Thailand Competitiveness by Professor Michael E. Porter

 Please see attached file:

http://www.bus.tu.ac.th/usr/wai/xm622/potter/Michael%20Porter%20Live%20in%20Thailand%20-part%202.pdf

Tackling the Underwater Threat: How Ukraine Can Combat Russian Submarines

 Dr Sidharth Kaushal and Dr Kevin Rowland  

7 March 2023 

  

Given that building anti-submarine warfare capabilities along Western lines would require significant time and resources, how can Ukraine best counter the Russian submarine threat?

One of the signal successes of the Ukrainian armed forces has been denying the Russian Black Sea Fleet’s surface vessels the ability to operate in close proximity to Ukrainian shores. The successful attack on the fleet’s flagship, the Moskva, with indigenous Neptune anti-ship cruise missiles and the subsequent Russian defeat at Snake Island denied the fleet the air cover it needs to be able to operate in range of an increasingly credible Ukrainian anti-ship missile threat. As such, it may prove increasingly difficult for Russia to enforce a renewed surface blockade of Ukraine if it decides that inflicting economic harm is important – a likely assumption if the war of attrition continues over the longer term.

That being said, Russia does have other options with which to menace Ukraine’s maritime economy. The risk posed by naval mines represents one vector; another is the use of submarines, which have not featured significantly in the conflict thus far. The Black Sea Fleet’s force of four Project 636 (Kilo) and Project 877 (Improved Kilo) submarines have not been used in a blockading role to date, acting primarily as a launch platform for 3M-14 Kalibr cruise missiles. However, if Russia did decide to use them in this capacity, it would raise new challenges for Ukraine’s sea denial strategy, which thus far has had to contend primarily with the (comparatively) easy task of anti-surface warfare. The skills and capabilities needed for Ukraine to conduct anti-submarine warfare (ASW) along Western lines would be time-consuming and expensive to generate, and are unlikely to be acquired in the foreseeable future, begging the question of how to ‘do’ ASW on a shoestring.

The Relevance of the Black Sea Fleet’s Kilo-Class Submarines

In the immediate term, and for good reason, Ukraine’s priorities are likely to remain primarily land-focused. However, should the conflict reach a point of enduring, frozen stalemate, Russia may shift its military focus to wearing down the Ukrainian economy, which has already seen a 30% reduction in GDP. To an extent, this has been visible in the air and missile campaign witnessed over the winter. Moreover, it would follow a pattern of how belligerents attempt to secure a strategic breakthrough when a tactical battlefield breakthrough seems unlikely – with precedents such as the Iran–Iraq tanker war and the British blockade of Germany during the First World War.

To an extent, one might argue that Moscow does not need military force to inflict a de facto blockade – simply declaring that it has pulled out of the grain deal, for example, would likely cause insurance rates to spike to exorbitant levels. However, two alternative scenarios might be considered.

First, Moscow may wish to drive a spike in insurance costs without paying the diplomatic price for pulling out of the grain deal. A deniable attack could be facilitated by the Kilo-class submarines. The boats can clandestinely lay up to 24 naval mines each during a single sortie. A direct torpedo attack would be more audacious, but it is worth recalling the time it took to attribute North Korea’s sinking of the South Korean vessel Cheonan in 2010 – four months – by which time the initial international outrage had abated. Attacking a vessel carrying a volatile substance such as ammonium nitrite might offer a level of deniability which, however implausible, could preclude unambiguous attribution. To consider the impact of such action, we might consider that in 2019, insurance rates in the Strait of Hormuz rose tenfold after Iran’s limpet mine attacks – even though a convoy system was put in place.

Second, the Black Sea Fleet’s submarines are an important launch platform for Russian cruise missiles such as the 3M-14 Kalibr, which – according to some experts – came close to delivering a death blow to Ukraine’s energy grid this winter. Any effort to maintain Ukraine’s viability in the long term will depend on the ability of its economy to at least partially recover from the impact of war, and open sea lines of communication will be crucial. The Black Sea Fleet’s submarines thus represent a clear and present challenge which the Ukrainian navy will need to resolve.

The Challenge of ASW

There are, however, be a number of issues that will preclude any effort to transpose a Western approach to ASW to Ukraine in the medium term. First, the platforms involved are too expensive and small in number to be gifted. Assets such as the P-8 maritime patrol aircraft or specialist ASW frigates are unlikely to be transferred, and the Ukrainian armed forces would struggle to crew, operate and protect them in any case.

ASW is an inherently skill-intensive task. Training an aviator on a Royal Navy Merlin helicopter, for example, takes at least 11 months before they can be integrated into frontline squadrons, and training pipelines everywhere are well known to be at capacity already. Training times for sonar operators are similarly long. Moreover, this excludes the challenge of integrating personnel into coherent units that can operate in tandem with one another. Though the Ukrainian navy had 11,000 personnel in its service when the war began, the fact that it had lost much of its fleet after 2014 – as well as an understandable focus on events on land – raises questions about the speed at which necessary competencies can be built, or rebuilt, within the force.

Finally, the maintenance of the platforms needed to operate an ASW barrier along Western lines would strain capacity at Ukrainian facilities, particularly if they remain under bombardment.

As such, a solution to the challenge of ASW – at least in the near term – needs to be developed along fundamentally different lines from traditional, Western approaches.

Begin with the End State, Not the Platform

There could, however, be relatively cost-effective solutions to the challenges that Ukraine faces. These could be built on the principle that harassment, rather than sea denial, should be the immediate Ukrainian goal. It is not necessary to destroy Russia’s submarines if they can be prevented from doing operationally useful work.

As a working hypothesis, it is reasonable to assume that Russian sabotage or interdiction of shipping to Ukraine is likely to occur within or close to Ukraine’s exclusive economic zone in the northern Black Sea, both to signal intent and because damaging vessels in a warzone is likely to be less contentious to the international community than sinking them well within international waters. If this is the case, the geography of the northern Black Sea offers partial solutions. The average depth of the area – 200 metres – is less than the 240-metre depth at which the Kilo generally operates, meaning that navigation and operation will be more difficult for submarines. This is not to say that it is impossible, and some parts exceed the average depth. However, submarines operating in the northern Black Sea do so at increased risk of collision, grounding and detection. The passage of submarines can be made even more risky by seeding the areas within which they can operate with remotely activated mines such as the US Hammerhead. Because these mines can be remotely activated, they are compatible with international law, and the fact that they can be programmed to seek specific magnetic anomalies aids against target misidentification. This would force the Kilos to operate in even shallower waters, increasing their risk even further.

Beyond canalising submarines through mines, Ukraine could use uncrewed capabilities to harass them further. For example, UAVs operating dipping sonobuoys and lightweight torpedoes could be utilised in an ASW role – an avenue that multiple navies are pursuing, albeit experimentally. While accurate detection by a UAV thus equipped may not be certain, a responsible submarine commander would have to take evasive action if he or she detected a pinging sonar, potentially disrupting firing solutions, affecting the vessel’s endurance, or even putting it in navigational danger. The perception that a UAV is armed and primed to attack could be exacerbated if some UAVs were equipped with munitions while many more were equipped with decoys that simulated the acoustic profile of an attack. We might think of the impact that the US Navy’s Julie Jezebel sonobuoys – which simulated the noise profile of a depth charge – had on Soviet submariners during the Cuban missile crisis.

Russian submariners’ perceptions of operational risks could also be compounded if Ukraine were to take possession of even a very limited number of ASW helicopters. Finally, the presence of NATO or other intelligence gathering aircraft, including P-8s, over the Black Sea would force Russian commanders to consider the possibility that Ukrainian assets were being cued, which – whether true or not – could be reinforced by conducting UAV flights at times at which the aircraft are present. Ultimately, all of these actions would raise the perceived risk for Russian operators and slow the rate and tempo of their activity.

Conclusions

There are no perfect immediate-term solutions to the submarine challenge. In the long term, after the war’s conclusion, Ukraine might well consider meeting the goals set out in its 2019 naval strategy, including rebuilding a surface fleet capable of limited sea control in peacetime, as well as prosecuting ASW missions near its shores and other sea denial missions. In the meantime, while the ideal of denying areas to Russian submarines is unlikely to be achieved, Ukraine can impose upon the Kilos and their operators a set of conditions which – though they may not end the submarine threat – will strain both vessels and crews. The immediate goal guiding Ukrainian ASW, then, should be harassment.

The views expressed in this Commentary are the authors’, and do not represent those of RUSI or any other institution.

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Lessons Learnt from Recent Court Decisions on Transfer Pricing Cases

 By Kishenjeet Dhillon

There have been a series of breathtaking developments in the country’s transfer pricing sphere lately. Since the start of the year 2021, the government has made changes to the transfer pricing legislation such as the introduction of the Section 113B (penalty for a failure to furnish transfer pricing documentation on a timely basis) and Section 140A(3A) (surcharge of up to 5% on transfer pricing adjustments). Most recently, the Inland Revenue Board (IRB) has expanded the transfer pricing disclosure section in the income tax return form (i.e., Form C) in requiring companies engaged in controlled transactions to declare their functional profile in the Form C. The slew of new measures significantly tightened the transfer pricing regime within Malaysia. 

Amidst the backdrop of these changes, transfer pricing centric litigation is increasing in number as we march into the 15th anniversary since the introduction of Section 140A in 2009. The frequency of litigation is signaling that transfer pricing disputes are becoming more significant. What can be observed is that a transparency gap exists between the IRB’s expectations, the rules and regulations as they currently stand, and the ongoing practice by tax practitioners as well as taxpayers. It is through the courts’ interpretation of transfer pricing legislation that we develop a more matured transfer pricing regime. Whilst we discuss the legal implications of the recent cases, which have been largely decided in favour of the taxpayers, it is perhaps time to take stock of these latest decisions made by the courts and analyse them through practical lens. 

High Court decisions on Sandakan Edible Oils Sdn Bhd’s case and Procter & Gamble Malaysia Sdn Bhd’s case 

The two most recent cases that have been widely discussed are: 

• • SEO case: Ketua Pengarah Dalam Negeri v Sandakan Edible Oils Sdn Bhd decided at the High Court (unpublished) (or SEO Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri (2021) MSTC 10-129 ); and 
• • PGM case: Ketua Pengarah Hasil Dalam Negeri v Procter & Gamble (Malaysia) Sdn Bhd (2022) MLJU 743. 

At the Special Commissioners of Income Tax (“SCIT”) level in the SEO case, the SCIT held that the IRB had failed to support its decision to utilize the median point of a benchmarking analysis, done at the request of the IRB, as a basis for adjustment. The taxpayer had proved that the additional assessments imposed by the IRB were exaggerated or wrong, and such a decision was reaffirmed by the High Court on 17 May 2022. 

As for the PGM case, the taxpayer had defended the appeal filed by the IRB at the High Court which reaffirmed the decision made by the SCIT in a previous judgement. It was made clear in the judgement issued that the taxpayer did not attempt to evade or avoid tax, had sought professional advice concerning its transfer pricing policy and tax matters, and that the main issue of contention was a technical disagreement regarding transfer pricing policy. 

The above cases are regarded as being instrumental to the conversation surrounding transfer pricing and contribute significantly to the ongoing development of the transfer pricing regime within the Malaysian context. The two cases had taken place under unique circumstances but share common outcomes which may serve as the foundation for how taxpayers can assess their own levels of transfer pricing compliance. In addition, both the SEO case and PGM case reaffirm long held positions among tax practitioners that are often challenged by the IRB during the transfer pricing audit phase. 

Practical considerations and lessons learnt 

Given the above developments, taxpayers can take note of the following practical considerations and lessons learnt in evaluating their current transfer pricing matters and level of compliance. This will enable taxpayers to build a robust defence against any potential transfer pricing dispute that may take place post-audit. 

1. The importance of an appropriate benchmarking analysis 

The first obvious starting point is that of the preparation of an appropriate transfer pricing analysis. The topic of benchmarking analysis and the application of the Transactional Net Margin Method (“TNMM”) is often widely discussed in the tax sphere. However, the SEO and PGM cases bring this issue to the forefront like never before. In both cases, the applicability of the benchmarking analysis performed by the taxpayer was significantly challenged. In the SEO case, the taxpayer and the IRB had agreed on a final set of comparable companies. However, in the PGM case, the IRB disregarded the taxpayer’s analysis entirely despite two levels of benchmarking analyses being presented i.e., one on a regional level and another on a local level. Whilst the benchmarking analyses were challenged by the IRB and rejected, the courts ultimately affirmed the reasonableness of the analysis and sided with the taxpayer. The findings of the High Court noted that the IRB’s own set of comparable companies ought to be rejected as the taxpayer had produced a reliable analysis. The taxpayer had appropriately performed a functional analysis and aligned its selection of comparable companies to that of the taxpayer’s own functional profile. In addition, the taxpayer had prepared a complete transfer pricing documentation with an appropriate methodology for selection – which very much aided the taxpayer in obtaining a favourable outcome. This was in contrast to the IRB’s own lack of analysis – a point highlighted as being fatal and against the IRB’s own transfer pricing guidelines. 

The lessons learned on this point is that, whilst the IRB may challenge the application of the TNMM during an audit, it is vital that taxpayers place an emphasis on the preparation of an appropriate benchmarking analysis that has been performed with a proper basis. An arbitrary selection of comparable companies or a simplistic approach is unlikely to yield a positive outcome in the event of any disputes. In addition, as the benchmarking analysis is often requested during the audit process, as in the SEO case, it is considered good practice for taxpayers to prepare such an analysis. This is especially so if the taxpayer meets the threshold for the preparation of a full transfer pricing documentation under Paragraph 1.3.1. of the Malaysian Transfer Pricing Guidelines or engages in cross-border transactions. The preparation of a benchmarking analysis in this case will act as an additional safeguard to defend the taxpayer’s position in the event of a transfer pricing audit. 

2. Burden of proof is on the taxpayer 

A key outcome of the SEO case is the determination of where the burden of proof lies. The SCIT had cited the case of Macmine Pty Ltd v FCT (1979) 9ATR 38, which noted that “the question in tax appeals is never whether the Commissioner has established, by proof, the particular state of facts upon which he relies in support of his assessment, it is, rather, whether the taxpayer has established the non-existence of the state of facts and, hence, the excessive (sic) of the assessment”. In other words, the burden of proof lies with the taxpayer to show that the facts to support the assessment made, as interpreted by the tax authorities, do not exist. 

To do so effectively, the taxpayer must realise that both quantitative and qualitative information are required to be sufficiently analysed and documented. From a quantitative perspective, the importance of the benchmarking analysis has been highlighted in Item 1 above. Taxpayers also must ensure that evidence such as economic data, transaction data, price movements for commodity-based transactions and financial data are all kept appropriately with respect to related party transactions. This would aid the taxpayer in making the arguments that its transfer prices have been sufficiently analysed and are in line with the arm’s length principle. 

In addition to quantitative data, the taxpayer should place additional attention on qualitative information – which can provide a proper context to the transaction and bring to life the information provided during the audit process. This importance of qualitative information is often overlooked and taxpayers often struggle to maintain such evidence on a year to year basis. 

The PGM case provides a clear illustration of its importance. During the audit proceedings, the taxpayer had sought to address the IRB’s queries regarding its transfer pricing practices by providing multiple sources of information. This included a functional analysis done within the transfer pricing documentation, sample marketing and promotional documentation, as well as explanations via letters to the IRB regarding the related party transaction being scrutinised. Specifically, the High Court noted that the taxpayer had offered “…not only documentary evidence but also elaborate explanation…” on the queries raised by the IRB. Therefore, it can be observed that the information presented by the taxpayer, which were aligned to the transfer pricing documentation and corresponding benchmarking analysis prepared, was a key component for consideration by the High Court in affirming the decision made regarding the PGM case in favour of the taxpayer. 

Hence, taxpayers should ensure that the qualitative aspects of their functions, assets and risks as well as the general conduct of their business with respect to related party transactions are well documented. This may include keeping qualitative information relevant to the company’s transfer pricing practices such as product brochures, marketing information, internal memos, meeting agendas or presentation slides. Whilst this list of information is not exhaustive, it should serve as a starting point for in-house tax teams on the part of the taxpayer to begin collating information relevant to the related party transactions documented in the company’s transfer pricing documentation. Such information may prove to be vital in supporting any arguments made by the taxpayer during a transfer pricing dispute with the IRB as well as in future court proceedings. 

3. The need for robust transfer pricing documentation 

Lastly, both the SEO case and PGM case highlight the great need for the preparation of robust transfer pricing documentation. Since 2021, the preparation of transfer pricing documentation for each year of assessment has become more important as any person who makes a default in furnishing contemporaneous transfer pricing documentation in respect of any year of assessment shall be liable to a fine of not less than RM20,000 and not more than RM100,000 (Section 113B of the Income Tax Act 1967). 

The PGM case adds further weight to the importance of the transfer pricing documentation as the preparation of robust documentation was a key factor in the successful outcome for the taxpayer in the case. In particular, the High Court noted that the taxpayer had performed a proper functional analysis, which had properly discerned the respective functions, assets and risks undertaken. In addition, a detailed search criteria to identify the comparable companies was also documented. Besides, the conduct of the taxpayer’s business was in line with the transfer pricing documentation prepared, indicating that the transfer pricing documentation prepared was aligned to the actual substance of the company’s operations. Crucially, the documentation aligned with the transfer pricing guidelines applicable at the time. 

The High Court in the PGM case affirmed the SCIT’s reliance on the transfer pricing documentation as it was prepared in accordance with the relevant guidelines and should be maintained. Whilst there remains a temptation to consider the preparation of transfer pricing documentation as merely a routine exercise, the PGM case highlights the importance of looking at the preparation of the transfer pricing documentation in greater detail. Taxpayers should ensure that any transfer pricing documentation that is being prepared aligns with the substance of the business and accurately documents the functions, assets and risks of the taxpayer with respect to its related party transactions. In addition, a yearly review would result in the contemporaneous nature of the documentation being maintained and may safeguard the taxpayer’s position in the event of any queries being raised by the tax authorities during a tax audit. 

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