Ernst & Young Foresees Aggressive Tax Enforcement Continues in 2012
Most Asia-Pacific nations entered 2012 continuing the prudent tax and fiscal policies that have helped make them preferred destinations for capital investment. In fact, the world’s investors passed a tipping point in 2011, directing more capital into emerging markets, many in Asia-Pacific, than into the markets of mature economies, according to the Ernst & Young Asia-Pacific Tax Policy and Controversy Outlook 2012.
Becky Lai, Tax Policy and Controversy Leader of China of Ernst & Young, says, “Governments worldwide have been enacting an ever-increasing number of complex changes to their tax laws, regulations and tax administration processes. The pace of these changes continues to accelerate, creating the riskiest environment for tax risk and controversy the world has experienced for many years and adding to the sense of uncertainty felt by tax executives everywhere.”
Healthier tax administration in Mainland China
Further promoting a healthier tax administration is one of the State Administration of Taxation’s (SAT) priorities in its Five–Year Plan strategies. The measures include improving the standard of tax services; enhancing the transparency of the tax rules and regulations, which will aid in the enforcement of tax rules; and strengthening the tax administration and increasing efficiency.
Taxation policy will continue to support economic policies for both outbound and inbound investments. Mainland China will focus on promoting international understanding of its tax policies and make reference to international tax experience.
The SAT will establish a specialized division for Controlled Foreign Corporation (CFC) that will be administered by the international tax department. The new department will focus on tax administration for CFCs as well as for overseas registered Chinese–capital controlled resident companies in line with Mainland China’s increasing emphasis on outbound investment.
It will seek stronger legal support and introduce more rules to back up CFC administration of the Tax Collection and Administration Law. It will also strengthen CFC–related administration and develop more technical guidelines for the proper application of CFC rules.
As part of the road to the convergence of value-added tax (VAT) and business tax (BT), Mainland China has started to lower turnover taxes in selected service industries on 1 January 2012 under a trial pilot scheme in Shanghai. The country will also introduce two new lower–rate VAT categories of 11% and 6%, as part of the tax reform, in addition to the current 17% (general rate) and 13% (for special industries).
Becky Lai adds, “In Mainland China, one of the SAT’s plans for 2012 is to further improve its anti-avoidance monitoring system through expanding its anti-avoidance focus into five aspects, including parent companies of domestic enterprises going overseas; financial services, trading and other service industries; transfers of equities or intangibles and financial arrangements between related parties; central and western China; and cost–sharing agreements, controlled foreign companies, thin capitalization and tax–planning activities involving overseas cost allocation or the use of intermediate holding structures and tax havens.”
Hong Kong continues to align itself with its international counterparts and promote the financial services industry
To further align itself with its international counterparts and promote investment and trade, Hong Kong continues to seek to enter into comprehensive double-tax avoidance treaties (CDTAs) with more trading and investment partners. As of April 2012, Hong Kong has signed 23 comprehensive double-tax avoidance treaties (CDTAs), and there are 12 CDTAs under negotiation.
Joe Chan, Hong Kong Tax Policy and Controversy Partner of Ernst & Young says, “Currently, Hong Kong engages in the exchange of information only under the framework of a CDTA, not a standalone Tax Information Exchange Agreement (TIEA).
However, as a result of the release of a peer-review report (Phase 1) on Hong Kong by the Global Forum on Transparency and Exchange of Information for Tax Purposes on 26 October 2011, Hong Kong faces pressure to enter standalone TIEAs with other jurisdictions. It is expected that the Hong Kong Special Administrative Region Government will recommend legislative amendments to enable Hong Kong to enter into standalone TIEAs with other jurisdictions on exchange of information outside the framework of comprehensive double taxation agreements.”
Promoting the financial services industry continues to be a priority for Hong Kong. In order to develop the Islamic bond market in Hong Kong so as to diversify the financial market, the Hong Kong Special Administrative Region Government has launched a consultation on the proposed amendments to the relevant tax laws to level the playing field for common types of Islamic bonds vis-a-vis conventional bonds.
On the tax enforcement side, the Inland Revenue Department (IRD) will continue to examine related-party transactions between Hong Kong resident persons and nonresident persons to determine whether sufficient profits have been reported in Hong Kong.
Taxpayers with Macao offshore company (MOC) operations will likewise face severe challenges from the IRD on the commercial substance of the MOC operation and the source of profits recorded in the books of MOC. It is also expected that the IRD will take a more stringent attitude in examining non-taxable claims for profits on sales of landed properties.
Leading practices for an uncertain world
Becky Lai concludes, “To avoid as many potential points of controversy as possible between corporate taxpayers and the world’s increasingly aggressive tax authorities, companies must stay informed and engaged. That means knowing what the legislature and the tax authority of each nation are planning, and closely monitoring the tax policy actions of countries that have already dealt with such issues. Companies that constantly build their levels of intelligence around the approach and processes used by local tax administrations can better manage their tax risks and controversies. ”