed with thorough knowledge of national and regional laws and rules (or by having people with such knowledge participate). It goes without saying that securing budget for this is also important.

It is important to think things through with local experts as early as possible in the upstream process (preferably at the project planning stage).

Although not a law, there are actually cases where people working at overseas local subsidiaries do not know the company-wide standard rules established by headquarters. You need to check whether company-wide standard rules are well-known, and if not, allocate adequate man-hours and time for that education.

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