Keeping on top of the domestic tax code is a tough task for U.S.-based companies, but the challenges are massively greater for organizations that must also cope with developing regulations in overseas jurisdictions. China looms large many companies’ expansion strategies, and Jeff Westphal, president and CEO of global tax technology firm Vertex Inc., recently returned from a tour of that country, where he met with business leaders and service providers with a view to getting a deeper feel for the markets, the tax regime and the reality of doing business today in China. I talked with Westphal about China’s developing tax structures and what he sees as an ongoing trend of “hyper-regulation” by governments worldwide.

John Cummings: How does the Chinese tax code compare with the U.S. code in terms of complexity?

Jeff Westphal: I’m not myself a certified tax professional, but I’ll give an opinion based upon not only on my own observations and conversations with certified tax professionals in China, but also on the advice of my chief global VAT officer and chief income tax officer. If you look at the Chinese tax regime on paper, it does appear to be pretty straightforward and simple. When you talk to people who have substantial operations and substantial complexity of business in China, the key thing you learn is that China’s tax laws are more like guidelines, and there’s increasing diversity of interpretation in the application of Chinese tax law on the part of various jurisdictional authorities.

So the challenge for foreign companies doing business in China is predictability. You can’t just read the law and get a good, hard, black-and-white answer, and that creates unique challenges for the non-Chinese.

The other thing that’s really interesting is that while China has explosive economic growth — and you see it everywhere, in terms of the road infrastructure, telecommunications, just everything — the back-of-the-house infrastructure in terms of Chinese-owned and operated businesses is very underdeveloped, in the opinions of thought leaders there. As is the notion of a corporate tax industry — there is no association of corporate tax professionals in China!

So the point there, and one of the main reasons we went, was to share with Chinese tax professionals that when your firm grows outside of China or you acquire businesses outside of China there’s a whole array of different tax regimes that you’re going to have to deal with. And that poses a real challenge.

So you have U.S. companies that are going to China to do business and that need to understand the ambiguities of Chinese tax in these jurisdictions and how to fit that into their global system. And you have Chinese companies looking to do business around the world that have very little appreciation of the rigor and complexity that exist elsewhere and don’t have any very mature systems internally whatsoever.

JC: Sounds like the differences are cultural as much as anything.

JW: I’m not sure it’s a cultural issue so much as a state of development following the natural order of affairs. China’s growth economy started out as a market for low-priced talent that could be applied to manufacturing processes; the country is now developing its own internal economy, and that wealth is looking to grow outside. Companies and economies mature at varying rates, and now China is maturing to the point where the country has to deal with administrative infrastructure at a higher level.

JC: From the global viewpoint, can you give me some examples of what you have called “hyper-regulation?”

JW: It’s a very broad notion, but we do see evidence for it. There is a faster pace and depth of change in tax regimes around the world. We see more regimes moving towards indirect tax; there are, I think, seven or eight different regimes currently implementing or considering implementation of new indirect tax structures. The economic climate and all the sovereign debt problems have only led to increasing reports of much more aggressive audit tactics.

Here’s a little history, for comparison … when President Reagan adopted a policy of “no new taxes” back in the ’80s, it was the first time that states aggressively started auditing sales tax. Before that it had been almost a kind of casual agreement with businesses — “Look, you need to collect this for us” — and they didn’t really push back hard on that. The penalties were not that severe. But Reagan had all these unfunded mandates, and he reduced funding to the states, so the states all of a sudden had this tremendous pressure and actually started auditing sales tax. So what we’re seeing with this sovereign debt crisis worldwide is that these jurisdictions, many of which have not really been aggressive auditors, are starting to put a great deal more pressure on their corporate taxpayers.

The big drivers of hyper-regulation are audit pressure, plus pace of change, plus the addition of new kinds of taxes and fees such as the tire disposal fees we see in the US — these kinds of creative means that jurisdictions are coming up with, but which are not actually called taxes, to raise revenue. Those are the three things behind our claim that this is actually an era of hyper-regulation. We don’t see it abating because nobody sees the global financial crisis quickly abating.