Exit charges in Asia Pacific: Current trends and approaches in Asia Pacific tax authority enforcement

 Matt Andrew and Michael Nixon Ernst & Young, Singapore

It is close to two years since the publication of Chapter IX of the OECD Guidelines, and the interpretation and application of the guidance varies amongst tax authorities across Asia Pacific. The following article seeks to outline the various interpretations of this and other guidanceand current audit trends, with respect to the tax treatment of gains on conversion.

I. Background

There are a variety of reasons why multinational companies (MNCs) seek to restructure their operating models, whether to integrate new acquisitions, streamline or simplify processes, or better position for growth in new markets. 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 need not be a specifically defined asset or intellectual property; it could also include a termination or renegotiation of existing arrangements. Determining this value generally requires valuing the foregone profits of a restructured entity on a risk-adjusted basis, taking into account market dynamics, or alternatively reviewing some form of adjusted cost or market comparable price for an asset with similar substance. 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”….

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