MAYER BROWN JSM | 1 Asia Tax Bulletin Spring 2018 Americas | Asia | Europe | Middle East www.mayerbrownjsm.com 2 | Asia Tax Bulletin MAYER BROWN JSM | 3 This Edition Pieter de Ridder Partner, Mayer Brown LLP +65 6327 0250 | [email protected] We are pleased to present the spring 2018 edition of our firm’s Asia Tax Bulletin and hope that you will find it useful and interesting. A new spring and a changing tax world. This Spring edition of the Bulletin features a host of important developments. India, Hong Kong, Malaysia and Singapore each issued their budgets for 2018 with tax proposals aimed at capturing the e-commerce business. India proposes to do so by deeming foreign e-commerce businesses to have a permanent establishment if they do business with customers in the country. Taiwan and Thailand are also proposing new tax provisions in this area. China came out with a new public notice about Beneficial Ownership, replacing the previous one, which came out in 2009. Hong Kong and Thailand are going to introduce transfer pricing law in the course of 2018. The provisions will have retroactive effect to the start of this year. Singapore changed its transfer pricing guidelines by including a penalty if taxpayers fail to comply with the arm’s length principle when they have business dealings with related parties, regardless of whether the income is taxable in Singapore. Korea and the Philippines have enacted the tax reform proposals reported in the previous edition of this Bulletin. Indonesia changed its tax reporting obligations and has started the renegotiation of its tax treaty with Singapore. China has, besides reducing its value-added tax rates, issued a helpful circular about the interpretation of certain provisions in its tax treaties, and we would like to draw your attention especially to the comments made in relation to the permanent establishment provision. Hong Kong has relaxed the tax deductibility rules for intellectual property rights purchases and has introduced a lower, step-up, profits tax rate, matching Singapore’s step-up rate of 8.3%. We trust that you will find it useful to read about these developments and look forward to hearing from you if you have any questions or require assistance with any of these tax changes. With kind regards, Pieter de Ridder 4 | Asia Tax Bulletin MAYER BROWN JSM | 5 Contents THAILAND 41 VAT on foreign e-commerce operators 42 Withholding tax on gains from digital assets 42 Tax incentive for angel investors 42 Deductions for events conducted at ‘second-tier’ tourism provinces 42 Draft Transfer Pricing Act 43 International tax developments VIETNAM 44 VAT 44 VAT refunds 45 Tax deductibility of life insurance premiums/ retirement funds MALAYSIA 28 Budget 2018 28 Disposal of plant or machinery controlled sales 28 CbC reporting regulations for Labuan entities gazetted 29 Practice note on tax treatment of digital advertising provided by non-resident PHILIPPINES 30 Tax Reform Bill 31 Increase in stock transfer tax SINGAPORE 32 Brazilian blacklist of tax havens 32 Budget for 2018 36 Transfer pricing 37 Goods and services tax – late submission penalty 37 Venture capital managers 37 International tax developments TAIWAN 38 Transfer pricing 38 Decree on taxation of electronic services provided by foreign enterprises 40 Tax treatment of repurchase or sell-buy-back transactions 40 International tax developments CHINA 6 Foreign tax credit 6 Beneficial ownership under tax treaties 8 Tax changes expected 8 Tax treatment of crude oil futures and other futures clarified 8 Implementation of treaty provisions clarified 10 Non-profit organisations 11 Deed tax exemption for reorganisation or business restructuring 11 VAT changes 12 International tax developments HONG KONG 13 Two-tiered profits tax rates regime to be introduced 13 Transfer pricing legislation to be introduced 14 New requirements for companies to keep significant controllers registers 15 Budget 2018 17 Amendment ordinance on ad valorem stamp duty gazetted 17 IP rights 17 International tax developments INDIA 18 Budget for 2018/2019 20 CBDT notification cannot override treaty provisions 21 Proposed taxation of long-term capital gains 21 New direct tax law to be drafted 21 International tax developments INDONESIA 22 Transfer pricing – CbC reporting 23 Tax reporting obligations changed 23 International tax developments JAPAN 24 International tax developments KOREA 25 2018 Tax Reform 26 Individual income tax 27 Foreign financial accounts reporting 27 International tax developments Key: Jurisdiction (Click to navigate) 6 | Asia Tax Bulletin MAYER BROWN JSM | 7 China (PRC) Foreign tax credit On 28 December 2017, the Ministry of Finance (MoF) and the State Administration of Taxation (SAT) jointly issued Circular  No.84 (the Circular) regarding rules on foreign tax credit. The Circular retroactively applies from 1 January 2017. The main details are summarised below: • Article 3 (Transparent Entities): The PRC reserves the right for the entirety of Article 3 not to apply to its Covered Tax Agreements. • Under the tax credit system of China, the deduction allowed is restricted to the amount of Chinese income tax payable on the foreign income. According to the Circular, in determining the foreign income for tax credit purposes, enterprises may elect to calculate foreign income per tax jurisdiction (per jurisdiction and not per item of income) or to calculate foreign income on the basis of the total of foreign income (aggregation of all kinds of foreign income from all the jurisdictions). As a result, the Circular offers enterprises, in addition to the current calculation per jurisdiction but not per item of income, also the choice to adopt the “overall credit” system. Once the election is made, it may not be altered for five years; • Further, the Circular clarifies that any unused foreign tax credits from previous years calculated according to Circular  No. 125, may be carried forward for five years; • Under this Circular, the indirect tax credit may be claimed up to the fifth tier of foreign subsidiaries (previously three tiers) if the resident enterprise has a direct or indirect shareholding of at least 20% in the foreign subsidiaries (up to the fifth tier); • For other matters related to foreign tax credit, the previous Circular  No. 125 remains applicable. Beneficial ownership under tax treaties China’s State Administration of Taxation on February 3 released Public Notice 9, providing new beneficial ownership rules to determine foreign taxpayers’ eligibility for treaty benefits on Chinese-source dividends, interest income, and royalty income. The notice replaces the Circular 601/2009 and adopts the results of action six of the OECD’s base erosion and profit-shifting project and looks for substantial business activity and ownership. The key points are summarised below: • Article 3 (Transparent Entities): The PRC reserves the right for the entirety of Article 3 not to apply to its Covered Tax Agreements. • ‘Beneficial ownership’ must be determined on the basis of factors and factual circumstances. However, the following factors may generally have an adverse effect in determining beneficial ownership status: o The recipient has the obligation to pass on more than 50% of the received payments to a resident of a third country (or region) within 12 months. ‘Obligation’ means contractual obligation and de facto obligation; o Activities conducted by the recipient do not constitute substantial business activities. Substantial business activities include substantial manufacture, sales and management activities. Substance must be determined by reference to functions performed and risks assumed. As an example, equity holding activity could be regarded as a substantial business activity; o The income of the recipient is not subject to tax, is exempt from tax or is taxed at a very low effective tax rate in the jurisdiction in which the recipient resides; o In addition to the loan agreement from which the interest income is derived, there is (are) other similar (in terms of amount, interest rate and time) loan or deposit agreement(s) with a third party; o In addition to the contracts on copyright, patent and know-how where royalties arise, there is (are) other contracts on copyright, patents and knowhow with a third party. • The following recipients are considered to be the ‘beneficial owner’ without a test required (safe harbour rules): o The government of the recipient’s country jurisdiction; o A resident company listed in the recipient’s jurisdiction; o An individual resident of the recipient’s country; and o A direct or indirect 100% owned subsidiary of the above mentioned (in the case of indirect shareholding, the intermediate company must be a resident of China or the recipient’s jurisdiction). • Additionally, if a recipient of dividend income is not a qualified beneficial owner, but its direct or indirect 100% owned shareholder (a 100% shareholding is required at any time within a 12-month period) is a qualified beneficial owner, the recipient will still be able to receive the beneficial owner status if: o The qualified shareholder is a resident of the recipient’s jurisdiction; or o in the case of an indirect shareholding, both that shareholder and the intermediate holding company must satisfy the conditions for beneficial owner as described in the Notice; - according to the Notice, agents and nominees are not beneficial owners. The fact that an agent receiving and passing on the payments may be a resident of the recipient’s jurisdiction will not play a role in determining the beneficial owner status. • The Notice further clarifies that the following are not pass-through transactions: o Shareholders who receive dividends based on shareholding; o Creditors who receive interest on loans; and o Licensors who receive royalties on intellectual properties. • The principal purpose test (PPT) and general antiavoidance rules may apply even though a recipient is the beneficial owner. • In determining whether any adverse factors are present, the tax authority will make its analysis on the basis of documents (depending on the type of income), such as articles of association, financial reports, cash-flow statements, minutes and resolutions of board meetings, allocation of goods and resources, expenditures, functions and risks, loan contracts, contracts on granting rights of intellectual properties, registration certificate of patents, certificates of asset ownership and so on. In determining the pass-through payments, agency agreements or agreements on the appointment of a recipient must be examined. The taxpayer who enjoys treaty benefits must also provide the tax authority with a certificate of residence. The certificates of JURISDICTION: The income derived by foreign individual investors from Chinese crude oil futures transactions is exempt from individual income tax for the next three years.” “ 8 | Asia Tax Bulletin MAYER BROWN JSM | 9 establishment, shipping and air transport income, entertainers and sportspersons, and the application of tax treaties to partnerships. The Notice applies from 1 April 2018. Some of the key points are: Permanent establishment • Unincorporated Sino-foreign educational institutes, or sites used for Sino-foreign educational projects constitute a permanent establishment of the foreign partner in China; • The statement “for a period or periods aggregating more than six months within any twelve-month period” as referred to in the relevant provision on (service) permanent establishment must be construed and implemented as meaning “for a period or periods aggregating more than 183 days within any twelvemonth period”. Shipping and air transport • If a provision on shipping and aircraft transport fully corresponds to the provision on shipping and air transport under the tax treaty between China and Singapore, the application of such provisions must observe the following rules: o Income of an enterprise of a contracting state from the operation of ships or aircraft in international traffic will be taxable only in that state. Income from international transport includes income from voyage charter or time charter of ships, or wet lease of aircraft; o The same rule also applies to income derived by a pool, joint business or participation in an international operating agency. The participant or partner enterprise will be taxed in their respective residence state; o The provision on interest does not apply to interest derived by an enterprise of a contracting state from its deposits of funds incidental to and connected with its operations of ships or aircraft in international traffic and such interest must be regarded as profits derived from the operation of such ships or aircraft and not taxed in the source state; and residence for direct or indirect 100% shareholders or an intermediate company will also be required. • This Notice takes effect from 1 April 2018 and the previous Notices on beneficial owners, i.e. SAT Letter  No. 601 and SAT Public Notice  No. 30 will be abolished. Tax changes expected At the closing of the annual National People’s Congress, the government presented the plan to reorganise government bodies. As for the tax department, the State Administration of Taxation (SAT) remains the government body that is directly subordinated to the State Council (Chinese Cabinet) and the merger of state tax bureaus and local tax bureaus under the provincial level was put on the agenda. The dual existence and parallel operation of state tax bureaus and local tax bureaus have caused a lot of issues over the years. One of the main issues is the overlapping of the authorities from both tax bureaus, where they had authority over the same tax issues for the taxpayer, but having different views and interpretations of the laws and regulations. Taxpayers had to deal with both authorities, provide information, and go through the administrative procedures separately for both authorities. As a result, the taxpayers faced a high level of compliance costs and the national tax policy was not always implemented consistently. With the coming merger, the government hopes to mitigate such problems. In response to the US tax reform and in order to boost the Chinese economy, debate was held on the following: • To cut taxes for the manufacturing and transportation sectors; • To reduce the different types of value added tax (VAT) rates; • To raise the personal monthly standard deduction; and • To introduce, in addition to the existing credit method, the exemption method for certain foreign income earned by Chinese multinationals. It is expected that the Ministry of Finance and the SAT will come up with more concrete plans in the course of the year and issue the relevant notices to implement wholly or part of the proposed changes announced. Tax treatment of crude oil futures and other futures clarified On 13 March 2018, the Ministry of Finance (MoF), the State Administration of Taxation (SAT) and the Securities Regulatory Commission jointly issued a circular (Circular  No.21) clarifying the tax treatment of crude oil futures. The Circular applies from the date on which the Circular is issued. According to the Circular, foreign institutional investors (including foreign trading intermediaries) are temporarily exempt from enterprise income tax on the income derived from crude oil futures transactions in China if they do not have an establishment or site in China; or they have an establishment or site in China, but the income derived is not connected with such establishment or site. The Circular also clarified that the commissions received by foreign trading intermediaries from foreign investors for the trading in Chinese crude oil futures are not income sourced in China and therefore not subject to enterprise income tax. Moreover, the income derived by foreign individual investors from Chinese crude oil futures transactions is exempt from individual income tax for the next three years. At last, the Circular states that the exemption and its conditions equally apply to other commodities futures approved by the State Council. Implementation of treaty provisions clarified On 9 February 2018, the State Administration of Taxation (SAT) issued a public notice (SAT Public Notice  No. 11) clarifying several issues concerning the implementation of tax treaty provisions on permanent China (PRC) cont’d JURISDICTION: o Generally, rental income from the rental on a bareboat basis of ships or wet lease of aircraft or the use, maintenance or rental of containers (including trailers and related equipment for the transport of containers) does not fall within the scope of the shipping and air transport income. However, if such income is incidental to the operation of ships or aircraft in international traffic, it will be regarded as income from shipping and air transport. This rule also applies to tax treaties which do not contain the paragraph dealing with the income from incidental activity. • The term ‘incidental’ means supporting or auxiliary in nature and must satisfy the following conditions: o The core business of the enterprise is international transport; o The incidental activity contributes to a little extent, but is closely connected to the core business and cannot be regarded as independent business activity or source of income; and o The revenue from the auxiliary activity does not, in principle, exceed 10% of the total revenue of international transport within an accounting year. • The following income that is closely connected with international transport must be regarded as parts of income from international transport: o Sales of tickets on behalf of other international transport enterprises; o Income from passenger transport from city centre to airport; o Income from cargo transport from warehouse to airport or docks or customers; and o Income from hotel for transit passengers. • Income from international transport includes income derived from international transport using ships and aircraft from enterprises not exclusively engaged in international transport business. Entertainers and sportspersons • If a provision on entertainers and sportspersons corresponds to the provision on entertainers and sportspersons under the tax treaty between China and Singapore, the following rules will apply: o The activities of entertainers include stage art performances in film and television, and in music. They also include other activities conducted by 10 | Asia Tax Bulletin MAYER BROWN JSM | 11 China (PRC) cont’d JURISDICTION: entertainers or sportspersons in their capacity as artists or sportspersons in a film, television commercial, at an annual party or opening ceremony of an enterprise, political, social, religious or charitable activities with entertaining characters. However, the delivery of a speech (with the exception of the speech of an entertaining nature at a commercial event) or activities conducted as a management member or facility worker (for example as a photographer, producer or director, choreographer or technician) are excluded from the scope of the activities covered by the treaty provision on entertainers and sportspersons. The activities of a sportsperson include participation in a digital game; o Gains from the sale of audio or video products of the performance or other copyright are subject to the provision on royalties. • In cases in which the income is wholly or partially received by a nominee or agent, the tax authority may make an assessment and tax, as the case may be, the entertainer, nominee or agent without restrictions by provisions on independent services or employment income. Application of the tax treaty to partnerships • A foreign partner of a partnership established under Chinese law may receive treaty benefits in China if his/ her income is taxable in China and recognised by his/ her residence state; • A partnership is a non-resident taxpayer if it is established under foreign law that its place of effective management is not in China, or that it does not have a place or site in China, but derives income from China. Unless the tax treaty provides otherwise, the Chinese taxable income of the partnership may only enjoy treaty benefits if the partnership is a resident of the contracting state. The partnership must provide evidence that it is subject to tax in its residence state according to the laws of the contracting state on the grounds of residence, domicile, place of incorporation, place of effective management or other criteria; • ‘The tax treaty provides otherwise’ refers to the situation where the partnership is treated by the contracting state as a transparent entity and the income of the partnership is attributed to its partners. In that case, the partners who are residents of the contracting state may receive treaty benefits in respect of the income attributed to them. Others • The Notice also applies to the tax arrangements with Hong Kong and Macao. With the publication of this Notice, articles 8 and 17 of Circular  No. 75 on the Interpretation of Articles and Protocol of the Tax Treaty between China and Singapore will be abolished. Non-profit organisations On 7 February 2018, the Ministry of Finance (MoF) and the State Administration of Taxation (SAT) jointly issued a circular announcing the new administrative rules regarding non-profit organisations (Circular  No. 13). The rules retroactively apply as from 1 January 2018 and supersede the previous Circular  No. 13. According to the Circular, a non-profit organisation will qualify for tax exemption if it satisfies the following conditions: • It must be established and registered according to the Chinese laws and regulations and recognised as such by the MoF and SAT; • It must conduct activities for public interest or nonprofit activities; • All the funds obtained, except for reasonable expenditures of the organisation, must be used for non-profit activities or activities for public interest; • Assets and gains accrued to the assets will not be distributed with the exception to reasonable payments for wages or salaries; • The remaining property or assets of the non-profit organisation that is wound up and deregistered must be used for non-profit activities or activities for public interest; • The incorporator (legal person, individual or other organisation) of the organisation does not retain or have any proprietary rights of the funds or assets bought in the organisation; • The level of salaries and benefits of the employees must be no higher than twice the average of the local average salaries and wages; and • The taxable income and tax-exempt income and their associated costs, expenses and losses must be calculated separately. Moreover, the applicant for the tax exemption is required to submit a set of documents including the application form, registration certificate, the statement of the source and expenditure of funds, and audit report of the immediate prior year financial statement. Once the tax exemption status is granted, the exemption will be valid for five years. After the expiration, a renewal is possible, subject to the application procedure. Deed tax exemption for reorganisation or business restructuring • An unincorporated business that changes its legal form and is converted into a limited liability company or a company limited by shares, or a limited liability company that is converted into a company limited by shares or vice versa. The investors (or shareholders) who inherit the rights and liabilities of the former entity must remain the same and at least 75% of the equity interest in the companies must be transferred to the new entity (proportions of investor’s investment may change); • More than 50% of a semi-government organisation is converted into a commercial entity; • Merger of two or more companies, where the main investors remain the same (proportions of investor’s investment may change); • Division into two or more companies; • Bankruptcy (subject to certain conditions); • Asset transfer between enterprises owned by the same investor including the asset transfer between a parent company and subsidiaries or companies wholly-owned by the same investors (including capital increase by a parent company to its wholly-owned subsidiary in the form of immovable property), or asset transfer under order by the government (from county level and above); • Conversion of debt to equity where immovable property is involved; and • Transfer of shares where the underlying assets include immovable properties that are not transferred. VAT changes Following the State Council meeting held on 28 March 2018, an announcement was issued that the VAT rates would be adjusted as follows with effect from 1 May 2018. Although the announcement did not clearly mention that all the sectors subject to 17% and 11% rates will be entitled to the newly reduced rates, i.e. 16% and 10% respectively, it is reasonable to anticipate the rate changes will be applicable to the following sectors while detailed implementation rules expected to be issued by the Ministry of Finance and the State Administration of Taxation shortly. The State Council announcement did not indicate there would be any change to the 6% VAT rate. Further, for the avoidance of any doubt, the State Council announcement did not specifically reference any changes to the 16% rate for the leasing of tangible movable property, nor did it specifically reference any change to the 10% rate for sale or leasing of immovable property. However, it would seem likely that these services would be similarly affected so as to avoid a multiplicity of rates in effect. Applies to: Current rate (%) New rate from 1 May 2018 (%) Sales of goods, importation of goods, leasing of tangible movable property; repair and processing services 17% 16% Transportation services, sales and leases of immovable property, basic telecommunications services, construction services, postal services, agricultural products and water and gas supplies 11% 10% 12 | Asia Tax Bulletin MAYER BROWN JSM | 13 International tax developments Jordan On 15 January 2018, China and Jordan signed an air transport agreement in Amman. Chile • On 18 January 2018, the Chilean tax administration published on its website, Administrative Jurisprudence 124/2018 explaining that payments made to a PRC resident for: (i) The use of intellectual property rights over a brand and the transfer of information that meets the characteristics of know-how; and (ii) The use of right to distribute a computer programme are covered by article 12 of the Chile - China Income Tax Treaty. Spain On 20 March 2018, the China - Spain Social Security Agreement and its administrative arrangement will enter into force. The agreement generally applies from 20 March 2018. China (PRC) cont’d JURISDICTION: Hong Kong JURISDICTION: The proposed two-tiered profits tax rates regime will benefit all eligible enterprises with assessable profits, irrespective of their size.” “ Two-tiered profits tax rates regime to be introduced On 29 December 2017, the Inland Revenue (Amendment) (No.7) Bill 2017 was gazetted by the government. The Amendment Bill seeks to implement a two-tiered profits tax rates regime as announced in the 2017 Policy Address. Under the proposed regime, the profits tax rate for the first HKD 2 million of profits of corporations will be reduced to 8.25%, while the standard profits tax rate of 16.5% will remain unchanged for profits beyond HKD 2 million. For unincorporated businesses, which mostly consist of partnerships and sole proprietorships, the two-tiered tax rates will be set at 7.5% and 15%, respectively. The proposed two-tiered profits tax rates regime will benefit all eligible enterprises with assessable profits, irrespective of their size. To ensure that the tax benefits are enjoyed by small and medium-sized enterprises (SMEs), restrictions will be introduced. The Amendment Bill was submitted to the Legislative Council on 10 January 2018. The proposed rate change seeks to copy Singapore’s system, almost to the dollar, and would remove the advantage Singapore offers for businesses with taxable profits of up to SGD 300,000. Transfer pricing legislation to be introduced The Inland Revenue (Amendment) (No. 6) Bill 2017 gazetted on 29 December 2017 (the Bill) introduces legislative provisions to codify transfer pricing regulatory regime and implement the four minimum standards of the Base Erosion and Profit Shifting (BEPS) package promulgated by the Organisation for Economic Co-operation and Development (OECD), i.e. imposing country-by-country (CbC) reporting requirements, improving the cross-border dispute resolution mechanism, countering harmful tax practices and preventing treaty abuse. 14 | Asia Tax Bulletin MAYER BROWN JSM | 15 Broadly and among other matters, the Bill: • Codifies transfer pricing rules, relief and provides for advance pricing arrangement (APA) regime to cater for unilateral, bilateral and multilateral APAs; • Introduces transfer pricing documentation requirements (i.e. master file, local file and CbC reporting) which are largely in line with the OECD’s transfer pricing guidelines; • Modifies mechanism of double taxation relief through tax credit; • Provides for mutual agreement procedure (MAP) and arbitration under double taxation arrangements (DTAs); and • Modifies certain Profits Tax concession regimes by removing ring fencing but introduces certain threshold requirement of substantive activities. The Bill was first read in the Legislative Council on 10 January 2018. If this draft of the Bill is passed, most of the provisions will generally take effect for years of assessment commencing 1 April 2018 or accounting period beginning on or after 1 April 2018 with the exception of CbC reporting requirements to apply to accounting period beginning on or after 1 January 2018. A new deeming provision is introduced to tax on a non-resident person who carries out the development, enhancement, maintenance, protection and exploitation (DEMPE) functions for an IP in Hong Kong owned by an overseas associate, on the basis that the value of contribution arises in or is derived from a trade, profession or business carried on in Hong Kong. The Bill also codifies the case law principles in Sharkey v Wernher 36 TC 275 to deem, in any appropriation from or into trading stock or any acquisition or disposal of trading stock other than in the course of trade at market value, the amount that the stock would have realised if sold in the open market at the time of appropriation or disposal to be the receipt or cost. The Bill contains provisions that allow taxpayers to apply for unilateral APA, in addition to bilateral and multilateral APA. Pre-agreement with the IRD (Inland Revenue Hong Kong cont’d JURISDICTION: Department) on whether an intercompany transaction is priced at arm’s length can only be applied under the APA regime. Advance pricing agreement will be excluded from the scope of advance rulings under Section 88A. The burden of proof is on the taxpayer to prove to the assessor’s satisfaction that the amount of income or loss in its Hong Kong tax return is the arm’s length amount. If the taxpayer fails to prove to the assessor’s satisfaction, the assessor is obliged to estimate an amount as the arm’s length amount. Non-compliance with the fundamental rule will be liable to an administrative penalty by way of additional tax not exceeding one time of the amount of tax undercharged. However, more severe penalty or criminal prosecution on blatant cases may be invoked in accordance with provisions of the Inland Revenue Ordinance (IRO). Omission of material information or provision of incorrect information in an APA application, or failure without reasonable excuse to notify the Commissioner of any breach of critical assumptions specified in the arrangement after an APA is made are subject to maximum penalty of HK$10,000 plus one time of the tax undercharged. Further, a maximum fine of HK$150,000 may apply to non-compliance with record keeping requirements in relation to an APA. Provisions relating to transfer pricing rules, relief and APA will apply to a year of assessment beginning on or after 1 April 2018. New requirements for companies to keep significant controllers registers In order to fulfil Hong Kong’s international obligations, the Companies Ordinance (Cap. 622) has been amended, requiring a company incorporated in Hong Kong to obtain and maintain up-to-date beneficial ownership information by way of keeping a Significant Controllers Register (SCR). The new requirements were introduced via the Companies (Amendment) Ordinance 2018 (the Amendment Ordinance) and entered into force on 1 March 2018. Application scope The requirement of keeping a SCR applies to all companies incorporated under the Companies Ordinance in Hong Kong, including companies limited by shares, companies limited by guarantee and unlimited companies. Companies with shares listed on the Hong Kong Stock Exchange are exempt from such requirement. An SCR is required to be kept in either the English or Chinese language, containing required particulars of its significant controllers (including registrable persons and/or registrable legal entities). The SCR should be kept at the company’s registered office or a prescribed place in Hong Kong. Conditions for significant control over a company A person has significant control over a company if one or more of the following five conditions are met: • The person holds, directly or indirectly, more than 25% of the issued shares in the company, or the person holds, directly or indirectly, a right to share in more than 25% of the capital or profits of the company; • The person holds, directly or indirectly, more than 25% of the voting rights of the company; • The person holds, directly or indirectly, the right to appoint or remove a majority of the board of directors of the company; • The person has the right to exercise, or actually exercises, significant influence or control over the company; and • The person has the right to exercise, or actually exercises, significant influence or control over the activities of a trust or firm that is not a legal person, but whose trustees or members satisfy any of the first four conditions (in their capacity as such) in relation to the company. Registration requirements If a registrable person of a qualifying company is a natural person, the particulars required for the SCR are as follows: • The person’s present first name and surname, former first name or surname (if any), and aliases (if any); • The person’s correspondence address; • The number of the person’s identity card, or the number and issuing country of a passport held by the person; • The date on which the person became a registrable person of the company; and • The nature of control over the company. If a registrable person of a qualifying company is a legal entity, the particulars to be contained in the SCR are as follows: • The entity’s name; • The registration number and address of its registered or principal office; • The entity’s legal form and the law that governs it; • The date on which the entity became a registrable legal entity of the company; and • The nature of control over the company. Budget 2018 The Budget for 2018/19 was presented to the Legislative Council on 28 February 2018. The tax-related proposals require legislative amendments before implementation. Once enacted, the amendments will apply from 1 April 2018. The Inland Revenue (Amendment) Bill 2018 (the Bill) was gazetted by the government on 9 March 2018. By amending the Inland Revenue Ordinance, the Bill seeks to implement the concessionary revenue measures proposed in the 2018-19 Budget. The Bill was introduced to the Legislative Council on 21 March 2018. Corporate taxation A one-off reduction of 75% of profits tax for the year of assessment (YA) 2017/18 is proposed. The reduction is capped at HKD 30,000, which is applied to each business. A qualifying debt instrument scheme is proposed to be amended as follows: • The types of qualifying instruments will be expanded to include debt securities listed on the Hong Kong Stock Exchange; and 16 | Asia Tax Bulletin MAYER BROWN JSM | 17 • The scope of the tax exemption for debt instruments will be widened from “debt instruments with an original maturity of not less than seven years” to “instruments of any duration”; • Tax concessions for capital expenditure incurred by enterprises in procuring eligible efficient building installations and renewable energy devices will be eligible for a 100% tax deduction in one year instead of five years. Personal taxation A one-off reduction of 75% of salaries tax and tax under personal assessment for YA 2017/18 is proposed, subject to a maximum of HKD 30,000. The Financial Secretary has proposed to widen the current tax bands from HKD 45,000 to HKD 50,000, commencing from YA 2018/19. The present and proposed tax bands and marginal tax rates are shown in the table below: Hong Kong cont’d JURISDICTION: The following allowances will be increased effective from YA 2018/19 onwards: A personal disability allowance of HKD 75,000 will be introduced for eligible taxpayers. The deduction ceiling for elderly residential care expenses will be increased from HKD 92,000 to HKD 100,000 from YA 2018/19. Currently, married couple who both have income chargeable to tax, election for personal assessment must be made jointly. The requirement for the election of personal assessment will be relaxed from YA 2018/19 by allowing married persons to elect personal assessment separately. A tax deduction of qualifying premium for eligible health insurance products under the Voluntary Health Insurance Scheme will be introduced. Following the passing of the relevant legislative amendments, the annual tax ceiling of premium for tax deduction will be HKD 8,000 per insured person. Present (YA 2017/18) Proposed (From YA 2018/19 onwards) Net chargable income (tax band) (HKD) Rate (%) Net chargable income (tax band) (HKD) Rate (%) On the first 45,000 2 On the first 45,000 2 Next 45,000 7 Next 50,000 6 Next 45,000 12 Next 50,000 10 Remainder 17 Next 50,000 14 Remainder 17 Child allowance Present (YA 2017/18) (HKD) Proposed (From YA 2018/19 onwards) (HKD) For each of the first to ninth child 100,000 120,000 Additional child allowance for each child born during YA 100,000 120,000 Not residing with taxpayer 23,000 25,000 Residing with taxpayer 46,000 50,000 Amendment ordinance on ad valorem stamp duty gazetted The Stamp Duty (Amendment) Ordinance 2018 (the 2018 Amendment Ordinance) was gazetted by the Inland Revenue Department on 19 January 2018. Under the 2018 Amendment Ordinance, ad valorem stamp duty (AVD) at Scale 1 is divided into Part 1 (a flat rate of 15%) and Part 2 (original Scale 1 rates under the 2014 [No. 2] Amendment Ordinance), which have been effective since 5 November 2016. Part 1 applies to instruments of residential property, while Part 2 applies to instruments of non-residential property. The 2018 Amendment Ordinance provides that any instruments of residential property executed, on or after 5 November 2016, for the sale and purchase or transfer of residential property, unless they are exempt or unless specifically provided otherwise, will be subject to AVD at the rate applicable under Part 1, i.e. a flat rate of 15% of the consideration or value of the residential property, whichever is higher. Under the 2018 Amendment Ordinance, Hong Kong permanent residents (HKPRs) disposing of their original property within 12 months (previously six months) after the date of conveyance of the new property acquired on or after 5 November 2016 will be allowed to claim partial refund of the AVD paid on acquisition of the new property. IP rights On 23 March 2018, Inland Revenue (Amendment) (No. 2) Bill 2018 was gazetted. By amending the Inland Revenue Ordinance, the Bill seeks to expand the scope of tax deductions for capital expenditure incurred for the purchase of intellectual property (IP) rights. The Bill will be introduced to the Legislative Council on 11 April 2018. Currently, the existing five types of IP rights that are eligible for profits tax deductions are: • Patents; • Know-how; • Copyrights; • Registered designs; and • Registered trademarks. Subject to the passage of the Bill by the Legislative Council, an additional three types of IP rights, including rights in layout design (topography) of integrated circuits, plant varieties and performances, will be included in the scope of profits tax deductions. International tax developments Ireland, UK and France According to an update of 15 January 2018, published by the Hong Kong Inland Revenue Department, a competent authority arrangement on the exchange of country-by-country (CbC) reports has been signed between Hong Kong and Ireland, the UK and France, respectively. India On 19 March 2018, the Hong Kong - India Income Tax Agreement was signed in Hong Kong. 18 | Asia Tax Bulletin MAYER BROWN JSM | 19 India JURISDICTION: Except for small and medium sized companies (SMEs), there is no change in the base tax rates for any category of taxpayer.” “ Budget for 2018/2019 The Indian Union Budget for the fiscal year 2018-19 was presented in the Lower House of Parliament on 1 February 2018. The key direct/indirect proposals are as follows: Corporate tax • Tax rates: o The concessional rate of tax for companies with turnover of less than INR 2.5 billion in FY 2016-17 – the 2018 Budget extends the 25% corporate tax rate to domestic companies with total turnover not exceeding INR 2.5 billion (approximately USD 40 million) for tax year 2016-17. Except for small and medium sized companies (SMEs), there is no change in the base tax rates for any category of taxpayer and the tax rates remain the same, viz. 30% for partnership firms and domestic companies (other than SMEs and manufacturing companies), and 40% for foreign companies. Currently, the Income-tax Act, 1961 (IT Act) provides for a levy of education cess on income tax as increased by applicable surcharge at the rate of 3%. The Bill proposes to increase the rate of cess to 4% and also change the nomenclature to “Health and Education Cess”. This proposal would lead to a higher effective tax rate. This amendment is proposed to be effective from FY 2018-19 onwards; o 100% deduction for companies registered as farmer produce companies, subject to certain conditions; o Transfer of immovable property - where variation between sale consideration and stamp duty value is 5% or less, no deemed income taxation in the hands of the transferor and transferee; o Incentive for employment generation - section 80JJAA - relaxation for leather and footwear sector on the period of service. Further deduction is allowed even if employees satisfy the minimum time period requirement over a two-year period; o Incentives to ‘start-ups’ on income from ‘eligible business’, subject to certain conditions; o Tax on distributed income at 10% for equityoriented mutual funds to be introduced; o Gains on listed shares to become taxable - currently, the Income Tax Act exempts long-term capital gains (LTCG) arising from the transfer of listed equity shares, or units of an equityoriented fund (EOF) or business trust (sold on the floor of a recognised stock exchange) so long as Securities Transaction Tax (STT) has been paid on such a transaction. The Bill proposes to tax LTCG in excess of INR one million (i.e. when the capital asset is held for a period of more than 12 months) arising to all investors including foreign portfolio investors from the transfer of listed equity shares or units of an EOF or business trust at the rate of 10%, provided that STT is paid (i) at the time of acquisition and transfer of equity shares; and (ii) at the time of transfer of EOF and business trust units. The tax base of the equity shares for purposes of computing the capital gain will be deemed to be the higher of (i) actual cost and (ii) fair market value (FMV) as on 31 January 2018; • Minimum Alternate Tax (MAT): o Currently, a domestic company is required to pay a MAT based on its book profits, where tax payable under normal provisions of the IT Act is less than MAT. In case of companies with past losses, book profit is to be computed after reducing, inter alia, the lower of brought forward loss and unabsorbed depreciation, as per the books of accounts. Thus, no amount is to be considered, if either business loss or depreciation is nil. This entails significant tax cost to companies, which have to write back substantial amounts payable to their creditors, pursuant to a corporate insolvency resolution process under the Insolvency and Bankruptcy Code, 2016 (IBC). In order to minimise the genuine hardship faced by loss-making companies against whom an application for corporate resolution process has been admitted by the National Company Law Tribunal (NCLT) under the IBC, the Bill proposes to allow the aggregate of brought forward loss and unabsorbed depreciation to be reduced for computation of book profit for MAT purposes. This is in line with the press release issued by the Government of India (Government) on 8 January 2018 (Press Release). While this relaxation provides much-needed relief and should bolster the revival process of companies, it was desirable to have a blanket exemption from MAT provisions for such companies. This is particularly important where the amount of loan write-off is far higher than the existing loss and is accounted for in the profit and loss statement. While the Bill is silent on the date of applicability of this amendment, the Memorandum, as well as the press release mention it to be effective from FY 2017-18 onwards; • Article 12 of the Multilateral Instrument (OECD) incorporated in domestic law. “Business connection” definition expanded to include “significant economic presence”; and • Revision of time limit for filing the country-by-country report (CbCR) by a parent or alternative reporting entity (ARE) resident in India. CbCR to be filed in India in the case that an overseas parent entity has no obligation to file CbCR and parent entity has not nominated are; • Deemed permanent establishment. The rise in e-commerce activities in India has led to the pressing need to amend tax laws to reinstate the equilibrium between brick and mortar and e-commerce players. With this objective in mind, the Bill proposes to introduce ‘significant economic presence’ into the definition of ‘business connection’, whereby income attributable to such presence shall be taxable in India. ‘Significant economic presence’ is defined to mean: (i) Any transaction in respect of any goods, services or property carried out by a non-resident in India, including provision of download of data or software in India if the aggregate of payments arising from such transactions during the relevant year exceeds the amount to be prescribed; or (ii) Systematic and continuous soliciting of its business activities or engaging in interaction with the number of users to be prescribed, in India through digital means. The Bill also states that transactions or activities undertaken by a nonresident shall constitute ‘significant economic 20 | Asia Tax Bulletin MAYER BROWN JSM | 21 India cont’d JURISDICTION: presence’ in India, irrespective of whether the non-resident has a residence or place of business in India or renders services in India. The threshold of the ‘revenue’ and the ‘users’ criteria under the ‘significant economic presence’ test will be specified further in consultation with interested parties. This proposal is in accordance with the recommendations of Action Plan 1 of the OECD’s BEPS Project. Existing tax treaties entered into by India would remain unaffected by this proposal and taxation of business profits of a foreign enterprise would continue to be governed by the provisions of the applicable DTAA, unless corresponding amendments are carried out to these tax treaties. This amendment is proposed to be effective from FY 2018-19 onwards. Personal tax • No changes in individual tax rates, salaried taxpayers are entitled to a standard deduction of INR 40,000 for transport reimbursements and medical allowances; • Senior citizens entitled to exemption of interest income up to INR 50,000, higher medi-claim allowance/critical illness allowance; and • Cess – increased from existing 3% to a consolidated 4% health and education Cess. Peak tax rate enhanced to 35.88% from 35.535%. Indirect tax • No GST-related amendments in the Budget; typically, decision on GST-related amendments will be taken by GST Council; • Scope of Customs Act expanded to include offences committed outside India; • Specific provision incorporated for exchange of information with other countries; • Social welfare surcharge (welfare Cess) levied at 10% on customs duty to finance education, health and social security measures; and • Changes in customs duty rates for certain products viz. perfumes, mobile phones, LCD/LED panels on television and petrol. The proposals are effective from Indian fiscal year 2018-19, unless otherwise specified therein. CBDT notification cannot override treaty provisions The Income Tax Appellate Tribunal (ITAT) gave its decision on 8 November 2017 in the case of Bank of India v. ITO (ITA No. 3082/Mum/2015) that rental income is governed by article 6 of the India – Kenya Income Tax Treaty (the tax treaty) and would not be taxable in India. Notification 91/2008 issued by the Central Board of Direct Taxes (CBDT) cannot override the tax treaty. An Indian public sector bank (the taxpayer), had a branch office in Kenya. During the relevant year, the taxpayer earned rental income from a property (house) located in Kenya. The taxpayer claimed that the rental income earned by the Kenyan branch was not taxable in India as per article 6 (income from immovable property) of the tax treaty. However, the tax authorities did not agree and applied Notification 91/2008 which states that where a tax treaty provides that any income of a resident of India may be taxed in the other country, such income shall be included in his total income chargeable to tax in India in accordance with the provisions of the Income Tax Act 1961 and relief shall be granted in accordance with the method for elimination or avoidance of double taxation provided in such tax treaty. It stated that the business income and rental income are from the same source of income and would be subject to article 7 (business income) of the tax treaty. The aggrieved taxpayer applied to the ITAT. The issue was whether the rental income from the Kenyan property is exempt from Indian tax as per article 6 of the tax treaty. The ITAT gave its decision in favour of the taxpayer i.e. the rental income from the Kenyan property would be taxable only in Kenya as per article 6 of the tax treaty. The ITAT held that the CBDT Notification 91/2008 would not override the tax treaty nor alter the nature of income included in a tax treaty already ratified by both its signatories. As the tax treaty contains separate articles for income from immovable property (article 6) and income from business activity (article 7), in the present case, the rental income is covered by article 6 of the tax treaty and accordingly, not taxable in India. Proposed taxation of long-term capital gains On 4 February 2018, the Central Board of Direct Taxes (CBDT) issued a set of Frequently Asked Questions (FAQs) that address the various queries raised since the introduction of a new tax regime for long term capital gains (LTCG) during the presentation of the Indian Union Budget for the fiscal year 2018-19 and in the Finance Bill 2018. Under this proposed new tax regime, gains arising from the transfer of long term capital assets, being equity shares of a listed company, a unit of an equityoriented fund or a unit of a business trust, exceeding INR 100,000, will be taxed at a concessional rate of 10%. Such LTCG are currently tax exempt. The FAQs clarify, inter alia, the meaning of LTCG under the proposed new tax regime and the method of calculating LTCG (with illustrations showing computations under the different scenarios provided). The FAQs also clarify that the tax will be levied only upon transfer of a long-term capital asset on or after 1 April 2018. New direct tax law to be drafted On 21 March 2018, the Central Board of Direct Taxes (CBDT) announced that a task force had been set up to review the Income Tax Act 1961 and draft a new direct tax law. The CBDT engaged with stakeholders and the general public for this task, inviting suggestions and feedback by 2 April 2018 at the latest. International tax developments Iran On 17 February 2018, India and Iran signed an income tax treaty in New Delhi. 22 | Asia Tax Bulletin MAYER BROWN JSM | 23 Indonesia JURISDICTION: The CbCR contains aggregate information on each entity in a business group, such as revenue, profit and taxes paid. ” “ Transfer pricing – CbC reporting1 The Minister of Finance issued Regulation No. 213/ PMK.03/2016 in December 2016 outlining transfer pricing documentation requirements. To provide further guidance, the Director General of Tax (DGT) issued Regulation No. 29/PJ/2017 on 29 December 2017 concerning procedures to manage the Country-byCountry Report (“CbCR”). The CbCR contains aggregate information on each entity in a business group, such as revenue, profit and taxes paid. The information contained in the CbCR is based on information available at the end of the tax year. A brief summary of those situations when an Indonesian taxpayer is required to submit a CbCR is provided in the following table. Tax reporting obligations changed With the aim of easing the taxpayers’ tax reporting obligations, the Minister of Finance (MoF) issued Regulation No.PMK9/PMK.03/2018 (PMK-9) on 26 January 2018 that amends MoF Regulation No.243/ PMK.03/2014 regarding tax returns. PMK-9 eliminates the following tax reporting obligations: • Submission of nil monthly Article 25 Income Tax returns; • Submission of nil monthly Article 21/26 Withholding Tax (WHT) returns, except for nil return: (1) in the December period; or (2) due to utilisation of tax treaty relief as supported by a Certificate of Domicile; • Submission of monthly Value-Added Tax (VAT) returns for VAT Collectors if there is no transaction subject to VAT and/or Luxury-goods Sales Tax collection during the period; • Submission of validated tax payment slip (Surat Setoran Pajak/SSP) on VAT due from ownconstruction activities; • Submission of validated SSP on self-assessed VAT due from the utilisation of offshore services and/or intangible goods; • Obligation to prepare tax returns in an electronic format (e-SPT or e-Faktur). Taxpayers that meet certain conditions must prepare the following monthly tax returns in an electronic format: • Monthly Article 21/26 WHT returns if the tax withholders fulfil these conditions: (i) Withhold Article 21/26 WHT from more than 20 employees and pension recipients in a tax period; (ii) issue more than 20 Article 21/26 WHT slips in a tax period from transactions other than those in point 1 above; and/or (iii) pay Article 21/26 WHT due using more than 20 SSPs in a tax period. • Monthly Article 23/26 WHT returns if the tax withholders fulfil these conditions: (i) Issue more than 20 Article 23/26 WHT slips in a tax period; and/or (ii) the amount of gross income as the tax imposition base in one WHT slip is more than IDR 100 million. • Monthly VAT returns for all VAT-able entrepreneurs and VAT collectors. • Any monthly tax returns for taxpayers that have submitted monthly tax returns in an electronic format or are registered under Large Taxpayer Tax Offices, such as Jakarta Khusus Tax Offices or Madya Tax Offices. The above taxpayers must also prepare annual income tax returns in an electronic format. Obligation to submit tax returns using dedicated electronic channels (e-Filing). This e-Filing obligation starts from monthly tax returns submitted in April 2018. Taxpayers must submit the following monthly tax returns through e-Filing if they are obliged to prepare the tax returns in an electronic format: • Monthly Article 21/26 WHT returns; and • Monthly VAT returns. International tax developments Singapore Following a meeting between officials from Indonesia and Singapore held in Jakarta on 14 February 2018, negotiations to revise the Indonesia - Singapore Income Tax Treaty (1990) and an Investment Protection Agreement are ongoing. Status Criteria Timing for CbCR submission Indonesian taxpayer is Parent Entity of the Business Group At least IDR 11 trillion in gross turnover 12 months after end of FY Indonesian taxpayer is Constituent Entity; Parent Entity* is a foreign taxpayer Country where the Parent Entity is domiciled: - Doesn’t require CbCR - Has no QCAA with Indonesia 12 months after end of FY of Parent Entity Has QCAA, but CbCR cannot be obtained Within three months after announcement of countries from which a CbCR cannot be obtained 1 Courtesy Harsono Strategic Consulting. 24 | Asia Tax Bulletin MAYER BROWN JSM | 25 Japan JURISDICTION: The new free trade agreement CPTPP incorporates, by reference, the provisions of the Trans-Pacific Partnership (TPP) agreement.” “ International tax developments Iceland On 15 January 2018, Japan signed a tax treaty with Iceland. Comprehensive and Progressive Agreement for Trans-Pacific Partnership signed On 8 March 2017, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) was signed in Santiago. The signatories of the CPTPP are Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. The TransPacific Partnership (TPP) was originally signed on 4 February 2016 by 12 parties (the 11 CPTPP signatories, plus the United States). On 30 January 2017, the United States notified TPP signatories of its intention to not ratify the TPP, effectively withdrawing from the TPP. The new free trade agreement CPTPP incorporates, by reference, the provisions of the Trans-Pacific Partnership (TPP) agreement, with the exception of a number of provisions pertaining mainly to intellectual property and investor-state dispute settlement, whose application will be suspended once the CPTPP comes into force. These provisions will be suspended until all the parties decide otherwise. 2018 Tax Reform On 19 December 2017, Korea enacted the 2018 tax reform bill (the 2018 Tax Reform) after it was passed by Korea’s National Assembly on 5 December 2017. The 2018 Tax Reform also includes provisions in line with the Organisation for Economic Co-operation and Development’s Base Erosion and Profit Shifting (BEPS) Action 2 (Neutralising the effects of Hybrid Mismatch Arrangements) and Action 4 (Limiting Base Erosion Involving Interest Deductions and Other Financial Payments), among others. The 2018 Tax Reform has generally become effective for fiscal years beginning on or after 1 January 2018. The 2018 Tax Reform adds a new 25% corporate income tax bracket for taxable income in excess of KRW300 billion (US$270 million): Accumulated Earnings Tax (AET) Effective for fiscal years beginning on or after 1 January 2015, certain corporations have been subject to AET that is due to expire as of 31 December 2017. Under the 2018 Tax Reform, certain corporations will be subject to a revised AET regime effective for fiscal years beginning on or after 1 January 2018 with a sunset clause due to expire as of 31 December 2020. Major changes in the revised AET include: (i) The tax rate applied on accumulated earnings is increased from 11% to 22% (inclusive of local income tax); and (ii) dividends, unlike in the previous provision, would no longer be used to decrease accumulated earnings. The following chart summarises the changes. Korea JURISDICTION: A tax-free merger or demerger may become taxable if certain events are triggered within two years from the end of the fiscal year.” “ Taxable income Current corporate income tax rate* (%) Amended corporate income tax rate (%) Over KRW20 billion (US$17.7 million) and up to KRW 300 billion 22 22 Over KRW300 billion 22% 25% 26 | Asia Tax Bulletin MAYER BROWN JSM | 27 Korea cont’d JURISDICTION: Under the current law, a merger or demerger would be treated as tax-free if certain requirements, such as business purpose, continuity of interest and continuity of business, are met. The 2018 Tax Reform imposes the continuity of employment requirement as an additional condition for the tax-free treatment of merger or demerger. Under the new requirement, 80% or more employees of the transferred business must continue to be employed by the surviving entity/spun-off entity until the end of the fiscal year during which the merger or demerger is registered. However, a tax-free merger or demerger may become taxable if certain events are triggered within two years from the end of the fiscal year during which the merger or demerger registration occurs. The triggering events include discontinuity of interest and discontinuity of business. The 2018 Tax Reform adds discontinuity of employment as a new triggering event. To maintain a tax-free merger, the total number of employees of the surviving entity must be 80% or more of the combined total number of employees of both entities. Similarly, to maintain a tax-free demerger, the total number of spun-off entity’ employees must be 80% or more of the total number of those of pre-demerger spun-off business. Under the current tax law, taxpayers failing to file a Combined Report of International Transactions (CRIT) or found to file false information are subject to penalties of KRW10 million (US$9,000) per documentation. Pursuant to the 2018 Tax Reform, the penalties would be increased to KRW30 million (US$27,000) per documentation. The amended law will be effective for non-compliance of transfer pricing documentation requirement from the date on which amended law is enacted. As a commitment to implement the hybrid mismatch rules recommended by the BEPS Action 2, the 2018 Tax Reform introduces a limitation on deductible expenses relating to hybrid mismatch arrangements. The proposed rule will apply to cross-border hybrid financial instrument transactions between a domestic corporation (including the Korean branch of a foreign corporation) and its foreign related party. If a payment associated with a hybrid financial instrument remains wholly or partially non-taxable in the counterparty jurisdiction until the close of the recipient’s fiscal year beginning within 12 months following the close of the payor’s fiscal year in which the deduction is claimed, the non-taxable portion of the payment would not be deductible for the fiscal year in which the payment is made. A claw-back provision applies when the payor deducts the non-taxable portion of the payment for the fiscal year in which the payment is made. The amended law will be effective for fiscal years beginning on or after 1 January 2018. Committing to implement the interest expense deduction limitation rules recommended by BEPS Action 4, the deductibility of interest payments made to foreign related parties will be limited. The new rule will apply to a domestic corporation (including the branch of a foreign corporation), other than financial institutions and insurance agencies, with foreign related party transactions. A domestic corporation would be able to deduct net interest expense up to 30% of the domestic corporation’s adjusted taxable income. The domestic corporation must use the method that results in a larger disallowance of interest expense deduction computed either under the new interest expense limitation rule or the existing 2:1 debt-to-equity safe harbour rules. The new rule will be effective for fiscal years beginning on or after 1 January 2019. Individual income tax User Korean entities are required to act as the income tax withholder when paying compensation to a hiring foreign entity for services rendered in Korea by foreign employees under a dispatch agreement (e.g. service fees). The withholding tax rate will increase from 17% to 19% on the amount of compensation paid to hiring foreign entities. Effective for payments made on or after July 1, 2018, the changes expand the scope of user Korean entities who are required to act as withholding agents on compensation paid to hiring foreign entities in two key ways: • The threshold on the annual sum amount of compensation paid by user Korean entities reduced to KRW 2b; • Businesses liable to the withholding now include those engaged in the ship/ floating structure building industry and financial industry. These are in addition to the previously announced requirements for air transportation, construction, or specialised, scientific or technical service businesses. Foreign financial accounts reporting Foreign financial accounts reporting requirement has tightened, with a reduction in the reporting threshold amount from KRW 1 billion (U$920,000) to KRW 500 million (U$460,000). Korean residents and entities are obligated to report foreign financial accounts that exceed the stated threshold by the end of June of the year following the respective year. The amendments have reduced this threshold to KRW 500 million. The amendment will apply to foreign financial accounts owned during financial years from 2018 and applicable for foreign financial accounts reporting to be filed in 2019 and thereafter. The obligation to submit documents on overseas corporations/subsidiaries, real estates, etc. has been removed for foreigners who are non-permanent residents. The administrative fines imposed for failure to comply with this obligation have increased to a maximum of KRW 50 million (U$46,000) and changed to impose penalties for each instance of non-compliance for both residents and domestic entities. International tax developments Czech Republic On 12 January 2018, the Czech Republic - Korea Income Tax Treaty (2018) was signed. Brazil On 10 January 2018, the amending protocol, signed on 24 April 2015, to the Brazil - Korea Income Tax Treaty (1989) entered into force. The protocol generally applies from 10 January 2018. 28 | Asia Tax Bulletin MAYER BROWN JSM | 29 Malaysia JURISDICTION: The withholding tax only applies where the non-resident does not have a permanent establishment.” “ Budget 2018 On 29 December 2017, the Finance (No. 2) Act 2017 was enacted to incorporate the 2018 Budget proposals into the relevant legislation (see the previous edition of this bulletin for details about the proposals). The Act amends provisions in the Income Tax Act 1967, Real Property Gains Tax Act 1976, Goods and Services Tax Act 2014 and the Finance Act 2013. The following amending acts were also enacted on the same date: • Income Tax (Amendment) Act 2017; and • Labuan Business Activity Tax (Amendment) (No. 2) Act 2017. Disposal of plant or machinery controlled sales On 26 February 2018, the Inland Revenue Board of Malaysia (IRBM) issued Public Ruling (PR) No. 1/2018 – Disposal of Plant or Machinery Part 2 - Controlled Sales. This follows PR No. 7/2017 – Disposal of Plant or Machinery Part 1 - Other than Controlled Sales, that was issued by the IRBM on 12 December 2017. PR No. 1/2018 reiterates the current tax treatment of the disposal and acquisition of an asset between two parties that are related in terms of control, and provides various examples. CbC reporting regulations for Labuan entities gazetted On 16 May 2017, the Malaysian Inland Revenue Board (MIRB) published a media statement, dated 17 April 2017, stating that a 100% penalty will be implemented with effect from 1 January 2018. The proposed increased penalty is aimed at encouraging voluntary compliance among taxpayers by targeting hardcore tax defaulters. On 26 December 2017, the Labuan Business Activity Tax (country-by-country reporting) Regulations 2017 setting out the guidelines for country-by-country (CbC) reporting by Labuan entities were gazetted. Below are some of the key points: • A CbC report must be filed by a Multinational Enterprise (MNE) with total consolidated group revenue in the financial year preceding the reporting financial year of at least MYR 3 billion and with its ultimate holding entity or its constituent entities being Labuan entities carrying on a Labuan business activity. The following details must be included in the CbC report: o Revenue; o Profit or loss before income tax; o Income tax paid; o Income tax accrued; o Stated capital; o Accumulated earnings; o Number of employees; o Tangible assets other than cash or cash equivalents; and o Details of each constituent entity of the MNE group (i.e. the entity’s tax residency, the jurisdiction in which it was incorporated and the nature of the main business activity). • The reporting entity is required to file its CbC report not later than 12 months after the last day of the reporting financial year; • Failure to file the CbC report or to notify the tax authority on the status of the CbC report before the stipulated deadline will result in a fine not exceeding MYR 2 million or imprisonment for up to two years, or both; • The Regulations are deemed to be effective from the year of assessment 2015 and are available on the Federal Gazette’s website. Practice note on tax treatment of digital advertising provided by non-resident On 16 March 2018, the Inland Revenue Board of Malaysia (IRBM) issued Practice Note 1/2018 (the Practice Note) clarifying the tax treatment of digital advertising provided by a non-resident. Payments made to a non-resident in relation to digital advertising will be subject to a withholding tax in either one of two categories: • Under section 109 of the Income Tax Act 1967 (the Act), if the payment is a royalty in nature; or • Under section 109B of the Act if the payment is received as a provision of services by the non-resident, which falls within the ambit of section 4A(ii) of the Act. The Practice Note also clarifies the criteria that would determine which withholding tax applies: • Section 109 withholding tax if the payment is for the purchase or use of an application that allows the payer to create their own advertisement campaign; or • Section 109B withholding tax if the payment does not involve the purchase of use of an application but merely the provision of services by the non-resident, and the payer relies solely on the service provider to deal with all aspect of the digital advertising. The withholding tax only applies where the non-resident does not have a permanent establishment (PE) or business presence in Malaysia. Where the non-resident has a PE or a business presence in Malaysia, such payments will be treated as business income. 30 | Asia Tax Bulletin MAYER BROWN JSM | 31 Philippines JURISDICTION: Tax Reform Bill On 19 December 2017, the President signed into law the first package of the Tax Reform for Acceleration and Inclusion (TRAIN) Bill or Republic Act No. 10963. The provisions in the Act are effective from 1 January 2018. The bill was first presented to Congress on 29 September 2016. Since then, the package has gone through numerous changes with the House of Representative’s version and the Senate’s version. The bicameral version was finalised on 13 December 2017 and signed by the President. Below are the main points summarised: Personal income tax • Individuals earning less than PHP 250,000 are exempted from tax from the year of assessment 2018 onwards. • A top rate of 35% applies for chargeable income of over PHP 8 million. • The 13th month pay and benefits tax exemption is increased to PHP 90,000. • Winnings from the Philippines Charity Sweepstakes Office and lotto are subject to 20% final tax. • Interest income from depository banks under the expanded foreign currency deposit system are subject to 15% final tax. • Capital gains from the sale of shares not traded in the local stock exchange are taxed at a flat rate of 15%. Value added tax • The VAT registration threshold is increased from PHP 1.9 million to PHP 3 million. • Self-employed and/or professionals who do not exceed the PHP 3 million VAT threshold may opt to be taxed at 8% on their gross sales or receipts in excess of PHP 250,000 in lieu of graduated rates and percentage tax or to be taxed at the personal income tax rates. • Retention of VAT exemption for the following items/ individuals/sectors: o Raw food; o Agricultural products; o Healthcare and education; o Business process outsourcing in special economic zones; o Persons with disabilities; Interest income from depository banks under the expanded foreign currency deposit system are subject to 15% final tax.” “ o Senior citizens; o Raw food; o Co-operatives; o Socialised housing (PHP 450,000 and below); o Low cost housing up to PHP 3 million; o Renewable energy; o Tourism enterprise; o Leases below PHP 15,000 per month; and o Condominium association dues. • The VAT threshold is increased from PHP 1,919,500 to PHP 3 million. Other taxes • Estate tax is fixed at a flat rate of 6%. • Donor’s tax is fixed at 6% on total gifts in excess of PHP 250,000 regardless of whether the donee is a stranger. • Excise tax on automobiles is revised as follows: • Hybrid vehicles are subject to 50% of the applicable rate. Electric vehicles and pick-ups are exempt from vehicle excise tax. • A new tax is introduced for sweetened beverages as follows: Vehicle price (PHP) Excise tax rate (%) Up to 6,00,000 4 600,001 - 1,000,000 10 1,000,001 - 4,000,000 20 Over 4,000,001 50 Beverage type Rate per litre (PHP) Using purely caloric, non-caloric sweetener, or both 6 Using purely high-fructose corn syrup or in combination with any caloric or noncaloric sweetener 12 Using purely coconut sap sugar or steviol glycosides exempt All milk products, fruit juices, vegetable juices, meal replacement and medically indicated beverages, ground coffee, instant soluble coffee and pre-packaged powdered coffee products are fully exempted from beverage tax. • A cosmetic surgery tax is introduced at the rate of 5%. The rate is applicable only to surgeries that are done purely for aesthetic purposes. Increase in stock transfer tax On 26 February 2018, the Bureau of Internal Revenue (BIR) issued Revenue Regulations No. 9-2018 prescribing the rules and regulations implementing the increase in stock transfer tax under the Tax Reform for Acceleration and Inclusion (TRAIN) Law or the Republic Act No. 10963. The rate of tax on the sale, barter or exchange of shares listed and traded through local stock exchanges has been increased to six tenth of 1%, from the prior rate of one half of 1%). The Regulations also provide transitional filing and payment procedures for stock transfer tax. 32 | Asia Tax Bulletin MAYER BROWN JSM | 33 Singapore JURISDICTION: Singapore taxpayers are exempted from preparing transfer pricing documentation if their gross revenue is not more than SGD 10 million.” “ Brazilian blacklist of tax havens Based on the Normative Instruction RFB n.1773/2017 issued on December 26, 2017, Brazil has removed Singapore companies from its tax haven blacklist. An exception however applies to Singapore companies engaged in certain incentivised activities. Under Brazilian tax laws, a jurisdiction is deemed to be a Preferential Tax Regime (PTR) if: (i) It does not tax income; (ii) It taxes the income at a rate lower than 20%; (iii) It grants tax advantages to non-residents in that jurisdiction without requiring the non-resident to carry out substantial economic activity in that jurisdiction or conditioning the tax advantage on the non-resident not carrying out substantial economic activity in that jurisdiction; or (iv) Its legislation provides for secrecy in the disclosure of the equity holding composition of, or the identification of the beneficiaries of the income distributed by, such legal entity. This rule may trigger, among others, actions in Brazil in relation to thin capitalisation and transfer pricing. Budget for 2018 The Budget for 2018 was presented to Parliament on 19 February 2018. The Budget includes the following provisions: Corporate tax • For the year of assessment (YA) 2018, the corporate income tax (CIT) rebate will be increased from 20% to 40% of tax payable, capped at an increased amount of SGD 15,000 (formerly SGD 10,000); • The CIT rebate will be extended for another year to YA 2019, but will revert to 20% of tax payable with a cap of SGD 10,000; • The Budget provides for the following incentives: o The 250% tax deduction for qualifying donations will be extended for donations made on or before 31 December 2021; o All other conditions of the scheme remain the same. • From YA 2019 to YA 2025, the tax deduction for staff costs and consumables incurred on qualifying research and development projects carried out in Singapore will be increased from 150% to 250%. All other conditions of the scheme remain the same; • The tax deduction for qualifying intellectual property (IP) registration costs will be amended as follows: o It will be extended from YA 2020 to YA 2025; and o The deduction rate will be increased from 100% to 200% on up to SGD 100,000 of qualifying IP registration costs incurred for every YA from YA 2019 to YA 2025; a 100% deduction will continue to be allowable on qualifying IP registration costs incurred in excess of SGD 100,000 for every YA within the same period. • The tax deduction for qualifying IP licensing costs will be amended as follows with effect from YA 2019 to YA 2025: o The deduction rate will be increased from 100% to 200% on up to SGD 100,000 of qualifying IP licensing costs incurred by a company for every YA; a 100% deduction will continue to be allowable on qualifying IP licensing costs incurred in excess of SGD 100,000 for every YA within the same period; and o Qualifying IP licensing costs include payments made by a qualifying person to publicly funded research performers or other businesses, but exclude related party licensing payments or payments for IP where any allowance was previously made to the person; o The expenditure cap for automatic tax deduction under the internationalisation scheme will be increased from SGD 100,000 to SGD 150,000 per YA with effect from YA 2019. Businesses may continue to apply to the International Enterprise (IE) Singapore or the Singapore Tourism Board (STB) for qualifying expenses incurred on other qualifying activities. All other conditions of the scheme remain the same. The IE Singapore or STB will release further details by April 2018. • The tax exemption scheme for new start-up companies will be adjusted from YA 2020 as follows: o A 75% tax exemption on the first SGD 100,000 of normal chargeable income; and o A further 50% tax exemption on the next SGD 100,000 of normal chargeable income. • All other conditions of the scheme remain the same; • The partial tax exemption scheme for all companies (excluding those qualified for the new start-up tax exemption scheme) and bodies of persons will be adjusted from YA 2020 (generally: financial year 2019) as follows: o 75% tax exemption on the first SGD 10,000 of normal chargeable income; and o a further 50% tax exemption on the next SGD 190,000 of normal chargeable income. o All other conditions of the scheme remain the same; • The Business and IPC partnership scheme (BIPS) will be extended from 31 December 2018 to 31 December 2021. The Ministry of Finance (MoF) and Inland Revenue Authority of Singapore (IRAS) will review the administrative processes for BIPS based on the feedback received. Details of any changes will be announced in the second half of 2018; • The tax incentive scheme for Approved Special Purpose Vehicles (ASPVs) engaged in asset securitisation transactions will be extended from 31 December 2018 to 31 December 2023, but not the stamp duty remission on instruments relating to transfers of assets to ASPVs for approved asset securitisation transactions. All other conditions of the scheme remain the same. The Monetary Authority of Singapore (MAS) will release further details of the extension by May 2018; • A tax framework for Singapore Variable Capital Companies (S-VACC) will be introduced to complement the S-VACC regulatory framework. The tax framework will consist of the following: o A S-VACC will be treated as a company and a single entity for tax purposes; o The tax exemption under section 13R (exemption of income of company incorporated and resident in Singapore arising from funds managed by fund manager in Singapore) and section 13X (exemption of income arising from funds managed by fund managers in Singapore) of the Income Tax Act (ITA) will be extended to S-VACCs; 34 | Asia Tax Bulletin MAYER BROWN JSM | 35 Singapore cont’d JURISDICTION: o The 10% concessionary tax rate under the Financial Sector Incentive – Fund Management scheme will be extended to approved fund managers managing an incentivised S-VACC; and o The existing GST remission for funds will be extended to incentivised S-VACCs; • The conditions under the existing schemes remain the same and the above changes will take effect on or after the effective date of the S-VACC regulatory framework. MAS will release further details of the tax framework by October 2018; • Concerning funds: o The Enhanced-Tier Fund Scheme under section 13X (exemption of income arising from funds managed by fund managers in Singapore) of the ITA will be extended to all fund vehicles constituted in all forms (previously available to qualifying companies, trusts and limited partnerships only), provided that they meet the qualifying conditions. The change will take effect for new awards approved on or after 20 February 2018. All other conditions of the scheme remain the same. MAS will release further details of the changes by May 2018; • The tax transparency treatment for Singaporelisted Real Estate Investment Trusts (S-REITs) will be extended to Singapore-listed Real Estate Investment Trusts Exchange – Traded Funds (REITsETFs). The tax treatment accorded to REITsETFs is as follows: o Tax transparency treatment for distributions received by REITsETFs from S-REITS out of the latter’s specified income; o Tax exemption on such REITsETFs distributions received by individuals, excluding individuals who derive any distributions through a partnership in Singapore or from the carrying on of a trade, business or profession; and o A 10% concessionary tax rate on REITsETFs distributions received by qualifying non-resident non-individuals. • The above tax concessions for REITsETFs will take effect on or after 1 July 2018, with a review date of 31 March 2020 (same date as that for other tax concessions for S-REITs). Applications for the tax transparency treatment can be submitted to IRAS on or after 1 April 2018. MAS and IRAS will release further details of the changes by March 2018; • The Financial Sector Incentive (FSI) scheme will be extended from 31 December 2018 to 31 December 2023. The scope of trading in loans and their related collaterals is expanded to include collaterals that are prescribed infrastructure assets or projects. The changes will apply to income derived on or after 1 January 2019 in respect of new and renewal awards approved on or after 1 June 2017. All other conditions of the scheme remain the same. MAS will release further details of the changes by May 2018; • The tax deduction under section 14I (provisions by banks and qualifying finance companies for doubtful debts and diminution in value of investments) of the ITA for impairment and loss allowances made in respect of non-credit-impaired financial instruments will be extended from YA 2019 to YA 2024 (for banks and qualifying finance companies with a December financial year-end), or from YA 2020 to YA 2025 (for banks and qualifying finance companies with a nonDecember financial year-end). All other conditions of the scheme remain the same. MAS will release further details of the changes by May 2018. The withholding tax (WHT) exemptions for the financial sector will be rationalised as follows: Rationalised changes A review date of 31 December 2022 will be introduced for the WHT exemptions on these payments Payments made under crosscurrency swap transactions made by Singapore swap counterparties to issuers of Singapore dollar debt securities Payments made under interest rate or currency swap transactions by financial institutions Payments made under interest rate or currency swap transactions by MAS The WHT exemptions will cease to apply to payments that are liable to be made under agreements entered into on or after 1 January 2023 (unless the exemption period is extended), but will continue to apply to payments that are liable to be made on or after 1 January 2023 (under agreements entered into on or before 31 December 2022) Specified payments made under securities lending or repurchase agreements by specified institutions Rationalised changes (cont’d) These WHT exemptions will be legislated, along with a review date of 31 December 2022. This change will take effect for payments under agreements entered into on or after 20 February 2018 Interest on margin deposits paid by members of approved exchanges for transactions in futures These WHT exemptions will cease to apply to payments that are liable to be made under agreements entered into on or after 1 January 2023 (unless the exemption period is extended), but will continue to apply to payments that are liable to be made on or after 1 January 2023 (under agreements entered into on or before 31 December 2022) Interest on margin deposits paid by members of approved exchanges for spot foreign exchange transactions (other than those involving the Singapore dollar) Interest from approved Asian Dollar Bonds The WHT exemptions for these payments will be withdrawn. This change will take effect for payments Under agreements entered into on or after 1 January 2019 Payments made under overthe-counter financial derivative Transactions by companies with FSI Derivatives Market awards that were approved on or before 19 May 2007 • All other conditions of the schemes remain the same. MAS will release further details of the changes by May 2018; • The Qualifying Debt Securities (QDS) incentive scheme will be extended from 31 December 2018 to 31 December 2023, but the QDS Plus incentive scheme will be withdrawn from 31 December 2018. Debt securities with tenure beyond 10 years and Islamic debt securities that are issued: o After 31 December 2018 can enjoy the tax concession under the QDS scheme if the conditions of the QDS scheme are satisfied; and o On or before 31 December 2018 may continue to enjoy the tax concessions under the QDS Plus scheme if the conditions of the QDS Plus scheme are satisfied. • MAS will release further details of the changes by May 2018; • The tax exemption on income derived by primary dealers from trading in Singapore Government Securities (SGS) will be extended from 31 December 2018 to 31 December 2023. MAS will release further details of the extension by May 2018; • The Insurance Business Development – Insurance Broking Business (IBD-IBB) scheme will be extended from 31 March 2018 to 31 December 2023, but the Insurance Business Development – Specialised Insurance Broking Business (IBD-SIBB) scheme will be withdrawn from 31 March 2018. The specialty insurance broking and advisory services will be incentivised under the IBD-IBB scheme at a concessionary rate of 10%. All other conditions of the IBD-IBB scheme remain the same. MAS will release further details of the changes by May 2018; • The Investment Allowance (IA) in respect of productive equipment will be extended to capital expenditure incurred on newly constructed strategic submarine cable systems landing in Singapore, subject to qualifying conditions. All other conditions of the IA scheme apply, except for the following which will be permitted: o The submarine cable systems can be used outside Singapore; and o The submarine cable systems, on which IA has been granted, can be leased out under indefeasible rights of use arrangements. • This extension of IA will take effect for capital expenditure incurred between 20 February 2018 and 31 December 2023 (both dates inclusive). MAS will release further details; • A review date of 31 December 2022 will be introduced for the WHT exemption on container lease payments made to non-resident lessors. Payments accruing to a non-resident lessor under any lease or agreement entered into on or after 1 January 2023 in respect of the use of a qualifying container for the carriage of goods by sea will be subject to WHT (unless the exemption period is extended). MAS will release further details; and • The Wage Credit Scheme (WCS) will be extended for three more years, from 2018 to 2020. The government co-funding of qualifying wage increases for Singapore employees up to a gross monthly wage of SGD 4,000 will be maintained at 20% in 2018. In 2019 and 2020, 36 | Asia Tax Bulletin MAYER BROWN JSM | 37 Singapore cont’d JURISDICTION: the co-funding percentage will be 15% and 10% of qualifying wage increases, respectively. Goods and services tax (GST) • The standard GST rate will be increased from 7% to 9%. This is proposed to be implemented sometime during the calendar years 2021 to 2025. Further details on this proposal will be reported in due course; • GST on imported services will be introduced. The following regimes will be implemented from 1 January 2020 to tax imported services: o The reverse charge regime for business-tobusiness (B2B) supplies (supplies made to GSTregistered persons) of imported services; and o The overseas vendor registration (OVR) regime for business-to-consumer (B2C) supplies (supplies made to non-GST registered persons) of imported digital services. • The Inland Revenue Authority of Singapore (IRAS) will release further details by the end of February 2018. Stamp duty (SD) • The top marginal buyers SD rate for residential properties will increase from 3% to 4% on the portion in excess of SGD 1 million. The following table presents the revision which took effect from 20 February 2018: • The remission of stamp duties on instruments relating to transfers of assets to Approved Special Purpose Vehicle (ASPVs) for approved asset securitisation transactions will be allowed to lapse after 31 December 2018. Rates (%) Tiers (Prior to 20 February 2018) Tiers (Effective from 20 February 2018) 1 First SGD 180,000 First SGD 180,000 2 Next SGD 180,000 Next SGD 180,000 3 Remaining amount Next SGD 640,000 4 Remaining amount Excise duties • The excise duties imposed on all tobacco products increased by 10% with effect from 19 February 2018. Transfer pricing The Singapore tax authority issued revised transfer pricing guidelines on 23 February 2018. Under the Revised TP Guidelines, transfer pricing documentation is based on a three-tiered structure consisting of documentation at the group level, entity level, and country-by-country report. The information required in the documentation at the group level and entity level are broadly aligned with the OECD’s recommendations concerning the three-tiered transfer pricing documentation practice with some minor amendments, e.g. taking out the important service arrangement from the documentation at group level. With effect from the Year of Assessment (YA) 2019, e.g. financial year ending 2018, Singapore taxpayers are required to prepare TP documentation when: (i) The annual gross revenue from their trade or business operation exceeds SGD 10 million; or (ii) Transfer pricing documentation is required for the previous basis period (the first applicable basis period for this condition will be FY 2019 (YA 2020), with Section 34F of ITA being effective from FY 2018 (YA 2019). However, even if they fulfil condition (ii), Singapore taxpayers are exempted from preparing transfer pricing documentation if their gross revenue is not more than SGD 10 million for the basis period in question and for the immediate two preceding basis periods. If the previous condition(s) is fulfilled, Singapore taxpayers are required to prepare transfer pricing documentation only for the significant related party transactions which exceed the safe-harbour thresholds, detailed within the Revised TP Guidelines. The IRAS has provided additional guidance on the principle of transfer pricing adjustments, clarifying that it has the discretion to determine whether related party transactions exist and determine the arm’s length price based on the commercial or financial relations of the independent parties. It remains to be seen how extensively these powers of reconstruction will be used in practice by the IRAS, but such powers do increase the potential risks for taxpayers in Singapore. The new Section 34E of ITA introduces a surcharge of 5% on TP adjustments (increase in income or decrease in deductions or losses) made by IRAS in case of noncompliance with the arm’s length principle, regardless of whether the amendments are taxable or not. It is worth noting that the 5% surcharge and non-compliance penalties would not be eligible for relief under any applicable double tax agreements and hence would be a permanent cost for taxpayers. Goods and services tax – late submission penalty IRAS has clarified that, with effect from 1 April 2018, a monthly penalty of SGD 200 for the late submission of GST returns will commence immediately after the filing due date (which is one month after the end of the relevant accounting period). This monthly penalty will be imposed up to a maximum of SGD 10,000 for every outstanding F5 (periodic filing of GST) and F8 (final filing of GST) returns. Venture capital managers On 20 October 2017, the Monetary Authority of Singapore (MAS) announced a simplified regulatory regime - the Venture Capital Fund Manager Regime (“VCFM Regime”) for Venture Capital (VC) managers. The new regulatory regime will simplify and shorten the authorisation process and relieve VC managers of capital requirements and some of the business conduct rules that currently apply to other fund managers. International tax developments Sri Lanka On 31 December 2017, Singapore’s tax treaty with Sri Lanka entered into force and replaced the previous tax treaty. The new treaty generally applies from 31 December 2017 for matters relating to the exchange of information and from 1 January 2018 for all other tax matters. On 23 January 2018, Singapore and Sri Lanka signed a free trade agreement (FTA) in Colombo. Tunisia Singapore signed a tax treaty with Tunisia on 27 February 2018. 38 | Asia Tax Bulletin MAYER BROWN JSM | 39 Taiwan JURISDICTION: A three-tiered approach, including the existing Local File and newly introduced Master File and CbC report, will apply starting from fiscal year 2017.” “ Transfer pricing On November 13, 2017, the Taiwanese Ministry of Finance (MOF) announced amendments to the rules governing assessment of profit-seeking enterprise income tax on non-arm’s length Transfer Pricing (TP Assessment Rules). Subsequently, on December 13, 2017, the thresholds for the Master File and the Country-byCountry Report (CbC Report) were announced. A threetiered approach, including the existing Local File and newly introduced Master File and CbC report, will apply starting from fiscal year 2017. Decree on taxation of electronic services provided by foreign enterprises In order to combat tax avoidance through a controlled foreign company (CFC) by individuals, the Ministry of Finance (MoF) has proposed the introduction of CFC rules for individuals. According to the proposal, a Taiwanese individual and associated persons who directly or indirectly hold more than 50% or, together with a spouse or second-tier relatives, hold more than 10% of the shares or capital of a foreign enterprise located in a low-tax country and have significant influence over that foreign company, are subject to CFC rules. General CFC rules in respect of definition, calculation of profits or losses, and avoidance of double taxation apply equally to individuals. The MoF will issue detailed implementation rules. If CFC rules apply, individuals are required to include CFC income and other foreign income in the taxable income of the tax year concerned. If, however, the foreign income plus CFC income do not reach the threshold. On 2 January 2018, the Ministry of Finance (MoF) published Decree No. 10604704390 (the Decree) providing relevant rules and simplified measures for calculating and reporting income derived by foreign enterprises from cross-border sales of electronic services to domestic buyers in Taiwan (including individuals, for-profit enterprises, not-for-profit organisations and government bodies) effective from taxable year 2017. The Decree was issued in accordance with articles 3 and 8 of the Income Tax Act. According to article 4-1 of the Value-Added Tax and Business Tax Regulations, the term ‘electronic services’ is defined as “services downloaded and stored, or used over the internet without being downloaded and stored onto computers or mobile devices; or other services provided online or electronically”. Foreign enterprises providing cross-border electronic services are categorised into two business models: • Platform Service Providers (PSPs): o PSPs establish platforms (online virtual stores) on the internet for both domestic and overseas buyers and sellers to trade via the internet or other electronic means. At the same time, they may also collect service fees from the platform users, i.e. Alibaba, Amazon, Apple, eBay, Google, Yahoo, etc; and • Non-Platform Service Providers (NPSPs): o NPSPs sell electronic services to buyers through websites set up by either the NPSPs or PSPs, collecting considerations from the buyers and/ or paying service fees to PSPs upon collecting considerations from the buyers on behalf of PSPs. The scope of NPSPs covers e-books, standard software, online games, online teaching, music, videos, internet advertising, cloud storage and computing, etc. In accordance with article 8 of the Taiwan Sourced Income Recognition Rules, remuneration from services with an economic connection to Taiwan is recognised as Taiwan-sourced income. Therefore, the source of income of foreign enterprises providing cross-border electronic services will be determined as follows: • If foreign enterprises sell digital products that are fully produced outside Taiwan (such as e-books, standard software, etc.) with only minor changes being made on the presentation of the products and the products being downloaded onto computers or mobile devices of domestic customers for online use via the internet or other electronic means, the income derived from such transactions will not be deemed to be income sourced from Taiwan. However, if it requires domestic individuals or domestic enterprises to participate in and assist in the delivery of the digital products, such income will be considered Taiwan-sourced income; • Income from sales of immediate, interactive, convenient and continuous electronic services, such as online games, online tutorials or teaching courses, online music and videos, online advertisements, etc., to domestic customers via the Internet or other electronic means will be deemed to be derived from Taiwan; • Foreign enterprises selling services which are delivered by physical locations (i.e. accommodation, car rental, etc.) via the internet or other electronic means and the locations of delivering services or running the business are outside Taiwan, whether or not through foreign PSPs, the remuneration derived is not income sourced from Taiwan; and • Foreign PSPs that establish platforms on the internet for both domestic and overseas buyers and sellers to trade, and the buyer or seller or both are domestic individuals, for-profit enterprises, notfor-profit organisations or government bodies, the remuneration collected from buyers or sellers is considered income sourced from Taiwan; • Any foreign enterprises providing cross-border electronic services must calculate the taxable income by deducting relevant costs and expenses or applying the profit contribution ratio. Four rules are stipulated in the Decree: (i) The actual net profit ratio based on the accounting records; (ii) The standard net profit ratio of the industry category; (iii) The deemed net profit ratio at 30%; and (iv) The net profit ratio assessed by the tax authorities. • If part of the cross-border electronic service transactions provided by foreign enterprises offshore, the Onshore Profit Contribution Ratio (OPCR) for allocating the total net profit into Taiwan-sourced income will be determined by one of the following three rules: (i) The actual OPCR proved by relevant documentation; 40 | Asia Tax Bulletin MAYER BROWN JSM | 41 Taiwan JURISDICTION: Taiwan cont’d (ii) The OPCR is 100% if the locations of providing and using services are onshore; (iii) The OPCR is 50% if one location of providing or using services is onshore. • Foreign enterprises providing cross-border electronic services without a fixed place of business and business agent in Taiwan must calculate taxable income sourced from Taiwan according to the rules referred to above, and report and pay the taxes in accordance with article 73, paragraph 1, of the Income Tax Act and article 60 of the Income Tax Regulations; • If the foreign enterprises are PSPs, the taxable income must be calculated by applying the above relevant rules to the gross payments collected. If part of the gross payment is transferred to other foreign NPSPs, the foreign PSPs can apply for an approval from the tax authorities to calculate Taiwan-sourced income based only on the net platform service fees received (gross payments collected minus the service fee payment transferred to foreign NPSPs). To obtain the approval, PSPs have to present relevant contracts, a statement of payment made and the certification of completing income tax report and payment (i.e. withholding tax statement) if the payment transferred to foreign NPSPs is Taiwan-sourced income; • The foreign PSPs will be the ‘withholding agents’ withholding the appropriate taxes from the payment transferred to foreign NPSPs by applying the above rules of computing source income stipulated in the Decree. The foreign PSPs are required to report the information of withholding tax and pay the total withholding tax collected monthly to the tax authorities before the tenth day of the following month. Treating foreign PSPs as withholding agents will likely give rise to controversy issues. Therefore, it is critical to observe the effectiveness of such withholding mechanism after the Decree has been implemented; • From taxable year 2017, if a foreign enterprise providing cross-border electronic services has overpaid taxes, due to the differences between the actual withholding tax (e.g. 20%) and the applicable withholding tax rate (e.g. 3% = 20% x 30% x 50%), a request for a tax refund can be filed with the tax authorities within five years from the date such Taiwanese-sourced income was derived; • The Decree also applies to individuals and enterprises from Mainland China providing electronic services to Taiwanese customers and collecting income sourced from Taiwan; • If any domestic (resident) enterprise, with its headquarters located in Taiwan, has abused the legal formation and made false arrangements in order to be eligible for such taxation rules under the Decree with the intention of avoiding or reducing its tax liability, the tax authorities will reassess the enterprise’s income tax accordingly with the actual transactions and economic facts. Tax treatment of repurchase or sell-buy-back transactions On the website of the Ministry of Finance, the National Taxation Bureau of the Central Area clarified that the tax treatment of repurchase or sell-buy-back transactions of an enterprise will be treated as a form of financing. The price difference between the sale and repurchase is considered to be interest. Such interest will be deductible in proportion to the monthly instalment based on the arrangement that the enterprise has entered into with a financing company. International tax developments USA According to a press release of 4 January 2018, Taiwan has expressed its intention to negotiate and sign a tax agreement with the United States. Further developments will be reported as they occur. Thailand JURISDICTION: ” “ VAT on foreign e-commerce operators On 17 January 2018, the Thai Revenue Department (TRD) issued the second draft bill aimed at bringing international e-commerce transactions with non-VAT-registered persons in Thailand (recipients) under the scope of value added tax (VAT). The proposed law will take effect 180 days after it is published in the Royal Gazette. VAT registration Foreign operators that are required to register for VAT purposes in Thailand and are subject to VAT in Thailand, provided that the annual service income derived by them exceeds THB 1.8 million and the services rendered are consumed in Thailand, include: • Foreign e-commerce operators providing services to recipients by means of electronic media or through foreign digital platform operators; • Foreign digital platform operators whose platforms are used by the above foreign e-commerce operators that provide services to recipients. However, VAT registration and VAT taxability of service income is re-allocated to the foreign e-commerce operators if all of the following criteria are met: o The foreign digital platform operator is not the person determining the terms and conditions of the service provision, approving the delivery of services to the recipient, or approving the service fee collection from the recipient; o An agreement stating that the foreign e-commerce operator, instead of the foreign digital platform operator, is responsible for administering and registering for VAT purposes in Thailand is made between both parties; and o A document is issued to the recipient stating that the service is provided by the foreign e-commerce operator. • The recipients making payment to the aforementioned foreign operators are not required to administer VAT through self-assessment; • The reduced VAT rate of 7% is applied to the service income received from recipients; • VAT administration: o Foreign operators may register for VAT electronically via the TRD’s website; On 3 January 2018, the government resolved to enact the draft Transfer Pricing Act which was first released in 2015. 42 | Asia Tax Bulletin MAYER BROWN JSM | 43 JURISDICTION: Thailand cont’d o Foreign operators are not allowed to issue VAT invoices to the recipients; o Foreign operators are not allowed to collect VAT from recipients; o Foreign operators are required to prepare output VAT reports and submit electronic VAT returns together with the VAT payments; o Foreign operators are not allowed to apply for input VAT deductions or obtain VAT refunds; o Foreign operators are subject to VAT liabilities, penalties, surcharges and fines for failure to comply with the VAT rules; o Foreign operators may request for their customers’ VAT number to confirm whether they are VAT-registered persons in Thailand; o Where a customer is a VAT-registered person in Thailand, the customer will not be able to claim the self-assessed VAT as input VAT or apply for a VAT deduction, if the foreign operator does not comply with the proposed e-commerce law. Withholding tax on gains from digital assets On 14 March 2018, it was reported that the Revenue Department has proposed to impose a 15% withholding tax on profits and dividends produced by transactions involving digital assets (e.g. investments in digital currencies). An amendment to the Revenue Code has been drafted for the collection of taxes. Tax incentive for angel investors A Ministerial Regulation regarding a tax exemption on personal income tax for angel investors was approved by the government at the end of January 2018. The tax exemption is capped at THB 100,000 per applicable tax year. The qualifying conditions for the tax exemption are set out below: • The investee must be a start-up company or juristic partnership: o incorporated under Thai law and registered between 1 October 2015 and 31 December 2019; o that conducts a promoted business activity in an industry approved by the National Science and Technology Development Agency (e.g. food and agriculture); o with registered capital not exceeding THB 5 million and revenue generated from the supply of goods or services not exceeding THB 30 million in any fiscal year that the tax exemption is applied; and o with at least 80% of total revenue generated from the sale of goods or services and/or related to the approved industry in the fiscal year. • The angel investor: o Has made investments between 1 January 2018 and 31 December 2019 at the incorporation phase or capital increment phase of the investee; and o Must hold shares in the investee for a period of two consecutive years or more from the date of investment. Deductions for events conducted at ‘second-tier’ tourism provinces On 26 December 2017, the government decided to grant the following deductions for events conducted at 55 ‘second-tier’ tourism provinces between 1 January 2018 and 31 December 2018: • A double corporate tax deduction for staff training seminar costs consisting of expenses for seminar and accommodation rooms, transportation and other related expenses; and • A personal tax allowance for residents not exceeding THB 15,000 consisting of payments made to tour, hotel or homestay operators for domestic tours. Draft Transfer Pricing Act On 3 January 2018, the government resolved to enact the draft Transfer Pricing Act which was first released in 2015. Once enacted, the Transfer Pricing Act will retroactively apply to financial years beginning on 1 January 2017 and thereafter. A second largely similar draft of the Act was released in 2017 for public comment. The second draft provided greater clarity regarding the definition of ‘related party’ and further details on administrative matters such as the documentation required, reporting timelines and disclosure obligations. The new transfer pricing provisions will: • Empower tax officers to adjust related party transactions in line with the arm’s length principle; • Impose a penalty if accurate and complete documentation is not submitted to the tax officer within the stipulated deadline; • Require an entity (with annual revenue that is at least an amount prescribed by the Ministerial Regulation but not less than THB 30 million) to submit to the tax authorities details of its related party transactions together with its annual tax return form. A tax officer can request transfer pricing documentation from the entity within five years from the date of submission of the declaration form. The Act is pending approval by the National Legislation Assembly. International tax developments Cambodia On 26 December 2017, the Cambodia - Thailand Income Tax Treaty (2017) entered into force. The treaty generally applies from 1 January 2018. 44 | Asia Tax Bulletin MAYER BROWN JSM | 45 Vietnam JURISDICTION: ” “ VAT The Government has issued Decree No. 146/2017/ ND-CP (Decree 146) amending and supplementing the current value added tax (VAT) and corporate income tax (CIT) decrees. Decree 146 provides guidance on VAT applicable to exported natural resources, VAT refund in relation to export activities and CIT deduction for contribution to voluntary pension funds and life insurance for employees. Exported goods which are directly and mainly processed from natural resources/minerals where the total value of natural resources/minerals plus energy costs accounts for at least 51% continue to be VAT exempt. However, Decree 146 provides cases where 0% VAT should be applied: (i) Exported goods processed from natural resources/ minerals which are either directly exploited or purchased and then processed by the trading entity or outsourcing manufacturing entity, where during the manufacturing process the goods have been transformed into other products before being processed into exported goods; and (ii) Exported goods which are not mainly processed from natural resources/minerals. Decree 146 also provides further guidance on the determination of the ratio of the value of natural resources/minerals and the energy costs over the cost of goods sold. Specifically, this ratio shall be determined based on the investment plan for the first year of exporting. Exported goods and imported goods for re-export are not entitled to VAT refund if the customs procedures are not carried out at the customs office as regulated. VAT refunds VAT refunds are now allowed for imported goods that are then exported (this was previously disallowed). In addition, the scope of items not subject to VAT was amended to include exported products being primarily processed from natural resources and mined minerals. VAT refunds are now allowed for imported goods that are then exported (this was previously disallowed). Both of these changes were effective from 1 February 2018. Tax deductibility of life insurance premiums/retirement funds Before Decree 146, life insurance premiums paid for employees were tax deductible without a cap but contributions to pension funds and pension insurance are subject to a cap of VND1 million/month/person (provided meet certain conditions). Decree 146 provides that these expenses will be deductible subject to a cap of VND3 million/month/person. 46 | Asia Tax Bulletin MAYER BROWN JSM | 47 About Mayer Brown JSM Mayer Brown JSM is one of Asia’s largest and longest-standing law firms. Representing some of the world’s most significant corporations the firm’s Tax Practice is central in advising on the most complex international deals, structures and multi-jurisdictional corporate activity. The breadth of Mayer Brown’s global Tax Practice is matched by few other law firms. It covers every aspect of corporate, partnership and individual taxation across Asia, the United States and Europe; from international right through to local level. Our subpractices include transactions, consulting and planning, audits, administrative appeals and litigation, transfer pricing and government relations. Mayer Brown’s Tax Practice is globally recognised as top-tier by Chambers, the Legal 500 and the International Tax Review; and offers the depth, knowledge and experience to manage every tax challenge. Asia Tax Practice Pieter de Ridder is a Partner of Mayer Brown LLP and is a member of the Global Tax Transactions and Consulting Group. Pieter has over two decades of experience in Asia advising multinational companies and institutions with interests in one or more Asian jurisdictions on their inbound and outbound work. Prior to arriving in Singapore in 1996, he was based in Jakarta and Hong Kong. His practice focuses on advising tax matters such as direct investment, restructurings, financing arrangements, private equity and holding company structures into or from locations such as mainland China, Hong Kong, Singapore, India, Indonesia and the other ASEAN countries. Pieter de Ridder Partner, Mayer Brown LLP +65 6327 0250 | [email protected] Americas | Asia | Europe | Middle East |www.mayerbrownjsm.com Mayer Brown JSM is part of Mayer Brown, a global legal services organisation, advising many of the world’s largest companies, including a significant proportion of the Fortune 100, FTSE 100, CAC 40, DAX, Hang Seng and Nikkei index companies and more than half of the world’s largest banks. 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