Worldwide: Tax Challenges In Emerging Markets

Last Updated: April 17 2013
Article by Jenny E. Doak


As multinational businesses increase their activity in rapidly-expanding economies, many local tax authorities have responded with an urgent effort to recoup tax on the increased profits being generated in their jurisdiction. Such efforts have, in the past, led to sudden and significant changes to local tax policies, often to the surprise and detriment of international businesses used to more developed tax regimes. This underlying tension has been brought to the forefront in a number of recent high-profile disputes between major multinationals and tax authorities in Africa and the BRIC jurisdictions and has, in places, prompted concerns that the commercial rationale for investing and transacting in certain emerging economies is being undermined.

This article seeks to highlight some common tax challenges facing multinationals doing business in emerging markets, and to suggest ways in which such challenges might be managed, mitigated and addressed.

Another, more draconian, way in which the tax authorities could collect tax from entities with no presence in a jurisdiction is to seize their assets in that jurisdiction if the tax is not paid.

The Challenges

Businesses transacting in foreign jurisdictions will want to assess, with reasonable certainty, the tax costs of entering into a transaction, the tax treatment of the cashflows over the life of the transaction, and tax on exiting the transaction. Unanticipated tax charges at any of these stages could have a significant impact on the profitability of the transaction (and, in extreme cases, whether the transaction is economically viable). Even if businesses are ultimately successful in defending challenges by tax authorities, the prospect of facing lengthy negotiations or litigation with tax authorities will be unattractive for businesses who will want to focus on their commercial activities.

The ways in which tax authorities have sought to impose taxes on foreign businesses are wide ranging. Examples include the following:

  • Extra-Territorial Tax: Taxing Indirect Transfers

    This was the theme of the high profile battle between Vodafone and the Indian tax authorities relating to the acquisition of Hutchison Essar in 2007. In broad terms, the parties to the sale were non-Indian and the transaction involved the acquisition of control of a non- Indian target company. However, the Indian tax authorities sought to impose a tax on the transfer because the value of the target company was derived substantially from Indian assets. The Indian tax authorities tried to assess Vodafone, the purchaser, for the tax (effectively by reference to the capital gain of the seller), by arguing that Vodafone should have withheld tax from the purchase price and accounted for that tax to the Indian authorities on the acquisition. In essence, the Indian tax authorities had sought to "pierce the corporate veil" and treat the transaction as a sale of the underlying Indian assets. Although Vodafone ultimately succeeded in defending their position in the Indian Supreme Court, the Indian tax authorities continued to pursue the claim by threatening to introduce retrospective legislation which would effectively override the Supreme Court decision (the position remains unresolved as at the date of this article).

    Imposing tax on "indirect transfers" of assets is not unique to India, and jurisdictions may seek to impose such tax through explicit legislation (as China has done and, more recently, Mozambique has sought to do) or through applying a "substance over form" approach.
  • Extra-Territorial Tax: Broad Concept of "Permanent Establishment"

    The concept of a "permanent establishment" is often important in determining whether a jurisdiction has taxing rights over an entity (both in domestic legislation and in a double tax treaty context). The term usually encompasses both (i) a fixed place of business in a jurisdiction and (ii) a person acting on behalf of a business in that jurisdiction (regardless of whether that person has a fixed place of business). Tax authorities in emerging markets have been known to construe "permanent establishment" broadly, assessing businesses to tax in unexpected circumstances. For example, concerns could arise as to whether any of the following could be treated as a taxable permanent establishment: a construction project or installation in progress; the presence of secondees, sales agents, engineers or contractors in a jurisdiction; or the transportation of oil and gas through a pipeline which passes through a jurisdiction.
  • Collecting Tax: Withholding Taxes

    Tax authorities are likely to have practical issues in terms of collecting taxes from entities with little presence in their jurisdiction. This issue is often dealt with through collecting the tax by way of imposing withholding taxes on payments made by residents of that jurisdiction to non-residents. Of course, although this is technically a tax liability on the payee's profits, the parties may agree to shift that risk contractually by including a "gross up" provision in the contract, meaning that the resident payer bears that cost.

Given the uncertainties involved in how transactions will be taxed in emerging markets, it is important to identify tax risks at the earliest possible stage in a transaction.

  • Collecting Tax: Secondary Liabilities

    Another solution for tax authorities wanting to collect taxes from non-resident entities is through so-called "secondary liability" provisions. These are provisions which allow tax authorities to collect tax from a party where the person on whom a "primary" tax liability is assessed has failed to pay that tax. The provisions usually work by imposing a "secondary" tax liability on persons with some connection with the defaulting tax payer, although this connection might be as little as having acquired assets from the defaulting taxpayer.
  • Collecting Tax: Risk of Forfeiture

    Another, more draconian, way in which the tax authorities could collect tax from entities with no presence in a jurisdiction is to seize their assets in that jurisdiction if the tax is not paid.
  • Tax Incentives: Withdrawal or Loss

    Governments and municipalities frequently offer tax reliefs and exemptions to incentivize investment in particular activities, sectors or regions, often including infrastructure and energy projects which typically have high upfront costs. Such incentives can be an important feature in attracting foreign investment. However, whereas emerging markets were at one time focussed on attracting foreign investment, the position is shifting so that many jurisdictions are now reducing incentives and, in certain cases, withdrawing incentives after the start of a project. Businesses should also be conscious that, where a tax holiday applies, continuing care needs to be taken to ensure compliance with the (often strict) conditions attaching to that regime.
  • High or Arbitrary Penalties and Interest

    Some countries seek to impose hefty interest and penalties (which in some cases are more than the tax payable), as well as penalties which appear to be arbitrary or unfair (for example, for paying the right amount of tax too early or for filling in the wrong box in a tax return).
  • Lack of Certainty

    As noted above, in some cases the main objection of businesses is not that they are subjected to unreasonably high tax rates in emerging markets, but rather to the risks created by the unpredictability of the tax regime in the particular jurisdiction. Some of these issues are highlighted above, but frequent changes to the tax code, the introduction of retrospective legislation, anti-avoidance measures being imposed with no warning, inconsistent practices by tax authorities and lengthy court procedures to defend claims by tax authorities, all of which contribute to uncertainty.

Addressing the Risks

Given the uncertainties involved in how transactions will be taxed in emerging markets, it is important to identify tax risks at the earliest possible stage in a transaction. As well as speaking to tax advisers about the current position in the relevant jurisdiction, it is a good idea to consider developments in other jurisdictions as, once one tax authority imposes a measure, other governments may well follow suit (an example is the taxation of "indirect transfers" cited above).

Once risks have been identified, it may be possible to mitigate them through structuring. For example, withholding taxes may be reduced by making payments to an entity which has the benefit of a double tax treaty with the country imposing the withholding tax. On this point, it is becoming increasingly important to be able to demonstrate real commercial substance in such entities to withstand challenges from tax authorities that the entity is a mere conduit that should not be able to access tax treaty benefits. Tax treaty structuring is often considered alongside investment treaty planning (i.e., which jurisdictions have treaties to protect investors from certain legislative, regulatory and judicial actions of the state).

Another way to address identified risks upfront is through obtaining rulings from the relevant tax authorities. In some cases it may not be possible to obtain rulings, but a discussion with the tax authorities may nonetheless be a good opportunity to explain the commercial rationale behind a transaction, establish a good relationship with the tax authorities (which can be very important) and gauge their attitude towards the project.

Of course, it is usually not possible to address all possible current and future tax risks and, therefore, parties to a transaction will often want to include provisions to address risks in their contracts. Provisions might include: warranty and indemnity protection for primary and secondary tax liability exposures (including that there are no circumstances under which assets may be seized); "gross up" clauses for withholding taxes; provisions allocating value added taxes, customs and excise duties and stamp taxes between the parties; termination rights where a party suffers an unexpected tax treatment; and provisions regulating the conduct between parties in the event of a dispute with a tax authority.


Tax risks are, of course, not the only challenges facing businesses in high growth jurisdictions, but tax should not be overlooked at the initial stages of a project. Addressing likely tax issues early in the life of a project provides the best chance of being able to mitigate them in the manner described above and minimise the prospect of a future battle with the tax authorities. It is also important to ensure that contracts between the parties include appropriate provisions allocating tax risk, so the parties are clear about who is liable if the tax treatment is not as expected under current law or as a result of a change in law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.