Taxes and intangible asset management play key roles for companies expanding into emerging markets

Date of Release: 2012/01/10

The 2011 European debt crisis remains unresolved and the US is deeply mired in long-term fiscal deficits and high unemployment. The focus of economic growth, meanwhile, has shifted to emerging economies, especially those in Asia and the BRIC countries—Brazil, Russia, India and China. With this in mind, PwC Taiwan began holding separate seminars on January 9 in northern, central and southern Taiwan on ‘Global Tax Management Challenges and Opportunities for Multinational Corporations.’ The seminars offer new thinking on global tax management for multinationals looking to reconsider and adjust how they deploy resources across borders.

Integrate different aspects of management to develop optimum business models

Speaking at the January 9 seminar, PwC Taiwan Tax Partner Elliot Liao said that multinationals challenged by recessionary conditions must seek change, consider what they must do to preserve their competitive strength, and look for the keys to improvement from within their own ‘value chain transformation’ (VCT). Liao noted that minimizing income tax expenses is no longer the only objective of tax management. Managing the cost of indirect taxes involved in transaction flows—customs duties, VAT, employer payroll taxes, social security contributions, etc.—as well as the costs associated with local personnel assignments, information systems and logistics, also plays a key role in influencing a corporation’s multinational operating costs.

Liao said that, when companies consider how to deploy resources for multinational operations, high efficiency business model analysis should guide the overall cost-benefit analysis. In other words, when a multinational goes about designing its optimal business model, it must consider the different business models it can develop for different industries in view of their supply chains, intangible assets, cash flows, human resources and other managerial aspects, in addition to tax costs. The goal is then to maximize financial gains for the overall corporate group and its shareholders, and boost the market value of the group’s intangible assets.

High tax costs in India and Brazil call for early planning

PwC Taiwan Tax Partner Wendy Chiu pointed out that globalization trends were helping to draw the attention of Taiwanese corporations invested in China to the other BRIC economies, namely India and Brazil. The Brazil market has been a particularly hot investment target following initial forays by tech giants Foxconn and ASUSTeK. However, corporate income tax rates of 34% in Brazil and 41% in India, and a complex assortment of indirect state and federal taxes, combine to produce high tax costs. And when multinationals enter the Brazilian and Indian markets, they must pay special attention to the particular business models they use, for these may have a major impact on the repatriation of profits to their parent companies, inter-corporate transfer pricing strategies, and overall tax costs. In short, companies are advised to start planning early how best to deal with these tax issues.

Ms. Chiu emphasized that, although a bilateral tax agreement between Taiwan and India takes effect on 1 January 2012 in Taiwan and on 1 April 2012 in India, India’s 16.22% dividend distribution tax (DDT) is levied at the corporate level, so signing the bilateral tax agreement cannot by itself lower the DDT. Apart from the effects of the Taiwan-India tax agreement, Taiwanese companies investing in India must also carefully assess the tax impact of different types of business entities.

Adjusting intangible assets across borders requires consideration of tax strategy

PwC Taiwan Legal Partner Eric Tsai indicated that when companies make cross-border arrangements for their intangible, some matters tend to be overlooked more often than others, despite having significant effects. For example, when a subsidiary and its parent company arrange to divide R&D responsibilities between them, the research output must then be cross-licensed accordingly, but they cannot use the resulting royalty payments to offset the associated taxes. The corporate parent may plan instead to spin off the R&D products, setting up an IP holding company (IHC), but there are no hard and fast rules to follow for setting reasonable prices on the R&D assets to be transferred. Finally, while Taiwan has signed mutual taxation agreements with a few countries, double taxation issues are hard to avoid whenever transfer pricing adjustments are concerned.

Tsai stressed that a company’s intangible assets may make different contributions to income and demand alternative transaction arrangements at different phases of their life cycle and under different business models. It follows that corporations need to adjust their existing tax plans over time and across locations if they want to make the most of fleeting opportunities and exploit the full range of options available for boosting corporate value.