Political risk is when a government will unexpectedly change its rules or ways of operation in business. It can often be determined by the stability of the government and the presence of an independent judiciary and legal system. The relationship with other countries is also very important in determining the level of political risk involved in entering a new market. Political differences between countries can create significant and unexpected business challenges, including international or home-country sanctions, consumer boycotts or even violent attacks against the country or firms that trade in that particular country.

The most common type of political risk is selective intervention, which can include restrictions on adjacent border trading, additional taxation and tariffs, restrictions on investment and operations
Restrictions on adjacent border trading can affect everything from securing equipment and supplies, to the travel and assignments of management. These restrictions can include: immigration laws, additional environmental protections, and currency exchange controls, which can occur for short or long periods of time – making it difficult to transfer funds or to collect royalties and profits. Tariffs and export restrictions can be significant, requiring the development of a local supplier network.
The effects of taxation between countries require knowledge that is accurately provided by attorneys and accountants specializing in this field. Companies operating subsidiaries in foreign countries must understand the issue of unitary taxation, which is a method of taxation used by countries to close the "subsidiary loophole" by treating integrated subsidiaries of corporations as a single business entity for tax purposes. This method can monitor the profits of integrated business’ offshore operations to a specific country based on the share of the businesses sales, employment and property located in that country. Many countries also apply withholding taxes on foreign remittances and restrict transfer pricing to ensure they collect their fair share of tax revenue from foreign-owned corporations.

Sources:
http://online.wsj.com/home-page
http://www.economy.com/dismal/