E 248

Since the global fnancial
crisis, the accelerating shift

in economic power from
developing to emerging
economies has occurred. The
seven largest emerging
economies, or E7, are
expected to overtake the G7
economies.
June 2011 Vol. 248
www.pwc.com/tw
The World in 2050
The accelerating shift of
global economic power :
challenges and opportunities
Events & Trends
2 Events & Trends Vol. 248
Events & Trends Vol. 248 3
Words from the Editor 04
Feature 06
The World in 2050

The accelerating shift of global economic power: challenges and opportunities

07
Issues 30
Growing globally: Aligning your tax and business strategies 31
The global tax environment: challenges for multinationals / Steven Go 36
PwC Update 42
Latest guidance shows broader FATCA impact 43
PwC Taiwan Contacts 45
Contents
Words from the Editor
As the global distribution of
economic power continues to evolve
over the next few decades, what
challenges and opportunities does
this entail for todays businesses ?
This months feature articlethe
latest in PwCs World in 2050
serieshighlights the accelerating
shift in economic power from
developing to emerging economies
that has occurred since the global
fnancial crisis. The seven largest
emerging economies (China, India,
Brazil, Russia, Mexico, Indonesia
and Turkey), or E7, are expected to
overtake the G7 economies (Canada,
France, Germany, Italy, Japan, the
UK and the US) before 2020.
This projection is based on GDP in
terms of purchasing power parity
(PPP). Using GDP at market
exchange rates delays the 2020 date
to sometime before 2040, but the
broad trend appears no less
inexorable. The key challenge, then,
is to prepare for an economic
landscape that will look
fundamentally different from the
one we have now.
Under the PPP model, China will
surpass the US as the worlds largest
economy by 2020, and India will
move into second place around 2045.
Using projected market exchange
rates, the E7 economies together will
be around 64% larger than the
current G7 by 2050. The bottom line
for businesses is that most global
growth opportunities will be found
in todays developing and emerging
economies.
A companion article from PwC USs
Growing your business publication
looks at how to align tax and
business strategies to take advantage
of global growth. In essence,
companies should treat international
tax planning as an integral
component of their business and
growth strategies and seek globally
tax-effcient structures. The good
news is that an integrated global
structure can lower your effective
tax rate.
It is important to realise, however,
that the team managing a companys
global tax structure must be well
equipped for the task. As PwC
Taiwans Steven Go explains in our
Issues section, the accelerating pace
of tax law changes around the world
threatens to push tax managers at
some multinationals beyond their
ability to cope.
In the short term, tax management
units are in dire need of talent and
resources. For long term solutions, a
coordinated effort by the IMF, OECD
and other global economic
organizations to achieve more
uniformity across countries could
help a great deal, and improvements
in technology promise higher levels
of automation.
As always, we welcome your
feedback and suggestions to help
improve this e-publication. Please
feel free to contact me at
damian.gilhawley@tw.pwc.com

Damian Gilhawley
Editor-in-Chief, Events & Trends
Feature
The World in 2050 The
accelerating shift of global economic
power: challenges and opportunities
Summary
In March 2006 we produced a report setting out projections for potential growth in GDP in 17 leading
economies over the period to 2050. These projections were updated in March 2008 and we are now revisiting
them again in the aftermath of the global nancial crisis, extended now to cover all G20 economies.
Our key conclusion is that the global nancial crisis has further accelerated the shift in global economic power
to the emerging economies. Measured by GDP in purchasing power parity (PPP) terms, which adjusts for price
level differences across countries, the largest E7 emerging economies seem likely to be bigger than the current
G7 economies by 2020, and China seems likely to have overtaken the US by that date. India could also overtake
the US by 2050 on this PPP basis.
If instead we look at GDP at market exchange rates (MERs), which does not correct for price differences across
economies but may be more relevant for practical business purposes, then the overtaking process is slower but
equally inexorable. The Chinese economy would still be lik ely to be larger than that of the US before 2035 and
the E7 would overtake the G7 before 2040. India would be clearly the third largest economy in the world by
2050, well ahead of Japan and not too far behind the US on this MER basis.
In many ways this renewed dominance of China and India, with their much larger populations, is a return to the
historical norm prior to the Industrial Revolution of the late 18
th
and 19
th
centuries that caused a shift in global
economic power to Western Europe and the US this temporary shift in power is now going into reverse.
This changing world order poses both challenges and opportunities for businesses in the current advanced
economies. On the one hand, com petition from emerging market multinationals will increase steadily over time
and the latter will move up the value chain in manufacturing and some services (including nancial services
given the weakness of the Western banking system after the crisis).
At the same time, rapid growth in consumer markets in the major emerging economies associated with a fast
growing middle class will provide great new opportunities for Western companies that can establish themselves
in these markets. These will be highly c ompetitive, so this is not an easy option it requires long term
investment but without it Western companies will increasingly be playing in the slow lane of history if they
continue to focus on markets in North America and Western Europe.
This applies not least to the UK, which currently sells only around 7% of its exports to the BRICs (even
including Hong Kong as part of China), about the same as it exports to Ireland at present. If the UK is to achieve
trend growth of more tha n about 2% in the long run, then it needs to nd a way to break into these fast -growing
emerging markets on a much larger scale than achieved so far.
Summary
1.Introduction
In March 2006 we produced a report setting out projections for potential growth in GDP in 17 leading
economies over the period to 2050. These projections were updated in March 2008 and we are now revisiting
them again in the aftermath of the global nancial crisis.
In this paper, we update the GDP forecasts for the G20 economies plus Nigeria and Vietnam. These include the
current G7 (US, Japan, Germany, UK, France, Italy and Canada), plus Spain, Australia and South Korea among
the current advanced economies. It also includes the seven largest emerging market economies, which we refer
to collectively as the E7 ( China, India, Brazil, Russia, Indonesia, Mexico and Turkey), as well as South Africa,
Argentina, Saudi Arabia, Nigeria and Vietnam. Our analysis suggests that this group of countries should include
the 20 largest economies in the world looking ahead to the middle of this century, although of course there are
always considerable uncertainties about any such long - term projections that need to be bor ne in mind.
The rest of the paper is structured as follows:
Section 2 outlines our methodological approach.
Section 3 summarises our ndings on the relative size of different economies, now and i n 2050, in terms of
two alternative measures of GDP at market exchange rates (MERs) and at purchasing power parities (PPPs).
Section 4 sets out our results for relative growth rates of the economies over the period to 2050.
Section 5 compares the relative levels of GDP per capita in PPP terms of the G7 and E7 economies.
Section 6 concludes and highlights some key implications for business.
1 Introduction

2.Approach
We began by collecting data on GDP at purchasing power parities (PPPs
1
) and at market exchange rates (MERs)
for 2009 from the World Bank. We included all of the current G20 economies, plus Vietnam and Nigeria. The
latter two countries are currently outside the top 20 economies ranked by GDP, but have strong long - term
growth potential that makes them worth including in such an analysis.
We use World Bank data up to 2009 and our own short term projections for real GDP growth between 2009
and 2014 and estimated long- term trend growth from 2015 to 2050
2
. These longer term trend growth estimates
are based on the same model as used in our 2006 and 2008 World in 2050 reports and described in more detail
there, but with updated data
3
. The essence of the model is that long -term trend growth is driven by the
following key factors:
Growth in the labour force of working age (based on the latest UN population projections).
Increases in human capital, proxied here by average education levels across the adult population.
Growth in the physical capital stock, which is driven by capital investment net of depreciation.
Total factor productivity growth, which is driven by technological progress and catching up by lower
income countries with richer ones by making use of their technologies and processes.
The emerging economies have stro nger potential growth than the established OECD economies on most of
these measures, although it should be stressed that this assumes they continue to follow broadly growth -
friendly policies. In this sense, the projections are of potential future GDP if su ch policies are followed, rather
than predictions of what will actually happen, bearing in mind that some countries may not be able to sustain
such policies in practice.
There are, of course, also many other uncertainties surrounding these long - term growth projections, so more
attention should be paid to the broad trends indicated rather than the precise numbers quoted in the rest of this
report. The broad conclusions reached on the shift in global economic power from the G7 to the E7 emerging
economies should, however, be robust to these uncertainties, provided that there are no catastrophic shocks
that derail the overall global economic development process.
1
We use the latest published World Bank estimates of GDP at PPPs for 2009 as the starting point for this
analysis.
2
In a few cases where short term PwC GDP projections were unavailable, we used short term forecasts from the
IMF or consensus forecasts. In a few cases where these short term growth rate projections were signicantly
different to the long term trend growth rate projections from our model, an adjustment was made to allow a
smoother transition from the short term to long term rates during the 2015-19 period.
3
The World in 2050 series of past reports are availabl e to download from our global website at:
http://www.pwc.com/gx/en/world-2050/index.jhtml . In technical terms, we estimate and project forward for
each country potential GDP based on a Cobb - Douglas production function augmented to include human
capital. This is a standard type of economic model that is widely used in long -term growth studies of this kind.
2.Approach
We began by collecting data on GDP at purchasing power parities (PPPs
1
) and at market exchange rates (MERs)
for 2009 from the World Bank. We included all of the current G20 economies, plus Vietnam and Nigeria. The
latter two countries are currently outside the top 20 economies ranked by GDP, but have strong long - term
growth potential that makes them worth including in such an analysis.
We use World Bank data up to 2009 and our own short term projections for real GDP growth between 2009
and 2014 and estimated long- term trend growth from 2015 to 2050
2
. These longer term trend growth estimates
are based on the same model as used in our 2006 and 2008 World in 2050 reports and described in more detail
there, but with updated data
3
. The essence of the model is that long -term trend growth is driven by the
following key factors:
Growth in the labour force of working age (based on the latest UN population projections).
Increases in human capital, proxied here by average education levels across the adult population.
Growth in the physical capital stock, which is driven by capital investment net of depreciation.
Total factor productivity growth, which is driven by technological progress and catching up by lower
income countries with richer ones by making use of their technologies and processes.
The emerging economies have stro nger potential growth than the established OECD economies on most of
these measures, although it should be stressed that this assumes they continue to follow broadly growth -
friendly policies. In this sense, the projections are of potential future GDP if su ch policies are followed, rather
than predictions of what will actually happen, bearing in mind that some countries may not be able to sustain
such policies in practice.
There are, of course, also many other uncertainties surrounding these long - term growth projections, so more
attention should be paid to the broad trends indicated rather than the precise numbers quoted in the rest of this
report. The broad conclusions reached on the shift in global economic power from the G7 to the E7 emerging
economies should, however, be robust to these uncertainties, provided that there are no catastrophic shocks
that derail the overall global economic development process.
1
We use the latest published World Bank estimates of GDP at PPPs for 2009 as the starting point for this
analysis.
2
In a few cases where short term PwC GDP projections were unavailable, we used short term forecasts from the
IMF or consensus forecasts. In a few cases where these short term growth rate projections were signicantly
different to the long term trend growth rate projections from our model, an adjustment was made to allow a
smoother transition from the short term to long term rates during the 2015-19 period.
3
The World in 2050 series of past reports are availabl e to download from our global website at:
http://www.pwc.com/gx/en/world-2050/index.jhtml . In technical terms, we estimate and project forward for
each country potential GDP based on a Cobb - Douglas production function augmented to include human
capital. This is a standard type of economic model that is widely used in long -term growth studies of this kind.
2 Approach

PPPs vs. market exchange rates
GDP at PPPs is a better indicator of a verage living standards or volumes of outputs or inputs, because it corrects
for price differences across countries at different levels of development. In general, price levels are signicantly
lower in emerging economies so looking at GDP at PPPs narrows the income gap with the advanced economies
compared to using market exchange rates.
However, GDP at MERs is a better measure of the relative size of the economies from a business perspective, at
least in the short term. For long run business planning or investment appraisal purposes, it is crucial to factor
in the likely rise in real market exchange rates in emerging economies towards their PPP rates. This could occur
either through relatively higher domestic price ination in these emerging economies, or through nominal
exchange rate appreciation, or (most likely) some combination of both of these effects.
When estimating GDP at market exchange rates in 2050, a similar methodology is therefore adopted as in the
original World in 2050 report where market exchange rates are converging to PPP rates with different
converging factors depending on the type of economy. This leads to projections of signicant rises in real
market exchange rates for the major emerging market economies due to their higher productivity growth rates,
although these projected MERs still fall some way below PPP levels in 2050 for the least developed emerging
markets.
For the OECD economies, we assume that real exchange rates converge very gradually to their PPP rates at a
steady pace over the period from 2009 to 2050. This is consistent with academic research showing that
purchasing power parity does hold in the long run, at least approximately, but not in the short run.
3.Relative size of economies
In our base case projections, the E7 economies will by 2050 be around 64% larger than the current G7 when
measured in dollar terms at market exchange rates (MER), or around twice as large in PPP terms. This is a
signicantly larger gap than in our original 2006 report owing to the stronger growth of the E7 economies
relative to the G7 through the period of the nancial crisis, which to some extent has caused us to revise up also
our longer term estimates of trend growth in the E7 relative to the G7.
In contrast, the E7 is currently only around 36% of the size of the G7 at market exchange rates and around 72%
o ts size in PPP terms (see Figure 1 below).
Below we start by reviewing the results for GDP at PPPs and then go on to consider results for GDP at MERs.
The nal part of this section compares the PPP and MER results in more detail and looks at how the dates at
which individual E7 economies overtake particular G7 economies occur much later when comparing GDP in
terms of MERs rather than PPPs.
3 Relative size of economies
GDP at PPPs projections
Looking at Figure 2, we can note that:
There has been rapid convergence between the E7 and the G7 in recent years, accelerated by the global
nancial crisis. In 2007, total G7 GDP at PPPs was still around 60% larger than total E7 GDP. By 2010, we
estimate the gap had shrunk to only around 35%.
The catch-up process is set to continue over the next decade: by 2020 total E7 GDP at PPPs could already
be higher than total G7 GDP, although any difference would still be within the margin of error of such
projections.
In the following decade from 2020 to 2030, however, the process of overtaking is likely to be reinforced,
with total E7 GDP projected to be around 44% higher by 2030 than total G7 GDP in PPP terms. The gap
would widen further beyond that, with the E7 almost twice as large as the G7 by 2050 in PPP terms.
The key drivers of the E7s growth are China and India, although the formers growth will slow down
progressively due to its signicantly lower labour force growth arising from its one child policy. Indias growth
will remain fairly strong even in the last decade of our projections. Despite Chinas slowdown in growth, it is
expected to overtake the US as the worlds largest economy (measured by GDP at PPPs) sometime before 2020.

Table 1 above shows the summary of GDP pro jections for 2050 measured at PPPs. The most notable changes
compared to the 2009 position are China and India rising to the top 2 positions above the US by 2050. The next
notable change in the rankings is Brazil rising above Japan in GDP at PPP terms. Additionally, Indonesia could
potentially rise signicantly in the rankings to eighth place by 2050.
Table 1: GDP at PPPs rankings
PPP
2009
Rank
Country
GDP at PPP
(constant 2009
US$bn)
PPP
2050
Rank
Country
Projected GDP at
PPP (constant
2009 US$bn)
1 US 14256 1 China 59475
2 China 8888 2 India 43180
3 Japan 4138 3 US 37876
4 India 3752 4 Brazil 9762
5 Germany 2984 5 Japan 7664
6 Russia 2687 6 Russia 7559
7 UK 2257 7 Mexico 6682
8 France 2172 8 Indonesia 6205
9 Brazil 2020 9 Germany 5707
10 Italy 1922 10 UK 5628
11 Mexico 1540 11 France 5344
12 Spain 1496 12 Turkey 5298
13 South Korea 1324 13 Nigeria 4530
14 Canada 1280 14 Vietnam 3939
15 Turkey 1040 15 Italy 3798
16 Indonesia 967 16 Canada 3322
17 Australia 858 17 South Korea 3258
18 Saudi Arabia 595 18 Spain 3195
19 Argentina 586 19 Saudi Arabia 3039
20 South Africa 508 20 Argentina 2549
Source: World Bank estimates for 2009, PwC model estimates for 2050
South Africa and Australia are projected to exit the top 20 PPP rankings by 2050, while Nigeria and Vietnam
are expected to enter the top 20 rankings at 13
th
and 14
th
respectively by 2050 (assuming they can continue to
follow broadly growth-friendly policies whether they will fully realise their long -term economic potential
remains to be seen).
The UK, as would be expected given it is a relatively mature ad vanced economy, is projected to fall in the GDP
rankings, but should just about remain in the top ten in 2050.
The UK, in common with other large European economies, is projected to see its share of world GDP fall
gradually over the next 40 years. Figure 3 above shows the gradual fall of the UKs share of world GDP at PPPs
over the period. A similar trend is observed in the UKs share of world GDP at MERs with the gap between the
two lines slowly closing (as one would expect due to the market exchange rates converging slowly to the PPP
rates). We discuss projections for GDP at MERs for all countries further below.
The UK might do somewhat better than our projections suggest if it can fully seize the opportunities provided
by the fast-growing emerging markets. The UK currently heavily relies on exporting to the US and the EU, while
a small share of exports are going towards the BRICs (only around 7%
4
in 2009 even including Hong Kong as
part of China this was about the same as the share of UK exports going to Ireland in 2009). If increased trade
and investment between the UK and the E7 economies can be achieved, the UK economy and consumers can
benet from the high growth of the emerging economies and might do somewhat better than our projections
suggest, although the UK will still not be able to grow as quickly as the emerging economies themselves.
4
The corresponding share of German exports going to the BRICs was a round 10% in 2009, with relatively rapid
growth in manufacturing e xports to China and Russia in particular in recent years.
South Africa and Australia are projected to exit the top 20 PPP rankings by 2050, while Nigeria and Vietnam
are expected to enter the top 20 rankings at 13
th
and 14
th
respectively by 2050 (assuming they can continue to
follow broadly growth-friendly policies whether they will fully realise their long -term economic potential
remains to be seen).
The UK, as would be expected given it is a relatively mature ad vanced economy, is projected to fall in the GDP
rankings, but should just about remain in the top ten in 2050.
The UK, in common with other large European economies, is projected to see its share of world GDP fall
gradually over the next 40 years. Figure 3 above shows the gradual fall of the UKs share of world GDP at PPPs
over the period. A similar trend is observed in the UKs share of world GDP at MERs with the gap between the
two lines slowly closing (as one would expect due to the market exchange rates converging slowly to the PPP
rates). We discuss projections for GDP at MERs for all countries further below.
The UK might do somewhat better than our projections suggest if it can fully seize the opportunities provided
by the fast-growing emerging markets. The UK currently heavily relies on exporting to the US and the EU, while
a small share of exports are going towards the BRICs (only around 7%
4
in 2009 even including Hong Kong as
part of China this was about the same as the share of UK exports going to Ireland in 2009). If increased trade
and investment between the UK and the E7 economies can be achieved, the UK economy and consumers can
benet from the high growth of the emerging economies and might do somewhat better than our projections
suggest, although the UK will still not be able to grow as quickly as the emerging economies themselves.
4
The corresponding share of German exports going to the BRICs was a round 10% in 2009, with relatively rapid
growth in manufacturing e xports to China and Russia in particular in recent years.
GDP at MERs projections
The gure above illustrates:
In 2009, total E7 GDP at MERs was still only around 35% of total G7 GDP at MERs.
The catch-up process, accelerated by the nancial crisis, will pick up over the next decade: by the end of
2020, we estimate that total E7 GDP at MERs will rise to around 70% of total G7 GDP at MERs, which
would be approximately double the ratio in 2009.
In the following decade from 2020 to 2030, the process of catching - up is likely to be nearly completed, with
total E7 GDP at MERs projected to be around 97% of total G7 GDP in 2030.
By the end of 2032 total E7 GDP at MERs could already be slightly higher than total G7 GDP at MERs,
although any difference would be well within the margin of error of such projections.
By 2050, we estimate the E7 GDP at MER to be approximately 64% larger than G7 GDP at MERs. As
market exchange rates are assumed to converge towards PPPs in the long run, so the differences in our two
sets of projections shrink signicantly by 2050 compared to the current situation.

Chinas rate of gain on the US is projected to slow down progressively after 2020 because o ts rapidly ageing
population (which has been accentuated by its one child policy for the past 30 years). Although the exact date of
overtaking is open to considerable uncertainty, it seems highly likely that China will emerge as the largest
economy at MERs by 2040, ending over a century of US economic primacy. This is subject to our assumptions
on the degree of convergence of Chinas marke t exchange rate with the PPP exchange rate, which are plausible
but nonetheless subject to signicant uncertainty.
In the course of this process, China will remain an export powerhouse, but as real wages increase so its
domestic market will become increas ingly important for both Chinese and foreign companies. Chinese
exporters will also move steadily up -market, competing increasingly on quality rather than price.
Table 2: GDP at MER rankings
MER
2009
Rank
Country
GDP at MER
(constant 2009
US$bn)
MER
2050
Rank
Country
Projected GDP
at MER
(constant 2009
US$bn)
1 US 14256 1 China 51180
2 Japan 5068 2 US 37876
3 China 4909 3 India 31313
4 Germany 3347 4 Brazil 9235
5 France 2649 5 Japan 7664
6 UK 2175 6 Russia 6112
7 Italy 2113 7 Mexico 5800
8 Brazil 1572 8 Germany 5707
9 Spain 1460 9 UK 5628
10 Canada 1336 10 Indonesia 5358
11 India 1296 11 France 5344
12 Russia 1231 12 Turkey 4659
13 Australia 925 13 Italy 3798
14 Mexico 875 14 Nigeria 3795
15 South Korea 833 15 Canada 3322
16 Turkey 617 16 Spain 3195
17 Indonesia 540 17 South Korea 2914
18 Saudi Arabia 369 18 Vietnam 2892
19 Argentina 309 19 Saudi Arabia 2708
20 South Africa 286 20 Australia 2486
Table 2 above summarises our GDP projections to 2050 measured at MERs. The most notable ranking changes
are China moving into the top position above the US by 2050 and India rising to third position by that date just
below the US. The next notable change in the rankings is Brazil and Russia rising above Germany. Mexico is
projected to break into the top 10 rankings in seventh position as it narrowly edges out Germany, but this is
subject to some uncertainty. Indonesia could potentially rise signicantly in the ranks to tenth place, narrowly
edging out France but this is also subject to considerable uncertainty. The UK, as expected, is projected to fall in
the rankings but will just about remain in the top ten in 2050 based on these projections.
Another not able change is that, by 2050, Nigeria and Vietnam could have the potential to rise into the top 20,
being ranked 14
th
and 18
th
respectively according to our model estimates. However, this depends on them
continuing to follow growth-friendly policies, which will represent a signicant challenge, particularly for
Nigeria, which needs to diversify its economy away from its current dependence on oil in the long run i t is to
realise its potential, as well as addressing governance issues. Australia, Italy, Canada and Spain are projected to
see signicant falls in their GDP rankings as the emerging economies continue to grow much faster than them
in the next few decades. Argentina and South Africa would drop out of the top 20 GDP rankings based on our
projecti ons, since their potential growth rates are not as fast as those of other emerging economies.
The Indian growth tiger
The most signicant increases in share of world GDP at MERs are projected to be achieved by India, which
deserves special mention here. In 2009, Indias share of world GDP at MERs was just 2%. By 2050, this share
could grow to around 13% according to our analysis.
Figure 6 below illustrates Indias rapid long - term rise in GDP at MERs relative to the US. India has the
potential to be the fastest growing large economy in the world over the period to 2050, with a GDP at the end of
this period of close to 83% of that of the US at MERs, or 14% larger than the US in PPP terms.
Indias trend growth is expected to overtake Chinas trend growth at some point during the coming decade due
to India having a signicantly younger and faster growing working age population than China and due to it
having more potential for growth as it i s starting from a lower level of economic development than China and so
has more catch-up potential. However, India will only fully realise this great potential if it continues to pursue
the growth-friendly economic policies of the last two decades. Looking ahead, particular priorities will be
maintaining a prudent scal policy stance, further extending its openness to foreign trade and investment,
signicantly increased investment in transport and energy infrastructure, and improved educational standards,
particularly for women and those in rural areas of India.
In the course of this process, the drivers of growth are likely to change. India is likely to become less dependent
on outsourcing and more on manufacturing exports, building on its strong engineering skills and rising levels of
education in the general population over the next decade. Consumer markets in major Indian cities will also
become increasingly attractive to international companies as the size of the middle class there grows rapidly
over time.
Indias rapid growth will see it overtaking current G7 economies on a regular basis over the next 40 years, as
summarised in Table 3 below. This also shows other key over - taking dates for the E7 relative to the G7. As you
would expect, overtaking dat es come much later when using GDP at MERs as the measure rather than GDP at
PPPs, a distinction that is sometimes lost in media coverage of this issue. For example, China might overtake
the US as early as 2018 based on GDP at PPPs, but would have to wait until around 2032 to become the biggest
economy based on GDP at market exchange rates.
India have a signifcantly
younger and faster growing
working age population
than China
Table 3: When could the E7 economies overtake the G7 in GDP at PPP and MER rankings?
Year GDP at PPP ranking changes GDP at MER ranking changes
2010 China overtakes Japan, India overtakes Canada
2011 India overtakes Japan, Brazil overtakes France India overtakes Spain, Russia overtakes Canada
2012 Russia overtakes Spain, Mexico overtakes Australia
2013 Brazil overtakes the UK
2014 Russia overtakes Germany India overtakes Brazil
2015 Indonesia overtakes Turkey India overtakes Italy
2016 India overtakes the UK
2017 Brazil overtakes Italy, Indonesia overtakes Turkey
2018 China overtakes US, Indonesia overtakes Canada India overtakes France
2019 Mexico overtakes Italy
2020 Turkey overtakes Canada
2021 Indonesia overtakes Spain
2022 India overtakes Germany, Russia overtakes Italy
2023 Brazil overtakes the UK, Indonesia overtakes Australia
2024 Indonesia overtakes South Korea, Turkey overtakes
Spain
Mexico overtakes Canada, Turkey overtakes Australia
2025 Brazil overtakes Germany Mexico overtakes Spain
2027 Brazil overtakes France
2028 Mexico overtakes France, Turkey overtakes South Korea India overtakes Japan
2029 Russia overtakes UK, Indonesia overtakes South Korea
2030 Indonesia overtakes Italy
2031 Mexico overtakes the UK Turkey overtakes South Korea
2032 China overtakes US, Brazil overtakes Germany,
Indonesia overtakes Canada
2033 Turkey overtakes Italy Russia overtakes France, Indonesia overtakes Spain
2034 Mexico overtakes Italy
2035 Turkey overtakes Spain
2037 Brazil overtakes Russia
2039 Brazil overtakes Japan, Mexico overtakes Germany Indonesia overtakes Italy
2040 Indonesia overtakes France
2042 Russia overtakes Germany, Turkey overtakes Italy
2044 Indonesia overtakes the UK Brazil overtakes Japan
2045 India overtakes US
2047 Indonesia overtakes Germany
2048 Mexico overtakes the UK
2050 Mexico overtakes Germany, Indonesia overtakes France
Source: PwC model estimates
Of course, these overtaking date projections are subject to increasing degrees of uncertainty as you move out in
time, but the change in rankings should occur in approximately the same order even if the precise dates differ
from those shown in Table 3. The pattern projected is similar in both rankings: over the next 40 years, the E7
economies will continue to rise above the G7 economies.
Comparing the PPP and MER ranking changes, there is obviously a delay in the date at which some E7
countries overtake s pecic G7 countries on a MER basis. For example, India is projected to overtake Japan in
2011 in the PPP rankings but only in 2028 in the MER rankings. This is due to the large difference in Indias
GDP at PPPs and GDP at MERs, which closes only gradually over the period (and remains to some degree even
in 2050). Similarly, Brazil is projected to overtake the UK in around 2023 based on GDP at MERs, about 10
years after it overtakes the UK in the GDP at PPP rankings.
Dominance of Big 3 economies
A key outcome of the future prevalence of the E7 will be the sheer size of the top 3 economies (China, the US
and India), which will account for approximately 50% of the world GDP at MERs compared to the current
gure of around 40%. T he EU economy might be of broadly comparable scale to these Big 3 economies in 2050,
but only i t acts as a single entity, which will always be challenging for a union of 27 member states. Individual
EU member states will inevitably be much smaller than any of the Big 3 by 2050.
Table 4 below illustrates the current and projected sizes of all economies considered in this study relative to the
US at both MERs and PPPs in 2009 and 2050. The US is currently by far the largest economy when measured
by GDP at both PPPs and MERs. It also shows the relative size of the other economies as compared to the US.
China, India and Russia can be seen from this to have particularly large disparities between GDP measured at
PPPs and MERs the gap is somewhat smaller for Brazil.
Table 4: Current and projected relative size of economies in 2009 and 2050 to the US (US =
100)
Relative size of GDP at MERs to the
US
Relative size of GDP at PPPs to the
US
Country (indices
with US = 100)
2009 2050 2009 2050
US 100 100 100 100
Japan 36 20 29 20
China 34 135 62 157
Germany 23 15 21 15
France 19 14 15 14
UK 15 15 16 15
Italy 15 10 13 10
Brazil 11 24 14 26
Spain 10 8 10 8
Canada 9 9 9 9
India 9 83 26 114
Russia 9 16 19 20
Australia 6 7 6 7
Mexico 6 15 11 18
South Korea 6 8 9 9
Turkey 4 12 7 14
Indonesia 4 14 7 16
Saudi Arabia 3 7 4 8
Argentina 2 6 4 7
South Africa 2 6 4 6
Nigeria 1 10 2 12
Vietnam 1 8 2 10
China, despite its projected market growth slowdown, is expected to be around 35% larger than the US at MERs
by 2050 or around 57% larger in PPP terms. As mentioned earlier, India has the potential to be the fastest
growing large economy in the world over the period to 2050, when its GDP could potentially be around 83% of
that of the US at MERs and somewhat larger than that of the US in PPP terms.
historical norm
5
prior to the Industrial Revolution of the late 18
th
and 19
th
These base case projecti ons also suggest that:
Brazils economy would be of similar size or even larger than Japan by 2050 in both MER and PPPs terms
but only 20-25% of the size of the US economy
Mexico would also grow relatively rapidly, being larger than both Germany and the UK in both MER and
PPPs terms by 2050.
Indonesia would grow rapidly and become nearly the same size as the UK and France at MER and larger in
PPP terms.
Russia would grow signicantly more slowly due to its declining working age population, but would still
become larger than Germany and the UK in both MER and PPPs terms.
Of course, as noted above, there are many uncertainties surrounding the precise numb ers shown in Table 4, but
the broad trends identied should be relatively robust to variations in particular countries.
Our focus in this section has been on the relative size of economies. In the next section we focus instead on
relative projected growt h rates.
5
As documented, for example, in A. Maddison, The World Economy, Volume 1: A Millennial Perspective,
OECD (2006). In 1000 AD, for example, Maddison estimated China and India s combined share of world GDP
at PPPs at around 52% and this was still around 49% in 1820. But by 1973 the combined world GDP share of
these two Asian giants had fallen to a low of only around 8% as the US, Western Europe and Japan moved
ahead in the econo mic development process.
China, despite its projected market growth slowdown, is expected to be around 35% larger than the US at MERs
by 2050 or around 57% larger in PPP terms. As mentioned earlier, India has the potential to be the fastest
growing large economy in the world over the period to 2050, when its GDP could potentially be around 83% of
that of the US at MERs and somewhat larger than that of the US in PPP terms.
historical norm
5
prior to the Industrial Revolution of the late 18
th
and 19
th
These base case projecti ons also suggest that:
Brazils economy would be of similar size or even larger than Japan by 2050 in both MER and PPPs terms
but only 20-25% of the size of the US economy
Mexico would also grow relatively rapidly, being larger than both Germany and the UK in both MER and
PPPs terms by 2050.
Indonesia would grow rapidly and become nearly the same size as the UK and France at MER and larger in
PPP terms.
Russia would grow signicantly more slowly due to its declining working age population, but would still
become larger than Germany and the UK in both MER and PPPs terms.
Of course, as noted above, there are many uncertainties surrounding the precise numb ers shown in Table 4, but
the broad trends identied should be relatively robust to variations in particular countries.
Our focus in this section has been on the relative size of economies. In the next section we focus instead on
relative projected growt h rates.
5
As documented, for example, in A. Maddison, The World Economy, Volume 1: A Millennial Perspective,
OECD (2006). In 1000 AD, for example, Maddison estimated China and India s combined share of world GDP
at PPPs at around 52% and this was still around 49% in 1820. But by 1973 the combined world GDP share of
these two Asian giants had fallen to a low of only around 8% as the US, Western Europe and Japan moved
ahead in the econo mic development process.

4.Projected economic growth
rates to 2050
Table 5: Projected real growth in GDP and its components of growth (2009-50)
Country
Average annual
real growth in
GDP
Average annual
population
growth
Average annual
GDP per capita
growth
Average annual
GDP growth
from changes in
MER
Vietnam 8.8% 0.7% 6.1% 1.9%
India 8.1% 0.8% 5.3% 1.9%
Nigeria 7.9% 1.5% 5.0% 1.3%
China 5.9% 0.1% 4.6% 1.1%
Indonesia 5.8% 0.6% 4.1% 1.1%
Turkey 5.1% 0.6% 3.4% 1.0%
South Africa 5.0% 0.3% 3.6% 1.1%
Saudi Arabia 5.0% 1.4% 2.7% 0.9%
Argentina 4.9% 0.6% 3.0% 1.2%
Mexico 4.7% 0.5% 3.2% 1.1%
Brazil 4.4% 0.6% 3.3% 0.5%
Russia 4.0% -0.7% 3.2% 1.4%
Korea 3.1% -0.3% 2.6% 0.9%
Australia 2.4% 0.7% 1.9% -0.2%
US 2.4% 0.6% 1.8% 0.0%
UK 2.3% 0.3% 2.0% 0.1%
Canada 2.2% 0.6% 1.7% -0.1%
Spain 1.9% 0.1% 1.8% 0.1%
France 1.7% 0.2% 2.0% -0.5%
Italy 1.4% -0.2% 1.9% -0.2%
Germany 1.3% -0.3% 1.9% -0.3%
Japan 1.0% -0.5% 2.1% -0.5%
Source: PwC model estimates
4 Projected economic growth
rates to 2050
Table 5 above summarises our estimates of average annual real GDP growth in 2009 -50 in US $ terms (i.e.
including the effect of real exchange rate changes relative to the dollar) and in domestic currency and PPP
terms
6
. It also shows the different components of this growth rate.
The rst point to note is that, as mentioned earlier, India has the potential to have the highest growth rate
among the largest E7 emerging economies. While it has a very high projected annual growth rate, Vietnams
GDP at PPPs will only be 10% of the US even by 2050 and hence it cannot be classed as a large economy
comparable with China or India. Nigerias high growth rate is al so subject to a considerable degree of
uncertainty due to its need to address issues relating to current over - dependence on oil and various
institutional and governance issues that have held back its growth potential in some past periods.
Russias growth is expected to be the slowest of the E7 due in particular to its sharply declining working age
population. Of the G7 economies, the US has the highest projected average annual growth rate of 2.4% followed
by the UK at 2.3%. Japan is expected to have the slowest growth rate at 1% per annum. Australia has a relatively
strong growth rate for an advanced economy due to its strength in natural resources and relative proximity to
the Chinese market in particular.
Figure 7 above breaks down the projected average annual GDP growth rate into three components contributing
either positively or negatively:
1. Growth in GDP due to population growth.
2. Real growth in GDP per capita (in domestic currency terms or PPPs).
3. Growth in GDP in dollar terms due to effects of changes in market exchange rates.
The most important feature to note is that Chinas growth is less than Indias primarily due to slower population
growth associated with its one child policy and a rapidly ageing population. Furthermore, average productivity
6
Note that, by assumption in our model, real GDP growth is the same in domestic currency and PPP terms.
and education levels across the population are currently lower in India than in China, giving it a greater scope
to catch up in the long run, provided that India can maintain the right kind o nstitutional policy framework to
support economic growth.
As is the case for India, Vietnams and Nigerias relatively high potential growth rates stem from average
productivity and education levels across the population being lower than in China and most other emerging
economies. In addition, Nigeria has the largest expected contribution from population growth over the next 40
years, which will signicantly increase its working age population contributing to GDP growth. However, both
countries are currently relatively small com pared to the BRICs.
Chinas growth to date has been driven by very high savings and capital investment rates, but experience with
Japan and other Asian tigers suggests that such investment - driven growth eventually runs into diminishing
returns once incom e levels approach OECD levels. As China ages, it is also likely that its savings rate will drop
as assets are cashed in to pay for the retirement of its ageing population (although we still assume that Chinese
savings and investment rates remain somewhat above OECD average levels in the long run in our base case
projections).
Other emerging economies with relatively young, fast -growing populations include Ind onesia, Turkey, Brazil
and Mexico. The key to them achieving the growth potential indicated by our model will be establishing and
maintaining a macroeconomic, legal and public policy environment conducive to trade, investment, increased
education levels and hence economic growth. This is by no means guaranteed in any of these economies, but
progress over the past 5 years has generally been positive in all of these countries, which gives some grounds for
optimism.
South Korea and Russia are in a different category, with relatively strong expected growth in GDP per capita
(particularly in Russia), but declining populations that hold back overall GDP growth
As you would expect, growth rates of the G7 economies are generally projected to be slower, with most of the
variation reecting differences in population growth in our model. In this respect, Australia, Canada and the US
are projected to continue to grow at around 2.2 -2.4% per annum, while countries with shrinking populations
such as Germany, Italy and Japa n see total GDP growth of only around 1.0-1.9% in domestic currency or PPP
terms. In GDP per capita terms, however, our model suggests much less marked variations in growth rates
between the G7 economies with a 1.7-2.1% per annum range.
5.Comparison of GDP per capita
levels
It is also interesting to look at income per capita levels based
on GDP in PPP terms as an indicator of relative living
standards in different economies. As shown in Figure 8 and
Table 6, the E7 economies will still remain some way behind
the G7 economies on this basis even in 2050. But they will
catch up gradually over time, with Chinese average income
levels being just under half those in the US by 2050 and
Indian average income levels being around a quarter of those
in the US at that time.
Table 6: Relative GDP per capita levels
in PPP terms (US = 100)
2009 2030 2050
US 100 100 100
Japan 71 78 79
Germany 79 80 82
UK 81 83 87
France 76 79 83
Italy 71 74 74
Canada 84 83 83
China 14 33 45
India 7 15 28
Brazil 22 31 41
Russia 42 67 74
Indonesia 9 16 22
Mexico 31 43 54
Turkey 30 43 57
Source: World Bank, PwC model estimates for 2050
5 Comparison of GDP per capita levels
6.Conclusions and implications
for business
The rst important point to note from our analysis is that there is no single right way to measure the relative
size of emerging economies such as China and India as compared to the G7 economies. Depending on the
purpose of the exercise, GDP at either market exchange rates (MERs) or purchasing power parities (PPPs) may
be the most appropriate measure. In general, GDP at PPPs is a better indicator of average living standards or
volumes of outputs or inputs, while GDP at MERs is a better measure of the current value of markets from a
shorter term business perspective. In the long run, however, it is important that business planners take into
account the likely rise in real market exchange rates in emerging economies towards their PPP rates, although
our modelling suggests that, for countries such as China and India, this exchange rate adjustment may still not
be fully complete even by 2050.
Secondly, in our base case projections, the E7 economies will by 2050 be around 64% larger than the current G7
when measured in dollar terms at projected MERs, or around twice as large in PPP terms. In contrast, total E7
GDP is currently only around 36% of the size of total G7 GDP at market exchange rates and around 72%of its
size in PPP terms.
Thirdly, there are likely to be notable shifts in relative growth rates within the E7, driven by demographic
trends. In particular, both China and Russia are expected to experience signicant declines in their working age
populations over the next 40 years. In contrast, countries like India, Indonesia, Brazil, Turkey and Mexico
(being relatively younger) should on average show higher positive growth over the next 40 years. However, they
too will have begun to see the effects of ageing by the middle of the century.
Fourth, India has the potential to be the fastest growing large economy in the world over the period to 2050,
with a projected GDP at the end of this period close to 83% of that of the US at MER, or 14% larger than the US
in PPP terms. China, despite its projected marked growth slowdown, is projected to be around 35% larger than
the US at MERs by 2050, or around 57% larger in PPP terms. China could overtake the US as the worlds largest
economy as early as 2018 based on GD P at PPPs, or around 2032 based on GDP at MERs.
Fifth, while the G7 economies will almost inevitably see their relative GDP shares decline (although their
average per capita incomes will remain well above those in emerging markets), the rise of the E7 economies
should boost average G7 income levels in absolute terms through creating major new market opportunities.
This larger global market should allow businesses in G7 economies to specialise more closely in their areas of
comparative advantage, both at hom e and overseas, while G7 consumers continue to benet from low cost
imports from the E7 and other emerging economies.
Sixth, trade between the E7 and the G7 should therefore be seen as a mutually benecial process for economies
and businesses: a win -win proposition, not a zero sum competitive game. This is certainly true for UK
businesses, which should see this as an opportunity to rely less on trading with the US and the EU and more
with the emerging economies. At the same time, there will clearly be new competitive challenges from rising
multinationals based in the E7 economies, so those UK or European companies that continue to rely only on
their domestic markets could see their market share progressively eroded by emerging economy rivals.
Finally, there will also be challenges arising from the rapid rise of China, India and other emerging economies
in terms of pressure on natural resources such as energy and water, as well as implications for climate change.
Commodity prices will tend to remain high, so boosting exporters of these products (e.g. Brazil, Russia,
Indonesia, the Middle East) and increasing input costs for natural resource importers.
6 Conclusions and implications
for business
6.Conclusions and implications
for business
The rst important point to note from our analysis is that there is no single right way to measure the relative
size of emerging economies such as China and India as compared to the G7 economies. Depending on the
purpose of the exercise, GDP at either market exchange rates (MERs) or purchasing power parities (PPPs) may
be the most appropriate measure. In general, GDP at PPPs is a better indicator of average living standards or
volumes of outputs or inputs, while GDP at MERs is a better measure of the current value of markets from a
shorter term business perspective. In the long run, however, it is important that business planners take into
account the likely rise in real market exchange rates in emerging economies towards their PPP rates, although
our modelling suggests that, for countries such as China and India, this exchange rate adjustment may still not
be fully complete even by 2050.
Secondly, in our base case projections, the E7 economies will by 2050 be around 64% larger than the current G7
when measured in dollar terms at projected MERs, or around twice as large in PPP terms. In contrast, total E7
GDP is currently only around 36% of the size of total G7 GDP at market exchange rates and around 72%of its
size in PPP terms.
Thirdly, there are likely to be notable shifts in relative growth rates within the E7, driven by demographic
trends. In particular, both China and Russia are expected to experience signicant declines in their working age
populations over the next 40 years. In contrast, countries like India, Indonesia, Brazil, Turkey and Mexico
(being relatively younger) should on average show higher positive growth over the next 40 years. However, they
too will have begun to see the effects of ageing by the middle of the century.
Fourth, India has the potential to be the fastest growing large economy in the world over the period to 2050,
with a projected GDP at the end of this period close to 83% of that of the US at MER, or 14% larger than the US
in PPP terms. China, despite its projected marked growth slowdown, is projected to be around 35% larger than
the US at MERs by 2050, or around 57% larger in PPP terms. China could overtake the US as the worlds largest
economy as early as 2018 based on GD P at PPPs, or around 2032 based on GDP at MERs.
Fifth, while the G7 economies will almost inevitably see their relative GDP shares decline (although their
average per capita incomes will remain well above those in emerging markets), the rise of the E7 economies
should boost average G7 income levels in absolute terms through creating major new market opportunities.
This larger global market should allow businesses in G7 economies to specialise more closely in their areas of
comparative advantage, both at hom e and overseas, while G7 consumers continue to benet from low cost
imports from the E7 and other emerging economies.
Sixth, trade between the E7 and the G7 should therefore be seen as a mutually benecial process for economies
and businesses: a win -win proposition, not a zero sum competitive game. This is certainly true for UK
businesses, which should see this as an opportunity to rely less on trading with the US and the EU and more
with the emerging economies. At the same time, there will clearly be new competitive challenges from rising
multinationals based in the E7 economies, so those UK or European companies that continue to rely only on
their domestic markets could see their market share progressively eroded by emerging economy rivals.
Finally, there will also be challenges arising from the rapid rise of China, India and other emerging economies
in terms of pressure on natural resources such as energy and water, as well as implications for climate change.
Commodity prices will tend to remain high, so boosting exporters of these products (e.g. Brazil, Russia,
Indonesia, the Middle East) and increasing input costs for natural resource importers.
Issues
Growing globally: Aligning your
tax and business strategies
International tax planning is
sometimes an afterthought rather
than built into a companys corporate
development strategy, says Ken
Esch, a partner with PwCs Private
Company Services group. That
stems partly from a silo approach
within organizations, but its also
due to a lack of awareness that your
tax planning in China, for instance,
may affect your planning in other
countries its all interconnected.
The good news is that you can
develop an integrated global
structure to manage all of these
issues and drive a lower effective tax
rate.
A non-integrated structure, on the
other hand, can result not only in
ineffcient tax structures, but also in
missed opportunities such as the
chance to signifcantly increase a
companys growth capital and
improve its liquidity. To make the
most of these opportunities, a
company will want to view its
international tax planning through a
wide-angle lensseeing the near-
term benefts that an integrated
global tax strategy can deliver while
also eyeing that strategy within the
broader context of the companys
evolution. This approach is more
likely to produce sustainable results.
Expansion abroad is just one reason
for a company to take international
tax planning into consideration.
Theres a host of other reasons as
well, but US private companies
sometimes overlook these, failing to
realize how international theyve
become in recent years. As a result,
they could be forfeiting the benefts
that a well-conceived global tax
strategy can deliver.
Are you more international
than you think?
A common reason some businesses
dont think strategically about
international tax planning even
though they should is that they
consider themselves primarily
domestic companies. Often the
United States is home to their
headquarters and the majority of
their employees. But many of those
same companies might be using
service providers beyond US borders,
such as international suppliers, or
they might be selling products
around the globe (e.g., through
Internet sales)and so quite
possibly their activities are more
international than they appear at
frst glance.
Take the case of a PwC clienta
privately held company with $1.5
billion in total revenuewhich
initially decided against developing
an integrated global structure, since
it considered itself a domestic
business.
From an accounting perspective,
everything was run through an S
corporation here in the United
States, says Michael Urse, a partner
with PwCs International Tax
Services group. As a result, the
companys internal recordkeeping
gave the impression that the business
was more US-centric than it really
was. However, when the company
turned to PwC to streamline its
operations and realign its tax
structures, it found that it was able to
reduce its annual tax cost by 25
percent.
Choosing a globally tax-
effcient business structure
Private companies often choose to
take the form of a fow-through
entity, such as an S corporation,
because they want to manage their
cash in the United States and pay one
level of tax (at the shareholder level).
If an S corporation operates abroad
(either directly or through other
fow-through entities), any foreign
taxes paid can be claimed by the S
corporations shareholders (subject to
the foreign tax credit limitation).
However, S corporation shareholders
will bear an increased tax burden
when the extension of the Bush-era
tax cuts expires.
At that time, the top tax rate for
ordinary income, including qualifed
dividends, is due to rise to 39.6%,
and the capital gains tax on the sale
of S corporation stock would increase
to 20 percent.
As Urse points out, One of the
biggest cash-fow drains for S
corporations is the distribution of
cash to pay the personal taxes of
shareholders. Given the signifcant
effect of tax costs on corporate
earnings, private companies may
want to reevaluate their tax
structures (along with their transfer-
Improvements in areas such as IT and accounting
systems have given US companies greater control over
their remote manufacturing and supply-chain
management. An additional advantage for certain
companies manufacturing abroad is that in the past
couple of years theyve been able to treat certain
foreign operations as manufacturing activities (for tax
purposes) even if those operations havent been doing
the physical manufacturing themselves. As a result,
businesses that outsource their manufacturing to a
foreign entity might be able to defer income that
previously they could not defer.
This is due to a recent US tax-regulation change that
broadens the range of activities that qualify for income
deferral as permitted under the exception to the
Subpart F regulations of the Internal Revenue Code.
These regulations deal with related-party transactions
that are characterized as foreign-based sales income.
Under Subpart F, companies that manufacture goods
have long been permitted to defer income on related-
party sales transactions. Over time, however, the
defnition of manufacture has evolved as businesses
have become more global in their operations.
When these rules were originally developed some
forty years ago, the notion was that the value in a
manufactured product lay in the bending of the metal
or the molding of the plastic, so to speak, PwCs Mike
Urse explains. Today, consistent with trends in
international operations and global manufacturing,
theres increasing recognition that value isnt limited
to the bending of the metal, but rather, extends to the
design, marketing, and distribution of the fnal
product.
Therefore, if a company essentially controls the
outsourced productincluding its quality and
quantityit can often claim to own the value of that
product and therefore defer the related income.
To do this, however, a company must have a tax
structure that allows it to take advantage of this recent
regulatory change. In some cases, that could require
abandoning a fow-through model and becoming a C
corporation (with foreign subsidiaries).
pricing arrangementssee sidebar
on page 34) when contemplating
international expansion. Some
companies, for instance, could fnd it
makes sense to change their status
from an S corporation to a C
corporation, particularly if they have
signifcant international operations.
While an S corporation is a tax-
effective way to operate for domestic
profts, acknowledges Urse, it can
also be very costly for international
profts. Use of a foreign holding
company can lower a companys cost
of capital by allowing the business to
capture its foreign profts and
reinvest them in working capital and
growth strategies outside the United
States.
Setting up foreign entities
Increasingly, companies with foreign
operations that had once focused
primarily on manufacturing goods
for US consumption are now selling
to a growing customer base in or
near where their foreign operations
are located.
It often makes sense to put the
ownership of certain corporate
assets where their market is, says
Yosef Barbut, a director with PwCs
Global Accounting Services group.
If the main market for one of your
core products is India, then setting
up a foreign corporation there might
be the most appropriate move, for a
variety reasons, including
operational ease, market
penetration, and tax effciency.
This principle applies to more than
just manufactured goods.
Intangible assets such as
intellectual property (IP) are also
something that companies may
decide to manage abroad if a
substantial portion of the market
for goods or services that use a
companys IP is outside the United
States.
An effective IP migration strategy
usually involves dividing economic
ownership of a companys valuable
intellectual asset between the
company and a non-US entity.
These arrangements may be
subject to costsharing
regulations. For example, a US
technology company based in
Silicon Valley could license its
non-US IP rights to a Swiss
company, with the understanding
that the Swiss company will pay a
portion of the cost of future R&D
development.
Although there are clear tax
benefts to such arrangements (if
the foreign entity is in a country
with relatively low tax rates), its
important that a company not
make tax considerations the sole
driver of its decision to migrate
intellectual property. IP migration
is about aligning the way a
company sources its revenue to
how it owns its intellectual
property, says Esch. Tax
objectives should certainly be
Redefning manufacturing
taken into account, but in a way
thats integrated with the
companys overall global business
strategy.
Other considerations
In considering tax objectives,
companies will want to keep in
mind that a key beneft of setting
up a foreign entity is the
opportunity to defer US taxation of
foreign earnings. If a US
businesseither an S corporation
or a C corporationwere to set up
subsidiaries abroad, it could have
considerably more working capital
at its disposal if foreign earnings
were kept offshore. While the
owners of an S corporation or a C
corporation can generally defer US
taxation of foreign earnings if they
use a foreign legal entity, there are
certain US anti-deferral rules that
need to be managed if a company is
to avoid immediate US taxation of
foreign earnings (i.e., before the
earnings are repatriated as
dividends). The decision to use
either an S corporation or a C
corporation in the United States
requires careful analysis.
Setting up foreign entities can also
be useful to private businesses that
are seeking fnancing at a
reasonable cost. Ideally, a business
will use intercompany debt
structures to obtain capital in a
tax-effcient way, says David Chen,
a director in PwCs
International Tax Services group.
Although this may seem like an
obvious suggestion, doing it
Transfer pricing refers to the pricing for transactions
between related frms, such as between a subsidiary
and its parent company. Under the so-called arms
length principle of US tax law, the amount charged by
one related party to another must be the same as it
would be if the parties werent related. In other words,
one division of a company cannot sell its products to
another division at artifcially low prices to reduce the
companys taxable income.
IP migration
Transfer pricing is an especially critical issue when a
company determines the value of intellectual property
(IP) before undertaking an IP migration. The value
that a company decides on for its IP determines the
price the companys foreign entity will set for the US
entity. That price, in turn, determines the amount of
taxes potentially owed. Determining the arms-length
price for IP can be quite complex.
US law requires that the best method rule be used to
determine which transfer pricing methodology is best
for deciding on the appropriate arms-length price of a
given transaction. The IRS defnes this as the method
that, under the facts and circumstances, provides the
most reliable measure of an arms length result.
Given the inherent ambiguity in this language (the
IRS does not defne most reliable), a US private
company doing business overseas may want to
consider undertaking a formal transfer pricing study.
This will provide contemporaneous documentation
that supports the companys transfer pricing policies,
with the goal of helping those policies withstand
increased IRS scrutiny.
Transfer pricing
US companies operating abroad should take note that the IRS
has announced its intention to increase its focus on the use of
transfer pricing.
effectively can be complicated and
requires careful planning. One
approach is to create a tax-effcient
debt structure by putting the
lender in a low-tax jurisdiction and
the borrower in a high-tax
jurisdiction.The borrower can take
a deduction on the interest paid on
the loan, while the lender pays a
comparably lower tax on the
interest income (or no tax at all).
In creating a foreign entity, private
companies will need to take care
that they choose the right legal
form for the country in which
theyre operating. Ideally, the form
of entity they choose will allow the
company to build a business
structure that is suffciently
fexible to accommodate growth
without undue tax consequences,
as well as accommodate future
changes in tax regulation. Often it
may also be advantageous to own
foreign subsidiaries through
foreign holding companies or even
regional sub-holding companies.
This is just one aspect of integrated
global structuring that can
improve cash redeployment
between foreign entities and make
it easier to implement tax-
reduction strategies.
Conclusion
As the geographic footprint of US
businesses continues to expand and
international growth opportunities
increase, there is a strong imperative
for private companies to assess their
tax structure from a global
perspective. Quite likely they will
fnd that integrated global
structuring can help them achieve
their growth objectives more
effciently, both at home and abroad.
Here are some other international tax issues
companies need to keep in mind:
Withholding taxes
Certain business charges are subject to withholding
taxes in foreign jurisdictions.
These include taxes on interest, royalties, dividends,
and some services.
Effcient capital structure or
intercompany debt
If a US company uses debt to set up a foreign business
(i.e., by loaning cash to the subsidiary), the subsidiary
can take a deduction on interest expense. This reduces
the amount of taxable income in that foreign
jurisdiction.
Subpart F income
Normally, payment of US income tax on the earnings
of a foreign subsidiary is deferred until those earnings
are repatriated in the form of a dividend. However,
there are certain key exceptions, which include
foreign passive income (e.g., interest, rents, royalties,
and certain dividends) and earnings from certain
types of intercompany transactions. These earnings
must be immediately included in US taxable income.
Indirect taxes
Examples of these are the value-added tax (VAT) and
customs duties. The VAT charges a sales tax at each
stage that value is added to a given product or service.
A US company that is the importer of record in a
foreign jurisdiction is responsible for collecting and
administering the VAT, although its cost is ultimately
paid by the end-user (normally the consumer).
Taxing matters
The global tax environment:
challenges for multinationals
For multinationals, the need to
operate in many locations makes
tax management especially
diffcult, and just complying with
the tax laws is far from easy. The
main problem is the large number
of laws and regulations to consider,
and the accelerating pace of
change.
There were literally thousands of
tax law changes around the world
from 2009 to 2010. In the U.S.
alone, sales tax rates were adjusted
in 850 different tax jurisdictions. In
Brazil, where there are over 5500
tax jurisdictions, hundreds of sales
tax rates were modifed. In these
and other countries, policy changes
have affected income taxes, VAT or
goods and services taxes (GST),
payroll taxes, customs duties and
special sales taxes (like Taiwans
commodity tax), environmental
taxes, property taxes, and so on. If
you include additional
complications, such as court
rulings in tax cases and changes in
how revenue agencies administer
tax collection, the collective impact
on tax management is truly
enormous.
Although technology offers tools
companies can use to maximize
cost effectiveness and achieve the
best tax rates globally (enterprise
resource planning systems, or ERP,
for example, include tax functions),
the sheer number and extent of
changes in global tax regulations
make it hard for multinationals to
handle their tax situations on their
own.
Most of the pressure bearing on the
corporate tax work environment
stems from obligations to comply
Steven Go
PwC Taiwan Tax Partner
steven.go@tw.pwc.com
with the regulations of multiple tax
agencies. Corporate tax leaders
must keep pace with changes in tax
regulations and tax rates wherever
they operate. Applying technology
to established tax regulations can
provide considerable assistance to
tax managers, but they must still
contend with the large number and
frequency of changes being made
to those regulations. Indeed, the
pace of change is still rising. As tax
authorities become increasingly
strict in how they assess and collect
taxes from corporate taxpayers,
the strict supervision approach
creates major tax management
challenges for multinationals.
Global tax challenges
The U.S. has indicated that it
intends to adopt IFRS as its
reporting standards as early as
2014. U.S. subsidiaries that have
come to rely on their information
systems to produce fnancial
statements must respond carefully
to any impact IFRS may have on
their overall operating procedures,
information systems and of human
resource allocation. They must also
make an early assessment of the
tax risks from introducing IFRS,
draw up effective plans and carry
them out cautiously. And while
many multinationals engage in
trade or business activities in the
U.S. through a permanent
establishment (PE), as opposed to a
subsidiary, the IRS is already
appointing additional tax experts
to assist in auditing multinationals
PEs in the U.S.
National tax authorities are
pursuing tax system reform and
pressing harder for strict
compliance with tax regulations,
driven by changes in the external
tax environment, changing
economic and business conditions,
and heightened demands from
governments for tighter tax
management and additional
revenues. This shows up, frstly, in
unabated transfer pricing disputes
and negotiations. Secondly,
nationwide audit approaches are
on the rise among tax agencies
around the world. (Representative
approaches include the
Netherlands Tax Control
Framework and Irelands
Cooperative Approach to Tax
Compliance.) These schemes may
translate into yet more work for
corporate tax departments already
burdened by the changing tax
environment, and they are part of
a global pattern of change:
The U.K. has introduced rules
requiring senior accounting
offcers to take personal
responsibility for their
companies tax accounting
arrangements.
The EUs broad package of VAT
simplifcation measures,
implemented in 27 member
countries, will impose
considerable costs on
multinationals in the short term,
though it promises to yield
benefts down the road.
India is implementing a two-
stage GST system in 2011 to
replace over ten existing indirect
taxes. In the long run,
corporations will beneft from
this tax reform, but in the short
run it will cost them
substantially in terms of tax
management, information
technology resources and
outside consulting costs.
Malaysia is set to implement a
GST in 2011, in this case to
replace sales taxes.
China intends to eliminate its
business tax by bringing it within
the scope of VAT taxation. The
current business tax is levied on
sales of services, transfers of
intangible property, and real
estate sales. Since the business
tax rates are generally lower
than the standard VAT rate, the
switch to VAT will mean applying
higher rates, increasing
companies tax burdens and
operating costs.
The Gulf Cooperation Council
countries (Saudi Arabia,
Bahrain, Kuwait, Oman, Qatar
and the United Arab Emirates)
are preparing to implement a
new GST system within two to
three years. This will be the frst
time a broad-based value
added-type business tax has
been instituted in the Middle
East.
In addition, governments
everywhere are using
environmental taxes, carbon taxes,
carbon emissions trading and other
methods to raise revenues, opening
up new sources of uncertainty for
multinationals over their tax
burdens. These new forms of
taxation add to frms costs, forcing
them to look for solutions.
Clear trend emerging from
the changing tax environment
Bilateral tax agreements and
information exchange networks
incorporating OECD standards
have become fairly common, with
the number of recently
renegotiated tax agreements
approaching the 100 mark. The
OECD and WTO have been working
together to promote international
coordination on taxes. Meanwhile,
the OECD-led dialogue on
corporate restructuring may also
show results in the near future.
Over 3o member countries have
already adopted new regulatory
compliance rules.
In the past, companies could fle
taxes in either soft or hard copy.
Now, they are more likely to be
required to fle electronic returns,
as this enables tax authorities to
audit tax flings electronically as
well. Some countries already use
statistical sampling audit as their
principle audit tool. This method is
likely to be widely adopted by
national tax agencies, so tax
professionals must have the
technical competence to meet the
associated tax management
demands.
For corporate tax departments, the
trend in tax management is quite
clear, and it means that workloads
are set to increase a great deal. In
many instances, corporate tax
departments are unable to achieve
their objectives when they are
forced to handle major tax
management cases without
additional resource support. Such
cases are not the sort that
corporate tax department
personnel can resolve quickly, so
frms must make sure to document
them thoroughly and resolve them
with care.
These are just a few of the pressing
compliance challenges facing
multinational tax departments.
Beyond meeting these challenges,
tax departments must also develop
plans for implementing their frms
global tax vision.
Demands on corporate tax
departments growing
Bound by cost management
pressures and resource constraints,
corporate tax departments ability
to play their tax management role
effectively is deteriorating at an
accelerating rate. Corporate tax
professionals are being asked to do
more tax management work with
fewer resources, and normal is
now seems to be defned as
unrelenting toil.
Companies need to go beyond
tackling information technology
problems and redouble their efforts
to develop in-house tax talent. It is
quite diffcult to recruit talent with
tax management backgrounds,
especially in international tax
management. Experts on transfer
pricing, tax withholding, customs
duties, commodity taxes, VAT or
GST are even scarcer. In fact, the
staffng problems of corporate tax
departments have persisted for
years, as younger generations tend
to feel that corporate tax
management is an unglamorous
feld. As a result, corporate tax
managers tend to be older, with
many approaching retirement age,
and flling senior tax management
positions is seldom easy.
Unfortunately, this situation is not
going to improve in the near
future, so corporations will
continue to suffer global tax
management staffng headaches.
Cross-border M&A deals are a
natural consequence of
globalization and the need to
pursue regional business strategies,
with the result that tax teams must
shoulder new and unfamiliar tasks.
This creates major challenges for
maintaining tax law compliance
and controlling costs. During the
recent worldwide recession and
subsequent recovery, some
multinational groups were quick to
absorb or merge with troubled
companies, becoming bigger
enterprises in the process. Even
now, healthy companies are
vulnerable to hostile takeover bids
if their share prices weaken. These
cross-border M&A involve
additional tax jurisdictions and
different cultures, tax rates and
regulations that will have to come
under multinational tax
management, adding to the
pressure on corporate tax
departments.
The global fnancial crisis led
predictably to lower tax revenues,
so to boost tax collection, most
national tax agencies have
tightened their supervision, with
audits covering tax avoidance as
well as illegal tax evasion. In recent
years, tax agencies around the
world have been expanding the
scope of legal compliance in order
to safeguard tax revenues, and of
course they hold the upper hand in
the perpetual struggle between tax
collectors and taxpayers. By
establishing information
exchanges and bilateral tax
agreements, vigorously promoting
tax information transparency, and
introducing anti-tax avoidance
legislation, they have effectively
reduced incentives for avoiding
and evading taxes, but this clearly
puts more pressure on corporate
tax departments.
The number and frequency of tax
regulation amendments in
different countries increases
uncertainty with respect to tax
burdens, thus posing a major
challenge to corporate tax
departments. Another development
is so-called moralistic legislating,
which relies on moral legitimacy as
opposed to legal sanctions to
dissuade large companies from
using tax planning to shirk their
taxpaying obligations. When
managers at multinationals decide
important tax payment matters,
moreover, they must bring possible
future legislation into
consideration.
Corporate tax management in
an era of strict supervision
In recent years, corporate tax
management personnel have found
themselves in a tax-regulatory
environment characterized by
increasingly rigorous supervision,
and this trend shows no sign of
abating. Under these
circumstances, the sense that tax
agencies demands may have
become excessive has gained
currency. As a result, tax agencies
and corporate taxpayers have come
together in some advanced
countries to alter the pattern of
corporate tax administration,
throwing out the traditional
approach audits of books and
records in favor of more strategic,
higher-level tax risk audits.
The basic premise of the new
approach is consistent recognition
by both the tax authority and the
taxpayer, with corporations
required to establish and maintain
certain controls and management
procedures, which are then
subjected to relatively loose
examination. The theory is that
corporations must allocate costs
and resources suffcient to
maintain reasonable standards of
tax code compliance. Currently,
only a few countries can be
considered leaders in this area, so
there is much room for
improvement. Before corporations
can reap benefts from changing
the system, however, there are a
number of changes they must make
themselves. For example, they
must:
convert internal tax information
search and maintenance into
outsourced data management;
adopt an automated tax payment
system for accounts payable and
receivable, in place of the current
practice whereby staff choose
which tax law provisions to
apply;
switch from detailed and
invasive tax audits to audits of
the risk management
arrangements;
go from relying on information
technology for the production of
fnancial statements to using
business intelligence and
reporting tools accessible by tax
experts; and
have suppliers maintain a tax
planning search engine instead
of establishing and maintaining
tax rules in the main ERP
module.
Conclusion
Uniformity of tax regulations in
countries around the world would
greatly simplify tax work for
multinational corporations, but can
it be achieved? In the short term,
the diffculties appear
insurmountable, but in the longer
term, the ideal should not be
considered beyond reach. If the
OECD, the UN, the World Bank and
IMF act decisively on global tax
management, laying down
reasonable guidelines and
leveraging the latest technology,
then considerable progress could
be made in that direction.
International tax coordination
would improve tax policy, and it
would also boost tax revenue,
which is, after all, what enables
governments to provide services to
their people.
Multinational corporations have
long relied on technology to deal
with complex problems. The
problems of international taxation
are no exception, so it is inevitable
that multinationals will tend to
automate tax management work.
For years now, many companies
have relied on the tax functions in
ERP systems. Without human
intervention, however, such
systems cannot integrate changes
in tax rates, regulations and logic.
Clearly then, multinationals
require a more advanced
automation system before they can
fully meet the management
challenges of todays complex and
rapidly changing global tax
environment.
(This article was completed with
assistance from Joseph Wu. It
originally appeared in Tax Journal,
Vol. 2116, on 10 July 2010.)
PwC Update
The United States is expected to
begin enforcing the Foreign Account
Tax Compliance Act (FATCA) on 1
January 2013. The new law,
intended to prevent U.S. taxpayers
from evading taxes through offshore
accounts, requires foreign fnancial
institutions (FFI) to perform detailed
checks of their accounts and report
account holders names, addresses,
taxpayer codes and other
information capable of identifying
U.S. accounts. If an FFI fails to
comply, 30% withholding tax will be
imposed on withholdable payments
to the FFIs accounts, including U.S.
- source payments of interest,
dividends and fees for services, as
well as proceeds from asset sales that
may generate U.S.-source income.
The U.S. government has continued
to issue guidance on FATCA since its
initial provisions were passed on 18
March 2010. The latest guidance
(Notice 2011-34, issued on 8 April
this year) is broken down into seven
sections:
Section I updates procedures for
FFIs to follow in identifying U.S.
accounts among their preexisting
individual accounts;
Section II expands on the
defnition of passthru payment
and clarifes participating FFIs
withholding obligation with
respect to passthru payments;
Section III provides guidance on
which categories of FFI will be
deemed compliant under the new
law;
Section IV adds guidance on the
reporting obligations of
participating FFIs with respect to
their U.S. accounts;
Section V provides rules for the
treatment of qualifed
intermediaries and their
participation in FFI agreements
with the IRS;
Section VI provides guidance on
the laws application to affliated
groups of fnancial institutions
participating in FFI agreements;
and
Section VII states the effective
date of FFI agreements.
The key point with regard to
passthru payments is that FATCA
requires participating FFIs to
Latest guidance shows broader
FATCA impact
Taiwanese fnancial
institutions need to
pay special attention to
FATCA

withhold 30% tax on payments
transferred to non-participating FFIs
or recalcitrant (non-compliant)
account holders.
According to Albert Chou, director of
PwC Taiwans U.S. tax unit, before
the latest guidance was issued, many
people had believed that mandatory
withholding would be restricted to
U.S.-source income or withholdable
income that is directly traceable.
However, the defnition of passthru
payments established by the new
guidance essentially broadens the
scope of tax withholding under
FATCA in order to prevent non-
participating fnancial institutions
from investing in U.S. assets
indirectly through participating FFI.
For example, if a Taiwanese bank
engages an FFI to provide custodial,
trusteeship and clearance services,
payments from the FFI to the
Taiwanese bank may be subject to
FATCAs 30% withholding tax rule.
This demonstrates FATCAs growing
potential impact.
Speaking of the new guidance,
Kuan-Pin Chang, a director in PwC
Taiwans fnancial tax unit, said:
Taiwanese fnancial institutions
need to pay special attention to the
new provisions that foreign banks
in particular their private banking
divisions and customer relationship
managersmust comply with,
which must be completed within one
year after the signing of an FFI
agreement. So, a Taiwan bank that
signs an FFI agreement with the IRS
will face a huge potential impact on
its wealth management business and
fnancial planning for high-net-
worth U.S. taxpayers.
Another point is that rules in
Taiwans Personal Information
Protection Act, passed just last year,
confict with FATCA. According to
Brian Chen, Senior Manager in PwC
Taiwans Tax and Legal practice, If a
Taiwanese bank signs an FFI
agreement and needs to provide
account holder information to the
U.S. government, it must frst notify
each account holder individually and
obtain their written consent in order
to comply with the new Personal
Information Protection Act. Banks
must carefully assess the changes
that signing an FFI agreement with
the IRS would have on their KYC/
AML (know your customer / anti-
money laundering) procedures, as
well as the external costs that would
come with FATCA compliance.
Summing up, PwC Taiwan Tax
Partner Richard Watanabe noted
that the next guidance the U.S.
government releases on FATCA may
include a draft FFI agreement and
the contents of information fling
forms. From the general trend, it
appears that the U.S. government
feels it has no choice but to stand
frm behind its commitment to
uncover U.S. taxpayer accounts
worldwide, although banks and
industry insiders in many countries
have used offcial channels to
express their views on the laws
obstacles and impracticalities, and
the IRS continues to issue new
guidance taking different views into
account.
With Taiwan set to introduce
International Financial Reporting
Standards (IFRS) offcially on 1
January 2013, the same day that
FATCA takes effect, our advice to
Taiwans fnancial institutions is to
face FATCAs impact squarely and
carry out a comprehensive
examination and analysis without
delay.
Financial Advisory Services
26F, 333 Keelung Rd., Sec. 1
Taipei, Taiwan 11012
Tel: +886 2 2729 6666
Fax: +886 2 2757 6529
Tax and Legal Services
Tel: +886 2 2729 6666
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Hsinchu, Taiwan 30075
Tel: +886 3 578 0205
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Hsinchu, Taiwan 30078
Tel: +886 3 500 7077
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Taichung, Taiwan 40309
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Fax: +886 4 2328 4858
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Tainan, Taiwan 74147
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Tel: +886 7 237 3116
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Customer Service Line
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Taipei
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PwC Taiwan Contacts
www.pwc.com/tw
2011 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to PricewaterhouseCoopers Taiwan or, as the context requires, the
PricewaterhouseCoopers global network or other member frms of the network, each of which is a separate and independent legal entity.

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