Focus on Asia – the regionalization challenge

March 6, 2013

There are clear opportunities to pursue across many Asian markets, but a range of challenges is inherent within them too.

Establishing operations in Asia is changing

Foreign investment into Asia has continued to increase substantially from outside multinationals. Traditionally, companies have set up their operations in Asia on a stand-alone local country operations basis.

That is now changing. More companies are now looking to regionalize their supply chains to capitalize on market opportunities, streamline costs and simplify their operations in response to greater competition and tougher macro economic conditions.

“Companies find it makes a lot of sense to work in a centralized and harmonized way – coordinating supply chains and procurement, taking advantage of tax efficiencies – even if specific countries have their own tax-specific hurdles,” says Edvard Rinck, a Partner in Tax Effective Supply Chain Management (TESCM) at Ernst & Young China.

“Coordination may be harder to achieve because of local logistics challenges and the limited resources of tax administrations to respond to taxpayers’ issues.”

Which challenges are companies up against?

Effective treasury strategies deliver cash to fund regionalized growth, but are limited by the foreign exchange control regulations in many Asian countries.

“Companies are asking themselves how they can practically manage the regional treasury functions due to these regulations,” says Matthew Andrew, Ernst & Young’s Asia Pacific Tax Effective Supply Chain Management Leader. “In this way, treasury considerations are driving regionalized supply chain initiatives.”

Transfer pricing is another key problem area for companies in Asia. “Even though they may broadly follow OECD guidance on transfer pricing, some tax authorities in Asia are taking varying approaches to practically applying and auditing such matters,” says Andrew.

“Other practical challenges of regionalizing a supply chain include non-resident VAT/GST registration, where even registering an offshore Principal for VAT/GST in some ASEAN countries will create a taxable presence for corporate income tax purposes.”

New transfer pricing approaches

Many Asian countries are adopting transfer pricing approaches from other markets. Exit charges, where local tax authorities try and secure arm’s length compensation from companies for moving functions and responsibilities to other countries, is one example that has recently emerged.

At the same time, there is growing pressure from some Asian markets to challenge commonly applied international standards when it comes to transfer pricing. The Indian Government has, for example, recently condemned the use of the OECD Transfer Pricing Guidelines by the UN, proposing instead the UN develop an alternative that benefits developing countries.

However, the UN protocols are more complex, which introduces additional challenges for companies. Furthermore, varying local requirements on transfer pricing often means that standard documentation won’t work, raising further complications.

All told, there are clear opportunities to pursue across many Asian markets, but a range of challenges is inherent within these too.

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