Is the change really not going to be that great? Is seven months enough time to adopt your business to the new environment? Will the accession countries be ready themselves with their new legislation and infrastructure? What the accession of a country means for companies operating in these countries? Many questions and not many answers yet.

Key impacts of the EU Accession

Increasing the common market and abolishing trade barriers between EU and accession countries and among accession countries should have a great impact on trade. New opportunities of restructuring, creating economy of scale, lowering labor costs and implementation of EU legislation and standards should attract new investments. The investments will be easier and more effective due to broadening market access abroad. Accessing countries will become even more attractive investment targets due to favorable labor cost and growing productivity. Financial stability and adoption of EU legal requirements into national laws will ensure the higher level of confidence and encourage middle and small business to invest in new markets. EU enlargement may have some indirect impact on second wave accession and Eastern neighboring countries like Romania, Croatia, Bulgaria, Yugoslavia, Russia, Ukraine and Belarus. After the accession these countries will start sharing borders with EU and can attract some international business to move into their territories.

KPMG’s EU Accession Services
Further information: www.kpmg.fi

Adoption of new EU laws and standards in the accessing countries

The key question and challenge is implementation of new EU laws and standards in particular accessing countries. Some of them have been delayed in that process. There is a commonly shared political will and commitment to ensure the completion of the accession process on time. It is fair to assume that in May 2004 all of the accessing countries will be ready with major changes in their legal and administrative environments, with a particular focus on areas related to free movement of goods.

All who had a chance to do business in one or more of the new accession countries had heard from the advisers many times in the past that something would not work that way or was impossible to implement due to local restrictions. Despite many bilateral and multilateral agreements (like Central European Free Trade Association agreement) trade among the now accessing countries has been very troublesome. Investors having set up businesses in Central and Eastern European region had to have a company in each of the countries. All companies present in the accession countries set up their operations based on the local legislation and investment incentives/restrictions in force at the time. Now all the countries will have to apply the rules similar and compatible with these existing in the EU member states.

Now EU accession will allow many business models, corporate and tax structures that are used in the EU countries and could not have been applied in the accession countries. It is a dramatic change for the accession countries and it will have some impact on present EU countries. Definitely it is a major change for every business local and foreign operating in one or more candidate countries.

A new strategic approach is needed

In order not to miss something of utmost importance every business operating now or going to invest in one of the accessing country should have a quick look at the current status and take decisions about new business location opportunities, cost saving strategies, new structures and models. It is not a compliance issue as many think. It is not enough to wait for the new local legislation and adoption of new rules. It is a much deeper a change and it will require strategic change of business approach in many cases.

The new strategy will depend on the analysis of new legal and tax regimes that are now considered by most accessing countries. The latest changes to tax legislation in Slovakia, Czech Republic, Poland and the Baltic States may have a great impact on economic conditions of doing business in the region. Many local and foreign companies may reconsider their business locations in particular countries as the choice becomes much bigger now.

Board level decisions are crucial

The discussion and eventual decisions should be taken at the Board level both locally in the accessing countries and at the group level, in investor’s home country. The commonly observed mistake is to leave it to local companies finance and legal people and believe that implementing new indirect tax rules it is all we need to do. Such approach may not only paralyze your business at the date of accession but it may weaken your competitive position in EU by missing new opportunities or not responding effectively to new challenges.

Indeed regulations will change in all the accessing countries and there will be a lot of legal, tax and systems compliance changes necessary but most of all the economies becoming compatible with EU will open new opportunities of planning and structuring the business.

Imminent change comes from removal of trade barriers

One of the most imminent strategic changes will be removal of tariff and especially non-tariff barriers to trade. With regard to Customs legislation, EU regulations have direct validity in all member states and national legislation is only allowed in those areas where the EU regulations leave room for this to the member states. In practice all Customs and administrative borders will disappear for goods and services. It is valid not only between the accession countries and EU but also among the accession countries themselves. We should not underestimate this fact. Only one who did have some trade within the region knows how their business can benefit by the direct possibility to distribute from the most convenient location, by lack of border crossing, by reducing administrative burden and costs. Mutual trade will completely change in Europe and definitely in Central and Eastern Europe. There will be new possibility of having regional distributors and warehouses; cash pooling and other effective solutions for trade will work.

In summary there will definitely be a great impact of the accession on economy and businesses of the candidate countries. There will be some impact on present member states as well. It is necessary to have a look at the situation in the accessing countries from the wider perspective of the EU states. All present group business structures and models should be reviewed and reconsidered in view of new legal, economic and business environment both locally and in the investor’s home country. There is an urgent need to adjust businesses currently run in the accessing countries to the new rules in order to comply with the change effective on 1 May 2004.

The changes will be much more serious that we think including implementation of new systems and procedures in accordance with EU standards. Be aware, however, that all changes will be made in the local way so the attention has to be paid to local rules in each of the accessing countries.

Don’t wait until the last minute with your preparations

Time is very short. Seven months seems a lot but in this part of Europe time goes fast now and there is lots to do. Companies should not wait until the last minute especially if they may need structural changes. There will be no time and resources if they wait too long. Act now. At minimum, have an EU accession team review the business and prepare an action plan outlining potential changes. Have a strategic view first and then go down to compliance and risk issues.

Ensure that your company identifies opportunities and detailed risks, develops and implements solutions. Look at your customers, suppliers and business partners – they will also change their businesses and you better be ready. Use new opportunities to reduce operating costs and corporate and indirect taxes. Make sure that your company has all core systems in place that can support new invoicing, tax, customs and statistical reporting requirements. Do not forget about the local knowledge and human factor. Give the necessary training to your personnel in local subsidiaries and at the group level. You can gain doing this and there is a lot to win.

Further information:
Andrzej Kolinski, KPMG in Poland
EU Accession Services
e-mail: andrzej.kolinski@kpmg.pl
tel: 48 22 528 1151

Ari Nielsen, KPMG in Finland
EU Accession Services
e-mail: ari.nielsen@kpmg.fi
tel: 358 9 6939 3661