With a growing number of countries taking on board the OECD’s base erosion and profit shifting recommendations, some countries in Asia Pacific are still lagging behind
This article was first published in the October 2016 China edition of Accounting and Business magazine.
Among countries globally preparing to implement the base erosion and profit shifting (BEPS) recommendations put forward by the Organisation for Economic Cooperation and Development (OECD), the majority are moving ahead towards the common goal of a more equitable international tax system.
As a recent Thomson Reuters study revealed, the number of respondents who report proactively taking steps in responding to BEPS has increased by 12% year on year to 66% overall, led by the UK (80%), Europe (75%) and the US (64%).
Slowest on the uptake, according to the findings, is Asia Pacific, where just 40% of respondents reported proactively taking steps and one-third (33%) are waiting to see what others in the region do.
Given the general consensus that businesses would gain clarity and peace of mind from the tightening of tax loopholes – in the words of Grant Thornton, enough to satisfy stakeholders that they are ‘paying their fair share of taxes’ – why is Asia Pacific, as a region, apparently lagging behind the rest of the world?
Jamie Towers, tax partner at Hanrick Curran Accountants in Brisbane, Australia and chairman of the Asia-Pacific regional membership of Alliott Group, an international association of independent accounting, law and consulting firms, recently chaired a conference in Kuala Lumpur, Malaysia, where tax professionals from 13 countries region-wide discussed the BEPS project. He pointed out that the nations represented were culturally, geographically and economically diverse, but also noted that few Asia-Pacific countries are actually members of the OECD.
‘Therefore, while their governments may support the overall initiative, there is not as much pressure to implement the changes,’ he said.
This is further compounded by the fact that each country has its own set of tax laws, Towers continued: ‘Depending on the size of the economy, certain tax laws are more advanced than others. Those with less advanced tax laws may not benefit much from the OECD recommendations until their domestic laws are strengthened.’
To illustrate the complexity of blanket BEPS adoption region-wide, Towers cited one of the key recommendations, laws that prevent ‘treaty shopping’ – or setting up holding companies in certain countries to minimise tax on repatriation of profits, of which the likes of Google, Amazon and Starbucks have been accused. ‘Some Asia-Pacific countries only have tax treaties with their immediate neighbours, and certainly not with many larger countries,’ he said. ‘For those without them, tax treaties would be more of a priority than implementing OECD BEPS recommendations.’
No quick fix
All representatives at the conference conceded that currently, legal tax planning strategies that exploit gaps and tax rules mismatches to make profits ‘disappear’, or shift profits to low (or no) corporate tax jurisdictions, occur across Asia Pacific as they do elsewhere, Towers said. ‘They agreed it was necessary to take action to prevent this occurring in future, and that the OECD recommendations, if and when implemented, would go a long way towards achieving that goal.’
While there will be ‘no quick fix’, given the region’s complexity, Towers did highlight countries that are taking a leading position.
Australia ‘has led the way’ as an early adopter of the BEPS recommendations; ‘it has already passed laws in relation to the country-by-country [CbC] reporting and has openly supported the OECD report,’ Towers said. The Singapore government has publicly supported the OECD’s final recommendations; Japan, likewise, ‘empathises with the OECD’s recommendations and a draft outline of its tax reform proposals includes adopting some of the OECD measures’. China has recently also issued new transfer pricing documentation rules in line with CbC reporting.
In a recent report, KPMG highlights China as one of the non-OECD countries that has ‘taken a particularly active and constructive role’ in BEPS working party meetings. Christopher Xing, Asia Pacific leader of international tax at KPMG, said that China is ‘as interested as any country in the G20 to have the global taxation system operating in a fair and consistent framework’.
According to Xing, China sees two potential issues: ensuring that those multinational corporations (MNCs) with operations in China pay their fair share of taxes there, and that Chinese companies operating abroad repatriate ‘reasonable profits’ for taxation purposes.
It’s important that the world’s second largest economy has a profile in international tax law development in keeping with its economic clout. ‘China wants to be in the front seat of the BEPS action plan,’ Xing said. Without China’s buy-in and support, he added, its credibility and effectiveness could be significantly curtailed.
Countries ‘which may adopt some measures’ include Hong Kong, Malaysia and Singapore, according to KPMG’s report. Hong Kong and Singapore have agreed to become BEPS Associates, which boils down to a concrete commitment to act: they are willing to collaborate with the OECD and comply with the four minimum standards of BEPS, Xing explained.
‘With the G20 and OECD keen to roll out the BEPS framework internationally, regional centres like Hong Kong and Singapore want to be seen as being on board,’ he said. However, the region’s two leading economies already have simple and easy-to-apply taxation systems, Xing pointed out, so many of the harmful tax practices that take place elsewhere don’t present to the same extent.
Malaysia, meanwhile, has made no significant moves in regard to BEPS. Xing believes that the country may tighten up its transfer pricing rules along the lines of the BEPS recommendations but does not expect to see a whole-suite adoption of the framework in the immediate future.
KPMG’s report also outlines tax complexity ahead, given the many different jurisdictions with varying tax policies. Already, some have departed from OECD recommendations by making their own rules, and KPMG expects these may multiply. So if there is no ‘one size fits all’ for BEPS in Asia Pacific, can the action plan still be effective in this region?
‘The big four – India, Australia, China and Japan – are very different economies, with different agendas for their perceived national taxation interest,’ Xing replied. ‘If countries take things into their own hands, inconsistent with what other countries are doing, I believe this has the potential to undermine the aim of BEPS, and jeopardise its international consistency.’
Yet Grant Thornton points out that BEPS would be no panacea. ‘In reality, businesses may face a greater risk of double taxation,’ said Peter Godber, tax services leader at Grant Thornton in Singapore.
This could be down to timing differences in the implementation of BEPS actions, conflicting adaption of the measures and countries taking unilateral action, Godber said. ‘Additionally, there is a genuine concern that dispute resolution has not been adequately addressed in Action 14 recommendations,’ he added.
Expecting to see increased competition among tax authorities for the MNCs’ tax dollars is Jason Casas, partner at Grant Thornton Australia, who leads the network’s transfer pricing practice in Australia and Asia Pacific. Casas sees transfer pricing becoming a difficult negotiation between countries post-BEPS implementation, when hefty tax revenues are at stake. ‘There is a very real possibility that transfer pricing adjustments being proposed by tax authorities to companies won’t be accepted by the country on the other side of the transaction,’ Casas explained.
One high-profile example is BHP Billiton (BHP). Following an Australian Taxation Office audit of the Australian miner’s Singapore marketing arm, the company reportedly faces paying as much as A$775m in backdated tax payments and charges which Australia wants to collect but Singapore needs to accept »
in order to avoid double taxation. The authorities have not confirmed the position, but BHP included an exceptional item of US$570m (A$750m) in its full-year results to June 2016 for ‘global taxation matters’.
Further industry concerns are expected around dispute resolution from a transfer pricing perspective. Casas notes this has not been adequately addressed under BEPS. ‘The process isn’t going to change dramatically, but the number of disputes will rise significantly as countries equate labour with value, coming up against countries that equate assets with value creation. BEPS is not going to solve that philosophical difference.’
According to Brian Peccarelli, president of the tax and accounting business at Thomson Reuters, there are steps businesses in Asia Pacific can make to prepare for BEPS. This includes facing up to what he sees as the biggest challenge for those doing business in the region: Action 13 on transfer pricing documentation, including CbC reporting. Audit risk exposure will be another issue for companies everywhere.
‘Companies should be analysing, with their advisers, what impact BEPS may have on them,’ he said. ‘They should be allocating more resources to run a check on their potential BEPS compliance.
‘The adequate staffing of affected departments, like tax and IT, will be important. Technology will play a major role in BEPS compliance, so companies should be reviewing their IT readiness.
Companies should also review their documentation processes and policies on transfer pricing, as well as assessing whether additional resources are needed, Peccarelli added.
Peta Tomlinson, journalist
"With the G20 and OECD keen to roll out the BEPS framework, regional centres want to be seen as being on board"