In this edition's asset and wealth management tax highlights for the Asia Pacific region, we highlight industry and tax developments from Australia, China, Hong Kong, India and Malaysia, which may impact your asset and wealth management business. We hope you find these updates of interest, and will be pleased to discuss these developments and issues with you further.
The Government introduced the Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 on 9 November 2016 which received Royal Assent on 29 November 2016. The Act introduces the key superannuation measures below, which are designed to tighten the superannuation tax concessions for individuals to improve the sustainability and integrity of the superannuation system.
AUD1.6m cap on the amount of capital that can be transferred by members to the tax free earnings retirement phase of superannuation.
A reduction in the annual concessional contributions cap to AUD25,000.
A reduction in the earnings threshold from AUD300,000 to AUD250,000 at which an additional 15% tax will be imposed on concessional superannuation contributions.
A reduction in the annual nonconcessional contributions cap of AUD180,000 to AUD100,000.
Removal of the requirement that an individual must earn less than 10% of their income from their employment related activities to be able to deduct a personal contribution to superannuation and make it a concessional contribution.
Amendments to enable eligible low income earners to receive the low income superannuation tax offset.
Removal of the "anti-detriment" provisions.
As the above measures generally apply from 1 July 2017 (with certain transitional measures), superannuation funds will have limited time to ensure their systems are updated to manage these changes.
Diverted profits tax
Exposure draft legislation was released on 29 November 2016 for an Australian Diverted Profits Tax (DPT). The DPT was originally announced in the 2016-2017 Federal budget.
The Australian DPT is based on the UK DPT and will be an extension of the general anti-avoidance rules. These measures apply to multinational groups with more than AUD1bn global revenue and impose a 40% penalty tax rate to Australian tax benefits obtained in income years commencing on or after 1 July 2017. A 40% tax rate applies to
the Australian tax benefit if there was a principal purpose to obtain the tax benefit or both to obtain an Australian tax benefit and reduce foreign tax liabilities. There are certain proposed carve-outs from the rules as follows:
Having AUD25m or less Australian turnover.
Paying foreign taxes amounting to at least 80% or more of the Australian tax benefit.
Having sufficient economic substance.
Due to the potentially broad application of these rules, large foreign multinational companies will need to consider their cross border transactions to assess the potential impact.
Increased administrative penalties for large multinationals
Exposure draft legislation was introduced on 20 December 2016 which proposes to increase the penalties imposed on companies with global revenue of AUD1bn or more (or companies who are part of a group satisfying that threshold), who fail to meet their tax disclosure obligations (including the lodgement of income tax returns and other tax statements). These measures are designed to encourage large multinationals to meet their Australian tax compliance obligations.
From 1 July 2017, penalties for a failure to lodge tax documents to the Australian Taxation Office (ATO) will be increased, raising the maximum penalty from AUD4,500 to AUD450,000. In addition, from 1 July 2017, penalties relating to making false and misleading statements to the ATO will be doubled.
Fixed trust status Draft PCG 2016/D16
The ATO has released Draft Practical Compliance Guideline PCG 2016/D16 outlining factors which the Commissioner will take into account in deciding whether to exercise his discretion to treat a trust as a fixed trust under the trust loss provisions. Fixed trust status is central to determining whether the trust has maintained continuity of ownership for the purposes of utilising losses under the trust loss provisions. Under the draft guidelines, the Commissioner considers various circumstances in deciding whether to exercise his discretion including whether the trust is listed, whether there is a single class of units, and various powers conferred to the trustee under the trust deed.
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Entry ban lifted for wholly foreign-owned enterprises and joint ventures engaging in private securities investment fund management business in China
On 30 June 2016, the Asset Management Association of China (AMAC) released a 10th FAQ Regarding the Registration and Record-Filing of Private Funds (FAQ No. 10), confirming that foreign financial institutions are permitted to engage in private securities investment fund management business in China via setting up wholly foreign-owned enterprises (WFOEs) and joint ventures (JVs).
Previously, foreign financial institutions were only allowed to engage in private securities investment fund management business through JVs, with a 49% ceiling on foreign shareholding.
WFOEs and JVs now looking to engage in private securities investment fund management business in China will need to satisfy the following criteria:
the qualified WFOEs and JVs should be incorporated as companies in China;
the fund-raising should be conducted in a non-public method;
the business scope should be limited to investing in China's domestic capital market and providing asset management services to qualified domestic investors; and
no cross-border fund should be involved.
The lifting of the foreign shareholding ceiling will certainly attract more elite foreign fund management companies. However, foreign financial institutions should consider various issues before setting up in China, such as the impact on global trading models and transfer pricing issues when determining the service fees to be charged to WFOEs and JVs.
For more details, please refer to the following URL:
New restrictions on China's outbound investments
http://www.pwccn.com/webmedia/ doc/636038417218915299_china_ amtax_news_ jul2016_1.pdf
Common Reporting Standard requirements for financial institutions
On 14 October 2016, the State Administration of Taxation (SAT) released the Discussion Draft on the Administrative Measures on the Due Diligence Procedures for Nonresidents' Financial Account Information in Tax Matters (the Discussion Draft) to gather public opinion. The issuance of the Discussion Draft earmarks the localisation of Common Reporting Standard (CRS) in China through legislation.
The recent growth in Chinese enterprises' outbound investments has led to increased capital outflows that have been putting downward pressure on the Chinese yuan. In a bid to stabilise cross-border capital flows, the National Development and Reform Commission, the Ministry of Commerce, the People's Bank of China and State Administration of Foreign Exchange (SAFE) outlined new rules on outbound investments. These government agencies will review more thoroughly Chinese enterprises' outbound investment proposals.
According to SAFE, the following types of transactions are likely to attract more scrutiny:
The objective of CRS is to ensure that financial institutions (FIs) collect and provide details of non-resident account holders to relevant tax authorities. The Discussion Draft sets out the scope of information to be collected, including:
the type of FIs required to comply with CRS obligations;
the type of financial accounts in scope; and
It also sets out the due diligence requirements for FIs and states that FIs should start their due diligence procedures from 1 January 2017. FIs are expected to provide the reportable information before September 2018 as China is committed to prepare and exchange first batch of information by September 2018.
Given the tight timeline, FIs should note the compliance requirements set out in the Discussion Draft and begin preparation as early as possible.
For more details, please refer to the following URL:
Outbound transactions undertaken by enterprises that are recently set up and lack commercial substance;
Outbound transactions that outsize the investing enterprises' registered capital and financial strength;
Enterprises looking to invest in overseas businesses that are different from and unrelated to their own main businesses; and
Outbound transactions whose source of RMB funding is suspicious, in particular where individuals' assets are suspected of being transferred overseas illegally.
SAFE has stated that it will continue to support "genuine" outbound investments. It is intended that additional scrutiny will weed out fake transactions and also promote a steady and sustainable growth in outbound investments.
Enterprises looking to acquire overseas investments should factor in more time in the deal process as the relevant Chinese government agencies will take more time to vet investment proposals.
http://www.pwccn.com/webmedia/ doc/636130044420875410_ chinatax_news_oct2016_30.pdf
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The HKSAR Government's consultation paper on BEPS
On 26 October 2016, the HKSAR Government launched a public consultation on implementing measures to counter BEPS in Hong Kong. The BEPS consultation paper issued by the HKSAR Government indicates that it will focus on the four minimum standards for implementing the BEPS package identified by the OECD and measures that are of direct relevance to their implementation.
The HKSAR Government has set out in the consultation paper proposals related to the following priority areas:
Transfer pricing (TP) regulatory regime;
TP documentation and country-bycountry reporting;
Anti-treaty abuse rules in CDTAs;
Multilateral instrument; and
Other related matters, namely a statutory cross-border dispute resolution mechanism, spontaneous exchange of information on tax rulings and enhancement to the tax credit system.
The BEPS consultation launched by the HKSAR Government signifies the start of the potentially long and ongoing journey for Hong Kong to implement the OECD's BEPS package and align its tax system with the latest international tax standards. Multinational enterprise groups should definitely be assessing the potential impact of the proposals in the BEPS consultation paper on their existing holding structures and business operations as well as their present planned wider BEPS responses outside Hong Kong, and stay tuned of the upcoming legislation in both TP and other non-TP areas.
The IRD announced the transitional arrangement for country-by country reporting in HK
The IRD published a web page on country-by-country (CbC) reporting on 22 December 2016. The web page contains information on parent surrogate filing as a transitional arrangement for Hong Kong-based multinational enterprise groups (Hong Kong MNE groups) (i.e. where the ultimate parent entities are tax residents in Hong Kong) to fulfil their CbC report filing obligations in other jurisdictions before the CbC reporting legislation can be enacted in Hong Kong.
The IRD is in the process of formulating the procedures for parent surrogate filing, which will be rolled out in the first quarter of 2017.
Meanwhile, the ultimate parent entity of a Hong Kong MNE group seeking parent surrogate filing in Hong Kong should submit a notification to the IRD informing that CbC reports will be filed to the Department by the deadline to be provided in the CbC report legislation to be enacted.
Japan and UK become Hong Kong's AEOI partners
The HKSAR Government issued a press release on 26 October 2016, announcing that Hong Kong has recently signed a bilateral competent authority agreement (CAA) with Japan and the UK respectively with a view to commencing automatic exchange of financial account information in tax matters (AEOI) with these two tax jurisdictions on a reciprocal basis by the end of 2018.
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For further details, please refer to the following URL:
The official launch of the Shenzhen-Hong Kong Stock Connect
The China Securities Regulatory Commission (CSRC) and the Hong Kong Securities and Futures Commission (SFC) have approved the official launch of mutual trading access between the Shenzhen and Hong Kong stock markets. The Shenzhen-Hong Kong Stock Connect, which is modelled off the ShanghaiHong Kong Stock Connect, was launched on 5 December 2016.
For further details, please refer to the following URL:
http://www.pwchk.com/webmedia/ doc/636165572899315251_fstax_ news_dec2016.pdf
The HK/Romanian CDTA entered into force on 21 November 2016
On 9 December 2016, the IRD announced that the arrangement between Hong Kong and Romania for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income has entered into force. The agreement was signed on 18 November 2015 and entered into force on 21 November 2016, after the completion of ratification procedures on both sides. It will have effect with respect to income derived on or after 1 January 2017.
Mutual Recognition of Funds between Switzerland and Hong Kong
The Securities and Futures Commission (SFC) and the Swiss Financial Market Supervisory Authority (FINMA) have signed a Memorandum of Understanding on Switzerland-Hong Kong Mutual Recognition of Funds and Asset Managers (MoU) on 2 December 2016, which will allow eligible Swiss and Hong Kong public funds to be distributed in each other's market through a streamlined vetting process.
The MoU also established a framework for exchange of information, regular dialogue, as well as regulatory cooperation in relation to the cross-border offering of public funds.
Central Board of Direct Taxes (CBDT) Final rules on determining amount received by the company on issue of shares, being subject matter of buyback, notified
On 17 October 2016, the CBDT issued the much-awaited final rules prescribing the manner of determination of amount received for issue of shares, being subject matter of tax on buy-back under section 115QA of the Income-tax Act, 1961.
Revision of the India/ Republic of Korea tax treaty
On 26 October 2016, the CBDT issued a press release notifying amendments to the Republic of Korea/ India tax treaty. The key amendments are as below:
Capital gains Source based taxation of capital gains arising from alienation of shares comprising more than 5% of share capital.
Interest income Taxable at 10% (presently 15%).
Income from Royalty/ Fees for Technical Services (FTS) Taxable at 10% (presently 15%).
Limitation of Benefit clause (LOB) - Insertion of LOB article to ensure that the benefits of the Tax Treaty are availed only by genuine residents of both the countries.
The Press Release provides that the revised Tax Treaty will have effect in India in respect of income derived in fiscal years beginning on or after 1 April 2017.
Protocol to amend India/ Japan tax treaty notified in the Official Gazette
On 9 November 2016, the CBDT issued a press release notifying protocol amendment to the India/ Japan double taxation avoidance agreement (tax treaty). The key features of the amendment in the Protocol are the provision of internationally accepted standards for effective exchange of information on tax matters including bank information and information without domestic tax
interest, exemption of interest income from taxation in the source country with respect to debt-claims insured by the Government/ Government owned financial institutions, assistance in collection of taxes etc.
India/ Cyprus tax treaty renegotiated
On 18 November, the Government of India (GoI) and the Government of Cyprus (GoC), signed a protocol amending the provisions of the tax treaty between India and Cyprus (India/ Cyprus tax treaty). The GoI has issued a press release dated 18 November 2016 (press release) providing a gist of the key amendments.
Further, the press release issued by the GoC on 18 November 2016 provides that Cyprus will not be regarded as a notified jurisdictional area (NJA) under the Income-tax Act, 1961 (the Act) retrospectively from 1 November 2013. The GoI had indicated such a rescindment in its press releases issued on 1 July 2016.
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The key amendments to the India/ Cyprus tax treaty, as summarised in the press release, are as follows:
Source-based taxation of capital gains arising from alienation (disposal) of shares (debt and derivatives exempt subject to GAAR). In other words, India shall have the right to tax capital gains arising to Cyprus tax residents on transfer of shares of an Indian company;
Grandfathering of investments undertaken prior to 1 April 2017;
Expanding the scope of the term `permanent establishment' (PE), possibly to introduce the concept of service PE; and
Aligning the rate of tax for royalty under the India/ Cyprus tax treaty with the rate under the Act, by reducing it to 10%.
On 16 December 2016, the GoI issued a notification clarifying retrospective application of rescission of Cyprus status as a NJA. As a result, the rescission of notification no. 86 of 2013 is now applicable with retrospective effect. In other words, removal of Cyprus as a NJA is effective from 1 November 2013.
CBDT clarifies on eligibility guidelines for safe harbor provisions applicable to fund manager managing an offshore fund
On 21 November 2016, the CBDT provided the below clarifications in respect of an eligible fund manager to avail the benefits of safe harbor provisions:
The eligible investment fund can be a resident of a country which notified by the Central Government for applicability of these provisions in addition to the resident of countries with which India has signed a tax treaty.
A fund manager shall not be deemed to be a person connected with the fund by virtue of the fund manager undertaking fund management activity of the said fund.
Any fixed remuneration received from the fund by the fund manager shall be deducted from the profits of the fund, for the purpose of calculating the maximum amount of profits to which the Fund manager shall be entitled, provided the remuneration paid by the fund is at arm's length.
India/ Switzerland Joint Declaration on exchange of information
On 22 November 2016, the CBDT issued a press release stating that India and Switzerland have signed a `Joint Declaration' for implementation of automatic exchange of information (AEOI). As per the release, from September 2019 onwards, India can receive financial information of accounts held by Indian residents in Switzerland for 2018 and subsequent years, on an automatic basis. This would facilitate the goal of the Government to fight the menace of Black Money stashed in offshore accounts which has been the Government's key priority area.
Revised Goods and Service Tax (GST) Model law
On 26 November 2016, a revised version of the Model GST Law has been released. In the revised Model GST Law, the term `securities' has been specifically excluded both from the definition of goods and services. Hence, supply of securities shall be outside the GST net.
CBDT clarifies on applicability of overseas transfer provisions to FPIs
On 21 December 2016, the CBDT issued a circular clarifying the applicability of overseas transfer provisions in the context of FPIs. In summary, the following have been clarified:
The provisions apply to investors in FPIs even though FPIs may be mainly portfolio investors and not strategic investors.
Redemption of units/shares by investors in FPIs could fall within the ambit of the Provisions.
The provisions apply to, amongst others, Master Feeder structures, Nominee-Distributor structures, India focussed sub-Funds and Listed Funds, where the thresholds are met. The Provisions apply to investors at the time of merger of offshore Funds and internal restructuring of such Funds.
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The provisions apply subject to carve-out for small shareholders.
Other provisions in the incometax law such as withholding obligation on the payer apply as per law.
India/ Singapore tax treaty renegotiated
On 30 December 2016, the GoI and the Government of Singapore (GoS), signed a third protocol amending the provisions of the tax treaty between India and Singapore (India/ Singapore tax treaty).
The key amendments to the India/ Singapore tax treaty are as follows:
Source-based taxation of capital gains arising from alienation (disposal) of shares. In other words, India shall have the right
to tax capital gains arising to Singapore tax residents on transfer of shares of an Indian company.
Grandfathering of investments undertaken prior to 1 April 2017.
Lower tax rate applicable to shares acquired on or after 1 April 2017, if such shares are sold before 1 April 2019. In such cases, subject to fulfilment of the Limitation of Benefit clause, the gains would be taxable in India as per the Indian tax laws, but the rate of tax will be equal to 50% of the applicable tax rate for such capital gains.
In respect of investments acquired after 1 April 2017 and sold before 31 March 2019, the expenditure test needs to be met for the twelve month period immediately preceding the date of transfer.
In order to facilitate relieving of economic double taxation, a new para has been inserted to allow taxpayers to claim corresponding tax adjustments in case of transfer pricing disputes arising from cross-border transactions between India and Singapore.
A new article has been introduced which explicitly provides that the India/ Singapore tax treaty shall not prevent either of the countries from applying its domestic laws and measures concerning the prevention of tax avoidance or tax evasion.
Securities Commission Malaysia (SC) proposed regulatory framework for Trustees and Custodians under Section 76A of Capital Market Services Act 2007.
Currently, there are 90 custodians and trustees safekeeping approximately RM1.7 trillion worth of assets on behalf of investors. The SC recognizes the significant role played by trustees and custodians in maintaining investors' trust in the capital market by safeguarding investors' assets and interest.
In view of the important functions undertaken by these entities, the SC is proposing to revise the regulatory framework that includes streamlining entry standards and on-going conduct obligations that will create a level playing field among trustees and custodians.
To enhance efficiency, the SC also proposes a one-time registration to enable trustees to provide services for all capital market products instead of the current product-based registration.
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This framework is consistent with SC's efforts in realigning its regulatory approach from product-focused to intermediary/activity-focused. This framework will focus on conduct regulation to ensure that trustees and custodians prioritise investors in all of their decision-making process. In addition, it will place greater emphasis on board and management responsibilities by holding them accountable for the conduct of the trustees and custodians to ensure that these registered entities continue to remain fit and proper when carrying out their obligations and responsibilities in protecting investors' rights and assets.
Amendment to exemption of interest received by a unit trust
It is proposed during the recent Budget 2017 on 21 October 2016 that income derived by unit trust from Malaysia and paid or credited by any bank or financial institution licensed under the Islamic Financial Services Act (IFSA) 2013 or an Islamic bank licensed under the IFSA 2013 or any development financial institution regulated under the Development Financial Institutions Act (DFIA) 2002 shall be exempted from income tax.
If the unit trust is a money market fund, the exemption shall only apply to a wholesale fund which complies with the relevant guidelines of the SC.
Amendment to exemption of interest income from Sukuk
Presently, Schedule 6 Paragraph 33B of the Income Tax Act 1967 provides income tax exemption for interest paid or credited to any person in respect of sukuk originating from Malaysia, other than convertible loan stock:
issued in any currency other than Ringgit Malaysia; and
approved or authorized by, or lodges with the SC, or approved by the Labuan Financial Services Authority.
Under the proposed legislation with effective year of assessment 2017 onwards, the above tax exemption shall not apply to:
interest paid or credited to a company in the same group; and
interest paid or credited to:
a bank licensed under the Financial Services Act 2013;
an Islamic bank licensed under the IFSA 2013; or
a development financial institution prescribed under the DFIA 2002.
This will be effective for the year of assessment 2017 onwards.
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