HONG KONG, SINGAPORE AND CHINA GET TOUGH ON TAX HAVENS

In an effort to create a ‘level playing field’, Asian economies are committing to new standards of transparency

At the risk of losing some foreign investors, Asian jurisdictions are stepping up efforts to combat corporate tax avoidance to meet new global transparency standards. More than a dozen Asia-Pacific jurisdictions have committed to the Automatic Exchange of Information, an initiative led by the Organisation for Economic Cooperation and Development (OECD) to boost tax transparency and to combat cross-border tax evasion that went into effect in January. Members such as Indonesia, Hong Kong, Singapore, and China agreed to bilateral reporting of taxpayers’ financial data that would commence in 2018. Governments hope to ramp up collections to help fund infrastructure projects and lift their economic growth.

“The OECD’s recommendations provide policy options to tackle international tax avoidance, which represent international consensus on the different tax avoidance issues,” says Antony Ting, associate professor of business law at the University of Sydney Business School. “Besides this multilateral approach, governments may also consider unilateral measures which have already proved to have positive impact on [multinationals’] behaviour and increased tax revenue.”

Global companies have a long history of complicated tax structures, but recent legal battles between European regulators and American multinationals fostered public anger over aggressive tax planning practices which forced politicians in Asia to act, experts said.

Google, for example, agreed to pay €306 million (HK$2.8 billion) and £130 million (HK$1.3 billion) to settle ongoing tax disputes in Italy and Britain, respectively. Last year, the EU Commission ordered tax haven Ireland to demand Apple cough up €13 billion (HK$1.2 trillion) following a ruling that the tech giant had received favourable tax benefits.

“This move is further fuelled by the fact that many governments have been facing decreasing revenue since the global financial crisis,” Ting said.

As Western countries struggled to recover from the global financial crisis in 2008, Asian markets contributed sensible growth for multinational enterprises due to their increase of private wealth. The Asia-Pacific region, excluding Japan, is projected to account for 26 per cent of all global financial wealth by 2019, according to research and consultancy firm Boston Consulting Group.

In the IT sector, rising internet penetration also boosted regional global tech revenues. Facebook recorded a revenue of US$1.5 billion in the second quarter this year in the Asia-Pacific, up from US$1.3 billion on-quarter, while Alphabet’s Google posted US$3.7 billion in revenue in the same period, a 28 per cent year-on-year jump. These firms ultimately shifted their international profits to tax havens such as Ireland, the Cayman Islands or the Netherlands.

The unilateral measures to hunt down tax revenues from multinationals vary across the region.

Indonesia Finance Minister Sri Mulyani Indrawati, for example, recently reaffirmed her intention to monitor the tax affairs of global firms, saying that many of them had manipulated local tax regulations and booked profits in countries with minimal taxation, a practice known as aggressive tax planning. In June, Indonesia signed multilateral and bilateral authority agreements with Singapore and Hong Kong, the go-to places for wealthy Indonesians to stash their money.

“Globalisation has transformed business activities, which drove big corporations to manipulate taxation,” Indrawati said during a recent speech at an International Monetary Fund conference in Jakarta. “Nowadays, aggressive tax planning is a common practice among multinational companies.”

Indonesia’s tax agency pursued back taxes from Google, Facebook, Twitter and Yahoo, after finding that they had been paying inadequate taxes for years. In June, the country settled its dispute with Google for an undisclosed amount, but it is thought to be lower than the 5 trillion rupiah (HK$3 billion) they sought for fiscal year 2015 alone. The settlement paved the way for Indonesia to demand Google and its ilk to book bigger amounts of revenue and profits and to follow a set of new rules designed for digital advertising business.

Representatives with Singapore-based Google Asia-Pacific and Google’s Indonesian unit declined to comment. A representative with Indonesia’s tax agency didn’t respond to repeated requests for comment.

“There has to be a level playing field for everyone who works in the same business field,” Rudiantara, Indonesia’s communication minister, told This Week in Asia. “I don’t think [this investigation] would spook investors; in fact, our new measure would give them legal certainty in doing business in Indonesia.”

Indonesia also launched a nine-month tax amnesty programme which ended in December. It was joined by more than 970,000 taxpayers whose combined newly declared assets reach nearly 5,000 trillion rupiah. Likewise, the country’s revenue jumped by some US$10 billion. The Philippines is said to be following the example by launching its own tax amnesty programme.

Under Australia’s Multinational Anti-Avoidance Law, multinationals with global revenue of more than US$1 billion and Australian revenue greater than US$25 million are subject to a 40 per cent tax on all profits, higher than the regular 30 per cent company tax rate.

Others choose to charge financial transactions directly. In July, regulators in India slapped a nationwide goods and services tax on thousands of items including ride-hailing services and e-commerce. This followed a demonetisation measure last year, in which the government withdrew 500 and 1,000 rupee notes that were often used by unlawful groups to avoid taxation.

In Thailand, lawmakers are proposing a bill to apply a maximum tax rate of 15 per cent for each online transaction and advertising fees on social networking platforms such as Facebook, Google, Line and ride-sharing apps Uber and Grab.

Some analysts said that these tax crackdowns could make investors adopt a wait-and-see approach before entering a certain market.

“From our perspective, the one who might be more considerate into coming into Indonesia directly are [those] from Europe and the US,” says Aldi Adrian Hartanto, head of investment at Mandiri Capital, the investment arm of Indonesia’s largest financial institution Bank Mandiri. “They’re more detailed and more conservative, especially [regarding] regulation and compliance, due to their home base that’s actually very strict as well.”

Others argue that the anti-avoidance regulations shouldn’t dent foreign investments if applied properly. Google and Facebook have restructured their businesses in Australia and as a result, both revenue and profit booked in the country have increased by 2.2 times and almost 10 times in 2016, for respective companies.

“These examples show that if the anti-avoidance measure is well designed to target [profit shifting] structures, it will not scare investments away,” Ting of the University of Sydney said.

“These [companies] had been successful in the past shifting profits generated in Australia to overseas tax havens…forcing them to pay tax in Australia on these profits means that they are still making significant after-tax profits in Australia.

“Therefore, there is no good reason for them to give up the Australian revenue simply to avoid paying 30 per cent tax on those profits.”