Asia tops the list: Unexpected tax troubles cropping up in emerging countries

Asia tops the list: Unexpected tax troubles cropping up in emerging countries

TOKYO — Many Japanese companies operating in emerging countries are grappling with taxation problems they would never face in major industrial nations.

     Honda Motor, for instance, has gotten embroiled in a dispute with Indian tax authorities over what Honda Chairman Fumihiko Ike criticized as “unreasonable double taxation.”

     The problem has remained uncorrected for too long, Ike lamented.

     In 2011, Honda Cars India, the Japanese company’s car manufacturing unit in the northern Indian state of Uttar Pradesh, received an unbelievable notice of assessment from the tax authorities.

     The notice demanded that the parent company pay tax on sales related to Honda Cars India, saying the local unit performs some of the functions of the carmaker’s Japanese headquarters.

     The tax authorities’ new assessment was over 100 billion yen ($827 million). But Honda Cars India argued that the levy represented “double taxation” because the company paid corporate taxes as a local subsidiary of the Japanese company.

     The Indian tax authorities later withdrew their demand for taxes on Honda’s sales, but they have not abandoned the view that Honda Cars India should be considered part of Honda’s headquarters.

Disputes on the rise

The number of tax disputes between Japanese companies and local tax authorities is on the rise.

     There were 145 such cases of “double taxation” involving Japanese companies operating overseas during the six years through February 2015, according to a survey by the Japanese government. These companies were subject to taxation on income that had already been taxed by Japan.

     India and other Asian countries accounted for some 80% of these cases, according to the survey. Asia’s high share was due to such countries’ lack of well-developed, clearly defined taxation rules.

     Foreign companies are more likely to find themselves in serious tax disputes in emerging countries because of slowing economic growth in there.

     The average growth rate among developing and emerging countries is expected to decline to 4.3% in 2015, down from 5% in 2013, according to the International Monetary Fund.

     Toru Shirasaki, a tax accountant well versed in international taxation issues, warned that companies operating in less-developed countries may face higher tax burdens.

     “Emerging countries suffering from slower economic growth due to outflows of money may expand back taxes on foreign businesses in efforts to make up tax revenue shortfalls,” Shirasaki said.

     Some companies work with local authorities to avoid sticky tax problems.

     One useful approach of this type is advance pricing agreements between companies and tax authorities specifying the pricing methods the corporate taxpayers will apply to business transactions.

     Last year, Japanese trading giant Mitsui & Co. struck an APA deal with the Indian tax authorities for the first time.

     Kenichi Mizutani, a senior Mitsui executive who led the negotiations with the Japanese and Indian tax authorities over the agreement, stresses the importance of avoiding litigation in emerging countries. “Lawsuits in emerging countries can last 10 years or longer,” he pointed out.

     APAs help companies reduce the danger of tax disputes in a proactive and cooperative manner. They represent a taxation management strategy aimed at avoiding trouble with the help of the local authorities.

The human factor

Human factors often play a vital role for companies’ efforts to sort out difficult taxation situations.

     Car electronics maker Fujitsu Ten started production of dashboard navigation equipment in the northern Indian state of Haryana two years ago. It is making full use of its local contacts to keep tax troubles at bay.

     Mikio Tezuka, the accounting manager at Fujitsu Ten’s Indian unit, was dismayed by the complicated, time-consuming procedures for handling import tariffs. His company was told to specify the countries where all the 1,000 kinds of components it imported into India were manufactured.

     The other accounting manager at Fujitsu Ten’s local unit, Lalit Kumar Agarwal, who is on loan to the joint manufacturing venture from the Indian partner, saved the day. Agarwal successfully negotiated with the superior of the tax official involved to simplify the procedures.

     Despite their weakening economies and a broad array of regulatory challenges to doing business in their markets, emerging countries will remain vital for the long-term strategies of companies in developed nations because of their expected population and economic expansion in the coming decades.

     Japanese companies are trying to figure out how to position themselves to capitalize on the long-term business opportunities offered by emerging countries while dealing with the risks involved in operations in these countries.

     “If we want to make our presence securely rooted in the local communities, we need to be a decent taxpayer,” said Honda’s Ike, who is aware that his company is now tackling a crucial challenge in India.

(Nikkei)

Asia tops the list: Unexpected tax troubles cropping up in emerging countries