Major shifts in the tax and regulatory landscape are unsettling asset owners worldwide. Experts at the BNY Mellon Asia Pacific Asset Servicing Client Leadership Summit in Beijing discussed how Asia Pacific investors can find their footing.
Panel Discussion: Navigating the Road Ahead – The Tax and Regulatory Landscape (From left to right) Sophie Wong, Head of Tax and Regulatory Affairs, APAC Asset Servicing, BNY Mellon; Florence Yip, APAC Tax Leader Financial Services, Asset & Wealth Management, PwC Hong Kong; Choo Lye Tan , Partner, K&L Gates
The global tax landscape is shifting as governments, in particular those from OECD countries, are again using taxation as a tool to promote economic growth and encourage or discourage certain investment activities. At the same time, regulators are increasingly aware of the need to create internationally applicable standards, with more sharing of information between jurisdictions and a spotlight on tracing ownership.
One innovative effort by the authorities is emerging around data. Florence Yip, APAC Tax Leader Financial Services, Asset & Wealth Management, PwC Hong Kong, cited an OECD consultation paper on taxation that confronts the need to determine the value of data.
“The OECD is proposing a new way of allocating profit that would change well-established transfer pricing law, profit allocation, and nexus rules,” she said.
Highly digitalized businesses, like global social media companies, that have no physical presence in a jurisdiction may still create value locally via marketing intangibles, user participation, and significant economic presence, with tax implications.
Despite the efforts of regulators, the challenges of applying existing frameworks to new markets are clear. Digital assets are a case in point, as Sophie Wong, Head of Tax and Regulatory Affairs, APAC Asset Servicing, BNY Mellon, explained.
“The first decentralized digital asset was launched only a decade ago, but today there are an estimated 2,000 crypto assets on offer, with market capitalization estimated at $211 billion,” she said. “Tax authorities, enforcement agencies, and regulators worldwide are struggling to keep up with the pace of these market-driven developments.”
Asian countries are taking the lead, however, providing further proof of the sophistication of the region’s authorities when it comes to managing these innovations from a regulatory perspective.
Mrs. Yip agreed. “In its 2019 tax reform, Japan announced that the taxation treatment of virtual currencies will now follow accounting treatment. So tax will be payable on virtual assets to the extent that their value is recognized in the corporate accounts. This is a significant step. Japan is a major proponent of virtual currencies, and we have to consider whether other jurisdictions will follow suit,” she said.
Choo Lye Tan, Partner, K&L Gates, argued that regulators have realized that outright bans do not work and that a global standard on digital assets is now necessary: “Open discussion with innovators is really the only way regulators can deal with this unpredictable and fast-moving environment. When innovators can bring their plans and concerns to regulators that understand digital products and the issues around them, like custody, servicing and taxation, they won’t need to find ways to avoid legislation.”
Furthermore, multiple tax and regulatory developments with implications for Asia Pacific investors are now underway overseas.
For example, Asian companies servicing EU clients have obligations under GDPR and face significant penalties for non-compliance.
Similarly, any asset owner entering into a transaction with one or more parties from the EU, including the UK after Brexit, or Switzerland will need to carefully consider the EU’s new mandatory disclosure regime known as ‘DAC 6’. The way the Directive has been drafted means that it potentially also applies to common transactions with no particular tax motive.
The OECD’s Base Erosion and Profit Shifting (BEPS) strategy is also affecting those who invest in nations beyond the OECD. Hong Kong’s own BEPS legislation is now in effect, and there are new economic substance laws in the Cayman Islands as well as British Virgin Islands, Bermuda and other similar tax havens.
Taking the Cayman legislation as an example, Mrs. Yip urged caution.
“Those setting up a Cayman special purpose vehicle there must check whether it is a pure equity holding company – earning only dividend income and capital gains – and therefore subject to less onerous substance requirements. Otherwise, you will be required to maintain staff and offices in the Caymans at a level that commensurate with your income generating activities unless it is a carved out entity including an investment fund. Declaring an overseas tax residency is an option to mitigate these requirements, but both tax and regulatory implications must be considered carefully” she said.
Know Your Customer (KYC) verification processes continue to evolve as governments seek to counter money laundering, market manipulation and terrorist financing more effectively.
“The need for KYC beneficial owner verification is growing,” Ms. Tan warned. “Regulators now require service providers to get information on the actual individual who owns certain shares or controls the special purpose vehicle that does so. Furthermore, while entities could previously delegate their compliance obligations to a third-party service provider, regulators are now holding them directly responsible for any breach or default by an intermediary.”
China’s Belt and Road initiative is creating opportunities for investors from China and around the world. But with more than 120 countries already involved in the plan, the tax and regulatory implications are complex and investors will inevitably have to reference bilateral and multilateral agreements.
“The promotion of economic cooperation across Asia, Africa and Europe is at the heart of the Belt and Road proposal. As international investors get involved in projects along the Belt and Road routes, participating countries are likely to be incentivized to be more transparent, efficient and fair in their dealings with one another, and this could affect evolving business and investment rules in years to come,” Ms. Wong concluded.
While greater openness brings opportunities for investors looking beyond their own borders, international cooperation between regulators will increase the tax and regulatory obligations on global investors. Timely market intelligence, coupled with a willingness to prepare and adapt, are key to navigating this changing environment.
The views expressed herein are those of the panel speakers and may not reflect the views of BNY Mellon. This does not constitute legal, tax, accounting, investment, financial or other professional advice on any matter and does not constitute a recommendation by BNY Mellon of any kind.
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