Asia Pacific businesses are placing greater focus on the consistency of tax policies, according to the Deloitte's 2014 Asia Pacific Tax Complexity Survey Report, which highlights key tax trends facing businesses operating in the region.
The findings for this year is a reversal of the 2010 study where businesses placed greater emphasis on complexity and predictability of tax policies when deciding to enter or exit a market in Asia Pacific.
Additionally, the report highlights the broad spectrum of Asia Pacific tax regimes—from mature to developing markets—concluding that overall, tax has become more complex, less consistent and less predictable than it was three years ago. High growth markets such as China and India continue to have challenges in providing consistent and predictable tax regimes for taxpayers, while the mature markets of Japan, Korea and Australia are seeing more complex regimes as a result of slowing economic growth. Key regional operating hubs such as Hong Kong and Singapore also scored well.
While tax is a key factor for investors in making investment decisions in Asia Pacific, respondents believe that consistency in tax policy is more important than predictability or complexity. According to 85 percent of respondents, tax policy is a high priority when considering investing in the Asia Pacific region. Therefore, achieving this consistency should be carefully considered.
More than 80 percent of respondents believe that India, Mainland China and Indonesia are expected to be the three most complex tax regimes by 2017. Hong Kong and Singapore will be amongst the least complex. Moreover, current global tax policy efforts around tax sharing (i.e. OECD's BEPS project) is likely to cause even further complexity, confusion and change within Asia Pacific
Respondents are very focused on taxation matters, their effect on business and their effect on their broader communities. Over 50% of respondents indicated that their board of directors and C-suite are now engaged in taxation matters and a high percentage indicating that they consider reputational risk when considering tax matters.
The growth in the Asia Pacific economies has placed an unprecedented challenge on tax bureaus and their ability to keep up with relevant legislation and trained tax inspectors. Tax inspector training and increased speed and resolution of tax audits should be a priority of governing bodies.
“The principles of tax consistency, complexity and predictability increasingly influence the decision of corporates as to whether they will invest in a market," says Alan Tsoi, Deloitte’s Asia Pacific Regional Managing Director for Tax and Legal.
Tsoi notes that tax regimes in Asia Pacific have got increasingly more complex, bringing with it risk and uncertainty to businesses operating in the region.
"With the OECD's Base Erosion and Profit Shifting project set to bring sweeping changes to the tax landscape, I expect even greater complexity—but also opportunity—in the future," says Tsoi.
With regard to China, survey findings indicate that it continues to have challenges in catching up with business changes and providing consistent and predicated tax regimes to taxpayers.
Around 77 percent of respondents noted that tax regimes in China have become more complex, along with 89 percent of respondents who believe that tax authorities are fairly rigorous or very rigorous. As a result, over 50 percent of respondents with operations in the China expect to spend more time and resources on tax management in this marketplace over the next three years.
In contrast, just 15 percent of respondents with operations in Hong Kong believe that they will invest more time and resources on tax management despite the Hong Kong government's emphasis to combat tax evasion and avoidance.
Market perceptions have it that substantial and material change in tax regimes is not unlikely in Hong Kong over the coming three years. Meanwhile, respondents continue to put their vote of confidence on Hong Kong's tax system and only 2 percent of them believe that Hong Kong tax officials are not fair.
Tax complexity in China is unavoidable in view of the size of the Chinese Mainland and its relatively young but yet complex economy, according to Tsoi.
"The Chinese government is aware of the tax challenges faced by business and is continuing to put forward reforms in its regulatory and tax system with the objective to facilitate and support growth. For Hong Kong, tax officials appear to be less rigorous when they conduct tax audits compared to other jurisdictions. This might be an area for consideration if the Hong Kong government is to step up its efforts against tax evasion," says Tsoi.