Regional taxation: Tax management crucial to attract foreign investments

Effective tax management is crucial to maximizing tax savings and, more importantly, to avoid potential tax pitfalls. This is particularly the case in Asia Pacific countries where the tax laws and regulations are diverse and still evolving. The issue is often one of contending with a myriad of interpretations and inconsistent tax practices between jurisdictions.

Regional countries are undergoing significant tax reforms to stay competitive in the new internet economy. As tax has the potential to significantly erode commercial benefits arising from various financial transactions and cash management structures, corporate treasurers cannot afford to ignore tax consequences. Keeping abreast of tax developments has become an increasingly important part of the corporate treasurer’s role.

What follows is a brief synopsis of some of the more recent tax changes in the region. These changes are generally a result of tax reform measures, or those arising from annual fiscal budgets. Other updates have arisen as a result of clarification on ongoing issues, particularly on the area of transfer pricing.

Australia

With the re-election of John Howard’s Coalition Government in November 2001, the roll-out of business tax reform measures appears to be on track, with various regimes applying from July 1, 2002.

During the Coalition Government‘s election campaign, one of the key elements presented was the "Securing Australia Prosperity" policy. This manifesto contained a number of tax-related measures aimed at improving the efficiency and attractiveness of Australian business internationally. In particular, this included extending the Australian capital gains tax (CGT) exemption for venture capital investments by providing venture capital limited partnerships with flow-through tax treatment, thereby increasing the range of investors who can claim the exemption.

The government will also be conducting an extensive review of Australian’s current international tax regime and the extent to which it is an impediment to Australian companies attracting domestic and foreign equity, Australian companies expanding overseas, and holding companies and conduit holding being located in Australia. The review will also address any current tax disincentives to international businesses to remain in Australia.

On July 2002, the government put into policy a "consolidation regime" that allows groups of wholly-owned companies to be treated as a single tax-paying entity. This simplifies tax compliance for consolidated groups because only one tax return must be completed instead of many separate tax returns in respect of each company within the corporate group.

This new regime eliminates double tax and double deduction arising under the existing rules, and allows the acquisition of an entity by a consolidated group to be treated for income tax purposes as equivalent to the acquisition of the underlying assets.

Additionally, due to the short lead time with the introduction of the tax consolidation legislation, the group relief rules will be extended to June 30, 2003.

The transitional period of a further 12 months will give groups more flexibility as to when they should consolidate.

The CGT regime applies to de-mergers that occurs on or after July 2002. The de-merger relief covers key tax burdens that have, to date, operated as substantial impediments to groups looking to de-merge. The relief provides CGT exemption on certain capital gains or losses that would trigger a CGT event as a result of the de-merger. Exemption is also granted based on the existing dividend rules in respect of any dividend that would otherwise arise under the de-merger. In addition, under the relief, there is no change within the de-merger provisions to the existing law or policy in relation to the treatment of tax attributes (such as tax losses, franking credits, and foreign exempt income) at the entity level, which is an important consideration in any de-merger transaction. For an arrangement to qualify as a de-merger eligible for tax relief, it must satisfy the following conditions:

An entity (the head entity) or its group must hold an ownership interest of at least 20 percent of the entity that is to be de-merged (the de-merged entity);

• there must be a transfer of at least 80 percent of the ownership interests held in the de-merged entity to the shareholders of the head entity;

• each shareholder of the head entity must hold the combined value of the de-merged entities immediately after the de-merger that is not less than the value of the head entity immediately prior to de-merger; and

• the means of achieving the transfer of ownership of the de-merged entity may involve a sale of the existing shares, a distribution of those shares, or a cancellation of those existing shares, and an issue of new shares (or any combination of these methods). Commencing July 2002, the new simplified imputation system requires the franking account to be maintained on a tax-paid basis with rolling balances. It facilitates the integration of the Australian corporate tax system and the taxation of its members by allowing corporate tax entities to pass on credits for income tax paid to their members. The new system further allows the Australian members to claim a tax offer for that credit, and in some circumstances to claim a refund if they are unable to sully use the tax offset.

The Australian Taxation Office (ATO) began targeting smaller loss-making distribution subsidiaries of overseas multinationals as part of its transfer pricing record review (TPRR) project. As part of this project, the ATO is offering these loss-making distributors two options. One is to face an ATO transfer pricing audit in relation to a prior period. (In Australia, there is no time bar for transfer pricing adjustments.) The other is to enter into a unilateral advanced pricing agreement (APA) with the ATO that will attribute an appropriate return to the Australian distributor in future periods. A precondition to taking up this option is that all prior tax losses are cancelled. (To be continued)