Why businesses overpay tax in emerging markets and how to avoiFor UK businesses expanding into emerging markets, the prospect of growth can be very appealing. But that promise often comes with hidden costs, especially in tax. Without careful planning, misunderstandings of local rules, double taxation issues, and weak transfer pricing policies can eat into profits. Here, we explore the most common reasons companies overpay tax abroad and a clear roadmap to help avoid those pitfalls.
1. Navigating Complex International Tax Rules
Emerging markets often have tax regimes that evolve quickly, with shifting legislation, sometimes opaque regulations, and diverse local practices. Misinterpreting local reporting requirements or failing to properly register taxable entities can lead to overcompliance, or worse, penalties. Detailed due diligence, engaging local counsel, and investing in compliance technologies allow companies to stay ahead of regulatory changes and avoid unintended tax burdens.
2. The Challenge of Double Taxation
One of the biggest risks is being taxed both in the new market and in the UK on the same income. The UK’s extensive network of double taxation agreements (DTAs) should help but only when correctly applied. For example, misallocating profits or not correctly claiming treaty relief results in higher tax bills and in cash flow issues. To prevent this, companies should map where income arises, how treaties apply and make sure that tax returns align with those treaties.
3. Overcoming Transfer Pricing Complications
Transfer pricing, such as setting prices for goods, services or intangible property between group entities, requires establishing arm’s length norms that tax authorities accept. In emerging markets, documentation may be weaker, local comparables scarce, and enforcement unpredictable. Weak transfer pricing policies can lead to adjustments, penalties and back-taxation. Companies should build solid policies from the start, ensure documentation is compliant both locally and per UK expectations, and consider using external benchmarking.
4. Missing Out on Local Tax Incentives and Credits
Many emerging economies offer incentives such as tax holidays, reduced rates, or credits for specific business activities (for example, investment in infrastructure or R&D). Companies unfamiliar with local economic policy can overlook these or misinterpret eligibility. Regular engagement with local tax experts and keeping up to date with government incentive programmes can help guarantee full benefit from these reliefs.
5. Seeking Expert Advice as a Strategic Investment
Attempting to manage all international tax risks in-house often leads to inefficiencies or costly mistakes. Partnering with an international advisory firm with expertise across jurisdictions helps firms structure effectively, avoid overpayments, and ensure global compliance. For instance, working with a trusted global advisor for guidance on local laws, treaty use, and transfer pricing mechanisms, offering both savings and confidence. Recent research from the National Audit Office revealed that UK small businesses lost approximately £5.5 billion in tax revenue in 2022-23 because of evasion and avoidance, often due to unclear or misused rules. Meanwhile, UK retailers responding to tax hikes reported price rises and operational adjustments to offset increasing employer costs, which illustrates how tax burdens in one region can ripple throughout a company’s operations.
When proactively understanding local tax environments, leveraging treaties correctly, maintaining solid transfer pricing policies, using incentives, and engaging experts early, UK businesses can avoid overpaying and strengthen their bottom line when entering emerging markets.