Audit Committee Bulletin: October 2013

Emerging markets get tougher on tax

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Organizations face growing tax risks in relation to their emerging market activities as governments refocus their policies and take a tougher stance on enforcement.

Previously, countries such as China and Brazil attracted potential corporate investors by offering significant incentives. But the pendulum has started to swing the other way.

Tougher on tax

When it comes to tax affairs, many emerging markets have ramped up their enforcement activities:

  • India and China are conducting more tax audits than ever before. The audit rate tripled in China between 2007 and 2011, reaching 12%. In India, it nearly doubled over the same period, reaching 11%.6 Tax officials are demanding more documentation, applying stricter legal interpretations and imposing bigger penalties.
  • Brazil is taking a tougher line on large companies, targeting issues such as tax planning and corporate restructuring, transfer pricing, controlled foreign corporation (CFC) rules and other international tax rules.
  • Outside the BRIC markets, the authorities in Taiwan are becoming tougher on all types of tax assessments and disputes. In Malaysia, audits are becoming more strategic and active.
  • Rapid-growth markets are increasingly challenging commonly applied international tax standards. This has proven particularly true in transactions involving inbound companies. Some markets are levying taxes on events that may previously have failed to trigger taxation, such as indirect capital gains and transfer pricing.

Actions to consider

Companies need to address the distinctive approaches to tax enforcement that individual countries have adopted. In that context, companies should consider taking one or more of the following action steps:

  • Improving their knowledge of the local tax administration processes and approaches the markets they operate and how they vary across and within markets
  • Developing strong local knowledge of the risk-rating processes in each country where they operate — or plan to operate
  • Taking concrete steps to improve relationships with local tax authorities
  • Understanding and making better use of any alternative dispute resolution processes that are available
  • Exploring the possibility of advanced pricing arrangements (APAs) where possible.
  • Gathering documentation and other evidence to support their tax position, such as intercompany agreements, documented processes, employment agreements and reporting frameworks

Questions for the audit committee