"One Step Forward, Two Steps Back" - The Development of Effective Tax Dispute Resolution in Asia
"Tax dispute resolution in Asia has been characterised by numerous examples of ineffective processes, administration and the conflict of interests regularly brought to the table by tax authorities in the region.
Excluding Singapore as a notable exception, the approach of tax authorities to dispute resolution in Asia is often an aggressive one. The assertive nature of the authorities largely stems from their view that tax planning itself is aggressive and their clear objective is revenue collection, to plug the holes in government finances, as opposed to effective resolution. The conflict in this arena has only been exacerbated by the global financial crisis which has worked to further highlight the ineffectual dispute resolution mechanisms that are currently in place.
In India, for example, there has been a growing trend towards more aggressive auditing practices with an increasing focus on cross-border issues as the benefit of treaties is challenged. China has followed India in these trends but has gone a step further by clamping down on the offshore sale of shares and making transfer pricing the backbone of the tax assessment process.
Similar developments are occurring throughout the rest of Asia, in Malaysia, Korea, Australia and Japan, fuelled by an upsurge in the signing of information exchange agreements. In these jurisdictions transfer pricing audits are gaining momentum aligning processes with global transfer pricing policies.
Within tax auditing, proper administration is crucial and whilst tax disputes are unavoidable, the tax system of a country can be judged by the stability, equality and efficiency it promotes. India has made a step in the right direction with the institution of the DRP and moves towards Advance Pricing Agreements that are likely to form a part of tax administration reasonably soon. However, a big question mark hangs over the authorities' ability to deal with such negotiations and settlements. For every step forward made in the region, there appears to be two steps back, causing further uncertainty for multinationals operating in the region.
The resolution process in a number of jurisdictions in Asia contrasts best practices in more developed countries such as the Administrative Appeals Tribunal, introduced in Australia and the negotiation process adopted by the UK.
In order to initiate an effective dispute resolution process in Asia, it is essential that these examples and some key principles are adhered to - namely time limits for resolutions to be reached, bank guarantees for the stay of demand and open, effective and timely communication. Still, without a clear and objective approach to resolution from the authorities, progression in this area is likely to remain frustrating."
Mukesh Butani, Leader, Taxand Asia
Media commentary released following International Tax Review's Asia Tax Executives' Forum 2010
Download the ITRs June 2010 article on the Asia Tax Executives' Forum in Singapore, featuring Taxand Asia, and discover what is really keeping Asia-Pacific taxpayers up at night. Increased scrutiny and dispute litigation rather than resolution really is the stuff of nightmares for the region's tax community: