Tax exposures in emerging countries
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Tax exposures in emerging countries

4 min.
21. July 2015

In May 2015, the Ministry of Economy, Trade and Industry of Japan (“METI”) announced a report regarding tax exposures in emerging countries.

Tax assessment cases in countries where Japanese companies are making inroads:

  • The METI conducted a taxation survey of 4,286 Japanese companies with subsidiaries overseas and received responses from 1,081 of them.
  • Tax assessment cases which result in double taxation have been reported in a total of 145 cases. China had the most, with 39.3%, India 15.9% and Indonesia 13.1%.

Tax assessment cases by country (within the past 6 years):

2015-03-eii_6_japan_online

  • These assessment cases related to transfer pricing (46.2%), PE assessment (20.7%), and royalties (16.6%).

The matters of the assessment cases (within the past 6 years):

(All) (n=145)

2015-03-eii_6_japan_online2

The matters of the assessment cases:

No.

Category

n

%

TP

1

Increase
of profit by applying uniform profit ratio

31

21.4

2

Increase
of profit by using inappropriate comparable price / transaction

25

17.2

3

Other
type of TP assessments

11

7.6

PE

4

Employee
travelling from Japan with short stays or employee seconded from
Japan to subsidiary is deemed as PE (Permanent Establishment) of
Japan parent company

18

12.4

5

Subsidiary
or third party agent is deemed as PE of Japan company

8

5.5

6

Rep
office is deemed as PE of Japan company

4

2.8

Royalty

7

Different
view of definition or scope of royalty

10

6.9

8

Royalty
disallowed due to restriction of remittance

3

2.1

9

Royalty
disallowed due to the upper limit of royalty ratio

2

1.4

10

Royalty
/ Others

9

6.2

11

Others

24

16.6

Total

145

100.0

 

Current issues in tax assessment cases
In recent years, tax assessments have been occurring frequently in emerging countries in accordance with the unique tax assessment approaches of those countries as distinct from global standards.
It has become essential to deal with these cases effectively to overcome global competition. There are the following reasons / background for such assessments by tax authorities in emerging countries:

  • Lack of human resources who are experts in cross-border taxation,
  • Ambiguity in legal system,
  • Considerable discretion on part of tax examiner, etc.

On the other hand, overseas subsidiaries of Japanese companies cannot handle tax matters approxiprimately in emerging countries because of lack of human resources who are tax experts, who have only limited knowledge, or given a lack of communication between parent companies and subsidiaries.

Taking these factors into account, it is necessary to consider from various angles the character of individual assessment cases in each country and the development of human resources for handling future tax cases in emerging countries.

Features of tax authorities in each country (example):

Tax Authority

Relief Process

China

  • Examine focusing on
    certain industries including automobile, pharmaceutical, etc.

  • Enforce taxation on
    service fees and royalties.

  • Retroactively
    examine and adjust under special tax adjustment system.

  • Representative
    offices have a difficulty in being established.

  • Probability that
    taxpayers win administrative litigation is extremely low.

  • Making
    mutual agreement procedures are decreasing.

India

  • Examine focusing on
    industries including IT, outsourcing, bank, and pharmaceutical.

  • Impose aggressive PE
    taxation.

  • There
    are large differences by each region and person in charge.

  • Tax examiners easily
    impose / assess taxes. As a result, contending in court is
    becoming continuous.

  • Recently,
    agreed to “Bilateral APA” as the first case.

Indonesia

  • Have functions of
    both securing annual revenue and collecting tax.

  • Specify the target
    of additional taxes in “Tax Investigation Plan”.

  • Investigate on the
    assumption that there are additional taxes.

  • Investigate
    mandatorily at the time of claim of tax refund.

  • Since tax court does
    not apply precedent principle to tax cases, predictability is
    not collateral.

  • Mutual
    agreement procedures are terminated once the court pronounces a
    judgment.

Brazil

  • Does not follow the
    OECD Transfer Pricing Guidelines.

  • Tax laws are
    complicated, and there are many gray interpretations.

  • Investigate focusing
    on particular industries and growing industries.

  • Are planning to
    increase tax examiners with the expertise in transfer pricing.

  • No
    aggressive taxation is imposed for PE.

  • Brazil side does not
    agree to mutual agreement procedures with regard to TP cases.

  • They
    have not introduced APA (Advance Pricing Agreement) under
    domestic law.

Vietnam

  • Established an
    action plan to strengthen the enforcement of transfer pricing
    taxation and enhanced human resources.

  • The quality of tax
    examiners has not reached international standard.

  • No
    aggressive taxation is assessed for PE.

  • Since the judicial
    function is not working well, taxpayers rarely file lawsuits.

  • Guideline
    for APA has been established. As a result, mutual agreement
    procedures are expected to be put into full effect.

Thailand

  • In conjunction with
    the reduction of the corporate tax rate, an increase of tax
    revenue from more examination of transfer pricing has become one
    of the key strategies.

  • No aggressive
    taxation is assessed for PE.

  • There is no record
    that cases on transfer pricing taxation are brought to court.

  • Mutual
    agreement procedures are sluggish.

 

“A recent report by METI concerning tax assessment cases in emerging countries contains some vital information. This article outlines that report.”
Yoshiaki UNO, ECOVIS XAT Tax Corporation, Japan

Author
Yoshiaki UNO
yoshiaki.uno@ecovis.com

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