If you own an Australian business that supplies services to overseas customers, there are a lot of things for you to consider. This article explores the issues and strategies that can help protect services exports and the businesses that supply them. It outlines some of those cross-border and commercial issues for services exports.
Author: Farrah Motley, a professional services lawyer.
The Australian Landscape of Services Exports
The rate at which Australia exports services has been steadily increasing.
In 2017, Australia's services exports accounted for 21.21% (as a percentage of gross domestic product). By 2019, services exports grew to 24.11% (as a percentage of gross domestic product).
And it shows no signs of slowing down. In 2021, the Australian government announced its services exports plans to promote exports of Australian services. You can read the government's services export plan here.
If COVID-19 has taught businesses anything, it’s that services really can be performed from anywhere in the world, to any buyer in the world (despite there being no physical presence). There are, however, some factors that businesses should take into account when exporting services.
The Top 5 Things for Service Providers to Consider
If your business is eyeing off an opportunity to export services (i.e. services are performed in a home country and sold to a buyer in another country), you should take into account:
Local laws aimed at protecting domestic businesses
Free trade agreements
Leverage for payment
The identity of your client
Many governments seek to protect certain local industries, particularly in developing nations where local businesses struggle to compete with their foreign counterparts.
These protectionist measures may include: licensing requirements which can only be achieved with the involvement of local specialists; requirements to incorporate a local branch or subsidiary and local directorship and minimum shareholding thresholds.
If you and your business are considered an Australian resident for tax purposes, it generally does not matter where in the world you earn income or revenue; tax is payable in Australia.
Your business may also need to pay local taxes.
Many countries have reciprocal taxation arrangements which require businesses to report revenue but the tax payable is offset by the tax paid in the business's home country. This means that your business may not be taxed twice.
It is always important that if your business is looking to export services, you seek professional tax advice (in Australia and the country in which you are selling services into).
There may be tax consequences in Australia that you weren't aware of and, when it comes to taxation, surprises are never a good thing.
Free Trade Agreements
Free trade agreements are treaties between two or more nations that reduce trading barriers and increase investment opportunities between the signatory nations.
If your business is seeking to export services, you should first check to see whether there is a free trade agreement in place as these can provide significant advantages.
Leverage for Payment
It’s important to have a strategy in place for dealing with bad debts in foreign countries; particularly where your buyer is located in a country where the administration of justice can be arbitrary.
To mitigate the risk of bad debts, ensure you retain all intellectual property rights in deliverables at least until payment is received in full, invoice at regular intervals with short payment terms and (where possible) seek parent company guarantees.
Unless your client is a trusted, long-term client, it’s important to know who your client is and resist the temptation to simply accept an opportunity.
Engage a local professional services firm to do some due diligence. They will be able to conduct searches to find out:
is your client experiencing financial difficulties;
do they have pending lawsuits against them;
are they a new company; and
do they have nominal paid up capital.
Aside from making revenue from selling your services overseas, your business may also be able to benefit from favourable foreign exchange rates. But the opposite is also true; you may end up with less money for your services when you exchange payment into Australian Dollars.
So if you are invoicing, being paid and transferring money in different currencies, consider your timing and ensure you keep an eye on foreign currency exchange rates.
How can Prosper Law Help?
If you need a lawyer to help your business with services export agreements and overseas business transactions, contact us today.
Farrah Motley | Legal Principal
PROSPER LAW - A Commercial Law Firm for Businesses
M: 0422 721 121
A: Suite No. 99, Level 54, 111 Eagle Street, Brisbane, Queensland Australia 4000