Editor’s note: “International Business Corner” is a weekly column written by Joan Keston that will be providing information for people involved in or considering international operations. Keston is an international business consultant. Over the next several months she will be writing about important issues that international businesses face as they compete in the 21st century global business environment. This article addresses the vital importance of knowing your distributors when working in developing countries, pointing to the recent occurrences in Brazil involving Cisco.
RALEIGH – There are a number of reasons why it is vital to know your distributor, especially in the post 9/11 days.
In developing countries it is even more critical. There are various schemes that can be used to avoid taxes that involve off-shore tax havens. Although these schemes can be used in such manners to avoid taxes in any country, they have been used successfully in the past when involving developing countries.
One scheme involves under-invoicing products that are sold into a country. The product would be imported at unreasonably low prices from an off-shore tax haven into a country, thus reducing the amount of import taxes paid in the destination country.
Another scheme involves over-invoicing products that are sold into a country. The product would be imported at higher prices from an off-shore tax haven into a country, thus leaving a large part of the profits in an off-shore account. The objective in the latter is to keep as much money out of the destination country, avoiding taxing and control. This is also important in countries where the economy is unstable, inflation is extreme and the currency volatile. Aside from the more negative attributes of this scheme, those funds are often used to assist companies in surviving economic turmoil in developing countries.
• Cisco in Brazil
A recent example that apparently may involve some type of scheme using off-shore tax havens is the case of Cisco in Brazil. Four Cisco officials were recently arrested and later released in Brazil in a tax evasion investigation.
The Brazilian government alleged that there was a scheme to avoid import duties and local sales and corporate taxes by importing products at unreasonably low prices from off-shore tax havens. Cisco has denied instigating the scheme and stated that it does not import products directly into Brazil, relying on resellers instead. In an interview with Folha de Sao Paulo (a Brazilian newspaper) Howard Charney, a Cisco vice president, stated that Cisco was not behind the alleged scheme and that the company is greatly inconvenienced by the allegations.
As developing countries move along what I call a “Development Spectrum” they increasingly take on attributes of what I call “Legitimization.” With increased technological advances, education and communication, they are more able to control data and enforce legislation.
One of the first areas where legitimization occurs, and probably so due to a government’s self-interest in enforcing its taxing authority, is the ability to investigate tax fraud and enforce taxing legislation.
The current position of countries such as China, India and Brazil along the Development Spectrum is somewhat precarious in terms of understanding how to operate successfully in those business cultures. There are attributes of legitimization, yet there still remain the old ways of doing business. It is a mine field that global companies must navigate very carefully.
• Know Your Distributor
Regardless of whether or not your company is involved in any alleged tax scheme, the fall-out will harm or at least inconvenience your company. Being naïve or ignorant of the mechanism for commercialization that your distributor or reseller is employing may allow you to escape liability, but it will not avoid the damage to your operations or image in that country.
One of the most significant aspects of the growth of developing countries such as China, India and Brazil, is the evolution and awareness occurring in the society in general to achieve what I call legitimacy. The trip is a bumpy ride filled with inconsistencies, conflicts and regressions; attributes that appear in all aspects of the development process.
Joan Keston has experience with mature as well as entrepreneurial companies, domestically and internationally, and with an executive managerial and legal background. She has a deep understanding of the business culture and issues involved in doing business in developing countries as well as Europe. She is the Senior Managing Principal at Keston & Associates, Ltd., an international business consulting firm located in Raleigh, NC, and a partner at Paladin and Associates, Inc. Her firm assists companies establish business operations throughout the world. She can be reached at (919) 881-7764 and email@example.com.