China is the most complex jurisdiction for financial compliance in Asia Pacific while Hong Kong is the easiest, said TMF Group recently.
China’s financial environment is the region’s most complex, followed by Vietnam, South Korea, Malaysia and Indonesia, according to TMF Group’s report titled Accounting & tax: The global and local complexities holding multinationals to account.
By contrast, Hong Kong, Australia, Singapore, New Zealand and Philippines were seen as the least complex for multinational companies when it comes to accounting and tax laws and practices, the report states.
According to the professional services firm, the report ranks 77 jurisdictions by the complexity of accounting and tax rules.
Why China is the most complex
Amongst the reasons for China’s ranking was the fact that many multinational companies find Chinese legislation more “layered” than other jurisdictions, with significant regional variations in tax rates, TMF Group pointed out.
China’s national corporate income tax rate is 25%, but regions, provinces and cities provide preferential rates to attract certain industries, the firm added.
Tax rates, policies and subsidies can also differ depending on whether a location is in a free trade zone, a special economic zone, or a hi-tech industrial development zone, TMF Group noted.
These policy changes are frequent, especially the 2019 VAT reform and the 2020 new crown related policies and regulations changes, according to the report.
Tax system digitization, complying with international standards — for instance Base Erosion and Profit Shifting and transfer pricing — will require global businesses to consider both local and global requirements, TMF Group explained.
Why Hong Kong is the least complex
At the other end of the scale, Hong Kong maintains one of the simplest tax systems globally, which is one of the key attributes why many foreign companies choose Hong Kong over other jurisdictions, TMF Group pointed out.
Hong Kong boasts only three major taxes for companies: profits tax, salaries tax, and custom and excise taxes.
Hong Kong has no value-added tax, capital gains tax, dividend tax or goods and service tax, TMF Group said.
In addition, Hong Kong adopts a “territorial” tax system, and so only profits derived in Hong Kong are taxed and some companies can be effectively tax-free, The company added.
- Jurisdictions in APAC lag significantly behind the adoption of technology to streamline and simplify processes.
- For example, 70% of jurisdictions in South America mandate electronic transaction reporting, yet this is only the case for two jurisdictions in APAC (15%) – India and South Korea.
- Many jurisdictions are moving towards international accounting standards such as International Financial Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (GAAP).
- International alignment is stronger in both North and South American jurisdictions, with IFRS being required in 50% of jurisdictions making it the most common accounting practice used.
- However, APAC and EMEA take a much more localised approach. Across these regions, local GAAP is more common than international standards, required in 71% and 44% of jurisdictions respectively.
- In 91% of jurisdictions globally a legal representative can delegate signatory power, allowing directors of international businesses to fulfil accounting and tax requirements without being physically present in their country of operation. This drops to only 71% of jurisdictions in APAC, showing a higher demand for individuals representing these companies to be locally resident.
- In 33% of jurisdictions companies can extend the deadline for tax/statutory filings and in 32% businesses can postpone the start of a tax audit, demonstrating the flexibility of governments who are choosing to work alongside businesses rather than in opposition to them. These figures rise to 50% and 43% respectively in jurisdictions in APAC, showing a clear move towards partnership in the region.
Digital services tax to become the norm
In addition, compliance complexity continues to evolve as traditional taxation principles don’t seem to apply in the today’s world.
"Physical flows are replaced by electronic flows and the tracking of goods and services becomes more complex,” said Emine Constantin, TMF Group’s Global Solutions Director, Accounting and Tax. “Consequently, corporate taxation has become a highly contentious topic.”
Since the beginning of the pandemic, digitisation and the groundwork for taxation of the digital economy have accelerated, Constantin noted.
Digital services tax will soon become the ‘norm’ in APAC rather than the exception as adoption increases, she added, adding that Australia, India, Japan, New Zealand, South Korea and Taiwan have already introduced such tax rules on the cross-border supply of digital services.
While Singapore and Malaysia become the first South-East Asian nations to do so, their neighbours, have followed suit, she added.
“Covid-19 will continue to pose great challenges for businesses, but it’s also acting as a catalyst for simplification. This could lead to significant changes to the global business landscape as we see jurisdictions take dramatic and unprecedented actions to stimulate their economies,” Constantin said.