APAC taxpayers are on edge as a result of aggressive audits
Asia-Pacific tax directors inform of the increase in aggressive audits in the region, attributing it to supply chain concerns and sophisticated surveillance systems.
According to sources, supply chain interruptions are aggravating tax concerns in the Asia-Pacific area in the midst of an increase in audits, which could prompt multinational organisations to restructure and budget for compliance tools.
Amit Gupta, tax director at Dell in Bangalore, asserts that regional regulations are developing in a variety of directions, consequently altering audit frequency.
“Some countries are increasing rates while others are decreasing them depending on their tax base... but typically a decrease means more collections and audits,” he says.
“Audits are looking at whether you have done everything right based on data and documents, and there is a lot more of that nowadays,” he adds.
Eugene Lim, co-founder and principal of the Singaporean law firm WTS Taxise, explains that multinational corporations formerly relied on centralised supply chains to simplify transfer pricing (TP) models.
“Businesses today want to ensure greater resilience, so they are restructuring for shorter supply chains and setting up entities closer to manufacturing sites,” he says.
“It is not clear how that will change TP models yet, but significant changes could raise some complexity in investigations and litigation in coming years,” he adds.
Taxpayers in India, Indonesia, the Philippines, and Vietnam are already subject to increasingly stringent audits, as authorities rely on more senior personnel to undertake routine investigations. Southeast Asian administrations are hiring senior IT personnel to manage the influx of international tax data from foreign authorities in order to streamline audit procedures.
Benedicta Du-Baladad, founding partner of law firm Du-Baladad and Associates under WTS in the Philippines, foresees a trend of tax administrations going digital, which will be characterised by a move from manual assessments to automatic large-scale assessments utilising big data.
“We expect administrations to rely on external data more than internal data for this activity,” she says.
“There are bound to be more aggressive audits as governments look for funds to recover from the aftermath of the pandemic,” she adds.
The administrations of China, India, and Indonesia are among the most aggressive auditors, and investigations that lead to litigation can be lengthy and expensive.
Taxpayers anticipate the continuation of vigorous audits following the implementation of the OECD's two-pillar strategy, as many APAC nations seek to recoup expenditures by targeting large multinational corporations and their digital operations.
Several APAC nations introduced digital service taxes to generate additional revenues prior to the OECD's major global tax reform initiative.
All change
After a succession of legal compliance modifications arose as a result of the COVID-19 outbreak, sources suggest multinational corporations have been seeking neutral territories in Southeast Asia to relocate their capital.
Gupta explains that C-suite executives require regular assurances from their tax teams that they are in compliance with all regional regulations.
In a fast-paced legislative environment, "group tax directors must be aware of the appropriate degree of governance controls their organisation requires," he says.
In addition, he asserts that connecting with customers and supply chains was a significant obstacle during the pandemic, and that computer chips and other essential production line components remain limited now.
Numerous organisations reformed to be closer to consumer markets. In a post-BEPS climate, corporations had a backlog of infrastructure projects, which the adjustments helped alleviate.
China has the majority of new factories and manufacturing operations, while other nations offer incentives to attract capital investments back to their jurisdictions, making them viable alternatives.
Malaysia is changing its incentives regime for post-BEPS compliance, Vietnam offers favourable rates and tax holidays for new investments, and the Philippines has some of the longest-lasting tax cuts for digital activity, with allowances extending as long as 17 years.
According to advisors and taxpayers, the impact of the OECD's minimum corporate tax rate in pillar two on such incentives is still uncertain.
Not every reorganisation involves physical changes, such as the relocation of factories from one country to another to take advantage of cheap labour and a large consumer market.
Vijayashree Ranganathan, the head of tax at the visa facilitation services company VFS Global in India, asserts that the organization's TP rules must be revised as its business model increasingly shifts online.
“It is getting more complex and scarier for online taxpayers, as the first BEPS project already led to huge changes in processes, systems, accounting, resources, and stakeholder management,” she says.
“We are very anxious about how to manage all the compliance changes in BEPS 2.0 [including pillar two] and harness technology to get a framework right,” she adds.
As a crucial component of the OECD's two-pillar system, dispute handling methods must be made very clear. According to taxpayers, they require alternative dispute resolution processes that provide clarity on what they may do to prevent intrusive inquiries from the authorities.
Tech trends
In the interim, tax directors have reportedly begun utilising tax technology to perform functions effortlessly — in order to keep up with authorities that share data with other administrations to boost audit efforts.
Ranganathan, whose company operates in 140 countries, states that the epidemic severely impacted the tourism industry, prompting her team to automate several more in-house compliance chores.
“The pandemic was a good time to put our technology plans in action as we were recovering,” she says.
The primary benefits of adopting tax technologies are the automation of tedious tasks and the digitization of documents, but the majority of C-level executives are unwilling to authorise a budget for the construction of a technological deck.
2022 saw a surge in the usage of automated systems for compliance, effective tax rate computations, and audits.
Lim tells ITR that taxpayers who do not invest in technology will create a situation in which tax authorities have greater clarity than they do regarding their tax affairs.
"You do not want to be left behind on these advances, since it will be very difficult to change your behaviour under BEPS and BEPS 2.0 legislation once the international tax dust settles," he argues.
The Australian Taxation Office, the State Taxation Administration in China, and other authorities in the Asia-Pacific area are encouraging taxpayers to share and handle issues proactively and as early as possible to avoid potential disputes.
According to sources, proactive participation, even at a distance, is the best method to manage tax risk in the wake of an increase in audit activities in APAC nations.
Sanjna Shah, the direct tax manager of the financial technology business Brankas in India, reports that her digital-first company encountered very few problems when operating completely remotely during the epidemic, as resources and supply chains were controllable.
“However savvy you and your business may be, at some point it is all about the audit,” says Shah.
“Tax authorities have started AI and several automation processes, so it is high time tax teams revisit their operations with a top-down review,” she says.
“More digital activities mean we have too many digital services taxes to deal with too, so we need more clarity on how to treat cross-border transactions that happen digitally,” she adds.
“Both in terms of technology and tax professionals, we have to be on top of the game to deal with novel circumstances in international tax and trade,” she explains.
The recent increase in audits in the APAC area can be mitigated through the use of tax technology compliance solutions and straightforward business models. However, taxpayers fear that future probes may be much more aggressive with the implementation of BEPS 2.0 laws in 2024.
By fLEXI tEAM