Regulation & Standards

Taxing times

Published: May 2013

According to the 2013 World Bank ‘Doing Business’ report, central Asia recorded the biggest improvement in terms of time required to comply with profit, labour and consumption taxes of any region worldwide over the last eight years.

However, the Asia Business Outlook Survey conducted by the Economist Corporate Network in December 2012 underlines the disparity within tax policy across the region. The survey found that tax rates were a ‘major issue’ for just 10% of Asian multinationals with a regional headquarters in Singapore or Hong Kong, whereas one third of those headquartered in Tokyo, 25% in Shanghai and 18% in Kuala Lumpur described tax rates as a negative factor.

These findings are largely reflected in the World Bank report, which ranks Hong Kong and Singapore as the fourth and fifth easiest places in the world to pay tax based on the number of payments, time and total tax rates. Japan, on the other hand, was the only Asian country to introduce new taxes in 2011/12 (although it also cut its corporate income tax rate).

Where is paying taxes easiest and where most difficult?

Easiest Rank Most difficult Rank
United Arab Emirates 1 Cameroon 176
Qatar 2 Mauritania 177
Saudi Arabia 3 Senegal 178
Hong Kong SAR, China 4 The Gambia 179
Singapore 5 Bolivia 180
Ireland 6 Central African Republic 181
Bahrain 7 Republic of Congo 182
Canada 8 Guinea 183
Kiribati 9 Chad 184
Oman 10 Venezuela, RB 185

Source: Doing Business database

Differing tax rates are not the only challenge facing corporate treasurers in Asia. Efficient tax planning depends on clarity, but this is often undermined by the practice of granting tax concessions to multinational companies (MNCs) on an ad hoc basis without clear guidance that could be used by other companies to seek similar concessions.

The fact that some countries fail to distinguish between revenue and capital when it comes to taxation is a further obstacle to a consistent regional treasury approach.

The dominant regional economies have been among the most proactive when it comes to reviewing and refining tax policy. For example, China’s State Administration of Taxation (SAT) recently clarified that as part of its value-added tax (VAT) pilot study, VAT should be excluded from taxable income such as dividends, bonuses and royalty fees derived by non-resident enterprises.

The announcement concerning the corporate income tax treatment for such enterprises specifically addresses income originating from China and earned by non-resident enterprises with no in-country presence, or enterprises with an establishment in the country but obtaining income that has no actual connection with that entity.

Australian developments

One of the key developments in Australia in recent years has been the introduction of Taxation of Financial Arrangements (TOFA) in 2009, which seeks to align tax and accounting outcomes for financial instruments. Paul Travers, President of the Finance and Treasury Association (Australia) and Executive Director of Oakvale Treasury, describes TOFA as a useful initiative since it mitigates the work to be done on valuations and settlements.

“Additionally, it has allowed hedge accounting principles to also be applied to tax by, for example, being able to apply effectiveness testing (for hedge accounting) to both areas. This helps align tax and accounting outcomes, although it is not a decrease to the burden as this type of testing was not previously required for tax.”

He believes this topic will become more of a focus for Australian treasurers looking to establish effective cash facilities in Asia. “The Asia capital markets are being increasingly discussed as a potential source of capital, with some corporations tapping the bond markets and having Asian banks join their banking syndicates.”

In early April, the Australian government published proposals that Assistant Treasurer David Bradbury said should help discourage aggressive tax minimisation practices by large corporate entities. The most significant proposed change (which would take effect from the 2013-14 tax year) is the publication of limited tax return information relating to businesses with a total income of AUD100m or more, including reported total income, taxable income and income tax payable. In recent months, the Australian government has also updated the transfer pricing rules contained in domestic law to bring them closer to the Organisation for Economic Co-operation and Development’s (OECD) standards.

Asian complexity

Governments across Asia have been particularly active on transfer pricing in an attempt to make sure companies leave a ‘fair share’ of their profit behind, explains Alf Capito, Tax Policy Leader Asia Pacific Ernst & Young (E&Y).

“The Philippines recently promulgated transfer pricing guidelines and even set a profit benchmark, and Indonesia has taken similar steps to make it harder for MNCs to charge management fees and royalties. The burden on reporting transfer pricing has become greater because more documentation is required and tax authorities also want to see the substance of what the company is doing. Corporate treasurers need to keep an eye on this issue because their tax base could be exposed to penalties and adjustments if they are not careful.”

“Treasurers across the region would benefit from co-ordinated lobbying of governments on tax policy issues.”

Delores Goh, Head of Tax in Asia Pacific, Jones Lang LaSalle

General anti-avoidance rules (GAAR) are also a hot topic, adds Capito. “China has had GAAR for a while but is now framing legislation for how such rules will be enforced. About two-thirds of countries in the region either have GAAR or are planning to introduce them.”

David Smith, Senior Advisor PricewaterhouseCoopers (PwC), refers to efforts to counter ‘treaty shopping’ leading to increasing challenges and disputes in relation to structures long used by Asian groups to hold investments in other countries. “At the same time, the OECD’s work in areas such as the meaning of ‘permanent establishment’ and ‘beneficial ownership’ for tax treaty purposes is also calling into doubt the viability of such structures. When all of these matters are taken together, there is little doubt that the management of taxes in Asia has become more complex over the last 12 months.”

Dezan Shira & Associates provides tax advice to foreign direct investors across Asia. Chris Devonshire-Ellis, Principal and Founding Partner of its Singapore office, says the unharmonised nature of the region means reform of tax regulations has been patchy and that the pace of change has slowed over the past five years due to uncertainties caused by the global financial crisis.

“Financial uncertainty is not a friend of liberal tax reform,” he says, referring to Vietnam as one of the most assertive Asian nations in this respect over the last 12 months. “Vietnam has been taking the lead in aggressively targeting China in terms of reducing tax levels for attracting light manufacturing from south China in particular. Tax breaks and rates in Vietnam are two points lower than in China now as a result.”

On the other hand, India has been particularly haphazard when considering corporate tax reforms, he suggests. “New tax laws and regulations generally don’t increase the financial and compliance burden on companies – the overall desire has been to find ways to lessen the tax burden and stimulate foreign investment. But while the intent may be there, much has yet to be done to see that actually realised in policy, with India being a prime example.”

However, changes are afoot in the world’s second most populous nation. In late February, India’s Finance Minister presented a budget that included several notable proposals, including introducing the country’s GAAR from April 2015 and increasing tax rates applicable to business income of foreign companies above certain thresholds and to royalties and fees for technical services paid to non-residents.

These proposals are expected to be enacted by June 2013 and would see the effective tax rate on income of a foreign company from India (where total income exceeds INR100m) increase from 42.02% to 43.26%, while the tax rate on royalties and fees for technical services paid to non-residents would rise from 10% to 25%. A proposal that a tax residency certificate alone would not suffice for a non-resident entity to claim a tax treaty benefit was subsequently dropped.

Devonshire-Ellis describes the eventual enactment of India’s tax reforms as a game changer that will affect all Asian foreign direct investment (FDI), impact on China and alter the global supply chain. “These changes will have the effect of significantly reducing both corporate and individual income tax levels and combined with its young and relatively inexpensive workforce, will shift export manufacturing from China to the sub-continent. India will finally lift off as an investment destination to rival what we have seen from China over the past 20 years.”

Potential for greater harmonisation?

Delores Goh is Head of Tax in Asia Pacific for global real estate services firm Jones Lang LaSalle. She agrees with the view expressed in the latest World Bank ‘Doing Business’ report that the regulatory environment for corporate enterprises in many Asian economies has generally become more sympathetic over the last decade.

“We have seen tax authorities trying to make filing and compliance easier for businesses by introducing e-filing, simplifying tax forms and using self-service e-tax certificates. However, the transfer pricing regime in most countries has intensified and audit, filing and documentation requirements have increased tremendously, putting a greater burden on the cost of doing business.”

Goh expects closer co-ordination and co-operation in the area of tax administration among Asian economies over the next few years. “We know of many tax authorities sharing information today and most tax treaties include clauses for the exchange of information across tax regimes.” Goh believes treasurers across the region would benefit from co-ordinated lobbying of governments on tax policy issues.

But she also admits that it would be difficult to find a company or treasurer who would be prepared to lead such an initiative and that in any case, persuading governments to set aside rivalries would be massively difficult. “Given that Asian economies are so different, it would be very challenging – not impossible, but a very long shot.”

Lattice and speciality emulsion polymer supplier Synthomer’s Group Finance Director David Blackwood relates a similar experience. Most of the company’s Asian business is done in Malaysia, where he says the company has found authorities across all aspects of regulation to be very business friendly and flexible and generally keen to support the business.

“The only substantial tax change in Malaysia recently has been around new transfer pricing regulations, which is right since most jurisdictions have transfer pricing rules. We are yet to see the application of these rules, but I would expect them to be applied in a balanced way based on previous experiences.”

However, Blackwood shares Goh’s doubts about whether tax laws and regulations across Asian countries could ever be harmonised, although he acknowledges that such a move would make life a lot easier.

Corporate compliance will remain an issue in Asia for some time as tax collection mechanisms lag behind policy, believes Devonshire-Ellis. “The simplification of tax regimes is more to stimulate growth than address collection issues. There will be closer co-ordination and co-operation in the area of tax administration among Asian economies over the next few years, but the objective will be to lessen overall tax burdens and specifically intra-Asian customs tariffs.”

The rise of Association of South-East Asian Nations (ASEAN) will create a massive free trade area across Asia, and the co-ordination of bilateral and multilateral double taxation agreements (DTAs) will pave the way for sustainable regional growth for the next 20-30 years, he adds.

“ASEAN’s agreements are already doing away with much of the customs duties, but I think the Asian harmonisation of corporate or individual income taxes will remain off the agenda for years. Asia is so diverse that I don’t think, apart from easing trade, we will see any collusion on sovereign tax or other matters.”

Tim Owen, an Independent Corporate Treasury Consultant and former Director of Treasury at Cadbury Schweppes, also doubts that Asian economies will produce any sort of harmonised approach to corporate tax.

“Certainly in India, whilst there have been moves to be more tax-friendly towards MNCs (for example the liberalisation of 100% foreign ownership around the turn of the millennium) there is still some way to go, as exemplified by the problems that MNCs such as Vodafone have had recently. This seems to me to involve the levying of income taxes on capital transactions, which is a very different approach from the rest of the world. The struggle of foreign retailers to get access to the Indian market is another example.”

Singapore-based Managing Director of Acarate and former Vice President of Treasury at Chinese telecommunications equipment maker Huawei, David Blair, says India’s recent claims that several MNCs (including Vodafone) failed to properly value transactions with their Indian subsidiaries is evidence of a more aggressive and sophisticated approach to corporate taxation.

He believes Asian treasurers are “very passive” on issues that affect their functions and would benefit from co-ordinated lobbying of regional governments.

Adapting to change

In order to take advantage of reforms in China and India, treasurers need to move quickly to evaluate treasury management changes and provide optimal structures and processes. That is the view of Gourang Shah, Head of Treasury Advisory, Asia Pacific Treasury and Trade Solutions at Citi, who recommends optimising funding options for investments in India and integrating renminbi (RMB) into group-wide cash and liquidity management structures.

The latest benchmarking survey from Citi Treasury Diagnostics found that a high percentage of Asian MNCs are failing to leverage technology, accounting for just 10% of all companies using SWIFT worldwide. The large number of Japanese corporates still using in-house spreadsheets or databases rather than treasury management systems (TMS) is a legacy of the fact that they didn’t historically manage global treasury operations from the headquarters, explains Shah.

“As MNCs from other parts of Asia globalise and their business scale increases, they will need to be more efficient in terms of treasury management. That will require them to centralise and TMS will be needed to support centralised treasury management. Some have already started licensing and implementing solutions.”

Favourable locations for RTCs: Singapore and Malaysia

Setting up a regional treasury centre in a location with a favourable tax and/or regulatory environment is an option for achieving a more tax efficient treasury solution. Several Asian countries, such as Malaysia and Singapore, offer specific incentives to locate such centres in their jurisdiction.

Malaysia provides a range of incentives to companies to establish their treasury functions within the country, including:

  • Income tax exemption of 70% of statutory income from qualifying treasury services rendered to related companies for five years.
  • Withholding tax exemption on interest payments on borrowings from overseas used for qualifying activities.
  • Stamp duty exemption on loan and service agreements for qualifying activities.
  • Expatriates working in the treasury management centre taxed only on the portion of their chargeable income attributable to the number of days they are in Malaysia.

MNCs who establish a finance and treasury centre in Singapore can avail themselves of tax rates of 5% or 10% for five or ten years (with possible extension) on qualifying income, which includes fee income received from related companies, offices and associates outside Singapore for the provision of qualifying services, as well as interest, dividends and gains earned from qualifying activities.

Providing they incur significant local business spending, employ a team of professional staff and provide qualifying services to approved network companies, these companies can also qualify for an exemption on withholding tax.

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