Tax Structure Changes on the Road to the AEC: How the CFO...

KPMG CFO Forum

Tax Structure Changes

on the Road to the AEC:on the Road to the AEC:

How the CFO responds

24 th May 2012

0© 2012 KPMG Phoomchai Tax Ltd., a Thai limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Thailand.

ASEAN Economic CommunityOverview

“AEC” ASEAN Economic Community

“The AEC Blueprint will transform ASEAN into a single market and production base a highlyThe AEC Blueprint will transform ASEAN into a single market and production base, a highly competitive economic region, a region of equitable economic development, and a region fully integrated into the global economy."

- Declaration on the ASEAN Economic Community


ASEAN Economic CommunitySingle Market and Production Base

“Single Market and Production Base”

5 Core Elements5 Core Elements5 Free flows in 2015• Free flow of goods• Free flow of services• Free flow of investments• Free flow of capital• Free flow of skilled labors

2 Important Components• 12 Priority Integration Sectors (agro-

based products, air travel, automotives, S fe-ASEAN, electronics, fisheries,

healthcare, rubber-based products, textiles and apparels, tourism, wood-based products logistics - ASEANbased products, logistics ASEAN Framework Agreement for the Integration of Priority Sectors)

• Food, Agricultural and Forestry


ASEAN Economic CommunityActions to Achieve “5 Free Flows” - Samples

Goods• Elimination of Tariffs, e.g. Eliminate import duties on all products except for the Sensitive and Highly Sensitive lists

– Action i. of Item 13, AEC Blueprint• Elimination of non-tariff barriers – Item 14, AEC Blueprint• Rules of Origin - Item 15, AEC Blueprint

Services• No restriction to service suppliers in providing services and setting up a company across national borders, subject

to domestic regulations• Allow 70% equity participation in service business by 2015 – Action v of Item 21, AEC Blueprint• Not completely free, activities that may interfere national public safety still be subject to domestic legal restrictions.• Engineering, nursing, architectural, surveying qualifications, tourism professional, accountancy services

Investment• Protection of transfer or repatriation of capital, profits, dividends, etc. – Item 27, AEC Blueprint

H i i li i• Harmonize investment policies

Capital• ASEAN Capital Market Development and Integration

F ilit t th fl f t d t f f t t t ti It 32 A ti i AEC Bl i t• Facilitate the flows of payments and transfer of current account transactions –Item 32, Action i., AEC Blueprint

Skilled Labors• Facilitate issuance of visas and employment passes for ASEAN professional and skilled labors –Item 33, Action i.

AEC Blueprint


AEC Blueprint• To support the free flow of services

ASEAN Economic CommunityTaxation under AEC

Taxation under AEC In short, no single taxation regime for ASEAN member countries under AEC Blueprint.

Apart from Free Flow of Goods (non-tariffs), AEC Blueprint only mentions about taxation in two parts• Enhance withholding tax structure, where possible,

to promote the broadening of in estor base in

Remark

E i t b i t t d ASEANto promote the broadening of investor base in ASEAN debt issuance- Item 31, Action iv., AEC Blueprint

• ASEAN member countries should complete the

Economic to be integrated among ASEAN but taxation remains local

Government needs to reform tax system toASEAN member countries should complete the network of bilateral agreements on avoidance of double taxation among all member countries by 2010

It 58 AEC Bl i t

Government needs to reform tax system to become competitive among ASEAN members

• Thailand’s latest response: Corporate i t t d ti t 23% i 2012- Item 58, AEC Blueprint

Now Thailand has Double Taxation Agreement (“DTA”) with almost every ASEAN member countries except

income tax rate reduction to 23% in 2012 and 20% in 2013, 2014

• 2015?with almost every ASEAN member countries, except Cambodia and Brunei. (DTA between Thailand and Cambodia is being negotiated.)

2015?

“Opportunity: Tax Optimization Structure”


T ti I tTaxation Impact

5

ASEAN Economic Community –Taxation ImpactTax Defines

T i th fit d l t1.

Tax in the profit and loss account(‘accounted for’)

2.

Tax paid

3.

Total tax borne


ASEAN Economic Community –Taxation ImpactTaxation of Global and Regional Companies

Key elements in solid corporate (profit) tax:

Companies are global or

y p (p )Efficient financingProfit repatriationAvoid taxation of capital gainsCompanies are global or

regional,but tax is local!

Avoid taxation of capital gainsAmortisation of intangiblesSolid transfer pricingRisk controlFollow the business

…Tax can drive shareholders value and add to competitiveness


…Tax can drive shareholders value and add to competitiveness

ASEAN Economic Community –Taxation ImpactGlobal Tax Trend

Corporate tax rates are going down

But...the tax basis is being expanded

Anti-abuse rules being introduced

Transparency required

Governments are becoming more aggressiveGovernments are becoming more aggressive

New and high-growth markets are tough

Substance required in tax planning


ASEAN Economic Community –Taxation ImpactCIT Rate Comparison

30

35

25

30

15

20

2012

5

10 20132014 -201X

0

*For Malaysia the corporate sector and professional bodies have been proposing to the Government to reduce the


For Malaysia, the corporate sector and professional bodies have been proposing to the Government to reduce the Malaysian corporate tax rates in order to remain competitive.

ASEAN Economic Community –Taxation ImpactWithholding Tax on Dividends Comparison

25

15

20

10

15

20122015

0

52015DTA Rate

0

* N WHT di id d d d ti l


* No WHT on dividends under domestic law.

ASEAN Economic Community –Taxation ImpactEffective Tax Rate Comparison

45

30

35

40

20

25

30

10

1520122015

0

5


ASEAN Economic Community –Taxation ImpactTax Comparison

Doing business in ASEAN member countries

Countries Tentative WHT on dividends Effective Tax rateCIT Rate (2015)

Brunei Darussalam* 22 - 22

Cambodia* 20 14 31 2Cambodia 20 14 31.2

Indonesia 25 15** 36.3Lao PDR 24*** 10 31.6

Malaysia 25 0 25

Myanmar 25 0 25

Philippines 30 15 40.5Singapore 17 0 17

Thailand 20 10 28Thailand 20 10 28Vietnam 25 0 25

*No DTA with Thailand


** Apply DTA Rate (20% local rate)***Not effective yet

ASEAN Economic Community –Taxation ImpactBusiness Trends and Taxation

Changes in business models and supply chain This creates a tax opportunity, in addition to traditional planningto traditional planning

C t li ti d ti i tiCentralisation and optimisation

Global/regional tradingGlobal financing

Central logisticsShared service centresg

Global key account managementCentral procurement and sourcing

Captive/group insurance


ASEAN Economic Community –Taxation ImpactTax Planning-Effective Tax Rate

Effective tax rate reduction

Current effective tax rate

One-off – transactional (e g gain mitigation)

rate Mid-level reorganisations

(e g holding compan

(e.g. gain mitigation)

Tax

Business driven, structural tax

(e.g. holding company, intercompany leveraging)

planning(e.g. intangibles, R&D, trading, contract manufacturing, and refinery)

Time

refinery)


A ti I tAccounting Impacts

15

ASEAN Economic Community – Accounting impactsIFRS Adoption in ASEAN Countries

IFRS PermittedIFRS Permitted

IFRS become standard language for accounting !

IFRS Permitted

IFRS Adopted

Local GAAP

IFRS EquivalentLocal GAAP

IFRS by 2012IFRS Equivalent

IFRS Adoptedp


IFRS by 2012

ASEAN Economic Community – Accounting impactsFree Flows of Capital and Investment

Impact of investment outflows Impacts of capital inflowsImpact of investment outflowsand financial statements

Depending on investment portion in l

Impacts of capital inflowsand financial statements

Key considerations for capital inflows:general:

• Less than 20% General investment• 20-49% Equity accounting• More than 50% Consolidation

ti

inflows: Choices of fund raising e.g.

debts and equity or hybrid Debts or equity ?

accounting• Joint ventures arrangements

Different impact to your reported fi i l lt d k fi i l ti

Interests or dividends ?

financial results and key financial ratios

What factors you need to consider?f Implications on financial positions

Consider the FX implications Tax and legal constraints Tax efficiency structure


ASEAN Economic Community –Taxation ImpactStructure Comparison - Dividend

Th il dTh il d

CIT 20% after 2012Dividend received is tax exempt (if holds more than 25% of voting rights in the paying entity)

Net received Net receivedThailandThailandParent CompanyParent Company

ThailandThailandParent CompanyParent Company

Dividend received= Tax exempt

Net received= 100

Net received= 100


Holds

•CIT 17%•No tax on dividend

= Tax exempt = Tax exempt

Dividend payment= No WHT

SingaporeSingaporeIntermediate Intermediate

CompanyCompany

more than35% shares

Dividend received


Holdsmore than

35% sharesCIT 25%No WHT on dividend



Myanmar Myanmar SubsidiarySubsidiary


Profit after tax= 100

Profit after tax= 100


ASEAN Economic Community –Taxation ImpactStructure Comparison – Capital Gain

Th il dTh il d

CIT 20% after 2012Dividend received is tax exempt (if holds more than 25% of voting rights in the paying entity)

Net received Net receivedThailandThailandParent CompanyParent Company

ThailandThailandParent CompanyParent Company

40% tax credited on gain received

Net received= 60

Net received= 48

20% CIT= 12

Holds

•CIT 17%•No tax on capital gains accrued in foreign country

on gain received = 12

Dividend from capital gain payment

SingaporeSingaporeIntermediate Intermediate

CompanyCompany

more than35% shares

Gain receivedHolds

more than35% sharesCIT 25%

Capital gains tax 40%

Gain received= tax exempt

40% Tax= 60

40% Tax= 60



Gains= 100

Gains= 100


ASEAN Economic Community – Accounting impactsCross-Border Mergers and Acquisitions

Cross-Border M&A ActivitiesKey accounting considerations Acquired assets & liabilities need to be measured at FV and this may materially affect future

consolidated earnings and financial ratios (e.g. FV recognition of long-term contracts) Foreign exchange fluctuations may affect overall net equity Deferred tax assets / liabilities arising from FV measurements g Difference in accounting standards of each country

Thinks ahead of the gameM t h ld bt i d t di f tiManagement should obtain understanding of accounting implications under each type of transaction and its impacts from: Financial positions and performanceFinancial positions and performance Key financial ratios arising from foreign investments

(e.g. Profit Margin, ROE, ROA) Differences in accounting standards Fair value measurements may significantly affect your Fair value measurements may significantly affect your

financial statements Efficient tax structure that facilitates flows of returns

and capitals


ASEAN Economic Community – Accounting impactsForeign Currency Exposure

Remember !Currency fluctuation always impact your Net Equity

Either from: FX translation of foreign entities’ financial statements

y y p y q y

FX translation of foreign entities financial statements Foreign currency denominated transactions

You may need to know:H h ld I t t it f FX fl t ti ?How should I protect my equity from FX fluctuations?

Potential Trends: Financial instruments may be increasingly used to limit FX exposuresFinancial instruments may be increasingly used to limit FX exposures Some instruments can protect loss but also could limit upside opportunity gain Hedge of net investment in foreign subsidiaries will be increasingly used to limit impacts arising from FX

fluctuations from currencies of foreign subsidiaries Ri k t d t b t t i d ll b l d t li it FX Risk management need to be strategic and well balanced to limit FX exposures

Unrealized exchange gain/loss could significantly affect the company effective tax expense.


ASEAN Economic Community – Accounting impactsAccounting profession

ASEAN Mutual Recognition Arrangement Framework on Accountancy ServicesFramework on Accountancy Services

• Education – agree to accept the educations of country of origin• Licenses – agree to facilitate Practicing Professional Accountant (“PPA”) of other country to obtain licenses in the g g ( ) y

host country• Demonstration of Competency – agree that PPA needs to demonstrate competency to have satisfactory

knowledge of domestic regulations of host country• Experience – PPA shall meet the experience requirements specified by the Host Country. • International Federation of Accountants (IFAC) Standards and Guidelines – Professional competencies and

qualifications shall follow IFAC taking into the considerations of Domestic Regulations of each country

• Thai accountants are regulated under Accounting Act BE 2543 and 2547• Currently FAP is working on the changes in rules and regulations in response to MRA FrameworkCurrently, FAP is working on the changes in rules and regulations in response to MRA Framework

above.• These changes have not yet finalized.


Why REACH?• Forward looking issues that may helpbusiness leaders stay ahead including business leaders stay ahead, including an article of every CFO Forum• Focus on practical angles• Easy to read with infographicsy g p

How to get REACH?• Download on kpmg co th or send a request• Download on kpmg.co.th or send a requestto [email protected]


Thank youThank you

Presentation by

Wirat Sirikajornkij, Partner

Sukit Vongthavaravat, Partner

© 2012 KPMG Phoomchai Tax Ltd A Thai limited liability company and a© 2012 KPMG Phoomchai Tax Ltd. A Thai limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

The KPMG name, logo and ‘cutting through complexity’ are registered trademarks or trademarks of KPMG International Cooperative (KPMG International).

This information is intended as a general guide only. Tax law is complex and professional advice should be taken before acting on the information provided.

25

Tax Structure Changes on the Road to the AEC: How the CFO...

Documents

Transcript of Tax Structure Changes on the Road to the AEC: How the CFO...