Underestimating the importance of tax compliance can pose a number of dangers to a business. Beyond potential legal consequences, reputational damage, and operational disruptions, compliance assumes a pivotal role in influencing economies and societies. Unfortunately, it is also increasingly difficult to achieve.
As APAC economies continue to grow and mature, the complexities around compliance are becoming more intricate, and can vary significantly from country to country. All of which could make ensuring compliance tougher than ever, and make implementing a robust governance framework a mission-critical requirement.
For example, the complex regulatory landscape can create compliance issues through differences in interpretation or insufficient clarity in tax law. Further, the definition of “spouse” differs from country to country, which can cause confusion and render the implementation of a global policy impractical.
Rigorous audits are another trend that is driven by relevant factors, ranging from increased regulatory scrutiny to technological advancements and compliance with changing labour laws. These audits extend beyond ensuring adherence to legislation for minimum wage, working hours, and leave entitlements; they also encompass labour standards such as equity, diversity and inclusion, while simultaneously ensuring accurate tax payments. For instance, in July 2022, the Indian Government introduced new labour codes to simplify applicable laws and provide stronger protection and benefits for employees1. However, it remains unclear whether regular audits will be required once the new legislation comes into force.
Another noteworthy trend involves the transformation of employee compensation to align with evolving talent expectations, with some enterprises adopting innovative structures to deliver equity and benefits that meet demands and drive business goals. While largely successful, this has also led to greater focus from tax authorities.
Mobility is also a major factor globally as well as in APAC. According to The Mobility (R)evolution survey conducted by Vialto Partners in early 2023, the vast majority of executives (89%) expect almost all move types to grow, with the largest increases across short-term international remote working (77%) and virtual assignments (64%)2. As a result, close to half (40%) of companies are looking to create policies to support non-traditional move types—particularly virtual assignments (55%).
Despite offering tremendous benefits to individuals and enterprises, an increase of mobility can trigger sizeable operational challenges in terms of taking steps to manage and ensure compliance of employment tax, address equity and fulfil payroll obligations.
Over the past several years, tax regulators have sharpened their focus on corporate tax risk management and governance. The Organisation for Economic Co-operation and Development’s 2016 report on Building Better Tax Control Frameworks 2016 defined a Tax Control Framework as “part of the system of internal control that assures the accuracy and completeness of the tax returns and disclosures made by an enterprise3.” This approach has been adopted in a number of APAC territories, including Australia, Singapore and Malaysia. Furthermore, Singapore recently introduced a collaborative tax governance framework to help companies strengthen their corporate tax and Goods and Services Tax compliance4. Malaysia has since launched a similar framework5.
It may only be a matter of time before the same focus on governance cascades down to the issue of workforce tax. So, what exactly are the key components of a robust, tax-effective governance framework and how can organisations get started?
First, it is important for organisations to understand their current state—i.e., where they stand regarding tax compliance, risks, and opportunities. For example, an organisation can take steps to determine the last time it conducted a comprehensive tax risk assessment, reviewed existing tax policies and procedures, and identified areas of improvement and potential compliance gaps.
Next, an organisation can define a governance strategy that aligns with its business goals and its appetite for risk. It is essential for the organisation to obtain buy-in for the strategy from all relevant stakeholders, both to confirm their agreement and secure their ongoing support.
The third step is implementation. This may include regular updates of tax policies and procedures, training relevant teams, and implementing tax technology and controls for efficient compliance. Where possible, internal audits should be regularly conducted to ensure adherence to the tax strategy.
The last thing any enterprise wants to find is that, while its policies define some benefits as taxable, the reporting position could say otherwise. Risk assessment reviews can uncover such irregularities before they become an embarrassing and potentially expensive regulatory issue.
Anticipating the future trajectory of workforce taxation can pose significant challenges. One of the more farfetched ideas is a “robot tax”, which would enable tax authorities to generate revenue from AI and robots doing jobs that are traditionally handled by human beings.
Regardless of what might actually transpire, for most organisations, the question is simple: Is the governance framework robust enough to ensure compliance in today’s workforce taxation landscape, and is it flexible enough to accommodate future developments?
Adopting a workforce tax governance roadmap is not a one-off exercise. It should be a dynamic strategy that aligns tax practices closely with business goals. The strategy calls for regular checks and continuous improvement to keep ahead of changing enterprise needs, and increasing employee expectations. Perhaps most crucially, it should allow the organisation to adapt to inevitable changes or reforms in taxation regimes.
For example, as companies grant more equity awards to more of their employees, costs are likely to increase. Organisations will typically recharge these costs to the country or territory where the employee receives the award. Although many of these countries would allow a tax deduction for this process, it is not uncommon for expenses recharged to foreign subsidiaries to effectively eliminate profits generated in that location.
Although this has not historically been an area of focus for tax authorities in APAC, the scale of the amounts is likely to draw their interest. These authorities may begin asking questions like:
The prospect of reform, especially in APAC countries that don’t currently withhold taxes on employee equity, is therefore quite high, and, as such, companies should plan accordingly.
Contingent workers have been a subject of interest for tax reform discussions in some regions. The convergence of employees demanding more flexibility and companies keen on reducing costs has sparked an explosion that shows no sign of slowing down. However, existing tax systems simply weren’t designed to cope with the complexities of mobile employees, who often (1) contract with multiple companies and (2) work in different locations from the company with whom they are engaged and from the customer to whom they are provide services.
In recent years, various tax authorities have attempted to redefine the distinction between employees and contractors. We can expect this trend to continue as these authorities look for ways to limit the leakage revenue. Several APAC countries, including China, India, Australia, Malaysia and Singapore, have also embarked on legislative reforms to provide better protection for such workers.
Naturally, tax authorities will expect organisations to apply the correct taxation protocols, or to put it a different way, it will be the corporations that are liable to the relevant tax authorities if these corporations get it wrong.
Once again, a flexible and effective workforce tax governance framework will be essential.
Contact us
For a deeper discussion on the above, please reach out to your Vialto Partners point of contact, or the following team:
Grace Huang
Partner, Asia Pacific Employment Tax Lead, Vialto Partners
grace.wj.huang@vialto.com
Emma Wappet
Partner, Asia Pacific Compensation and Payroll Lead, Vialto Partners
emma.wappet@vialto.com
Mark Bosotti
Partner, Asia Pacific Equity Awards Lead, Vialto Partners
mark.bosotti@vialto.com
1 “All you need to know about labour codes in India,” Times of India, June 27, 2022.
2 “The new work journey—mobility (r)evolution: redefining the mobility paybook,” Vialto Partners, September 2023.
3 “Co-operative tax compliance: building better tax control frameworks,” OECD, May 13, 2016.
4 “Companies to strengthen corporate governance with two new tax frameworks,” Inland Revenue Authority of Singapore, March 18, 2022.
5 “Tax corporate governance framework,” Inland Revenue Board of Malaysia, April 11, 2022.
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