With rapidly expanding populations and economies, many Iberoamerican countries are seeking to finance badly needed infrastructure improvements. Individual countries are taking different tax policy approaches to protect and advance their economies, and the pace of change is challenging the ability of tax directors to keep up.
In this environment, tax departments not only need to understand the potential impact of these forces, but they also need to work closely with their counterparts across the business so they can help their companies avoid missteps, seize opportunities, and prosper in the new business reality.
Tax policy responses to the new reality
From a tax policy standpoint, countries in Iberoamerica are responding to these global forces in two distinct ways. Some countries, such as Argentina and Venezuela, are applying tax and fiscal policies to fence in their economies and keep capital within their borders. Argentina has imposed new import restrictions and strict foreign exchange controls, and it has cancelled several of its tax treaties, including those with Chile and Spain.
Other countries, such as Mexico and Chile, are using their tax policies to stimulate international engagement and attract foreign investment. Chile has significantly broadened its tax benefits for investments in research and development (R&D), while Mexico continues to attract manufacturing and related services businesses through its Maquila tax incentive program.
Brazil’s central government also recognizes the importance of tax policy in attracting investment. However, while the country offers lucrative R&D and other incentives for foreign investment, it faces significant challenges in reducing tax complexity and bringing its international tax rules in line with global norms.
10 hallmarks of a competitive tax system
As globalization continues, competition among countries for foreign investment will grow. Creating a business-friendly tax system is one way that countries can improve their ability to compete and promote economic growth. A country may be able to attract more foreign investment and raise more revenues by establishing a tax system with the following characteristics:
- Broad tax base
- Competitive tax rates
- Balance between various taxes
- Equity (horizontal and vertical)
- Respect for the rule of law
Focus on tax collections and morality
As in most other countries, tax authorities in each of these Iberoamerican countries are stepping up efforts to increase tax revenues, becoming much more aggressive than they have been in the past. They are becoming more sophisticated in their use of technology to identify and target specific transactions and structures. They are collaborating more closely and sharing information with other government departments and with tax authorities in other countries. They are taking a hard line on aggressive tax planning, working together to shut down tax-motivated arrangements designed to shift profits beyond their borders.
In Iberoamerica, part of this activity stems from the need for countries to extract more funds from their tax bases, whether to help fund economic development or pay for infrastructure improvements. Over the past few years, tax authorities’ revenue-raising mandates have gained strength from an unexpected source. Following the financial crisis, populations around the world have grown more hostile toward corporations and high net worth individuals who shirk their tax payment obligations. In fact, some believe financially amoral behavior, including widespread tax avoidance, was at the root of the crisis.
Whether or not these views are accurate, tax has become a significant reputational risk. Companies need to ensure they are perceived to be giving back their fair share of tax to the societies they operate in. They should also expect tax authorities to approach their tax affairs from the perspective of tax morality and ensure their tax contribution is appropriate.
Operating in today’s environment
In an environment of increasing risk and accelerating change, tax functions need to get ahead of the curve to add more value to their companies, or they risk losing relevance as they scramble to catch up. Gone are the days when tax was simply an expense to be managed. Today’s tax functions need to take more proactive roles in managing risk in a changing business environment, contributing to decisions, and influencing the bottom line.
|3 Stages of Tax Function Transformation|
|Stage 1 – Internal focus on effectiveness of tax function’s processes and controls
||Stage 2 – Focus on vertical engagement with boards and upper management with emphasis on mitigating tax risk through strong tax governance
||Stage 3 – Focus on horizontal engagement with all parts of the business with emphasis on advancing business strategy and adding value |
Based on research and the experience of KPMG member firms working with some of the world’s leading companies, the most effective, highly valued tax departments collaborate closely with all parts of the business, identifying risks and opportunities and advancing the business’s overall objectives. Over the past decades, these companies have led a sea change in the way tax departments operate, evolving along a continuum from internal compliance focus toward a focus on board engagement and company-wide tax governance. The final stage sees tax departments operating as true business partners with other departments in setting and advancing business strategy.
For tax directors of Iberoamerican companies that are expanding into new markets, this means doing your homework in advance to ask:
- What systems, processes and technologies need to be put in place to increase visibility and provide accountability that local tax reporting and compliance needs are met?
- What are the country’s tax and financial policy goals, and do they support or create obstacles for businesses?
- Are tax or other incentives available to assist in financing new projects or initiatives in the proposed and alternative locations?
- Are the tax authorities adversarial or cooperative with foreign taxpayers, and how should they be approached?
- What types of transactions are under tax authority scrutiny in the country, and are alternatives available that would meet the same objectives with less exposure to tax risk?
- What is the appropriate amount of tax to remit in return for the company’s participation in economic opportunities in the country?
Tax directors should be prepared to answer similar questions in relation to any proposed business transformation project, including mergers and acquisitions, centralization of finance or other functions, and optimization of the supply chain. Tax directors need to have a strong understanding of the tax and business environment and close integration with other parts of the company so they can help the company make tax-effective decisions in line with its broader business objectives.
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