Southeast Asian countries step up tax efforts


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TOKYO – A wave of efforts to increase corporate tax revenues is sweeping across Southeast Asia as governments rush to fill yawning budget holes created by economic hardship from the COVID-19 pandemic.

For example, tax authorities are stepping up the pace of investigations and applying stricter rules to businesses than before – such as shortening the deadline for submitting tax documents.

This trend should alarm multinationals operating in the region without sufficient local staff to handle tax affairs. They could become easy targets of the new tax campaign.

In early 2021, several Japanese companies operating in Malaysia and Thailand began receiving requests from local tax authorities for documents relating to their business relationships in recent years.

The Southeast Asian offices of global tax audit firm Deloitte are receiving nearly three times as many requests for advice from Japanese companies than before the region was affected by the novel coronavirus.

Jun Igarashi, Japanese leader in Southeast Asia transfer pricing at Deloitte Singapore, said countries in the region are stepping up transfer pricing tax inspections, which focus on the prices at which transactions are made between the headquarters of Japanese companies and their local units in Southeast Asia.

When, for example, a local unit sells a particular good to its parent company at a price significantly lower than the price at which the good is sold to an outside company, an additional tax may be charged if the local tax authorities consider the price difference to be. be an efficient transfer of profit.

In 2020 and 2021, Vietnam and Malaysia revised their transfer pricing rules to strengthen the taxation of these transactions. They have started to require taxpayer companies to submit transfer pricing documents within shorter timeframes at the request of the tax administration.

One of the factors behind these changes is the relatively high ratio of corporate tax payments to overall tax revenues in Southeast Asian countries.

According to the Organization for Economic Co-operation and Development, the average share of corporate taxes in the total tax revenue of OECD members in fiscal year 2018 was 10%. The ratio for Japan was slightly above 10%.

But the figures for Malaysia and Indonesia, for example, were almost 50% and over 30%, respectively.

Measures regarding transfer pricing taxation in Southeast Asian countries indicate that these governments are seeking to collect more taxes from companies to finance their increased spending to deal with the pandemic, according to a local tax expert .

Transfer pricing is not the only target of the region’s tax campaign, however. Japanese companies in Thailand are gearing up for a more in-depth review by the Thai tax administration of their stamp duty payments.

In 2019, the Thai government extended stamp duties to electronic documents such as contracts in digital form. “The tax authorities are responding to the decline in tax revenue due to the pandemic by trying to increase various types of tax collection, including transfer pricing tax revenue,” said Nobuyuki Ishii, executive director general of the Chamber of Commerce. Japanese in Bangkok. Businesses are concerned about the prospect of stamp duty being used as a tool to support taxation.

As for Japanese companies operating in Southeast Asia, experts said their local units were ill-prepared to handle tax matters. “Since tax inquiries in Southeast Asia tend to be a very short process, you cannot properly handle such inquiries by responding to actions only when they are actually taken,” Igarashi pointed out.

Transfer pricing taxation could pose a significant financial risk for any international business. Depending on how the tax administration collects a transfer price, the affected company could face a massive additional tax burden.

“It is important for companies to prepare documents and answers to possible questions in advance that might convince the tax administration of the relevance of transfer pricing,” said Igarashi. “It is essential to train tax experts who are knowledgeable about the tax systems in Southeast Asia.”

Some Japanese companies operating in the region are taking steps to prepare for possible tax investigations, such as compiling internal guidelines on the handling of surveys by tax authorities.

A Japanese company in Indonesia was recently the subject of a transfer pricing tax investigation. Indonesian tax authorities have told the company that management fees paid to its parent company in Japan cannot be considered consideration. But the company retaliated by using documents that had been prepared to calculate transactions and managed to sell most of its arguments to the tax authorities.

Nobuhiro Tsunoda, chairman of the audit firm EY Japan says foreign units of Japanese companies must be better prepared to deal with any tax investigation by foreign tax authorities regarding transfer pricing that could result in additional taxation. “These companies should also consider seeking help from the Japanese tax authorities, as the Japanese authorities may advocate for the company’s practices when speaking with their counterparts in Southeast Asian countries,” Tsunoda pointed out.

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