KPMG SPECIAL REPORT
Tax considerations for emerging markets
For most companies investing in emerging markets the main interests will usually be the market potential, the access to resources and, in many places, the labour cost advantages. However, companies should be wary of assuming that their normal approach to tax structuring will be appropriate when investing in emerging markets for the first time, writes David Bywater, Head of Tax for KPMG in the South East.
Without careful planning that involves local expertise there are many unexpected pitfalls to catch the unwary, as well as opportunities that could easily be missed. There are often many different legal forms to choose from when setting up operations in a new country. It is therefore worth considering whether certain legal forms offer more tax advantages than others.
The choice of where to hold the investment from can significantly impact the return earned by the investor. In particular it will have an impact on dividend withholding tax (where there is one) and on capital gains. The capital gains treatment is not just important in the case of a disposal – it can also be an important factor during the lifetime of an investment. For example in India, share buybacks (often used as a tax-efficient alternative to dividends) are themselves taxable disposals for capital gains tax.
In Brazil, there is an extra complication that shareholders in countries regarded as ‘tax havens’ are treated less favourably from the viewpoint of the thin capitalisation rules.
Getting the holding company structure right can therefore make a very big difference to the financial success of a new venture in an emerging market economy.
Supply chain and contractual structuring
This too is an area that needs careful thought. Inadequate planning in this regard can result in an unexpected taxable presence (a ‘permanent establishment’) of a foreign group company in the emerging market in question. This could increase the tax burden and may bring a large share of the global profits into the tax charge in the country concerned. The definition of a permanent establishment in many emerging market tax treaties is often wider than in the OECD model, meaning even experienced in-house group tax departments can be faced with unexpected results. Another feature of emerging markets is the sometimes unexpectedly high import duties on goods; up to 60% of the value of electrical goods imported into Brazil for instance.
Don’t forget incentives
Economic and investment development programmes in many places include subsidies, tax holidays, customs and duties reliefs and other tax reliefs which might depend upon location, sector or labour market issues. It is not unusual for overseas groups to fail to take advantage of the local tax incentives on offer, often simply because they are unaware they are available.
Getting the tax structure right from the outset can make a substantial difference to the success or otherwise of an investment in a growth market. Seeking local advice upfront rather than assuming it will be ‘business as usual’ will help. (continued overleaf)
kpmg.co.uk // JULY/AUGUST 2011 41
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