Asia countries are busy with new tax and regulations, complicating things for treasurers.
Members of the NeuGroup’s Asia Treasurers’ Peer Group recently discussed what was taking place in their region, with input from global law firm Clifford Chance and representatives from KPMG.
One takeaway from the meeting was that countries, strapped for cash, are after corporate cash. While this is true globally, nowhere is more a factor than in Europe and the OECD’s BEPS (Base Erosion and Profit Shifting) initiative. Clifford Chance listed the 15 Actions from the OECD’s final report published in early October; however, the firm highlighted only four that will have implications for Asia regional treasurers. The actions are intended to address what authorities see as threats to tax collections, specifically: (1) interest deductions, (2) tax treaty abuse and (3) shifting profits to tax havens. The four key actions are briefly described below:
- Neutralizing the Effects of Hybrid Mismatch Arrangements: This occurs when interest payments received are treated as nontaxable in a lender jurisdiction while being treated as deductible in the borrower jurisdiction.
- Limiting Base Erosion Involving Interest Deductions and Other Financial Payments: Related to the previous action, the OECD has proposed limitations on interest deductibility set at 10‐30% of tax‐adjusted EBITDA.
- Preventing the Granting of Treaty Benefits in Inappropriate Circumstances: OECD proposes two approaches to limiting “abusive” treaty benefits:
a.Limitation on benefits article ‐ Limitation on benefits (“LOB”). Broadly, LOB limits treaty benefits to entities that pass economic benefit to persons themselves qualifying for treaty relief.
b.Principal purpose test ‐ Obtaining benefit of treaty was “principal purpose” of arrangement or transaction. - Guidance on Transfer Pricing Documentation and Country‐by‐Country Reporting: One of the more onerous requirements is “country‐by‐country” (CBC) reporting, which requires MNCs to report required financial, tax and transfer‐pricing data on a country‐by‐country basis. Asian jurisdictions are embracing CBC reporting because of the spotlight on transfer‐pricing abuses and because it is an easy way for tax authorities to access valuable information on where profits are being booked in the group.
a.Australia, China, India, Japan will commence CBC reporting in 2017.
b.Singapore and Malaysia will commence CBC reporting in 2018.
The rules go into effect in 2017 with high limits but with dramatic reductions in the limits annually through 2020. Derivative portfolio limits begin in 2017 at 2.25 trillion euros for two counterparties combined and drop to 8 billion euros by 2020. Mr. Landless warns that large MNCs should expect letters from their derivatives banks asking about the size and volume of their trading activity in order to classify them.
Regulations in Asia are ever‐changing and increasingly being influenced by other governments both regional and Western. The influence is generally not positive as it drives more burdensome requirements and ideas for tax collection. Members consistently express concern over increasing and changing regulations, and that is not likely to change.