That an Organisation for Economic Co-operation and Development (OECD) official in Singapore commented that the OECD is giving “voice” to non-member countries with respect to transfer pricing should come as no surprise. While the OECD has been primarily focused on the economic and tax issues of developed countries, it has in the last decade, with the rising economic clout of developing nations, specifically the BRICS (Brazil, Russia, India, China and South Africa), directed increasing attention to non-member countries. This attention is also falling on smaller, but perhaps strategically significant, countries especially in Southeast Asia, including Singapore, Malaysia and Vietnam. Malaysia and Singapore have taken active roles in the OECD’s intangibles project, and all three countries have recently enacted formal transfer pricing legislation and formal administrative guidance.
The three countries are part of the 10 member Association of Southeast Asian Nations (ASEAN) group, a diverse and dynamic group of countries situated next to the emerging giants of China and India. Singapore is the high-tech leader of the group with its highly educated workforce, ultra-modern infrastructure and emerging financial sector. Singapore has become a regional headquarters for many Western businesses. Malaysia is perhaps the most diverse economy with its strong agricultural and manufacturing sectors. And Vietnam, with its recent liberalization has become the region’s new low-cost producer.
With the increased economic activity and business interest, the governments have recognized the need to update their tax systems, in particular their transfer pricing regimes, both in terms of a counterbalance with their larger neighbors, but also in an attempt to capture some tax revenue from their growing economic status. Indeed, all three countries have developed rather comprehensive transfer pricing regimes recently, with statutory authority, regulatory guidance and dedicated administrative resources. Indeed, Malaysia and Vietnam have both announced stepped up enforcement of transfer pricing rules to combat what they perceive as abuse.
On May 21, 2012, the Vietnam Ministry of Finance announced a target of 20 percent transfer pricing audits starting in tax year 2012. In 2011 the government reported that only 3 percent of business enterprises received transfer pricing adjustments (1,276 entities out of some 45,900 returns). (See Bloomberg BNA 21 Transfer Pricing Report 182.) In August, the Malaysian Inland Revenue Board published its country’s first ever transfer pricing guidelines requiring companies to have in place contemporaneous documentation. (See Bloomberg BNA 21 Transfer Pricing Report 470.) The rules are retroactive to 2009. For the tax year 2011, the government sent related party disclosure forms requesting information.
With the increased economic activity and transfer pricing scrutiny, it is interesting the U.S. government has only two double tax treaties with ASEAN members, Indonesia and Philippines. Although, negotiations were initiated with Vietnam in 2010, with a second round recently concluded in August 2011. Perhaps it’s time for the U.S. to also look beyond Europe.© 2014 McDermott Will & Emery