Exit charges in Asia-Pacific
Attempts to improve the broader enforcement environment
There have been attempts to improve the broader enforcement environment in Asia-Pacific.
In particular, the Australian Taxation Office has taken a lead in training many regional tax authorities on this issue. With the recent surge in business restructuring in the region, this has resulted in some restructuring cases across various industries in Asia-Pacific, helping regional tax authorities to gain both experience and skills in evaluating the transfer pricing aspects of business restructuring, including exit charges.
An increasing number of audits and challenges by these tax authorities, in relation to exit charges and conversion issues, will also provide a better understanding of issues faced by taxpayers and the expectations of tax authorities.
Further, recent bilateral APAs between key Asian tax jurisdictions and the United States and Europe have resulted in the issue of exit charges being settled as part of the transfer pricing negotiations (e.g. Japan). Although no explicit sign-off has been provided by the relevant tax authorities in those cases, the authorities have agreed that they will not challenge the rulings, assuming that the companies concerned will be remunerated based on an arm’s length post restructuring return, agreed in the transfer pricing negotiations as part of the APA.
So whilst there is a long way to go in aligning tax authority policies regarding exit charges, it is hoped that the recent momentum in developing consistency of treatment will continue swiftly into the future.
Further, given that audit activity on business restructuring is expected to dramatically increase, taxpayers need to be prepared to defend the tax position on their business restructuring, including the exit tax position and also the post-restructuring transfer pricing.
There are several best practices that may be applied to deal these issues. They are:
- Document the business case behind the restructuring
- Fully understand the restructuring’s commercial and tax consequences, taking into account the consistency of treatment issue, and document the conversion analysis and its conclusion
- Prepare documentation and review the legal agreements and business processes that would sustain the new business model and support the new structure under transfer pricing principles. They should sufficiently deal with the divergent rules and regulations that apply across different countries that host restructured entities
- Prepare an operations manual and ensure that the roles and responsibilities are clearly defined in the new structure and are followed through in practice
- Put a process in place for monitoring these structures annually, so that as the business continues to evolve and people rotate through the principal, the structure the company has designed will be sustainable in the long term and supportable in a tax audit
- Utilise APA programmes as far as possible, to seek implicit or explicit certainty on these matters, dependent on the circumstances