Countries in Asia are in the midst of a balancing act of making sure their corporate tax revenues are all they can be and at the same time, staying competitive. But trade or threats to healthy trade, both locally and globally, could push some Asian countries to slow or dilute their adoption of the OECD’s Base Erosion and Profit Shifting (BEPS) exercise.
And countries do have that right. The OECD’s BEPS action plan for the most part has no legal authority – the OECD calls its action plan list of 15 items “soft law legal instruments” intended to serve as a basis for “interested jurisdictions” to adopt and implement. That means local legislation is required to pass any tax rules, which could lead to some jurisdictions weakening their legislation. So even though the OECD says it has “expectations” that countries who join the effort will adopt the spirit of the proposals, how they adopt could ultimately lead to a race to the bottom.
For instance Hong Kong has already sees taxes as a weapon in its fight to stay relevant. Recently the famous special administrative region of China’s chief executive-elect Carrie Lam said she would do all she could to keep Hong Kong competitive. “My new tax philosophy is not exactly ‘the more, the merrier,’” she said in her first public speech in her new role. “Sometimes collecting less is highly desirable,” noting that “unfortunately we have lost a few regional company headquarters to another place” due to taxes. Therefore, “there is no place for complacency.” Hong Kong has previously said it was committed to “implementing the BEPS package consistently.”
“There is currently a general climate of uncertainty where Governments are trying to balance the tension between creating an environment that attracts investment whilst at the same time protecting their tax bases and raising needed tax revenues, which could also be contributing to a sense of unpredictability in regional tax regimes,” said Alan Tsoi, Deputy Regional Managing Director and Tax & Legal Leader, Deloitte Asia Pacific in comments related to Deloitte’s 2017 Asia Tax Complexity Survey.
“This has created competition for tax revenue amongst many countries worldwide, reigniting a general trend to lower corporate income tax rates.”
Nonetheless, corporations are becoming more conservative in their tax planning, according to the Deloitte survey. “In light of the uncertain tax landscape, companies are less likely to pursue aggressive tax strategies than in the past,” Deloitte said. According to the survey, “three-quarters of respondents indicated they would not enter into a tax planning strategy if perceived by some to be aggressive.” This is versus 40 percent of respondents expressing the same sentiment in 2014, the last time the firm conducted the survey. This could be the result of “the social responsibility” companies feel as taxpayers. This after public scrutiny has led to controversy over who pays wha – witness Amazon and Apple in Europe. “The enormous potential for detrimental reputational risk has prompted company executives and boards of directors to acknowledge the need to consider such risk when determining the company’s tax strategy,” Deloitte said.
This attitude recently emerged at a NeuGroup peer group meeting held in Asia. One member of the NeuGroup’s Asia CFO Peer Group noted that, “where the value is created [is] where the profits should remain, [and] thus where the tax should be paid.” This is a far cry from the old method of transferring the fruits of that value to another (lower tax) location.