Asia needs to start preparing for BEPS Action 1

Asia needs to start preparing for BEPS Action 1

Benjamin Pong shares his insights on why Asia needs to start preparing for BEPS Action 1.

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Partner, Tax, Hong Kong

KPMG in China

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E-commerce is booming in Asia with China leading the charge in this new age of digitalisation. While this trend has created numerous business opportunities, companies need to be aware of global discussions surrounding taxation on digital economy business.

New ways of doing business can lead to a rise in tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is actually little to no business activity taking place. This tactic is generally what is known as base erosion and profit shifting (BEPS).

This can be particularly hard to track and regulate if businesses are conducted in the digital realm although the Organisation for Economic Co-operation and Development’s (OECD) has tried to tackle the issue.

  • Preparatory or auxiliary activities – Activities previously considered to be preparatory or auxiliary may now correspond to core business activities of an enterprise, particularly in the digital economy.
  • Artificial sales arrangements – Artificial arrangements relating to the sales of goods or services of one company in a multinational group effectively result in the conclusion of contracts. The sales should be treated as if they had been made by that company.
  • Digital services - The jurisdiction of the usual residence of the customer will have the right to levy value-added tax (VAT) on the supply of the digital content. On the other hand, the foreign seller will be required to register for VAT in that market jurisdiction under a simplified registration and compliance regime, and to charge and collect the VAT in that jurisdiction at the same rate as domestic supplies.

On paper, the BEPS action plans seems to be fairly distant for most of Asia as Japan and Korea are the only two OECD members in the region. However, the OECD and G20 countries have an inclusive agreement, under which over 100 jurisdictions are to cooperatively integrate the action plans into their own regulations. This means the impact of the BEPS action plans is bigger than the OECD membership suggests:

India, Japan and Korea have already implemented some form of VAT or levy on digital economy business based on their own interpretation and implementation of Action 1. And discussions are taking in place in other Asian jurisdictions to introduce similar measures.

Hong Kong, for example, does not impose VAT. However, the city’s tax authorities is planning to issue a Departmental Interpretation and Practice Note on the digital economy, according to a consultation last year.

A lot of attention will also be on the policy direction of China, which is the home to one of the largest e-commerce markets in the world.

China has yet to indicate whether it will implement Action 1, but the country’s State Administration of Taxation (SAT) has been reforming its tax laws to accommodate some of the other BEPS action plans. If and when they do, however, the impact on the global digital economy will be felt.

Multinational corporations (MNCs) with or are planning to focus on the digital economy will need to keep a watchful eye out for this. Not only does this concern tax laws, it also has an impact on how individual jurisdictions interact and operate. With e-commerce a rising trend globally and not just in Asia, companies should start preparing for the eventual adaptation of Action 1.

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