In this blog post, we explore the insights gleaned from a recent transfer pricing webinar hosted by Maikel Verhoeven from Quantera Global and co-hosted by Steven Carey from Kroll. Focused on the complexities of navigating Asia’s transfer pricing landscape, the session provided a detailed exploration of regional challenges, opportunities, and regulatory nuances. Key takeaways and expert insights from both Quantera Global and Kroll will be distilled, offering invaluable guidance for businesses managing compliance and optimizing their tax position in this diverse economic, political, and culturally rich region.
Emerging trends
Diversity in tax regimes
- Diverse Approaches: Asian countries display a wide spectrum of transfer pricing approaches, reflecting their varying stages of economic development. Viewing Asia as a whole and applying a ‘one size fits all’ mindset is not going to be helpful.
- Convergence of tax rates: Corporate tax rates across the region are falling and beginning to converge. For example, Vietnam and Japan have significantly reduced their corporate tax rates, in recent times. This reduces tax arbitrage opportunities but does not negate the benefits of regional principal models.
Documentation and compliance
- Local vs Pan-Asian Benchmarks: Many Asian jurisdictions require local comparables for transfer pricing documentation, challenging and rejecting the use of broader, pan-Asian benchmarks.
- Language requirements: Countries such as China, Vietnam and Indonesia demand documentation in local languages, adding another layer of complexity and cost to compliance.
- Arm’s Length Range Interpretations: There is no uniform interpretation of the arm’s length range in Asia. Malaysia and Vietnam, for instance, adopt unique percentile ranges for determining arm’s length prices.
Audit adjustments
- Pre-Audit Consultations: Encouragingly, countries such as Malaysia are moving towards pre-audit consultations, allowing businesses to align their strategies proactively with tax office expectations.
- COVID-19 Adjustments: The pandemic has necessitated reevaluating transfer pricing models, especially for businesses experiencing sustained losses. Although the pandemic has passed, these years are beginning to be audited and taxpayers need to consider using loss-making comparables or one-off adjustments to strengthen their defense.
China profit and cash repatriation
Profit and cash repatriation challenges
- Stringent regulations: China’s tax authorities apply strict criteria for allowable charges such as royalties and service fees with a number of rigid tests being applied from a foreign exchange and tax perspective. Management fees, seen as non-beneficial to Chinese entities, are typically disallowed.
- Deemed permanent establishment: Payment of a service fee to an overseas related party can lead to the deeming of a deemed permanent establishment (PE) in China, resulting in additional tax burdens.
- Proactive design and implementation: Designing the optimal model can help to mitigate some of the challenges. Depending on the transactions, this can include:
- Engage in negotiations in advance with Chinese tax authorities, presenting well-substantiated and compliant transfer pricing arrangements.
- Avoid using the label ‘management fee.
- Consider maximizing the royalty (up to an informal cap of around 5%) as this may be more tax effective than paying a service fee.
- Consider splitting service fees into different buckets to isolate contentious elements.
Key takeaways
Customized Strategies: Develop country-specific transfer pricing strategies that respect local regulations and cultural nuances.
- Proactive Planning: Stay ahead of the curve by continually assessing and updating transfer pricing policies, especially due to evolving tax landscapes and economic conditions such as COVID-19.
- Documentation Rigor: Ensure compliance with local documentation requirements, including language specifics and the use of local comparables. Plan this on a regional or global basis to identify efficiencies and manage compliance costs.
- Engagement and Negotiation: Engage proactively with tax authorities, especially in complex jurisdictions like China, and be prepared to negotiate, compromise and adapt strategies.
- Holistic Approach: Consider the broader implications of transfer pricing strategies on overall business operations, including supply chain management and global tax planning.
Conclusion
Navigating the complex and diverse transfer pricing environment in Asia demands a nuanced and well-informed approach. By understanding the specifics of each jurisdiction, maintaining compliance, and adapting to dynamic economic conditions, businesses can more effectively manage their transfer pricing risks and opportunities in this region.