What is the most significant change to your region/jurisdiction’s indirect tax legislation in the past 12 months?
In APAC, three Goods and Sales Tax (GST) or Value Added tax (VAT) reforms dominated the headlines in recent years, with Malaysia being the first country to introduce GST reform (followed by China and India). Therefore, when the Malaysian Government announced their decision on May 30, 2018 to replace the GST, after three years, with a new Sales and Services Tax (SST), it was a significant development. We consider that, for APAC, this was the most significant change in the Indirect Tax legislation in the past 12 months.
GST, whilst technically abolished, still lingers as the repealed legislation requires any outstanding tax to be reported indefinitely (i.e. any services performed prior to the abolition date continue to be taxable if the taxing point arises after), and this has created additional costs for businesses as the corresponding ability to recover input tax was not extended.
What has been the most significant impact of that change?
The most significant impact was for businesses to implement and ascertain that their IT systems were correctly set up as the timeframe allowed between the release of the final rules and the go-live date was only a few weeks. Consequently, there were considerable challenges due to the systems implementation, especially where almost no time was provided for the user acceptance testing which is a requirement for any systems implementation. Also, as we are seeing with China and India, the law and guidance on the GST/VAT reforms continues to evolve as the government and authorities deal with issues as and when they emerge.
In addition, from a technical perspective, a major change between the two taxes is the inability for an input VAT deduction mechanism under the new SST. Thus, commercially, pricing became a significant challenge.
How do you anticipate that change impacting your work and the market moving forwards?
For our work, significant effort was invested several years ago to ramp-up the team nationally in Malaysia (both in size and quality) to prepare for the launch of GST. We also invested to build new automation tools for our clients for compliance. With the new SST, which behaves differently to GST, we needed to quickly consider how to resize the team, the need to redeploy our talent to other markets (such as Singapore) and implement both a short- and long-term plan with a refocus on different markets.
Moving ahead, as the tax settles down, we expect the complexity levels to decrease as teething problems are resolved. The challenge will be how Malaysia can remain competitive, especially to those who have set up Shared Service Centers in Malaysia because, whilst there is an exemption for these entities and their activities, the question will be whether the new SST can contain more tax incentives to retain the competitive advantage.
How has this changed the way you offer tax advice?
Fundamentally, our clients are facing new challenges and the focus has shifted to the manufacturers and exporters who are now not only faced with additional costs on materials but also from increased and onerous compliance requirements due to new reporting requirements and the management of various exemptions that exist under the new taxes.
As GST still lingers, we have adapted to the market needs and our focus to the emerging trend of tax audits and litigation work.
What potential other legislative changes are on the horizon that you think will have a big impact on your region/jurisdiction?
All changes we expect to see will be about developing the local economy and reactions to global developments, but it is certain that changes will occur, perhaps announced and enacted within a short timeframe, which is very usual for APAC.
For example, due to the current China-US trade measures, we expect even more changes in indirect tax in China. We have already seen a series of groundbreaking actions in 2019 with VAT rate reductions, customs duty deductions, a new input VAT super-deduction mechanism — all aimed at boosting the domestic economy. Potentially, as China is supporting the development of certain industries (such as electronic vehicles and pharmaceuticals) and local IP, more VAT deductions can be foreseen, especially with a broadening of the scope from exemption to zero rating on exported services. In 2019, we are also expecting the China VAT law to be published.
For countries such as India, whilst their CSG reform was enacted on July 1, 2017, many more changes are expected to be announced as refinements continue to be fine-tuned.
Consistent with global trends, Japan has already announced the Japan Consumption Tax (JCT) rate increase to 10% on October 1, 2019. Japan also announced their Free Trade Agreement (FTA) with the EU in 2019 to encourage their export market.
Generally speaking, we may see a broadening of the scope of indirect tax and indirect tax reforms. For example, the China Consumption Tax maybe reformed in 2019 with a change in the tax collection point and a possible rate reduction. Also, in Malaysia, a tax on B2C (electronically supplied services) will commence from January 1, 2020, together with a possible further reform of the indirect tax system, which could be a hybrid system (a mix of GST and sales tax), that may provide a limited form of input tax.
What are the potential outcomes that might occur if those changes are implemented?
The changes are both positive and negative, and businesses all expect change. Providing regulatory changes are notified with sufficient time for implementation, and are clear, they are usually manageable. For APAC to remain competitive as the markets evolve, we do expect many of the changes to be positive to maintain or attract inbound investment.
On the more challenging side, the management of indirect tax in APAC is focused on technology and automation. As governments across APAC are focused on investing in technology to enhance tax control, businesses must stay one step ahead to confirm that they have control understanding and completeness of their master data. Therefore, the use of automation across APAC will be a critical and focal point.
Do you think that change will have a positive effect on both your practice and the wider regional/jurisdictional market?
Any change presents an opportunity to provide solutions to our clients because we can help provide clarity in relation to the regulations. We do expect that technology needs will drive our business in the foreseeable future, whether it is automation or machine learning, but the trend is very clear.
As complexities arise with new as well as changing legislation, the only way to confirm that our clients obtain certainty and comfort is through the management of data.
How are issues surrounding the taxation of the digital economy affecting your jurisdiction?
This is an area we are focused on due to working groups with certain government entities (such as the Ministry of Finance) to design a more strategic tax collection model. There are two areas of focus for e-commerce in APAC.
For certain markets, such as India and China, increasingly there is outbound e-commerce business into the EU and US. With changes in the US such as the Wayfair case, and new requirements in the UK and Germany rendering marketplace providers to be jointly liable for the VAT obligations of their sellers, the need to comply with overseas regulation has become a key focus.
For e-commerce providers selling into APAC some countries have encouraged this, such as Australia through its revised low value imports scheme announced a few years ago. However, the challenge is that several of the regulations in APAC will not allow a non-resident to register for VAT, relying on a tax shift or withholding system to the recipient instead. Clearly, the challenge is on B2C sales and all governments are considering a more efficient way to control and collect the tax on nonresidents.
What legislative changes would you like to see be implemented that you think would have the most positive effect on your practice and the wider regional/jurisdictional market?
E-commerce, or a tax on digital supplies, is one that is being watched, as commented above.
The second one is probably some form of green or environmental tax. APAC still houses many manufacturers, which remains a key market. If a green tax was implemented in this region it could have a significant impact on the quality of life and new industries, such as the Future of Mobility with the E Cars. As a new tax across APAC, we would be able to work alongside the government to design a robust but effective tax system which, correctly modeled, could have a positive impact on the environment whilst encouraging those (especially those in the renewable energy sector) to flourish. Of course, as a new tax, it will also bring opportunities to our practice as we support our clients with the implementation.
Do you think something like that is likely to be implemented in the near future?
Yes, we do and we are already working with some governments to understand how other bodies, such as the OECD, view this. There are several academic groups examining it and the various models that can be considered but, realistically, we are still some way away from an implementation.
How soon do you think they will be implemented and what do you anticipate will be the positive effect of those changes?
The challenges are not roadblocks. The challenges are local countries grappling with how to encourage free solutions or discourage pollution without damaging their core economy, as well as how industries will change (for example, the infrastructure of the charging stations with the Future of Mobility) and predicting technological advances. However, we do see determination in certain countries so enactment could be in a few years’ time because in some cases, such as China, it is the country’s aim to go green.