Leading the Way is a column written by PricewaterhouseCoopers professional staff. It appears in the Business section of the Bangkok Post twice each month. The column provides specialised advice to corporate decision-makers in Thailand on global and local business trends.
This article appeared in the May 16, 2006 issue of the Bangkok Post.
By Thavorn Rujivanarom and Peerapat Poshyanonda
Based on the 2006 tax survey "Back to the Future" conducted by PricewaterhouseCoopers, this is the first installment of a two-part article that will look at the risks and challenges of the tax function in the Asia Pacific region.
The current economic growth in Asia is being led by China and India. Everyone is watching these two countries as organisations enter their markets in abundance. The expansion of regional activity by both local and multinational organisations undoubtedly presents tax challenges as cross-border transactions increase, and tax laws and practices are developed.
Effective tax management is vital to any organisation, not only because of the impact on an organisations' bottom line, but because of future shareholder value, reputation and directors' liabilities.
Based on the results of our 2006 tax survey, transfer pricing is the area of tax that companies see as posing the highest risks. In fact, more than 60% of respondents rated transfer pricing as the top risk area. These results are not surprising as companies grow and extend their operations into other countries.
The expansion of operations inevitably leads to more transactions with overseas companies, such as purchase and sale of goods, provision of services and financing transactions. Moreover, as companies' businesses become more global, there is an increasing concern among governments and tax authorities to protect their tax revenues.
Hence, the increase in focus on transfer pricing by tax authorities and their need to develop more formal transfer pricing rules and policies. For example, India introduced its transfer pricing code in 2001 and already the authorities have conducted two rounds of audits.
If we look more closely at the corporate tax issues that companies face, our survey indicates that in addition to transfer pricing, two areas that prove to be a significant challenge are ensuring tax-effective financing, and management and services fees.
Again, these are the result of an increase in international trade and the provision of services within an international group. It is not surprising to see the related tax issues with international expansion and exposure being rated as high-risk and as representing the greatest challenge.
Tax functions within many companies focus heavily on compliance with tax laws and practice. Around 37% of respondents ranked tax compliance as the most important challenge, followed by value creation at around 32%. The impact of the Sarbanes-Oxley Act in the US and similar legislation in other countries is having a major impact here.
In the current environment of new laws and regulations, tougher reporting requirements, expanding business operations and consequently expanding tax functions, a key requirement of companies is to have quality tax staff with the adequate skills to assist them in meeting these demands.
Part II of this article, which examines the challenges faced by the tax function, will be published on May 23.
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