We are living in a time of unprecedented economic, political and technological change. From a tax standpoint, they have contributed to increased complexity for businesses. These changes include evolving business models, the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) action plans, differing viewpoints on digital taxation, the US-China trade tensions, increasing competition for investments between countries and various other factors. Some of these points are discussed below.
The OECD’s BEPS reports, released in October 2015, have significantly impacted the way that multinational groups organise themselves. When evaluating corporate and intellectual property (IP) holding structures, groups must consider whether they have sufficient business substance in the holding/IP company location to qualify for tax treaty benefits. Such treaties may reduce the tax burden on dividend and royalty payments.
When evaluating capital structures, groups also need to consider restrictions on interest deductibility due to Earnings Stripping Rules. For example, Malaysia has introduced ESR, which will limit interest deductions to 20% of “tax-Ebitda”. With respect to travelling employees and trading activities, groups need to consider the significantly lowered “permanent establishment” thresholds, which means that they are more likely to crystallise taxable business presence in multiple jurisdictions. All these are underpinned by “country-by-country reporting” obligations, requiring groups to provide tax authorities with significant details about their global footprint.
Digital tax is another area keeping tax directors up at night. Many countries, including the UK, New Zealand, Australia and the European Union nations, have introduced or have proposed a Digital Services Tax (DST). This tax is not to be confused with the Service Tax, which will be imposed in Malaysia from Jan 1, 2020, on imported digital services.
Instead, the DST being implemented globally is a tax on the turnover of large multinationals providing prescribed digital services across borders. These services may include online advertising, sale of user-generated data or the operation of online marketplaces. Further, the “destination principle” for the Goods and Services Tax (GST) and Value Added Tax now applies widely, requiring international suppliers to register and collect indirect taxes in the countries where their customers are located.
Businesses operating across borders need to pay close attention to these developments and can expect enhanced compliance requirements. Due to the way that the laws have been drafted in many countries, it is important to note that it is not necessarily only technology companies that are impacted. For example, in New Zealand, re-deliverers such as logistics companies may have increased GST compliance obligations with respect to supplies made by their customers.
The trade dispute between the world’s two largest economies has also caused concern. While the main focus thus far has been on manufacturing companies located in China, any company operating in a supply chain involving either country, including service providers and IP owners, may be affected. With no immediate solution in sight, impacted businesses need to assess the additional tariff costs and whether these can be passed on to customers.
Businesses that are impacted by high tariffs and have slim product margins and/or inelastic demand for their products will need to review their supply chains to identify opportunities to reduce costs and mitigate tariffs. Some multinationals have responded by moving manufacturing facilities out of China. This has led to significant competition between countries to attract such multinationals. While Vietnam has been the early winner in attracting manufacturing activity that is looking for a new home, Thailand, India and Indonesia have announced incentives, liberalisation of foreign investment rules and/or reductions in corporate taxes to attract such activities. In future, multinational groups may be wary of concentrating their manufacturing facilities in a single country.
Multinationals also need to deal with increased use of technology by tax authorities. In some countries, the tax authorities now have almost real-time access to transactions. This, combined with enhanced upfront disclosure requirements in relation to tax planning strategies, means that the authorities are able to detect and scrutinise potential tax issues much earlier. The level of information exchange between the tax authorities pursuant to the OECD’s Common Reporting Standards and BEPS action plans will also increase the amount of data available to them.
Overall, multinationals will probably find that they have tax reporting and payment obligations in more countries than before. This, combined with the added scrutiny from the tax authorities, will lead to more tax controversy, and taxpayers will need to invest in the appropriate technology and people to remain compliant and to deal with disputes effectively. The merger and acquisition environment may also be impacted, with potential acquirers needing to conduct far more detailed due diligence and post-integration planning to address tax risks and the complex tax environment.
Closer to home, businesses operating in Malaysia will be awaiting the Budget 2020 announcement to see what else is in store for them.
Anil Kumar Puri is a tax partner at Ernst & Young Tax Consultants Sdn Bhd. The views expressed here are solely those of the author in his private capacity and do not necessarily represent the views of the global EY organisation or its member firms.