The art of reaching true agreement with a foreign distributor is a delicate dance. At the beginning, the relationship is full of possibilities and enthusiasm. Both companies want to reach agreement and get down to the business of selling things as soon as possible.

But, when it comes to negotiating international distribution agreements there is a lot of room for error, which can lead to some major hiccups and ultimately cost your business time, money and customers.

Here are the top ten misconceptions floating around out there, and the solutions to protect your bottom line in distribution agreements.

Myth #1: We don’t have time for a contract – we need to get busy selling!

Many companies will only do a legal agreement if their legal department insists on it, and if they don’t have a legal department, it probably won’t happen.

Even companies with written agreements may think of the contract as something to be done at the end of the negotiations—a necessary evil to tidy up the little details, but that delays getting on with the business at hand.

But they’re missing a great opportunity: the contract negotiation process ensures the parties truly have clarity and consensus, and as an added benefit, builds the all-important relationship between supplier and distributor.

Through the contract negotiation process, a good international lawyer helps reveal gaps in understanding that are never an issue in domestic negotiations, and coaches and guides the parties to a better partnership. Working through small conflicts as part of the negotiation builds trust as they gain confidence they can successfully work through inevitable disagreements.

Myth # 2: How we found our distributor is totally separate from our contract

Many may ask: what does that have to do with the distribution contract?

It matters because the best foreign distribution agreements start long before sitting down with a written document.

A supplier with a distributor recruitment process has thought pretty carefully about its objectives for its distribution business. These objectives can be clearly articulated, which leads to discussions with distributors that are more productive for both companies. They see mutual interest right from the outset of the relationship (or the lack of real interest becomes clear very quickly).

The contract negotiation process is consistently smoother when suppliers do a lot of the contract pre-work by thinking carefully about what they want in their distributors, envision what a great distributor looks like, and then go find those distributors.

Due diligence also helps create better agreements because it weeds out distributors that are bad fits long before wasting time finding that out through a painful contract negotiation process.

Myth # 3: Contract templates are great, because that way we can skip the legal review costs.

Templates are a great place to start. But they are only the START, and should not replace competent legal review.

These days, it’s easy to find templates on the internet. You can purchase them online, or obtain them from colleagues, trade associations, or government agencies. Even most lawyers will admit they start with a document repurposed from somewhere. Make sure the one you use fits your situation.

Some questions to ask to ensure you’re starting with a good template:

Do I have an agent or a distributor? The legal agreements for the two types of arrangement are totally different. If you pull a “distribution agreement” off the internet, but you have an agent, you’re not even starting with the right kind of agreement.

Does the template cover all the key points? Make sure your template is comprehensive.

Does it adequately address services or software? Distribution templates are typically product-focused, and may not address related service and software issues. Today, there is often a service component to many product sales. For example, is installation required for your products? What about trouble-shooting, maintenance, upgrades, and warranty repairs?

Second, templates are NOT a substitute for competent legal review

Used wisely, a good template can facilitate the negotiation process. Unless you’re very experienced with legal agreements, however, you’ll benefit immensely from having a qualified lawyer review the document with you.

Agreements without legal review often omit important provisions. Many are worded poorly and the interpretation is subject to dispute.

Myth #4: We Can Just Have Our Local Contracts Lawyer Review Our Agreements

Just because a signed contract says something doesn’t make it so.

When you have a contract with a foreign distributor, you now have two completely different legal systems—yours, and that of your distributor. The contract interpretation becomes much more complicated and much less predictable. Expert legal advice is needed to sort out the rules that will apply, and how they will apply.

Balancing all this is complicated, and depending on the amount at stake, requires not only an experienced international attorney in your home country, but selective consultation with their counterpart in the distributor’s country. And the lawyer in the distributor’s country cannot be just any local commercial lawyer, but a lawyer who also is experienced with cross-border transactions.

For these reasons, you should NOT have your international distribution agreement reviewed by the local lawyer who helps your company with other business, even other contracts—unless they also happen to be an experienced international lawyer, which is unlikely.

Myth #5: We hope our foreign distributors don’t hand out bribes, but if they do, it’s really not our problem.

Most companies today know that foreign bribery is bad and  illegal. They may have heard of the U.S. Foreign Corrupt Practices Act (FCPA), or the UK Bribery Act, and other similar laws.

But there are plenty of companies that export using distributors still don’t understand that they can be held accountable for bribes their distributors make. Maybe it’s because it seems far-fetched that a completely independent company like your distributor can put you at risk for their actions. Maybe it’s because it seems unlikely your distributor or you will get caught.

Whatever the reason, the truth is: more and more companies are finding themselves subject to FCPA enforcement because of their distributor’s bribes.

According to the U.S. government, here’s what every U.S. company needs to do with their foreign distributors to avoid liability:

• Conduct thorough due diligence, which may include regular background checks and investigations on distributors.
• Include anti-bribery language in all distributor agreements (which presumes you must have written contracts) that clearly allows you to terminate if you discover bad behavior.
• Train your distributors (as well as your employees who interact with them) regularly on anti-bribery compliance.
• Clearly understand how your products are reaching the end customers and confirm if there are any other intermediaries.
• Prohibit use of sub-distributors, agents, or other intermediaries by your distributor unless you have investigated appropriately and provided written approval.
• Make sure your distributors’ customer margins, and any other compensation you pay them, are reasonable and customary.
• Have controls in place to make sure any red flags are raised and addressed.
• Have your internal audit or finance function monitor this program regularly.
• Document everything that you verified, as well as how any issues or problems were investigated and resolved.

By the way, bribes are still pretty common in many countries. So make sure you get good legal advice when exporting so that you can assess bribery risks and create an anti-corruption program that works for your company.

Myth #6: Two extremes: We never give exclusivity unless forced to, or, we give exclusivity freely.

Virtually every international distributor will ask for (or insist on) exclusivity. A frequent question in contract negotiations is whether you can or should give it to them. It’s an issue worth weighing carefully.

There is no single rule about granting exclusivity. It depends on the geography, local laws, what is customary in your industry, and practical business considerations.

The best we can do is set out some of the most common factors to consider.

Does local law permit the type and extent of exclusivity you are considering?

When granting exclusivity, it is expected to have minimum purchase requirements. You will still want to understand which these will be enforceable under local law, especially regarding “take or pay” minimum purchase provisions.

If a distributor insists on exclusivity, but is unwilling to agree to enforceable minimums, think long and hard before moving forward with this partner.

You will also need to weigh the practical and business considerations. In some cases, you may have no real choice on exclusivity. If there are only two qualified distributors in a market and your competitor already works with one, you have limited negotiating leverage.

Are you are willing to invest in the distributor, and vice versa?

Ensure that you contract allows you to terminate exclusivity without terminating the entire agreement. 

Understand clearly the local law requirements for terminating exclusivity, including the grounds for termination and whether any payments will be due.

Myth #7: If We Set Aggressive Deadlines to Finalize Our International Contracts, We’ll All Stay Focused and Get it Done More Quickly!

Negotiating a cross-border agreement flat out takes a lot more time to negotiate than the same agreement within your country, or between a U.S. and a Canadian company. Expecting negotiations to move at the pace of a typical domestic agreement is almost guaranteed to result in disappointment and frustration.

This concept is simple on its face, but in reality is often very difficult for some to accept. The reasons these agreements take so much longer varies. Time zone differences and language issues definitely play a role. Differing cultural expectations, though, usually have a larger impact. To effectively negotiate great distributor relationships in the international arena, you need to get a bit zen. Negotiating styles vary widely from country to country, and you must accept that your distributor is not going to change their culture suddenly to meet your arbitrary timelines.

It helps a lot to relax, and just enjoy the process of seeing the many different styles of negotiation. Getting frustrated will not force your foreign partner to be more like you!

In the end, continuing to build a good relationship with the distributor is most important – if you have that, you are much more likely to have a productive business partner and a better agreement than by simply rushing to meet artificial deadlines. And you may also need to help educate your own bosses to help manage their expectations.

Myth #8: We don’t need to spell out operational details in the contract—that’s business stuff, not legal!

Operational issues generally make or break client-distributor relationships. And the time to think through and discuss them is during contract negotiations. If the parties have detailed discussion and put their agreement in writing, there tends to be fewer issues later.

Here are some of the most common sources of disputes, and some questions to consider:

Investments: How many people will the distributor dedicate to selling and supporting your products? What kind of skill sets do they need? Do you want the right to interview, veto, or replace these people? When there is turnover of personnel, how quickly should these positions be filled, and what recourse should you, the manufacturer have, if the positions aren’t replaced? Which of you will pay for product training, congresses to promote your products, or the creation of localized marketing materials?

Forecasting & Demand Planning: There is nothing worse than having your distributor provide you an aggressive sales forecast, and you purchase or make products based on this forecast, only to find the orders never come. The reverse is equally bad: the distributor suddenly wants lots of unforecasted products shipped immediately, and you don’t have them available.

Logistics and Supply Chain: When are rush or air freight shipments appropriate? How long are manufacturing lead times? How are product shortages rationalized? Will the distributor incur penalties in their customer contracts if delivery is delayed? What shipping metrics will you use?

Reporting and Business Reviews: Will there be an agreed business plan? Will there be quarterly business reviews? Will there be minimum purchases, and how and under what circumstances will they be adjusted? What metrics, besides minimums, are you expecting your distributor to meet? Do you expect sales tracings reports? If so, how often, and in what format?

After-Sales Support: How will returns and repairs be handled? What tasks are the distributor able to handle? Should they receive special training to do certain after-sales support activities? Will the manufacturer or a third party handle? How quickly can repairs be done? When is replacement appropriate?

Take the time to discuss these and any other relevant operational detail with your new distributor. Memorialize these in your contract. Think of your distribution contract less as a document you pull out of the dusty files when things have gone wrong, and more like a blueprint for governing your distributor relationship.

Myth #9: We don’t spend much time negotiating termination, because it will spoil the enthusiasm.

No one (except, of course, the lawyers) want to think about how to end a relationship when it is only just beginning and full of promise. However, most agreements eventually end, and that’s why it’s worth spending time thinking about termination—especially while the relationship is amicable.

You should always plan for termination in the context of how you would transition to a different distributor or your own stand-alone sales office. (It’s always easier to torch and run from the market, but the reality is that you should think hard about entering a market if you think that’s how it will end.)

Goodwill payments: Make sure you clearly understand any goodwill payments that may be due on termination. Think about how long-term customer contracts and government tenders should be managed to avoid disruption to the customer.

Inventory: Think through how the distributor’s existing inventory should be handled. Consider buying back some or all the inventory (other than maybe excess no-move inventory) to essentially buy their goodwill so that your brand isn’t ruined.

Product registrations and other key files: If you’re in a highly-regulated industry, think through how all the registration documents and files should be handed over. This can significantly shorten your new partner’s time to market, and may be worth a generous payment to your old distributor.

Customers: Ultimately, protecting your brand is about making sure the end customers are happy or at least accommodated. Agreeing that your distributor will provide a list of customers and key contract terms will allow a much smoother termination.

Myth #10: We’ve Invested So Much Time in This Relationship – We Can’t Give Up Now!

Whether in contract negotiations or in a long-term business relationship, human psychology is definitely at work.

Companies often feel like they’ve invested so much already that they need to slog through and finish the negotiation or continue the relationship.

All too often, suppliers keep distributors around whose poor results suggest they should be replaced. If you are clear about your exit strategy (even if that strategy evolves over time), it will guide you to a decision about whether it’s time to put in place a direct sales force, find a new distributor, or leave a market altogether if certain results aren’t met over a specific time.

Similarly, having a backup plan (again, it’s OK if that plan morphs over time) helps you keep you’re your walk-away point clearly in focus. If you don’t have Plan B, human psychology again will come into play, and you’re likely to settle for sub-par results because making change is hard and requires focus.

Having a Plan B is especially important in emerging markets. Huge currency fluctuations, political unrest, and sudden regulatory changes can happen, and the market that was once attractive no longer is. But it’s also important almost everywhere in today’s business environment, where technology changes, mergers and acquisitions, and factors have accelerated the pace of change. Being flexible and adaptable is one of the most important attributes for success in global markets.

Your distribution business will be more successful if you always keep your walkaway point in mind, and know when it’s time to pull the plug, regardless of the investment made already—that’s a sunk cost that can’t be recovered. Know when you want to exit, and how you want to exit by being prepared with a backup plan.

This article series originally appeared in Global Trade Magazine. You can view the series here.

As the service export industry evolves, businesses face many unique challenges to deliver them.  Some of these issues may look familiar to those with experience in exporting commodities, while others are tax considerations and compliance provisions that relate directly to the service exports industry.

In previous articles, we’ve talked about the different ways service exports can be delivered.  In this article, we’ll look at what you need to consider when sending employees to represent your company by delivering services remotely to foreign locations.  These services vary widely and might be provided in a number of different ways. The commonality among them is that an idea is created that has value and is shared across national boundaries.

In today’s world, this sharing could occur in any of the following ways:

• Sending documents or ideas via email
• Through the cloud (sharing files on Drop or DropBox, for example)
• Sending hard copies (paper or USBs) of designs and ideas via express mail
• By fax
• Sharing ideas or providing solutions by telephone (landline, cellular, or VOIP)
• By “remoting” into another computer or IT system using a software program (think of the IT person in the Philippines who takes control of your desktop to troubleshoot a problem)

Are there any risks associated with these exports?

The technology and processes to accurately track all of these mostly virtual activities do not yet widely exist.  Remote service exporters should note, however, that governments worldwide are aware of these growing activities, and are actively working on ways to track and tax them more effectively.  There are certainly ways you might get tripped up, so you should be cognizant of the risks and address them appropriately.

The three primary types of compliance risks to consider when providing services:

(1) Export compliance

(2) Taxes

(3) Data privacy concerns in the case of remote access

Let’s look at each of these in more detail.

1. Export compliance still applies to remotely-provided services

Transmissions of concepts, drawings, ideas, and information are still deemed to be exports under the laws of Canada and the U.S.

If encrypted technology is used to remote into a foreign system, you should check to make sure it is not subject to licensing requirements.

In addition, the destination country will need to be checked against country restrictions.  The customer should also be checked against any list of denied parties or other known bad actors.

Sometimes, while executing a project remotely, assistance may be needed from a local firm.  In this case, your company must have a process for ensuring this company and its principals are also screened.

Key recommendations: 

• If the services are related to any kind of product sale, make sure you consider all the necessary related services BEFORE you sell the product to a particular country. Do this so that you can consider any export issues related to the services as part of the product sale – don’t just evaluate the “exportability” of the product alone.
• If you provide only services, remember that you are still exporting. Before you agree to provide services, ensure that you have checked all the relevant export compliance issues (e.g., verify that the customer is not on any denied party or other bad actor list, make sure that the country where the service is being delivered does not have restrictions; make sure the contract paperwork does not contain anti-boycott language; investigate “red flags,” etc.)
• Be sure to check any licensing requirements software on encrypted software used to “remote” into foreign computer systems.

2. Consider the tax risks

The tax risks primarily relate to income tax or value-added tax (VAT).  Let’s look at each in a little more detail.

Income tax/permanent establishment (PE) risk

This risk arises when a company located in one country starts doing things that trigger corporate income tax in a foreign country.  Governments everywhere will try to tax productive activities whenever they can. 

Certain “de minimis” activities are allowed (usually spelled out by a tax treaty between the two countries), but once that threshold is crossed, local authorities will attempt to assess income tax on the local activities.

Unfortunately, there is no agreed-upon set of principles among countries for remote or virtual services. In fact, there is considerable disagreement about their treatment.  This is an area where the tax laws have lagged significantly behind the reality of how many services are delivered today across borders.

The reality is that companies providing only export services to a country (with no other types of economic activities occurring there) are probably at a low risk of triggering any local income tax obligations.  Generally, among the 38 members of the Organization for Economic Cooperation and Development (OECD), providing less than 181 days’ worth of services remotely will not create income tax risk.

However, companies that provide services but also do other activities in that country, such as sending employees there to provide onsite services, operating a warehouse, or having a sales agent there have a significantly greater risk profile.

These companies need to have a system to track all their various activities in each country.  Companies that fail to track all of these activities are at a much greater risk of falling into the PE trap. Make sure you obtain good international tax advice if you conduct business in a foreign country beyond the remote provision of services.

Value-added tax, or VAT

VAT may be assessed on the transaction because the service export is deemed to occur in the foreign country.   For example, Singapore has clearly taken the position that all services provided via the internet should include local VAT tax.  There are new EU VAT rules applicable to services that will come into effect in January of 2017, and several other countries have introduced similar legislation.

These laws will mean that companies providing certain services to foreign countries will be obligated to add local VAT to their invoices.  This will be a true added cost of the service, since many foreign companies will be unable to offset this cost, or will find it inconvenient to recover it (in countries where it can be recovered).

As noted previously, most governments’ ability to actually track these virtual services remains limited. However, there is a huge difference between not collecting VAT because the local law is unclear versus not collecting VAT that is legally obligated in the hopes of not getting caught.

Exporters providing virtual services in particular will want to closely monitor developments around this topic, as it is evolving rapidly.

3. Get to know data privacy laws

Remoting into foreign computers, whether to troubleshoot and fix software bugs, to share raw data, or to conduct “white hat hacking,” is becoming increasingly common.

Anytime someone from one country has access behind the firewall of another country’s system, there are not only data security issues, but also data privacy considerations.

In much of the world, personal data is protected, and the type of data protected is quite broad.  For example, in the EU, it is against the law for a company in the U.S. to have access to any personal data residing on a server in Europe – including office telephone numbers, employment history, or dietary needs – without adequate data protection programs in place.

If your company is providing services where this could occur, become familiar with any applicable data privacy laws, and design an appropriate compliance program.

Key recommendations:

• Involve your tax team early in the planning process. If you don’t have an in-house tax resource, help educate your finance team so that they understand the importance of getting good external international tax planning advice.
• Become familiar with the various country laws assessing VAT on services, and monitor developments closely.
• Consider data privacy regulations when “remoting” into foreign computers

The service export industry is growing rapidly around the world, and things aren’t getting any simpler for those involved.  Although difficult to systematically check today, rest assured countries around the world are working aggressively to better track and monitor many types of remotely-provided services that increasingly cross borders.

As the service export industry evolves, businesses face many unique challenges to deliver them.  Some of these issues may look familiar to those experienced in exporting commodities, while others are tax considerations and compliance provisions that relate directly to the service exports industry.

Here’s what you need to consider when sending employees to represent your company by delivering services in person in foreign locations.

The 3 types of taxes you need to plan for

The three primary tax considerations are: 1. permanent establishment risk, 2. local withholding tax, and 3. personal income tax.

Let’s look at each of these in more detail.

1. Permanent establishment (or PE) risk arises when employees working for a company located in one country start doing things that trigger corporate income tax in a foreign country. Governments everywhere will try to tax productive activities whenever they can. Certain de minimis activities are allowed (usually spelled out by a tax treaty between the two countries), but once that threshold is crossed, local authorities will attempt to assess income tax on the local activities.

Among the 38 countries that are members of the Organization for Economic Control and Development (OECD), there is an agreed set of standards.  Typically, employees of an American or Canadian company (both are OECD treaty members) can spend a total of 181 days in a foreign country before a permanent establishment is created.

Beware that travel days are included, and the days do not need to be consecutive.  Some companies fail to track this, and fall into the PE trap when projects are extended or run into delays.  Other company activities in the local country may make this 181-day threshold less certain, so make sure you obtain good international tax advice.

2. Withholding tax arises when a foreign worker earns more than a maximum local tax withholding threshold in the foreign country. Even though this employee is paid by the company in their home country, the local foreign country will attempt to attribute a value to the services each foreign worker is providing in that country. If the value exceeds the local threshold, then the employer will be required to pay withholding tax on that amount.

It may be interesting to note that Canada has one of the lowest withholding tax thresholds in the world, a fact that has tripped up many U.S. companies who send their workers into Canada on projects.

If the destination country’s thresholds are exceeded, it may be possible to file for an exemption from this withholding tax, or file for a refund later.  In some cases, it will just be an additional cost of doing business that needs to be factored into project/services pricing.

3. Personal income tax can also become an issue. The situation is the same as an employee of an American or Canadian company who resides in one state/province but works a substantial period of time in another. The individual in this case will receive two state W2s, and therefore must file state/provincial income returns in both jurisdictions.

The difference in international cases is that the employee’s individual tax preparation will become far more complicated.  The employer will typically provide the employee with the necessary international tax advice to help them prepare these returns.

Thoughtful employers also ensure that the employee is appropriately compensated financially, as the tax rates in the destination country could be substantially higher than in the employee’s home country.

2 key rules to operate under

1. Involve your tax team early in the planning process; if you don’t have an in-house tax resource, help educate your finance team so that they understand the importance of getting good external international tax planning advice.

2. Be aware of key thresholds and closely track against them; make sure you have an alert system that lets you know when you are getting close, but have not yet exceeded them, so that you have time to explore and implement alternatives.

Export compliance still applies to services

Export compliance issues need to be considered if the service providers carry laptops, USB drives, or other portable media with encrypted software into a foreign country.  Depending on the destination country, there may be export restriction issues, or even licensing issues.  (Many times, these employees will access such software remotely, which also creates export compliance questions, but we’ll talk about providing services remotely in a future article).

In addition, the type of project and the destination country will need to be checked against country restrictions.  If the service supports a product, the customer should already have been checked against any list of denied parties or other known bad actors.  If there is no related product, the local customer should have been screened against these lists prior to bidding on, or contracting for, the project/services.

Sometimes, while actually executing a project, it becomes clear that some sort of assistance may be needed from a local firm. In this case, your company must have a process for ensuring this company and its principals are also screened. 

Key recommendations: 

1. If the services are related to any kind of product sale, make sure you consider all the necessary related services BEFORE you sell the product to a particular country. Do this so that you can consider any export issues related to the services as part of the product sale – don’t just evaluate the exportability of the product alone.

2. Have a system for checking the software on travelers’ computers for any export compliance issues.

Seek help from experts in the local laws

This is a broad category, and is difficult to generalize much because local laws vary widely from country to country, and are also highly dependent on your industry vertical.

Here are a few general recommendations:

1. Make sure your travelers are aware of driving restrictions and traffic laws. Make sure they understand what they need to do in the event of an accident.

2. Provide guidance to them on any specific laws that may affect them (e.g. chewing gum in public in Singapore), as well as cultural sensitivity training and local “do’s” and “don’ts”.

3. Make sure travelers understand what do if they need medical treatment.

4. Make sure your insurance broker is informed of the travelers’ activities so that the appropriate coverage is extended.

To address some of these risks, a good internationally-experienced travel agency, as well as a similarly-experienced insurance broker can be invaluable resources.

Someone who can provide detailed cultural training can also be helpful.  If you are regularly sending people overseas to provide services and you don’t have these resources at your fingertips, it may be time to re-look at your service providers to make sure they have the right skillsets to help you.

The service export industry is growing rapidly around the world, and as it does things aren’t getting any simpler for those involved. Companies sponsoring employees traveling to provide service exports will need to have strong compliance programs in place to make sure they follow the applicable laws and that the risks are properly managed.

If you’ve followed our previous articles about service exports, or have provided service exports, you know that they can be delivered in several ways: in person, or remotely via the Internet or the cloud, by telephone, or over email.

In this article, we’ll focus on the former: services provided in person by representatives traveling to foreign locations.

Locally engaged staff who represent your company in foreign countries to deliver services face quite a few challenges. Here are some of the immigration issues you’ll need to consider.

Papers please!

When professionals travel to provide services on site in a foreign country, immigration is an important consideration.  Most people are aware that a passport is needed for foreign travel to most countries – even between the U.S. and Canada.

That wasn’t always the case, and recently tripped up an American colleague who still thought he could travel with a voter’s registration card!

Most people who have traveled for business meetings or vacation also know that some countries require a visa – a special authorization to visit a particular country for a limited time period and for a limited purpose.

Some visas are obtainable by simply filling out a form and paying a fee upon entry to the country, but many more involve bringing or sending your passport to the destination country’s consulate.

You can generally attend sales meetings or conferences, take plant tours, and visit customers with the same kind of visa you would obtain if you were on vacation for a few days. In fact, this is what is referred to as a “tourist visa.”

New country, new work visa rules

What fewer people realize is that when travel involves doing valuable work, such as providing services of any kind, this typically requires a special work visa.

For example, participating in a trade show in the United States typically requires a special visa.  Working on an installation or construction project requires a special visa in most countries.  Even negotiating a contract may require a work visa.

This type of visa generally requires additional paperwork, and will often take longer to process – sometimes MUCH longer –than a tourist visa.

Whether or not a work visa is required, the kinds of work that can be performed, and for how long, varies widely among countries.

The analysis gets even more complicated depending on the immigration status of the professional who is traveling, and even on which passport they will be using for work-related travel.

Ironically, this complexity can sometimes lead to simpler solutions.

For example, a UK national working in the U.S. on an H-1B visa, or a dual UK-Canadian citizen presenting his/her UK passport, may be able to travel to a project in Europe without needing a work visa at all.

 3 key rules to operate under

1.

Check the work visa rules very, very carefully and consult with the destination’s consular officials. If the advice is unclear, or your traveler already has a complicated immigration status, take advice from a good immigration lawyer.

Make sure you clearly allocate enough time prior to a project launch to obtain the appropriate work visa in order to avoid unhappy clients or project delays. If necessary, opt to send a professional with a less-complicated immigration status.

2.

Never, ever ask your employees to travel on a simple tourist visa if they will be providing services in a foreign country, even if your project is an emergency or the client wants the work done right away.

Doing so puts your employees at enormous personal risk.

If immigration officials find out that they are there to perform services without a work visa, they will likely be sent back home on the next plane.

This outcome is not worth the risk, since it causes an embarrassment for everyone, broken customer promises, and a wasted international plane ticket.

Worse, the employee could be detained, fined, and in some countries, receive an “undesirable” stamp on their passport, making it difficult for them to travel internationally in the future.

3.

Consider putting together a database of your professionals who may travel, including their nationality, immigration status, and any dual citizenship. This will make it easier to staff projects based on your employees’ abilities to travel for work, rather than discovering extra hurdles after they are assigned to a project.

As service exports grow steadily, the number of professionals traveling to provide services in foreign countries will continue to expand, as will the number of destinations.

Companies sponsoring these travelers will need to have strong processes in place to ensure their employees travel safely, and are able to get the job done for their clients.

Services are the fastest growing exports just about everywhere. According to the International Trade Centre (the joint agency of the World Trade Organization and the United Nations), they grew 27% worldwide between 2010 and 2014.

Who’s leading the way in service exports?

The U.S. exports more services than any other nation in the world, more than $700 billion in services each year.

Canada also exports around $90 billion in services annually, making North America the single largest region for service exports, after the EU which trades mostly within its own region.

The U.K. is the world’s second largest service exporter, and despite its much smaller economy, provides about $350 billion in services – about half as much as the entire U.S.

The U.S. exports many of its services to Canada and the U.K. Surprisingly, Canada doesn’t export a high volume of services to the U.S. The country’s largest services trading partner by far is the U.K., with France and China nearly tied for a distant second place.

Thirty-one percent of U.S. exports are services. Canada’s service exports were only about 21% of total exports, but the sector is staged for growth.

And while the U.S. is the largest services exporter, it accounted for only about 14% of the world’s services export market.

With the huge focus on the service economy in North America (an estimated 70% of U.S. GDP is service-related), these numbers show that both countries are missing huge opportunities to increase their service exports.

What types of services are exported from North America?

The number one service that both Canada and the U.S. export is travel.

Around 25% of the services exported from the U.S. and 19% from Canada are travel-related.

Second for the U.S. (but much smaller for Canada) are royalties and other intellectual property payments.

This would include payments to foreign companies for the use of intellectual property based outside the U.S.

Some of this may be franchise fees (think Christian Dior), but a large proportion is actually intercompany royalties paid by a U.S. operating company to a foreign subsidiary where the company’s intellectual property has been parked.

Transportation-related services are a huge and growing part of service exports from North America, making up close to 13% of the U.S.’ service exports and 14% of Canada’s.

This speaks to the fact that many North American goods are exported and require transport to their ultimate destination.

Other types of services that both the U.S. and Canada export frequently include: financial services, telecommunications services, and a giant catch-all category of “other business services.”

All of these numbers should be considered directional only because of the huge measurement problems related to services.

Not all countries report their services the same way, and there are many, many types of services that are currently not captured – an issue we’ll delve into in a future article.

3 current megatrends leading service export growth into the future

The growth of service exports worldwide is forecasted to continue, and will likely outpace product exports.

Some of the identifiable trends that will contribute to the growth of service exports include:

1. Growing innovation and integration of technology incorporated into physical products.

Automobiles; they were never simple products, but are now chock-full of electronics that a simple car mechanic can no longer diagnose or repair.

Home appliances; exporters of these products must now think about how all of the electronic components can be diagnosed and repaired.

In some cases, this results in the need for additional training for local distributors (one type of service export).

In other cases, it may necessitate training and contracting separate local or regional service providers, or even having company repair experts hop on planes (creating more service exports).

Cloud-based services; the cloud is making it ever-easier to provide the sharing of music, ideas, designs, and data of all kinds virtually across borders.

Services will be provided as software incorporated into Bluetooth technologies, wearables, robotics, and the Internet of Things. Self-driving cars and 3-D printing over long distances will be possible because of the cloud.

Interestingly, the printed item is a product, although whether it actually is deemed an export or not will be open to interpretation and debate, but the technology that makes it possible will be cloud-based software services.

The real issue here isn’t the explosion of services, but whether or not laws and regulations (about such things as data privacy and data security, licensing of encrypted technology, and export and import controls) can be passed to keep up.

For example, if there is a data breach, from what country are the cloud services even provided?

Without these laws, one could argue that national boundaries are becoming increasingly irrelevant, which will be an advantage to service providers in emerging economies.

Another aspect of this trend is the shift from services that have a linguistic component to those that are purely data or algorithmic.

In the past, it is not surprising that a large volume of services trade occurred among the U.S., Canada, and the U.K. – all three share a common language and a common legal system.

These elements are important when the service requires person-to-person communication, such as troubleshooting computers remotely, arranging travel and financial transactions, and designing buildings and golf courses.

However, the shift to cloud-based data transmission will make these aspects of technology-driven services that are important on the front-end design to be less important for the delivery, which will occur in data packets.

2. Continued rapid growth of global e-commerce

Online purchasing is booming worldwide, with more and more people able to access and purchase items from anywhere.

This is resulting in an increase in distribution service exports tasked with moving e-commerce goods across borders. It is also a key reason distribution-related service exports are growing rapidly.

3. Enormous demographic changes

The middle classes in many emerging markets are exploding. This will mean more disposable income for both products and services.

Studies consistently show that once basic living needs are met, middle class people everywhere will be purchasing music downloads online (a service export), surfing the internet (more service exports), and buying more things online (yes, the products may be traditional exports, but the applications facilitating buying and paying for these items will be service exports in many cases).

Similarly, these rapidly developing economies will require massive investments in infrastructure, leading to many architectural, engineering, and construction service opportunities.

It’s also been shown that emerging economies shift more quickly towards services than developed economies.

Exports are a hot topic these days, but generally when people talk about exports, they are referring to product exports. Did you know, though, that the fastest growing type of exports is services?  

More and more companies are finding profit in exporting services, and several trends ensure that these exports will grow rapidly.

Service exports are an important emerging trend in global trade. Many traditional manufactured product exports increasingly contain technology that requires installation, troubleshooting, maintenance, and repairs.

The increase in service exports is a natural outcome of the continued growth of the services economy in North America.

And the pervasiveness of the Internet and the explosion of cloud-based communication has enabled information and related services to flow freely across country boundaries.

In this new article series, our goal is to help companies learn more about them and their role in the global trade industry.  We’ll also look at some of the many benefits, issues and challenges of exporting services. As well as explore some tips on how to export services successfully.

What counts as a service export?

The natural place to start is to clearly define what exactly a service export is, and is not.

If people think of anything when they hear the term “service export,” they might think of construction services on large foreign infrastructure projects. Or maybe oil rig workers, or film stars and production crews on foreign sets.

These are definitely some examples, but there’s a whole lot more where that came from.

A service export is, very simply, any service provided by a resident in one country to people or companies from another.

Here are some broad categories of services that are exported from the North America every week:

Financial

• Rents paid by a North American resident for property owned outside their home country
• Converting British pounds to Canadian dollars for a British bank, or arranging the purchase of U.S. stocks for a foreigner
• License and royalty fees paid to tax havens where large companies like Apple and many others have “parked” their intellectual property

Know-How

• Franchise support and know-how supplied to a foreign franchisee (think of McDonald’s providing its operating template to a franchise in China)
• Architects and engineers designing a project in Abu Dhabi (even if they never physically leave their offices in North America)
• Call center support provided to users from outside the country
• Tax advisors in North America providing advice to foreign companies
• A translation company in North America providing its services to clients in Europe
• Medical personnel based in the U.S. or Canada who read test results or compile medical reports about patients located in another country
• Financial, benefit, HR, IT and management support provided by a company’s North American headquarters for the company’s foreign subsidiaries

Internet & Cloud-Based Software

• Cloud service providers whose platform is used by companies based outside their home country
• Remotely accessing IT systems located outside North America

People-Based Service Delivery

• A team of consultants traveling to a foreign destination to assist with an installation or trouble-shooting equipment
• Geologists traveling to a foreign oil production site

The breadth of service exports is enormous.  But there’s still more. Many services are “exported” but never cross any physical boundaries.   This may sound confusing, but here are some examples:

• A local tailor creates a suit for a foreign visitor
• A foreign visitor books hotels, tours, and a rental car while visiting the U.S. or Canada
• A local dry cleaner launders and presses a foreigner’s shirt

All of these are considered exports because they are provided by a service provider in one country to an individual or company in another country.

Many companies are already exporting services without realizing it!

If you’ve shared your computer screen with someone outside your country via Skype, for example, to solve a problem together, you have exported services.

So, let’s say you’ve presented an informational webinar and some of the participants were located outside your home country, service was being exported during the webinar.

If you are exporting services, you may wonder if there is anything you need to worry about.  Some of the challenges associated with service exports include export compliance, VAT and income tax, work visas and immigration, tariffs and duties, and data privacy considerations.

Whether these issues will be a major concern or not  depends on the service you’re exporting and how you provide it.  We’ll cover some of these issues later in our series.

Watch for our next article on this topic, where we’ll look at the growth of service exports.  We’ll examine some of the services trends between the U.S. and Canada, from North America to the rest of the world, and worldwide.

Is your company looking to add service exports to its offerings? What are some of the challenges and opportunities you see in this exciting, growing industry?