Most Asian countries have been feeling the heat from BEPS for some time now, but many frontier markets such as Vietnam and the Philippines are early in the process of adopting transfer pricing rules aligned with the OECD’s recommendations into their domestic legislations.
Myanmar, Laos and Brunei are interested in transfer pricing but there is still a limited knowledge base among the tax authorities, said a speaker on a panel on international tax developments in South-East Asia.
“South-East Asia is not concerned with being the ‘poster child’ of BEPS like India, or inventing a host of anti-avoidance rules. This region is focusing on the minimum BEPS standards of compliance,” a speaker on the panel said.
A peer review process, under the Inclusive Framework on BEPS, seeks to support countries on the implementation of the minimum standards and monitors, among others, progress on BEPS Action 5 on combatting harmful tax practices. To level the playing field, preferential tax regimes in Asia are slated to be either removed or opened up to the wider economy.
“A lot of change is happening on the ground. Significant activity in Vietnam and Thailand is expected for preferential regimes,” another speaker said on the second day of the forum.
“Thailand has been undergoing significant tax reform and a big push has been made under the new government for Thailand 4.0 – a big overhaul of not just hard infrastructure but also social infrastructure such as laws and taxation. Following a period of rapid changes that have created some taxpayer uncertainty, an election is slated for February 2019, which will restart a formalised legislative process,” a panellist said.
Not part of the four minimum standards but expected to be transformative on a global scale is the multilateral instrument (MLI), or BEPS Action 15, which is driving countries to take a position on their interpretation of substance. One panellist on a tax planning panel noted that, unlike the uniform application of substance in Europe, there was only a “very limited application in Asia, swinging from super tough to super lenient on substance”.
Digital economy
The taxation of the digital economy also featured heavily in discussions on both days.
Achim Pross, head of the OECD’s International Co-operation and Tax Administration Centre for Tax Policy and Administration, commented in his keynote speech, “The focus on the digital economy is tremendous around the world. There isn’t a finance minister who doesn’t want to weigh in on this.”
“The key is to understand – things are changing in this space. Whatever we get it will not be what we have today. It’s a fact of globalisation.”
“Individual countries going after their own solutions risks increased compliance costs and double taxation,” Pross said.
Opinions were split on the question of an interim tax, whether it is needed and how it is going to work.
A speaker on the BEPS in Asia Pacific panel on the second day commented: “There is a consensus on the direction of travel. The question is how to collect.”
“It is harder to interpret what the real application is and what is actually going to change,” another panellist said.
Meanwhile, China was said to be more insulated from the reform movement in the digital economy because taxation in that segment applies in cross-border dealings. One speaker pointed out that three out of five big tech giants under fire for taxation are blocked in China, and therefore the issue has not flared up. “[Taxation is based on] domestic provision of services so China doesn’t have to deal with these as much as other jurisdictions,” the speaker said.
India
The taxation of the digital economy also gave rise to concerns in the Indian market, and a panel on India’s new tax environment drew attention to rising tax collection and the 6% equalisation levy
A transfer pricing expert from India said that although the OECD encourages countries to wait for a consensus on digital taxation, India was among the first to introduce Action 1 measures with the 6% equalisation levy. “But you’re only able to collect so much of so little,” he said.
However, given the current format, he said the levy “could be challenged as unconstitutional”. The government insists the levy was more about making a statement.
“[There is a] lack of predictability. Several times a year there is a new law or complete change which throws projections in disorder,” another panellist said.
Attendants participating in the live audience polls tipped India (64%), China (57%) and Australia (36%) as the top countries with the greatest increase in TP disputes.
In a live audience poll 47% anticipated aggressive tax audits to be the biggest challenge for tax professionals in Asia Pacific in the coming year. This was closely followed by close to one third (32%) pointing to TP documentation as another challenge.
Another poll surveyed audience sentiment toward APA and MAP as the best way forward to manage international tax risks, and while 41% agreed, 41% were unsure.
A taxpayer said, “We tried to utilise APAs as much as possible in the past. But in some countries, like India, the APA process is confusing. It takes much longer than we anticipated. More than 200 companies wait for their application. It is a great tool but you have to think through all the complexities of the APA process. The tax authority comes back to you with more and more questions. So you have to be able to be very patient to go through that process.”
ICAP
Another speaker on the same panel said, “We come to a point in the discussion [where] the authority on the receiving end wants a higher attribution and the paying one wants a lower attribution. We don’t necessarily get a relief on the cost side.”
“Can this be improved? Yes, it can be improved with the authorities and the big markets with programmes such as ICAP,” the speaker said.
ICAP, or the International Compliance Assurance Programme, is a voluntary programme the OECD is rolling out, which might not provide the same degree of legal certainty as an APA but offers a lower risk on audit for permanent establishment and transfer pricing exposure.
“You sit at the table with eight tax authorities and it moderates the view of all of them. Having a multilateral conversation once seems logical rather than going through each [tax authority] unilaterally,” one panellist said.
“The idea of the ICAP is simple but the implementation is particularly challenging, especially for the taxpayers,” the panellist added.
A panel on transfer pricing discussed the new paradigm of joint and simultaneous audits in the Asia-Pacific region, and how to deal with it.
One panellist said, “First, we first think about the aggressiveness of the tax authority for our industry. Second, what is the success rate of the programme?”
“Bilateral agreements in APAs are seen as more balanced, but you may need to go unilateral due to having multiple countries,” the panellist said, adding that “unilateral APAs used to be non-disclosure but that’s changing.”
China
Stakeholders in China are focusing on implementation of new regulation, such as those on beneficial ownership, while keeping an eye on potential future changes. The country still has grey areas in dispute resolution that differ from international practices.
China’s State Administration of Taxation still had limited resources available and was largely focused on getting MAPs processed, one speaker pointed out, saying there wasn’t much of a framework to get private or public rulings.
“MAP is a must have, whereas APAs are nice to have,” one panellist commented.
Another panellist said China preferred a combination of MAP and APA, and prioritised APAs if the taxpayers had a concluded audit case.
Other panellists agreed that the peer review process under BEPS Action 14 would be beneficial for taxpayers. “China hasn’t signed onto it yet but it will put pressure on the Chinese authorities to align with the OECD, and a strategy to relieve double taxation in the long term,” one speaker said.
