Even when they interact with authorities in a proactive manner, APAC tax teams still have to make difficult choices about how to handle their compliance duties in various nations.
The State Taxation Administration in China, the Australian Taxation Office, and other government agencies in the Asia-Pacific area are pushing hard to encourage taxpayers to proactively communicate and fix concerns as early as possible in order to prevent future conflicts.
In light of the recent increase in audit activity in the region, sources claim that proactive involvement is the best method to mitigate tax risk.
Even though the continuous compliance method is aimed to clarify concerns before audits and investigations, tax directors find it difficult to choose what information to submit without suffering unintended effects.
According to tax directors, proactive involvement is uneasy because, depending on their risk level, the government may impose fines and other penalties for being open about subjective tax circumstances.
According to Marie Godenir, APAC tax director at Netflix in Singapore, the strategy for proactive involvement varies each nation.
"While voluntary compliance is fine in Australia, it is our experience that other countries have questioned why we are engaging early without being audited," she stated.
"It is not the case that taxpayers are ill-informed about the law, but unprepared to face the communication structures in place," she continues.
"We try to provide a lot of education in-house to make sure legal and businesspeople understand why we are set up in a certain way and present the company correctly," she continues.
At ITR's Asia Tax Forum on August 24, Roberta Chang, a tax partner at K&L Gates in Shanghai, stated that proactive communication has not improved since the COVID-19 outbreak began.
Her visit to the tax office in China was difficult since contacts are only permitted outside the premises for unknown safety concerns.
According to Chang, "We are basically standing on the street, answering questions and handing over documents."
In contrast to many other [jurisdictions] like Hong Kong [SAR] or Singapore that are transferring operations online, she added, "It is almost like going back to a primitive way of auditing."
Australia is one country in the APAC area that exemplifies proactive involvement. Australia has an assurance review procedure that asks taxpayers to demonstrate that they are paying the correct amount. The stance that businesses adopt when dealing with the ATO has been affected by this strategy.
The assurance evaluation results in a color-coded output, according to Angela Wood, tax partner at Clayton Utz in Melbourne, which aids authorities and taxpayers in determining the degree of risk involved with certain transactions. This study informs tax teams if they should anticipate additional assessments in the coming years.
As a result of the ATO's visibility into the transaction, tax directors are sometimes forced to come forward about the decision-making process, and other times there is a decision to be made about whether to talk proactively about a particular issue, according to Wood.
"It is a fraught decision to be made by businesses," says Wood. "ften if taxpayers have the right level of prep and connectivity with the ATO then it is a conversation that can be had in a reasonable fashion."
However, there are also reactive methods to deal with tax authorities, and depending on their situation and the laws in their area, some taxpayers may need to choose which strategy works best for them.
If a transaction is audited six years after it took place, that is an example of a reactive circumstance. The taxpayer would then be subject to adjustments for several years until the matter was resolved or a lawsuit was filed.
"If there is one thing that we can all agree on, it is that we are all resource challenged when it comes to dealing with several layers of data and rapidly changing [business] models," Wood continues.
Other APAC advisers assert that because proactive disclosures are less expensive than audits, clients are more likely to make them without taking the legal expenses of ongoing compliance into account.
According to Chang, her customers are more willing to be proactive because cross-border miscommunications may be expensive.
Chang continued, "We can see authorities no longer providing penalty waivers and there is a lot of pressure on tax officers to collect money in China."
The contested amount, associated interest fees, and penalties from the first tax bill might all be evaluated through an audit. Sometimes the total of the interest and penalties exceeds the initial tax.
Additionally, if the taxpayer has not previously interacted with the audit team, there may be a knowledge gap regarding the company model, which makes it more difficult to acquire objective assessments.
The Assisted Compliance Assurance Programme (ACAP) in Singapore and an OECD-backed justified trust approach in Australia are just two examples of the proactive compliance initiatives that are part of a larger trend in the APAC region, according to Andy Hung, a director at Wolters Kluwer in Melbourne.
According to Hung, "The ATO and other authorities are looking for better ways to identify and manage tax risk."
The taxpayer's proactive management of audit risk and the authorities' audit monitoring, he continues, are actually the only components of voluntary compliance and confidence.
He says, "All of this is improved by solid tax governance frameworks, and we can start to see taxpayers talk about this more and more."
Australia, China, and Singapore tax officials frequently request to review a company's tax governance plan. Authorities want to understand the regional internal rules and procedures that guide systems and people, as well as board of director approvals.
It is more challenging to defend some kinds of voluntary compliance, such as the two- to three-year commitment to apply for advanced pricing agreements (APAs) and other programs, due to a revolving door of audit teams who do not comprehend the company.
Godenir points out that APAs take a long time to sign since they are challenging to negotiate, and for certain businesses, it may not be a wise course of action.
She adds, "it is difficult for technology companies without a mature operating model to show consistent transactions over a five-year period to acquire the APA."
It may be considerably more challenging for rookie auditors to comprehend how local operations relate to the firm in environments of business that are changing quickly and producing inconsistent operational data.
"You can file your tax position based on the data available at one point, but any business change can mean more site visits from auditors to re-evaluate the company’s position," continues Godenir.
The focus has shifted away from audit prevention methods and toward voluntary compliance frameworks like ACAP that prevent misconceptions during audits.
However, taxpayers spend a lot of time discussing proactive data management with advisors and how to draw valuable conclusions from the data shipments to the authorities.
Godenir explains, "There is too much data for us to process and tax authorities to assess, so one approach that we take is to provide a sample that closely represents the full spectrum of transactions in review."
When the internal tax team is not in charge of collecting pertinent data, additional procedures must be followed to maintain compliance, and authorities may ask for further details.
"“There are considerations on how to present the data, as some of our systems cannot pull the information the way authorities would want, as they are tailored to the customer not audits," according to Godenir.
"We sometimes have to go to tax technology service providers to do a post-mortem analysis to see how we can improve the system, but it is difficult to automate because there is no one standard across countries," she says.
Taxpayers must demonstrate to authorities that their data offers a story about the development of their business and the reasons behind why things are moving and changing in order to overcome data difficulties.
Hung argues that as more authorities are beginning to knock on taxpayers' doors, tax storytelling is a crucial component of the inside job.
When working with tax offices, you must be able to utilize data to convey a story about what is occurring in your supply chain since regulators want to know how you patch results between accounting and tax, according to Hung.
Another Australian advisor, Wood, claims that clients' information-collection techniques are intended to anticipate the ATO's requests for extremely broad ranges of information.
The way regional authorities handle audits is based on at-risk transactions, and they ask for all the paperwork related to that tax status. Paper trails of counsel, board permission, and proof to support the transaction are all included in the documents.
"You need to think about how you are monitoring and capturing that information, it makes a difference in how to robustly defend certain positions," according to Hung.
In addition, there is a lot of information sharing across tax authorities, and tax officials have access to a lot of technology to determine what taxpayers may do elsewhere based on submissions.
During the ITR conference, Chang said that discussions in China can get contentious when officials retrieve records that were submitted in the US and query the validity of the data if it pertains to the results of regional activities.
A common theme across authorities is to refrain from approving any tax situations resulting from proactive involvement in recent years so that transactions may be examined in greater detail during upcoming audits.
Taxpayers draw attention to this restriction because it alters the goods that businesses may offer to regional markets and requires tax teams to provide less assurance to the board.
While proactive engagement and voluntary compliance are difficult for taxpayers to manage, most would rather use these strategies than deal with the consequences of audits. After all, such consequences may be more costly and harmful.
By fLEXI tEAM