This article was first published in the January 2016 China edition of Accounting and Business magazine.

Change is afoot across Asia Pacific as its key economies scramble to approve draft financial services legislation and implement new audit and tax proposals intended to help each not only maintain their competitiveness but also enhance their positions as the region’s leading business and financial centres.

Chief among these economies are Hong Kong and Singapore, where major proposals to improve the former’s regulatory regime for listed entity auditors and the latter’s implementation of the second phase of its Companies (Amendment) Act are expected to take effect in 2016.

But other, smaller economies are also seeking to keep pace with their bigger regional counterparts. Thailand, for example, is following Organisation for Economic Co-operation and Development (OECD) guidance in considering the introduction in 2016 of its first law relating to transfer pricing. If the legislative process moves quickly enough, Thai tax authorities may require taxpayers to start providing transfer pricing documentation from the 2015 tax year, due on 30 May 2016, Benjamas Kullakattimas, head of tax at KPMG Thailand, notes.

Not to be outdone, ASEAN economic outlier Malaysia is also in the midst of changes to improve the quality of financial reporting among small and medium-sized entities and to review its listing requirements related to disclosure and corporate governance (see sidebar).

But first to Hong Kong, where a survey conducted by KPMG prior to the 2015/16 Budget showcased much of the business and financial community’s angst surrounding the government’s proposed amendments to the tax system. Survey respondents wanted tax incentives for group headquarters/service companies in Hong Kong and worried about the potential leakage of confidential business information under the move to exchange tax information.

It seemed that the government was listening to some of the feedback because it subsequently announced several tax initiatives to bolster Hong Kong’s position as a financial services centre. In addition to the Inland Revenue (Amendment) Bill 2015 (new offshore fund law), which provides profits tax exemption for non-resident private equity (PE) funds, the government also announced in the 2015/16 Budget the introduction of a corporate treasury centre (CTC) regime in Hong Kong with a view to attracting multinational and mainland enterprises to establish their regional headquarters and perform corporate treasury activities in the territory.

Together with other plans to provide a more commercially friendly environment for operating an intellectual property (IP) hub, the new offshore fund law is crucial in attracting multinationals to Hong Kong, according to Agnes Cheung, director and head of tax at BDO Hong Kong.

‘The offshore fund law provides tax certainty for non-resident PE funds being managed out of Hong Kong. But the Inland Revenue Department’s (IRD) recent field audit and tax investigation on asset managers and its views on the taxability of carried interest could well deter managers who may otherwise wish to move their asset management businesses to Hong Kong.

‘So whether Hong Kong can position itself as the preferred asset management location remains to be seen. That said, with the government’s efforts to introduce the CTC regime and IP holding hubs in Hong Kong, we believe the territory should be well placed as an international business and financial centre in the next few years.’

Bring the curtain down on self-regulation

The most significant change for Hong Kong’s auditing profession, however, is the proposal to improve the regulatory regime for listed entity auditors. Following a public consultation, the government is drafting a legal amendment to reflect the final proposed regulatory reform. Once the drafting is done the proposed amendments will be heard by Hong Kong’s Legislative Council in 2016 for approval and subsequent implementation.

Under the proposal, the Financial Reporting Council (FRC), an independently run organisation, will become the primary regulator of listed entity auditors. This change will officially bring the curtain down on self-regulation in Hong Kong for listed entity auditors. Under the new proposal, all matters related to the performance of listed entity auditors will be the responsibility of the FRC, including investigation, inspection, disciplinary hearings and sanctions. Most importantly, it will make Hong Kong eligible to apply to be a member of the International Forum of Independent Audit Regulators (IFIAR).

‘In the big picture of global capital markets, being a member of IFIAR will add credibility to Hong Kong as a robust capital market because its auditors of listed entities will be under the monitoring of an independent regulator, which will generate greater confidence in the quality benchmark of Hong Kong’s listed entity auditors,’ says Clement Chan, immediate past president of the Hong Kong Institute of Certified Public Accountants.

‘The other immediate benefit is that audit opinions of listed entities will gain immediate recognition and acceptance by the member states/jurisdictions of IFIAR. In short, the wider acceptance and recognition of the quality and integrity of Hong Kong listed entity auditors will no doubt enhance the status of Hong Kong as an international finance and business centre.’

Tax policy is a critical area for Hong Kong’s reputation as a transparent and compliant international financial and business centre. A commitment to combat cross-border tax evasion and engage in long-term fiscal planning has seen the continued expansion of Hong Kong’s tax treaty network, with comprehensive double tax agreements signed with 32 jurisdictions and 10 more in negotiation.

At the global level, the Hong Kong government has committed to implement the OECD’s Common Reporting Standard (CRS). Hong Kong will adopt the new standard on the automatic exchange of information (AEOI) in tax matters, making financial institutions report to the IRD specified financial account information on a regular basis, so that the territory can exchange such information with other jurisdictions. The timetable is to introduce the relevant legislative amendment bill in early 2016 with a view to beginning the first exchanges with appropriate partners in 2018.

‘AEOI is at the top of the Hong Kong government’s agenda,’ says Florence Chan, partner and business tax services leader, financial services, at EY Asia-Pacific. ‘The plan is that the government can enter into its first Competent Authority Agreement at the end of 2016 and financial institutions will then have to file returns to the IRD in May 2018. As such, Hong Kong can commence its first AEOI at the end of 2018, in line with the requirements under OECD. Hong Kong is committed to adopting this international trend to cooperate with other countries in terms of sharing relevant information for tax purposes.’

‘The biggest impact will be on financial institutions,’ Chan continues. ‘They will have to revisit their current account opening procedures to make sure they know the tax residency of the account holder and amend their systems in order to extract the relevant information for exchange with other countries.’

Similar change in Singapore

Like Hong Kong, Singapore is pursuing similar change. The second phase of the implementation of the city-state’s Companies (Amendment) Act is expected to begin in 2016. Key elements of the second phase are an extension of directors’ disclosures requirements to CEOs; the removal of one share, one vote for public companies; provisions relating to the revision of defective accounts; a new exemption from the preparation of financial statements for dormant non-listed companies; and the extension of summary financial statements to all companies.
The second phase changes have more limited impact to auditors and financial statements as compared to phase one. Nevertheless, the new exemption for dormant non-listed companies and the provision relating to revision of defective accounts may have some impact. The exemption (for dormant non-listed companies with total assets during the financial year not exceeding S$500,000) will reduce the compliance burden and costs for dormant companies. Currently, a dormant company is exempted from the statutory audit requirements but is still required to prepare financial statements.

In relation to defective accounts provision, the new sections provide alternative remedies when defective accounts are detected. They will allow an application to court to determine if financial statements are defective/non-compliant, as well as facilitating voluntary revisions to defective financial statements. Currently, the only enforcement action available is to prosecute the directors. The new provision will allow directors to rectify the financial statements before the issuance of the subsequent year’s financial statements. However, if the breach has occurred, the directors may still be potentially liable, and auditors will have to reissue their report.

The act was passed by parliament in October 2014. On 15 April 2015, the Accounting and Corporate Regulatory Authority announced that the legislative changes would be effected in two phases. The first phase was implemented on 1 July 2015; the second will begin in the first quarter of 2016.

Kate Watson, journalist