Savings & Investments

The myth of offshoring and realities of global expansion

Published on September 4th, 2015

Many African entrepreneurs believe that they should establish their businesses with intellectual and other property vested “offshore” - even though they do not have plans for expansion outside of their own borders yet. The reasons for this range from myths surrounding the portability of intellectual property from countries like South Africa to complicated tax structures that not only don’t work, but are often illegal.

At a recent AlphaCode event intellectual property law expert Craig Shapiro, FirstRand co-founder Paul Harris and AlphaCode thought leader Simon Dingle discussed the realities of global expansion for African companies and how they should be approaching the topic of intellectual property.

Shapiro, a partner at WCIS Attorneys in Johannesburg, said he is frequently asked about offshoring intellectual property.

“The main reason the question gets asked is due to exchange control,” he said.

“But the starting point is to understand the nature of your business and the nature of the intellectual property you’re dealing with. In the tech space, for example, intellectual property is generally [in the form of] copyright and it resides in the underlying source code and software.”

In many cases this means that the business has little to worry about in terms of protection or portability of its intellectual property, because these are afforded automatically.

“Copyright is actually one of the best forms of intellectual property a company can have - first of all because it’s free,” explained Shapiro.

“It vests automatically - which is also the worst thing about it, because you have to understand it to control it. But once you own it, under the Berne Convention you are given reciprocal rights in pretty much every country in the world. It’s the only form of intellectual property that is afforded that protection.”

So if your business deals primarily with software, as most fintech businesses do, then you probably have all the protection you need. It is very rare for startups to have a technology that actually warrants a patent - which is where things become more complicated. According to Shapiro, many startup businesses overlook the fact that patents must be pursued before commercialising a technology.

“If you want to patent something, you need to put protection in place before you commercialise it. If you commercialise something before filing your patent, your destroy your ability to file it,” he said.

No matter what form your intellectual property takes, however, Shapiro believes that some of the common opinions surrounding the nature of that property in terms of African markets is incorrect.

“The overriding question is whether you should de facto export all intellectual property because South Africa is a poor environment to have it and the answer is ‘No’,” he said.

“In my experience it hasn’t been a problem developing a property in South Africa and commercialising it inside or outside of our borders. If one does want to create intellectual property and get if offshore legitimately, that is a very difficult process and that’s where people start off with the ideology that it should first reside offshore. But if you get it offshore legitimately, for example if your company is bought out by a UK investor, as long as you can show that it’s an arms-length transaction and that there’s fair value, there should be no problem.”

The reasons controls exist in this regard is not to limit business, but rather to make sure that fair value is returned to the country.

“The [South African] Reserve Bank’s primary objective is to make sure fair value comes in, as opposed to what goes out. What we mainly see is entrepreneurs trying to set up unbelievably complicated structures with their primary goal being not the commercialisation of intellectual property, but rather getting money outside of South Africa,” said Shapiro.

“So if that’s your objective, then my view is that both the Reserve Bank and South African Revenue Services have top-quality people [who will] see through the structures, those will fall flat - and if you fall foul of the Reserve Bank, most people don’t know that it carries both a civil and criminal penalty. So I’d be very cautious about it.”

FirstRand’s Harris echoed Shapiro’s sentiments and said that new businesses should be more concerned with fundamental issues, such as their revenue models.

“People give a lot of attention to how they can save tax - but they haven’t made a rand in profit yet,” said Harris.

“They create incredible structures to keep money offshore. Then one day they decide they have to make profit too, and it’s too late.”

Harris related his experience from founding and running one of the most successful financial groups in South Africa. He said that international aspirations came later on.

“We never thought we’d be part of a big group. We were opportunistic and there were a few things we got right. We employed very good people. We work with people, I don’t like the concept of people working ‘for’ us,” he said.

“And then there did come a time when we had to start thinking strategically and make the transition from a small to a large company. [We embarked] on a process of encouraging debate and thinking about what was defining an industry and why we could disrupt it.”

The international expansion of the group - with successes for some of its subsidiaries such as Outsurance and FNB - came as strategic decisions.

“There are a couple of lessons we’ve learned; if you go offshore you’re playing in the olympics, not a club game. You have to take your best team out there,” said Harris.

“Often the best entrepreneurs are the people running the business and if they get too distracted with what they’re going to do offshore before they’ve established themselves locally, they can run into some problems.”

The correct approach, from a business perspective, is to look at market opportunities in other countries - not which are the most appealing in terms of lifestyle.

“A lot of people start businesses in places like Australia and the UK - and not because they’ve looked at it strategically, but because often these are places they want to live,” said Harris.

“[Australia] is actually one of the most difficult places to start a business anywhere in the world. So if you’re serious about it; then take a strategic approach. Analyse all the various markets, decide what you’re good at, where the opportunities are, and then target that market. Not because you want to live there.”

Once the strategic reasons for exploring an international market have been validated, only then should one begin worrying about the intellectual property, tax and other implications of opening up that territory. As always, the decision needs to make solid business sense, and be based on actual market data as opposed to opinions.