||ITR coverage and key takeaways from the Asia Tax Forum 2016 Day 1 & 2:|
Achim Pross, Head of International Cooperation and Tax Administration Division, Centre for Tax Policy and Administration, OECD
- Country-by-country reporting (CBCR) is a long-term project to create a level playing field not based on tax secrecy.
- Exchange of information and BEPS are two very different projects.
- BEPS project was aimed at tackling a lack of transparency, lack of coherence and a lack of substance, or the artificial segregation of taxable income from the activities that generate it.
- BEPS actions split into minimum standards (Actions 2 – 5); reinforced international standards (Action 6 – 10); common approaches and best practices (Actions 11 – 14) and analytical reports and measuring BEPS (Actions 1 and 15).
- 62 countries now directly involved in work of OECD Committee on Fiscal Affairs.
- BEPS work fast-paced, inclusive and transparent.
- BEPS not finished. Still more work to be done, eg, interest deductibility; harmful tax practices; treaty abuse; avoidance of permanent establishment.
- Common Reporting Standard: 98 jurisdictions now committed to exchange by 2017 or 2018; two not – Panama and Bahrain.
- 80 have signed CRS Multilateral Competent Authority Agreement.
Hot Topics in Asia Pacific Taxation: Is it all about BEPS? Really?
- Tax function is a cost so you have to work closely with the company.
- Asia tax environment changings; formerly based on tax incentives and the export of goods and services.
- Important to understand business transaction and to be able to be explain this to the tax authorities.
- More anti-avoidance measures, eg General Anti-Avoidance Rule (GAAR); specific anti-avoidance rules (SAAR) and Limitation on Benefits (LoB).
- GAAR in India: knee-jerk reaction after last Vodafone case.
- What skills do you need in your tax functions to manage changing relationship with tax authorities?
- Remember, tax policy making is a political process, so you have to think of what will motivate the political decision-makers.
Hot Topics in International Tax (US, EU and OECD)
- Inversions: Irish changes to residency rules.
- Knowledge development / patent / innovation boxes on the increase.
- Attraction of UK incl. generous participation exemption regime, low tax rate.
- But anti-avoidance measures in UK too, eg, interest deductibility limit; criminal liability for company employees who facilitate tax evasion.
- Regulatory more than tax concern about Brexit and the impact on passporting; US companies and banks like to come into Europe through London.
- Difficult to think of substantive statutory change to US tax code in the last eight years.
- “Silly season” as far as tax proposals of US presidential candidates are concerned. Donald Trump would slash rates but greatly add to the deficit; Hillary Clinton’s plans would broadly end up with the same tax burden as now.
BEPS: Everything there is to know in 75 minutes
- Not a surprise that mandatory disclosure was slower to be taken up as a minimum standard.
- Mandatory arbitration not a minimum standard; it will be in multilateral instrument (MLI) so jurisdictions won’t be guilty of violating any commitments if they don’t accept it.
- MLI is mechanism for a fast-track tool to get into treaties.
- Questions to be answered: LoB or principal-purpose test; what type of arbitration? Scope of MLI.
- Also questions about which accounting standards to use for CBCR;
- Disparity between what is discussed in CBCR and how the authorities assess your value chain. Still traditional methods.
- CBCR filed in country of parent and competent authority agreements with jurisdictions where you have subs or PE take care of the rest.
- Discussions on-going with tax authorities about intelligent use of CBCR info.
- BEPS proposals significantly lower the threshold for independent agent PE test.
- Much tighter rules on profit attribution required.
- Perplexing that headquarter charges thought of as base-eroding payments.
- Very high risk of economic double taxation if current situation on HQ charges persists.
ENFORCEMENT IN SOUTH EAST ASIA: What's with the aggression, man?
- No withholding tax on headquarter charges but still can be offset against corporation tax in local country.
- Use of local comparables proving to be problematic.
- No substitute for insight from your local team or adviser.
- Move towards centralization, eg CBCR, but be careful to apply to local situation.
- Preparation for meeting tax authorities – presentation of documentation, followed up by explanatory slides, is very useful.
- China, Taiwan don’t recognise client-adviser privilege. Communication with lawyer privileged in Singapore.
- Keep number of people involved or who know about a transaction small.
CHINA: The only constant is change
- Multiple-rate, VAT system in force from May 1 2016.
- Foreign companies can’t register for VAT.
- VAT occurs at branch level, not legal entity; no grouping.
- No repayment of excess, VAT credit refunds.
- VAT on financial services, one of the few jurisdictions worldwide to do so.
- Some services zero-rated elsewhere are exempt in China.
- Moving to self-assessment system for treaty benefits.
- Announcement 7: indirect transfer of assets by a nonresident enterprise, replaces 698, though not entirely; expands scope of penalties for not reporting transaction that turns out to be taxable.
- Can you take tax authorities to court in China? The answer depends on which tax adviser you ask!
- Only the end of beginning of further tax policy and administrative changes.
- Need for business to be more proactive.
INDIRECT TAXES: China and India - Who will win the race to complete their system?
- China won! VAT system in effect from May 1 2016.
- New prediction for GST introduction in India: October 1 2017.
- How to operate the Interstate GST (IGST) system in India is big question.
- VAT on financial services, consumer-to-consumer transactions in China.
- New VAT system in China should be seen as a business change not a tax change.
- Multiple decision-makers (central, provincial, local) on Chinese taxes, so be careful.
- Need for real-time information systems that collect and credit the VAT at the same time.
INDIA: Tax Trends and Developments
- Budget 2016 developments: tax equalization levy; CBCR; patent box.
- CBCR marks insatiable desire for information.
- Penalty provisions for misreporting, underreporting.
- Dispute resolution trends incl. mandatory stay where arrears paid; DRP decisions not appealable by tax authorities; more AAR benches; introduction of APA rollback.
- APA – best thing to happen to TP in the last number of years.
- Aim to eliminate interstate tax, which isn’t creditable.
DISPUTE RESOLUTION: I don't want to fight you but...
- Offshore marketing hubs; supply chain restructuring: targets of NZ tax authorities.
- Contract, conduct, control: key factors.
- Treaty relief; unilateral tax relief; exemption: Singapore’s methods against double taxation.
KOREA: Still difficult to deal with?
- Key amendments to Korean tax law in 2016 incl. foreign investment tax incentive; real property holding company status; VAT on electronic services; automatic exchange of information – Common Reporting Standard; CBCR.
- Beneficial ownership; entity classification; Supreme Court cases; holding-company litigation.
- Tax audit trends: taxpayers should always be prepared for a tax raid, which can involve non notification; seizure of books and records, both print and electronic; criminal prosecution
- Tax appeal cases in tax tribunal have gone from c.7,200 in 2010 to 10,400 in 2015.
- Tax revenue shortfall of W11 trillion ($10 billion) in 2014. Fewer audits but larger assessments. Net profit from tax collection in 2015 for the first time in four years.
TRANSFER PRICING: How to refine your policies on related-party transactions
- 3 months after end of financial year to submit your local file in Korea, 12 months in Japan. These differences don’t help taxpayers.
- Different levels of development in tax authorities in Asia-Pacific and not every tax administration is the fairest assessor.
- Sometimes APAs can take so long, they become PPAs (Past Pricing Agreements!)
- Managing APAs in Australia is time-consuming and costly.
- Changing views of APAs because of change in how businesses are organised, eg vertically.
- Diverted Profits Tax assessment almost a prerequisite in the UK before an APA application.
- Check tested party, profit level indicators are correct before you get to comparables.
- Nothing unusual about business restructuring, reorganisations so BEPS is a good time to look at how you do things.