The economies of Central and South America offer attractive business opportunities. However, these are accompanied by a set of risks, which businesses need to understand and manage effectively. In this paper we will discuss a business risk analysis of MBS Inc in the Venezuelan market.
Taxation and Double Taxation Risks.
The accounting standards adopted by The Republic of Venezuela coincide with International Accounting Standards (USDT, 2004). MBS Inc.'s own financial statements will have to adhere to International Accounting Standards to avoid double taxation. The Republic of Venezuela foreign investment legislation provides general assurances on the rights of foreign investors to remit profits and dividends from their investments in the Republic of Venezuela (ANDEAN Community, 2004). However, in some cases these rights are subject to currency tax and export restrictions, and no guarantee can be given that all profits will be able to be remitted (ANDEAN Community, 2004). To aid these restrictions, Companies use partnerships in both domestic and international tax-planning structures as a result of the increase in global commerce.
A number of these tax structures incorporate a multitude of both domestic and foreign partnerships (U of F, 2004). MBS Inc uses the same strategies. By opening subsidiary companies in Venezuela and Europe, modeled after our subsidiaries MBSUSA and MBSUK, MBS Inc. should be able to successfully maneuver around the double taxation threat.
Taxation in The Republic of Venezuela
Taxable profit is determined based on adjusted gross income reduced by deductible costs and tax depreciation. For corporate income tax purposes, adjusted gross income means gross income (i.e. a company's world-wide income) received (accrued) during the reporting period either in cash, in kind or in intangible form. Gross income includes total income from the sale of goods (work, services), fixed assets and gratuitous transfers (McGraw-Hill & Irwin, 2003).
Foreign Tax Credit.
A tax credit system is effective to avoid double taxation of income derived from abroad. A credit is allowed for foreign taxes paid up to the amount of tax due on such income, provided there is a tax treaty with the state in which the tax was paid and proof of taxes paid can be obtained (USDT, 2004). The tax credit system effectively avoids the potential for double taxation of income derived overseas. Taxation law in The Republic of Venezuela is developing and is taking the shape of its northern neighbors. It is possible therefore that the current interpretation of the law or understanding of current practices may change which would, in turn, affect the Company's taxation as well (USDT, 2004).
Future legislation and the resulting impact on the Company cannot be fully anticipated, though there is significant political support for legislative changes that will further improve The Republic of Venezuela growing market economy (USDT, 2004).
An Inside Look At MBS Inc.
Most of the raw materials that are needed for the manufacturing of our products are available inside Venezuela, and can be purchased tax-free, as long as they are being used for manufacturing proposes within Venezuela. The Venezuelan Government will tax the end product. Manufactured products will be taxed on two levels. All manufactured products will be subject to a manufacturing tax. Our products that are sold locally will also be subject to sales tax. MBS will sell products locally in our "gift store", which is located outside our manufacturing plant, and to our employees. All employees will get a 50% discount on their purchases. Exported products will not be subject to any additional taxes until they reach "customs" of the country that they are being exported to. Then they will be considered imports, and be subject to the import tax controlled by that country. We will avoid being double taxed by shipping directly to the country that the products are going to be sold in, or directly to the vender that sells our products. In short, we will not ship our products from Venezuela, to the United States, and then to the European Union.
Social and Cultural Risks
The MBS Hr Dept. will rightfully take up considerable consumptions of resources to ensure that religion, culture, the public, and the political leaders are not offended. ALL employees, even though some employees and employee positions will not be affected will be mandated to go to training. Experts will have to be hired in the fields on political, local religion, and local culture. They will have to set up workshops and to give training in the areas of cultural and cross cultural curtsies, religious believes, and the local political system. Interactive workshops need to be structured in a non-stressful environment and non-stressful manor so that relocated employees and new hirers will be able to interact with each other, get familiar with each other, and hopefully become friends.
In establishing a marketing risk analysis, we must recognize a couple of factors that create challenges for many companies expanding into the global market. Some foreign nations like The Republic of Venezuela do not think like Americans. Things like how they purchase products, how they conduct business, and their lines of transportation are all treated with a different mentality. For example, in Italy an afternoon nap is part of the normal day. Different countries also have different work ethics. Understanding ethics and marketing within the cultural norms will eliminate numerous obstacles. In establishing our business in Venezuela we also have to consider risks like what the international response for our company moving to South America will be on the effects of the presumed sweatshops and child labor. The fact that Venezuela also houses many major traffickers of narcotics (CIA, 2004) and the volatility of the national drug cartels may also affect our business.
The Venezuelan people are not our main end user; however there will be some utilization of local retailers. Price controls and/or mark-up limits have existed in Venezuela for many years. There are still occasions when the government used armed forces to raid some of the distribution warehouses of manufacturers to confiscate what was termed "hoarded" products. Bartering is not common for most retailers, however some barter and trade does exist. On the other hand, special offers and sales, or product discounting, is common for the local markets and malls. The key to our pricing strategy has always been to maintain the same pricing structure throughout all our markets, though some tweaking might have to be done to comply with local law. Through Internet information, a detailed analysis of our pricing practices and policies may be obtained. By establishing a common price structure we hope to avoid accusations of unfair pricing by the local and international community.
Distribution and Supply Chains.
Currently there are few limitations that limit distribution both in and out of The Republic of Venezuela. Channel strategies will be key in both importing supplies and exporting our apparel. It will be practical and efficient to use manufacturer representatives and commissioned agents that are experienced in the local import/export business. This will aid us in developing internal networks and undertaking several business functions simultaneously. The agent should be familiar with laws, regulation, and ways to legally navigate around them. If properly motivated, the agent should be able to move through the channels pushing the timely movement of the products down. There are also several paths for the importing and exporting of supplies and goods in Venezuela. There are 326 airstrips and 19 major seaports (CIA, 2004). The lager seaports are Puerto Capello, Cumana, and the capital of Caracas (CIA, 2004). Land transportation is also abundant. There are no specific business licenses that are required for a local company, or individual, to be an importer. Many retailers administer their own imports and exports by placing orders through commissioned agents or purchasing directly from foreign suppliers.
The means of distribution we will be able to utilize for our manufacturing plant will include the use of the three main seaports; Caracas, Cumana, and Puerto Capello. At these key locations, which are located along the Caribbean Sea, we will be able to ship orders to our international customers as well as receive material from our international venders or our parent plant, which is in the United States.
Political, Legal, and Regulatory Risks
There are many political business risks when doing business in the ANDEAN Community. Each country that makes up the ANDEAN Pact (Bolivia, Colombia, Ecuador, Peru, and Venezuela), face many political and regulatory issues, which stem from sovereignty and independence issues.
One of the major issues surrounding the ADEAN Community is Peru's intension of leaving the ADEAN community to increase Peru's trading bloc in South America. On April 1997 Peru's President Fujimori announced his intent to leave the ANDEAN Pact and shortly after lowered tariff tax in Peru from 16% down to 13%. The U.S. currently remains Peru's leading supplier with approximately 20 percent market share.
Regional integration has not come easy in the ANDEAN Community. Peru is still a member of the ANDEAN Pact but does not participate fully in ANDEAN's free trade area or customs union because of disagreements over tariffs and the differences of what Peru's view of trade policies should be. Peru still maintains limited bilateral trade agreements with each of the four members of the community and full-fledged free trade agreement with Bolivia (Wagner, 2003).
This is one of the prime examples of how our business operations in the ANDEAN Community could be disrupted or financially harmed when countries like Peru decide to change tariffs or regulatory issues, for their own benefit and not for the ANDEAN community. However there is a bright side; foreign direct Investment has come into these countries in connection to oil and mining exploration in other countries like Colombia and Venezuela. Each year the political and terrorism picture improves for these countries and the people have contributed in establishing law and order throughout the region. Each country is working hard to eliminate drug smuggling, kidnappings and political corruption. This approach is catching on very strong within the ANDEAN Community and helping reduce our political business risks in the region. This new outlook led to the "Cartagena Agreement" was signed by each country's leader to attain economic goals by creating an integration and cooperative system that will lead to the balanced, and shared economic development of their countries (Wagner, 2003).
Exchange and Repatriation Risks
On February 5, 2003 the Venezuelan Government established a new exchange control regime. The agreement establishes restrictions on foreign trade and the other half sets an official exchange rate for the immediate future. The agreement establishes the Foreign Exchange Management Commission (CADIVI) as the exchange control administration entity, responsible for issuing the Foreign Currency Acquisition Authorization required for the purchase of foreign currency (Blackaby, 2003).
One of the main risks to our business is that the CADIVI does not make it clear whether investors must obtain Foreign Currency Acquisition Authorizations to repatriate their investments. The current regulation only refers to dividends and capital gains, but not to repatriation of capital. Companies incorporated or to be incorporated must obtain authorization to keep foreign currency denominated funds in bank accounts abroad, including amounts received from their sales and capital contributions or loans made by their investors or credit institutions. All other foreign currency held by these companies must be sold to the central bank (Blackaby, 2003). There are definitely risks associated in dealing with foreign banks, but that is the risk our company must weigh in order to do business in the ANDEAN region.
Conducting a business risk analysis takes extensive research, financial awareness, and a lot more research. There are many issues to consider ranging from political risks to low wages. Evaluating each risk carefully will decrease the risks of MBS, Inc from failing to exceed in the ANDEAN Community. There still is a long way to go in the development of the ANDEAN Community, but as countries like Venezuela continue to make Foreign Direct Investment more attractive, the future of MBS, Inc. in the Venezuela looks bright.
ANDEAN Community, (2004). CARTAGENA AGREEMENT - CHAPTER I OBJECTIVES AND MECHANISMS. Retrieved September 18, 2004 from The ANDEAN Community's website at: http://www.comunidadandina.org/endex.htm
Blackaby, N., (2003). Freshfields Bruckhaus Dringer - MMB Legal Report. Retrieved September 18, 2004 from The ANDEAN Community's website at: http://www.hpcd-ip.com
CIA (Central Intelligence Agency), (2004). The World Factbook - Venezuela. Retrieved September 18, 2004 from The CIA's website at: http://www.cia.gov
McGraw-Hill & Irwin (2003). International Business: Competing in the Global Marketplace (4th ed.). Retrieved September 18, 2004 from the University of Phoenix, MGT/448 - Global Business Strategies Website at: https://mycampus.phoenix.edu
U of F (University of Florida), (2004). College of Journalism and Communications - Mission/Vision: Business Plan Basics. Retrieved September 17, 2004 from The University of Florida's website at: http://www.jou.ufl.edu
USDT (Unites States Department of the Treasury), (2004). Convention between the United States and the Republic of Venezuela for the avoidance of double taxation and the prevention of fiscal invasion with respect to taxes and capital income. Retrieved September 18, 2004 from The Unites States Department of the Treasury's website at: http://www.ustreas.gov
Wagner, A., (2003). Common Foreign Policies, Economic policies, Retrieved September 18, 2004 from The ANDEAN Community's website at: http://www.comunidadandina.org