Financial institutions are among the growing number of global firms taking advantage of global tax reforms to maximise their profits. Gordon Kwong, Associate Director in Aquis Search’s Finance & Accounting team in Hong Kong, explores the resultant reallocation of manpower in the sector.
Globalisation, encouragement in FDI and advancements in technology are amongst the factors that have made it possible for multinational companies to offer products and services at optimum price points and with higher profit margins for themselves. Financial firms too have expanded their operations manifold. With open trade policies in place, financial flow across borders has spurred financial firms into setting up their offices in multiple locations. By taking advantage of the finance and commerce policies of countries across the globe, global financial organisations continually strive to ensure they work around tax policies to maximise profits. Cut throat competition in global markets has further forced institutions s to outsource product and services components to regions with relaxed taxation norms, which in turn enables them to offer competitive prices. This is a cross sector trend, but multinational financial firms in particular are taking advantage of global tax disparity by transferring transactions to jurisdictions with relatively lower or no transaction tax. This enables firms to achieve lower cost of finance which in turn maximises revenue.
This manipulation of tax laws and economic policies by MNCs to gain profit has been under scrutiny by the ‘Organisation for Economic Co-operation and Development’ (OECD) as mandated by the G20. The primary aim of the OECD is to put in place measures to counter Base Erosion and Profit Shifting (BEPS). The premise of this issue is the fact that multinationals are indulging in avoidance of tax by using artificial structuring arrangements like transfer pricing, exploitation of gaps and mismatches in the tax rules to artificially shift profits to low or no-tax locations. The OECD has put forward a fifteen step measure to counter BEPS and reduce international tax avoidance and ensure tax is being paid where the economic activity takes place. Broadly speaking, these steps encourage disclosure of country by country reporting, exchange of information and tax audits across different jurisdictions, debt and interest deduction and rigorous transfer pricing documentation. These measures may also lead to a possible need for change in supply chain management and business models (https://www2.deloitte.com).Financial institutions will face greater complications adapting to these changes with the additional layers of compliance and protocols they will have to follow. As a result of this the OECD has been making finer refinements to the amendments to ensure reduced business disruption in the financial sector. It is almost certain, the steps taken by the OECD will impact the bottom line of multinational corporations, however, the sooner firms assess their situation and respond, the better position they will be in to avoid confusion and high costs. With more than 60 countries supporting this measure, nations are moving towards being part of an interconnected global economy.
Implementing these changes in international taxation policies requires considerable resources to ensure the process can transition smoothly. Jobs in the tax field have become more important and high profile within organisations due to these reforms. Practitioners’ involvement with senior management is more prevalent, as all expansion plans have to be structured around tax policies. Transfer pricing compliance has also become crucial, particularly for the financial sector, as failure to comply can incur heavy costs to large corporations. Decision making on transfer price determination rests with in-house tax personnel and is accompanied with adherence to stringent compliance norms. These personnel also work with external tax consultants and advisors actively on an increasingly frequent basis. As such, organisations are increasing their in-house staff headcount along with contract employee headcount, as well as continuing to obtain services from specialised tax consultation services providers. This has lead to an increase of job opportunities for tax professionals within large corporates and consulting firms. Due to the complexities in the taxation norms and its dynamic nature, the importance of consulting firms has not diminished, as they play a strategic role in formulating robust transfer pricing strategies, the execution and compliance of which, can then be ensured by the in-house staff.
Allocating budget for increased hiring is always an added expense. However, when compared with the heavy costs an organisation incurs if it comes under the scrutiny of authorities, it is an expense that is completely justified as it offers long term stability and security. This leaves tremendous scope for skilled tax professionals to make good career strides in this field, be it in an in-house setting or with a consulting firm.
For more information, or for a confidential conversation with Gordon about opportunities for tax professionals across Asia, please email email@example.com or call +852 2537 0333.