With the global economic recession, tax authorities everywhere are looking to increase the tax coffers. If you run a business with operations located in countries outside the U.S, be aware that your business may be put under the microscope.
In down economies when it’s not politically expedient to raise taxes, the tax authorities are instead stepping up enforcement, according to Larry Harding, CEO of High Street Partners, a firm which advises businesses on establishing operations in countries outside the United States and complying with local requirements. While a tax problem is not the worst problem to have, because it’s related to success… still, no one wants the tax man breathing down their neck.
China is one of the countries targeting increased tax enforcement and collection. In May 2009 China issued “Circular 85,” which puts provincial and municipal tax bureaus in China on alert to step up enforcement of specific taxes. (For more information, see this PDF alert from Deloitte, May 2009 and this news alert at High Street Partners.) Among the taxes on the short list for intensified enforcement are international taxes.
China’s Circular 85 pronouncement is relatively new. Multinational companies haven’t necessarily experienced an increase in audits, penalties or other tax enforcement – yet. But you can imagine it’s coming.
Similar stepped up tax enforcement activity is taking place in other countries, too.
One area of particular concern for U.S. companies doing business in China or other countries, is transfer pricing. Transfer pricing refers to the split in taxable income in a company as it relates to activity between two countries. The company determines the transfer pricing, but it’s subject to oversight by the countries involved. “The IRS and the Chinese taxing authorities would each like to see a bigger split apportioned to their country. Countries are starting to question transfer pricing because it’s one of the lowest hanging fruits,” says Harding. “It’s really clever and smart on their part. But it’s potentially a nightmare situation for smaller multinationals, because it can have dire economic consequences.”
So what should you do? Harding’s advice:
1. Be aware the stepped-up enforcement is out there.
2. Make sure your records and documentation are in good order.
3. Be sure you are in good shape with compliance – filing everything that should be filed.
“Don’t give them a reason to knock on your door,” he says.
The news isn’t all bad, though. Harding notes, “Despite the higher tax hurdles, there are still robust markets and still huge incentives for companies to have global expansion. The global marketplace is still booming. China is one example. Even though growth has fallen off, growth rates are still at 6%. But do make sure that when going overseas that you are dotting all the i’s and crossing all the t’s.”