Table of Contents
Table of Contents
|Section |Description |Page |
| |Table of Contents |1 |
| |Executive Summary |4 |
| | | |
| | |Country Guides | |
|I | | Australia |6 |
| |1 | Geographic and Cultural Information |6 |
| |2 | Australian Economic Welfare |10 |
| |3 | IT industry –Small Businesses |14 |
| |4 | Distributors and competitors |16 |
| |4.1 | Distributors |16 |
| |4.2 | Competition |18 |
| |5 | Taxation |21 |
| |6 | Barriers |25 |
| |7 | Entrance Strategy |29 |
| |8 | Appendix for Australia |31 |
|II | | United Kingdom | |
| |1 | Geographic and General Information |43 |
| |2 | Economic Welfare |50 |
| |2.1 | Key Economic Indicators |50 |
| |2.2 | General Policy Framework |50 |
| |2.3 | Exchange Rate Policy |52 |
| |2.4 | Structural Policies |52 |
| |2.5 | Debt Management Policies |53 |
| |2.6 | Export Subsidies Policies |53 |
| |2.7 | Worker Rights |54 |
| |3 | Information Technology |56 |
| |3.1 | Software |56 |
| |3.2 | Small Businesses – viable customers |58 |
| |4 | Distribution and Competition |61 |
| |4.1 | Distribution and Sales Channels |61 |
| |4.2 | Competition |70 |
| |5 | Taxation |74 |
| |6 | Significant Barriers to Entry |81 |
| |7 | Entrance Strategy |86 |
| |8 | Appendices for the United Kingdom |90 |
| |8.1 | Appendix A |90 |
| |8.2 | Appendix B |108 |
|III | | Ireland |120 |
| |1 | Geography and General Information |120 |
| |2 | Economy |124 |
| |2.1 | Government Role in the Economy |124 |
| |2.2 | Ireland and the EU |125 |
| |2.3 | Privatization |125 |
| |2.4 | Balance of Payments |126 |
| |2.5 | Software Industry |126 |
| |2.6 | Data Table |128 |
| |2.7 | Computers and Peripherals |128 |
| |3.1 | Competition |130 |
| |3.2 | Small Business Market |130 |
| |3.3 | Political Environment |131 |
| |4 | Trade Regulations/Taxes |133 |
| |5 | Trade Barriers |134 |
| |5.1 | Import Duties |134 |
| |5.2 | Goods in Transit |135 |
| |5.3 | Free Trade Zones |135 |
| |5.4 | Registration of Patents |136 |
| |5.5 | Copyright |136 |
| |5.6 | Protection of Property Rights |136 |
| |6 | Entry Strategy |138 |
| |6.1 | Agents/ Distributors |138 |
| |6.2 | EU Legislation on Agents |139 |
| |6.3 | Distributors |140 |
| |6.4 | Distribution Methods |141 |
| |6.5 | Finding a Partner |141 |
| |6.6 | Wholesale and Retail Channel |142 |
| |6.7 | Joint Ventures/Licencing |143 |
| |6.8 | Advertizing |144 |
| |6.9 | Trade Shows |146 |
| |7 | Appendix |147 |
|IV | | Mexico | |
| |1 | Geographic Highlights |158 |
| |1.1 | Location and Area |158 |
| |1.2 | Relief |159 |
| |1.3 | Climates |159 |
| |1.4 | Natural Resources |159 |
| |1.5 | Natural Hazards |160 |
| |1.6 | Population |161 |
| |1.6.1 | Total Growth and Population |161 |
| |1.6.2 | Population by Age and Gender |161 |
| |1.6.3 | Geographic Distribution |162 |
| |1.6.4 | Education |162 |
| |1.6.5 | Health Care |162 |
| |1.6.6 | Ethnic Groups |162 |
| |1.6.7 | Religions |162 |
| |1.6.8 | Languages |162 |
| |2 | Economy |163 |
| |3 | Information Technology |168 |
| |3.1 | Telecommunication Infrastructure |168 |
| |3.2 | Major Telecommunication Companies |168 |
| |3.3 | Internet Activity |168 |
| |3.4 | Internet Service Providers |169 |
| |3.5 | Internet Users |169 |
| |3.6 | Electronic commerce |170 |
| |3.7 | Obstacles to Electronic Commerce |170 |
| |3.8 | Other Obstacles |171 |
| |3.9 | Major Vendors |171 |
| |3.10 | Revenues and Sales |171 |
| |3.11 | Hardware/Software Manufacturing |171 |
| |3.12 | Major Suppliers |173 |
| |3.13 | IT Geography |173 |
| |3.14 | Government Policy |174 |
| |3.15 | Environment |174 |
| |4. | Taxation |176 |
| |4.1 | Personal Income Tax Rates |176 |
| |4.2 | Taxable Income |177 |
| |4.3 | Employment Income |177 |
| |4.4 | Income from Personal Services |177 |
| |4.5 | Real Estate Rental Income |178 |
| |4.6 | Income from the Acquisition of Goods |178 |
| |4.7 | Income from Business Activities |179 |
| |4.8 | Dividend Income |179 |
| |4.9 | Interest Income |180 |
| |4.10 | Income from Prizes |180 |
| |4.11 | Other Income |180 |
| |4.12 | Exempt Income |180 |
| |4.13 | Personal Deductions and Reliefs |181 |
| |4.14 | Personal Assessments & Payments |182 |
| |5 | Viable Customers |185 |
| |6 | Distribution, Sales Channels and Partners |187 |
| |7 | Competition |190 |
| |8 | Barriers/Incentives to Entry |192 |
| |8.1 | Currency Conversion and transfer policies |193 |
| |8.2 | Dispute Settlement |193 |
| |8.3 | Fiscal Incentives |194 |
| |8.4 | Financing |195 |
| |8.5 | Right to Private ownership |195 |
| |8.6 | Bilateral Investment Agreements |195 |
| |8.7 | OPIC and Other Investment Insurance Programs |196 |
| |8.8 | Transparency of the Regulatory System |196 |
| |8.9 | Political Violence |197 |
| |8.10 | Corruption |198 |
| |8.11 | Protection of Property Rights |198 |
| |8.12 | Labor Scarcity |199 |
| |8.13 | Language Barrier |200 |
| |8.14 | Complex and Dynamic Tax System |200 |
| |9 | Entrance Strategy |201 |
| |10 | Appendix for Mexico |203 |
|V | | Peru | |
| |1 | General, Geographic and Cultural Information |210 |
| |2 | Peruvian Economic Welfare |212 |
| |3 | IT Industry |214 |
| |4 | Distributors |218 |
| |4.1 | Top Three Distributors |218 |
| |4.2 | Trade Promotion Opportunities |219 |
| |5 | Competition |220 |
| |6 | Taxation Issues |220 |
| |7 | Barriers to Entry |220 |
| |7.1 | Protection of Intellectual Property Rights |221 |
| |7.2 | Government and Regulations |222 |
| |7.3 | Customs Entry Forms |223 |
| |8 | Entrance Strategies |224 |
| |9 | Appendix and Contacts for Peru |225 |
| | | | |
|VI | | Application Service Providers |230 |
|VII | | Conclusions |235 |
Executive Summary
The main objective of this International Market Planning Program was to conduct a comprehensive pre-export plan and to realistically evaluate five country markets for PenSoft Incorporated. PenSoft is the U.S. market leader in Payroll software applications which enable small to mid-sized businesses comprising 1 to 500 employees to process their own payroll.
Our group of five Old Dominion University MBA students met with Mr. Leroy Newman, President and CEO of PenSoft and agreed upon the main issues to be addressed in this study. The countries for which market planning was undertaken by each student are: Australia (Sarah Weaver), United Kingdom (John Coudounaris), Ireland (Tami Green), Peru (Chandra Qureshi) and Mexico (Koushika Kadidal).
The study of each country’s prospects for PenSoft’s international expansion centered on each of the following six points of consideration:
1. Identification of the resources and contacts needed to obtain payrolll tax information
2. Statistical analysis of the computer literacy rates and computer hardware owned by small businesses
3. Identification of the economic welfare of small businesses and the size of the small business market so as to include the ability of small businesses to incorporate new software and current technology
4. Identification of local distributors, best suited to marketing PenSoft’s Payroll software. Study of the competition in each country for determination of price and quality of rival products and possible interest in PenSoft products
5. Identification of barriers to market entry of PenSoft into each market by examining taxes, tariffs, import regulations, government approvals required and other relevant information
6. Recommendation of entry or non-entry strategy and promotional activities for each country based on all available information. Development of strategy to promote PenSoft’s relationships with associations, professional bodies, societies and business software developers in each market.
The group consulted and contacted a plethora of resources both in the U.S. and abroad for each country involved. The group also visited numerous government agencies in Washington D.C. All relevant internet resources were also examined, and only after exhausting all resources and contacts the students could obtain, a report was generated for each of the five countries. Each country report is included in this project and based on the information on each, the students concluded that PenSoft must definitely consider its international expansion into Australia, the United Kingdom, Ireland and Mexico, while non-entry is recommended for the country of Peru. The conclusions for each country are detailed in the final sections of this project.
1. Geographic and Cultural Information
Australia is the world’s largest island. Approximately three million square miles, it is roughly the size of the continental United States. While Australia is the largest island in the world, it is also the least densely populated country in the world, and is one of the most urbanized, with 85 percent of the population located in urban centers.
Despite its similarity in size to the United States, Australia’s population is just under 19 million, with a Population Growth Rate of 1.22 percent. Almost all of Australia’s population lives in a narrow band along the southeast coast and the southwest corner of the continent. The population in these regions is further concentrated into capital cities, major cities, and towns. It is estimated that 70 percent of the population lives in the 13 largest cities, with a more detailed breakdown as follows:
The Capital—Canberra 309,000 Sydney 3.9 million
Melbourne 3.3 million Brisbane 1.5 million
Adelaide 1.0 million Perth 1.3 million
Hobart 195,000 Darwin 84,300
Geographically speaking, mainland Australia is broken down into six provinces.
• Sydney, the capital of the State of New South Wales is the country’s largest city and oldest European settlement. Sydney is Australia’s major international gateway.
• Victoria is the smallest of the mainland States, but the second most populous State. The capital, Melbourne, is Australia’s second largest city.
• The state of Queensland stretches from the tropical rain forests of Cape York into the Temperate Zone. Its northeastern coastline is fringed by the Great Barrier Reef. The capital of Queensland is Brisbane.
• The State of Western Australia is nearly as large as Western Europe. More than 70 percent of the State’s population of two million live in its capital, Perth.
• Adelaide, the capital of the State of South Australia is spacious and green, and ringed by protective parklands.
• The Northern Territory has more than twice the land area of France and a population of less than 200,000. Darwin is the capital and Alice Springs is the principal inland town. The Territory contains Uluru (Ayers Rock) and Kakadu National Park.
As of June 30, 1997, there were 6,955,800 households in Australia. The most common household type contained only two persons 15 years of age or over, representing 31 percent of households. One member households represent 24 percent of households, and the average number of people per household in 1997 was 2.7.
Australia is an English speaking country with only minute changes in the spelling of words.
Australia is also one of the most multicultural nations in the world with communities using almost every other world language. The 1996 census showed that there were 2.6 million people who spoke a language other than English in the home, most of these people were Asian, speaking Japanese and Chinese.
When planning a business trip to Australia, one should consider the holidays Australians tend to take. They tend to take their long annual holiday in December and January, combining Christmas and New Year celebrations with the long summer school holidays, as their seasons in Australia are opposite to ours in the United States. Due to this, business slows down and it can be very difficult to make appointments during the December and January holiday season. It is not recommended to take business trips to Australia during these months. There are also some differences in the holidays celebrated in Australia. The national public holidays will very from state to state, and certain states celebrate additional public holidays. These are some holidays celebrated by all of the Australian states.
DATE HOLIDAY
January 1 New Year’s Day
January 26 Australia Day
April 3 Good Friday
April 5 Easter Monday
April 25 Anzac Day
December 25 Christmas
December 26 Boxing Day
As far as business travel is concerned, American business travelers should not encounter any particular difficulties while visiting Australia. Business hours are the same as in the U.S, generally from 9:00 am until 5:00 pm. Travelers should use normal reservation services for travel and accommodation, while also taking into account that they are required to have either an electronic travel authority or a valid Australian visa. The electronic travel authority is obtained from approved U.S. travel agents and airlines when purchasing the airline ticket. The Australian Embassy has lists of approved travel agents. U.S. citizens traveling to Australia should note that the electronic travel authority can only be obtained in the U.S. Requirements for work and resident visas are more stringent, and should be applied for well in advance.
Business customs are very comfortable for most American business people because the language, the cultural environment, business practices, and customer expectations are very similar. Business etiquette is also similar to that in the United States, with particular emphasis on advance planning, promptness, punctuality, and follow ups.
The flying time to get to Australia is approximately a 17-hour non-stop flight from the East Coast, and passengers can choose from several International airlines. Most flights depart the United States late in the evening and arrive in Australia early in the morning, with a day lost at the International Date Line. There are frequent interstate flights that connect the five major Australian cities. Savings are available on internal airfare, when purchased along with international tickets. Australia is also very similar to the United States in reference to transportation, where air, rail, coach, sea and rental cars are available for travel between the cities.
As it will become apparent below, time zones are very complicated in Australia. When traveling to Australia, one must consider the three time zones, Eastern Standard Time (EST) which operates in New South Wales, Australian Capital Territory, Victoria, Tasmania, and Queensland. Cities in the Eastern Standard Zone therefore include Sydney, Melbourne, Canberra, Brisbane and Cairns. Not all states have daylight saving during the summer months. Daylight savings runs from the end of October through the end of March in New South Wales, the Australian Capital Territory, Victoria and South Australia. As related to PenSoft, these areas are 16 hours ahead of us. Between April and October, these areas are 14 hours ahead of Virginia. Central Standard time (CST) includes South Australia and the Northern Territory, and is one half our behind EST. Western Standard Time (WST) is effective in Western Australia, and is two hours behind Eastern Standard Time.
2. Australian Economic Welfare
Just as there are many similarities in the cultures of Australia and the United States, there are also many similarities in the economies. Some economic similarities include the current account situation; a significant trade deficit; a low savings rate; declining union membership; and expanding services sector; a strong focus on the Asia/Pacific Region; ready acceptance of product and marketing innovation; the availability of a major money center; and trend towards the privatization of government assets.
Australian trade policy combines an integrated set of bilateral, regional, and multilateral efforts aimed at achieving the best possible market access outcome for Australian business and advancing Australia’s commercial interests. Pre-eminent regional and multilateral forums are APEC and WTO. The Australian government has developed a specific APEC Support System which provides funding for small, high impact projects to help developing economies meet APEC goals. The WTO is significant to Australia because it is the major forum for global trade liberalization, providing a predictable and transparent environment for business, and a means of resolving trade disputes.
Australia’s trading interests are global, as is its trade policy and market development activities. Australia’s regulatory and industry environment is a different prospect from the U.S. with its large population and strong domestic economy.
The Internet Technology industry has really taken off during the past several years. The Australian IT market was valued at US$13 billion in 1998. The Australian software market is also experiencing steady growth. It is predicted that the market will grow from 14.3 percent of total IT spending in Australia to an anticipated 18.5 percent in 2002.
The packaged software industry was estimated to generate US$1.28 billion in sales in Australia in 1996. Observers have noted that the industry is growing in excess of 15 percent per year and will have a market value of US$2.6 billion by 2001. The U.S. is the largest single exporter of packaged software to Australia, accounting for 66 percent of all packaged software imports.
The Industry Sector Analysis of interest to PenSoft is the Document Management market, and includes Electronic Document Management Software (EDMS). EDMS is defined as software that will allow the contents of documents to be stored on a computer. Documents can be integrated from almost any part of an organization and managed as a whole. The Australian Document Management market was valued at US$19 million in 1997, and the size of the Australian knowledge management market which incorporates DM is thought to be valued at approximately US$55 million. The Australian DM market is said to be following very closely with the United States market, which grew by 31 percent in 1997.
Many reports currently available compare Australia with the United States, stating that they are very similar with regards to economy, geographic size, and cultural diversity. One commonly held misconception is that, as Australia and North America are geographically the same size, there is potential for similar revenue streams to be generated in both markets. This is simply not possible. Australia’s current population of 18.7 million cannot be compared with the United States in terms of economic activity and output. The similarities between Australian and worldwide IT trends include Australia’s strong IT market, whose service sector contributes 37 percent of revenues to the IT market. The Australian packaged software market contributes 17 percent of revenues to the total IT market, which is just below the worldwide average of 20.4 percent.
Australia has a very good computer literacy rate. 1998 figures show that 431 people out of every 1000 have a computer in their home. Other statistics provided by the U.S. Department of Commerce suggest that 37 percent of Australian households own a personal computer; of the PC owning households, 74 percent of them own a CD-ROM drive (1.8 million units) and 48 percent own a modem (1.2 million units). More promising information was released in 1998 by the Australian Bureau of Statistics which stated that 17 percent of all Australian households (1.1 million) intended to purchase of upgrade a computer in the next 12 months. Nearly 37 percent of these households did not already have computer facilities. Approximately 26 percent of households with PCs and no Internet access indicated an intention to connect to the Internet in the next 12 months. The strongest growth is observed in the more populated centers of Sydney and Melbourne (approximately 28 percent). By 2000, it is expected that the installed PC base will expand to approximately 8.5 million units. Australian schools actively promote computer education. Studies have also indicated that as of 1998, twenty one percent of all Australian businesses have net access.
Needless to say, the software industry is growing at a rapid rate, and is of much interest to software manufacturers in the United States, partially because software enters Australia duty free. The only sales tax involved is 22 percent, and is levied on the CD-ROM carrying medium. Australia is one of the largest information technology markets in Asia/Pacific, the fastest growing region in the world. Australian hardware and software sales are expected to reach an estimated US$9.7 billion. As a result, Australia holds enormous business opportunities for U.S. computer good suppliers with advanced technologies. The best prospects for U.S. suppliers are client/server application solutions, database management systems and applications development tools, and systems management software.
The Best Market Report of fiscal year 1999 for computer software ranked software sales of 27 countries. Australia’s market size was US$2.596 billion. The total imports were US$2.35 billion, with imports from the U.S. topping out at US$1.527 billion. Judging from the information currently available about the hardware and software industry in Australia, there is no reason that small to mid-sized companies would not be able to run PenSoft’s payroll software.
The Asian crisis of 1997 was the biggest financial storm since the Great Depression hit Asia. Despite that news, and the fact that over 60 percent of Australia’s exports were destined to Asia, Australia’s economy recorded a growth of nearly 5 percent and performed strongly despite the poor economic conditions in Asia. With most of Australia’s exports going to Asia, many predicted disaster and it was speculated that recession was inevitable, but Australia was fortunate. Despite the fact that some individual companies suffered, rather than falling into a recession, the Australian economy grew by 4.7 percent in 1998. Australia outperformed the U.K., France, Germany, and even the United States.
Australia’s unit of currency is the Australian dollar (A$) and is freely traded. In May of 1997 the Australian Dollar was worth US$.78 and by August of 1998 it was only worth US$.553. The Australian Dollar is currently worth US$.6400. It is true that Australia’s currency has gone down significantly in recent years, and yet their economy has emerged undamaged. Part of the reason for their success, despite its damage to importers and Australian tourists, was that their cheap dollar assisted Australian exporters to remain competitive in world markets and allowed companies to switch their exports to the stronger markets of the United States and Europe. Australian exporters quickly reacted to the Asian crisis and reoriented their exports toward the more agile markets. The low value of the Australian dollar was a crucial factor enabling Australia to target new markets. In the meantime, unemployment fell, inflation and interest rates remained unchanged (at their lowest levels ever) and Australia contributed to economic aid packages for areas harder hit by the Asian Depression.
With Australia’s economic and political environment as stable as ever, Australia has many prospects making it a great environment for the United States to expand its software industry.
The Australian economy has enjoyed eight consecutive years of growth, recording an annual increase in Gross Domestic Product of 4.7 percent. Policy makers and forecasters have been surprised by how well the Australian economy has survived the Asian economic downturn, especially given Australia’s significant trade exposure to the region. The outlook for the medium term is good, with a moderate growth slowdown expected next year, followed by an export-led recovery.
The excellent performance of the Australian economy in recent years can be attributed mostly to strong domestic demand. Household consumption grew at an average rate of over 5 percentage points over 1997 and 1998, as consumers took great pleasure in an environment of low inflation, low interest rates, rising asset prices and falling unemployment. Housing construction and business investment recorded steady growth during 1998, with both sectors coming to the end of boom periods lasting two and six years. Services sectors have been the main beneficiaries of the boom in household consumption, outpacing all other areas of production.
More good news for PenSoft is the fast growing sectors, which include communications services, property/business services, and accommodation and restaurants. Australia has a good inflation record that looks as if it will continue. The only areas of concern with the economy deal with Australia’s low inflation environment and it’s higher import prices caused by the devalued Australian dollar. More concerning than that is Australia’s external deficit. Falling exports caused by lower demand in Asia and rising imports provoked by strong domestic demand have conspired to force Australia’s current account deficit upwards.
3. IT industry - Small Businesses
Further information indicates that as of 1995, there were over 780,000 small businesses in Australia, employing over 2.6 million people. In this case, small businesses are defined as independently owned and managed businesses that are closely controlled by the owners/managers who also contribute most of the operating capital. 1997 statistics indicate that typically Australian small businesses employ on average 20 people in the non-manufacturing sector, and less than 100 people in the manufacturing sector.
Currently, approximately three-quarters of Australian businesses use computers. The percentiles of computer-using businesses increase with the size of the company. Most of the available information suggests that office-based industries located in the major cities and towns are most likely to be using the latest technologies and applications. As a whole, Australian small businesses perceive more benefits than problems with their use of Information Technology.
As for the question of whether or not Australian small businesses could run PenSoft software on their computers, we revert to the latest statistics. The results of a study of 134 small businesses in New South Wales, conducted in 1997, suggest that over 70 percent of Professional and Finance/Property/Business Services firms use the latest Pentium technology. The bulk of the usage of Pentium technology occurs in the Central Business District. The majority of the businesses that are not quite as technologically advanced are using a standard 486.
When examining the operating environment of small businesses, about half of the Professional small businesses in Australia were using Windows 95, as of April of 1997. Approximately 46 percent of Finance/Property/Businesses were using MS Dos and/or Windows 3.0. No statistics were located since the release of Windows 98, but it is save to presume that the usage of updated software has increased. In most Australian industries, the usage of sound cards, speakers, modems, and CD Rom drives is about 70 percent. Nonetheless, it appears evident that the majority of small businesses in Australia have the means necessary to run PenSoft Payroll software.
Another study, known as the YP 97, was performed in May 1997 by the Yellow Pages Australia, and researched 1200 small businesses Australia wide. The study released some information about the Popular Office Applications Packages used in small Australian businesses. The statistics show that 88 percent of small businesses were using word processing packages, 65 percent were using spreadsheets, 51 percent were using databases, and 37 percent were using graphics. Research depicting specific applications being used in small businesses indicates that 75 percent were using accounting document/records management applications, and 23 percent were using Internet browser and payroll applications. This data shows the emphasis placed upon accounting and payroll software.
The 1997 study performed in New South Wales looked at some data related to particular industry usage of certain types of software that was significantly higher than the overall average. This information is significant to PenSoft, and will help to determine what industries to concentrate on. The research showed that all industries use accounting software extensively, but that of all the industries using payroll software, the manufacturing industry relies upon it more than any other industry, with 67 percent of small manufacturing businesses using payroll software.
Concluding this section, is has been discovered that the majority of Australian small businesses that use computers, make extensive use of packaged or “off the shelf” software. In order for more service oriented software products to penetrate the market, they must compete with the pricing of the packaged software.
4. Distributors and Competition
4.1 Distributors
Australia’s extensive distribution and sales channels are comparable to those in other industrialized countries. Channels of distribution are through direct sales, use of distributors or agents, and also through direct investment. Financing of exports is effected through open account, commercial bills of exchange, letters of credit, and cash in advance. Foreign exchange is readily available to Australian importers through local Australian banks. There are no exchange controls or import licensing applicable to the importing of goods and services.
The most common way United States businesses market their products in Australia is through the use of agents and distributors. Sales agents used by U.S. businesses solicit business for the U.S. companies and serve as a channel for future purchase agreements. Generally, the sales agent does not have the power to negotiate terms, or to finalize sales contracts. Sales agents simply forward contracts to the company, who decides whether to accept or reject. However, any decisions made by the sales agent are binding for the foreign corporation under the general laws of agency. An advantage to the use of agents is that parties may stipulate causes for termination in their agreement. There is no need for contracts to be for fixed or indefinite periods of time. Either party may terminate the agreement upon receipt of reasonable notice of termination.
Distributors act as independent contractors, purchasing products from the foreign corporation and distributing them to the wholesale buyers or to the retailers. In this case, foreign corporations are not legally bound by the acts of the distributors. It is common practice for Australian distributors to ask for exclusive geographic rights to market foreign company’s products, and because the size of the Australian market, these rights often cover several states and even all of Australia.
When drafting contract agreements with Australian distributors, the parties are free to choose between Australian and U.S. laws governing the contract. But, choosing the foreign law does not preclude application of mandatory provisions of Australian law. Without a stipulation of law, Australian courts will apply the law of the jurisdiction where the agent or distributor works.
Finding agents and distributors was truly the most challenging aspect of this International market research project. Through the use of Stat-USA, thirteen Australian software distributors were located. All of these distributors were contacted, and only one replied. This distributor will be highlighted with an asterisk in the appendix following this portion of the manual.
There are many ways to locate potential distributors in Australia. The most favorable service is called the Gold Key Service (GKS). The purpose of this service is to make a U.S. company’s visit to Australia more productive. The GKS provides a combination of many services, such as market orientation briefings, market research, agent/distributor search and screening, introductions to potential partners, and assistance in developing a sound market strategy and an effective follow-up plan. This service is used frequently by U.S. businesses planning to penetrate new markets, and is an efficient and cost effective way to plan a market strategy.
The Agent/Distributor Search (ADS) is another alternative method of finding distributors. CS Australia locates, screens, and assesses Australian agents, distributors, and representatives for U.S. companies. After some preliminary research is conducted to determine if there is a potential interest in a U.S. product or service, CS Australia sends the U.S. firm some contact information on companies that have reviewed product literature and expressed an interest in representing the U.S. firm in Australia. It is then up to the U.S. firm to contact the potential distributors directly. This service is less costly than the Gold Key Service, however it is sometimes said to be a poor quality service. Given the research the PenSoft group has conducted, it is recommended that the U.S. firm initiate direct contact with distributors prior to resorting to this service.
Customized Market Analysis (CMA) is a valuable service for first-time exporters with limited Australian contacts and limited overseas expertise. CMA’s provide an expedient and accurate assessment of how an American product will sell in Australia. If Australia becomes a strong candidate in the quest for expansion, a customized market analysis could provide current data useful for making market decisions, without the added expense of International travel, and overseas product research.
Access Australia is another program developed by CS Australia, designed to test the Australian market. Here, U.S. firms are contacted in a specific industry, and asked to provide their product literature. A special mailing is sent to Australian agents, distributors, and end-users in that particular industry about the study. Interested respondents are then sent the product literature; and the U.S. participants are sent a list of names of the companies and people interested in their product.
Not to be ruled out altogether, there is something to be said for direct marketing. According to a recent study, telemarketing is the fastest-growing segment of thirteen industries in direct marketing, which also includes direct mail, catalogs, stuffers, the Internet, mail order, television, radio, newspapers, and exhibitions. Direct sales is becoming a very popular marketing tactic in Australia. In December of 1998, it was reported that the “telesales” industry in Australia had approximate sales of over US$55.9 billion, which was an increase of over 75 percent from 1997.
If it is decided that distributors will be used to sell PenSoft products, there is more extensive information that will be needed. With Australians being as price sensitive as they are, PenSoft must know that customers tend not to have company loyalty. Customers often switch their software when a similar product is offered at a lower price. So, the best way to stop customers from leaving you for a competing product is to promote customer loyalty and repeat sales by providing superior value added customer services.
Most businesses in Australia who use resellers or distributors realize that they need to have representation in either Sydney or Melbourne, and preferably both of these cities. Companies who limit their representation to those cities often find that they are missing out on opportunities in smaller states. Companies should strive for representation in all of the Australian states. A good way to go about this is to appoint one or two national distributors and a number of niche distributors. Master distributors are appointed for the territory, and they then sell through Value Added Resellers (VARS). Systems integrators generally have up to 100 resellers of which they train and support.
4.2 Competition
Not dissimilar to the United States, Australia has payroll software on the market. As discovered from a distributor, most small to mid-sized businesses are currently using a generic, off-the-shelf software program for payroll called MIOB. PenSoft has much more to offer its customers than a generic program. When researching more specialized payroll software, a company called Winpay emerged as the current market leader.
Winpay is a Windows 3.1, 95, 98, and NT based payroll system used in companies with as few as 10 employees to well over 2000 employees. It is very similar to PenSoft’s product, but it targets mainly medium to large businesses. They can be seen on the web at . Winpay also emphasizes the quality of support that they provide, and their version upgrades are free. Their pricing details are listed below.
Kwikpay is also somewhat similar to PenSoft Payroll in that it is a comprehensive Windows based payroll system for small to medium sized companies. It is an inexpensive product, costing only $50 for businesses with more than two employees, and free for businesses with two or less employees. The reason it is so inexpensive is because it is sold directly by its author. No intermediaries are involved in the sale of this product. It does have its shortcomings. It is only available on the Internet. There are no diskettes or CD’s, so the downloading and installation of this product is left up to the user. This seems to be the company’s biggest problem with the product. The company’s website .au has a Frequently Asked Questions page loaded with solutions to problems with the downloading and proper installation of this product.
Kwikpay does however, have many of the options available with PenSoft’s payroll software. It includes current legislation, and it calculates all types of payments and deductions. Kwikpay is compatible with Microsoft Access Database, and is contained in Microsoft Office, which is the Industry Standard Software. Kwikpay includes pay history directly in Microsoft Excel Spreadsheets, and has a built-in zip compatible data back-up system.
Despite the similarities in product functions, PenSoft has a comparative advantage over Kwikpay. The service that PenSoft provides its customers is irreplaceable. It’s customers phone the PenSoft Headquarters and have a solution to their problem before the end of the phone call. This is a service that PenSoft’s competitors will find difficult to match. This is also the case with Kwikpay. Its customer support consists of a mailing address, an e-mail address, and a fax number. Customers may be willing to pay more for a better quality service.
With regards to selling costs and price competitiveness, it is important for U.S. exporters to Australia to competitively price their products. They will be selling in an active, highly competitive and vibrant market. Products from all over the world are represented in this extremely sensitive market, where sellers and end-users alike are all searching for something new. Australia’s receptivity to a broad range of U.S. goods and services is well documented, offering opportunity to a wide variety of U.S. exporters. But for U.S. exporters to succeed they must realize that Australians are extremely price sensitive. Furthermore, with PenSoft’s market, Australia is comparable with the U.S. when it comes to technological development, so PenSoft must expect similar competition in Australia as it faces in the United States.
5. Taxation Issues
The Australian Federal Government is the major revenue raiser under Australia’s tax system, accounting for almost 80 percent of Australia’s tax collections. Although the Federal government has sole responsibility for income tax, the state governments impose a number of other taxes, including land tax, payroll tax, stamp duty, motor vehicle registration and insurance charges. Local governments account for less than 5 percent of taxes levied on the private sector. In general, all taxes imposed on business operations (other than income tax) are deductions when determining the profit before tax in the statutory accounts.
Generally, a company resident in Australia, or an Australian branch or “permanent establishment” of a non-resident company, is subject to income tax at the rate of 36 percent on its taxable income. There is no specific branch profits tax or withholding tax on branch profits in Australia. Broadly, an Australian resident company is subject to tax on its worldwide income. Apart from specific provisions, assessable income is determined according to “ordinary concepts” and includes all types of gross income, which would normally appear in the revenue accounts of a business enterprise. While gifts and certain windfalls are not normally assessable, certain capital gains (indexed) and capital profits are assessable.
Allowable deductions include most of the expenses which would normally appear in the revenue accounts of a business enterprise, provided such expenditures satisfy the general or specific statutory tests. The general test requires a taxpayer to show that the expenses are losses or outgoings incurred in producing assessable income (including future income), or necessarily incurred in carrying on a business for the purpose of gaining or producing such income. Some expenses are not allowable deductions such as some entertainment expenses and travel costs and interest costs subject to the thin capitalization rules. Generally, allowable deductions do not include capital expenditures. However, depreciation deductions or building allowances may be available for qualifying capital expenditures.
The Australian government is in the process of a major review of laws covering business taxation. The newly proposed tax program is a joint effort of the three government offices (the Treasury’s Tax Policy Office, the Australian Tax Office, and the Office of Parliamentary Counsel of the Attorney General’s Department). The treasury department quickly moved forward with the preparation of an “issues paper” which was released in late February, and contains over 40 chapters covering many aspects of business taxation. Once the paper was released, meetings with interested parties were held in March and April in each of the state and territory capital cities. The timetable for the review called for the submission of a final report, which included draft legislation and was released in June 1999.
The Government Office of Accounting (GOA) is also conducting a major review of laws relating to business taxation. The review is known as the Ralph Review because it is headed by chairman John Ralph. This review of business taxation is completely separate from the implementation of the Goods and Services Tax (GST), which was agreed upon months ago, and will be discussed in just a moment.
All of these changes and modifications in tax reform is welcomed by the Australian Computer Society (ACS), which represents thousands of information technology professionals around Australia. Prins Ralston, the president of ACS, was one of several advocates seeking tax reform on a federal level. The ACS feels that the Federal Government’s recent business tax reforms will lead to flow-on benefits for the Australian IT industry. The society said that some of the new measures should help small and medium sized start up companies by encouraging more local investment in Australian tech ventures.
Since the onset of the Ralph Review, a number of laws for the new tax system have been passed and will go into effect in June 2000. Benefits will include abolishing a large number of hidden indirect taxes and introducing a flat 10 percent goods and services tax (GST). This will dramatically reduce business costs. The government is providing $500 million to assist small and medium businesses make the transition to the New Tax System. Registering for the new tax system will require the filing of one form with the Australian Taxation Office, and businesses will be given an Australian business number for all dealings with the ATO. The new taxes will be explained thoroughly and can be accessed on the Internet at taxreform..au, as the information is being released.
If PenSoft chooses to penetrate the Australian software payroll market, the new taxation policies are good news. The new taxation system will mean streamlined reporting for all businesses, and business taxes will be reported monthly or quarterly with the use of just one form. Businesses will also receive a credit for any Goods or Services Taxes that are business related.
The Australian Competition and Consumer Commission (ACCC) will monitor prices to make sure that they are adjusted properly. The ACCC has special transitional powers to take action under the legislation to ensure that price changes by businesses are consistent with changes in the tax rates.
The new tax system will be made up of many major elements, including the new GST. The Goods and Services Tax will be a broad-based tax of 10 percent on most supplies of goods and services consumed in Australia. As mentioned previously, businesses registered for GST will be able to claim back any GST paid as part of business expenses. Consumers will not be afforded this benefit, but they will receive personal income tax cuts and other compensation as needed to offset any rise in prices.
Businesses required to register for the GST will be any organization (for profit and non-profit) with an annual turnover of A$100,000 or more. These businesses will be required to register for an Australian Business Number, and can do so electronically through the Business Entry Point at .au. Once registered, businesses will pay GST on all goods and services purchased by businesses, with an exception to goods or services that are input taxed supplies. Businesses will have to claim their credits or remit GST to the ATO monthly or quarterly, depending on the size of the turnover. Generally, GST will be charged on the importation of goods. Goods imported directly into a customs-bonded warehouse will be liable for GST when they are released into the market.
The GST will charge 10 percent when businesses supply most goods and services. They will also pay GST on the things that they acquire for their business. The difference between the GST they have collected and the GST that they have been charged will be the amount that they owe or are owed by the ATO.
Other elements of the New Tax System passed by parliament include the reporting of employees’ fringe benefits on their group certificates. A new Pay as You Go (PAYG) system will replace several tax installment payment and reporting systems.
The PAYG system will simplify and consolidate arrangements for businesses who currently have obligations to collect tax on behalf of the Government, as applicable with the Pay As You Earn (PAYE), Prescribed Payments System (PPS), Reportable Payments System (RPS), and dividend, interest and royalty withholding tax of non-residents. Pay As You Go will also apply to businesses who currently make their own tax payments through company or provisional tax. In addition, the Australian Government plans to introduce a range of business tax reforms after it considers the recommendations of the Review of Business Taxation.
The Year 2000 tax forms will be out by March 2000. Attached are the 1999 federal tax forms, and updated forms for the Year 2000 can be found at taxreform..au. Downloading these documents will require the use of Acrobat Reader.
The ATO will send out all further information by request as it becomes available, including a comprehensive booklet explaining how The New Tax System affects businesses. Fact sheets are made available by phoning the business tax reform infoline on 13 24 78.
6. Barriers to Entry
As far as barriers to entry go, Australia is a fairly welcoming country for receiving exports. At one point, Australia had a long-standing policy of using tariffs to protect its local industry. That policy began changing in the early 1970s and was accelerated in 1988 by the Federal Government’s program of economic reform, directed toward moving the country to a globally competitive economy. This program is focused on microeconomic changes to help Australian businesses become more competitive. The strategy has three principal premises:
• tariffs and other forms of protection must be reduced
• industry must drop its preoccupation with protection and turn its attention to becoming more competitive
• and improvements must come from both labor and management
In 1996, all Australian tariffs were reduced to five percent or below, with an exception of textiles, clothing, footwear, and certain automotive products. Australia is a signatory to the GATT Standards Code as well as a member of the World Trade Organization’s Agreement on Technical Barriers to Trade, and it maintains some restrictive standards requirements and design rules that have an impact on the free flow of goods.
There is no retail sales tax in Australia. Instead, wholesale taxes are levied at either the manufacturer or wholesaler level by the Commonwealth Government and passed along to the consumer as part of the retail price. Of course, in July of 2000, the 10 percent Goods and Services Tax with be unveiled, and will replace the current wholesale sales tax. When it is introduced in July of 2000, the GST will be levied at 10 percent of the value-added at each point in the production and distribution chain, for all goods and services including imports.
Given this information, it may be a good idea for PenSoft to become Internet based because there will be no tariff and value added tax.
Ultimately, the consumer will feel the full burden of the Goods and Services Tax. The GST will be collected by the producer as part of the final sale price of the product, and will then be remitted to the Australian Tax Office. Meanwhile, the existing wholesale sales tax regime will remain in place, and it will be imposed on the sale of both domestically-manufactured and imported goods. Manufacturers and wholesalers are required to register for sales tax, but importers of goods are not required to register but are liable for wholesale sales tax on the entry of goods into Australia. Wholesale sales tax in Australia in generally 22 percent of the sale value of the goods, which is broadly equal to the fair wholesale value.
Australia has phased out its import licensing requirements. Importers are responsible for obtaining Customs clearance for consignments of goods above set value limits. The minimum documentation required includes an air-way bill or bill of lading, invoices and any other papers relating to the shipment.
If it is decided that PenSoft will take part in an Australian trade show to determine the market demand for new payroll software, they should try to import their goods into Australia duty-free. Goods being brought over for a temporary period, for display purposes in a trade show can be imported duty-free.
U.S. suppliers also need to be aware of Australian legislation regulating the packaging, labeling, ingredients, marketing, and sale of specific products, and of general weights and measures. Legal import and sale of products may not be possible without modification. U.S. exporters should ask their Australian importer to ensure that products comply with Australian Federal and State Government labeling regulations.
Australia is the second largest per capita user of personal computers in the world after the United States, and is also one of the largest per capita users of the Internet. Another similarity between Australia and the United States lies in the software piracy rates. The U.S. has a 27 percent piracy rate, while Australia has a 33 percent piracy rate. These piracy rates are relatively low in comparison with the other countries we researched. Nonetheless, it is important to protect your intellectual property rights. Copyrights, patents, trademarks, industrial designs, and integrated circuits are protected under Australian law. Australia is a member of the major global intellectual property protection organizations and conventions. America patent holders planning extensive sales or manufacturing in Australia should not assume that a U.S. patent provides comparable protection in Australia and should seek legal advice as to the advisability of registering their patents under Australian law.
Copyrights are protected under the Copyright Act of 1968 for the life of the author plus 50 years and in most cases apply to books, sound recordings, films and computer software. The parallel importation of overseas sound recordings and computer software is illegal. Works do not require registration, and copyrights automatically subsist in original literary, artistic, musical and dramatic works, film and sound recordings. Computer software is considered under law to be literary works.
Patents are available for inventions in all fields of technology and are the principal system for protecting ownership of any invention. They are protected under the Patents Act of 1990, which offers coverage for 20 years, subject to renewal. An application for a patent in Australia provides international priority rights if applications follow in overseas jurisdictions within 12 months. Trade secrets are protected by common law.
Trade marks may be protected for ten years and renewed indefinitely, upon request by registration under the Trade Marks Act of 1995. Once used, trade marks may also, without registration, be protected by common law. Registration with IP Australia does make enforcement easier. It is wise for any U.S. exporter with intentions to market their product in Australia to ensure its mark or name is not already in use.
It is a wise idea for U.S. companies to hire a local attorney in Australia once they have begun international sales there. Legal expertise is needed to execute legal documentation, interpret laws and regulations, and settle disputes. Most businesses also use the services of a professional accounting firm. This is especially important for PenSoft, as a reputable accounting firm could keep PenSoft abreast of changing tax codes.
PenSoft will also need to consider researching bona fide banks. The appendix contains a list of American Banks in Australia. PenSoft should be cautious when entering the Australian market and it is advisable for them to perform due diligence on likely business partners and customers. It would be wise to contact the Australian Securities and Investment Commission (ASIC), which is a government agency that enforces and administers Australia’s Corporate Law and registers all companies. ASIC can provide companies with “historical extracts” which will help advise the companies on whether or not they should do business with the investigated companies.
Although this is an extensive amount of information, the processes involved are very similar to those used in the United States. Australia is really a friendly country to trade with. Their policies are fairly straight forward, and the taxes imposed are not exorbitant.
7. Entrance Strategy
All of the information prior to this section is crucial in the decision making phase of the project. Indeed, Australia has some advantageous market conditions that U.S. software manufacturers could take advantage of. PenSoft should definitely plan a business trip to Australia before making a final decision about entering this market. There are many trade shows in Australia each year, and it is recommended that PenSoft plan their trip around a trade show, so that they may learn more about the Australian market. Listed in the appendix immediately following the Australia section of this paper is a directory of trade associations as well as directories of industry-specific directories. Trade magazines would also be beneficial to look over. Trade shows are advertised in the financial sections of major newspapers, in industry magazines, and in newsletters and associations. Trade shows are also found in directories such as Margaret Gee’s Media Guide, published by Information Australia, which can be located on the web, at
It seems that the most popular way for U.S. software businesses to sell their products in Australia is through the use of agents and distributors. Another suggestion is the consideration partnering with some Australian corporations. CS Australia provides a range of business facilitation services to help American companies identify potential partners. Most services are arranged by the U.S. company contacting its local U.S. Department of Commerce Export Assistance Center. The Australian Chamber of Commerce might also be helpful in finding U.S. companies Australian partners. The benefit of partnering is the reduced financial risk that PenSoft would face. Another possibility would be contacting IBM whose E-Commerce department is currently focusing its efforts on small businesses. In this situation, IBM would be doing most of the leg work, while also assuming a portion of the risk.
It is said that a good indicator of whether or not a product will succeed in a foreign market is to gauge the product’s success in the U.S. market. If the markets are similar, then there is a good chance that the product will succeed in the foreign market as well. It is pretty apparent that there are some strong similarities between the Australian market and the U.S. market.
Once PenSoft determines that it has exportable products it must remember to consider all of the other factors involved. PenSoft must keep in mind its expectations and goals of exporting. They then must determine if exporting is consistent with the other goals of the company. The demands that exporting will place on PenSoft’s key resources must also be considered. Many companies fail to thoroughly plan their strategy, as it is said, companies do not plan to fail, they fail to plan.
An extensive export plan needs to be acknowledged. It must include an action statement that includes specific objectives. It is also necessary for the key management to agree upon the company’s goals, objectives, capabilities, and constraints. It is wise for newcomers to the International market to attend conferences, seminars, and workshops on topics such as export documentation and licensing procedures, country-specific market opportunities, export trading companies, and U.S. trade promotion and trade policy initiatives. Seminars of this nature are generally held in conjunction with local chambers of commerce.
There are many opportunities available in Australia. It is imperative though, for PenSoft to be experience success, they must demonstrate a degree of price flexibility. This is especially true initially, because PenSoft must prove to the Australian market that they are worthy of its trust. PenSoft does demonstrate the height of service quality in the United States. And once Australia realizes the impeccable level of service that PenSoft provides, they too will become brand loyal. But for PenSoft to succeed in penetrating the Australian market they must force end-users to try their product, and to do that, they must price their software competitively. In order to reach the entire market of small businesses currently using PC’s, PenSoft must make it’s software backward compatible. This will enable the companies current running Windows 3.0 and other currently inadequate operating systems to use PenSoft Payroll Solutions. It is essential that PenSoft have a 24- hour support for its customers, as the time zones in Australia are very different from ours in Virginia. Other than these few necessities, it is believed that feature-to-feature, PenSoft has a superior product, and should experience much success in Australia.
8. Appendix for Australia
U.S. and Australian contacts
Government Agencies
American Consulate General—Sydney
Commercial Section
36th Floor, T&G Tower, Hyde Park Square
Park and Elizabeth Streets
Sydney 2000, N.S.W., Australia
APO AP 96554
Tel: 61-2-261-9200
Telex: 74223 FCSSYD
Fax: 61-2-261-8148
American Consulate General—Melbourne
Commercial Section
553 St. Kilda Road
South Melbourne, Victoria 3004, Australia
APO AP 96551
Tel: 61-39-526-5900
Telex: 30982 AMERCON
Fax: 61-39-529-6774
American Consulate General—Perth
Commercial Section
246 St. George’s Terrace
Perth, WA 6000, Australia
Tel: 61-9-221-1177
American Chamber of Commerce in Australia
Suite 4, Gloucester Walk
88 Cumberland Street
Sydney NSW 2000
Tel: 61-2-9241-1907
Fax: 61-2-9251-5220
E-mail: nsw@.au
Australian Chambers of Commerce (By State)
New South Wales
State Chamber of Commerce
GPO Box 4280
Sydney NSW 2001
Tel: 61-2-9350-8100
Fax: 61-2-9350-8199
Queensland
Queensland Chamber of Commerce
Industry House, 375 Wickham Terrace
Brisbane QLD 4000
Tel: 61-7-3842-2244
Fax: 61-7-3832-3195
Victoria
Victorian Employers’ Chamber of Commerce and Industry
50 Burwood Road
Hawthorne VIC 3122
Tel: 61-3-9251-4333
Fax: 61-3-9819-3676
South Australia
South Australian Employers’ Chamber of Commerce and Industry
136 Greenhill Road
Unley SA 5061
Tel: 61-8-9365-7555
Fax: 61-8-9365-7550
Tasmania
Tasmanian Chamber of Commerce
GPO Box 793H]
Hobart TAS 7001
Tel: 61-3-6234-5933
Fax: 61-3-6231-1278
Western Australia
Chamber of Commerce
PO Box 6209
East Perth WA 6892
Tel: 61-8-9365-7555
Fax: 61-8-9365-7550
Embassy of Australia Commercial Section
1601 Massachusetts Avenue, N.W.
Washington, DC 20036
Tel: 202-797-3201
Department of Communications, IT & Arts
PO Box 2154
Canberra ACT 2601
Tel: 61-2-6279-1644
Fax: 61-2-6279-1717
URL:
Tax Commissioner
Michael Carmody
Department of Business Taxation
for contacting government directly
to determine who you need to
speak to:
enquiries@.au
Business entry point website
Australian Government
National Office of Information Economy
General Information on Australia
US Department of Commerce
Trade Information Center
1800-USA-TRADE
Australian Bureau of Statistics
PO Box 10
Belconnen ACT 2616
Tel: 61-2-6252-5000
Fax: 61-2-6251-6009
US Information Agency
East Asia Desk
302 4th Street, SW., Room 766
Washington DC 20547
Trade Related Contacts:
US Department of Commerce
International Trade Administration
Computers/Software Division
R. Clay Woods
ITA/TD, Room 2806
14th&Constitution Ave., NW
Washington, DC 20230
Tel: 202-482-0569
Fax: 202-482-0952
Robert_Woods@ita.
Australian Desk Officer
Ronald Reagan Building
14th&Constitution
Washington DC 20230
Gary Bouck
Tel: 202-482-2522
International Trade Administration
For general questions concerning trade policies or issues
Senior Commercial Officer for Australia—Commercial Service
US Consulate General
Level 59, MLC Centre
19-29 Martin Place
Sydney NSW 2000
Tel: 61-2-9373-9200
Fax: 61-2-9221-0573
Trade Events:
IT 2000
Sydney, NSW
Date: March 7-10, 2000
@ The Sydney Convention & Exhibition Centre, Darling Harbour
Brisbane, QLD
Date: May 16-18, 2000
@ The Brisbane Convention & Exhibition Centre
Melbourne, VIC
Interact + It 2000
Date: August 29-September 1, 2000
@ The Melbourne Exhibition Centre
Interact Asia Pacific Mulimedia Festival
Date: August 20-September 3, 2000
@ The Melbourne Exhibition Centre
Exhibition Organizer: Interact Events Ltd.,
Level 33, 360 Collins Street
Melbourne VIC 3000
Tel: 61-3-9696-7900
Fax: 61-3-9696-7911
E-mail: info@.au
URL:
Trade Magazines
Image & Data Manager
Kis Publications
PO Box 576
Surry Hills NSW 2012
Tel: 61-2-9318-2644
Fax: 61-2-9310-4608
Contact: Mr. Gerard Knapp—Editor
Gerard@.au
Trade Magazines continued
Plantline
Reed Business Information
Tower 2, 474 Victoria Avenue, Chatswood NSW 2067
Tel: 61-2-9422-2951
Fax: 61-2-9422-2966
Australian Reseller News
Computer World
IDG Communications
PO Box 295
St Leonards NSW 2065
Tel: 61-2-9439-5133
Fax: 61-2-9439-5512
Australian Distributors
Delta Technology Pty Ltd
PO Box 53
Spring Hill Queensland 4004
Tel: 61-7-3832-5377
Fax: 61-7-3831-8118
Contact: Mr. Dennis Sussens
Wordware Pty Ltd
PO Box 737
Hathorn Victoria 3122
Tel: 61-3-9819-9366
Fax: 61-3-9818-1785
E-mail: greg@.au
Contact: Mr. Greg Collette
Maxim Pty Ltd
PO Box Q 263
Sydney New South Wales 1230
Tel: 61-2-9299-1333
Fax: 61-2-9299-1444
Advanced Records Mgmt Pty Ltd
Unit 3, 281 Pacific Highway
North Sydney
Tel: 61-2-9953-4763
Fax: 61-2-9956-5623
E-mail: imaging@arm.
Contact: Mr. Arthur Chapman—Managing Director
CV Services International Pty Ltd
PO Box 1364
Lane Cove NSW 2066
Tel: 61-2-9844-8222
Fax” 61-2-9844-8234
Concord Australia Pty Ltd
PO Box 1254
Milton Queensland 4064
Tel: 61-3368-1966
E-mail J.Parsons@.au
Contact: Mr. James Parsons
**Office Information Pty Ltd
Level 2 Eastpoint Plaza, 233 Adelaide Tce
Perth, WA 6000
Tel: 61-9-8325-9922
Fax: 61-8-9325-9938
E-mail: lyntons@.au
Contact: Mr. Lynford Siford
Insight Technologies Pty Ltd
Suite 4, Level 10, 100 Walker Street
North Sydney NSW 2060
Tel: 61-2-9420-0211
Fax: 61-2-9460-0299
E-mail: clark@
Contact: Ms. Sandra Clark
Executive Computing Group Pty Ltd
1st floor, 6 Ryde Road
Hunters Hill, NSW 2110
Tel: 61-2-9816-3433
Fax: 61-2-9816-3455
Rims Australia Pty Ltd
PO Box 81
St Ives 2075
Tel: 61-2-9440-8395
E-mail: peco@.au
Telesystems Pty Ltd
150 Victoria Road
Drummoyne 2047
Tel: 61-2-9819-6322
Fax: 61-2-9819-7375
E-mail: jfox@.au
Contact: Mr. John Foxe
ACA Pacific Pty Ltd
PO Box 53
Carlton North Victoria 3054
Tel: 61-2-9922-5333
URL:
1. Geographic and General Information
The United Kingdom consists of England, Scotland, Wales and Northern Ireland as well as the Shetland and Rockall islands. The United Kingdom is located in Western Europe and lies near vital North Atlantic sea lanes; it is only 35 km from France and is now linked by tunnel under the English Channel. Due to its heavily indented coastline, no U.K. location is more than 125 km from tidal waters. The climate in the U.K. is temperate; moderated by prevailing southwest winds over the North Atlantic Current. More than one-half of the days each year are overcast.
The United Kingdom (U.K.) has more than 59 milion inhabitants according to July 1999 official statistics. It occupies 244,101 square kilometers.Two percent of the people work in the agriculture sector, 24 % work in industry and 74 % of the people work in the service sector. The capital of the United Kingdom is London. This is also the capital of England. Edinburgh, Cardiff and Belfast are the capitals of the other parts. Other important cities are Glasgow, Leeds, Liverpool and Birmingham, as seen in the country map.
The UK is by far the preferred location for North American investments in Europe. The facts speak for themselves: Over 4,200 U.S. companies, including the vast majority of Fortune magazine's top 100 companies have a U.K. base. Nearly 40% of all U.S. and 45% of Canadian investment in Europe is in the U.K. (figures from U.S. Bureau of Labor and Statistics). U.S. investment in Britain amounts to some US$120 billion, more than the combined shares of France, Germany, Italy and the Netherlands.The United Kingdom has the best combination of benefits that offer pro-business conditions, work-force cost efficiency and flexibility, minimum risk, and maximum bottom line return.
The United Kingdom is attractive to U.S. exporters and investors both in its own right and as a gateway to the larger European Union (EU) market. With a similar language, legal framework and business practices, and relatively low rates of taxation and inflation, most industries in the U.K. do not limit foreign ownership and place no restrictions on the repatriation of capital and profit. This is true for the software industry. U.S. businesses should bear in mind that within the EU, the British Government defends the rights of any company registered in Britain, irrespective of the nationality of its ultimate parent. The U.K. is receptive to U.S. goods and services, as a result of a shared cultural heritage and the traditional flow of trade and investment. With its $1.21 trillion GDP, the U.K. remains the United States' largest European market and fourth largest market worldwide, after Canada, Mexico and Japan. In 1998, the United States exported $39.07 billion of goods to the U.K. and imported British goods worth $34.79 billion.
The United States and the U.K. are the largest foreign investors in each other’s country. Sixty of the U.K’s five hundred largest companies are U.S-owned and historical cost investment by U.S. companies in the U.K. amounted to $138.8 billion by 1997. Comparable British investment in the United States amounted to $129.6 billion.
Even though the U.K. has a lot in common with the U.S., some points regarding British customs are worth noting. The traditional rigidity of the British social class structure has been diminished by social and economic developments over the last two decades. Government grants have permitted universal access to higher education and have thus enhanced social mobility. Increased liberalization of the marketplace and the greater competition induced have rewarded enterprise, and a new generation of professionals schooled in U.S. management, marketing and finance techniques are increasingly taking the helm of British business. The significance of being "British" has evolved in recent decades as immigration progressively altered the ethnic mix. Minorities, which now constitute over five percent of the population, are growing. British business contacts might well be individuals who are ethnically Indian, Pakistani, Arab, African or other descent; they bring a welcome vitality to the business culture.
As a result, U.S. firms such as PenSoft should be aware that the relative ease of communication with British clients may disguise the fact that there are some fundamental cultural differences. While variances in pace and style will be most noticeable, PenSoft should avoid making quick assumptions concerning business relationships until on-the-ground experience has been gained. As in most overseas markets, there is no substitute for sustained personal contact with potential business partners. The most important characteristics of British business etiquette are punctuality and courtesy. Prompt acknowledgement of the receipt of letters is expected, for example. Delivery terms, as well as appointment schedules, are expected to be maintained. Titles, when known, should be used in all correspondence. For expeditious handling of correspondence, airmail or fax should be used. It is advisable to address commercial solicitations to the firm, rather than individuals. British company executives will communicate more often by writing letters, telexes, and fax messages than do most U.S. executives, who tend to rely more on the telephone and, increasingly, on email. British executives are far less likely to seek legal advice and guidance than their U.S. counterparts. Only as a last resort will the U.K. executive consult a solicitor, while the American may use an attorney as a business advisor. "Working" breakfasts are far less common in the United Kingdom than in the United States. Luncheons are more appropriate as a form of business meetings. Developing relationships with U.K. executives that extend beyond business matters into social affairs will take time and is not guaranteed. Only after appropriate familiarization would a U.K. business executive expect to be invited to a dinner or social function in an American's home, or invite a U.S. executive to a similar function in his own residence. Under such circumstances, the business aspects of the relationship would be completely subordinated to the social elements. Gift giving or exchanging is not a normal business custom.
Business hours in the United Kingdom correspond closely to those in the United States. Banking hours are generally 9:30 a.m. to 3 p.m., Monday through Friday, except on Thursday when banks stay open later. Offices are open from 9 a.m. until 5 p.m., while stores are open from 9 a.m. to 5:30 p.m. In the vacation months of July and August, many British executives are not available except by advance appointment. The United Kingdom is on Greenwich Mean Time (GMT). London changes to daylight savings time on the last Sunday of March and reverts back to standard time on the last Sunday of October. London is five hours ahead of Eastern Standard Time (EST). Scotland, Wales, and Northern Ireland are on the same schedule. When arranging travel arrangements, each U.S. citizen entering the United Kingdom must have a valid American passport. No visas, entry permits, or vaccinations are required of U.S. citizens entering the United Kingdom, except for non-tourist stays of more than three months. If a longer stay is contemplated, visitors should check with the nearest British consulate in advance of travel. Three months after their arrival - unless the immigration officer has endorsed their passports upon arrival - U.S. citizens over 16 years of age should register with the local British police, except in the Metropolitan District of London. There, they are to register at the Aliens Registration Office, address is included in Appendix B to the U.K.
An initial business trip to the U.K. is highly recommended for PenSoft directors in developing entry strastegy for the U.K. market. When planning to visit the United Kingdom, the company directors may obtain passports on application through the clerk of any U.S. federal or state court authorized by law to naturalize aliens. Current regulations governing the admission of visitors will be modified soon, and proposed changes may restrict the ability of some foreign nationals, including American citizens, to reside in the United Kingdom. The address of the State Department's Passport Office can be found in Appendix B to this section of the report.
Work permits are required if a U.S. business is contemplating employment of American citizens in the United Kingdom. The British Consulate in New York should be contacted regarding inquiries for work permits. The employment of aliens in the United Kingdom is controlled by the Home Office and the Department of Employment. U.S. citizens wishing to extend the length of stay to obtain employment, paid or unpaid, or to set up any business or profession, must obtain permission from the Under Secretary in the Immigration and Nationality Department (address listed in Appendix B). Directors and employees of British subsidiaries of U.S. firms have, in general, encountered little difficulty in obtaining permission to enter and remain in the United Kingdom. In the case of technical employees, it is necessary to establish that British subjects with the necessary qualifications are not available. Work permits are usually readily issued for key personnel. Bringing technical personnel required to set up and operate the plant or business generally poses no problem.
As previously mentioned, the British Government is modifiying regulations governing the admission of visitors for business purposes and economic immigration to the United Kingdom. The changes will limit the ability of some foreign nationals, including American citizens, to reside in the United Kingdom. The categories of employees under the new immigration rules which will directly affect the business community are: businessmen and self-employed persons; retired persons of independent means; investors; and (short-term) business visitors. According to the modified regulations, persons establishing a new business must be investing at least US$300,000 of their own money in the company, or, alternatively, they can invest a similar amount in an ongoing concern. In either instance, the person must be occupied full-time in running the business. Simple property investment will not necessarily suffice to obtain resident status (indefinite leave to remain status) in the United Kingdom. Retired persons of independent means will have to be at least 60 years of age, and have control of at least US$375,000 or an annual income of at least US$37,500. Engaging in business or professional activity is prohibited. The new investor category requires a US$1.5 million investment of which three-fourths must be in an active, trading U.K. registered company (and not simply property investment). The business visitor category is more sharply defined. Under the new regulations, entry may be denied to those who will perform 'productive service.' Thus, a consultant coming to the United Kingdom to do research for a U.K. firm, such as a possible PenSoft distributor’s firm, and who will be paid by this firm, qualifies as a business visitor only if the 'productive' portion of his work (i.e., writing the report itself) is done outside the United Kingdom. Writing the final report here would subject the person to the work permit regime. The determination of who may be admitted as a consultant is decided on a case by case basis at ports of entry. The legal profession has been among the most active U.S. professional services sector in the United Kingdom. Its members actively travel in and out of the country for short-term business purposes. Lawyers coming to consult on foreign laws currently fall under an exemption to the normal work permit rules. Those travelling for specific short-term consultation will normally be admitted as business visitors. Those desiring to practice law or work as salaried employees in private practice, commerce, or industry must obtain entry clearance (similar to a visa) based on an exemption letter issued by the Law Society of England stating that the Society has no objection to the persons providing legal services. Additionally, the lawyer must demonstrate an ability to live in the United Kingdom without recourse to public funds. There is nothing in the proposed regulations, which would alter this current exemption from the work permit scheme.
The American Citizen Services (ACS) section at the Embassy in London provides many services for U.S. citizens, including passport issuance, absentee voter registration and notarial services. The Passport Unit supplies travel advisory information on visa requirements, health concerns and political violence in the U.K. iself and in countries around the world. For information on these and other issues, U.S. businesses such as PenSoft can contact the Embassy on +44 171 499 9000, or visit at 21- 24 Upper Grosvenor Square in Mayfair, London. The Passport Unit is open 9:00-12:00 and 2:00-4:00 Monday through Friday, with the exception of Tuesday afternoon. Notarial services is provided 9:00-12:00 Monday through Friday and 2:00-4:00 on Wednesdays. The Embassy is closed for all American and British holidays.
The following major holidays are observed by most businesses in the United Kingdom:
|England and Wales: |Holiday Day |
|Holiday Day | |
|New Year's Day |January 1 |
|Bank Holiday |January 1 |
|Good Friday |Variable |
|Easter Monday |Variable |
|May Day |First Monday |
|Spring Holiday |May Last Monday |
|Summer Bank Holiday |August Last Monday |
|Christmas Day |December 25 |
|Boxing Day |Variable - first weekday after Christmas |
Scotland observes the above except Easter Monday, Spring Holiday, and Summer Bank Holiday, and the following:
|Bank Holiday |First Monday January |
|Spring Holiday |First Monday April |
|Victoria Day |Third Monday May |
|Bank Holiday |First Monday August |
|Autumn Holiday |Third Monday September |
In Northern Ireland, the following holidays are observed in addition to the U.K.-listed holidays:
|St. Patrick's Day |March 17 |
|Easter Tuesday |Variable |
|Orangeman's Day |July 12,13 |
2. United Kingdom Economic Welfare
2.1 Key Economic Indicators
The following figures are expressed in $ billions except where noted. 1998 statistics are the latest official figures for the U.K.
| |1996 |1997 |1998 |
|GDP (nominal) |920.6 |944.5 |1,210.0 |
|GDP Real Growth (%) |2.7 |2.6 |1.9 |
|GDP per capita in US$ |19,259.0 |20,382.0 |21,104.0 |
|Govt spending as % of GDP |40.8 |39.6 |36.3 |
|Inflation (%)* |3.6 |3.4 |3.3 |
|Unemployment claimants (%) |7.6 |5.7 |4.8 |
|Avg. exch. rate (BPS/$) |0.53 |0.63 |0.64 |
(Source: Office of National Statistics, U.K. Government)
* Headline rate of inflation. Official inflation statistics record a rate approximately one percentage point less, due to the narrower basis of calculation.
2.2. General Policy Framework
The United Kingdom has a free market economy and a liberal financial services environment. In May 1997, the Labor Party won an overwhelming Parliamentary majority, ending 17 years of Conservative government. The new Prime Minister, Tony Blair, inherited a strong economy, with the recovery from the 1990-92 recession in its fifth year. Gross Domestic Product (GDP) expanded 2.3% in 1996 and at a 3.0 percent annual rate during in 1997. In 1998, growed slowed slightly as tighter monetary and fiscal policy combined with a stronger sterling putting a brake on British economy. Underlying inflation averaged 3.0 percent in 1996, and is now slightly above the 2.5% target range. Unemployment fell significantly, reaching 7.1% in 1997, well below that of many continental European nations.
As far as fiscal policy is concerned, the sharp recession of 1990-92 led to a record budget deficit in 1993, encouraging the previous government to launch a deficit reduction program in 1994. This and the economic recovery has helped begin to unwind the deficit. The new government's determination to live within spending limits set by the previous government, along with the introduction of additional revenue measures in July 1997, has put the UK on a clear course to achieve fiscal balance by the year 2000. The General Government financial deficit was 4.0% of GDP in fiscal year 1996 (April 1996-March 1997) and fell to 1.5% in fiscal year 1997 and 0.25% in fiscal year 1998.
The new government promised during the 1996 campaign not to raise the personal income tax rate or broaden the Value Added Tax (VAT), when it came to tax policy formulation. The bottom and top personal tax rates thus remain at 20 and 40%. The Labor government intends, however, to strengthen incentives for work and savings, and will review the tax (and benefit) system to that end. This may produce tax reform in the medium-term. The capital gains tax is being reviewed. The main corporate tax rate was reduced in July 1997 to 31% from 33%; the small companies' rate was reduced to 21 from 23%. The Labor government also undertook a controversial measure to tax the windfall gains of privatized utilities; this tax is expected to yield 5.2 billion pounds sterling over three years, which will be used to help finance the government's new Welfare-to-Work program. Other domestic tax revenue sources include the VAT (currently 17.5%) and excise taxes on alcohol, tobacco, retail motor fuels and North Sea oil production.
After the U.K. was effectively forced from the Exchange Rate Mechanism (ERM) at the beginning of 1993, the previous government established an inflation target as the guiding objective for monetary policy. The new Labor government has reiterated the importance of a low inflation policy. It quickly granted the Bank of England independence to set interest rates, with the aim of achieving an inflation target of 2.5%. The U.K. manages monetary policy through open market operations by buying and selling overnight funds and commercial paper. There are no explicit reserve requirements in the banking system.
It is essential that any U.S. business, such as PenSoft, with interests in the U.K. market, keep abreast of current British government legislation. Specific tax information is detailed in section 5. (Taxation).
2. 3 Exchange Rate Policy
Since the U.K.'s withdrawal from the European Exchange Rate Mechanism (ERM) in January 1993, the U.K.’s currency, the pound sterling (GBP or £) has floated freely. Sterling's trade weighted exchange rate (1990=100) averaged 99.6. in 1997. This appreciation reflects a variety of factors, including higher interest rates in the U.K. than in continental Europe and possibly concerns in the market about European Economic and Monetary Union (EMU).
The new Labor government has indicated it views EMU favorably, although it the U.K. did not join the EMU when it was launched on January 1, 1999. Should the government decide to pursue EMU membership, it has promised to seek approval from Parliament and from the public (either through a referendum or general election) before proceeding.
2.4 Structural Policies
The U.K. economy is characterized by free markets and open competition, and the government promotes these policies within the EU and in international trade fora. The U.K.'s low labor costs and labor market flexibility are often credited as major factors influencing the U.K.'s success in attracting foreign investment.
Prices for virtually all goods and services are established by market forces. Prices are set by the government in those few sectors where the government still provides services directly, such as urban transportation fares, and government regulatory bodies monitor the prices charged by telecommunications, electric, natural gas and water utilities. The very competitive U.K. software sector is not subject to regulation and is driven by market forces. This has tremendous implications for U.S. businesses and must be given due consideration by PenSoft, as will be detailed in the market competition section.
Over the past 17 years, Conservative governments pursued growth and increased economic efficiency through structural reform, principally privatization and deregulation. The financial services and transportation industries were deregulated. The government sold its interests in the automotive, steel, coal mining, aircraft and air transportation sectors. Electric power (except nuclear), rail transportation and water supply utilities were also privatized. Local bus transportation is in the process of privatization. Subsidies were cut substantially, and capital controls lifted. Employment legislation significantly increased labor market flexibility, democratized unions, and increased union accountability for the industrial acts of their members. The Labor government in general is continuing this approach, and has launched further reviews of the regulatory systems governing utilities and transportation.
Although these structural policies have achieved substantial economic results, for the U.K. some segments of the economy have still not adjusted. Social welfare programs and the business community are still adjusting to job losses and changes in the business climate resulting from deregulation and privatization.
2.5 Debt Management Policies
The U.K. has no meaningful external public debt. London is one of the foremost international financial centers of the world, and British financial institutions are major intermediaries of credit flows to the developing countries. The British government is an active participant in the Paris Club and other multilateral debt negotiations.
2.6 Export Subsidies Policies
The government opposes export subsidies as a general principle, and U.K. trade-financing mechanisms do not significantly distort trade. The Export Credits Guarantee Department (ECGD), an institution similar to the Export-Import Bank of the United States, was partially privatized in 1991.
Although much of ECGD's business is conducted at market rates of interest, it does provide some concessional lending in cooperation with the Department for International Development (DFID, akin to the U.S. Agency for International Development) for projects in developing countries. Occasionally the United States objects to financing offered for specific projects. The U.K.'s development assistance program also has certain "tied aid" characteristics. The U.K. adheres to the OECD "Arrangement on Officially-Supported Export Credits" to minimize the distortive effects of such programs.
2.7 Worker Rights
a. The Right of Association: Unionization of the work force in Britain is prohibited only in the armed forces, public sector security services, and police force.
b. The Right to Organize and Bargain Collectively: Nearly 9 million workers, about a third of the work force, are organized. Employers are not legally required to bargain with union representatives, but are barred from discriminating based on union membership. Employers are allowed to pay workers who don't join a union higher wages than union members doing the same work. The 1993 Trade Union Reform and Employment Rights Act limited that prohibition under certain special circumstances in matters short of dismissal. The new Labor Government has promised it will require union recognition where at least half the workers belong to a trade union
The 1990 Employment Act made unions responsible for members' industrial actions, including unofficial strikes, unless union officials repudiate the action in writing. Unofficial strikers can be legally dismissed, and voluntary work stoppage is considered a breach of contract. During the 1980s, Parliament eliminated immunity from prosecution in secondary strikes and in actions with suspected political motivations. Actions against subsidiaries of companies engaged in bargaining disputes are banned if the subsidiary is not the employer of record. Unions encouraging such actions are subject to fines and seizure of their assets. Many unions claim that workers are not protected from employer secondary action such as work transfers within the corporate structure.
c. Prohibition of Forced or Compulsory Labor: Forced or compulsory labor is unknown in the U.K.
d. Minimum Age for Employment of Children: Children under the age of 16 may work in an industrial enterprise only as part of an educational course. Local education authorities can limit employment of children under 16 years old if working will interfere with a child's education.
e. Acceptable Conditions of Work: The new government has established a minimum wage. Daily and weekly working hours are not now limited by law, although the EU directive outlawing mandatory work weeks longer than 48 hours is being implemented soon.
Hazardous working conditions are banned by the Health and Safety at Work Act of 1974. A health and safety commission submits regulatory proposals, appoints investigatory committees, does research and trains workers. The Health and Safety Executive (HSE) enforces health and safety regulations and may initiate criminal proceedings. This system is efficient and fully involves workers' representatives. U.S. firms in the U.K. are obliged to obey legislation relating to worker rights.
3 Information Technology
3.1 Software
Britain's IT and communications industries are worth approximately GBP 37 billion and employ one million people whilst contributing around 7% of GDP. It is worth noting that the U.K.'s performance in the IT industry is outstripped by a close neighbour; Ireland. For example, since 1980, 40% of all U.S. new inward investment in European electronics has come to Ireland and Ireland wins nearly a quarter of electronics manufacturing investment in Europe. This stems from the fact that, within the EU, Ireland is the only country to have a government-backed National Software Directorate with specific responsibility for the development and growth of the commercial software sector. The need for the formulation of similar policy in the U.K. is crucial. In terms of overall computer literacy, the U.K enjoys one of the highest in the world.
Statistics from 1996 report that IT expenditure in U.K. businesses is rising rapidly with organisations in the financial services sector, for example, spending on average 15% of their total budget on IT. Other sectors, however, such as educational establishments have failed to invest; in schools expenditure on IT is still only 0.86% of total expenditure.
Investment in U.K. IT companies is difficult to secure. Of the 115 companies operating in providing venture capital in the U.K., only 25 are actively involved with IT. The difficulty in attracting investment has led to many U.K. IT ventures to go abroad for funding. For example, in 1995 many U.K. companies sought listings on NASDAQ, the second largest stock market the U.S.instead of opting for listing on U.K. exchanges (Source: Financial Times, December 96). To help smaller companies, the British Venture Capital Association (BVCA) put forward a number of recommendations to the government for the 1998 budget. None of them were adopted.
As far as internet access is concerned in the United Kingdom, a national study conducted in November of 1998 found that there are more than 7 million people online in the UK, representing 15 percent of the nation's population. By the end of 1998, the Computer Industry Almanac estimates there were 8.1 million people online in the U.K. This places the U.K. in third place among 15 nations with the most Internet users at the end of 1998, behind the U.S. and Japan. Analysis of marketing directors in 100 U.K. companies with a turnover of GBP200 million per year showed that large companies expect 20% of sales to come via the Internet within five years. But 60% of these directors described their knowledge of the Internet as poor or very poor. 63% had never even used it.
The majority of British software companies belong to the Computing Services & Software Association (CSSA). This is the trade association for the IT services and software sectors, representing the interests of companies in these sectors since 1975. It is especially concerned with the development of e-commerce in the U.K. The CSSA had over 600 member companies representing approximately 80% of the industry by turnover with combined revenues of more than GBP 14 billion in 1998. CSSA's contact information is in Appendix B to this section.
U.S. software businesses such as PenSoft will greatly benefit from the present general outlook for this industry. The software sector in the United Kingdom is very encouraging. Growth in the U.K. market for computer software is expected to continue at a high rate for at least the next two years. The trend is toward packaged applications running on networked client/server systems. In 1998, the fastest growing market segments were software development tools and application software, which both grew by 15 per cent. Windows applications software will continue to be in high demand. Recent figures show that the Windows operating system is installed on more than 70 percent of all PCs currently in use. In recent years the banking and financial services sector has been the biggest spender on software, principally driven by the globalization of the sector and year 2000 compliance projects.
|Market Data ($ billions) |1997 |1998 |1999(est.) |
|A) Total Market Size |7.90 |8.90 |10.3 |
|B) Total Local Production |2.76 |3.11 |3.75 |
|C) Total Exports |1.3 |1.51 |1.90 |
|D) Total Imports |6.52 |7.12 |8.45 |
|E) Imports from the U.S. |3.15 |3.60 |4.80 |
3.2 Small Businesses - Viable PenSoft Customers
In the U.K., over 94.4% of all businesses employ fewer than 10 people and 99.6% of all business employ under 100. Taking the definition given to the Bolton Committee in 1971 of 200 employees, then only 0.2% of UK businesses are not 'small'. The table below details the contribution that different size businesses make to employment and turnover.
|Employees |Businesses |Employment |Turnover |Businesses |Employment |Turnover |
| | |(000's) |(£m) |(%) |(%) |(%) |
|0-9 |3,379,625 |5,805 |326,013 |94.36 |28.17 |9.07 |
|10-99 |184,711 |4,579 |718,700 |5.16 |22.22 |20.00 |
|100-499 |13,628 |2,695 |990,969 |0.38 |13.08 |27.58 |
|500+ |3,205 |7,530 |1,557,449 |0.10 |36.53 |43.35 |
|Total |3,581,469 |20,607 |3,593,132 |100 |100 |100 |
Source : DTI SME Statistics for the U.K.
According to the Department of Trade and Industry (DTI), there were an estimated 3.7 million active businesses in the U.K. at the start of 1998 according to new statistics published today. The Statistical Bulletin Small and Medium Enterprise (SME) Statistics for the UK, 1998 contains a size breakdown of the number of businesses in the UK, from small traders with no employees to those with 500 or more employees. It also shows the contribution to employment and turnover made by businesses of different sizes, industry by industry.
As the graph above shows, the trend in the stock of enterprises in the U.K. is at a similar level for the fourth successive year, following falls in 1992 and 1993. Currently, the business stock is 1.3 million higher than in 1980 (the first year for which comparable figures are available). Most of the growth in the business population has been in one-person businesses.
Of the 3.7 million businesses in 1998, over 2.3 million were ‘size class zero’ businesses - those made up of sole traders or partners without employees. The number of size class zero businesses has fallen since the start of 1997 mainly due to a fall of 100 thousand self-employed workers in the construction sector. An increase in the number of self-employed people working in partnership, rather than as sole proprietors, also reduced the number of size class zero businesses. At the start of 1998, 1.3 million businesses were employers, an increase from the 1.2 million employers seen in the previous three years. The increase is mainly due to an increase in single employee companies to 220 thousand. 1997 also saw improved survival rates for businesses, an increase in the number of new business start-ups, and higher self-employment in sectors where the self-employed tend to employ people, such as retail.
Of the entire business population (3.7 million enterprises) only 25 thousand were medium sized (50 to 249 employees) and less than 7 thousand were large (250 or more employees). Small businesses, including those without employees, accounted for over 99% of businesses, 45% of non-government employment and (excluding the finance sector) 38% of turnover. In contrast, the 7 thousand largest businesses accounted for 44% of non-government employment and 48% of turnover.
At the start of 1998, at least 99% of businesses in all but the electricity, gas and water supply sector were SMEs.The share of employment provided by SMEs varies greatly from one industry to the next. In construction 86% of employment is accounted for by SMEs while in finance it is only 23%. Detailed industry figures (available in the Statistical Bulletin of the DTI) show employment was particularly reliant on small businesses in areas as diverse as veterinary services, recycling, motorcycle repairs and salt production.
Finally, examination of regional data in the U.K., the share of employment in SMEs was highest among Northern Ireland based businesses and lowest among those based in London. The share of turnover in SMEs was also highest among Northern Ireland based businesses, and was lowest among those based in London and the South East. (in 1998).
Appendix A of the U.K. contains the distribution of the SME businesses in the U.K. and further detailed information on Small to Medium sized Enterprises can be obtained from the DTI, contacts are in Appendices A and B of the U.K.
4. Distribution and Competition
4. 1 Distribution and Sales Channels
According to the Department of Commerce latest data, the prospects for U.S. exports of computer software (Code CSF) to the U.K. are very encouraging. Combining this with the high receptiveness of the U.K. for U.S. goods and services, as well as the similar language, legal framework and business practices, and relatively low rates of taxation and inflation, the U.K. software industry looks very promising for businesses such as PenSoft.
There exist numerous channels and methods for distributing goods and services in the United Kingdom. A wealth of distribution and trade assistance is available by many government agencies and organizations affiliated to the government. Most important for potential United States businesses is the Commercial Service of the U.S. Department of Commerce. This has a range of services designed to help U.S. businesses identify prospective distributors or sales and service representatives. It is definitely worth considering for PenSoft. The services provided include the fee-based Agent/Distributor Service (ADS) and the Gold Key Program. American companies initiate the ADS at their Export Assistance Center in the U.S.; the Gold Key may be commissioned directly with the Commercial Service post. ADS applicants specify the profile of their ideal prospective representative, and the Commercial Service searches for appropriate local companies that have a specific interest in representing them. The Gold Key service schedules face-to-face meetings with business prospects, either as a follow-on to a successfully completed ADS, or as a separately organized program of meetings with prospective representatives, end-users or joint-venture partners. The achievement of mutually agreed objectives has consistently proved the value of the ADS and Gold Key programs as export promotion tools.
Counseling provided by the Commercial Service to U.S. firms intending to establish a presence in the U.K. can include market research, advice on regulations, the provision of business contacts and networking opportunities, and assistance with product launches and marketing campaigns.
Among the U.K.’s range of product-specific distribution and sales channels, there exist many options, such as sales subsidiaries of foreign manufacturers and import houses that purchase and sell on their own account. Between these two extremes are resellers, commission agents, specialized importers, brokers, and importing distributors. The distinction between the various types of marketing channels is not clear cut, and a considerable variation exists for even a single group of products such as computer products.
All U.S. businesses such as PenSoft who wish to export to the U.K should bear in mind that their market prices should reflect all of the actual cost components, even for shipments to a related company. Shipping, insurance, financing charges, customs duties, storage, distribution, advertising, sales, after-sales service, ultimate profit and any other transaction costs should be examined individually, and included in the final price.
British laws governing the relationships between agents and distributors and their suppliers are broadly harmonized throughout the EU. EU Directives establish the rights and obligations of the principal and agent, the agent's entitlement to remuneration, and the conclusion and termination clauses of agency contracts. The law appears to favor the agent rather than the principal to such an extent that most agency arrangements within the EU have been terminated in favor of distributorships.
The Commercial Service of the Department of Commerce is equipped to advise U.S. exporters and new to market companies in virtually every business sector. In addition to the promotion of conventional products and services, the Commercial Service promotes market access through various business formats including franchising, direct marketing, and licensing and joint ventures. The relevant contact for PenSoft in the Commercial Service is the Office of the Director of software, Mr. Robert Clay Woods. This specializes in International Trade Development for U.S. software companies. The address of the Commercal Service in Washington D.C. is included in Appendix B.
Another feasible alternative for PenSoft, based on the U.K. internet statistics mentioned in section 3 , is direct marketing. Affordable transatlantic telecommunications, low cost bulk mailing rates, and the use of credit cards for international transactions from the United States are making direct marketing a reality for many U.S. businesses. Public confidence in the accuracy of remote billing, data security, and certainty of delivery is increasing in line with the Internet’s expansion is turning direct marketing into an accepted marketing tool for the United Kingdom. These factors combine to make direct marketing of many types of goods and services worth considering. PenSoft, which already has a web site, and has had significant interest from the U.K so far, could initiate this process with minimum setup and operational costs.
The U.K.Advertising Standards Authority (ASA) has established a code of practice for direct mail advertising and for list and database management. The code and the supplementary rules can be obtained from the ASA, Brook House, Torrington Place, London WC1E 7HN; telephone: (44) 207-580-5555; fax: (44) 207-631-3051.
Joint ventures and licensing are often used to maintain a competitive advantage in the British market. Joint ventures and licensed production may be eligible for U.K. investment grants and financial assistance, and will provide for relief from import duties. PenSoft could develop a joint venture with local distributors of payroll software. A list of possible contacts is included in this section.
Yet another option for PenSoft is the establishment of a branch office in the U.K. This is an inexpensive and simple procedure, involving the notification of the parent company’s registration details to the Department of Trade and Industry’s Registrar of Companies. There is no need to complete the registration process before commencing operations, as the branch office of a foreign parent is given a one-month grace period.
Setting up a subsidiary company is equally easy, although using a local accountant or law firm for filing purposes may make the task even easier. Inexpensive pre-registered companies can be purchased from company formation agents, allowing new-to-market companies to start trading with limited liability immediately.
EU and British legislation govern exclusivity in agency and supply agreements, purchasing contracts, and contract terms. U.S. manufacturers and exporters are able to appoint exclusive agents, and to determine the methods used to promote the sale of their products.
Advertising and trade promotion materials prepared for use in the U.S. market may need to be modified for local legal, cultural, and other differences. In addition to advice that the Commercial Service offers, local advertising agencies and marketing consultants can provide appropriate professional guidance. Also, the Advertising Standards Authority oversees the practices of the advertising industry and enforces the provisions of the British Code of Advertising Practice (CAP). Advertisers should become familiar with CAP recommendations. PenSoft, which alreay has an excellent web site, may wish to expand its website to include specific information of interest to U.K prospective customers. In accordance with the British Advertising Standards Authority, PenSoft (through its selected local distributor) can take advantage of the popularity of the British press, epsecially local newspapers and magazines, to develop an effective U.K. advertizing strategy.
Even though the nature of the U.K. market is both competitive and receptive to U.S. goods and services, PenSoft must remember when pricing products for sale in the U.K., U.S. exporters should be aware of the additional costs that could otherwise undermine profit margins. In addition to the EU’s common external customs duty on imported goods, a local value-added tax of 17.5% is charged on the majority of goods sold in the U.K. The VAT rate does apply to software products. The cost of freight, insurance and customs clearance will further diminish margins, as will commission payments made to agents. These considerations must be included in any pricing strategy PenSoft will follow in this country.
Since the U.K. market is smaller than the U.S. market and does not benefit from the same degree of economies of scale, local retailers have tended to seek a higher profit margin than is customary in the United States. Countering this tendency toward higher prices, the availability of similar goods throughout the European Single Market introduces competitive pressure to keep prices down.
Since companies trading with the Euro zone may wish to invoice and receive payment in Euros. The banking mechanisms are in place to facilitate this preference, but few British companies have opted for the Euro as their principal trading currency. PenSoft must consider the impact of the 11 countries which are now part of the Euro zone and which carry out transactions with U.K. businesses on a regular basis. Any selected local distributor must be knowledgaeable on such transactions and how they affect PenSoft’s U.K. customers.
Having an advanced economy, the U.K. offers a full range of sales and after-sales customer support services independent of those of the original equipment manufacturers. In the case of software, information on Value Added Resellers (VARs), who can deliver the necessary support to local customers, may be obtained from the Commercial Service of the American Embassy in London. The relevant officer is Mr. David K. Katz, Minister-Counselor for Commercial Affairs. PenSoft can obtain assistance in entering the U.K. market and, once established here, the Commercial service can help launch the company into other European markets. This can be achieved through the Department of Commerce's various Showcase Europe initiatives. These initiatives aim to increase the export of U.S. goods and services in European countries. The Embassy’s American Business Information Center (ABIC) also answers inquiries from U.K. firms about American suppliers of products and services, and the Commercial Service's International Marketing Center is a trade-promotion event venue that can utilized by U.S. firms and by companies representing American products/services. The American Embassy in London can be contacted at the address given in Appendix B.
The viable customers section of this report focusses more on small and medium sized businesses, but there is significant evidence to suggest that numerous British government departments are interested in PenSoft’s Payroll software, as indicated to our group by John McGinley, of the Inland Revenue London Office. (contact in Appendix B). Most U.K. Government departments are subject to the GATT Government Procurement Code, which requires that qualified foreign bidders should be given equal access to public sector contracts. Urgency or national security reasons can be used to justify procurements outside GATT rules. As there is no widely-available U.K. Government journal, procurement intentions are published in the EU Official Journal which PenSoft can evaluate and respond to.
Given the fact that most government departments in the U.K. are small in size, and according to the Inland Revenue Department of the U.K. it was found that, indeed, the government is considering payroll management systems for its various departments as well as for the huge number of small businesses in the U.K. More information regarding the Inland Revenue is located in the Taxation section of this report.
So far, most resources for PenSoft’s sales channels and distribution, mentioned U.S. agencies. However, the British Department of Trade and Industry (DTI) is also an important source of information for PenSoft . Even though it is mainly concerned with the expansion of British businesses abroad, it also provides support for U.S. companies investing in the U.K. The DTI promotes inward investment on the basis of the UK's competitive advantages, including a stable, low-inflation economy, low taxation costs, a highly skilled and flexible workforce and an open market with free movement of goods.
DTI's Invest in Britain Bureau (IBB) is the Government's principal inward investment agency, set up specifically to promote the U.K. as a location for international investment. The IBB operates through a network involving the Foreign and Commonwealth Office (FCO), National and Regional Agencies and Government Offices, as detailed below. In addition, the DTI supports British trade and investment overseas, through British Trade International. This branch (found at ) conducts market surveys to bring together British and overseas investors. It is very useful in locating payroll software distributors. Using the above web site, the distributors listed in this section were located. Some contact was established with two of these, but PenSoft will have to pursue specific distribution relationships with them, which will be beneficial to both. Establishing the role of the distributor in the U.K, and ascertaining his trustworthiness in dealing with the buyers or retailers will be critical. Also, a distributor must have sound knowledge of current U.K. government legislation affecting software industry and tax information, as well the aforementioned EU regulations.
The Invest in Britain Bureau office contact for PenSoft is included in Appendix B to this section.
The British American Chamber of Commerce (BABC) is another valuable resource that can be most helpful in PenSoft’ business development and networking with the payroll software industry professionals in the U.K. Through its London office, the Chamber provides a trade information service and employs a full-time Director of Trade Information to maintain a reference library and provide a service to answer trade questions. This service provides its members with information on the U.K., lists of sales leads and contact details for companies navigating the laws governing bilateral trade. Inquiries are also referred directly to members thereby promoting them to buyers, distributors, wholesalers and other relevant businesses. The Trade Information Service is reinforced by the Chamber's close contacts with the DTI, the U.S. Embassy, the U.S. Department of Commerce and the 32 member associations of the BABC. It is through these links that the Chamber can provide either information in-house or refer inquiries to member companies. Specifically, the Trade Information Service can provide:
Lists of companies in specific industry sectors
General import/export information
Contacts for trade associations, governments and statutory bodies.
The Chamber offers a range of other business development and business intelligence services, including:
Business referrals, through which the Chamber refers potential new business - from Chamber members and non-members alike - to member companies who are equipped to provide the services required
Sectoral roundtables
CEO dinners for the chief executives of Sponsor members of the Chamber
Trade and market information and resources to support the business needs of Chamber members .
Online services through the Chamber's web site at as well as the BABC's website at
Business contacts with British-American business associations and their member companies in 32 other major business centers, through the British-American Business Council.
The Chamber’s contact information for PenSoft is included in Appendix B. According to Molly Hays, the group’s contact person, current membership fees for the BACC in New York (East Coast region) are:
• Sponsor $2300,
• Corporate$895 and
• Associate $395.
Finally, an additional reference for PenSoft to consult is the Software Business Network (SBN) in the U.K. The SBN is a sector support program aimed at helping young software companies achieve faster, sustainable and more profitable growth. The SBN is a network, which provides guidance on management, marketing, and access to capital to the software sector from a single source, and signposts general advice and guidance already available. The network is centred on an Internet based information resource and 4 regional managers who provide "added value" services in the form of mentoring and partnership arrangements, introductions to financiers and networking events. The Software Business Network project is partly funded by the British government. Other support comes from the IT industry and from the business support community. To-date more than 700 companies have enrolled with the SBN. The services provided by the network include:
a world wide web site with an information base, guidance notes, self-help kits, briefing documents, discussion forums etc;
a regional network which will provide information via seminars, breakfast meetings, financial and management advice, access to local software specific training and management development courses; and
Added value services, e.g. matching companies with investors and appropriate management expertise, benchmarking, and training needs analysis
SBN has now developed 6 core services/product lines. These are:
SBN Connect - Access to capital network
SBN Technical - Technical support
SBN Support - Mentoring programme
SBN Inform - Information programme
SBN Fastrack - Identify/focus on fast growing companies
SBN Shop - Web-based shop window for Small to Medium sized Enterprises
The SBN also runs the UK's pre-eminent Software Investment and Partnering forum, an annual event which showcases the most promising small businesses in the software sector and provides an opportunity for partnering and venture financing. It also provides an opportunity for the business support community to form networks of partners with complementary skill sets in small business development, similar to those at work in Silicon Valley. The contact for PenSoft is included in Appendix B.
The followin table of possible PenSoft Payroll software distributors was compiled with the help of the “TradeUK” initiative, of the Invest in Britain Bureau:
|U.K. Distributor |Contact Information |
|Penygon Systems Ltd |2 Plantation Grove, |
| |Carnforth, |
| |Lancashire, |
| |LA5 0HY |
| |Tel: + 44 1524 761080 |
| |Fax: + 44 1524 762304 |
|Custima International Plc |Custima House, |
| |Rochester, |
| |Kent, |
| |ME2 4FD |
| |Tel: + 44 1634 292 292 |
| |Fax: +44 1634 715 411 |
|Unipro (Software) Limited |28 Campus Road, |
| |Bradford, |
| |West Yorkshire, |
| |BD7 1 HR |
| |Tel: +44 1274 740120 |
| |Fax: +44 1274 740136 |
|K C S Management Systems Plc |Whitecliff House, |
| |Purley, |
| |Surrey, |
| |CR8 2BH |
|Cyborg Systems Ltd |Central Court |
| |Orpington |
| |Kent |
| |BR6 0JA |
| |Tel: +44 1689 827011 |
| |Fax: +44 1689 836477 |
4.2 Competition:
The U.K. is highly competitive in the software sector, and our study has found that this is also the case to a cerain extent, in the payroll software market. The software market is dominated by the off-the-shelf applications, the big players being Microsoft (Money), Quicken (QuickBooks 99) and SAP’s R/3 Financials which have captured the lion’s share of the market. However, it seems that most small and medium sized businesses’ (called SMEs) needs are not fully met by these generic products. Most importantly, SMEs do not have the budget to be able to afford these products. A niche exists for comprehensive Windows based payroll systems such as the product being offered by PenSoft in the U.S. This has prompted a few local payroll software companies to offer specialized payroll solutions to the U.K. market. The following companies comprise the major players for specialized payroll software in the U.K. Contact was established with them, but specific market share information was not provided to the group.
i. Intex Software
This company is well known in the U.K. and Ireland for “EARNIE-32”. This is one of the most flexible payroll packages available in the market. Although based on its 16-bit predecessor, EARNIE-32 has been re-designed from scratch to take full advantage of true Windows 32-bit technology. The main highlights of the small business edition, which is single user only, are given below:
|Maximum 250 employees per company |Weekly, fornightly, 4-weekly, monthly and |P30, P45, P35(cs), P14 and P60 reports |
| |quarterly paid |(Inland Revenue Forms) |
|Full SSP and SMP calculation (see Taxation Appendix |Quick calculations for Tax, NI, SSP,SMP and |40 Payments/Deductions |
|for details of these codes ) |Class 1A (Tax codes) | |
|Directors' National Insurance (NI) |Unlimited rates of pay either at company or |Holiday pay facility |
| |employee level | |
|Back-dated NI calculations |Pensions Calculations |Batch tax code amendments |
|Net-to-Gross facility |Council Tax AEOs |On-line help, inculding Government Guides|
| | | |
|Departmental and cost centre reporting |Pensions Calculations |Year 2000 ready |
A professional version of the EARNIE software also exists, its main advantage over the small business edition being the added feature of having unlimited employees and better networking capabilites for multiple users (Client Server). Intex also offers training services for its customers at additional cost.
Similar to PenSoft payroll software, the Intex product seems to offer flexibility and support for, what seems to be a quality product. Pricing information was not available for the latest product, but the 16-bit version predecessor of the small busineess edition retailed for GBP 120 plus VAT. The company web site was still lacking the detailed information found on the PenSoft site, and no trial version could be downloaded from there. The company offers technical support for the product via its hotline which is available to its customers from 8.30am to 5pm Monday through Thursday (with a later start of 9am on Fridays due to a regular staff training).
The company does not use PenSoft’s approach of annual subscription, rather it follows the mainstream method of giving a discount on newer versions to exisiting customers. (upgrades, sent via regular mail). No newsletter is available for its customers.
It must be concluded that the Intex product (in both its versions) does present a viable threat to PenSoft. A better assessment must be made on this product when final pricing for the 32-bit version is available.
ii. Metro Payroll by Springsoft
The current product is Metro Payroll 98. It is an easy to use payroll software for Windows and very competitively priced at £49.95 including VAT. It is designed to help small companies in the UK calculate their PAYE (see Taxation section for this) without having to be PAYE experts, spending time to find information they need from tax tables, or incurring the additional expense of employing a specialist to do it for them. Metro Payroll is programmed to calculate all rates of National Insurance contributions and can handle all current tax codes, including K and BR codes. A trial download is available on the company’s web site. However, the quality of the product is not up to PenSoft standards, reports of persistent inaccuracies and bugs in the software were found, meaning that customers are having trouble, especially with the previous release of this software. The company claims it has now fixed all problems with the 1998 version. Springsoft can be contacted on + 44 01352 770049. Their fax number is +44 01352 770816.
iii. Visual accounts (VA2000)
This software is also a SpringSoft product. The Business edition allows entry of payments, receipts, bills and invoices and caters for multiple accounts, bank transfers and reconciliations. It handles U.K. VAT on a cash or Accrual basis and EC VAT reporting, if it is needed. VA2000 keeps regular customer and supplier details on file and allows categorization and split transactions. It can produce simple or multi line invoices and customer statements. What sets VA2000 apart from other products on the market is its unique, very powerful, easy to use filter system which completely removes the need for ledger style accounting while keeping the same level of accuracy and detail. The Home edition provides the same ease of use but omits the Invoicing and VAT features. Both editions are Y2K proof and even though intended only for British Users, they will operate in other European Community country settings. VA2000 for business costs only GBP 49.99 inclusive of VAT and the Home edition costs GBP 19.99 (inc. VAT). In comparison to Metro Payroll, this seems to be a better quality product and its European Commision features have been well received by small and medium businesses. In comparison, the PenSoft product is superior to both of this company’s offerings in all respects.
It is worth mentioning that both Intex and SpringSoft products are fully approved by the IRS in the U.K. Some other payroll software companies were found in the U.K. but the products did not offer the features and functionality of the ones above. In addition IRS approval was not granted to those companies. Also, in the U.K. numerous accountancy packages exist, and many offer some features comparable to payroll software packages. However, such products are very expensive and have not been well received by small and medium sized companies. The best example of this is Sage’s Accountancy and Payroll software, whose price starts at GBP 100 for the basic product and escalates to GBP 500 for a full features, 50 user licence.
Even though the competition is well established in the U.K. for payroll software, it seems that PenSoft will be able to break through using its excellent after sales customer support and its product’s wealth of features(which will naturally be adapted to the U.K tax codes). The only sticky point is the price sensitivity which is apparent especially in the case of small to medium businesses , as well as the fact that there is little brand loyalty in the U.K. A more thorough assessment of PenSoft’s entry to the U.K. is provided in the last section of the report (Entry Strategy).
5. Taxation
PenSoft must know that the United States and the U.K. have no formal bilateral investment treaty relationship; however a bilateral Tax Treaty specifically protects U.S. investors (and their U.K. counterparts) from double taxation. The U.K. has its own bilateral tax treaties with almost 90 (mostly developed) countries, and a network of double taxation agreements.
There are certain taxation issues which directly affect U.S. businesses. Local and foreign-owned companies are taxed alike. Inward investors have access to certain regional grants and incentives that are designed to attract industry to areas of high unemployment, but no tax concessions are granted. The U.K. corporate tax rates are the standard rate of 31 percent, and a smaller companies rate (for those firms with a turnover of less than BPS 300,000) of 21 percent. The starting tax rate for small businesses (firms with a turnover of up to BPS 50,000) is 10 percent. An Advance Corporation Tax (ACT) levied on companies paying dividends was abolished on April 6, 1999. Tax deductions are allowed for expenditure on assets used for trade purposes, including: machinery, plant, industrial buildings and assets used for scientific research. The U.K. has a simple system of personal income tax, and one of the lowest tax rates (40% on incomes in excess of BPS 27,100) of any EU country.
The Inland Revenue Service is the Department of the British government which is responsible, under the overall direction of Treasury Ministers of the United Kingdom, for the efficient administration of income tax, corporation tax, capital gains tax, inheritance tax, national insurance contributions and stamp duties. The Department's job is to provide an effective and fair tax service to the country and Government.
A project called the Tax Law Rewrite is currently under way which will simplify the language and structure of tax legislation in the U.K It is essential for PenSoft to keep abreast of future developments in this project by continuous contact with the Inland Revenue. A major issue in this project is the expansion of the PAYE (Pay As You Earn) system.The appendices at the end of this section contain specific tax information for the years 1999 and 2000, as well as all tax issues which affect employers in any business in the U.K. This is information directly applicable to PenSoft’s product development. It is not exhaustive and will need to be regularly updated as the Inland Revenue updates the British Tax code. Through the group’s research, it was found that the Inland Revenue web site provides the most comprehensive and tax information for the U.K as well as downloadable manuals and help files. It is at
The Invest in Britain Bureau, in association with the leading U.K. accounting firms have devised the following points, which U.S. Businesses must be aware of when entering the U.K market:
i. Tax brackets:
These are less than in most of the developed countries. The U.K. offers an attractive tax system to companies. The main corporation tax rate is currently 31% and the rate for many small companies is lower still - just 21%.
ii.CorporationTax:
Already cut to this level by 2% last year, further reductions were announced in the Government's March 1998 annual Budget, ensuring that the main rate continues to be the lowest among major industrialized countries. Within the European Union, the U.K. has the most generous combination of a low rate and a high profits limit for small companies with profits up to around US$480,000. The U.K. offers an attractive tax system to companies. The main corporation tax rate at present is 31%. The rate for many small companies is lower still - just 21%. From 1 April 1999 the main rate of corporation tax will be reduced to 30% and the small companies' rate to 20%. All U.K. resident companies pay corporation tax on their world-wide profits (adjusted for tax purposes) including capital gains. The gains are fully indexed against inflation. A company is `U.K. resident' if it is incorporated in the U.K. or its central management and control is in the U.K. If the company pays foreign taxes on any foreign income, although it has to pay U.K. tax on the same income, it can generally get credit against the U.K. charge for foreign tax suffered. For the financial year starting 1 April 1998 the small companies' rate of 21% applies to single U.K. resident companies with profits of up to £300,000 (US$480,000). If a company's profits are between £300,000 and £1,500,000, the average corporation tax rate rises from the current rate of 21% to 31%, increasing as the level of profits increase.
If the company is associated with other companies either in the U.K. or elsewhere (for example,. is within a group of companies or otherwise related), the profit limits are divided by the total number of associated companies.
iii. Advance Corporation Tax (ACT):
When a company pays a dividend it also pays ACT to the Inland Revenue. If any of this ACT cannot be set against the company's tax liability for the year, it may be carried back and set against the tax due for the six previous years. Alternatively, it can be carried forward to future years. At present, ACT is payable at a rate of one quarter of the dividend. From 6 April 1999, ACT will be abolished, so companies will no longer have to pay anything to the Inland Revenue when paying a dividend.
Currently, when a shareholder living in the U.K. receives a dividend (other than a Foreign Income Dividend), the ACT accounted for by the company is "imputed" to the shareholder, so that the shareholder becomes entitled to a tax credit currently equal to 20% of the value of the dividend plus the credit. The shareholder may set this credit against his UK income tax. Before July 1997, when investors who were exempt from tax received dividends to which a tax credit was attached, they could claim payment of the tax credit from the Inland Revenue. From 2 July 1997, pension providers and most U.K. corporate shareholders ceased to be able to claim payment of tax credit. Individuals whose income is below the tax threshold will continue to be paid tax credits until the end of 1999, but not thereafter.
Starting at the end of 1999, the tax credit regime will change for all shareholders. The rate of tax credits will be halved to 10%. Individual shareholders whose income is within the lower of basic rate bands will be liable to tax at 10% on their dividend income. The higher rate of tax on dividend income was reduced to 32.5% from 6 April 1999. The effect will be to preserve the existing treatment of taxpaying individuals who receive U.K. dividend income, i.e. the tax credit will continue to satisfy their tax liability on U.K. dividends.
Currently, overseas shareholders who receive a dividend may be able to claim whole or part payment of the tax credit, in line with the terms of any double taxation agreement. The changes announced in the Budget of 2 July 1997 do not change these arrangements. Whilst the reduction in the rate of the tax credit to 10% from 6 April 1999 will significantly reduce the value of these arrangements (entirely in some cases), this is part of the whole reform package that enabled the lowering of corporation tax rates discussed above. The abolition of ACT does not affect the taxation of shareholders' dividends. Foreign Income Dividends (FIDs) are subject to ACT but recipient shareholders do not receive a tax credit. Instead the shareholders are treated as having received income which has borne income tax at a rate of 20%. Companies are able to claim repayment of the ACT paid in relation to an FID paid out of foreign source profits. These special rules for FIDs will cease to apply from 6 April 1999. As ACT will not apply to any dividends from 6 April 1999, there will be no need for a successor to the FID scheme.
iv.Corporation Tax on Branches of Foreign Companies:
U.K. corporation tax is charged on the trading profits of the activities of a branch or agency in the U.K. It is also charged on U.K. capital gains and investment income which are connected with the branch operations. Expenses incurred outside the U.K. wholly and exclusively for the purposes of the branch trade (including a reasonable amount of head office expenses) may also be deducted. Branch profits are subject to corporation tax at the normal rate, although the small companies' rate may be possible where there is a non-discrimination article in a double taxation agreement, depending on the extent of the company's worldwide income and the number of associates.
Foreign companies not carrying on a trade in the U.K. pay income tax on other income arising in the U.K.(i.e. property and investment income) at the basic rate of income tax. Gains on disposal of U.K. assets by such companies are not subject to corporation tax.
v. Repatriation of Profits:
As previously mentioned, the U.K. has the most extensive networks of double taxation treaties in the world. These help the flow of dividends, interest and royalties into and out of the U.K. Also, the U.K. has no exchange controls to stop the payment of profits abroad.
Under some of the U.K.'s double taxation agreements, a foreign parent company with a U.K. subsidiary may claim a tax credit when the subsidiary repatriates its profits by paying a dividend. For example, under the U.K./U.S.double taxation convention a U.S. business with at least a 10% holding in a U.K. company can have a tax credit equal to half the tax credit to which a U.K. resident would be entitled. This is usually subject to a reduction of 5% of the total dividend and the half tax credit.
vi. Payments for Goods and Services:
These are usually tax deductible for the U.K. paying company but are sometimes subject to conditions. Payments to associated companies overseas are subject to anti-avoidance provisions in the field of transfer pricing. There are no detailed regulations or overall limitations or "safe havens" within which payments will be deductible for UK purposes. Generally the market value or "arm's length" rule applies to cross-border transactions.
vii. Repayments of Patent Royalties and Interest:
In most cases, these payments are subject to deduction of tax at the basic rate of income tax if there is no treaty provision to the contrary. The use of treaties to reduce withholding rates is common. Some treaties contain articles that prevent the practice of "treaty shopping".
viii. Management Charges:
These are not subject to withholding tax, but the U.K. authorities will need evidence about the make-up of a charge for management services. This will include details of the particular service provided.
ix. Tax Administration:
A company must make and pay its own estimate of its liability to corporation tax nine months after the end of its accounting period. It must then send in its completed tax return, accounts and tax computations 12 months after the end of the accounting period. If payment is made late then interest is charged on overdue tax and is not tax deductible.
x. Tax Incentives and Reliefs, Capital Allowances:
Depreciation of fixed assets charged in the income statement in the commercial account of business is not allowed as an expense for tax purposes. However, expenditure on assets used for trade purposes may qualify for capital allowances. These assets include machinery and plant, industrial buildings and assets used for scientific research. The Inland Revenue permits such allowances as a deduction in computing taxable income.
xi. Trading Losses:
At present, trading losses made by companies may be offset against taxable profits in the following ways:
1. against total profits of the previous year,
2. total profits of the same period,
3. total profits of the same period of other companies within the same 75% U.K. group,
4. and future income from the same trade.
There is no time limit on carry forward.
xii Pre-trading expenditure:
Revenue expenditure incurred during the years before the date of starting a new trade is treated as though it were incurred on the day trading started. It is therefore allowable as a deduction in computing the taxable trading income for that first year. Similarly, capital allowance entitlement on expenditure incurred before trading started is available on the first day of trading.
xiii. Rollover Relief:
A person who disposes of qualifying business assets used for the purpose of a trade and uses the proceeds from the sale to re-invest in further qualifying assets for a trade may rollover the chargeable gains on the old assets. A person therefore postpones a charge on the tax on that gain. Re-investment has to be made in the period from one year prior to the disposal to three years afterwards, although this period may be extended at the Inland Revenue's discretion. The acquisition cost of the new assets is reduced by the gain on the old asset, so that any gains on the subsequent disposal of those assets are increased accordingly. The gains on the new assets can be rolled over in to further assets, and so on.
xiv. Personal taxes:
The U.K. has one of the simplest systems of income tax in the world with a lower rate of 20% on the first £4,300 of taxable income, a basic rate of 23% and a single higher rate of 40%. No other EU country has a lower top rate of income tax.
If an individual becomes resident in the United Kingdom (U.K.) he/she will normally have to pay UK tax on all his/her income. If one is not domiciled in the U.K. (broadly if one’s permanent home is elsewhere) then one will only have to pay tax on one’s foreign income (for example dividends from a U.S. business), if it is brought into the U.K.
U.S citizens will be entitled to certain income tax allowances. All income tax-payers, around 26 million people, will pay less income tax in 1998-99. There will generally be a personal allowance of £4195 and (for a married couple) an additional married couple's allowance of £1900. Relief on the married couple's allowance is given for this year at 15% (it is restricted to 10% in 1999-2000 with a corresponding increase, above indexation, in the age-related married couple's allowances for people aged 65 and over).
U.S. citizens will also be entitled to tax relief on items such as certain pension scheme contributions. If one is resident in the United Kingdom, but working in the U.K. for an overseas employer, one may also be entitled to tax reductions for commitments at home that one pays out of earnings from that work.
xv. Rates and Bands for 1998/99:
Lower rate band of taxable income charged at 20%: £1-4300. Some 7.5 million people in Britain now pay tax only at the lower rate. Basic rate band of taxable income charged at 23%: £3301 - £27,100
xvi. Higher rate band of taxable income charged at 40%: Over £27,100
U.S. business owners may still have to pay overseas tax on your income. But the U.K.'s network of double taxation agreements normally stops them from being taxed twice. There is generous tax relief for travel expenses for non-U.K. domiciled employees working in the UK, for their first five years of employment in the U.K., provided certain conditions are met. The tax relief means that employers can pay or reimburse, tax-free, the cost of travel by employees for journeys between the U.S. and the U.K.
6. Significant Barriers to Entry for U.S. Exports
As already mentioned, U.S. businesses have a long and prosperous history of investing in the U.K. The United Kingdom has no significant trade or investment barriers, or restrictions on the transfer of capital. Those few barriers that do exist are the result of U.K. implementation of EU Directives and regulations, rather than the intended result of actions of the U.K. Government. This report has emphasized the fact that the U.K. is highly receptive to U.S. investment, and already, U.S. companies have found that establishing a base in the U.K. is an effective means of accessing the European Single Market, and the abolition of most intra-European trade barriers enables U.K.-based firms to operate with relative freedom throughout the EU. Sixty of the U.K.'s five hundred largest companies are U.S.-owned, and, according to the Invest in Britain Bureau, all of the one hundred largest U.S. companies have established operations in the U.K.
The Right to private ownership and establishment readily granted to U.S. businesses in the U.K. and eliminates a lot of entry difficulties which would otherwise exist.
An EU common external tariff applies to all non-EU imports, and the local valued-added tax (VAT) of 17.5% applies to most transactions including imports. VAT on business expenses paid by non-EU participants at trade fairs, exhibitions and conferences can be recovered by the foreign firm’s local agent or accountant.
As far as Customs regulations are concerned, Duty is assessed on the fair market value of goods at the time of importation, negotiated under open market conditions in the United Kingdom between an independent buyer and seller. The invoice value is usually accepted as the normal price, but if a preferential arrangement has been established between the overseas supplier and the U.K. importer, Customs reserves the right to assess a fair market value for duty purposes.
Duty is payable at the time the goods are imported. However, importers can arrange with U.K. Customs and Excise to defer payment for a 30-day period under a bonding arrangement.
The applicable rates of import duty (Tarrifs) can be obtained from U.S. Department of Commerce Export Assistance Centers, and copies of the current tariff rates can be purchased from the Stationery Office, address given in Appendix B. A very limited range of goods require import licenses, which are issued by the U.K. Department of Trade and Industry. Software does not fall normally under these categories, but PenSoft will have to obtain further specific information on this matter, especially if it is to go ahead with thew establishment of a British branch. This will almost definitely be done with the help of the selected distributor.
Duty-free entry is also permitted for machinery, plant, and equipment imported by lease or loan, goods imported solely for processing, repair, technical examination and testing. Professional and demonstration equipment may be temporarily imported into the U.K. free of duty and tax under the Customs Convention on the Temporary Importation of Professional Equipment. For this, a carnet should be obtained from the U.S. Council of the International Chamber of Commerce.
Certain import/export requirements and certifications do apply for U.S. businesses. The documents required for shipments include the commercial invoice, bill of lading or air waybill, packing list, insurance documents, and, when required, special certificates of origin, sanitation, ownership. The commercial invoice should accompany the shipment to avoid delays in customs clearance. No special form of invoice is required, but all details necessary to establish the true value of the goods should be given. At least two copies of the invoice should be sent to the consignees to facilitate customs clearance. Consular documents are not required on shipments to the U.K.
Current labeling and marking requirements dictate that origin, weight and dimension, and appropriate hazard warnings are required for consumer protection purposes on any product offered for retail sale. This is applicable to computer related products as well. If the product cannot be labeled or marked, the data may be included on any packaging or accompanying printed material or product literature. Although metric units of weight and dimension are required, the continued use of labels with both metric and standard U.S. units is permitted.
Warranty and non-warranty repairs regulations are in place to protect consumers. Consumer legislation requires full refund or direct replacement of goods that have a material defect or faulty workmanship that make them unfit for their intended purpose. The manufacturer’s warranty is usually expressed in terms that limit contingent claims. Again, PenSoft’s products, if distributed by diskette or CD, will be subject to this requirement. Independent service and repair businesses have evolved as local industries in many parts of the U.K. provding support for both hardware and software. Many of these small firms welcome the opportunity of becoming service points for larger firms, for warranty and non-warranty repairs and upgrades.
Regarding all applicable standards, PenSoft should know that in the EU, standards are hierarchical. The order of precedence is ISO, EU and national standards, with the higher standard superseding the lower as soon as it is issued. Although industry-specific standards and approvals have no legal standing, they are often accepted as an assurance of product quality if no relevant national standard exists. Such acceptance, though, is invalidated when a national, EU or ISO standard is adopted.
Standards information can be obtained from the British Standards Institution, at the address included in the Appendix. Assistance in identifying applicable foreign standards is available from the Standards Information Service Center, Technology Building 228, Room B-166, National Institute of Standards and Technology, Gaithersburg, MD. 20234; Tel (301) 975-4037. Copies of the standards can be obtained from the American National Standards Institute (ANSI), an agent for BSI, located at 11 West 42nd Street, New York, N.Y. 10036; (212) 642-4900; fax (212) 302-1286.
The Free Trade Zones of the U.K. are the cargo ports and freight transshipment points of Birmingham, Humberside, Liverpool, Prestwick, Sheerness, Southampton and Tilbury. These seven zones are used only for cargo storage and consolidation, and not for value-added processing of the goods concerned. The U.K. participates in the Free Trade Arrangements of the European Union (EU) and European Free Trade Association (EFTA).
Other significant attributes of the U.K, which do not impose barriers to U.S. businesses are the U.K simple system of personal tax, its adequate laws and regulations protecting U.S. businesses when conducting their business, the various incentives the government can give to U.S. businesses investing in depressed areas of Britain, as well as the U.K’s transparency of its regulatory system. Other, non-barrier attributes of the U.K are its low levels of corruption, the efficiency of the capital markets and portfolio investments, the fact that the Britih pound is a free currency with no restrictions on its conversion or transfer, as well as the excellent legal system, should a U.S. business need it, in case of dispute with its distributor, for example, over contracts.
U.K. intellectual property laws are strict, comprehensive and rigorously enforced. The U.K. is a signatory to all relevant international conventions, including the Convention Establishing the World Intellectual Property Organization (WIPO), the Paris Convention for the Protection of Industrial Property, the Berne Convention for the Protection of Literary and Artistic Works, the Patent Cooperation Treaty, the Geneva Phonograms Convention and the Universal Copyright Convention.
The British legal system provides a high-level of intellectual property rights (IPR) protection. Enforcement mechanisms are comparable to those available in the United States. Under the Patents Act of 1977, a patent application requires that an invention must be new, involve an innovative step, and be capable of industrial application. A patent cannot be granted for any invention used for any offensive, immoral or antisocial purpose, for any variety of animal or plant, or for a biological process used in its production. Patents are granted for a term of twenty years.
The Copyright, Designs and Patents Act of 1988 grants the originator the exclusive right to assign those rights or to exploit them through copying, dissemination, publication or sale. Computer programs and semiconductor internal circuit designs are included as works that are protected by this Act. Under the terms of an EU Directive which took effect in January 1998, databases are also protected in each EU-member country by the national legislation that implements the Directive.
New copyright legislation simplified the British process and permitted the U.K. to join the most recent text of the Berne Convention. The United Kingdom's positions in international fora are very similar to the U.S. positions.
Another positive point for PenSoft is wide availability and accesibility of the Internet to the U.K. market. This would be a great barrier in many other European countries where the Internet has still not evolved as an acceptable means of business nor does it have the population coverage that the U.K. has.
On the negative side for U.S. businesses, it is still a fact that the U.K. software market still suffers from piracy of software. According to the Business Software Alliance (BSA), almost one in three (29%) copies of software used in the U.K. is illegal. From PenSoft’s perspective, the matter is even more serious, since the latest BSA statistics reveal that amongst small to medium sized U.K. businesses this rate is estimated to be much higher, at around 50%. In 1998, software piracy cost the U.K. software industry over £290 million - damaging the economy and risking smaller software developers' businesses. Another major issue for PenSoft is the price sensitivity of small to medium businesses in the U.K. This has the potential of being a very significant barrier to the entry of PenSoft in the U.K, as is also evident from the current pricing of competitors’ products in this market. The fact that Small to Medium sized Enterprises (SMEs) in the U.K. do not have a reputation for brand loyalty is also an additional sticky point for PenSoft. Continuous advertising, especially over the popular media of the press (newspapers, computer magazines and other professional publications) will have to be initiated by PenSoft and its distributor to achieve the level of brand loyalty that PenSoft enjoys in the U.S. The issue of price sensitivity will also apply to PenSoft’s current subscription policy, especially since Intex (the major competitor for PenSoft in the U.K) as well as the other payroll software companies in the U.K. do not follow this regime.
Also, certain sensitivities relating to British culture and etiquette have to be adhered to by PenSoft, otherwise the potential for misunderstanding and costly mistakes may arise. Even the language poses some risk, as British english does have some differences from U.S. english; this being the case not only for the software itself, but for all documentation / manuals to accompany it.
Finally, even though only a relatively small part of the British population, Welsh (local language for Wales) and Gaelic (local language in Scotland), could be a barrier to PenSoft’s software expansion into these areas of the U.K. market.
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