Challenges in Asia's Tax Functions

The tax affairs of organisations are rarely perceived as glamorous. Compliance with tax laws and regulations involves necessary but mundane activities. So why is it important to manage an organisation’s tax affairs? The obvious answer is that effective tax management can have a material impact on an organisation’s bottom line. However, in today’s corporate world it goes further, impacting on areas such as reputation, directors’ liabilities and future shareholder value.

We have seen corporate scandals, the introduction of the Sarbanes-Oxley legislation in the US and similar legislation in other countries. There is an increasing global focus on risk management. Today’s organisations must develop and implement tax strategies that address the twin goals of value creation and risk management.

The economic growth in the Asian region, fuelled in particular by the growth in China, has led to the expansion of regional activities of both local and multinational organisations. This presents tax challenges as cross-border transactions increase while tax laws and practices continue to develop and change throughout the region.

In this increasingly difficult tax environment for organisations in the region, we decided to conduct a survey on November 2004 to provide insights into the key tax challenges they face today. The survey comprises 12 key questions on tax challenges, risks and extent of implementation of tax strategies and processes. It was made available online to management in charge of making strategic tax decisions across the region and across industry groups. Responses have been collated and aggregated to ensure confidentiality of respondents. Ninety clients took the opportunity to respond. The majority of the responses were from Singapore and Hong Kong/China.

We are aware that the “tax function” can take many different forms in companies in the region. Some have large global and regional tax teams staffed with experienced tax professionals. Others have a tax function that is part of the finance department or is split with responsibilities in finance and the local business units. Some tax functions may report to local CFOs, finance departments or business units, others may report directly to a global head of tax. In addition, some may do all work in-house while others may have outsourced all or some tax work to external service providers.

We recognise that the models differ from company to company. However, we believe that this does not change the overall corporate responsibility of ensuring compliance with tax laws and enhancing shareholder value through effective tax planning. The form of tax function should have no significant impact on the key issues faced by senior management responsible for making key tax related decisions.

The results of our survey highlight that value creation and risk management are primary objectives of tax managers today. As a result, formal tax strategies to achieve both the management of material tax risks and the creation of shareholder value, remain high on the agenda for all tax functions.

They also align with our own view that tax risk management and value creation are symbiotic in nature. One objective cannot be viewed or managed in isolation from the other. A successful tax function must be capable of managing tax risk, ensuring compliance, advising businesses and managing people to both protect and create value for the organisation.

Highlights of our survey are as follows:

• China ranks a clear number one in the list of countries that provide the greatest tax challenge in the region with India ranked as number two. Korea, Japan, Australia and Indonesia follow. These results reflect the level of economic activity and investment into China and India, as well as the complexity of local laws and practices. Korea, Japan and Australia are more mature locations for multinational investment but the local tax laws remain complex and management of local tax authorities present significant challenges.
• Transfer pricing is the area of taxation that presents the greatest risk for tax functions with 66 per cent of respondents identifying it as high risk and only 6 per cent identifying it as low risk. This result is not unexpected given the uncertainties created by transfer pricing practices in the region and the difficulties and costs associated with risk management strategies such as advance pricing agreements.
• The most challenging corporate tax issues are the creation of permanent establishments and management and service fees. Along with the transfer pricing, tax issues associated with cross border trading and management structures are causing significant difficulties for tax functions in the region.
• The number one challenge for tax functions is value creation. This is an interesting result at a time when there is an increasing focus on risk management and compliance. Tax planning is still the most highly valued attribute of the tax function. This is further supported by the survey results that show 80 per cent of respondents would undertake any tax planning opportunities provided they are supported by a credible basis in tax law and 86 per cent would change a commercial transaction to take advantage of tax planning opportunities.
• While value creation remains a top priority, only 19 per cent of respondents have fully implemented processes to measure value creation as a performance indicator for the tax function.
• While a significant majority of tax functions have some form of tax strategy in place, only 26 per cent have a strategy that is fully documented and agreed with senior management and only 37 per cent have fully implemented a process to identify and report the risks that they manage. Given the importance of financial risk management for companies today it is a concern that these figures are not higher.
• The majority of tax functions are actively involved in providing tax advice to their businesses. Some degree of tax function sign off is usually required for tax sensitive transactions and tax is often involved at an early stage.
• Most companies have implemented some processes to provide effective tax compliance, accounting and payment functions but in fewer instances are these functions highly automated. There is generally a medium to high degree of comfort that sufficient controls are in place to address compliance risk.
• The majority of respondents had a moderate or high understanding of the requirements of Sarbanes-Oxley Section 404 and had made good progress to meeting these requirements where they applied to their company.
• 37 per cent of respondents had a low degree of comfort that controls are in place to cover risks associated with tax disclosure in the financial statements.
• When looking at the management of relationships, people and costs, the top two priorities are the management of relationships with fiscal authorities and finding tax staff with the required experience. Most respondents were of the view that both priorities were adequately or well managed.
• The majority of respondents indicated that their budget for work by external consultants had increased over the last three years with the focus on both compliance and tax planning and advisory services.

In conclusion the survey highlights China as the most challenging country and transfer pricing as the most challenging area of tax. Tax risks associated with international trading and management structures in the region are high on the agenda for tax functions.

The emphasis on planning and value creation demonstrates that tax functions have come a long way from the days when they were little more than embedded tax compliance teams. However, in today’s environment, companies cannot lose sight of the fact that they need to remain compliant with tax laws and practices. Value creation and value protection are the twin goals of today’s tax function.

To read PwC’s report in full click on the link below:

https://www.pwchk.com/home/eng/manage_tax_function_may2005.html

Reprinted with permission. Copyrights 2005 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the Hong Kong firm of PricewaterhouseCoopers or, as the context requires, the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. The information in this survey report is not meant to be comprehensive advice. Readers should retain their own advisers and specific action should not be taken without consultation.