MAYER BROWN JSM | 1 Asia Tax Bulletin Winter 2015/16 Americas | Asia | Europe www.mayerbrownjsm.com 2 | Asia Tax Bulletin MAYER BROWN JSM | 3 We would like to thank you for your continued interest in the Asia Tax Bulletin. The aim of our publication is to bring you carefully considered guidance and comprehensive updates about tax developments from southeast Asia, China, Japan and India. In this issue we look at transfer pricing in India, cover a tax amnesty in Indonesia, delve into a tax reform plan for Japan, as well as report on a whole host of other key issues from across the continent. Beginning with this issue, there will now also be an interactive version available. We hope the Asia Tax Bulletin will become a valuable and trusted resource to all our readers, and look forward to your continued involvement and feedback. Pieter de Ridder Partner, Mayer Brown LLP +65 6327 0250 | firstname.lastname@example.org This Edition 4 | Asia Tax Bulletin MAYER BROWN JSM | 5 Contents HONG KONG 10 Corporate treasury centre tax incentive 10 Guidance on tax treatment of amalgamations 12 Automatic exchange of financial account information 13 Hong Kong removed from the blacklists of Spain and Estonia 13 International tax developments INDIA 13 Transfer pricing 14 Draft guidelines on determining tax residency 16 International tax developments INDONESIA 17 Tax amnesty 18 Changes to regulations for foreign workers 18 Indonesian REITS 19 Regulation on fixed assets revaluation JAPAN 20 2016 tax reform plan 22 Use of partnerships to invest abroad 22 International tax developments MALAYSIA 23 Expatriate projections for 2016 23 Budget for 2016 24 Thin capitalisation rules 24 Interest between related parties 24 Investment holding companies 25 Tax incentive for angel investors 25 Persons leaving Malaysia PHILIPPINES 26 Tax incentives 27 International tax developments SINGAPORE 28 Gains derived from disposal of investments 29 Transfer pricing 30 Transfer pricing guidelines amended 31 International tax developments TAIWAN 32 Work permit eligibility requirements to be eased THAILAND 33 Corporate tax rate to remain at 20 percent 33 Tax amnesty 34 Small and medium-sized enterprises tax incentive VIETNAM 35 International tax developments Key: Jurisdiction (Click to navigate) CHINA (PRC) 6 Multilateral Competent Authority Agreement on automatic exchange of information 6 Construction project, real estate and finance sectors 6 Individual income tax deduction for health insurance premium 7 Transfer pricing agreements 7 VAT exemption for cross-border e-commerce in Hangzhou 7 Taxation of income from qualified investment funds 8 Stock incentives and conversion of retained earnings/profits 8 Stamp duty on financial leasing contracts 8 Tax policy measures to comply with WTO rules published 9 Convention and protocol on Mutual Administrative Assistance in Tax Matters 9 International tax developments 6 | Asia Tax Bulletin MAYER BROWN JSM | 7 China (PRC) Multilateral Competent Authority Agreement on automatic exchange of information On 16 December 2015, the PRC became the 77th jurisdiction to join the OECD Automatic Exchange of Information Agreement (2014) (MCAA) on the introduction of the automatic exchange of information in tax matters on a reciprocal basis. China will exchange information automatically based on the international standard developed by the OECD. Construction project, real estate and finance sectors At a meeting of the Ministry of Finance on 28 December 2016, the Minister of Finance stated that the transformation of business tax to VAT, which started in 2012, will be extended in 2016 to include the construction, real estate, and financial and consumer service sectors. These are the remainder of the most important sectors currently subject to business tax. Details will be published in due course. Individual income tax deduction for health insurance premiums The Ministry of Finance, State Administration of Taxation and China Insurance Regulatory Commission jointly issued a notice (Cai Shui  No.126) concerning the implementation of the individual income tax policy on deduction for health insurance premiums. This was announced in an earlier notice (Cai Shui  No.56) in May 2015. The policy will be introduced as a trial project in Beijing, Shanghai, Tianjin, Chongqing and 27 other major cities. The notice Cai Shui  No.126 provides that from 1 January 2016 an annual amount of CNY2,400 (CNY200 per month) paid by employees, sole proprietors or partners of a partnership to a qualified commercial health insurance scheme is, in addition to the monthly standard deduction, deductible for individual income tax purposes. Hong Kong investors are exempt from stamp duty on transactions relating to participations in Chinese investment funds in China.” “ Transfer pricing agreements The State Administration of Taxation (SAT) released the China Advance Pricing Agreement (APA) Report of 2014 on 21 December 2015. According to the report, 9 APAs (3 unilateral and 6 bilateral) were concluded in 2014. The total number of APAs entered into in 2014 is considerably less than the previous year in which 19 (11 unilateral and 8 bilateral) were concluded. Both Chinese and English versions can be downloaded from the website of the SAT. VAT exemption for cross-border e-commerce in Hangzhou On 18 December 2015, the Ministry of Finance (MoF) and the State Administration of Taxation (SAT) jointly issued a notice (Caishui  No.143) concerning the value added tax (VAT) exemption policy applicable to the export of goods through e-commerce in the cross-border e-commerce pilot area of Hangzhou (this is the city in which China’s largest e-commerce enterprise, Alibaba, is located). Goods exported by enterprises located in Hangzhou without any valid purchase certificates being issued are exempt from VAT until 31 December 2016, provided that the following conditions are satisfied: • the exported goods are supervised by what is known as a ‘Single Window platform’; and • export enterprises keep accurate records of the information available on the suppliers of the exported goods. Taxation of income from qualified investment funds The Ministry of Finance (MoF), the State Administration of Taxation (SAT) and the China Security Supervision Committee jointly issued a notice (Cai Shui  No. 125) on 14 December 2015 concerning the taxation of mutually recognised investment funds in mainland China and Hong Kong. The notice applies from 18 December 2015 and its content is summarised below. Capital gains on the trading of participations in Hong Kong investment funds realised by Chinese domestic individuals through recognised funds are exempt from individual income tax in the period from 18 December 2015 to 17 December 2018. However, the income derived by Chinese domestic individuals from investment funds in Hong Kong through recognised funds is subject to individual income tax at a rate of 20 percent, which is to be withheld by agents maintained in mainland China by Hong Kong investment funds. Both capital gains and income are taxable under enterprise income tax if such gains and income are derived by Chinese domestic enterprises from investment funds in Hong Kong through recognised funds. Conversely, capital gains on the trading of participations in mainland China investment funds realised by Hong Kong individuals or enterprises are exempt from income tax. However, dividends distributed by Chinese domestic listed companies to Chinese domestic investment funds are subject to a 10 percent withholding tax, and listed companies are required to withhold the tax on distributions pertaining to Hong Kong investors (individuals or enterprises). If the distribution concerns interest on corporate bonds, the withholding tax is 7 percent. At the time that a Chinese domestic investment fund distributes the gains or income to Hong Kong investors, no withholding tax will be imposed. Further, the notice states clearly that no business tax will be imposed on capital gains derived through recognised funds. As regards stamp duty, only Chinese domestic investors are subject to Hong Kong stamp duty on transactions relating to participations in investment funds in Hong Kong. Conversely, Hong Kong investors are exempt from stamp duty on transactions relating to participations in Chinese investment funds in China. JURISDICTION: 8 | Asia Tax Bulletin MAYER BROWN JSM | 9 The central legislative and policy department of the tax authority has to conduct a compliance assessment on the draft tax policy and provide feedback to the policymaking department. Convention and protocol on Mutual Administrative Assistance in Tax Matters On 16 October 2015, China deposited its instrument of ratification for the multilateral Convention on Mutual Administrative Assistance in Tax Matters, as amended by the 2010 protocol. The Convention and the amending protocol will enter into force three months after the instrument of ratification has been deposited. Further details will be reported subsequently. International tax developments ASEAN On 22 November 2015, the Association of Southeast Asian Nations (ASEAN) and China signed an amending protocol to the 2004 free trade agreement (FTA) between ASEAN and China, following a successful fourth round of negotiations. Stock incentives and conversion of retained earnings/profits The State Administration of Taxation (SAT) issued an announcement on 16 November 2015 (SAT Gong Gao  No. 80) clarifying the individual income tax treatment of stock incentives as provided in Cai Shui  No. 116 that stipulates certain tax incentives for National Innovation Demonstration Zones. The announcement applies from 1 January 2016 and its content is summarised below. The individual income tax base of stocks must be calculated by reference to the fair market value at the time the stocks are received by employees. For listed companies, the fair market value is the closing price of the stock on that day; and for non-listed companies, the value must be ascertained on the basis of net asset method, comparable method or other reasonable methods which can be applied in consultation with the tax authority. The value is included in the taxable income of the employee as salary and wages. Non-listed companies that convert undistributed profits, retained earnings and mandatory accumulation of profits to stocks for distributions to individual shareholders are required to withhold individual income tax on stock dividends. If the stocks (as stock dividends) are distributed by a listed company, the tax treatment of dividends from listed companies depending on the holding period of the underlying shares will apply. On the basis of Cai Shui  No. 116, employees receiving stocks and shareholders receiving stock dividends may pay the individual income tax over a period of five years if certain requirements are satisfied. The company granting or distributing the stocks must file the tax payment in instalments with the competent tax authority by submitting certain documents such as certification of high-technology enterprise, the resolution of a general meeting of shareholders on such plans, stock valuation reports and financial statements of the company. Stamp duty on financial leasing contracts The Ministry of Finance and the State Administration of Taxation (SAT) jointly issued a notice concerning stamp duty on financial leasing contracts on 24 December 2015 (Cai Shui  No. 144). The notice applies from its issuance date. According to the notice, financial leasing contracts, including sale-and-leaseback contracts, are subject to stamp duty at a rate of 0.05 percent of the total lease amount. Under sale and leaseback arrangements, the sale and repurchase of assets by the lessor or lessee are exempt from stamp duty. Tax policy measures to comply with WTO rules published The State Administration of Taxation (SAT) issued a notice on 10 October 2015 (Shui Zong Fa  No. 117) concerning interim measures on compliance issues relating to tax policies. The notice applies as from 1 November 2015. For the purposes of this notice, “tax policies” are understood to mean tax rules and regulations affecting trade services and transactions involving intellectual property. For example, tax policies affecting import and export include indirect taxes on import, export duties, export tax refunds and tax reductions for processing industries, as well as other tax incentives for trade. In the context of the notice, “compliance” means that tax policies have to be in conformity with the rules of the World Trade Organisation (WTO). When introducing a new tax policy, the tax policy department is required to examine if the policy complies with: • the most-favoured-nation treatment; • national treatment; • transparency; • regulations on subsidies and state aid; and • other WTO rules. China (PRC) cont’d JURISDICTION: 10 | Asia Tax Bulletin MAYER BROWN JSM | 11 Hong Kong Corporate treasury centre tax incentive The Inland Revenue (Amendment) No.4 Bill 2015 was gazetted on 4 December 2015 to introduce a concessionary profits tax rate of 8.25 percent (compare Singapore: 10 percent) for certain profits derived by a qualifying corporate treasury centre in Hong Kong. This bill also enhances interest expense deduction rules for an intra-group financing business carried on by a corporation, and it will deem the interest income and certain profits derived from such business as taxable trading receipts. Finally, the bill clarifies the Profits Tax and stamp duty treatment of regulatory capital securities issued by financial institutions in compliance with Basel III capital adequacy requirements. The bill was introduced to the Legislative Council on 16 December 2015 where it will be discussed and – as expected – approved before being enacted into law. Once enacted, the provisions are expected to apply from 1 April 2016. Interested parties should review their current corporate treasury operations to examine whether the arrangements under the bill will be beneficial to them. Guidance on tax treatment of amalgamations On 30 December 2015, the Hong Kong Inland Revenue Department (IRD) issued a Guidance concerning the tax treatment of profits in a court-free amalgamation. Hong Kong’s new Companies Ordinance (Cap.622), which became effective on 3 March 2014, introduced the court-free amalgamation regime to facilitate an amalgamation of two or more wholly-owned intra-group companies without a preliminary court approval. However, there have been no amendments made to the Inland Revenue Ordinance (IRO) to reflect the new court-free amalgamation regime, nor has the IRD provided guidance on the tax treatment of court-free amalgamation, which leads to considerable tax uncertainties. JURISDICTION: According to the Guidance, if the Commissioner is satisfied that the court-free amalgamation is not carried out for the purpose of obtaining tax benefits, the provisions in sections 61A or 61B of the IRO will not be applicable to the amalgamation (e.g. the denial of losses carried forward from the merging company to the merged company) and the merged company will be regarded as the continuation of the merging company for the purposes of the IRO. The IRD is considering making amendments to the IRO to provide a statutory framework for the court-free company amalgamation. Before the amendments are enacted, the Assessor will make an assessment in accordance with the following practice: • Amalgamation with sale of assets: if a court-free amalgamation is structured with a sale of assets on an arm’s-length basis, the provisions concerning sale of assets will be applied to assess any deemed trading receipts and to make balancing adjustments. • Amalgamation without sale of assets: the merging company will be treated on the day before the amalgamation as having: - ceased to carry on its trade, profession or business; and - realised its trading stock in the open market. The merged company will be treated on the effective date of amalgamation as having: • continued to carry on the trade, profession or business of the merging company by way of succession; • qualified for annual allowances in respect of commercial/industrial buildings or structures by way of its entitlement to the relevant interests (however, the disposal of such interests will be subject to balancing charges); • qualified for annual allowances in respect of machinery or plant by reference to the reducing values of unclaimed allowances (however, the disposal of machinery or plant will be subject to balancing charges); • qualified for any unexpired allowances/deductions in respect of capital expenditure incurred by the merging company (however, the disposal of such capital assets will be subject to the assessment of proceeds as trading receipts on sale); • entitled to deductions that the merging company would have been allowed but for the amalgamation; and • taken over the amount that would have been income or trading receipt of the merging company but for the amalgamation. Tax losses of a company cannot be transferred to other group companies. Group loss relief and deduction for acquired losses through the court-free amalgamation procedure are not allowed. However, tax losses can be used to set off against profits of the merged company in the following situations: • tax losses are incurred after both the merging and the merged company have become wholly owned subsidiaries of the same group; • tax losses are carried forward by the merging or merged company in a trade or business, which continues until amalgamation: - if tax losses are brought forward in the merged company, the merged company has adequate financial resources (excluding intra-group loans) to purchase the trade or business of the merging company even if the amalgamation is not conducted; and - if tax losses are brought forward from the merging company, such losses can only be used to set off against the profits of the merged company derived from the same trade or business succeeded from the merging company. If tax losses available for setting off are considerably large, the merging and merged company should consider applying for an advance ruling under section 88A of the IRO. In addition, the Guidance also clarifies the rights and obligations of the merged company. Group loss relief and deduction for acquired losses through the court-free amalgamation procedure are not allowed.” “ 12 | Asia Tax Bulletin MAYER BROWN JSM | 13 Hong Kong cont’d JURISDICTION: Automatic exchange of financial account information On 12 October 2015, the Information Services Department of Hong Kong announced that the government will refine the legislative proposals for implementing the new standard on automatic exchange of financial account information on tax matters (AEOI) by taking into account the feedback of relevant stakeholders gathered during a public consultation. The main changes proposed include: • a mandatory requirement will be introduced for financial institutions (FIs) to carry out the due diligence procedures set out in the OECD’s Common Reporting Standard. In addition, a clear legal basis will be provided for allowing FIs to collect information on reportable accounts (not only with respect to account holders with tax residence corresponding to Hong Kong’s AEOI partners but also with respect to account holders with other tax residences); and • penalties will be introduced for FIs and employees that have caused or permitted the FIs to file an incorrect return on purpose. Hong Kong removed from the blacklists of Spain and Estonia On 14 October 2015, the Hong Kong Information Services Department announced that the European Commission had updated its web page which contains the list of non-cooperative tax jurisdictions as classified by Member States of the European Union. The update sees the removal of Hong Kong from the blacklists of Spain and Estonia. International tax developments UAE On 10 December 2015, the Hong Kong-United Arab Emirates Income Tax Agreement (2014) entered into force. The agreement generally applies from 1 January 2016 for the United Arab Emirates and from 1 April 2016 for Hong Kong. Denmark On 4 December 2015, the Denmark-Hong Kong Exchange of Information Agreement (2014) entered into force. The agreement generally applies from 1 January 2016 for Denmark and from 1 April 2016 for Hong Kong. Faroe Islands On 4 December 2015, the Faroe Islands-Hong Kong Exchange of Information Agreement (2014) entered into force. The agreement generally applies from 1 January 2016 for the Faroe Islands and from 1 April 2016 for Hong Kong. Iceland On 4 December 2015, the Hong Kong-Iceland Exchange of Information Agreement (2014) entered into force. The agreement generally applies from 1 January 2016 for Iceland and from 1 April 2016 for Hong Kong. Norway On 4 December 2015, the Hong Kong-Norway Exchange of Information Agreement (2014) entered into force. The agreement generally applies from 1 January 2016 for Norway and from 1 April 2016 for Hong Kong. South Africa On 20 October 2015, the Hong Kong-South Africa Income Tax Agreement (2014) entered into force. The agreement generally applies from 1 January 2016 for South Africa and from 1 April 2016 for Hong Kong. Pakistan According to a press release of 17 October 2015, published by the government of Pakistan, Hong Kong and Pakistan signed an income tax agreement on 16 October 2015, in Hong Kong. India JURISDICTION: Transfer pricing The Central Board of Direct Taxes issued Notification No. 83/2015 of 19 October 2015 (the Notification) amending the Income-tax Rules, 1962 relating to the use of range and multiple year data. The Notification amends Rule 10B and introduces Rule 10CA under this amendment. The changes to Rule 10B imply that, where the Resale Price Method, Cost Plus Method or Transactional Net Margin Method is used for determining the arm’s length price (ALP) of international transactions entered into on or after 1 April 2014, the data to be used for analysing the comparability of an uncontrolled transaction with an international transaction will be conducted on the basis of the (a) data relating to the current year; or (b) data relating to the financial year immediately preceding the current year, if the data relating to the current year is not available at the time of furnishing the return of income. Furthermore, where the data relating to the current year is subsequently available at the time of determining the ALP during the course of the tax assessment, then such data will be used for such determination even if the data was not available at the time of filing the tax return for the assessment year relating to the said current year. The “current year” is understood to mean the year in which an enterprise has entered into an international transaction with an associated enterprise. The Notification introduces Rule 10CA. This Rule is summarised below. • The dataset for determining the ALP is to be constructed by placing prices in an ascending order. • Where the comparable uncontrolled transaction of an enterprise has been identified based on current year data and the enterprise has conducted similar transactions in either or both of the two financial years immediately preceding the current year, the dataset is prepared for those three years and the weighted average of the prices is determined accordingly. It is also clarified that day-to-day routine operational decisions undertaken by junior and middle management are not relevant for the purpose of determining the POEM.” “ 14 | Asia Tax Bulletin MAYER BROWN JSM | 15 India cont’d JURISDICTION: • Where the comparable uncontrolled transaction of an enterprise has been identified based on the data relating to the financial year immediately preceding the current year and the enterprise has conducted similar transactions in the financial year immediately preceding the preceded financial year, the dataset is prepared for the immediately preceding two financial years and the weighted average of the prices is determined accordingly. This clause will not apply (not included in the dataset) where the use of data relating to the current year establishes that the enterprise has not undertaken the same or a similar transaction during the current year, or the uncontrolled transaction undertaken in the current year is not a comparable uncontrolled transaction. Rule 10CA further states that the weighted average of the prices of comparable uncontrolled transactions in more than one financial year is to be computed by aggregating the numerator and denominator of the chosen Profit Line Indicator. In respect of the use of range of prices, Rule 10CA(4) defines the arm’s length range as the 35th to 65th percentile of the dataset organised in an ascending order. However, a minimum of six comparables are required, in the absence of which the ALP will be the arithmetical mean of all the values included in the dataset. Furthermore, the use of the range concept does not apply where the Profit Split Method or Sixth Method is regarded as the most appropriate method for determining the ALP. Rule 10CA(4) also states that: • if the price at which the international transaction has actually been undertaken is within the arm’s length range, then the price at which such international transaction has actually been undertaken will be deemed to be at arm’s length; and • if the price at which the international transaction has actually been undertaken is outside the arm’s length range, then the median of the dataset will be deemed to be the ALP. Draft guidelines on determining tax residency The Central Board of Direct Taxes (CBDT) issued a draft report on Guidelines for Determining Place of Effective Management (POEM) (F. No. 142/11/2015-TPL) dated 23 December 2015 for public comments. The deadline for submitting comments and suggestions was 2 January 2016. The draft guidelines were issued further to the amendment of section 6(3) of the Finance Act 2015 on the tax residence test for a company, which replaced “control and management of its affairs” with “place of effective management”. The draft guidelines state that a company is regarded as a resident of India if it is incorporated in India or if its place of effective management in the tax year concerned is in India. The process of determining the POEM is primarily based on whether the company is engaged in active business outside India. With respect to a company engaged in active business outside India: • The POEM is presumed to be outside India if the majority of the meetings of the board of directors (BOD) of the company are held outside India. However, if the BOD is not exercising its powers of management, but such powers are being exercised by either the holding company in India or any other person resident in India, then the company’s POEM will be considered to be in India. • To determine whether the company is engaged in an active business outside India, the average of the data for the previous year and two years prior to that will be taken into account. If the company has existed for a shorter period of time, then the data of such period will be considered. “Active business outside India” is defined as: • having passive (aggregate of income from purchase and sale of goods from/to its associated enterprises and income by way of royalty, dividend, capital gains, interest or rental income) income less than 50 percent of total income; • having less than 50 percent of its total assets in India; • having less than 50 percent of its total number of employees in India; and • having payroll expenses of such employees in India less than 50 percent of total payroll expenses. With respect to a company engaged in active business in India, determining the POEM is a two-stage process: first, it involves identifying or ascertaining the person who actually makes the key management and commercial decisions for the conduct of the company’s business as a whole; second, the location where these decisions are made needs to be determined. This is more important than the place where such decisions are implemented. The following guiding principles should be noted: • the place where the BOD’s meeting is regularly held, provided that the BOD retains and exercises its authority to govern the company and does in substance make the key management and commercial decisions necessary for the conduct of the company’s business as a whole; • the place where senior managers or other persons, including shareholders, make key decisions, provided that the BOD has delegated the de facto authority and does nothing more than routinely ratifying the decisions that have been made; • the location of the head office. With regard to determining the location of the head office: -if senior management and its support staff are based in a single location which is registered as the company’s principle place of business or headquarters, then that location is deemed to be the place where the head office is located; - if the company is more decentralised (i.e. with various members of senior management operating from time to time, or at offices located in various countries), then the company’s head office would be the location where these senior managers: a) are primarily or predominantly based; b) normally return to following travel to other locations; or c) meet when formulating or deciding key strategies and policies for the company as a whole; and/or - members of senior management may operate from different locations on a more or less permanent basis and members may participate in various meetings via telephone or video conferencing rather than by being physically present at meetings in a particular location. In such a situation, the head office would normally be the location, if any, where the most senior level of management (e.g. the Managing Director and Financial Director) and their direct support staff are located; • the place where directors or persons taking decisions, or the majority of them, reside; and • the residuary POEM, i.e. the place where the main and substantial activity of the company is carried out, or where the accounting records of the company are kept. It is also clarified that day-to-day routine operational decisions undertaken by junior and middle management are not relevant for the purpose of determining the POEM. “Senior management” means any person or persons generally responsible for developing and formulating key strategies and policies for the company and ensuring or overseeing the execution and implementation of those strategies on a regular and ongoing basis. The draft guidelines negate the possibility of establishing the POEM in India in the following circumstances: • the Indian company being a wholly-owned subsidiary of a foreign company; • one or more directors of a foreign company residing in India; • the local management being situated in India in respect of activities carried out by a foreign company in India; and • the existence in India of support functions that are preparatory and auxiliary in nature. 16 | Asia Tax Bulletin MAYER BROWN JSM | 17 India cont’d JURISDICTION: International tax developments Macedonia On 12 September 2014, the India-Macedonia Income Tax Treaty (2013) entered into force. The treaty generally applies from 1 January 2015 for Macedonia and from 1 April 2015 for India. Australia On 1 January 2016, the Australia-India Social Security Agreement (2014) entered into force. The agreement generally applies from 1 January 2016. South Korea On 9 December 2015, India and South Korea signed a memorandum of understanding (MoU) on the suspension of collection of taxes during pendency of the Mutual Agreement Procedure (MAP) to their tax treaty. Israel On 14 October 2015, India and Israel signed an amending protocol to the India-Israel Income and Capital Tax Treaty (1996), in Jerusalem. Tax amnesty According to a member of the finance commission of the Indonesian parliament, the government has proposed a tax amnesty programme which will be prioritised when parliament reopens in mid-January. The source claims that there is enough support from lawmakers to pass the law in the first quarter of 2016. The proposed amnesty, which the government had planned to implement in 2015, would allow people to declare previously unreported assets and benefit from tax rates as low as 2 percent. That compares with the corporate tax rate of 25 percent and the top rate of 30 percent for personal income. The measure is motivated by the desire to arrange for short term funding of government budget plans. It has been widely criticised by market watchers, who believe that it will undermine the government’s plans to enhance tax compliance in the country. Key points of the proposed amnesty programme include: • All taxpayers have the right to an amnesty, except those suspected of a tax crime and who are under investigation by the Attorney General’s Office (AGO) or who are currently on trial or serving prison time for a tax crime. • Taxpayers who apply for an amnesty between January and March of 2016 will have to pay 2 percent income tax. This is referred to as a ‘penalty’, but it is in fact the income tax itself as there will not be any further tax charge. The rate will rise to 3 percent if the application is lodged between April and June, and 5 percent if between July and December 2016. In the explanation section, the penalty is calculated based on the margin resulting from the deduction in the net assets reported in the previous tax filing (SPT) with the current undeclared net assets. • An amnesty is given to taxpayers who have a tax number (NPWP), have applied for the programme, have paid the penalties and incurred tax liabilities. Indonesia JURISDICTION: ” “ The SPC is considered as a low-risk entrepreneur whereby it can obtain preliminary refunds of value added tax (VAT) overpayments. 18 | Asia Tax Bulletin MAYER BROWN JSM | 19 Indonesia cont’d JURISDICTION: • The Finance Ministry is required to grant an amnesty within 30 working days after a taxpayer has fulfilled all requirements. A taxpayer automatically receives an amnesty if the ministry fails to issue confirmation within 30 working days. • Taxpayers who receive an amnesty will be exempt from paying administration penalties and from tax crime prosecution. They will also receive a tax-debt free declaration for any tax declaration made before 1 January 2016. • Taxpayers who receive an amnesty will be exempt from paying higher taxes on their undeclared assets resulting from Supreme Court rulings, delayed payment penalties, tax filing revisions and reviews for tax declaration before 1 January 2016. • Data and information resulting from applying for tax amnesty cannot be used as a legal basis for a tax investigation and tax crime prosecution of any kind. • Within one year of the amnesty implementation, the Finance Ministry is required to revise the General Tax Procedure Law, Income Tax Law, Value-Added Tax and Luxury Tax Law. Changes to regulations for foreign workers After passing new regulations governing foreign workers in June 2015, the Ministry of Manpower made further amendments in October 2015. Significantly, the 1:10 ratio of foreign workers to Indonesian employees has been removed from the regulations. Further, foreigners engaging in guidance, counselling or training on the application of industrial or technical products, attending business meetings and giving lectures, no longer need to obtain a temporary work permit. Foreign workers engaging in the production of a commercial film, conducting audit, quality control or inspections, or installing products or machinery are still required to obtain a temporary work permit. The amendments clarify that non-resident foreign directors and commissioners are not required to obtain a work permit. The amendments also do not contain the previous requirement that foreign workers be able to communicate in Indonesian. Representative offices need to observe a ratio of foreign to domestic workers of 1:3. Indonesian REITS The Ministry of Finance (MoF) has issued regulation No. 200/PMK.03/2015 (PMK-200) on the tax treatment of specific collective investment contracts (Kontrak Investasi Kolektif, KIK) focused on real estate to enhance the financial sector (i.e. real estate investment trusts or REITs). PMK-200 was issued on 10 November 2015 and became effective on the same date. Previously, a REIT was subject to tax as follows, resulting in double taxation: • when its special purpose companies received income from transfers of assets or rent (5 percent of gross transaction value and 10 percent of gross rental fee respectively); and • when it received dividends distributed by its special purpose companies. PMK-200 defines a REIT (Dana Investasi Real Estat, DIRE) as a vehicle to collect funds from investors for subsequent investment in real estate, real estate-related assets, and cash or cash equivalents. Additionally, a special purpose company (SPC) is defined as a limited liability company whose share capital is at least 99.9 percent owned by a DIRE that is established in the form of a KIK whereby the SPC is incorporated solely for the purpose of administering the DIRE. Under PMK-200, the MoF provides the following tax facilities: • dividends received by the KIK-DIRE from an SPC are not subject to tax as the SPC is treated as an integral and inseparable component of the KIK-DIRE; • the transfer of land and buildings to an SPC or KIKDIRE will not be subject to a final tax of 5 percent of the transfer value (however, any gains from the transfer of real estate to the DIRE will be subject to tax under normal rules); and • the SPC is considered as a low-risk entrepreneur whereby it can obtain preliminary refunds of value added tax (VAT) overpayments. To qualify for the above tax facilities, the KIK-DIRE must comply with various administrative requirements. Regulation on fixed assets revaluation On 15 October 2015, the Ministry of Finance (MoF) issued Regulation No. 191/PMK.010/2015 (PMK-191) on the revaluation of fixed assets in order to assist taxpayers when the thin capitalisation rules are implemented. This regulation is applicable to companies that submit applications for fixed asset revaluations (FAR) to the Director-General of Taxation (DGT) during the period from 20 October 2015 until 31 December 2016. The difference between the new market value and the previous book value resulting from the revaluation is a capital gain that is subject to tax. Under PMK-191, final income tax will be imposed on the capital gain at different rates depending on when the companies submit the FAR application, as follows: • 3 percent for submissions between 20 October 2015 and 31 December 2015; • 4 percent for submissions between 1 January 2016 and 30 June 2016; and • 6 percent for submissions between 1 July 2016 and 31 December 2016. The salient points from PMK-191 are: • individuals or companies residing in Indonesia (including permanent establishments) that maintain their books and records either in Indonesian rupiah or US dollars can make a FAR application under PMK-191; • any FAR applications submitted after 31 December 2016 will be taxed based on MoF Regulation No. 79/PMK.03/2008 (PMK-79); • revaluations can be made on tangible assets located in Indonesia and used for the purpose of deriving income. Revaluations will be based on appraised values. If the appraised value does not reflect the market value or fair value, the DGT will redetermine the market price or fair value of the revalued assets. Revaluation of assets can be made only once in five years; • FAR applications to the DGT must be accompanied by the following supporting documents: - final income tax payment receipt; - details of the fixed assets that have been revalued at the appraised value; - copy of the licence of the approved consultant; - the appraisal report; and - the latest audit report before the revaluation; • if a FAR application is submitted without an appraisal report, the assets will be revalued at the appraised value once it is made available; • depreciation of the revalued assets will be based on the approved value while the useful life of the assets will be adjusted to the full useful life of the different groups of assets as prescribed in MoF Regulation 96/PMK.03/2009 of 15 May 2009, after the revaluation starting from the month in which the revaluation was made; • revalued assets in the prescribed Groups 1 and 2 cannot be transferred before they are fully depreciated. Assets in Groups 3 and 4, buildings and land cannot be revalued within 10 years after revaluation. Otherwise, the gain on the revaluation of assets will be taxed at the highest corporate tax rate of 25 percent. The additional tax is payable within 15 days after the end of the month in which the transfer is made; • the issuance of bonus shares or recognition of additional nominal shares originating from the capitalisation of gains from asset revaluations without any contributions from shareholders are not subject to tax; and • companies that have already submitted a FAR application pursuant to PMK-79 are allowed to re-submit their application under PMK-191. 20 | Asia Tax Bulletin MAYER BROWN JSM | 21 Japan JURISDICTION: 2016 tax reform plan On 16 December 2015, the government outlined its 2016 Budget. It will be submitted to Parliament in January. Key measures are summarised below. Corporate income tax • The headline corporate income tax rate will be reduced from 32.11 percent (2015) to 29.97 percent (2016) and 29.74 percent (2018). • The size-based business tax will be expanded and the regulation on fixed asset depreciation unified. Further details will be published in a separate report shortly. Consumption tax • As pledged in the 2015 Budget, the consumption tax will be increased to 10 percent from April 2017. To mitigate the impact on general consumers, certain qualifying items, mainly food and beverage items, will be subject to a reduced rate of 8 percent. The proposed social security and consumption tax reform will continue to be discussed over the upcoming months. • An invoicing system will be introduced by April 2021. Controlled foreign companies (CFCs) • The trigger rate will not be reduced. • With respect to Lloyd’s insurance companies, foreign companies which are, either directly or indirectly, wholly owned by Japanese companies and trade in the Lloyd’s insurance market are deemed to satisfy the entity and control requirements under the existing Japanese CFC rule. Transactions with such foreign subsidiaries are therefore excluded from the non-related party transaction rule. This is in response to the clarification request from the industry in respect of the interaction between the Japanese CFC legislation and the mandatory legal requirement in the UK to separate the managing agent and its corporate members. The consumption tax will be increased to 10 percent from April 2017.” “ • With respect to foreign tax relief, dividends received by the CFC from its subsidiaries (which are at least 25 percent owned, i.e. second-tiered companies) are currently included in the CFC’s foreign income when computing foreign tax relief. Such dividends are to be excluded from the income of the CFC as long as the dividends are not subject to foreign corporation tax. This partly resolves the situation in which the amount of foreign tax relief that may be claimed by the Japanese parent is ‘artificially’ reduced due to substantial dividends received by the CFC from second-tiered subsidiaries. Adoption of OECD BEPS Final Report Japan will adopt the BEPS Final Report. In particular, the following issues will be addressed: Country-by-country reporting (CbCR) • The ultimate Japanese parent company of the multinational group must submit the CbCR report for each group company jurisdiction to the tax authority via “e-tax” within one calendar year of the end of the relevant financial year. • The multinational group excludes listed subsidiaries, but includes entities that are normally not subject to consolidation accounting. Those with total consolidated earnings of less than JPY100 billion based on the previous financial year are also excluded. • The information required is identical to that required under OECD guidelines. Notably, the report must be submitted in English. • Although the Final Report recommends introduction as at 1 January 2016, CbCR will be introduced in Japan for the financial year commencing on 1 April 2016. Master file • The filing obligations and entities required to file are the same as those for CbCR purposes. • The required information corresponds to the OECD Final Report. • However, the master file may be submitted in English or Japanese. • The requirement will enter into force for the financial year commencing on 1 April 2016. Local files • Although the Final Report does not specify as such, the applicable Japanese companies will be required to submit local files together with their annual tax returns. Furthermore, the local files must be kept for seven years. • The information required is governed by both the Special Taxation Measures Law 22.10.1 and the Final Report. • Entities whose previous year’s international and intangible asset transactions amount to less than JPY50 billion and JPY500 million, respectively, are also excluded from the local filing requirement. Exit tax for individuals • Assets subject to exit and gift transfer tax will not include assets such as share options which are partly or entirely subject to Japanese withholding tax. This measure will apply to assets subject to tax after 2016. • The tax deferral period has been extended from five years to five years and four months following the day of the departure or transfer of gifts. • Assets transferred to non-residents for reasons such as inheritance must be reported to the authority within four months of such an event. • With respect to NISA (Nippon Individual Saving Account) accounts used for holding listed shares, which are closed following the account holder’s departure from Japan, the listed shares held will be subject to exit and gift tax and will be deemed to be disposed and reacquired three months prior to the departure. • Losses incurred on listed shares as a result of the deemed transfer (at the time of departure from Japan) may qualify as losses available for set-off and may be carried forward. 22 | Asia Tax Bulletin MAYER BROWN JSM | 23 Use of partnerships to invest abroad As a result of the 17 June Supreme Court decision concerning the Delaware LP which was ruled to be a corporation for Japanese tax purposes, there was a general concern in Japan that pension and mutual funds were unnecessarily disadvantaged and that this was not in the public interest. Consequently, the National Tax Agency (NTA), the (Japanese) Financial Services Authority and the (Japanese) Ministry of Finance have on 3 December 2015 agreed that, going forward, the NTA will not challenge claims for partnership tax treatment if Japanese pension funds or Japanese mutual funds use Delaware LPs to invest in US corporates. • This is provided that there are no ‘bad facts’ as in the June 17 case, where the Japanese investors were looking to offset losses of the overseas investment to reduce the Japanese tax base. Therefore, in the absence of such bad facts, the Japanese pension funds/mutual funds should be entitled to claim the Japan/US tax treaty with respect to the reduced US dividend withholding tax rate if they invest through a Delaware LP. • It should be understood that the Supreme Court ruling remains, but will not be enforced by the NTA so long as there are no ‘bad facts’ (roughly translated as aggressive tax planning). International tax developments Germany On 17 December 2015, the Germany-Japan Income Tax Treaty (2015) was signed, in Tokyo. Once in force and effective, the new treaty will replace the Germany-Japan Income and Capital Tax Treaty (1966), as amended by the 1979 and 1983 protocols. Further details of the new treaty will be reported subsequently. Taiwan On 26 November 2015, Japan and Taiwan signed a tax agreement, in Tokyo. Further details of the agreement will be reported subsequently. Vietnam The amending exchange of notes to the Japan-Vietnam Income Tax Treaty (1995), signed on 26 November 2015, entered into force on the same day and will apply from 26 November 2015. Qatar On 30 December 2015, the Japan-Qatar Income Tax Treaty (2015) entered into force. The treaty generally applies from 30 December 2015 for the exchange of information and from 1 January 2016 for withholding taxes and other taxes. From this date, the new treaty generally replaces the Japan-Qatar Transport Tax Treaty (2009). OECD On 30 October 2015, Japan signed the OECD Automatic Exchange of Information Agreement (2014) (MCAA) on the introduction of the automatic exchange of information in tax matters on a reciprocal basis. It was signed during a meeting of the Global Forum held on 29-30 October 2015, in Bridgetown. Japan will exchange information automatically based on the international standard for the exchange of information developed by the OECD. USA The US Treasury Department has released its technical explanation of the new protocol that was signed on 24 January 2013, and, when ratified, will amend the existing Japan-United States Income Tax Treaty, signed on 6 November 2003. The technical explanation indicates a release date of 29 October 2015, and provides a summary and commentary on each article in the protocol. The Treasury Department states that it is an official guide to the protocol, and the related exchange of notes. The Treasury Department further states that the technical explanation reflects the policies behind particular provisions, as well as understandings reached during the negotiations with respect to the interpretation and application of the protocol and the exchange of notes. Expatriate projections for 2016 On 15 November 15 2015 the Expatriate Services Division began accepting employer projections of expatriates for 2016. The projections are being processed within 5-10 business days and must be approved before employers may apply for individual Employment Passes for foreign national employees. The yearly projections require employers to plan and estimate the number of foreign nationals, both new and existing, who will be required based on the company’s business plan and project requirements. Budget for 2016 The Budget for 2016 was presented on 23 October 2015. The main measures concerning corporate taxation are summarised below and are effective from 1 January 2016, unless otherwise stated. Corporate taxation • A special reinvestment allowance of 60 percent of qualifying capital expenditure will be extended to companies engaged in factory or agricultural activities whose reinvestment allowance incentives have expired. • Double tax deduction up to RM50,000 per year of assessment will be granted on research and development projects for small and medium-sized enterprises. This deduction will be granted from years of assessment 2016 to 2018. • The 100 percent tax exemption for travel companies will be extended to 31 December 2018. Personal taxation • The tax rate for the taxable income bracket of RM600,000 to RM1 million will be increased from 25 percent to 26 percent; the tax rate for the taxable income bracket above RM1 million will be increased from 25 percent to 28 percent. • Child relief for each child below 18 years is increased from RM1,000 to RM2,000. Malaysia JURISDICTION: The 100 percent tax exemption for travel companies will be extended to 31 December 2018.” “ Japan cont’d JURISDICTION: 24 | Asia Tax Bulletin MAYER BROWN JSM | 25 • Child relief for each child above 18 years receiving tertiary education will be increased from RM6,000 to RM8,000. • Spouse relief for a taxpayer’s spouse with no income will be increased from RM3,000 to RM4,000. • Subject to certain conditions, children supporting and caring for their parents will be entitled to a tax deduction of RM1,500 for each parent. • Relief for parents with a disabled child will be increased from RM5,000 to RM6,000. The additional deduction for a disabled child pursuing tertiary education will also be increased from RM6,000 to RM8,000. • The tax deduction for higher education fees on approved courses will be increased from RM5,000 to RM7,000. Indirect taxation • Zero-rating for all types of controlled medicines under the Poisons List Group A, S, C and D, as well as the addition of 95 brands of over-the-counter medicines. • GST relief for the oil and gas industry on the re-importation of equipment for oil and floating platforms that are temporarily exported for rental and leasing purposes. • GST relief for the re-importation of goods that were exported temporarily for the purpose of promotion, research or exhibition. Thin capitalisation rules On 30 December 2015, the Ministry of Finance issued a notice to state that the effective date of the Income Tax (Thin Capitalisation) Rules has been deferred. The Rules will take effect from 1 January 2018. Interest between related parties On 3 December 2015, the Inland Revenue Board of Malaysia (IRBM) issued Public Ruling No. 9/2015 (the PR) explaining the deduction of interest expense and recognition of interest income in relation to a loan transaction between related persons. Key points include: • Interest expense can only be claimed by the borrower when the interest is due to be paid (subsection 33(4) of the Income Tax Act 1967 (ITA)), whereas income is assessed on the lender when it is obtainable on demand (subsection 29(3) of the ITA). • For the deduction of interest expense, a review and confirmation from the IRBM is required on the amended assessment for each year of assessment (YA) where the deduction of the interest expense is relevant. • Section 27(2)(b) or 27(2)(c) sets out the computation method that would be applicable if either part of or the entire overlapping period in respect of interest income which is receivable has elapsed more than four years before the day on which the receipt of that interest income first became known to the Director General. The interest income for the elapsed period is deemed to have accrued evenly over the period that has not elapsed. • The PR also includes various detailed examples to provide greater clarity. Investment holding companies On 16 December 2015, the Inland Revenue Board of Malaysia (IRBM) issued Public Ruling (PR) No. 10/2015 on Investment Holding Company (IHC). This PR replaces PR No. 3/2011 of 10 March 2011, which provided guidance on the tax treatment of IHCs resident in Malaysia. The contents of the updated PR are generally the same as PR No. 3/2011, with amendments made to the “permitted expenses” formula under section 60F of the Income Tax Act 1967 (ITA) and illustrations therein. Tax incentive for angel investors On 16 December 2015, the Inland Revenue Board of Malaysia (IRBM) issued Public Ruling (PR) No. 11/2015 on Tax Incentive for Angel Investors. This PR explains the tax incentive granted to an angel investor who has invested in an investee company. The PR provides guidance in respect of the following: • criteria for qualifying as an angel investor; • criteria for qualifying as an investee company; • tax treatment, as follows: - a tax exemption will be granted to an angel investor in respect of his aggregate income for the basis period in the second year of assessment (YA) following the YA in which the investment is made. The amount of the tax exemption is capped at the amount of the investment made, or MYR500,000, whichever is lower; - any unclaimed excess of the said investment amount will not be refunded or carried forward to be set off against any tax liability for subsequent YAs; and - any person who has made a claim for a deduction under the Income Tax (Deduction for Investment in a Venture Company) Rules 2005 [P.U. (A) 76/2005] will not be eligible for claiming a tax exemption under this tax incentive; • a list of distinct differences between a venture capitalist and an angel investor. Persons leaving Malaysia On 17 December 2015, the Inland Revenue Board of Malaysia (IRBM) issued Public Ruling (PR) No. 12/2015 on Recovery from Persons Leaving Malaysia. The objective of this PR is to explain the circumstances and procedures for recovering tax and debts due from taxpayers who will be leaving Malaysia. • A certificate may be issued by the Director General (DG) to invoke a stoppage order to an individual or company director who is liable under section 104 or section 75A of the Income Tax Act 1967 (ITA) to prevent the taxpayer from leaving Malaysia. • A person who leaves Malaysia voluntarily or attempts to leave Malaysia without settling the tax liability and dues referred to in the certificate will be liable to a fine of between MYR200 and MYR20,000 or imprisonment for a maximum of six months, or both. Malaysia cont’d JURISDICTION: 26 | Asia Tax Bulletin MAYER BROWN JSM | 27 Philippines JURISDICTION: Tax incentives On 9 December 2015 President Benigno S. Aquino III signed into law Republic Act (RA) No. 10708, also known as The Tax Incentives Management and Transparency Act, seeking to enhance fiscal accountability and transparency in the grant and management of tax incentives. Some important points include: • Tax returns and complete annual tax incentives reports are required to be filed and submitted by “registered business entities” to the relevant investment promotion agencies (IPAs). • Non-compliance with reporting requirements is subject to penalties ranging from a fine of PHP100,000 (first violation), PHP500,000 (second violation) and cancellation (third violation). • The Department of Finance (DOF) will monitor tax incentives and the National Economic Development Authority (NEDA) will conduct a cost-benefit analysis on the investment incentives to determine the impact of the tax incentives on the Philippine economy. • The DOF and Department of Trade and Industry in coordination with the NEDA Director General, the Commissioners of the BIR and BOC, and heads of the relevant IPAs will promulgate the implementing regulations of the RA within 60 days from effectivity of the law. Tax returns and complete annual tax incentives reports are required to be filed and submitted by “registered business entities” to the relevant investment promotion agencies (IPAs).” “ Tax returns and complete annual tax incentives reports are required to be filed and submitted by “registered business entities” to the relevant investment promotion agencies (IPAs).” “ International tax developments Germany On 14 December 2015, the Philippines’ Senate ratified the Germany-Philippines Income and Capital Tax Treaty (2013), by way of Resolution No. 1540. Once in force and effective, the new treaty will replace the GermanyPhilippines Income and Capital Tax Treaty (1983). Italy On 14 December 2015, the Philippines’ Senate ratified the amending protocol, signed on 9 December 2013, to the Italy-Philippines Income Tax Treaty (1980), by way of Resolution No. 1541. Further details will be reported subsequently. Turkey On 14 December 2015, the Philippines’ Senate ratified the Philippines-Turkey Income Tax Treaty (2009), by way of Resolution No. 1542. Japan On 19 November 2015, the Japan-Philippines Social Security Agreement (2015) was signed, in Manila. Qatar On 19 May 2015, the Philippines-Qatar Income Tax Treaty (2008) entered into force. The treaty generally applies from 1 January 2016. 28 | Asia Tax Bulletin MAYER BROWN JSM | 29 Singapore JURISDICTION: Gains derived from disposal of investments On 27 October 2015, the Inland Revenue Authority of Singapore (IRAS) issued an e-Tax Guide that sets out how the principles stated in the case of Comptroller of Income Tax v. BBO ( SGCA 10) (BBO case) are applied to determine the tax treatment of gains derived from the disposal of investments of insurers. The Guide, which takes effect immediately from the date of issuance, is relevant to a person (including a partnership) licensed under the Insurance Act to carry on insurance business in Singapore. IRAS has taken the view that all investments of an insurer are revenue assets as investment activities are an integral part of the insurance business of an insurer. Therefore, all investment returns of the insurance business – including dividends, interest, rental and gains from the disposal of investments – are revenue in nature and thus taxable. In the BBO case, the Singapore Court of Appeal ruled that insurers, in addition to holding investments as revenue assets, could also hold investments as capital assets under exceptional circumstances. The Guide provides the approach that IRAS takes to determine the tax treatment of gains derived from the disposal of investments of insurers based on the decision in the BBO case. IRAS will follow closely the principles in the BBO case and continue to treat the investments of insurers as their revenue assets and tax gains on disposals of these investments as trade income under section 10(1)(a) of the Income Tax Act (ITA). Any investment income derived from the investments prior to disposal is also taxable as trade income. Any gain or loss from the disposal of the immovable property will accordingly be treated as capital in nature.” “ The tax treatment for the following investments, based on IRAS’s application of the principles in the BBO case, is summarised below: Investments in ordinary shares (whether quoted or unquoted) Where insurers claim that certain investments in ordinary shares are capital assets, they must be able to provide cogent and contemporaneous evidence that the motive of acquiring, holding and disposing of the investments is not related to or for the insurance business of the insurer. The insurers have to produce documentation such as directors’ resolutions, minutes of board/directors’ meetings, minutes of investment committee meetings and announcements to shareholders that provide explanation on: • the purpose of acquiring the investments and reasons for disposal; • the factors considered and the process of decisionmaking with regard to the acquisition, holding and disposal of the investments; and • internal, management or external restrictions imposed on the disposal of the investments. Additionally, the period of holding the investments, the frequency of transactions surrounding the investments, and the nexus between the disposal of the investments and the carrying on of the insurance business must bear out the insurer’s original intention of acquiring and holding the investments as capital assets. Investments in immovable property Although shares were the subject of dispute in the BBO case, IRAS is prepared to treat the following immovable property as capital assets of the insurance business: • immovable property consistently and substantially occupied and used by the insurers’ own employees as office premises (excluding premises occupied by employees of related companies and insurance agents). This is to recognise that insurers may conduct their business from buildings owned by them; • immovable property consistently and substantially used by the insurers as staff accommodation (staff excludes employees of related companies in the group) provided these benefits-in-kind are declared in the hands of the insurer’s employees; and • any gain or loss from the disposal of the immovable property will accordingly be treated as capital in nature. For all other immovable property, as with investments in ordinary shares, the insurers must be able to provide cogent and contemporaneous evidence, as specified above, that the motive of acquiring, holding and disposing of the immovable property is not related to or for the insurance business of the insurer. Investments in any other assets As with investments in ordinary shares, where insurers claim that certain investments in any other assets are capital assets, they must be able to provide cogent and contemporaneous evidence that the motive of acquiring, holding and disposing of such investments is not related to or for the insurance business of the insurer. Transfer pricing The Inland Revenue Authority of Singapore issued updated transfer pricing guidance, which consolidates four previous e-tax guides on transfer pricing, advanced pricing arrangements, and guidelines for related party loans and services. The guidance, issued 4 January 2016, is the third edition of Singapore’s transfer pricing guidance. The first edition was released in 2006, and an update was published in 2015. The previous e-tax guides included transfer pricing guidelines published 23 February 2006; a transfer pricing consultation published 30 July 30 2008; supplementary administrative guidance on APAs published 20 October 2008; and guidelines for related party loans and services published 23 February 2009. 30 | Asia Tax Bulletin MAYER BROWN JSM | 31 The updated guidance contains new language that includes examples for the application of the cost-plus method with suppliers who are located in Singapore. The guidance also clarifies roll-back years for the APA program, and specifically states that the authority “is not precluded from conducting an audit on the taxpayer if there is non-compliance with Singapore tax law.” It also includes technical corrections and clarifications. Transfer pricing guidelines amended On 4 January 2016, the Inland Revenue Authority of Singapore (IRAS) issued the third edition of the e-Tax Guide on the transfer pricing guidelines for previous reporting. The contents of the e-Tax Guide remain largely unchanged. Important points to note are the following: Enhanced guidance on the cost-plus method (CPM): • in applying the CPM, the direct and indirect costs of producing a product or providing a service are normally used to compute the cost base and such costs are limited to the costs of the supplier of goods or services and should take into account an analysis of the supplier’s functions performed, assets used and risks assumed. The methods of determining the cost base should be consistent over time; and • if the supplier of the goods and services is the tested party and is a taxpayer in Singapore, the cost base should be determined according to the Singapore Financial Reporting Standards. Where necessary, adjustments will be made to ensure the cost base is arm’s length, i.e. the cost base may include cost not reflected in the tested party’s accounts (an example is included in the guide) Enhancement of the mutual agreement procedure (MAP) and advance pricing arrangement (APA) process: • the acceptance of a taxpayer’s request for an APA period and rollback years is subject to the taxpayer’s observation of the APA process. The general rule regarding when a financial year is considered a roll-back year (paragraph 8.19) has been replaced with examples on the APA period and roll-back years; • the IRAS is not precluded from conducting an audit on the taxpayer if there is non-compliance with Singapore’s tax law; • the diagram of the MAP process (paragraph 9.2) has been updated to provide more clarity; and • various amendments to reflect the enhanced APA process: - when initiating meetings with IRAS, taxpayers or tax agents are required to provide the basic information as indicated in Annex B2 of the e-Tax Guide; - the IRAS will indicate if it is inclined to accept the APA request at least four months before the first day of the APA period; - taxpayers should submit a formal application to IRAS within three months from the receipt of IRAS’ indication that the application can be submitted; and - for bilateral and multilateral APAs, where the filing deadline imposed by a foreign competent authority is earlier than that of IRAS, taxpayers should observe the earlier filing deadline. This, however, will not affect IRAS’ consideration and observation of the timeline under its APA process. International tax developments Ecuador On 18 December 2015, the Ecuador-Singapore Income Tax Treaty (2013) entered into force. The treaty generally applies from 1 January 2016. San Marino On 18 December 2015, the San Marino-Singapore Income Tax Treaty (2013) entered into force. The treaty generally applies from 1 January 2016. Seychelles On 18 December 2015, the Seychelles-Singapore Income Tax Treaty (2014) entered into force. The treaty generally applies from 1 January 2016. Luxembourg On 28 December 2015, the IRAS released a media alert to confirm that the Luxembourg-Singapore Income and Capital Tax Treaty (2013) has entered into force with effect from 1 January 2016. From this date, the new treaty generally replaces the Luxembourg-Singapore Income and Capital Tax Treaty (1993). The tax sparing provisions of the previous tax treaty remain applicable until 31 December 2020. Notably, the revised tax treaty provides for an exemption of dividend and interest withholding tax, contains a 7 percent royalty withholding tax rate and allows for collective investment vehicles to be eligible for tax treaty protection if the pertinent conditions are satisfied, lengthens the period test for determining permanent establishments, and provides a more mutually favourable tax treatment for international air transport and shipping income. Singapore cont’d JURISDICTION: 32 | Asia Tax Bulletin MAYER BROWN JSM | 33 Taiwan JURISDICTION: Work permit eligibility requirements to be eased The Minister of Labour has announced that work permit eligibility requirements applied to foreign nationals in white-collar positions will be eased at the end of 2015. The eligibility requirements under review include prior work experience of two years, minimum salary and a paid-in capital for the sponsoring employer. The eligibility requirements under review include prior work experience of two years.” “ Thailand JURISDICTION: Corporate tax rate to remain at 20 percent On 13 October 2015, the Royal Cabinet decided to maintain the corporate income tax rate permanently at 20 percent, effective from 1 January 2016. The corporate income tax rate was previously reduced from 30 percent to 23 percent for the fiscal year 2012 and temporarily to 20 percent for the fiscal years of 2013-2014. Tax amnesty On 1 January 2016, the government gazetted the following new tax laws: • Royal Decree Governing Tax Amnesty and Tax Compliance under the Revenue Code BE 2558, issued on 31 December 2015; and • Royal Decree Governing Reduction and Exemption of Income Tax (No. 595) BE 2558, also issued on 31 December 2015. Both laws are effective immediately and are part of the government’s tax reform measures, aimed at encouraging Thai corporate entities to comply with the tax laws. The tax amnesty essentially applies to income generated prior to 1 January 2016 which would have been subject to corporate income tax, value added tax, specific business tax and/or stamp duty. The amnesty also applies to any tax examination, inquiry, assessment, payment demands or criminal prosecution in respect of such income. A corporate entity is eligible for the tax amnesty if it is a Thai company, or a juristic partnership, generating gross revenue of not more than THB500 million in the financial year 2015. The Royal Cabinet decided to maintain the corporate income tax rate permanently at 20 percent.” “ 34 | Asia Tax Bulletin MAYER BROWN JSM | 35 Vietnam JURISDICTION: International tax developments EU On 2 December 2015, the European Union and Vietnam signed a free trade agreement in Brussels, following two-and-a-half years of negotiations. The European Union considers free trade agreements with individual ASEAN countries as stepping stones towards a region-to-region agreement, which remains the long-term objective. On 2 December 2015, the European Union and Vietnam signed a free trade agreement.” “ However, the tax amnesty is not available to a Thai company or juristic partnership under the following circumstances: • currently under tax investigation by the Revenue Department or awaiting court proceedings for tax matters; • has issued/used fake tax invoices; and • has applied for a tax refund for either income tax, value added tax, specific business tax or stamp duty tax. In order for the Thai company or juristic partnership to enjoy the tax amnesty, it is essentially required to: • notify and apply for the tax amnesty with the Revenue Department according to the rules and within the prescribed time limit; • correctly file tax returns (and pay the correct taxes accordingly) from financial year 2016 onwards in respect of corporate income tax, value added tax and/ or specific business tax; • file stamp duty tax returns and remit the amounts due accordingly; and • ensure that its accounting records and financial statements are in compliance with the accounting laws from the financial year 2016 onwards. Small and medium-sized enterprises tax incentive Small and medium-sized enterprises (SMEs) are entitled to further corporate income tax exemptions and reductions for their 2016 and 2017 financial years. Qualifying SMEs with a net profit of less than THB300,000 would be exempt from corporate tax for the financial years 2016 and 2017. Qualifying SMEs with a net profit of THB300,000 or more would be exempt from corporate tax for the financial year 2016 and subjected to a reduced corporate tax rate of 10 percent for the year 2017. For an SME to qualify for these additional incentives, the SME is required to: • have been established prior to 1 January 2016; • fulfil the conditions as an SME under the Thai Revenue Code, i.e. paid up capital not exceeding THB5 million and gross sales or service revenue not exceeding THB30 million in the financial year; • file a notice and application for tax amnesty with the Revenue Department; and • fulfil the conditions of the tax amnesty granted. Thailand cont’d JURISDICTION: MAYER BROWN JSM | 35 36 | Asia Tax Bulletin MAYER BROWN JSM | 37 About Mayer Brown JSM Mayer Brown JSM is one of Asia’s largest and longest-standing law firms. 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