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Digital tax and DST concerns dominate ITR’s Asia Tax Forum 2020

The tax implications of COVID-19 are not sparing any business

Indirect tax and transfer pricing dominated this year’s ITR Asia Tax Forum as double taxation risks from digital services taxes (DSTs) continue to rise and many prepare for the OECD’s final digital tax proposals due in October.

As the Asia-Pacific (APAC) region adopts digital taxation rules, some countries are looking to combine local indirect taxes with DSTs, potentially hitting transactions twice, tax directors told delegates at ITR’s Asia Tax Forum 2020, held virtually on August 25 & 26.

Amit Gupta, director of tax at Dell, said that unilateral DSTs are a message from governments that they are running out of patience.

An increasing number of countries, tired of waiting for an OECD consensus on an international solution, have launched their own DSTs including India, IndonesiaSingapore and Malaysia.

Multinational enterprises (MNEs) are concerned that the growing number of unilateral tax measures increases the risk of being taxed by two countries simultaneously.

“Governments are almost picking one or the other, at least at the moment,” said Matthew Campbell, global lead for indirect tax technology and manager of indirect taxes in APAC at JP Morgan.

Campbell and several other tax executives explained in further detail how multiple indirect taxes in a country such as Malaysia will lead to taxing the same transaction twice.

MNEs are also struggling with Malaysia’ssales and services tax (SST), which is causing uncertainty and complications for companies operating in the country. One of the key issues has been the tax collection for business-to-business (B2B) transactions.

“You've got this problem under the service tax regime where it's a single stage tax, meaning that if you are a registered person providing a service, which is in the list of taxable services in the regulations, you have to collect the 6% tax, but it's not recoverable by the receiving business,” said Ben Wolfe, senior regional tax manager at Prudential.

Taxpayers air their concerns over pillar one and pillar two

While local digital taxes are an immediate concern for many businesses, tax directors were keen to discuss the OECD developments at the international level.

Establishing segments and different entity levels within a group of companies may answer some of the questions the OECD is grappling with on the scope of Amount A in the pillar one blueprint, according to Matt Andrew, head of the tax treaty, TP and financial transactions division at the OECD.

In order to understand the scope and the potential application of the nexus rules, Andrew said corporate segmentation holds the key to pillar one blueprint. He said it is important to determine what the differences are between a digital services segment, a consumer-facing segment and the out-of-scope entities within one multinational group.

However, the OECD faces opposing views about the scope of Amount B in its pillar one proposal, including calls for a broader baseline activity test and demands to keep the focus on marketing and distribution activities.

Working Party 6 (WP6), which is the transfer pricing group within the OECD, has been in discussions on the key features of Amount B in the pillar one profit attribution rules, looking at which entities are within scope and what the scope of those baseline activities should be.

Pillar one proposes a three-tier mechanism where Amount B will establish fixed returns for baseline marketing and distribution activities that take place in the market jurisdiction based on the arm’s-length principle (ALP).

Nevertheless, tax professionals say they have more questions than answers on pillar one of the OECD’s digital tax proposals, and expect a lot of difficult administrative work on Amount A.

Many fear that double taxation and tax controversy will persist because the measures will remain complex despite the OECD’s insistence on keeping the framework of pillar one as simple as possible.

“There is a mountain of work ahead on compliance and administration under pillar one,” said one vice president of tax at a large consumer goods company, who spoke about preparing for the upcoming global digital tax reform at the ITR Asia Tax Forum.

The heavy burden of COVID-19

Outside indirect taxation, the tax implications of COVID-19 are not sparing any business operating in the Asia Pacific region.

Panellists at ITR’s Asia Tax Forum advised tax directors to actively engage with international tax transparency initiatives and be open about their financial planning. This comes as advisors predict an increase in scrutiny on MNEs across the region.

“If you’re naked, you’d better look good,” said Barbara Voskamp, partner in the ASEAN division at Loyens & Loeff.

Voskamp added that companies should offer active statements on their tax policies to “control the narrative”.

Asia-based tax directors are expecting more controversy and litigation as a result of the COVID-19 pandemic.

Tax directors at large multinational companies told ITR that it may be difficult to raise taxes in this political and economic climate given the ongoing pressures on businesses and individuals. This could open the door to more tax litigation as a way for governments to recover funds in 2021.

“There will be sensitivities to increasing taxes given the fragility of the economies, so I think there will be a focus on controversy issues and large multinational corporations will be in the crosshairs of that,” said one head of tax based in India at a pharmaceutical company. “This will increase the importance and profile of tax functions in large organisations.”

In response, companies facing tax scrutiny are turning to operational transfer pricing (OTP) systems to pre-empt difficult questions from tax authorities.

The COVID-19 pandemic has raised new questions about corporate tax residency and permanent establishments, but OTP has helped some companies answer these questions.

“Operational transfer pricing is one of the most important functions and loaded with a lot of risks and responsibilities,” said the head of transfer pricing at a manufacturing company based in Singapore.

In the meantime, the OECD’s Matt Andrew told conference attendees that the OECD is planning to have draft TP guidance on COVID-related matters ready internally by September or October. It then intends to circulate the guidance in November to seek the views of WP6.

Depending on the views of OECD members, WP6 and the Forum of Tax Administration’s mutual agreement procedure forum, a decision will be made on whether to publish the guidance and whether it will be on a consensus basis or not.

While the COVID-19 TP guidance is still in draft stages, the final OECD guidance on financial transactions transfer pricing (FTTP) has left open the potential for serious disagreements about credit ratings in different countries.

Tax directors at ITR’s Asia Tax Forum said there will be national divisions over group credit rating versus stand-alone ratings. Countries like Singapore could chart a different path to the OECD guidance on group credit ratings and this will lead to more problems for businesses in the future.

Tax authorities single out APAs from CbCR data

Taxpayers are also facing questions from revenue authorities about the advance pricing agreements (APAs) included in their master files as part of their country-by-country reporting (CbCR) obligations.

Tax directors at ITR’s Asia Tax Forum said companies are expected to explain their APAs and the tax outcomes. Although this is not the beginning of an audit trend from CbCR data, it may be a sign of rising scrutiny.

Many tax professionals are still expecting a wave of audits from CbCR in the future and say that businesses should not be complacent. “It may come in the future,” said one head of transfer pricing at a manufacturing company based in Singapore. “We have to be aware of the transparency.”

Full details about the Asia Tax Forum 2020 and how to sign up for next year’s event can be found here.

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