FORUM: Managing tax disputes in the Asia-Pacific region
December 2017 | SPECIAL REPORT: GLOBAL TAX
Financier Worldwide Magazine
December 2017 Issue
FW moderates a discussion on managing tax disputes in the Asia-Pacific region between Rachanee Prasongprasit at LawAlliance Limited, Liesl Fichardt at Quinn Emanuel Urquhart & Sullivan, LLP, and Vijey M. Krishnan at Raja, Darryl & Loh.
FW: How would you describe recent developments in corporate tax regulations across the Asia-Pacific region? Have the risks for companies increased in this area?
Fichardt: The Asia-Pacific covers both developed and emerging economies and varying political regimes, with different corporate tax agendas. So, it presents a complex corporate tax environment. However, a broad assessment of recent developments reveals an ongoing commitment by tax administrations and authorities across the region to regulate tax affairs rigorously, to combat perceived tax avoidance or tax evasion by foreign investors operating in the jurisdiction, and to determine tax obligations relative to where profits are made, rather than where corporates are resident under the law. For instance, in Malaysia, the Inland Revenue Board has recently affirmed its aim to conduct tax audits every five years on both individuals and companies. The heightened monitoring of tax affairs in Malaysia is indicative of wider activism by tax authorities in the region. On the issue of tax avoidance, tax evasion and profit shifting, Australia recently enacted the Multinational Anti-Avoidance Law which applies to ‘significant global entities’, that is, multinationals operating in or from Australia, with an income of A$1bn or more, subject to additional legislative criteria. Moreover, many nations in the Asia-Pacific have amended or enacted domestic law to implement the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) framework, consisting of a set of rules targeting corporate tax avoidance or evasion. In the absence of a full harmonisation of tax law in the Asia-Pacific, the implementation of this framework inevitably will vary among jurisdictions. However, even this partial adoption of the BEPS framework is significant because it enhances coordination by governments in the region in reconsidering the tax obligations of multinationals conducting business there.
Prasongprasit: While no direct amendment has been made to the corporate tax provisions under the Thai Revenue Code, since the second half of 2015, the government has continuously legislated new regulations to encourage the streamlining of businesses’ tax compliance via the corporate income tax system. For instance, at the end of 2015, the government legislated a tax amnesty programme, which allows those corporate entities that meet particular conditions to gain an exemption from tax audit, investigation and assessment of taxes on income incurred during the accounting years that started before 1 January 2016, provided that such corporate entities complied with their tax liabilities, including filing financial statements that reflect the genuine status of the business, from 2016 onwards. Where noncompliance is found, the company will be deprived of amnesty. Further, a series of regulations were legislated to encourage the reorganisation of businesses operated by individuals into corporate entities, and to discourage the operation of some types of business by individuals by reducing their lump sum tax expenses. Recently, provisions under the Thai Revenue Code were modified to impose harsher criminal charges on whoever failed to file required tax returns in an attempt to evade tax. The change was also made so that tax evasion of no less than THB10m, or claiming a false tax refund of not less than THB2m, during any year, may be treated as a money laundering case with a fine of THB200,000 to THB1m and/or the imprisonment of authorised personnel for one to 10 years if false transactions were plotted among syndication networks.
Krishnan: Tax law amendments in Malaysia usually come from the annual budget. The 2017 budget introduced a number of changes that had turned what is generally considered to be an already difficult tax compliance environment into an even more difficult one. For example, the scope of an already ambiguous withholding tax on services had been extended to cover services which are provided offshore. However, due to persistent lobbying, an exemption order was issued recently to exempt the payment of withholding tax on such services. The scope of the definition of ‘royalty’ was also extended. This new and much broader definition challenges many established Malaysian case laws in this area. Developments like these can lead to the Inland Revenue Board of Malaysia (IRBM) taking positions that can catch taxpayers unaware. For example, it appears that a view was recently decided by the IRBM that payments made for Google and Facebook advertising may be taxed as ‘royalty’, thus attracting withholding tax. There has also been a bolstering of the penalty regime with the introduction of various new penalties. The director general of the Inland Revenue has also announced that, from 1 January 2018, a maximum penalty of 100 percent will be imposed on persistent defaulters, compared with the 45 percent penalty currently imposed.
FW: What, in your opinion, are among the typical factors driving recent tax disputes? To what extent are they the result of government attempts to increase tax revenues through heightened monitoring and enforcement activities?
Krishnan: Malaysia practises a self assessment regime. Tax compliance is therefore monitored via tax audits or investigations by the IRBM. Tax audits and investigations have heightened over the years and there is a definite increase in enforcement activities by the IRBM. An increased pressure can be felt particularly in relation to corporate tax. It is commonly believed that all of this is a direct result of government attempts to increase tax revenue. While tax audits and investigations are broad-based, they are being centred on certain industries at present. For example, medical practitioners in private practice were recently subjected to intense scrutiny on whether they were reporting their income properly. The building and construction sectors are also seen as high risk industries. There is also focus on companies claiming any type of tax incentives or holidays to ensure that these companies are not claiming incentives on anything more than what the IRBM considers to have been envisaged under the legislation and the incentive approvals.
Fichardt: Heightened public awareness of instances of corporate tax avoidance and complex corporate structures enabling companies to evade tax obligations have placed tax policy at the top of the agenda for many governments. This issue likely accounts, in part, for the recent drive in regulatory developments and a rise in tax disputes in the Asia-Pacific. A further explanation could be the perceived multi-billion dollar annual ‘tax gap’ – the discrepancy between what tax administrations are currently receiving and the amount they consider as lost to tax avoidance schemes. This perceived loss of potential revenue has resulted in increased mobilisation and aggressive strategies by tax authorities around the world to re-examine corporate tax obligations.
Prasongprasit: An increasing number of tax disputes are taking place, due to some taxpayers’ application of old-fashioned aggressive tax planning schemes, while the Thai Revenue Department is becoming more alert in respect of tax avoidance. Although Thailand does not have a general anti-tax avoidance rule (GAAR), where transactions are too abusive or lack real commercial purpose, the court may apply the substance-over-form rule in interpreting the real tax implications. Also, where a transaction is considered a sham, it could be treated as invalid under Section 155 of the Civil and Commercial Code – the general law governing commercial transactions. Another typical factor of tax disputes is the interpretation issue, which is often caused by insufficient guidelines on particular legal provisions, while the tax authorities are so diligent in screening tax compliance failures. In addition, the introduction of national e-payment, the online system through which most businesses will soon be required to make payments, will be an advanced means for the Revenue Department to monitor tax compliance in the near future, which may increase tax disputes.
FW: Can you highlight any recently introduced rules, regulations or legal developments that are having a significant impact on tax disputes across the Asia-Pacific region, including how they are managed and resolved?
Prasongprasit: To date, tax avoidance issues, rather than changes to the law, have had the most significant impact on tax disputes. Nevertheless, with Thailand recently becoming a member of the Global Forum on Transparency and Exchange of Information for Tax Purposes, and joining the Inclusive Framework on BEPS, as well as the likely overhaul to the Revenue Code, in conjunction with entering into the national e-payment system, the new laws are expected to impact tax disputes.
Fichardt: In light of increased public and political awareness surrounding corporate tax avoidance schemes, the BEPS framework is among the most significant regulatory developments impacting the corporate tax climate in the Asia-Pacific region. An ambitious initiative with the commitment of 100 countries globally, the BEPS aims to target aggressive tax avoidance strategies used by multinationals. For example, in July 2017 the government of Hong Kong announced a set of reforms in line with the BEPS principles and with the aim of combating transfer pricing, country-by-country (CbC) reporting and tax dispute resolution through greater harmonisation between the OECD’s four key standards – confronting harmful tax practices, eliminating treaty abuse, implementing CbC reporting obligations and improving cross-border dispute resolution schemes – and domestic legislation. Similar legislative changes have taken place or are underway in Singapore, Japan, Australia and China.
Krishnan: There have been a record number of appeals being filed against assessments raised by Malaysia’s IRBM, to the extent that the specialist tax court has taken longer than usual to dispose of appeals. Taxpayers have therefore been looking for alternative methods to resolve their tax disputes. One popular option over the specialist tax court is the filing of judicial review applications to the High Court. Judicial review is an application by which the court can review an administrative action by a public body, and the applicant can typically obtain various reliefs, including quashing of notices of assessments. There are case law authorities which have held that taxpayers can resort to judicial review to resolve tax disputes although an internal remedy is provided by the specialist tax court. However, recent decisions by the apex courts now question the suitability of this avenue. In certain exceptional circumstances, this avenue may still be open. These developments are influencing how a taxpayer decides to settle his tax disputes. It is anticipated that as taxpayers seek filing appeals before the tax specialist court again as their main option, the time frame for disposals of appeals at that court is bound to grow even longer.
FW: How would you describe the popularity of alternative dispute resolution (ADR) for companies embroiled in a disagreement with tax authorities? Is there a general appetite to avoid litigation where possible? What options are available?
Fichardt: The difference between pursuing alternative dispute resolution (ADR) procedures, as against litigation, is flexibility in procedure. While some companies prefer this flexibility, others prefer a more firmly entrenched structure to the settlement of a dispute. One factor to consider is that most ADR procedures tend to work better when both parties are willing to collaborate. For those tax authorities that are not collaborative, companies may well prefer litigation or arbitration. Another factor to consider is the nature of the case – is it one that is inherently suited to compromise or negotiation? If so, ADR procedures are likely to prove more useful than an adversarial process before a court or tribunal. However, if the dispute turns on fundamental differences in the interpretation of tax law, litigation or arbitration may be the preferable solution. In fact, some tax authorities – such as the Australian Tax Office – are unwilling to resolve such issues through ADR, on the basis that a court decision would establish useful public precedent and advance the rule of law. In this context, arbitration deserves separate mention because, although classified as one method of ADR, it resembles more traditional litigation compared to dispute resolution methods such as conciliation or mediation. Arbitration, however, may be the preferable option in some situations, mainly due to party autonomy, which can include governments, to customise the terms of the dispute resolution process, including the location of the proceedings, the governing law and of course the adjudicators themselves. In terms of other ADR options available, these include mediation, in-house facilitation, conciliation and early neutral evaluation. Some jurisdictions have specific rules about what forms of ADR are permissible to resolve tax disputes. For example, in China, tax disputes cannot be submitted to arbitration. In Indonesia, no ADR procedures are available, and the tax litigation procedure must be followed in all cases.
Krishnan: ADR is available in Malaysia. It was previously managed by a dedicated division in the IRBM’s headquarters. It is now being handled by senior officers at the state level instead. Essentially, after a taxpayer files an appeal against an assessment, the IRBM has one year to review the appeal before forwarding the same to the specialist tax court, the Special Commissioners of Income Tax (SCIT). During that period, the taxpayer is entitled to request that ADR proceedings be held. ADR has been popular and was successful in reducing the number of cases forwarded to the SCIT by virtue of settlements arrived at the ADR stage. It now remains to be seen whether it will continue to be successful after the ADR process has been moved to the state level. Another alternative method of resolving tax disputes is to make representations directly to the minister of finance, who as a policy maker can override decisions of the IRBM. This can typically be done in larger cases or where the issues are more wide ranging, for example the decision to exempt withholding tax on offshore services. This is the result, to a large extent, of this type of representation being made to the minister of finance.
Prasongprasit: For those tax disputes that are brought to the court, the only means of ADR in Thailand is mediation during the court process. The court will ask the parties on the first hearing date if they are willing to enrol in the dispute settlement programme, but seldom has this happened. A major pattern of the development of tax disputes is that, where the relevant tax authority, such as the Revenue Department or the Customs Department, carries out a tax audit on a taxpayer, and requires an additional tax payment with or without penalties or surcharges, the authority may issue a tax assessment letter to the taxpayer. Where the taxpayer disagrees with the assessment, it may not file the case directly with the central tax court, but is legally required to first make an appeal to the appeal committee of each authority. Then, after receiving the result of the appeal, in which the taxpayer will typically lose its case at this level, the taxpayer may bring the case up to the court level. Filing the tax dispute with the central tax court without appealing to the appeal committee is legally allowed where there is no tax assessment by the authority, for example where a taxpayer requests a tax refund and is turned down by the relevant tax authority. Since tax disputes are time and money consuming, a number of taxpayers are willing to settle any taxes demanded by the authorities, provided they can bear the tax costs.
FW: Do expert witnesses often play an important role in tax disputes in the region? What are the advantages and disadvantages of introducing an expert witness into the process?
Krishnan: Typically, it is not common to have expert witnesses in tax disputes in Malaysia. Only where the area of dispute is very technical, in transfer pricing cases for example, may expert witnesses be required. In such circumstances there may be advantages to having an expert witness explain the technicalities to support the taxpayer’s position.
Prasongprasit: Unless the tax disputes are based purely on the factual issues, human errors for example, since most of these tax cases involve interpretation issues, expert witnesses are almost an inevitability when a dispute is escalated to court. When seeking an expert witness to testify in respect of the interpretation of tax laws, the disadvantage is their scarcity. Meanwhile, when inviting an expert witness to prove the practical facts, the major disadvantage is that if the expert witness happens to be a bureaucratic official, some may feel uneasy testifying against the tax authority.
Fichardt: The role played by expert witnesses generally pivots on the nature and facts of the case. If the case involves the interpretation of specific provisions of tax law, expert witnesses may not be necessary or even useful. On the other hand, where one of the issues at stake involves a question of valuation or accounting standards, expert evidence is likely to be significant to the outcome of the case.
FW: What general advice can you offer to companies engaged in a tax dispute? What issues and challenges are they likely to encounter?
Fichardt: Companies, particularly foreign investors, which are engaged in tax disputes in the Asia-Pacific region should be aware of any applicable objection, appeal or review remedies and proceedings under local law, and specifically any time limitations or time barring provisions. Under the tax law of some jurisdictions, time limitations for contesting tax decisions can be short and strict. These could be fatal in cases where a local remedy is not pursued within the applicable limitation period. Similarly, investors should remain aware of their broader legal rights arising under contractual or international treaty provisions. Tax reforms are rife across many jurisdictions in Asia-Pacific. For instance, India introduced a unified goods and services tax law in July 2017. Companies should also be careful to ensure that they remain abreast of such developments. Moreover, in some jurisdictions foreign investors may come across differences between the letter of the law and practice. For example, tax authorities may demonstrate willingness to negotiate the resolution of a dispute, without suspending the tax decision in question. In these cases, the investor should comply closely with the requirements under local law – for example, by seeking a stay of the decision or filing a protective appeal pending discussions with the tax authority.
Prasongprasit: Companies would be wise to avoid tax disputes wherever possible. This can be achieved by consulting with tax experts regularly, especially before entering into any transaction that may bring about complex tax issues or are seemingly tax driven. However, should a company find itself in a situation that could foresee a tax dispute, for example there is a disagreement with the tax authority during a tax audit, it would be advisable to consult with tax experts immediately, so that the company can plan and prepare for the dispute at this level. Where a tax assessment has already taken place, companies would be strongly advised to engage a tax litigation expert to appeal against the assessment. It is not advisable to dispute a tax case without soliciting advice from a tax expert. In Thailand, issues which are not raised at the level of the central tax court cannot be raised at the Court of Appeal for Specialised Cases and the Supreme Court. In respect of the challenges and difficulties, expert witnesses that hold the supporting views can be difficult to find. Also, a tax dispute will be costly. Where there is a tax assessment by the Revenue Department, the company will be treated as being in tax arrears, even though the company believes that it has no liability to pay such tax, for which the Revenue Department is authorised to confiscate the company’s assets to enforce payment, without having to obtain a court order. To prevent confiscations, the company will need to ask the director-general of the Revenue Department to defer any tax payments until the judgment of the court is rendered – upon which the company must place a pledge, which may incur some costs.
Krishnan: Taxpayers should carefully pick their mode of resolving their tax disputes. Whether it is to appeal to Malaysia’s SCIT, file judicial review application to the High Court, pursue ADR or make representation to the minister of finance. In a judicial review application, taxpayers can potentially obtain various other remedies such as a stay against tax recovery proceedings by the IRBM and interest on any refund. It is also likely to be heard faster than an appeal to the SCIT. In an appeal to the SCIT, the main problem would be the time needed to get the appeal heard. Practically speaking, this works against a taxpayer since at law, generally a taxpayer is required to pay first, notwithstanding any appeal. The suitability of the judicial review mode has been questioned by recent decisions of the apex courts. Relevant facts of the tax disputes will need to be considered before making a decision.
FW: Do you expect to see a rise in tax disputes in the Asia-Pacific region in the years to come? What steps should companies take to ensure their tax practices are in line with current regulations, and generally reduce the likelihood of falling into a dispute?
Prasongprasit: Based on the upcoming changes to the Revenue Code, including Thailand’s commitment to improving its tax system via a variety of the information exchange programmes, such as the Global Forum and the Inclusive Framework on BEPS, a rise in the number of tax disputes is expected. Besides consulting with tax experts, companies should be alert to any changes announced by the relevant tax authorities. They must communicate with the relevant tax authorities, especially with the audit team in charge, to determine in advance if there is a likely mismatch of interpretation between the company and the authority.
Krishnan: It can generally be said that taxpayers in Malaysia view the current tax climate as being extremely difficult and challenging, with the IRBM increasingly taking aggressive positions and the imposition of penalties, very often at the rate of 100 percent. This is exacerbated by the fact that taxpayers generally have to pay the disputed taxes first, even if there is an appeal. With the time frame for appeals becoming longer due to mounting numbers of appeals, taxpayers are finding themselves out of pocket on genuinely disputed taxes for longer periods of time. It is now not uncommon for the IRBM to depart from established practices, including at times, its own public or private rulings. One recent issue surrounds the deductibility of interest expenditure against dividend income received by taxpayers when Malaysia still had the imputation or franked system of dividends. Malaysia had, in 2008, adopted the single tier tax system. The IRBM had recently conducted audits on many large corporations on this issue and raised multi-million ringgit assessments by virtue of a change in their basis on how such dividend income is to be brought to tax and how interest expenditure is to be deducted. This, coming after so many years, shocked taxpayers. Income tax assessments are usually time-barred after five years, unless there is fraud, wilful default or negligence on the part of the taxpayer. Increasingly, the IRBM is alleging negligence or wilful default, thus opening the time-bar on a frequent basis. Particular industries may have higher risks as their tax issues are more complex. It is not uncommon now for taxpayers to seek legal advice and review their position continuously throughout the year. Tax disputes seem almost inevitable in today’s climate. The question is only on the magnitude of dispute.
Fichardt: There is an expectation that the number of tax disputes in the Asia-Pacific region will rise. Multinationals are increasingly concerned that they will be unfairly taxed due to a shifting sentiment in several jurisdictions as regards the tax benefits and status of foreign investments. To mitigate against such occurrences, companies would be well-advised to provide timely, accurate and complete tax filings. In an ever-changing regulatory landscape, companies should establish requisite compliance measures and ensure that reviews are taking place regularly. Companies should also be conscious that in the event of a dispute, the lines of communication between the taxpayer and tax administration are open, and settlement is frequently an option. This is particularly true in the context of large companies and foreign investors, where there may be a package of tax disputes and the incentives to settle are higher.
Rachanee Prasongprasit is an associate at LawAlliance Limited and an expert in Thai taxes on corporate reorganisation, trade, securities and financial transactions, and international transactions. Her practice extends from tax planning advice to tax disputes, and review of contracts from a tax perspective. Most of the tax disputes that Ms Prasongprasit handles are those with complex interpretation issues involving sophisticated transactions. She can be contacted on +66 (2) 677 6300 2 or by email: firstname.lastname@example.org.
Liesl Fichardt is a partner specialising in complex international and cross-border tax investigations and disputes. She joined the firm’s London office in 2017. Prior to joining the firm, Ms Fichardt was the head of the tax investigations and disputes practice at Clifford Chance. She is one of the leading experts in complex international tax disputes, and has considerable court and tribunal experience which includes conducting cases in the Tax Tribunal, the courts of appeal and the Court of Justice of the European Union. She can be contacted on +44 (0)20 7653 2000 or by email: email@example.com.
Vijey M. Krishnan is a partner at Raja, Darryl & Loh, where he heads the revenue law practice. Having joined the firm in 1999, Mr Krishnan regularly appears before the Special Commissioners of Income Tax, the High Court, the Court of Appeal and the Federal Court on major points of tax law. He has consistently been recommended in the area of tax in publications such as The Asia Pacific Legal 500, the Tax Directors Handbook and Chambers Asia Pacific. He can be contacted on +603 2694 9999, ext 112 or by email: firstname.lastname@example.org.
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