TOKYO -- A wave of efforts to increase corporate tax revenue is sweeping through Southeast Asia as governments race to plug yawning budget holes created by the economic hardship due to the COVID-19 pandemic.
For example, tax authorities are accelerating the pace of investigations and are enforcing stricter rules on companies than before -- such as shortening the deadline for submitting tax documents.
The trend should alarm multinational companies operating in the region without a sufficient local staff to handle tax affairs. They could become easy targets of the new taxation drive.
Around early 2021, multiple Japanese companies operating in Malaysia and Thailand started receiving requests from local tax authorities for documents concerning their business dealings in the past several years.
Southeast Asian offices of global tax audit firm Deloitte are receiving nearly three times more requests for advice from Japanese companies than in the time before the region was hit by the new coronavirus.
Jun Igarashi, Southeast Asia Japanese transfer pricing leader at Deloitte Singapore, says countries in the region are stepping up transfer pricing taxation inspections, which focus on the prices at which transactions are made between Japanese companies' headquarters and their local units in Southeast Asia.
When, for instance, a local unit sells a particular good to its parent company at a price significantly lower than the one at which the good is sold to an outside company, additional tax can be charged if local tax authorities consider the difference in price to be an effective transfer of profit.
In 2020 and 2021, Vietnam and Malaysia revised their transfer pricing rules to enhance taxation on such transactions. They have started requiring corporate taxpayers to submit transfer pricing documents within shorter periods of time upon the request of the tax authority.
One factor behind these moves is the relatively high ratios of corporate tax payments to overall tax revenues of Southeast Asian nations.
According to the Organization for Economic Cooperation and Development, the average share of corporate tax in the total tax receipts of OECD members in fiscal 2018 was 10%. The ratio for Japan was slightly above 10%.
But the figures for Malaysia and Indonesia, for instance, were nearly 50% and over 30%, respectively.
The moves concerning transfer pricing taxation in Southeast Asian nations signal these governments are seeking to collect more tax from businesses to finance their increased spending to deal with the pandemic, according to a local tax expert.
Transfer pricing is not, however, the only target of the region's taxation drive. Japanese companies in Thailand are bracing for closer scrutiny by the Thai tax authority on their stamp duty payments.
In 2019, the Thai government extended stamp duties to electronic documents such as contracts in digital form. "The tax authority is responding to declining tax revenue due to the pandemic by trying to increase various types of tax collections, including transfer pricing tax receipts," said Nobuyuki Ishii, executive managing director of the Japanese Chamber of Commerce, Bangkok. Companies are uneasy about the prospect of stamp duties being used as a tool for propping up taxation.
As for the Japanese companies operating in Southeast Asia, experts have said that their local units are ill-prepared to handle taxation issues. "Since tax investigations in Southeast Asia tend to be a very short process, you cannot properly deal with such inquiries by responding to the actions only when they are actually taken," Igarashi pointed out.
Transfer pricing taxation could pose a significant financial risk for any international company. Depending on how the tax authority views a transfer price, the company involved could face a massive additional tax burden.
"It is important for companies to prepare in advance documents and answers to possible questions that can convince the tax authority of the appropriateness of the transfer price," Igarashi said. "It is vital to train tax experts well-versed in tax systems in Southeast Asia."
Some Japanese companies operating in the region are taking steps to prepare for possible tax investigations, such as compiling in-house guidelines for dealing with probes by tax authorities.
A Japanese company in Indonesia recently faced a tax investigation concerning transfer pricing. Indonesian tax officials told the company that the management fee paid to its parent in Japan could not be regarded as a consideration. But the company countered by using documents that had been prepared to calculate the transactions and succeeded in selling the tax authority on most of its argument.
Nobuhiro Tsunoda, chairman of the auditing firm EY Japan, says overseas units of Japanese companies need to be better prepared to deal with any tax investigation by foreign tax authorities concerning transfer pricing that could lead to additional taxation. "These companies should also consider asking for help from the Japanese tax authorities, as Japan's authorities could argue a case for the company's practices when they hold talks with their counterparts in Southeast Asian nations," Tsunoda stressed.