Tax authorities in APAC have steadily been stepping up on TP enforcement in recent years. Swift implementation of enhanced standards for Exchange of Information (EOI) and Country-by-Country Reporting (CbCR) have led to tax authorities having unprecedented and coordinated access to more information. Deployment of technology to analyse big data and increased connectivity between different branches within tax administrations further contributed to this trend. The ongoing debate around what constitutes a fair share of tax has further fuelled the intensity of tax assessments and audits.
Many multinational enterprises (MNEs) have been facing intense tax audits and discussions in Australia. The Australian Taxation Office (ATO) is now issuing more formal information requests, including information relating to overseas entities. The detailed requests include internal email trails, board papers and/or minutes. There have also been situations where the ATO utilised information from EOI exchange (including from CbCR and spontaneous exchange of rulings).
As a means to steer compliance, the ATO released a number of Practical Compliance Guidelines (PCGs). In 2019, the ATO released a draft PCG providing guidance for the Arm's-Length Debt Test (ALDT)1 in relation to Australia's thin capitalization regime. The draft PCG outlines the more stringent analysis expected in applying the ALDT and reflects the ATO's overarching view that gearing2 in excess of the safe harbour debt amount should only be observed in limited circumstances.
Another key PCG3 provides a risk assessment framework for MNEs' distribution operations in Australia i.e., "risk zones" (white, low, and medium-high) guiding the level of expected ATO scrutiny. The risk rating outcomes will steer the level of intensity of ATO discussions and dispute resolution options.
These safe harbours, could on the one hand provide taxpayers more certainty and practical means to manage long and tedious disputes. On the other hand, it may be argued that these safe harbours may not necessarily lead to arm's length outcomes when taken in a broader (global) context of a taxpayer's TP policy. In other words, even when a taxpayer falls within a medium-high risk factor under the ATO's risk assessment framework, this does not necessarily mean that the transactions are not at arm's length. It therefore remains to be seen whether adopting such safe harbours may end up creating double taxation or disputes in a cross-border context.
TP continues to be one of the State Taxation Administration of China (STA)'s key areas of focus. Intangibles-related matters, appropriateness of cost sharing arrangements as well as outbound payments (e.g., royalties, management and service fees) continue to be closely scrutinised. However, there has been a general decline in tax investigations, signalling a maturing Chinese TP regime and shift in priorities.
In 2018, Mainland China piloted a Global Analysis Framework for MNEs (i.e., profit monitoring mechanism) in the Jiangsu province, with the anticipation for nation-wide roll-out at later stage. This is aimed to introduce a risk matrix to monitor and rank MNE groups into tax risk levels to facilitate swifter and more targeted regulatory actions. Taxpayers identified as "high-risk" are expected to have increased engagement with the tax authorities.
For some time now, we are aware that the Chinese authorities use combinations of tools to gather data (e.g., commercial database and company websites), automated search tools, which scan the internet for public information (e.g., on restructuring measures, acquisitions or even new transactions).
On a positive note, we have observed increased openness from the Chinese authorities to engage in Advanced Pricing Agreements (APAs) to resolve technical TP issues. This goes hand in hand with the introduction of a tax refund mechanism in China's tax legislation. Whilst still in its early days, these developments signal the intent of Mainland China to meet growing demands of taxpayers seeking tax certainty in a post BEPS world.
Tax controversy topics in Hong Kong continue to be dominated by issues surrounding offshore tax claims. Management services and intercompany loans also continue to be reviewed.
One of the key developments was the establishment of a formal TP examination process and (24-month) timeline in July 2019 (See figure 1)
The adoption of the 3-tier OECD Masterfile, Local File and CbCR requirements in 2018 gives the Hong Kong Inland Revenue Department (IRD) unprecedented access to information on MNE's group and local TP practices. Taxpayers should gear up for increased scrutiny and stepping up of enforcement of the examination of the arm's length principle.
Consolidation can be taken in the IRD's keen interest to support cross border dispute resolution mechanisms. Hong Kong has been progressively engaging in unilateral and bilateral APA applications with taxpayers as it continues to gain experience in these procedures.
Source — IRD presentation on HKICPA annual tax update dated 20 July 2019
Taxpayers can expect continued focus by the Indonesian Tax Office (ITO)4 on examining taxpayers' comparables set, disputing the use of TP methodology selected, intra-group services transactions and royalty/Intellectual Property (IP) payments, TP loss adjustments, etc.
The ITO has also steadily been stepping up its tax audits. As compared to 2017, the 2018 audit coverage of realized audits for corporates has increased. Further, in 2018, the Directorate General of Taxes and the Directorate General of Customs and Excise have completed 34 Joint Audits (out of 39 assignments). We have also encountered a number of EOI requests from the ITO as part of the tax auditors' preparation in arranging their arguments and positions.
It is expected for the ITO to continue emphasizing on TP reviews. On this note, the use of bilateral dispute resolution platforms such as APAs and Mutual Agreement Procedures continues to be limited (but growing).
Historically, tax auditors in Japan are very thorough and detail oriented. There is continued focus on international transactions, such as on IP transfers or changes in supply-chain models.
It is also becoming more common for the tax bureaus to combine normal corporate income tax and TP examinations. The National Tax Agency has invested resources to educate and build additional TP specialists who are assigned to all examinations with material inter-company transactions. There is now also more focus on medium to smaller companies.
TP company visits continue to be conducted by the tax bureaus. Selection is based on tax return information. Typically, such visits will cover compliance status, discussion of issues commonly subject to scrutiny in a TP audit and/or which require attention when forming the TP policy. There may also be requests for interviews with business partners and customers (e.g., to understand the value added provided by the taxpayer).
Tax bureaus start to examine information from the Group Masterfile and CbC reports submitted as well as information obtained from other sources (e.g., market surveys/ data from market research institutions, EOI etc.).
On 27 August 2019, the Philippine Bureau of Internal Revenue (BIR) issued the Revenue Audit Memorandum Order (RAMO) No. 1-2019 – known as the "Transfer Pricing Audit Guidelines" – to provide standardized audit procedures and techniques.
Broadly, the TP audit is expected to cover:
- Business restructuring within a multinational group,
- Intra-group services,
- Transfer and utilization of tangible and intangible asset transactions,
- Cost contribution arrangements
- Capitalization/ interest payment transactions
The audit covers cross-border, domestic and intra-firm transactions (i.e, taxpayers with different tax regimes).
With Singapore signing on as a BEPS Associate, Singapore has stepped up its TP enforcement and administration.
Singapore amended its TP legislation in November 2017 which takes effect for Year of Assessment (YA) 2019 (broadly relating to fiscal year 2018). Such amendment increases penalties for non-compliance with TP documentation requirements and introduces a 5% surcharge (penalty) for TP adjustments. Coupled with the introduction of related party disclosure forms (RPT forms) from YA 2018, the Inland Revenue Authority of Singapore (IRAS) will have greater ease of evaluating TP issues. The IRAS can at times, also be detail oriented in seeking clarifications of tax matters under review (eg., board minutes etc.).
We have also observed the IRAS starting to conduct TP audits (instead of TP Consultations), signalling a stronger intent of IRAS to enforce the arm's length principle.
Thailand's new TP Act applies for years commencing 1 January 2019, which requires:
- Submission of TP form
- Preparation of TP documentation
Further regulations and guidance on the scope of the TP documentation under the new TP Act is still being awaited and highly anticipated. As with the current situation, lack of compliant Thai TP documentation is expected to delay the resolution of tax audits and tax refunds (if any).
In the environment where TP audits continue to be very common and are highly intensive, the submission of the TP form will likely draw further scrutiny of TP matters. Thai tax authorities may also refer to other information submitted for other purposes (e.g., with the Board of Investments for information related to tax incentives granted).
Tax authorities in the region are not expected to be slowing down their review of TP matters. New practice guidelines, legislation changes introducing enhanced TP documentation or TP forms, rules and unprecedented tax authority co-operation (e.g., through EOI) will only serve to fuel the momentum for more intensive challenges on TP.
Layering on the current discussions on BEPS 2.0, which seeks to introduce new nexus and TP rules arising from the digitising of the overall economy, will add on additional complexities. Are you ready for this change?
- PCG 2019/D3
- Gearing is the ratio of a company's loan capital (debt) to the value of its ordinary shares (equity).
- PCG 2019/1.
- Also commonly referred to as Directorate General of Taxes (DGT)