Exit charges in Asia-Pacific
Asia-Pacific tax authority enforcement trends
Since the publication of Chapter IX of the OECD Guidelines, the interpretation and application of the guidance has been varying amongst tax authorities across Asia-Paciﬁc.
Exit charges in business restructuring
As business restructuring becomes more commonplace, it receives greater scrutiny from tax authorities who are increasingly aggressive and sophisticated in their approach to protecting their tax base.
A common focus of tax authorities when reviewing cross-border business restructuring is whether there is a transfer of value from one territory to another between related parties as a result of the restructuring. Such a transfer of value needs not to be a specifically defined asset or intellectual property. It could also include a termination or renegotiation of existing arrangements.
To the extent that a transfer of value exists, the transferee may receive or be deemed to receive an appropriate compensation that, in turn, may be deemed taxable by the relevant tax authority. Such tax is sometimes called an “exit charge”.
Divergence in rules and enforcement
Due to the inherent challenges in ascertaining whether such transfers have taken place, in valuing such transfers and in the divergent tax treatment of such transfers, taxpayers often face high levels of tax uncertainty when undertaking business restructuring.
A welcome development was the publication of the new Chapter IX of the OECD Guidelines in 2010, which provides guidance on how the transfer pricing rules apply to business restructuring and when exit charges may be applied. However, Chapter IX is insufficient on its own, there is still considerable uncertainty.
Interpretation of the guidance differs markedly between tax authorities as well as between taxpayers and tax authorities. Many authorities apply not only their own interpretation of this guidance, but also apply other principles in addressing the tax treatment of transfers of value made via business restructuring.
The enforcement and scope across Asia-Pacific are characterised by a difference in the maturity of the various tax authorities, with some possessing a more limited understanding of business restructuring and exit charges thereon. This has resulted in various approaches to tax entities undergoing business restructuring and enacting such transfers of value.
Further, there is a relative lack of regional collaboration in resolving or addressing transfer pricing issues, differing enforcement and application of transfer pricing across territories and limitations/variations inherent in tax treaties. These have all contributed to the uncertainty experienced by taxpayers in understanding why and how an exit charge may be applied on a business restructuring.
In this report, we discuss the current trends and approaches with regard to Asia-Pacific tax authority enforcement across the following topics: