The Arbitration Convention and Transfer Pricing

Amidst rapid globalisation, the corporate world is getting smaller by day and, transfer pricing inevitably remains a significant issue that draws attention from governments, in particular governments that impose higher corporate taxes. In the European Commission, an Arbitration Convention was initiated to tackle this concern. The Arbitration Convention was originated from the European Commission's 1976 proposal for a directive to eliminate double taxation in the case of profits transfers among associated entities of Member States (Official Journal C 301 of 21 December 1976) and the White Paper of 1985 on the completion of the Internal Market. After long negotiations, the Commission's proposal was finally transformed from a Directive into an inter-governmental Convention, signed on 23 July 1990. This Arbitration Convention is referred to as Convention 90/436/EEC. The Arbitration Convention sets up a procedure to resolve disputes where double taxation takes place between entities of different Member States caused by an upward profits adjustment of an entity of one Member State. Although most bilateral double taxation treaties include a provision for a corresponding downward profits adjustment of the relevant associated entity, they do not generally impose a binding obligation on the Contracting States to eliminate the double taxation. The Convention, therefore, provides for the elimination of double taxation by agreement between the contracting states including, if necessary, by reference to the opinion of an independent advisory body. The Convention, hence, improves the scenario for cross-border activities in the Internal Market.  For more practical aspects of the Convention, see the European Commission's official website.

Alibaba's IPO: Raising the eyebrows of China Taxation Bureau

Alibaba - China's largest e-commerce business - made headlines worldwide when it went through a record setting initial public offering (IPO) on 19 September 2014. On the third trading day, Alibaba made another world's headlines; this time, claiming the title as the world's largest IPO with extra share sales. Alibaba's IPO has definitely raised the eyebrows of the China Taxation Bureau. China is now considering launching its first taxation of the country's massive e-commerce market. An intensive research is said to be carried out by the China Taxation Bureau to study a policy framework on how to tax e-commerce. As part of this move, the Chinese government may extend the use of a nationwide "e-invoice" system next year and begin collecting the required data to establish a tax regime. At the moment, "e-invoice" system is only used in a few regions of China and only by a few online retailers, such as Yixun.com, JD.com Inc and Tencent Holdings Ltd. The potential taxation regime might not be good news to China's emerging e-retailers, including the large number which use Alibaba. According to Alibaba's founder, Jack Ma, some 94% of online vendors on Alibaba's Taobao site don't need to pay taxes as their revenues are too trivial. In an interview with the state broadcaster CCTV, Ma said that Alibaba supported the taxation of e-commerce as he "always think, and firmly believe, it's unethical for companies not to pay taxes" (Marketwatch, Aug 2014). He also said that "the entire society has made a huge contribution to your company, and provided supporting facilities to you. If you don't pay taxes, it's not only illegal, but also unethical". As Alibaba's IPO debut makes a splash in the US stock exchange, e-retailers of Alibaba back home in China share an ironic joy of pride and concern, well aware that China Taxation Bureau has also made a debut into the potential e-commerce tax regime.

Burger King: Whopping its tax base to Canada

A Reuters analysis of Burger King’s regulatory filings in the U.S. and overseas, which was also reviewed by accounting experts, shows that it has been making major efforts to decrease its U.S. tax bill for some time. Burger King's recent decision to move its tax base to Canada, claiming that this decision was about international expansion, has been attacked by some US lawmakers and critics. Click here for the full story.

GST: Types of GST

Basically there are 3 categories of goods & services under the GST scheme in Malaysia:

1) Standard-rated GST
Goods & services in this category will be charged a tax rate of 6% at every stage of the supply chain. The tax is billed and collected by businesses and paid to the government. Each party, except the final consumer, can claim back credits on the GST they already paid (know as input tax). E.g. car, fruits & cloth.

2) Zero-rated GST
Goods & services in this category will be charged 0% GST. This means that GST is not charged to the final consumer. However, businesses can claim back credits on their input tax. E.g. meat, fish & cooking oil.

3) Exempt-rated GST
Goods & services in this category will be non-taxable and are not subject to GST at the output stage. This means that GST is not charged to the final consumer. However, it also means that businesses, especially the final party in the supply chain (before the final consumer) cannot claim back credits on their input tax even if they might have incurred it earlier on. E.g. residential property and health care services.

Information courtesy of Loanstreet.

GST: Dates that You & I should know

6 months before GST implementation (October 2014) - it is the recommended period to register GST as it provides adequate time for businesses to make preparation.

3 months before GST implementation (January 2014) - GST system makes it compulsory for businesses that exceeded the prescribed threshold to register GST

Official date of GST implementation (1 April 2015) - GST registered businesses begin to impose 6% GST

GST: Can Malaysia Builders survive the next big wave?

It is reported that Malaysia's biggest developer by market value, UEM Sunrise Bhd (UEMS) faces lower profit margins from a new tax and may delay some projects amid Malaysia's steepest slump in property sales since the 1998 recession. The company's costs will rise as a 6% GST which is starting in April 2015 boosts prices of building materials that can't be passed on for certain projects. The government introduced the GST to broaden its revenue base after running a fiscal deficit since 1998. Property demand has dropped 11% in 2013, the most since the 1998 recession. Fitch Ratings cut its Malaysia outlook to negative in July 2013, citing concern over deteriorating public finances. Whether Malaysia Builders can survive the GST wave next year is yet to be seen, although Malaysians are already feeling the pinch now. To read more: Bloomberg news

PRC Tax Reform: China expanding VAT scope

On 16 November 2011, the PRC State Administration of Taxation (SAT) and the Ministry of Finance ("MoF") jointly issued a notice regarding their general plan of replacing the business tax ("BT") system with the VAT system ("the Plan"). In accordance with the Plan, details of the Shanghai Pilot Program are provided under the Tax Circular Caishui [2011] No.111 ("Circular 111").

The author decided to offer to sneak preview of what this tax reform is all about. Below is an article written by Charlie Sun (Head of Tax PAG, CMS China) on this regard.

In China, there are two major kinds of turnover taxes, i.e. Value-Added Tax (VAT) and BT. They cover different scopes of transactions. The VAT system mainly covers import and sales of movable/tangible goods, while the BT system covers services, transfer of intangibles and immovable properties. A few exceptions are processing, repairing and maintenance services which are covered by the VAT system, not the BT system. The BT system has been widely criticized for not having the input-output credit mechanism which is adopted in the VAT system. Such feature of the BT system means that BT costs are not recoverable by either party. Further, in case of subcontracting of services, the portion of the subcontracted service value will be taxed twice for BT purposes (once at the main-contractor and once at the subcontractor). In addition, due to the different tax rates and systems, the simultaneous operation of both VAT and BT systems has caused various administrative problems for both taxpayers and tax authorities. To solve the above problems and to ultimately eliminate the BT system, the PRC government has recently taken actions to launch a pilot tax reform starting from 1 January 2012. For the time being, this reform is limited to Shanghai. However, ultimately, it is expected to be extended to all over China in the future.