By Wiebke Szymczak
According to a survey by Deloitte, published on Monday, tax policy remains one of the key investment considerations for firms engaging in business activities in the Asia-Pacific economic region.
85 percent of more than 800 financial and tax professionals who responded to the survey considered tax policy to be a high priority when investing in Asia, with roughly one third listing it among their top three criteria. Here, consistency of tax policy appears to play a more important role than overall complexity, reflecting the fact that “must-be-there“ economies like China and India were found to have the most complex tax regimes out of the 20 Asian tax jurisdictions considered in the survey. At the same time, Asia‘s two most populous economies provide some evidence that market potential still outweighs tax concerns.
“Despite the challenges that businesses face when dealing with Chinese tax issues, they continue to invest heavily. Principally, this is because of the business prospects China presents.” said a Chinese mainland respondent, cited in the report. “The cost involved in navigating and complying with its complex business, regulatory and tax requirements are regarded by businesses as being merely one of the components of the total cost of operating in China,” he further commented.
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According to the study, the number of directors recognizing the reputational and operational risks of noncompliance increased significantly over the previous years, resulting in a lasting boom in compliance hiring. “There is significant desire to be seen as socially responsible taxpayers as a result of which, there is a concern for reputational risk and an inclination not to engage in tax planning that may be perceived as aggressive,” remarked a respondent from India.
With the tax structure of multinational companies attracting ever more public attention, tax and accounting issues have left back offices and entered board meetings, making it a topic of strategic, rather than administrational, dimension.
While key regional operating hubs, such as Hong Kong and Singapore, scored well in all respects of the survey, high-growth, factor-driven economies like Mainland China and India are struggling to provide a consistent and predictable tax framework for their dynamic business landscapes.
During the reform years, the Asian giants succeeded in attracting significant amounts of foreign direct investment. Facing stagnating growth figures and increasing competition from other Asian economies in recent years, Chinese and Indian government officials are feeling the issue of streamlining their tax legislation accordingly to become more and more pressing.
As Western investors pour more capital into Chinese and Indian equity, they are demanding transparency – not at the cost of exploding bureaucracy, however.
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While providing the most complex regulatory environment in the sample, China and India are also the most active when it comes to government audits. 40 percent of all India-based respondents and 33 percent of those in Mainland China note that they have been audited by local tax authorities within the last three years, illustrating the administrational burden enterprises are facing in those countries.
Moreover, tax officials in India and China are perceived to be the most rigorous when conducting tax audits. China just recently announced plans to further intensify its fight against tax evasion, which will likely add to their auditing efforts.
While being perceived rigorous, one in two recipients from both India and China felt they were being treated unfairly by tax officials. Given the lack of trust in a favorable reading of tax laws, investors appear to have accepted the risk of unintentional noncompliance to be an unavoidable collateral accompanying investments into the region.
With elections coming up in India, many hope for better times approaching once a new, more pragmatic government comes into place. Investors can only dream of the potential to be set free when China and India streamline their tax environment.
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