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Cross-border tax planning in Asia

The structuring of businesses with Asian and international operations needs to take into account cross-border tax planning issues to aviod unnecessary "tax-leakage".

The structure adopted should balance the requirements to reduce the overall rate of direct (corporation taxes) and indirect (GST, VAT, TVA, import duties etc) taxes paid by the group, with a realistic and practical operational set up, along with the need to make a fair contribution to society through the payment of tax.

This may also need to take account of a long-term aim of allowing the sale of the business to third party investors with minimal tax impact, as well as the manner in which the business is financed.

Depending on the nature of the activities each group will have different areas of tax risk which should be reviewed and addressed.

Issues such as Transfer Pricing for Intercompany Transactions, Marketing Service Agreements and Distribution agreements, Permanent Establishment, and Thin-Capitalization Rules will need to be reviewed based on the local country legislation, as well as considering the application of any relevant country specific Double-Tax Treaties. Local Anti-Avoidance rules and Controlled Foreign Corporation ("CFC") legislation in Asia and elsewhere will need to be taken into account.

Businesses will often try to avoid a taxable presence or minimise assets/risks and maximise deductions in high tax jurisdictions, and maximise assets, functions and risks in countries with low tax regimes, taking advantage of low or no withholding taxes, preferential tax regimes, or even hybrid mismatches.

E-commerce businesses in Asia in particular, by the nature of their internet based activities, may be able to take advantage of these possibilities, although any presence whatsoever in the country of distribution (even local marketing) will need to be carefully planned depending on the specific legislation in the country where the final custmer is based.

These matters however are precisely the issues that the OECD is trying to deal with in its Base Erosion and Profit Shifting project. It will be more and more important that there is “substance” in any jurisdiction used for tax optimization.

Base Erosion and Profit Shifting (BEPS) OECD/G20

Base Erosion and Profit Shifting (BEPS) refers to tax planning strategies that exploit these gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid. BEPS is of major significance for developing countries due to their heavy reliance on corporate income tax, particularly from multinational enterprises (MNEs). The aim of the project is to bring to an end the practice of BEPS by international corporations.

The BEPS Action Plan endorsed by the G20 in July 2013 identified 15 key areas to be addressed. 

The final BEPS package, which includes and consolidates the 2014 interim reports has been developed and agreed in just two years and covers the following Actions.

‌Action 1: Addressing the Tax Challenges of the Digital Economy 
Action 2: Neutralising the Effects of Hybrid Mismatch Arrangements 
Action 3: Designing Effective Controlled Foreign Company Rules 
Action 4: Limiting Base Erosion Involving Interest Deductions and Other Financial Payments 
Action 5: Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance 
Action 6: Preventing the Granting of Treaty Benefits in Inappropriate Circumstances 
Action 7: Preventing the Artificial Avoidance of Permanent Establishment Status 
Actions 8-10: Aligning Transfer Pricing Outcomes with Value Creation 
Action 11: Measuring and Monitoring BEPS 
Action 12: Mandatory Disclosure Rules 
Action 13: Guidance on Transfer Pricing Documentation and Country-by-Country Reporting 
Action 14: Making Dispute Resolution Mechanisms More Effective
Action 15: Developing a Multilateral Instrument to Modify Bilateral Tax Treaties
 
With the adoption of the BEPS package it is intended that OECD and G20 countries, as well as developing countries that participated in its development, will lay the foundations of a modern international tax framework under which profits are taxed where economic activity and value creation occur. These principles are starting to be adopted at differing speeds across Asia.

Existing businesses already established in Asia will need to take account of these developments, analyse any impacts on their operations, and may need to think about restructuring their activities.

For more details see the OECD BEPS site at http://www.oecd.org/ctp/beps.htm

January 2016
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