What is the most significant development in your region/jurisdiction's tax practice in the past 12 months?
Across the APAC region, one of the most significant developments in tax practice in the past 12 months has been the use of technology, be it advising MNCs to deal with the taxation aspects of their digital footprints in market jurisdictions, reimagining tax in the connected and data-driven age, automation/analysis of complex data used for tax compliances, the launching of smart tools for managing operations/compliance, etc. In our transformation strategy, technology has been an integral component, which has not only helped us in strategic planning, but also in mindset change and development of capabilities, and overall led to a benefit in terms of time and cost savings with higher efficiency.
In short, technology has helped us to move the tax function up the value chain within the organisation.
How do you anticipate that change impacting your work and the market moving forwards?
The approach of the revenue to go digital has not only helped to have paperless offices, but also helped to correlate digital information across various revenue departments. The most notable effect can be seen in the APAC region's investment in the digitization of tax technology solutions for various tax aspects such as transfer pricing, tax controversy, GST and tax issues in new digital business models. Such an increased focus has changed the outlook of all the stakeholders, namely taxpayers, tax consultants and revenue authorities.
Today, employees in the APAC region are working with smart tools to harness data, automate execution of rote tasks, comply in real time and free themselves up to add greater value to the organization.
Further, the increased participation of the APAC region can even be seen at various forums such as OECD/UN/G20 meetings. With digital information, developing countries have turned aggressive in their bid to guard, as well as extend, their tax base and get a fair share of taxes. Increased participation in the OECD/UN/G20 would help them have their say at a global level, not only in terms of a right to tax, but also to gather information for MNCs spread across the world.
Every function in an organization is under perpetual pressure to cut costs, improve efficiency, and enhance overall organizational agility. While there are still certain tax activities that are comparatively manual intensive, relative to other functions, many aspects having already conducted a digital transformation. Gone are the days when a particular complex tax requirement was soaking up significant resources. Now, the organizations are constantly looking for ways to reduce manual activities and shift resources to more value-added services. This increased use of technology has completely changed our approach towards client needs, and now it has become more of a necessity.
On the tax controversy front as well, the COVID impact has invented virtual courts in countries who were dependent on physical hearings. This has proved to be again a very effective way of disposing of disputes by concerned parties using technology effectively to argue and defend their matters. The Indian government has already started faceless assessments in limited cases. The scope may be expanded in future to widen the base. It is also expected to have virtual hearings/faceless hearings for appeals at the first appellate authority.
What impact do you see the COVID-19 pandemic having on your work directly and on the wider tax environment, in both the short and long term?
COVID-19 has forced business houses to cut down costs and they would prefer to maintain a level which is sustainable in the future. Though recovery will eventually start, it will be slow initially and will only improve over a period of time.
The impact will vary differently based on the nature of work. For example, in M&A the current situation will put a break on certain activities. However, there will be a growth in the business later, as there is a lot of debt restructuring and other merger activities, wherein investors will be looking to take advantage of low valuations, etc. Clients who undertake changes in their supply chain due to the disruptions caused will also need expert opinion on the tax and legal implications of the steps they intend to undertake.
Similarly, audit/court work/bilateral negotiations, which had come to a halt, have resumed via virtual hearings, and down the lane though the physical format may resume. Virtual courts and meetings may be the new normal to achieve the expeditious closure of cases.
Given the likely long-term implications of COVID-19 on things like remote working and digital retail, how do you see tax technology developing to accommodate this new reality and where do you think the next area of focus might be?
If there is one thing that has helped us survive during this pandemic, it is technology. In fact, not only during this pandemic, but even otherwise, technology has long become an intimate part of our routines and has also influenced all aspects of our business activities, including business models.
The market is now seeing technology deliver exponential growth in speed and performance, enabled by capable systems and tools that are available on demand, even during pandemic times. Such a transformation has enhanced MNCs' visibility into their data/supply chain/operations at a much more granular level, and business leaders now make data-driven and quick decisions. This has really allowed businesses to reach into new markets without requiring massive investment.
There has been lot of debate on ways to tax transactions on digital retail. Debate between the taxpayer and tax collector continues, and with rapid changes in technology tax laws need to be dynamic to foresee such changes and tax effectively without hampering business. The next area of focus should be to develop effective mechanisms to tax this new style of doing business.
Further, given the rate at which business is digitally transforming, I think the next area of focus will be robotics. Standard industrial robots will be replaced by advance autonomous robots, replacing not only routine tasks but also tasks requiring higher skills. This space of 'humans vs robots' is something to really watch out for in the future.
What potential other legislative changes are on the horizon that you think will have a big impact on your region/jurisdiction?
Governments all over APAC and the world are seeking ways to tax digital companies, be it introducing a Digital Service Tax (DST), by expanding the scope of existing indirect tax or by any other means. Even multilateral groups, including the OECD, the European Commission and IMF, are exploring different taxation models for the future.
As this debate continues about the best approach, we can anticipate significant legislative changes in next 12-24 months, either through unilateral measures or through a global consensus reached through the OECD process. In fact, India has recently expanded its scope of equalization levy to tax the digital transaction of ecommerce companies.
As per recent reports on tax controversy management, the Indian government is also mulling a mediation mechanism to resolve tax disputes. Further, in the current situation the priority of the government is to augment its revenue, which can be deployed for public expenditure/relief packages, etc. This may lead to a situation wherein the tax base is enhanced to generate that extra revenue.
So, there are significant legislative changes expected in the future, specifically pertaining to the taxation of digital transactions and also augmenting tax collections. Adjustments in tax and transfer pricing policies due to the COVID impact is another significant area that may result in controversy.
What are the potential outcomes that might occur if those changes are implemented?
The digital economy has been growing at a staggering pace. With working from home becoming the new normal, customers prefer ordering online thereby increasing the customer base of ecommerce companies. Further, online streaming has grown many times over. The implementation of the equalization levy, which is a unilateral levy applied by India, will create a lot of controversies and may also lead to double taxation.
The litigation battle in India is a long-drawn process. Dispute resolution settlement schemes may be the new way of closing out overdue disputes and bilateral advance pricing agreements (APAs) and mutual agreement procedures (MAPs) may be alternate dispute resolution mechanisms to achieve certainty and avoid the impact of double taxation. Mediation has been adopted as a method to resolve tax controversy in many countries. This would help in the speedier resolving of disputes and could also boost investor sentiment, if introduced in the right form and also implemented in the right spirit. Further online hearings/virtual courts may also be a new normal, leading to faster and more efficient dispute resolution.
Do you think that change will have a positive effect on both your practice and the wider regional/jurisdictional market?
It is not a debate anymore that taxation rules were developed to cater to traditional ways of doing business and are not able to cope with current digital businesses structures. Thus, the introduction of digital taxation would definitely have a positive impact, especially on consumer heavy or market-focused jurisdictions like India, China, Brazil, etc. It will undeniably increase significant untapped tax opportunities for organisations.
However, a consensus-based solution would be the ideal solution to this global problem, and any unilateral/isolated measures by countries will lead to unintended double taxation, having undesirable results like an increase in the administrative and compliance burden, as well as an increase in tax disputes (e.g. claiming tax credit in other countries, adopting a dispute resolution mechanism, etc.).
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?
I am waiting for a consensus-based multilateral solution to address the tax challenges brought about by the digitalization of the economy. In various G20/OECD meetings they have endorsed the unified approach as the basis for further negotiations and the basic idea of it is to re-allocate some profits and corresponding taxing rights to countries and jurisdictions where MNEs have their markets. This will really be a booster for the Indian economy in particular, as India has a huge consumer/market base. In fact, India has been at the forefront of leading policy initiatives for changes in the international tax system and was among the first to implement an equalization levy of 6% in 2016 on online advertisements. Further, the Finance Act, 2018 introduced the concept of the significant economic presence of a non-resident in India. Also, the recent Finance Act, 2020 has expanded the scope of the equalization levy to bring into its scope ecommerce transactions other than online advertisements, on which there is a levy of 2%.
On the tax controversy front, bilateral safe harbors, multilateral APAs, joint audits and non-binding arbitration could be modern alternate dispute resolution mechanisms to adopt.
The above-mentioned legislative changes will definitely create the need for a lot of tax advice and I think is likely to have a positive impact on the economy of developing countries. It may also help address perceptions and concerns about a fair share of tax being paid across the world.
Do you think something like that is likely to be implemented in the near future?
While the OECD is still trying to reach consensus on digital taxation and is sticking to its committed deadline of end of the year, it is to be seen if the COVID-19 situation derails the final outcome. Also, the US has expressed concerns over digital taxation and has suggested a pause in the OECD talks.
We are hopeful that the talks will resume later this year and all members of the Inclusive Framework will remain engaged in the negotiation towards the goal of reaching a global solution by year-end, or at least by mid-2021.
What have been the biggest developments in tax technology and where do you think the next area of focus might be?
As an organisation, we are at a turning point in tax. I feel the biggest development in tax technology has been developing and implementing a customised tax technology strategy for clients, working on tax data management and analytics to assist in the decision-making process and using technology to collaborate, automate and monitor tax processes/compliances.