China is the most complex jurisdiction for financial compliance in the Asia Pacific region and Hong Kong is the easiest, according to a new report by global professional services firm TMF Group.
'Accounting & tax: The global and local complexities holding multinationals to account' ranks 77 jurisdictions by the complexity of accounting and tax rules. It found China's financial environment to be the region's most complex, followed by Vietnam, South Korea, Malaysia and Indonesia. By contrast, Hong Kong, Australia, Singapore, New Zealand and Philippines were seen as the least complex for multinational companies when it comes to accounting and tax laws and practices.
Most and least complex in APAC
Amongst the reasons for China's ranking was the fact that many multinational companies find Chinese legislation more "layered" than other jurisdictions, with significant regional variations in tax rates. China's national corporate income tax rate is 25%, but regions, provinces and cities provide preferential rates to attract certain industries. Tax rates, policies and subsidies can also differ depending on whether a location is in a free trade zone, a special economic zone, or a hi-tech industrial development zone. These policy changes are frequent, especially the 2019 VAT reform and the 2020 new crown related policies and regulations changes. Tax system digitization, complying with international standards (e.g. Base Erosion and Profit Shifting and transfer pricing) will require global businesses to consider both local and global requirements.
Thun Lee, Head of China and Taiwan market at TMF Group, said: "The current financial environment should not be a deterrent for China to be a partner of choice for businesses. The Chinese government is taking a number of steps to improve the business environment like converging Chinese accounting standards with international norms, implementing new fiscal policies to achieve larger tax reductions, and implementing inclusive tax relief measures to help small enterprises. With help from local experts, foreign companies can address any complexities presented by languages and local financial rules effectively and efficiently."
At the other end of the scale, Hong Kong is ranked as the least complex jurisdiction in APAC. It maintains one of the simplest tax systems globally, which is one of the key attributes why many foreign companies choose Hong Kong over other jurisdictions. Hong Kong boasts only three major taxes for companies: profits tax, salaries tax, and custom and excise taxes. Hong Kong has no value-added tax, capital gains tax, dividend tax or goods and service tax. In addition, Hong Kong adopts a "territorial" tax system, and so only profits derived in Hong Kong are taxed; thus some companies can be effectively tax-free.
Some of the report's key findings- Jurisdictions in APAC lag significantly behind the adoption of technology to streamline and simplify processes. For example, 70% of jurisdictions in South America mandate electronic transaction reporting, yet this is only the case for two jurisdictions in APAC (15%) – India and South Korea.
- Many jurisdictions are moving towards international accounting standards such as International Financial Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (GAAP). International alignment is stronger in both North and South American jurisdictions, with IFRS being required in 50% of jurisdictions making it the most common accounting practice used. However, APAC and EMEA take a much more localised approach. Across these regions, local GAAP is more common than international standards, required in 71% and 44% of jurisdictions respectively.
- In 91% of jurisdictions globally a legal representative can delegate signatory power, allowing directors of international businesses to fulfil accounting and tax requirements without being physically present in their country of operation. This drops to only 71% of jurisdictions in APAC, showing a higher demand for individuals representing these companies to be locally resident.
- In 33% of jurisdictions companies can extend the deadline for tax/statutory filings and in 32% businesses can postpone the start of a tax audit, demonstrating the flexibility of governments who are choosing to work alongside businesses rather than in opposition to them. These figures rise to 50% and 43% respectively in jurisdictions in APAC, showing a clear move towards partnership in the region.
Emine Constantin, TMF Group's Global Solutions Director, Accounting and Tax, said: "Traditional taxation principles don't seem to apply in the today's world, where physical flows are replaced by electronic flows and the tracking of goods and services becomes more complex. Consequently, corporate taxation has become a highly contentious topic."
"Since the pandemic emerged, we have seen digitisation accelerate and the groundwork laid for taxation of the digital economy. Digital services tax will soon become the 'norm' rather than the exception as adoption increases. Within the APAC region, Australia, India, Japan, New Zealand, South Korea and Taiwan have already introduced such tax rules on the cross-border supply of digital services. While Singapore and Malaysia become the first South-East Asian nations to do so, their neighbours, have followed suit. Covid-19 will continue to pose great challenges for businesses, but it's also acting as a catalyst for simplification. This could lead to significant changes to the global business landscape as we see jurisdictions take dramatic and unprecedented actions to stimulate their economies."
This latest report by TMF Group expands on the findings of its Global Business Complexity Index 2020 that ranked jurisdictions on overall business complexity.
To download a complimentary copy of the report, please click here.