On May 31st the State Council of China issued a statement confirming the approval of a fiscal reform proposal submitted to the Government by the National Development and Reform Commission. The State Council did not reveal the entirety of the intended property tax reforms, but stated that the implementation would be gradual with trial programs in selected regions. Previous statements by the Government indicated that Beijing, Shanghai, Chongqing and Shenzhen will be the initial testing regions, with reforms spreading across the country if deemed successful.

The Government of China has adamantly advocated the need for a fiscal measure to reduce speculative property investment across the country. According to official statements, if the rampant and unbalanced investment is not reduced, the country will experience an economically damaging property sector boom. The statements have lead economists to claim that the tax reform will target owners of more than one residential property.

According to Liu Ligang, economist at ANZ Bank, 20 percent of the country’s residential properties were held by investors with a portfolio of several houses. He further added that the tax would be levied at 0.8 percent of the market value of the property, and raise approximately RMB 120 billion (approx. USD 17.57 billion) annually. Additionally, Sabrina Wei, head of research at property consultancy DTZ North China, has attributed the tax to a tax collection raising measure for local Government bodies, to reduce reliance on the revenue from sales of local land.

Photo by buck82

Ahead of the upcoming June G20 Summit in Toronto, Canada, the German and Canadian Governments are increasing efforts in swaying international Governments towards their views on the proposed introduction of an international bank tax system. At a conference on new financial regulations held in Berlin on May 20th, German Chancellor Angela Merkel stated “We will campaign for a tax on the financial markets and we will campaign for that at our (G20) summit in Canada.” While in the week leading up to Angela Merkel’s statements, several Federal Canadian Cabinet Ministers met with select international delegations to advocate an opposition to an international bank tax.

On May 18th Jim Flaherty, Finance Minister of Canada, met in Mumbai with representatives of the Indian Government to explain the Canadian view on an international bank tax. On the same day, Stockwell Day, Minister for the Asia–Pacific Gateway, held a meeting in Beijing, and Peter Van Loan, International Trade Minister, spoke at a conference in Washington D.C. All three officials campaigned against any proposed bank tax. Tony Clement, Industry Minister of Canada, hosted a corresponding conference in Canada and explained the Government’s stance, saying, “Make no mistake, our government is opposed to a global bank tax. This tax would reach into consumers’ pockets and punish our financial institutions, which have taken precautions to avoid turmoil.” The Canadian Government has also explained that the national bank system is safe and renowned for its stability, and the Canadian finance industry should not have to pay for the mistakes of other nations. Stockwell Day has already reported that the Government of the People’s Republic of China fully supports and shares Canada’s sentiment.

Conversely, Angela Merkel used the current Euro-zone debt crisis to springboard into advocating the need for a set of unifying international financial regulations, including fiscal measures such as multinational bank tax. Angela Merkel stated on May 20th that the German Government will continue to rally supporters for an international bank tax until the upcoming G20 Summit. If no conclusive decision is reached among G20 leaders, the Chancellor will continue her efforts in reaching a Euro-Zone only solution.

Photo by London Summit

On May 18th the Asian Development Bank (ADB) released its annual Asian Capital Markets Monitor report, which investigates the performance and outlooks for the equity, bond and currency markets in emerging economies. According to the report, several factors have cumulatively increased the risk of Asian economies facing sudden high levels of investment capitals, leading potential destabilization of currency and financial markets.

Amidst worries of a continued national debt crisis in Greece and the Euro-zone, international investors have been paying greater attention to Asian economies. The interest has been further increased by the area’s swift and secure return to a positive economic condition after the international economic crisis. The ADB claims that the increased capital inflows could trigger significant upwards pressure in national currency, leading to volatility in valuation and the financial markets. Additionally, national inflation, which among emerging Asian economies is widely considered to be manageable, could be caused to increase. Cumulatively, sudden burst in overseas investment capital might lead to limitations in short and mid-term growth potential for emerging Asian economies.

The ADB recommends that Governments of vulnerable economies take action now to ensure that appropriate national policies are ready for potential investment inflows. Suggested policy considerations consisted of sound macro-economic management, flexible foreign exchange regimes, increased resilience of national financial systems, along with temporary and targeted capital controls. The suggestion of capital controls is especially aimed at nations which expect capital inflows to be transitory with significant destabilizing effects on exchange rates, and with uncertain national macro-economic policies.

Under the ADB’s classification, the emerging Asian economies consist of the People’s Republic of China, Hong Kong, India, Indonesia, the Republic of Korea, Malaysia, the Philippines, Singapore, Taipei, Thailand and Vietnam.

Photo by ethan.crowley

At the conference the IRD emphasized its acceptance and attempts to closely follow the Organization for Economic Cooperation and Development’s (OECD) Transfer Pricing Guidelines for assessing and reviewing clients’ TP arrangements and methods. The SAT added that it has been actively leading emerging economies in a number of United Nations (UN) organized TP development initiatives, such as the UN Practical Manual on Transfer Pricing. Both jurisdictions also highlighted their continued efforts to increase Government transfer pricing expertise through continued training and international knowledge sharing.

Both the SAT and IRD spoke about perceived technical ambiguities in their respective legislation. The IRD emphasized its stance on the non-deductibility of retrospective payments made as a result of TP adjustments carried out during the year. The SAT, along with the IRD, confirmed that it will regard entity branches and overseas permanent establishments as separate entities in regards to TP. The IRD reiterated that it will apply TP laws to not only international transactions but also domestic related party transactions. Conversely, SAT stated that it is currently in the process of implementing more stringent domestic transfer pricing regulations. Both parties also announced their full endorsement towards the use of the OSIRIS database, a source of detailed information on large listed and unlisted international companies, by taxpayers and tax officials in analysis of TP procedures.

The SAT mentioned the possibility of expanding the two economies’ current Double Taxation Agreement (DTA) to include provisions for a bilateral Advance Pricing Agreement. Although the IRD stated that it is not yet in the capacity to adequately facilitate such an agreement, but is open to receive any advance ruling applications for the purposes of TP legislation.

Photo by Arno_BOP

On April 26th the IMF published a previously unreleased transcript of a speech given by Naoyuki Shinohara, Deputy Managing Director of the IMF, at the 14th ASEAN Finance Ministers’ Meeting, held on April 8th 2010 in Nha Trang, Vietnam. The speech focused on the key economic challenges the IMF perceives as facing ASEAN member nations. According to the Deputy Managing Director, to see strong economic growth, ASEAN members must overcome the fragile external economic environment, the potential for surges of inward capital flows, and the need to expand private domestic demand over the medium term.

Naoyuki Shinohara said that Asian nations are showing greater levels of economic recovery and fiscal stability, when compared to advanced economies. Cumulatively, the ASEAN members are projected to increase economic output by 5.5 percent over the 2010 year. Despite the positive outlook, ASEAN economies are highly reliant on external economic factors. The IMF does not expect credit conditions across the US and the Euro-Zone to normalize until 2011, and the Deputy Managing Director warned that ASEAN members need to balance this factor into the timing of their 2009 stimulus package withdrawal policies. He advised that policymakers should consider taking precautions to allow for agility in any present decisions, to cope with unforeseen economic shifts.

According to Naoyuki Shinohara, ASEAN economies face the unique challenge of possible spikes in foreign capital inflows. As the international economy recovers, it is conceivable that ASEAN nations will see higher than expected investment. In preparation for such eventualities, policymakers have been advised to tighten fiscal regulations, allow for greater flexibility in exchange rate in decision making, create macro- and micro-level policies to handle the spikes, and begin accumulating fiscal reserve to use as a safe-guard.

A warning was given to ASEAN Governments that pre-crisis fiscal policies favoring expansion of exports over the growth of local private consumer demand need to be addressed. The Director gave broad directives for ASEAN economies to instate reforms to improve private investment, raise productivity in services, and improve the overall private sector consumer demand.

Photo by Foreign and Commonwealth Office