Emerging markets push for share of global tax take

By Ben Chapman-Smith

China and India want a fair share of the profits made my multinational companies lie Amazon which operate in those countries. Photo / AP
China and India want a fair share of the profits made my multinational companies lie Amazon which operate in those countries. Photo / AP

Emerging markets like India and China are becoming just as frustrated with international tax rules as developed nations, says a KPMG partner.

Companies such as Google, Amazon, Starbucks and Apple are all facing mounting pressure in developed countries over the legality and morality of their tax arrangments.

An "interesting dynamic" to the debate was the added pressure now coming from emerging markets, said KPMG partner Kim Jarrett its annual tax briefing in Auckland this morning.

"The emerging markets think a bit differently about international tax. They want first-world business in their countries; they want a fair share of the profit in a supply chain."

Jarrett, who heads up KPMG's transfer pricing and customs team, said governments in countries like China and India had growing frustrations about international transfer pricing rules.

Transfer pricing refers to cross-border transactions made between different entities owned by the same multinational company.

Often, profits could be transferred to sit in first-world countries which meant emerging markets missed out on their share of the income tax, Jarrett said.

"India and China have had different ways of dealing with this and one of the things they've looked at is what's called taxing location savings," she said.

Location savings are net savings made by a multinational from relocating some of its activities to a market where things like labour or real estate are cheaper.

"From the benefit of manufacturing or operating in a low-cost market, they (emerging markets) want that part of the profit in a supply chain to fall in India and China as well," Jarrett said.

"Which means they're asking for mark-ups on cost which are well in excess of what first-world countries would accept."

Jarrett said multinationals were facing a major threat to their brands by using tax structures designed to avoid paying tax in various jurisdictions.

"These companies are really at the pointy end of the tax morality debate and getting the type of press no company wants to get.

"They're starting to lose some credibility because structures like this mean that some companies pay very little tax and that's starting to really rile politicians and the general public."

The Organisation for Economic Co-operation and Development (OECD) was also facing a brand issue because international tax treaties were not working, she said.

While the OECD had a fast-moving plan to address the problem, some issues would be trickier to resolve.

The same economic pressures forcing governments to focus on increasing their tax take was also leading them to create more incentives - enticing companies to do business within their borders.

"If you look at Australia, at the same time that the ATO (Australian Taxation Office) was asking for the ability to name and shame tax payers, Julia Gillard was announcing a grant of $21 million to be paid to have 20,000 Leagues Under the Sea filmed in Australia."

For now, the tax morality debate was not going away, Jarrett said.

"We're probably in a situation now where showing you've paid the right amount of tax under the law may not be enough. It's getting a whole lot more complex out there."

© Copyright 2014, APN New Zealand Limited

Assembled by: (static) on production bpcf04 at 26 Dec 2014 21:52:25 Processing Time: 377ms