Asia to clamp down hard on corporate tax avoidance

Key Asian jurisdictions have joined the OECD’s initiative to tackle tax evasion by multinational corporations in recent weeks, including Hong Kong, Singapore and China. Taiwan is introducing changes to income tax legislation – one that gives it authority to tax foreign entities on its global income if their actual place of effective management is in Taiwan.

Christoph Kober 26 Aug 2016

Key Asian jurisdictions have joined the OECD’s initiative to tackle tax evasion by multinational corporations in recent weeks, including Hong Kong, Singapore and China. In an interview with The Asset, Taiwan’s Ministry of Finance also declares its commitment to implementing Common Reporting Standards (CRS).

Singapore and Hong Kong joined as BEPS (Base Erosion and Profit Shifting) Associates on June 16 and June 20, respectively, and will begin the automatic exchange of financial account information with tax authorities from other jurisdictions starting in 2018. China, meanwhile, revised its transfer pricing documentation rules to align with the OECD standard on July 13.

One day earlier, Taiwan’s Legislative Yuan passed an amendment to its Income Tax Act that introduces the concepts of a controlled foreign company (CFC) and place of effective management (PEM) into domestic legislation. The sweeping amendment will give the country’s tax authority, the Ministry of Finance, power to tax foreign entities on their global income if their actual place of management is located in Taiwan.

Speaking in Taipei in early August, Deputy Minister Jain-Rong Su of Taiwan’s Ministry of Finance, told The Asset that the MoF will “follow the guidelines of the OECD” and that it is “in the process of integrating BEPS into local tax regulations for the purpose of countering tax evasion”. That includes joining the growing network of countries that have agreed to exchange financial account information for tax purposes under CRS.

Experts believe that the amendment of July 12 will have decisive impact on the tax burden of Taiwanese corporates, particularly those not listed on public stock exchanges. “Taiwanese companies typically set up offshore holding companies or subsidiaries in low tax jurisdictions such as the British Virgin Islands [also a CRS participant] and invest in operating capacities in China or Southeast Asia through this entity. The profits repatriated from the operational subsidiaries to the offshore entity are then often not repatriated to Taiwan so they are not taxed,” explains a tax partner at a major auditing firm in Taiwan.

Going forward, profits kept in offshore locations will be taxable on account of the CFC concept. Meanwhile, the PEM amendment addresses the fact that currently, only companies incorporated in Taiwan are subject to corporate income tax in Taiwan.

Although the amendment has passed, it will most likley not become effective until the tax treaty between China and Taiwan has come into force and the CRS initiative has reached significant international traction.

“These rules will have significant impact on Taiwan citizens and companies, as well as the wealth management industry that caters to them,” a note to clients by Baker & McKenzie reads. Although the July 12 amendment only applies to companies, high net worth individuals typically set up trust companies in offshore locations to manage their wealth and hence will be affected by the rule change as well. Furthermore, a similar amendment to the tax code applicable to individuals has already passed the Executive Yuan and will likely pass the Legislative Yuan in the coming months, a source says.

Indeed, says a private banker in Taiwan, “The world as we know it today and the world with such transparency will be very different. The kind of offshore banking that we have today, which in many ways is based on banking secrecy, all that is going to go away, because by law, everyone will come clean.”

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