A COMPANY'S ability to effectively manage its taxes across borders affects not just its bottom line these days, but also its reputation in the eyes of stakeholders and the wider public. A spate of high-profile cases has put the spotlight on the issue of tax avoidance by large corporations in recent months. Tech giant Apple found itself in hot water when a US Senate committee found in May that all of its foreign sales were channelled through an Irish entity that paid no taxes. This and other cases have led to certain groups expressing outrage over corporate behemoths getting away with not paying their fair share of taxes.
Indeed, "tax morality" is emerging as one of the most prominent areas being scrutinised by governments, the general public and the media, said Tay Hong Beng, head of tax at KPMG in Singapore.
"This is the essence of concerns keeping CFOs and finance heads awake at night. More than just paying the legal obligations surrounding tax, the issue is becoming increasingly about paying a fair share of tax," he said. An organisation's reputation can risk significant damage if there is a perception that it has been overly aggressive in minimising its tax liability.
"If not effectively managed, the cost of getting it wrong is more than the financial cost of additional taxes, interest and penalties - it also includes the cost of senior management to resolve the issues, the potential financial viability of an investment, and the reputation of the corporation," said Brendan Egan, head of tax at insurer AIG APAC Holdings Pte Ltd.
Add to that the thorny issue of transfer pricing and the complexity of compliance across multiple jurisdictions and the tax landscape has become a particularly tricky one for senior finance executives to navigate.
"Unfortunately, potential and unexpected tax audit adjustments, challenges to group transfer pricing policies and the growing application of anti-avoidance provisions in a number of tax jurisdictions have served to increase the angst," said Alan Ross, head of tax at PwC Singapore.
The problem is compounded in the Asia-Pacific by the fact that tax systems across the region are far from homogenous with more nuances than perhaps one would find in Europe, he added.
Transfer Pricing
One significant issue facing CFOs is the issue of transfer pricing, which refers to the method of attributing a corporation's profit or loss before tax across the different countries it operates in. Since countries impose different corporate tax rates, companies try to allocate more of their profit to low-tax jurisdictions, in order to minimise the overall taxes they have to pay. Many countries impose penalties on corporations if they consider that they are being deprived of taxable profit.
While a global consensus on transfer pricing rules has yet to be established, some countries such as China and India are in favour of a system that puts an additional premium on their country's share of a group's profits in exchange for access to their large consumer markets, said Mr Ross.
"More business-friendly locations such as Singapore and Hong Kong and jurisdictions such as Switzerland, Ireland and Luxembourg therefore have to think about defending their tax revenue base derived from corporates operating out of their country as challenges on intercompany transfer prices eventuate in other counterparty jurisdictions," he said.
Meanwhile, tax compliance issues are particularly troublesome for companies with operations across several countries. For instance, more and more jurisdictions impose significant penalties for late filing of returns, incorrect returns, and the lack of transfer pricing documentation or transfer pricing adjustments.
This is particularly problematic for small-and medium-sized enterprises which cannot afford the luxury of engaging tax experts in every country in which they seek to operate.
"This necessitates the use of systems and control procedures to monitor issues and adherence to deadlines and typically a system of alerts where those deadlines are not being met," said Mr Ross.
Similar to the issue of perceived tax avoidance, the failure to comply with tax regulations can, apart from incurring financial costs, also potentially damage an organisation's reputation.
Indirect taxes
CFOs also have to deal with a trend among many governments towards using indirect taxes to balance their budgets, experts said.
"Given the impact of the global financial crisis which started back in September 2008, the level of corporate profits was impacted, as were the tax collections from direct taxes. The focus started to turn to indirect taxes as the taxing authorities' need to meet fiscal budgets intensified," said Mr Egan.
For instance, Malaysia recently indicated that it would be pushing to introduce a goods and services tax (GST) in its upcoming Budget in October to help curb the country's fiscal deficit and debt burden. Meanwhile, Japan is planning to hike its consumption tax rate, a move aimed at improving the country's finances.
With indirect taxes such as GST and Value-Added Tax (VAT) present in more than 150 countries, the impact of such taxes on cross-border trades can be significant.
However, as such taxes are not as well measured or managed as direct taxes, they are sometimes poorly understood, warned Mr Ross.
"Within organisations there is often a lack of clarity on where the responsibility for indirect taxes lies, whether in operations or in finance. Another problem is the lack of a common framework in Asia to harmonise the rules," he said.
A failure to properly manage a company's indirect taxes can result in a significant tax bill plus penalties for the company, as well as reputational risk for the organisation. The emerging challenges on the tax front means that companies must change their mindsets towards tax risk management, and realise that failure to deal with the changes can result in damage to more than just the bottom line.
"Companies need to watch the development at the local and international level closely. It is also important to ensure that tax decisions are made taking into consideration the reputational risks and not merely based on whether the tax law in the various jurisdictions has been complied with," said Mr Tay of KPMG.
This is the last in a four-part business strategy thought leadership series that looks at how Singapore companies and business leaders can better prepare for the challenges ahead and capitalise on a world of opportunities in Asia and beyond. The series is brought to you by CPA Australia, in conjunction with this year's CPA Congress that will be held on Oct 9, 2013
Source: Business Times © Singapore Press Holdings Ltd. Permission required for reproduction.
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