Asia Pacific tax challenges and the impacts of cloud computing 

Hello, I'm Graeme Reid, Regional Tax Partner based in Singapore. The key issues that I'm seeing the tax directors of many of the multinationals facing they fit in to three categories. First of all as ever is transfer pricing. That is a huge issue within the region. Secondly it's the proliferation of tax audits and the different way authorities are approaching that within the various countries throughout the region. The third area is India and China. They are all having issues. We're beginning to see a lot more reliance on local comparables that tax authorities are wanting to see comparables, not just based out of the U.S. or the U.K. or even regionally. They want it in very specific to their own country and this is putting added pressure on finding that information as it's not always available. The other part of that is local documentation. Not only does it have to be local documentation, it has to be in the local language in many countries and this puts increased pressure on the tax directors to be able to deliver that given the variety of different types of services that are being provided.

India and China have come up to the curve very quickly in the way that they are approaching taxpayers. Even five to ten years ago they were trying to assist especially in China inward investment and they were being a lot more open with taxpayers. Recently we've seen in China Circular 698 which is attacking the ability for multinationals to make disposals in China. Now this has put a lot of pressure on tax planning and China doesn't have an appeal process. So you've got to deal with the tax authorities. They can be state or federal and it's a very difficult process for multinationals to find a way through that.

India for a lot of the multinationals is the number one trouble spot. Every single tax director I speak to is facing a multitude of tax audits on a variety of issues including transfer pricing. They just cannot get certainty of treatment. They don't mind going through an appeal process but some of these processes take a long time, five, ten years to get an agreed position. And that puts a lot of pressure on the tax director whose trying to deliver a tax number to the regional CFO. He's finding it harder and harder to be able to with certainty.

The Asia Pacific region still has less sophisticated tax regimes than you'll find in the U.S., U.K., and Europe, even in places like Australia. But they're getting there very quickly and they are taking leaps and bounds. They are bypassing some of the interactions that the more developed countries went through and they're beginning to introduce general anti-avoidance rules and a lot more strict regimes very quickly.

The key trends that I see for the future are a real increase in tax audit activity. That is going to be an increasing burden for tax directors. They're going to be spending more and more of their time dealing with tax audit. Not just in India and China but in many of the other countries, Vietnam, Thailand, and Malaysia. They're all becoming more active on tax audits. I think we'll also begin to see more tax rulings and more free year-end clearance of transactions. We're seeing that in Australia. We're seeing it in the U.K. and U.S. We will begin to see that a lot more within Asia Pacific.

Other than these compliance pressures that tax directors and multinationals are facing, they're also going to face some of these transformational changes which are going to arise from their organizations joining the cloud, getting into cloud computing. A recent KPMG survey, Clarity in the Cloud demonstrated that over 46% of those respondents do not consider tax share as an issue. Now, when you begin to analyze some of the key flows of information and payments, it's a very, very complicated area. Tax authorities aren't understanding these flows, and tax directors are going to need a lot of assistance in the different treatments throughout the region.

Documentation becomes even more key because many of these payments before when you were an organization was acquiring software. It was a license so many countries got as a royalty note. Then there would be withholding tax. Cloud computing changes that completely. Rather than getting software through a license you're now accessing software. Is it a rental? Is it a royalty? Is it just a payment for the right to use? These issues have not yet been clarified, even at the OECD levels. So this is going to be a really challenging area for many tax directors in the region.