Many tax administrations in rapidly emerging economies have yet to establish the regimes and protocols for interacting with taxpayers. They often lack features, such as binding tax rulings, standard procedures, proper appeal regulations and electronic tax filing facilities that taxpayers in more developed countries take for granted. Treatment of tax issues can be mercurial, technical guidance may not exist, and recourse through appeals may not be an effective option.
From the Middle East and South Asia (MESA) region, across the Commonwealth of Independent States (CIS), and into Africa and South America, tax administrations vary widely but the way to deal with them is remarkably consistent. Below are the most important steps you can take to help ease your dealings, reduce hassles and improve results when interacting with tax authorities in emerging markets.
The best approach in any emerging market starts with the engagement of local professional advisers with in-depth knowledge of the tax system and familiarity with tax authority personnel—advisers who can help you avoid missteps and optimize your local after-tax returns. Understanding local tax rules is important, but understanding how the tax authorities apply the law in practice—the reasoning that underlies their assessments and behavior—is even more critical. Look for advisors who are versed in local tax laws, have strong working relationships with the tax authorities, and familiarity with the ins and outs of the tax administration.
It is important to set up sound structures at the outset and take advantage wherever possible, of the certainty that can be provided by advance compliance agreements. Tax administrations are growing increasingly aggressive in challenging transfer prices and international structures. It is important to have in place strong tax governance structures and comprehensive documentation that supports transfer pricing methods and verifies legal relationships.
Many international companies mistakenly believe that Middle Eastern countries, or at least the Gulf Co-operation Council (GCC) states, have similar tax laws and practices. This is not the case. Further, it is important to understand that tax and commercial laws and regulatory/tax authority behavior can vary widely not just among different countries but also within the country itself. This is especially the case in larger economies such as Egypt, Saudi Arabia, Pakistan and the United Arab Emirates (UAE). For example, a company setting up operations in the UAE may face different sets of regulatory requirements and challenges in the different emirates. Companies should investigate local laws and regulatory authority experiences to determine different strategic approaches for their dealings in different countries and regions within a country.
In developed countries with well-established legal systems, the tax audit can be the first of many steps. But in many emerging economies the legal system may not have enough strength or development to give taxpayers confidence on the tax treatment of their activities, even on matters where they believe their position is technically strong. Taxpayers in developed countries who disagree with their assessments can take the dispute through the tax appeal and litigation process. While this is true even within MESA, recourse to an independent judiciary is often too time-consuming and the outcomes are often unpredictable. In these countries, it is critical to ensure tax audits are well handled by experienced professionals who can explain your position in a way the tax authorities can understand.
Tax authorities in most emerging economies are rapidly catching up to their more sophisticated counterparts, and companies should ensure their approach to the tax authorities evolves accordingly.
At the national level, many emerging market tax authorities are increasingly taking steps toward cross-border cooperation and knowledge sharing in order to enhance their assessment and collection capabilities. Saudi Arabia, for example, is adopting more sophisticated audit methods and increasing its collaboration with other tax authorities.
At the international level, these authorities are starting to advance their understanding of tax planning structures and trends, taking more sophisticated approaches to cross-border tax issues. Transfer pricing, international trade and finance, and corporate tax planning strategies are increasingly at the top of their priorities.
Global companies expanding into multiple emerging markets should avoid picking different professional advisers in each destination. Engaging a global firm with a strong network of local advisers can help ensure your tax affairs are in good shape in each location while ensuring your global tax obligations are managed with coordination and efficiency. They can also help you centralize your tax management systems and help you keep updated on local tax rate changes and other developments as they occur.
Above all, international companies should not let the unpredictability of tax authorities scare them away from emerging market ventures. With the help of local advisers, embedded in a global network, who know the ropes and how to get things done, international companies can take advantage of the tremendous opportunities that markets like MESA have to offer—with a minimum of tax surprises.