Changes to tax laws in sight for MNCs as the authorities adopt BEPS

(The Edge Malaysia) -

Multinational corporations (MNCs) in Malaysia will soon be seeing more tax law changes coming their way as the authorities get down to tackling base erosion and profit shifting (BEPS).

This follows efforts by the Organisation for Economic Co-operation and Development (OECD), approved by G20 leaders, to formulate a 15-step action plan to equip governments with domestic and international instruments to address tax avoidance.

BEPS refers to tax avoidance strategies by MNCs that exploit gaps and mismatching in tax rules to artificially shift profits to low or no-tax locations.

Grant Thornton Malaysia executive director for international tax and global mobility services Daniel Woo opines that the implementation of the BEPS action plan in Malaysia could take about three years and will entail many changes to the country’s tax landscape.

He says the Inland Revenue Board is studying the action plan and is most likely to focus on areas such as the digital economy, harmful tax practices, treaty abuse, transfer pricing and dispute resolution.

“I would say things are coming onstream. [Based on input from the tax authorities,] I think it will take probably three years [for the all actions to be implemented]. However, this is just an indicative period,” he says in an interview with The Edge.

BEPS has been the buzzword in the tax fraternity for some time, especially after Malaysia became the 95th member of the inclusive framework in March.

While the BEPS recommendations will be fully adopted by the OECD nations, countries like Malaysia, which is not an OECD member, can choose to implement some of them or none at all.

Nevertheless, Woo says the effects of BEPS will be felt across the region.

“The BEPS report essentially provides countries with recommendations to update and refine their tax laws as well as propose changes to their double tax treaties to minimise the gaps and mismatches that MNCs have been using to level the playing field,” he explains.

Not a hindrance to FDI

Woo does not think the tax law changes will hinder foreign direct investments because BEPS is a worldwide movement and not confined to Malaysia.

“MNCs will continue to invest in Malaysia as long as the country has good fiscal policies, a robust tax system and stability in terms of doing business. They will have to relook their current business and reporting models and quickly adapt to the changing global tax environment that demands greater transparency and commercial substance in their operations,” he says.

MNCs will have to assess how BEPS will impact their operations and start taking measures to minimise any potential risks identified. Some high-risk areas for MNCs include provision of financial and intangible services, supply chain planning and intercompany transactions. These areas, says Woo, should be aligned with the commercial activities carried out.

Grant Thornton International global leader of tax services Francesca Lagerberg believes that the implementation of the BEPS recommendations will encourage MNCs to be more transparent when disclosing information, for the sake of their reputation.

“The reality for a multinational is, it will know that it has to follow these international rules, and transfer pricing is probably a very significant part as it is applied in many countries around the world,” she says.

“[Now with BEPS,] these MNCs will have to think about country-by-country (CbC) reporting, about the information they provide and how transparent they are about their data. So, a lot of this involves the openness of tax transactions and being more explicit in what they are doing.”

On Dec 23 last year, Malaysia issued the income tax CbC reporting rules, which are in line with Action 13 of the BEPS package. In essence, CbC provides a template for MNCs to report annually and for each tax jurisdiction in which they do business information, such as their earnings and the number of people hired.

The CBC reporting rules came into effect on Jan 1 and applies to MNCs whose ultimate holding companies are incorporated and resident in Malaysia and have a consolidated annual turnover of RM3 billion or more.

Lagerberg says the BEPS mechanism will also change the way MNCs do international tax planning.

“It will 150% change the way multinationals do their tax planning. Back in the 1990s, they had a huge range of aggressive planning opportunities that they could or could not choose to do, and they weren’t illegal,” she says.

“But today, a lot of those planning rules and regulations have become stricter, and some you can no longer do ... or rather the appetite has changed. Because, if you are a very large multinational in the public eye such as Starbucks or Google, you won’t want to spend the rest of your life in the newspapers being attacked for your tax policies.”

BEPS encourages a more “aligned set of rules” when it comes to international tax planning, she says.

“A lot of international tax planning in the past was based on disparities between different jurisdictions, so you can trade off here and get a win there, and you can manage your effective global tax rate,” says Lagerberg.

“When the rules become more aligned, there will less of a mismatch. So, there is less ability to trade across different jurisdictions to get a better tax effect.”

However, she points out that the implementation of BEPS does not mean that it will be illegal for MNCs to establish their operations in countries with low tax jurisdictions. Rather, they will need to prove that they are truly operating out of that particular country that provides lower tax rates.

A boost to tax revenue?

Nevertheless, the pertinent question is whether the adoption of the BEPS action plan can result in an increase of tax revenue for Malaysia.

Lagerberg believes that the answer is not so clear-cut.

“The challenge for every government around the world is, how do you protect your tax base? How do you have enough money to do the things you want to do? So, running alongside all these international tax changes, it’s interesting to see how governments are bringing in new taxes and [finding] new ways to tax,” she says.

“Malaysia introduced the transfer pricing regime not too long ago. Each government is looking for ways to not only align the rules it currently has but also raise more revenue.”

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