Revisions to inbound foreign investment laws China’s regulatory regime on inbound foreign investment entered a new era on 1 October 2016. According to a decision issued by the National People’s Congress of China in September 2016, the foreign investment approval requirement has to a large extent been replaced by a filing system across the nation (please refer to our earlier Legal Update for details). To implement this decision, a number of regulations have been released recently, including: • NDRC & MOFCOM Circular 2016 No.22 (中华人民共 和国国家发展和改革委员会中华人民共和国商务 部公告2016年第22号) (“Circular 22”) • Interim Administrative Measures on Record-filing of Establishment and Change of Foreign Invested Enterprises (外商投资企业设立及变更备案管理暂 行办法) (“MOFCOM Measures”) • SAIC Notice on Registration of Foreign Invested Enterprises under the Filing System (工商总局关于 做好外商投资企业实行备案管理后有关登记注册 工作的通知) (“SAIC Notice”) Under the new system, foreign investment no longer requires approval from the Ministry of Commerce (MOFCOM) or its local branches, as long as the business undertaken is not on a “negative list”. Foreign investment changes On 7 December 2016, the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) jointly released the latest revised draft of the Foreign Investment Industrial Guidance Catalogue (外商投资产业指导目录(修订 稿) (Draft Catalogue) soliciting public comments. The deadline to submit comments is 6 January 2017. Background Since the Foreign Investment Industrial Guidance Catalogue (Catalogue) was first issued in 1995, it has been one of the most fundamental legal documents regulating foreign investment in China. On 1 October 2016, a nationwide reform on foreign investment was launched resulting in the removal of the requirement to obtain approval from MOFCOM or its local branches for projects which do not fall within a negative list. However, no separate negative list has been issued by the government so far; instead, reference was made to the current catalogue adopted in 2015 (2015 Catalogue). To correspond to this negative list approach, NDRC and MOFCOM changed the structure of the 2015 Catalogue to form the Draft Catalogue. In addition, changes were made to relax certain restrictions on a number of industry sectors. Structural changes to the Catalogue One of the main changes in the Draft Catalogue relates to its structure. Under the 2015 Catalogue and all previous versions of the Catalogue, industries were classified under the following categories: (a) encouraged, (b) restricted and (c) prohibited, with those industries which are not expressly listed in the Catalogue falling under the “permitted” category. To implement the recent reform on foreign investment, the Draft Catalogue groups industries under the following two main headings: (a) encouraged and (b) negative list. The negative list section is further divided into three categories: • Industries under the encouraged category but subject to restrictions on foreign equity holding; • Industries under the restricted category; and • Industries under the prohibited category. As its name suggests, if a foreign investor would like to know whether its investment falls within the negative list (and therefore requires MOFCOM approval), it should refer to this negative list section. Compared with the 2015 Catalogue, where references to these items are scattered throughout, the amendment provides easier reference and clearer guidance to foreign investors. Encouraged category Restrictions on foreign equity holding have been removed for a number of industries (i.e. 100 per cent foreign ownership is allowed), such as: • Manufacturing and R&D of automobile electronic bus network technologies (汽车电子总线网络技术) and electronic controllers for electric power steering systems (电动助力转向系统电子控制器); • Manufacturing of new energy automobile power batteries (新能源汽车能量型动力电池制造) – this has been changed from an encouraged industry to a permitted one; and • Manufacturing of track transportation equipment (轨道交通运输设备) – this has been changed from an encouraged industry to a permitted one. Due to structural changes to the Draft Catalogue, the encouraged industries with restrictions on foreign equity holding also appear under the new negative list section. The Draft Catalogue clarifies that while these industries are subject to the applicable foreign equity restrictions, they will continue to enjoy preferential policies available to any encouraged industry (such as tax reduction on imported equipment). Restricted category A number of industries, including those listed below, have been removed from the restricted category and have now become permitted industries: • Highway passenger transportation service (公路旅客运输); • Credit investigation and evaluation service (资信调查与评级); • Exploration and exploitation of precious metals (贵金属勘探、开采); • Processing of rice, flour and crude sugar (大米、面粉、原糖加工); processing of edible oil and fats (食用油脂加工) – restriction on foreign equity holding has also been removed; • Production of biological liquid fuels (生物液体燃料生产) – restriction on foreign equity holding has also been removed; and • Motorcycle manufacturing (摩托车制造) – restriction on foreign equity holding has also been removed. JURISDICTION: The key highlight in this round of amendments is that a new negative list section has been added to the Draft Catalogue.” “ 8 | Asia Tax Bulletin MAYER BROWN JSM | 9 information-sharing among entry/exit authorities. The report also stipulates that entry/exit services for foreigners will be improved. Stock option incentive scheme On 28 September 2016, the State Administration of Taxation (SAT) issued an announcement concerning the collection and administration of income tax on stock option incentive schemes and capital contributions in the form of technology (SAT Gong Gao  No. 62), implementing Cai Shui  No. 101 on the same subject. The announcement retrospectively applies from 1 September 2016. The main content of the announcement is summarised below. Individual income tax • For the qualified stock option incentive schemes of an unlisted company, the average number of employees is determined by the average number of the company’s employees in the last six months as reported in the withholding tax returns for wages and salaries prior to the granting of such schemes. • If the unlisted companies undergo changes and, as a result, no longer satisfy the conditions for the tax deferral treatment of incentive schemes, the individual income tax of employees should be withheld and remitted within 15 days after such changes. • The fair market price of the shares of a listed company is determined by reference to the closing price on the trading day. The fair market price of the shares of an unlisted company is determined by using the net asset method, the analogy method or another reasonable method. • All qualified stock option incentive schemes and the tax deferral treatment of the contribution in the form of technology must be filed with the competent tax authority. The relevant forms are available on the website of the SAT. Enterprise income tax • The enterprise that applies the deferred tax treatment should be an enterprise that is taxed on actual profits (not on deemed profits) and makes the investment by contributing the proprietary right of the self-developed technology. Compared with the 2015 Catalogue, there are around 11 fewer industries under the restricted category in the Draft Catalogue. However, some of these industries have been removed from the Draft Catalogue because they are restricted to both foreign investment and Chinese investment and have already been covered by the Draft Pilot Market Access Negative List (市场准入 负面清单草案（试点版）)circulated in March 2016, which applies to any investment in China (whether foreign or not). These sectors include, for example, the construction and operation of large-scale theme parks ( 大型主题公园建设、经营). Prohibited category Similarly, a number of prohibited industries have been removed from the Draft Catalogue because they are prohibited to both foreign and Chinese investment, such as the construction of golf courses and villas (高尔夫球 场、别墅的建设), gambling and lottery (博彩业). Other Highlights The Draft Catalogue clarifies that foreign investors are not allowed to set up a foreign-invested partnership in any restricted industry where restrictions on foreign equity ratio exist. The Draft Catalogue reiterates that the current regulatory regime on acquisition of associated Chinese companies in the form of round-trip investment remains effective and must be complied with. This seems to suggest that MOFCOM approval under Rules on Foreign Investors Acquiring Domestic Companies 关于外国投 资者并购境内企业的规定 is required for such round-trip acquisition regardless of industry sectors. Comments The key highlight in this round of amendments is that a new negative list section has been added to the Draft Catalogue. Although this is more a reorganisation of the existing categories, it does provide easier reference to foreign investors. The changes also reflect a move towards a regulatory regime where two negative lists will apply, one specific for foreign investment and the other which generally applies to both foreign and Chinese investment. However, the negative list section in the Draft Catalogue is still rather lengthy with very broad language on restrictions. Therefore, while the regulatory regime on foreign investment has been largely relaxed since 1 October 2016, there is still a long way to go in implementing national treatment for foreign investors. Pilot programme introduced to centralise work permit system The PRC has introduced a “Pilot Implementation Plan on the Work Permit System for Foreigners in China.” The pilot programme seeks to unify the current two work permit streams (alien employment permit and foreign expert permit) into a single work permit stream. The pilot programme will run in nine locations in China from 1 November 2016 to 31 March 2017, with nationwide rollout effective 1 April 2017. While implementing rules have not yet been released, the pilot programme is expected to introduce the following new features: • Online filing system, with a reduction in government processing times and required application documents; • Identification card to serve as the work permit approval; and • Points-based system to classify workers as (A) Foreign Top Talent, (B) Foreign Professional Talent or (C) Temporary, Seasonal, Non-Technical or Service Workers. Nationwide platform for sharing entry/ exit information China announced plans to explore development of a unified entry/exit platform to strengthen the coordination of governmental departments across the country. A report submitted by the Standing Committee of the National People’s Congress, China’s top legislative body, highlights the improvements in efficiency created by development of a unified platform. Currently, Chinese nationals must seek approvals from multiple departments to submit documents if they seek to travel abroad, which creates asymmetric China (PRC) cont’d JURISDICTION: • An enterprise applying the tax-deferral treatment is required to file the contribution in the form of technology with the tax authority, and the tax authority is authorised to make adjustments to the value of the contribution if it is unreasonable. VAT on disposal of immovable property The State Administration of Taxation (SAT) issued an announcement on 24 November 2016 (SAT Gong Gao  No. 73) clarifying the VAT treatment of the disposal of immovable property. The announcement applies from 24 November 2016. According to the announcement, a taxpayer is subject to VAT on the balance between sale proceeds and acquisition price when an immovable property is disposed of. If the taxpayer is unable to provide the original invoice of immovable property proving the acquisition price, other documents, such as the payment certificate of deed tax, which states the taxable amount of deed tax on the transaction, may be used. Supplemental VAT rules published The Ministry of Finance and the State Administration of Taxation jointly issued a notice on 21 December 2016 (Cai Shui  No. 140) supplementing VAT rules for financial services, exploitation of real estate, educational services, etc. With the exception of article 17, the notice retrospectively applies from 1 May 2016. The main content of the notice is summarised below. • Income derived from an investment in its holding period, in respect of which the recovery of the invested principal amount is not guaranteed, is not subject to VAT due to the non-interest nature. • Holding of financial products purchased from a fund, trust or other asset management company is not considered a transfer of financial products in the sense of Cai Shui  No. 36. • Interest payables on loans granted by approved securities companies, insurance companies, financial leasing companies, securities fund management 10 | Asia Tax Bulletin MAYER BROWN JSM | 11 China (PRC) cont’d JURISDICTION: companies, securities investment funds and other institutions are subject to VAT within 90 days of the due date of interest, and are subject to VAT. Those accrued after 90 days of the interest due date are temporarily exempt from VAT until the accrued interest is paid. • The “considerations for acquiring land paid to the government” referred to in Cai Shui  No. 36 include the fees related to the acquisition of land, relocation costs, land development costs and income from the transfer of land. • Subject to certain conditions, a real estate development company may deduct the consideration for acquiring land paid to the government for the purposes of VAT. • Takeaway services provided by taxpayers engaged in food and beverages are treated as “food and beverage service” and taxed accordingly. • Providing conference venues and associated services by hotels, resorts and other business accommodations is treated as conference and exhibition service and taxed accordingly. • In tourist places, income from operating cables, ferry cars, battery cars, cruises and other appliances is subject to VAT in accordance with the “Cultural and Sports Services” article. • Non-enterprise organisations that are general taxpayers may elect to apply the simple calculation method and pay 3% VAT on supplies of R&D and technical services, information technology services, forensic consulting services, sales of technology, copyright and other intangible assets. • General taxpayers may elect to apply the simple taxation method and pay 3% VAT on the supply of educational assistance services. • Armed transportation services are treated as “security services” and taxed accordingly. • Property management services that mainly comprise maintenance and repair services are treated as “construction services” and taxed accordingly. • The leasing of construction equipment to others, provided the equipment is operated by an employee of the taxpayer, is treated as “construction services” and taxed accordingly. Tax incentives for advanced technology service enterprises On 10 November 2016, the Ministry of Finance, the State Administration of Taxation, the Ministry of Commerce and the National Development and Reform Commission jointly issued a notice introducing tax incentives for advanced technology service enterprises that are located in pilot service innovation development zones (Cai Shui  No. 122). The designated zones include Tianjin, Shanghai, Hainan, Shenzhen, Hanzhou, Wuhan, Guangzhou, Chengdu, Suzhou, Weihai, Harbin New Area, Jiangbei New Area, Liangjiang New Area, Guian New Area and Xixian New Area, and the tax incentives apply from 1 January 2016 to 31 December 2017. Under the tax incentives, an advanced technology service enterprise located in the zone is subject to enterprise income tax at 15% and the actual employee education expenditure is deductible for up to 8% of the total salary and wages in determining taxable income (the excess of the expenditure can be carried forward in the following tax years) provided that certain requirements are satisfied. An advanced technology service enterprise is required to observe the relevant provisions of Cai Shui  No. 59 when applying for the tax incentive. The services being eligible for the incentive include computer and information services, R&D technical services, culture technical services, and medical services of traditional Chinese medicine etc. A list of such services is attached to the notice. Advance pricing agreements On 11 October 2016, the State Administration of Taxation (SAT) issued an announcement updating the rules on advance pricing agreements (APAs) (SAT Gong Gao  No. 64). The announcement, pursuant to the enterprise income tax law and the tax administration law, seeks to improve APA management and implement the tax treaties concluded by China. The announcement will apply from 1 December 2016, and chapter 6 of the Implementation Rules on Special Tax Adjustments (Guo Shui Fa  No. 2) will be abolished on the same date. The main contents of the announcement are summarised below. Chapter 6 of Notice Guo Shui Fa  No. 2 provides for the implementation rules of an APA. However, Notice SAT Gong Gao  No. 64 made the following amendments to the Notice Guo Shui Fa  No. 2: • The authority to accept an APA application is extended to the competent tax authorities. An enterprise for which the total annual amount of related transactions exceeds CNY 40 million in the preceding three years, prior to the tax year when the Notice of Tax Items concerning the acceptance of negotiation intentions by the competent tax authority is delivered, may reach an APA with its competent tax authority concerning the pricing policies and calculation methods for its related transactions in future years; • The whole application procedure for an APA is rescheduled and consists of six steps: (i) preliminary meeting, (ii) negotiation intention, (iii) analysis and evaluation, (iv) formal application, (v) negotiation and signing, and (vi) monitoring and implementation; • Under Notice SAT Gong Gao  No. 64, the application year of an APA starts from the day the Notice of Tax Items concerning the acceptance of negotiation intentions by the competent tax authority is delivered to the enterprise. A concluded APA generally lasts from three to five years. Previously, the application year of an APA started from the following year the enterprise submitted its formal application; • The negotiation intention and formal application of an enterprise may be turned down by the competent authorities, and priority of handling a formal application for an APA may be given by the competent tax authorities under some circumstances; and • An article of exchange of information on a unilateral APA is introduced. Based on the minimum standards under the OECD BEPS Project, China is committed to include the unilateral APA concluded after 1 April 2016 into the framework of the mandatory spontaneous exchange of information with relevant countries and regions. An enterprise may apply for a unilateral APA with the competent tax authority. A unilateral APA proposal must contain the following information: • The tax year for which the APA should apply; • Related parties and transactions involved in the APA; • Organisation and management structures of the enterprise and the group; • Business operations, financial statements, audit report and contemporaneous documentation of the enterprise in the preceding three to five years; • Function and risk analysis of related parties; • The proposed transfer pricing principle and calculation methods to be used, and the functional and comparability analyses, the assumptions on which the transfer pricing principle and calculation method used are based; • Value chain or supply chain analysis, and the consideration about location savings such as cost saving, market premium; • Market statement, including industry development trend and the competitive environment; • The forecast and estimate of the annual business scale, profits and plans for the APA period; • The possibility of the APA applied retrospectively; • Domestic and foreign laws and regulations affecting the APA; and • Other information required by the competent tax authorities. An enterprise may apply for a bilateral or multilateral APA to the SAT and its competent tax authority simultaneously. Besides the information mentioned above, a bilateral or multilateral APA proposal must contain the following: • The information concerning the application for an APA to the competent tax authority of treaty partners; • Business operation and related transactions of related parties in the preceding three to five years; and • The possibility of double taxation. The State Administration of Taxation (SAT) released the China Advance Pricing Agreement (APA) Report of 2015 on 23 December 2016. This is the seventh time that the SAT has published the APA annual report. The report provides statistics of APAs concluded from 2005 to 2015. 12 | Asia Tax Bulletin MAYER BROWN JSM | 13 China (PRC) cont’d JURISDICTION: According to the report, 12 APAs (six unilateral and six bilateral) were concluded in 2015. The total number of APAs entered into in 2015 is considerably higher than in the preceding year, in which nine (three unilateral and six bilateral) were concluded. All six bilateral APAs entered into in 2015 were concluded with Asian countries. Accounting rules related to VAT revised The Ministry of Finance issued accounting rules on value added tax (VAT) on 3 December 2016 (Cai Kuai  No. 22) (the Rules). The Rules address the different aspects of recording VAT in accounting records and aligning accounting rules with VAT regulations in the aftermath of the VAT reform that transforms business tax on services into VAT. The Rules apply as from 3 December 2016. The Rules provide the ledgers for the purpose of recording VAT, including: • VAT payable; • VAT to be paid; • VAT advance payment; • Input VAT; • Input VAT upon approval (of tax or customs authority); • VAT on accrued sales; • Non-deductible VAT; • VAT based on the simplified calculation method; • VAT on transfer of financial products; and • VAT by way of withholding. Furthermore, the Rules specify how to make entries of sale of goods and services, acquisition of tangibles, taxation on the basis of the difference between sale proceeds and acquisition price (such as immovable properties), and VAT refund for export. With the publication of the Rules, Cai Kuai  No.13 and Cai Kuai  No. 24 on the treatment of VAT in accounting records ceased to apply. Export VAT refunds The Ministry of Finance and the State Administration of Taxation jointly issued a notice on 4 November 2016 (Cai Shui  No. 113) increasing the VAT refund rates for the export of certain products. From 1 November 2016, the VAT refund rates for cameras, video recorders, internal-combustion engines, petroleum, aviation kerosene, diesel oil, etc. have been increased to 17%. A list of the products and their applicable VAT refund rates is attached to the notice. International tax developments Pakistan On 8 December 2016, China and Pakistan signed an amending protocol to their tax treaty, as amended by the 2000 and 2007 protocols. Hong Kong JURISDICTION: Such drastic increase of the AVD rates will no doubt cool down the residential property market with immediate effect.” “ Automatic exchange of information Following the passage of the Inland Revenue (Amendment) (No. 3) Ordinance 2016, Hong Kong will start implementing the new international standard for automatic exchange of financial account information in tax matters (AEOI). On 11 October 2016, the Hong Kong Monetary Authority (HKMA) issued an explanatory notice to ensure compliance with the due diligence and reporting obligations for authorised institutions (AIs) under the Amendment Ordinance. Under the Amendment Ordinance, a financial institution (FI) is required to identify financial accounts held by tax residents of reportable jurisdictions (i.e. tax residents who are liable to tax by reason of residence in the jurisdictions with which Hong Kong has entered into an AEOI agreement). The Amendment Ordinance prescribes the due diligence procedures for FIs to identify whether a financial account is a “reportable account”. FIs are required to collect the reportable information of these accounts and furnish such information to the Inland Revenue Department (IRD) which will exchange the information with the tax authorities of relevant AEOI partner jurisdictions (AEOI partners) on an annual basis. It is expected that subject to negative vetting by the Legislative Council, the new Schedule to the Inland Revenue Ordinance listing the AEOI partners will come into operation by the end of 2016. FIs can start conducting the due diligence procedures to identify and collect information on the relevant financial accounts in 2017, and furnish the information to the IRD in 2018 for transmission to the AEOI partners concerned. Tax objections and appeals On 28 November 2016, the Inland Revenue Department (IRD) updated the Departmental Interpretation and Practice Notes No.6 (Revised) to reflect the legislative changes brought about by the Inland Revenue (Amendment) (No.3) Ordinance 2015 which had entered into effect on 1 April 2016. The revised version has been published on the website of IRD. 14 | Asia Tax Bulletin MAYER BROWN JSM | 15 The Practice Note covers the provisions of the Inland Revenue Ordinance in relation to Objections to the Commissioner, Appeals to the Board of Review and Appeals to the Courts. These notes are issued for the information of taxpayers and their tax representatives to safeguard their right of objection against the assessment and the right to appeal to the tax authorities or the court. Guidance on tax consequences of court-free company amalgamations issued On 16 December 2016, the Inland Revenue Department issued guidance on profits tax consequences of courtfree company amalgamations. The guidance covers amalgamation with or without sale of assets of the amalgamating company, tax losses, profits tax return, and rights and obligations. The guidance provides examples that illustrate the rules. The full English text of the guidance can be found on the website of the Inland Revenue Department and is consistent with the preliminary guidance issued by the IRD in December 2015. Stamp duty residential property sales On 4 November 2016, in an attempt to cool off the residential property market, the Hong Kong Government announced that the Stamp Duty Ordinance would be amended to increase the ad valorem stamp duty (AVD) rates for all residential property transactions to a flat rate of 15% with effect on 5 November 2016. This is a significant leap from the so-called “Double Stamp Duty” (Scale 1 of AVD) under the current regime, which stands at a range of 4.25% to 8.5%, being applicable to purchases by non-Hong Kong permanent residents and/or if the purchaser already owns another residential property at the time of the subsequent purchase. Key features of the new AVD rates are as follows: • Flat rate of 15% of the purchase price, irrespective of the amount or value of consideration; Hong Kong cont’d JURISDICTION: • Applies to all residential purchases, irrespective of whether the purchaser is individual, company or otherwise; • Applies to all agreements for sale and purchase executed on or after 5 November 2016, unless specifically exempted or provided otherwise in the Stamp Duty Ordinance; and • Payable within 30 days after the execution date. According to Government, exemptions and exceptions to the payment of AVD rates already provided for in the Ordinance will continue to apply. One key exception is residential property acquired by a Hong Kong permanent resident (HKPR) who: • Is acting on his/her own behalf; and • Does not own any other residential property in Hong Kong at the time of acquisition. For those purchases, the lower rate under Scale 2 of AVD is chargeable. The refund mechanism under the existing regime is also retained. Some key examples include: • HKPR buyer who changes his/her single residential property within six months from the date of completing the new transaction; and • Acquisition of old residential properties for redevelopment purposes. The AVD paid in excess of that payable under the lower rate at Scale 2 (i.e., the difference between the higher rate at Scale 2 and the lower rate at Scale 1) would be refunded. The duty is on the applicant to prove to the satisfaction of the Collector of Stamp Duty that the relevant criteria for the refund are satisfied. Transactions relating to non-residential properties would not be affected by the change. The Stamp Duty Ordinance will need to be amended to incorporate these changes. It remains to be seen whether the actual amended provisions will tally with the measures as announced by the Government. Such drastic increase of the AVD rates will no doubt cool down the residential property market with immediate effect. However, given the increasing demand for domestic homes and the consistent shortage of residential land supply (which, interestingly, is controlled by the Hong Kong Government itself ), it remains to be seen whether and how this new measure could effectively contain the heat in the residential property market in the long-run. Hong Kong to codify BEPS standards On 26 October 2016 the Government launched a consultation exercise to gauge views on implementation of the OECD’s BEPS measures. The two-month consultation ended on 31 December 2016. The Government says that Hong Kong is supportive of international efforts to promote tax transparency and combat tax evasion. Implementation of measures to counter BEPS signifies Hong Kong’s commitment to international tax co-operation. Being an international financial centre and a responsible member of the international community, Hong Kong indicated to the OECD in June 2016 its commitment to the BEPS package and its consistent implementation. The commitment was premised on the condition that Hong Kong could put in place the necessary domestic legislation in a timely manner. Hong Kong is now an Associate in the inclusive framework established by the OECD for implementing the BEPS package. Hong Kong will need to revise its existing tax laws to meet the requirements of the BEPS package. In formulating its implementation strategy, Hong Kong must ensure that its model meets the international standard without compromising its simple and low tax regime. The implementation timetable for BEPS is very tight. To meet the OECD’s requirement, Hong Kong’s current target is to introduce the relevant amendment bill or bills into the Legislative Council in mid-2017. Hong Kong will focus on the four minimum standards as well as measures of direct relevance to their implementation. The priority is to put in place the necessary legislative framework for transfer pricing rules which cover the latest guidance from the OECD, spontaneous exchange of information on tax rulings, country-by-country reporting requirements, the cross-border dispute resolution mechanism and the Multilateral Instrument. International tax developments Japan According to a press release of 26 October 2016, published by the Hong Kong Government, Hong Kong and Japan have recently signed a competent authority agreement (CAA) on automatic exchange of information (AEOI). The agreement specifies the details of what information will be exchanged and when, as set out in the OECD Automatic Exchange of Information Agreement (2014). UK According to a press release of 26 October 2016, published by the Hong Kong Government, Hong Kong and the United Kingdom have recently signed a competent authority agreement (CAA) on automatic exchange of information (AEOI). The agreement specifies the details of what information will be exchanged and when, as set out in the OECD Automatic Exchange of Information Agreement (2014). 16 | Asia Tax Bulletin MAYER BROWN JSM | 17 India JURISDICTION: GST On 3 November 2016, the GST Council finalised a four-tier goods and services tax (GST) rate structure of 5%, 12%, 18% and 28%. While food items of mass consumption would be zero-rated, the GST Council suggested a lower rate of 5% for goods of common household consumption and a higher rate of 28% for luxury cars, aerated drinks and tobacco. The GST Council has yet to decide on the rate structure for services. In the subsequent meeting, it is expected that the GST Council will specify a list of goods falling in the respective rate structure. The GST Bill was passed earlier by both the Upper House (Rajya Sabha) and Lower House (Lok Sabha) of Parliament. Subsequently, the Bill obtained approval from the President on 8 September 2016. Courtesy BMR Advisors, it was reported on 27 November 2016 that, inching closer towards GST implementation, the Central Board of Excise and Customs (“CBEC”) has released a revised draft of a model GST law which would be taken up for further discussion and finalisation by the GST Council in the upcoming meetings. Earlier, a draft was placed in the public domain in June 2016 for comments and suggestions in response to which several representations were filed by the industry and forums. Royalties not connected to a PE The Delhi Income Tax Appellate Tribunal (ITAT) issued its decision on 29 July 2016 in the case of Iveco Spa v. ADIT (ITA 5696/2012) on whether royalty income earned by a non-resident company is effectively connected to its permanent establishment (PE) in India or not. The taxpayer (Iveco Spa), a company resident in Italy, set up an Indian branch, after obtaining due permission from the Reserve Bank of India. The branch was engaged in liaising and support activities and did not undertake local buying and selling nor was in the business of retail trading in India. The taxpayer entered into a technical collaboration and licence agreement on 17 December 2004 with New Holland Tractors India Private Limited (New Holland Tractor) for providing the right to assemble diesel engines and its parts in India. Under that agreement, it received royalty income in India. The GST Council has yet to decide on the rate structure for services.” “ The taxpayer claimed that it had received this income by the head office directly. The tax authority on the other hand was of the opinion that the royalty income was effectively connected to the PE (branch office) in India and therefore the income was not chargeable to tax as royalty income at a tax rate of 20% on a gross basis but as business income to be taxed at 41.82% on a net basis. The tax authority inferred that the taxpayer’s personnel were constantly present in India and were providing technical support services, and the branch office had employed around 25 employees who were equipped to render business development services which were mandated under the contract; thus being “effectively connected” to the PE. The taxpayer approached the Dispute Resolution Panel that ruled against the taxpayer. The tax authority passed a final assessment order declaring the income as business income. The aggrieved taxpayer appealed before the ITAT. The ITAT held in favour of the taxpayer that royalty income was not effectively connected to the PE and hence chargeable to tax as royalty under article 13 of the India - Italy Income Tax Treaty (1993) (the treaty). The taxpayer’s employees visited India and provided the necessary support and training for execution of the agreement for technical services; none of them stayed in India for more than 90 days. It was also contended that as the training and technical support services were to be provided on an as-needed basis, there was no further need for any assistance to be provided by employees of the taxpayer. Further, no services had been provided by the employees of the branch office in India. Merely having staff at the branch who are technically qualified does not infer that they have provided services for the performance of the impugned contract. In fact, the services rendered by the branch office in India were also technical in nature and included, inter alia, the provision of technical support services to the clients of its head office in India, aftersales support services, warranty services, etc. Therefore, to perform liaison activities, the staff of the branch in India also need technically qualified employees. No presumption can be drawn by the tax authority regarding involvement of the PE in earning royalty income. To effectively connect royalties with a PE, the “asset test” and “activity test”/“function test” have to be evaluated. It was stated that the asset test failed when applied. To effectively connect this royalty income with the PE, it should be established that: • Royalties should arise as a result of the activities of the PE; • The PE should, at least, facilitate, assist or aid in the performance of such services irrespective of the other activities the PE performs; or • The PE should be engaged in the performance of technical services or should be involved in the actual rendering of such services. The tax authority could not provide conclusive evidence to prove the above facts in substance. In fact, royalty income has arisen because of the direct dealing of the head office of the taxpayer (without PE involvement) with New Holland Tractor. Thus, the ITAT issued its decision that royalty income earned by a non-resident company under a technical collaboration and licence agreement with an Indian company is taxable on a gross basis under article 13 of the treaty, thus rejecting the opinion of the tax authority that royalty income was effectively connected with the Indian branch office of the non-resident. Penalties under black money bill On 29 November 2016, the lower house of Parliament (Lok Sabha) passed the Taxation Laws (Second Amendment) Bill 2016 (the Bill), which aims to impose a higher tax rate and more stringent penalty provisions in respect of black money. International tax developments Korea On 12 September 2016, the India - Korea Income Tax Treaty (2015) entered into force. The treaty generally applies from 1 January 2017 for Korea and from 1 April 2017 for India. From this date, the new treaty generally replaces the India - Korea Income Tax Treaty (1985). 18 | Asia Tax Bulletin MAYER BROWN JSM | 19 India cont’d JURISDICTION: Cyprus The Indian Government announced in a press release dated 16 December 2016 that it has rescinded Cyprus’ “notified jurisdictional area” (NJA) classification retroactive to 1 November 2013. India announced also that the new tax treaty and accompanying protocol between Cyprus and India, signed in November 2016, will take effect 1 April 2017, in India. The new tax treaty will take effect 1 January 2017 in Cyprus. New Zealand On 26 October 2016, India and New Zealand signed an amending protocol to the India - New Zealand Income Tax Treaty (1986), as amended by the 1996 and 1999 protocols. Switzerland On 22 November 2016, the India - Switzerland Joint Declaration on Automatic Exchange of Information (2016) was signed. In accordance with their commitment to the Global Forum, India and Switzerland intend to start collecting data in 2018 and first transmit data in 2019, after the necessary legal basis has been created in both countries. Both countries will exchange information automatically based on the Multilateral Competent Authority Agreement on the Automatic Exchange of Information (MCAA). The MCAA is based on the international standard for the exchange of information developed by the OECD. The joint declaration specifies that both states are satisfied with the confidentiality rules provided for in the other state with regard to taxes. Following the signing of this declaration, the Swiss Federal Department of Finance will prepare a consultation draft on the introduction of the automatic exchange of information in tax matters with India. The corresponding federal decree will be submitted for parliamentary approval. Indonesia JURISDICTION: The DGT raided the office of Google Indonesia after it reportedly refused to co-operate in a tax audit. ” “ Dependent agent It was reported that on 7 November 2016, the Directorate General of Taxes (DGT) stated that the Government aims to collect taxes from Singapore-based Google Asia Pacific Pte. Ltd (Google Asia-Pacific) by the end of 2016 after completion of a tax investigation into the company. PT Google Indonesia (Google Indonesia) is currently being investigated by the DGT for unpaid taxes on its advertising revenue. In September 2016, the DGT raided the office of Google Indonesia after it reportedly refused to co-operate in a tax audit. Google Indonesia has been registered at the Tanah Abang Tax Office as a foreign investment company since 15 September 2011 and is a dependent agent of Google Asia-Pacific. Transfer of real property Based on Government Regulation 34/2016 issued on 8 August 2016, the income tax rate on transfers of real property has been reduced from 5% to 2.5% with effect from 7 September 2016. This is a final income tax. The tax base is no longer the NJOP value, but will depend on the facts of a sale. In the case of a sale to a third party, it will be the value actually received for the sale, whereas a sale to a related party is taxed on the value that should have been received. This should be the fair market value. Exemptions apply in the case of a qualifying legal merger or split for which tax book value has been approved or transfers under a build operate and transfer (BOT) projects. Tax-free income The amounts of tax-free annual income have been increased for individual income tax purposes. The new amount for an individual taxpayer is now Rp 54 million per year (previously Rp 36 million) and each dependent (maximum three) adds Rp 4.5 million (previously Rp 3 million) to this amount. 20 | Asia Tax Bulletin MAYER BROWN JSM | 21 Indonesia cont’d JURISDICTION: International tax developments Laos On 29 June 2016, Indonesia ratified the Indonesia - Laos Income Tax Treaty (2011), by way of Presidential Decree No. 58, as published in Official Gazette No. 132 of 2016. Japan JURISDICTION: The threshold on the lower-earning spouse’s annual income will be increased.” “ 2017 tax reform plan proposals On 8 December 2016, the Government outlined its 2017 tax reform plan (the Plan). The Plan is currently only at the proposal stage and is still subject to change. Key measures are summarised as follows. Individual income tax • The definition of taxable income for non-permanent residents will be expanded and revised to “income other than foreign source income” and “any foreign source income that is paid or remitted into Japan”. (Previously, the definition of taxable income for non-permanent residents included “Japanese source income” and “income other than Japanese source income that is paid or remitted into Japan”.) • The threshold on the lower-earning spouse’s annual income will be increased from JPY 1.03 million to JPY 1.5 million for households that are eligible to receive the special spouse tax deduction (a maximum deduction of JPY 380,000). Corporate income tax • The scope of research and development (R&D) credits will be expanded to a range between 6% and 14%. (Currently, the R&D credit ranges from 8% to 10%). Controlled foreign company (CFC) Under the Plan, new CFC income rules have been proposed, with a foreign subsidiary being subject to CFC rules if: • It fails to meet any of the economic activity tests (i.e. business test, substance test, control test, location criteria or unrelated party test) and the foreign tax burden is less than 20%; • It meets all the economic activity tests but the foreign tax burden is less than 20%. However, only certain passive income will be included as CFC income (if the total passive income is JPY 20 million and below); or • It is either a “paper” company, “cash-box” company or located in a blacklisted country, and has a foreign tax burden that is less than 30%. The new rules will take effect from 1 April 2018. 22 | Asia Tax Bulletin MAYER BROWN JSM | 23 Japan cont’d JURISDICTION: International tax developments Belgium On 12 October 2016, the Belgium - Japan Income Tax Treaty (2016) was signed in Tokyo. Once in force and effective, the new treaty will replace the Belgium - Japan Income Tax Treaty (1968), as amended by the 1998 and 2010 protocols. Chile On 28 December 2016, Japan’s tax treaty with Chile entered into force. The treaty generally applies from 28 December 2016 for tax matters relating to the exchange of information and from 1 January 2017 for other tax matters. 2017 tax changes On 2 December 2016, the National Assembly of Korea passed the 2017 tax bills. Most of the tax proposals prepared by the Ministry of Strategy and Finance (MOSF) were passed without modifications. However, some of the 2017 tax proposals were changed in relation to individual tax, as follows: • The expiration date of tax benefits for foreign workers was changed from 31 December 2019 to 31 December 2018. The requirements for such benefits were also simplified. • The new exit tax rules proposed by the MOSF were removed from the 2017 tax bills. • In addition, a new highest individual income tax rate was created in the Personal Income Tax Law. This top tier tax rate (40%) will be applied to individuals whose gross income is more than KRW 500 million. Several other tax proposals are still pending, because the Korean Government must first pass the Enforcement Decrees of the Law for Coordination of International Tax Affairs (LCITA) and the Customs Law. Tax treatment of liquidated damages 1 On 24 November 2016, the Korean Supreme Court handed down an opinion where the Court held that liquidated damages (“LD”) due to delay in delivery of ship by the shipbuilder constitute a purchase price adjustment and are not “other income” to the ship’s owner (Supreme Court 2016 Du 47123, decided on November 24, 2016). In this case, the domestic shipbuilder was unable to deliver in time the ship ordered by the foreign ship owner and, consequently, had to pay LD to the foreign ship owner under the shipbuilding agreement. The shipbuilder withheld income tax at 22% on the LD and filed a refund request with the tax authorities. The tax authorities rejected the shipbuilder’s refund request, arguing that the LD were a payment by the shipbuilder to Korea JURISDICTION: A new highest individual income tax rate was created in the Personal Income Tax Law. ” “ 1 Courtesy Korean law firm Kim & Chang. 24 | Asia Tax Bulletin MAYER BROWN JSM | 25 Korea cont’d JURISDICTION: the ship owner that is separate from the purchase price of the ship and is “the amount of damages compensated due to breach or termination of contracts on property rights and in excess of those to compensate losses of performances under the original contract” under Article 93(11)(b) of the Corporate Income Tax Law (“CITL”) and Article 132(10) of the Presidential Decree of the CITL and, therefore, constitute Korean source income subject to withholding. Representing the domestic shipbuilder, which was the withholding agent, K&C successfully argued in all three levels of courts that the LD at issue should not constitute separate income to the ship owner but a purchase price adjustment or reduction. K&C was able to secure a favourable outcome by (1) broadly researching and thoroughly analysing foreign case laws as well as Korean domestic tax statutes, regulations, case laws, and rulings; (2) emphasising the peculiarities of shipbuilding contracts due to relatively long (two to three years) contract terms with industry literature, expert opinions, foreign law firms’ legal opinions; and especially (3) overcoming unfavourable case laws and tax practices in regard to compensations for delay in the construction industry by distinguishing typical breaches of contract terms from the delay of delivery in shipbuilding. Furthermore, employing arguments based on tax, civil and maritime laws and demonstrating the true intent of the relevant parties to the transaction, K&C was able to defeat the tax authorities’ argument that the LD at issue were penalty compensation under the substance over form doctrine. As this case dealt with an issue common to the shipbuilding industry in Korea, it was closely followed by domestic and foreign companies in shipbuilding and other related industries. The taxpayer-favourable outcome in this case is particularly meaningful in that (1) this case is the first significant court case that addresses the taxation of LD and, more specifically, (2) the shipbuilder was able to get a refund for taxes withheld not only where LD were paid to adjust or reduce the purchase prices at the delivery of ships but also where LD due to delay in delivery were paid under an arbitration award several years after the ship was delivered. International tax developments India On 12 September 2016, the India - Korea Income Tax Treaty (2015) entered into force. The treaty generally applies from 1 January 2017 for Korea and from 1 April 2017 for India. From this date, the new treaty generally replaces the India - Korea Income Tax Treaty (1985). Costa Rica On 12 October 2016 in Seoul, Costa Rica and Korea signed an exchange of information agreement relating to tax matters. Brunei On 14 October 2016, the Brunei - Korea (Rep.) Income Tax Treaty (2014) entered into force. The treaty generally applies from 1 January 2017. Jersey and British Virgin Islands On 21 November 2016, Korea’s exchange of information treaties with Jersey and the BVI entered into force. The agreements generally apply from 1 January 2017 for Korea. Guernsey On 21 December 2016, the Guernsey - Korea (Rep.) Exchange of Information Agreement (2015) will enter into force. The agreement generally applies from 21 December 2016 for criminal tax matters and from 1 January 2017 for other tax matters. Malaysia JURISDICTION: A penalty between MYR 20,000–100,000 or imprisonment of not more than six months, or both, will apply.” “ Budget 2017 tax proposals The Budget for 2017 was presented on 21 October 2016. The proposals mentioned below are effective from 1 January 2017. Corporate taxation • Reduction in corporate income tax between 1% to 4% based on percentage of chargeable income increased compared to the previous year of assessment (YA). This is applicable for YAs 2017 and 2018. • Reduction in corporate tax rate from 19% to 18% for small and medium-sized enterprises (SMEs) on the first MYR 500,000 of chargeable income. • Extension of application period for pioneer status or investment tax allowance for investments in new 4 and 5-star hotels, up to 31 December 2018. • Extension of income tax exemption period to Islamic banking and Takaful business entities conducting foreign currency activities through an international currency business unit, up to year of assessment (YA) 2020. Withholding tax on offshore services: in the current regime, a resident is not required to withhold tax for payment made to a non-resident if the services provided by the non-resident are performed outside Malaysia. Going forward, any payment made to a non-resident, regardless of where the services are performed, will be subject to withholding tax at the prevailing rate of 10% (except where a lower preferential rate is provided for in an applicable tax treaty). Percentage (%) of increase in chargeable income (compared to the immediate preceding YA) % of reduction Income tax rate after reduction (%) less than 5 0 24 5.00 to 9.99 1 23 10.00 to 14.99 2 22 15.00 to 19.99 3 21 over 20.00 4 20 26 | Asia Tax Bulletin MAYER BROWN JSM | 27 Malaysia cont’d JURISDICTION: The definition of royalties will be broadened to include the use of, or the right to use, a radio frequency spectrum specified in a relevant license and the rights to use tapes for radio and television broadcasting, and also the right to broadcast visual images and/or sound by satellite, cable, fibre optics or similar technology. Country-by-country (CbC) reporting. The Budget for 2017 introduces a penalty for an incorrect return or failure to comply with CbC reporting within the stipulated timeline. A penalty between MYR 20,000– 100,000 or imprisonment of not more than six months, or both, will apply. Goods and Service Tax • GST relief for the purchase of aid equipment for registered persons with disabilities (PWDs). • GST exemption on goods from principal custom area (PCA), which includes licensed manufacturing warehouses, excise warehouses and free industrial zones (FIZs) that are deposited into and supplied within and between warehouses under the warehousing scheme. Stamp duty • 100% stamp duty exemption on instruments of transfer and housing loan instruments (presently the rate is 50%). This is limited to houses with a value up to MYR 300,000 for first-time homebuyers for the period between 1 January 2017 and 31 December 2018. • Stamp duty will be increased from 3% to 4% on instruments of transfer of real estate worth more than MYR 1 million. This will take effect from 1 January 2018. GST audit framework published The Royal Malaysian Customs Department (RMCD) published the goods and services tax (GST) audit framework dated 20 June 2016 on its website. The framework aims to ensure that auditing tasks are performed in a systematic, transparent and fair manner for registered persons or auditees. In general, the framework details the administrative process relating to GST audits, including: • The relevant empowering sections; • The audit period; • The process relating to persons that may be audited; • The implementation of the audit; • Documents required for the audit; • The audit exit conference; • Rights and responsibilities of the auditee; • Confidentiality of information; and • Appeals and complaints. Rules on country-by-country reporting issued On 23 December 2016, the Income Tax (Country-byCountry Reporting) Rules 2016 were gazetted to provide guidelines on the country-by-country reporting under Action 13 of the Base Erosion and Profit Shifting (BEPS) project. Some of the salient points from the Rules are as follows: • The Rules are applicable to any multinational corporation group where the ultimate holding company is incorporated in Malaysia and has crossborder transactions between the entities of the group; • The Rules apply where the total consolidated group revenue in the financial year preceding the reporting financial year exceeds MYR 3 billion; and • The ultimate holding company or surrogate holding company would be the one filing the country-bycountry report. The Rules also include the list of information that should be reported in the country-by-country report. The Rules come into effect on 1 January 2017 and the country-by-country report must be submitted within 12 months from the last day of the reporting financial year. R&D expenses On 2 September 2016, the Inland Revenue Board of Malaysia (IRBM) issued a technical guideline on automatic double deduction for research and development (R&D) projects (the guideline). The guideline was published in line with the Budget for 2016 allowing automatic double deduction for R&D projects to a qualifying resident company: • Incorporated under the Companies Act 1965; and • With paid-up capital not exceeding MYR 2,500,000 in accordance with paragraph 2A, Schedule I of the Income Tax Act 1967 (ITA). The automatic double deduction is applicable to inhouse R&D expenses not exceeding MYR 50,000 for each year of assessment (YA), not including, however: • Capital expenses, such as plant and machinery, land and buildings; • Permanent structural works, including renovations, additions or extensions to any original structures; and • The acquisition of property title, such as the acquisition of technology, intellectual property or royalty payments. Basis period for companies under liquidation On 7 October 2016, the Inland Revenue Board of Malaysia (IRBM) issued Public Ruling (PR) No. 7/2016 which aims to explain the determination of the basis period for companies under liquidation. The PR states that liquidation can happen either as a voluntary liquidation initiated by the company’s shareholders or by court order. For a company under liquidation, a liquidator’s accounts must be prepared for a period of six months from the date of appointment of the liquidator, and for every period of six months subsequently. 28 | Asia Tax Bulletin MAYER BROWN JSM | 29 Philippines JURISDICTION: Tax incentives for tourism enterprises On 15 November 2016, the Bureau of Internal Revenue (BIR) issued Revenue Regulations No. 7-2016 (the Regulations) on the implementation of tax incentives for tourism enterprises registered with the Tourism Infrastructure and Enterprise Zone Authority. The Regulations outline the available tax incentives for tourism enterprises located both within and outside the Tourism Enterprise Zone. Some of the key tax incentives are as follows: • An income tax holiday of up to six years for qualifying tourism enterprises; • A tax exemption on importation of capital investment and equipment; • A tax exemption on importation of transportation equipment and spare parts; • Goods and services tax incentives; and • Social responsibility incentives. The Regulations will take effect 15 days after their publication in the Official Gazette or general newspaper. First tax reform package submitted On 29 September 2016, the Department of Finance (DoF) submitted the first of its four tax reform packages to the Congress following the National Budget that was announced on 15 August 2016. The following proposals are listed in the first package: • Personal income tax: reduction of the personal income tax rate from 32% to 25% for taxpayers earning between PHP 500,001 to PHP 800,00 by widening the existing tax brackets; • Excise tax: part of the proposal is to raise the excise tax on gasoline from PHP 4.35 to PHP 10.00 per litre and diesel (which is currently at zero) to PHP 6.00 per litre; and • Value added tax (VAT): expanding the VAT base by reducing the coverage of exemptions, such as repealing the VAT exemptions for senior and disabled citizens. The package is pending enactment from the Congress. The Regulations outline the available tax incentives for tourism enterprises.” “ Singapore JURISDICTION: The treaty provides protection against permanent establishment risks if services are furnished.” “ Pre-commencement of business expenses On 30 September 2016, the Inland Revenue Authority of Singapore (IRAS) issued an e-Tax Guide to provide guidance on the tax treatment of certain expenses incurred prior to the commencement of a business activity. As announced during Budget 2016, pre-commencement expenses and section 14U of the Income Tax Act (s14U) expenses incurred on or after 25 March 2016 will be allowed as a deduction as follows: • Pre-commencement expenses and s14U expenses that are directly attributable to the normal, concessionary and tax-exempt incomes will be offset against the respective income streams; and • The remaining pre-commencement expenses and s14U expenses will be allocated to the respective income streams based on income apportionment. Prior to the Budget 2016 announcement, where income from a business activity is subject to tax at different rates in the first year of assessment, there is no need to allocate the pre-commencement expenses and s14U expenses to normal, concessionary or tax-exempt incomes. The e-Tax Guide also prescribes the administrative procedure and provides examples illustrating the application before and after the tax treatment change. Note 1: Pre-commencement expenses refer to qualifying expenditure relating to intellectual property protection, research and development, renovation and refurbishment and design incurred before the business activity commences that are deemed to be incurred on the first day on which business activity commences. Note 2: S14U expenses refer to revenue expenses incurred on or after the deemed date of commencement but before the first dollar of business receipt is derived as well as revenue expenses incurred up to 12 months prior to the deemed date of commencement. 30 | Asia Tax Bulletin MAYER BROWN JSM | 31 Related party transactions must be disclosed in tax return IRAS has published a supplementary requirement on the Reporting of Related Party Transactions (“RPT”), as part of the tax return. Taxpayers are required to adhere to this new requirement with effect from Year of Assessment 2018 (financial year 2017). By requesting taxpayers to disclose their related party transactions in their tax return, IRAS has further increased its scrutiny on transfer pricing. Taxpayers whose related party transactions exceed S$15 million in aggregate are required to complete and submit the Reporting of Related Party Transactions Form with their tax return. To determine the threshold of S$15 million, the company has to calculate: • All amounts of RPT as reported in the Income Statement but excluding compensation paid to key management personnel and dividends; and • Year-end balances of loans and non-trade amounts due to/from all related parties. Furthermore, taxpayers are required to disclose the different categories of RPT, and the top five related customers and suppliers for cross-border related party sales or purchases of goods and services. The values of the following categories of RPT are to be reported in the Reporting of Related Party Transactions Form: • Sales and purchases of goods; • Service income and expense; • Royalty and licence fee income and expense; Interest income and expense; • Other income and expense; and • Year-end balances of loans and non-trade amounts. IRAS has noted that the Reporting of Related Party Transactions Form will serve as a means to assess transfer pricing risks and can lead to the selection of appropriate cases for the transfer pricing consultation (“TPC”). The third edition of Singapore TP guidelines, issued on 4 January 2016, requires Singapore taxpayers to Singapore cont’d JURISDICTION: prepare and maintain contemporaneous transfer pricing documentation to show their related party dealings are in compliance with the arm’s-length principle. The Reporting of Related Party Transactions continues to be an affirmation of IRAS’ efforts on administering the compliance status of Singapore taxpayers in respect of their cross-border related party dealings. Although the financial statements typically contain disclosures of related party transactions, these disclosures are only made for significant related party transactions. On the other hand, the Reporting of Related Party Transactions Form must contain details of all cross-border related party transactions that may or may not be explicitly disclosed within the financial statements. However, the Reporting of Related Party Transactions Form should be seen as a supplementary information document (since the Reporting of Related Party Transactions Form requires details of cross-border RPT which may not currently be disclosed within the audited financial statements) which IRAS will consider, but it is not the only criterion in selecting TPC cases. Loss-making companies for consecutive financial years, and companies with insufficient documentation to substantiate the cross-border related party dealings, remain companies of higher risk. An interesting observation within the list of RPT categories is the inclusion of year-end balance of nontrade amounts. Such a treatment of non-trade loans may possibly indicate IRAS’ opinion that such non-trade balances are an extension of financial aid, and should be treated akin to intercompany loans. In light of the details required in the Reporting of Related Party Transactions Form, the typical disclosure within audited financial statements that “non-trade balances are interest-free, and repayable on demand” may raise possible queries from IRAS on the nature and treatment of such nontrade amounts, from a transfer pricing perspective. In addition, the list of country codes within the Reporting of Related Party Transactions Form does not explicitly delineate the tax haven jurisdictions such as the Cayman Islands, the Bahamas and the British Virgin Islands. It is likely that these countries are classified under the catchall of “Other countries not elsewhere classified”. Such a practice is contrary to the approaches put forth by other tax jurisdictions (e.g. Australia) which have particularly focused on transactions with parties located in lower headline tax rate countries. However, the position adopted by IRAS suggests its concerns around crossborder transactions are increasingly not only limited to tax haven countries, but globally. This also reflects IRAS’ principled approach. It is also important to note that information listed within the Reporting of Related Party Transactions Form does not substitute the need for detailed transfer pricing analyses of individual transactions and pricing policies as required by the current Singapore Transfer Pricing Guidelines. As a matter of fact, in the guidance provided on the Reporting of Related Party Transactions, the IRAS has reiterated the need for transfer pricing documentation to substantiate the arm’s-length nature of each type of related party transaction. With the above observations, we recommend for taxpayers to diligently document the related party transactions to ensure proper completion of the Reporting of Related Party Transactions Form and prepare robust transfer pricing analyses in support of these related party transactions. In doing so, the risk of transfer pricing controversy and disputes with IRAS are more likely to be successfully mitigated. Cross-border related party dealings remain of higher risk. Country-by-country reporting With effect from financial year 2017, Singapore-based multinational companies with an annual turnover of SGD 1,125 billion must file country-by-country reports according to a prescribed format specified by IRAS in an E-tax guide dated 11 October 2016. Productivity and innovation credit On 22 November 2016, IRAS issued an updated e-Tax Guide on the Productivity and Innovation Credit (PIC) scheme. The e-Tax Guide has been amended to incorporate the changes introduced in Budget 2016 as follows: • Expiry of the PIC scheme in the year of assessment 2018; • The PIC cash payout rate is reduced from 60% to 40% for qualifying expenditure incurred on or after 1 August 2016; • Compulsory e-filing of PIC cash payout applications, which has taken effect from 1 August 2016; • Removal of information on the PIC bonus, which expired after the year of assessment 2015; and • Information in Annex B regarding enhancement of the Writing-Down Allowance (WDA) and deduction for Intellectual Property Rights (IPRs) that allow companies to make an irrevocable election to claim the WDA over a 5, 10 or 15-year period (on a straight line basis) on capital expenditure incurred in acquiring the IPR with effect from the year of assessment 2017. CRS Regulations 2016 enacted The Income Tax (International Tax Compliance Agreements) (Common Reporting Standard) Regulations 2016 (CRS Regulations) were enacted on 8 December 2016. The CRS regulations incorporate the requirements of the CRS into Singapore’s domestic legislative framework. The CRS Regulations will enter into force on 1 January 2017. The CRS Regulations require and empower all financial institutions (FIs) to put in place the necessary processes and systems to collect financial account information from 1 January 2017. Singapore has adopted the “wider approach”, which means that FIs will need to collect and retain the CRS information for all non-Singapore tax residents in the case of new accounts, instead of just tax residents of Singapore’s Competent Authority Agreement (CAA) partners. For CRS reporting purposes, Singapore-based FIs (SGFIs) will need to transmit to IRAS the financial account information relating to tax residents of Singapore’s CAA partners from the year 2018. IRAS will subsequently exchange the reported information with Singapore’s CAA partners. 32 | Asia Tax Bulletin MAYER BROWN JSM | 33 Singapore cont’d JURISDICTION: IRAS also issued on the same date guidance comprising frequently asked questions including basic guides on CRS which were prepared to help FIs, service providers and account holders to understand the key requirements of the CRS and how they will be affected by its implementation. International tax developments India India signed a new protocol to the existing tax treaty with Singapore on 30 December 2016; the protocol preserves the existing tax exemption on capital gains for shares acquired before 1 April 2017, while providing a transitional arrangement for shares acquired on or after 1 April 2017. For shares acquired on or after 1 April 2017, there will be a two-year transition period, during which the capital gains from such shares will be taxed at 50% of India’s domestic tax rate if the capital gains arise during 1 April 2017 to 31 March 2019. The new protocol will continue to be underpinned by the stringent substance requirements which are unique to the Singapore-India tax treaty, and which ensure that the protocol can only be enjoyed by tax residents with substantive economic activities. Japan On 13 October 2016, the Japan - Singapore Competent Authority Agreement on Automatic Exchange of Information (2016) was signed in Singapore. The agreement specifies the details of what information will be exchanged and when, as set out in the OECD Automatic Exchange of Information Agreement (2014). The Netherlands On 24 November 2016 (Netherlands) and 5 December 2016 (Singapore), the Netherlands - Singapore Competent Authority Agreement on Automatic Exchange of Information (2016) was signed. The agreement specifies the details of what information will be exchanged and when, as set out in the OECD Automatic Exchange of Information Agreement (2014). Laos On 11 November 2016, the Laos - Singapore Income Tax Treaty (2014) entered into force. The treaty generally applies from 1 January 2017. This is one of the first tax treaties concluded by Laos. The treaty provides protection against permanent establishment risks if services are furnished, including consultancy services, by an enterprise through employees or other personnel, if such activities continue (for the same or a connected project) for a period or periods aggregating less than 300 days in any 12-month period. The maximum rates of withholding tax are: • 8% on dividends (5% if the beneficial owner holds directly at least 10% of the capital of the payer); • 5% on interest, subject to exceptions; and • 5% on royalties. Korea The Korea - Singapore Competent Authority Agreement on Automatic Exchange of Information (2016) was signed on 11 October 2016 in Korea and on 14 October 2016 in Singapore. The agreement specifies the details of what information will be exchanged and when, as set out in the OECD Automatic Exchange of Information Agreement (2014). Norway On 25 October 2016, the Norway - Singapore Competent Authority Agreement on Automatic Exchange of Information (2016) was signed in Norway and Singapore. The agreement specifies the details of what information will be exchanged and when, as set out in the OECD Automatic Exchange of Information Agreement (2014). South Africa The Singapore - South Africa Competent Authority Agreement on Automatic Exchange of Information (2016) was signed on 11 October 2016 in Brooklyn/ Pretoria, South Africa and on 24 October 2016 in Singapore. The agreement specifies the details of what information will be exchanged and when, as set out in the OECD Automatic Exchange of Information Agreement (2014). On 16 December 2016, the Singapore - South Africa Income Tax Treaty (2015) entered into force. The treaty generally applies from 16 December 2016 for tax matters relating to the exchange of information (article 24) and from 1 January 2017 for withholding and other tax matters. Ireland and Latvia On 20 December 2016, the Ireland - Singapore Competent Authority Agreement on Automatic Exchange of Information (2016) was signed. The agreement specifies the details of what information will be exchanged and when, as set out in the OECD Automatic Exchange of Information Agreement (2014). On the same day, a similar agreement was signed between Singapore and Latvia. Malta On 15 December 2016, the Malta - Singapore Competent Authority Agreement on Automatic Exchange of Information (2016) was signed. Iceland On 13 December 2016, the Iceland - Singapore Competent Authority Agreement on Automatic Exchange of Information (2016) was signed. Italy On 3 November 2016, the Italy - Singapore Competent Authority Agreement on Automatic Exchange of Information (2016) was signed. Canada On 16 November 2016, the Canada - Singapore Competent Authority Agreement on Automatic Exchange of Information (2016) was signed. Russia On 25 November 2016, the amending protocol (signed on 17 November 2015) to the Russia - Singapore Income Tax Treaty (2002), entered into force. The protocol generally applies from 1 January 2017. 34 | Asia Tax Bulletin MAYER BROWN JSM | 35 Taiwan JURISDICTION: The securities transaction tax on bank debentures and corporate bonds will be suspended until 31 December 2026.” “ Bank debentures and corporate bonds Trading in bonds, shares and any other securities is subject to securities transaction tax. However, trading in bank debentures and corporate bonds is exempt from tax from 1 January 2010 to 31 December 2016. On 5 December 2016, the Legislative Yuan approved the amendment of securities transaction taxation, extending the exemption by another 10 years, which means that the securities transaction tax on bank debentures and corporate bonds will be suspended until 31 December 2026. In addition, under the amendment, trading in certificates of a listed exchange traded fund (ETF) that mainly invests in bonds is also exempt from such tax until 31 December 2026. Taxpayers’ Rights Protection Act passed On 9 December 2016, Congress passed the Taxpayers’ Rights Protection Act (TRPA). This is a significant progress in legislation for the protection of fundamental human rights. In the past decade, more than 50% of litigation cases in the High and Supreme Administrative Courts related to tax disputes, but taxpayers’ chances of winning the cases were less than 10%. The current judges’ knowledge of tax laws and commercial practice was not sufficient to deal with complicated tax issues, with their rulings tending to rely on the opinions of tax authorities rather than taxpayers. The TRPA was finally passed by the Legislative Yuan after having been proposed by several tax professors and retired judges 10 years ago. Under the TRPA, taxpayers may be protected at three different levels, as follows: Taxpayer Protection Officers (TPOs): The main responsibilities of TPOs are communication and coordination of tax disputes, proposing improvements for taxpayers’ appeals, and providing necessary assistance and advice to taxpayers when they are subject to auditing obligations. TPOs’ names will be published on the Ministry of Finance (MoF)’s website. TPOs will be assigned to local tax collection offices, and obliged to issue annual reports on the results of taxpayers’ rights protection (article 20 of the TRPA). Taxpayer Protection Advisory Committee (TPAC): The TPAC will be set up as part of the MoF to supervise and review all tax regulations and rulings which may impact taxpayers’ rights. Any obsolescent or non-practical tax rules will be amended or repealed. The TPAC may propose any tax law which improves the effective protection of taxpayers’ rights. The members of the TPAC appointed from public sectors will take up less than one-third of the seats in the committee so as to avoid any bias towards the tax authorities (article 19 of the TRPA). Tax Professional Court (TPC): The High and Supreme Administrative Courts will set up the TPC to handle tax litigation cases. The judges of the TPC are obliged to attend training courses or seminars on tax laws annually in order to keep their professional skills up to date (article 18 of the TRPA). In addition to the above three levels, other provisions regarding the protection of taxpayers’ fundamental living rights and justice of procedure are set out below. • The tax deduction and exemption amount must be sufficient to cover basic living costs of taxpayers and their families. • Discrimination against taxpayers is prohibited unless a special policy may be justified. • Any evidence obtained by the tax authorities through illegal procedure may not be used for taxation and penalty charge purposes. • In the case of an investigation by the tax authorities, taxpayers may be represented in meetings by an attorney. During tax audit interviews, taxpayers are allowed to make audio or video recordings. • The tax authorities are not allowed to impose any penalty if the tax assessment is based on estimation due to uncertainty or limited resources, and taxpayers have fulfilled their obligation to provide assistance. • No penalty may be imposed in cases in which no intention to commit fraud or negligence exists. Individual income tax rates for 2017 On 12 December 2016, the MoF announced the allowances, standard deductions, the special deduction for salary and wages, as well as the individual income tax rates for 2017. In 2017, the personal exemption will amount to TWD 88,000 for an individual taxpayer, or TWD 132,000 if the taxpayer, his/her spouse and any dependant is aged 70 or over. Standard deductions, the deduction for salary and wages, and the deduction for the disabled or handicapped remain unchanged. The standard deductions are TWD 90,000 for a single taxpayer and TWD 180,000 for a married couple filing a joint return; the deduction for salary and wages amounts to TWD 128,000 for an individual taxpayer, or the actual salary, whichever is lower; and the deduction for the disabled or handicapped is TWD 128,000 for each taxpayer. The individual progressive income tax rates for 2017 and subsequent tax years are set out below. In general, the allowances, deductions and taxable income are adjusted by reference to the consumer price index (CPI), with the adjustment being made to the same degree if the CPI rises to more than 3% of that for the previous adjustment year. Taxable income (TWD) Rate (%) up to 540,000 5 540,000 – 1,210,000 12 1,210,000 – 2,420,000 20 2,420,000 – 4,530,000 30 4,530,000 – 10,310,000 40 over 10,310,000 45 36 | Asia Tax Bulletin MAYER BROWN JSM | 37 Taiwan cont’d JURISDICTION: Withholding tax on income derived by non-resident workers The Taipei Tax Bureau of the MoF issued an announcement stipulating that withholding tax on income derived by a non-resident worker will, due to the adjustment to the amount of the minimum monthly wage of TWD 21,009, be adjusted in 2017. According to the announcement, monthly income of less than TWD 31,513 will be subject to withholding tax at a rate of 6%, and monthly income of more than TWD 31,513 will be subject to withholding tax at a rate of 18%. The new rates will take effect from 1 January 2017. VAT on cross-border supply of electronic services passed by Legislative Yuan On 9 December 2016, Congress passed an amendment to article 2-1 of the VAT Act imposing VAT on the cross-border supply of electronic services by foreign enterprises directly to natural persons resident in Taiwan. Previously, services amounting to less than TWD 3,000 (approximately USD 100) per transaction supplied to non-taxable persons were VAT exempt. According to the amendment, which takes effect from 1 January 2017, a foreign enterprise without a fixed place of business in Taiwan that supplies electronic services directly to natural persons resident in Taiwan is liable to VAT under the VAT Act. Once a foreign enterprise makes a supply of electronic services directly to natural persons in Taiwan to an amount exceeding the threshold amount designated by the MoF, the foreign enterprise is obliged to register with the tax authority, file a VAT return and pay the VAT. There is no clear definition of the scope of electronic services. Since the new law not only imposes VAT on digital products, online games, app downloads and remote updating software but also on the regular services provided by Uber, Agoda, Booking.com, etc., the MoF is soon expected to issue detailed rules to clarify the scope of electronic supply of services. MAYER BROWN JSM | 37 Vietnam JURISDICTION: ” “ Transfer pricing guidelines The final draft transfer pricing (TP) decree was released on 3 October 2016 by the Ministry of Finance, following Resolution No. 19-2016/NQ-CP dated 28 April 2016. The decree aims to replace the existing TP regulations, Circular 66/2010/TT-BTC, and to respond to the OECD’s base erosion and profit shifting (BEPS) developments. The salient provisions from the draft decree are as follows: • The definition of “related parties” between two companies will be revised if: - the transactions between two companies are more than 60% of the transaction volume (currently, this is 50%); or - a party holds directly or indirectly at least 25% of the owner’s equity of a third party (currently, this is 20%). • Introduction of TP documentation in line with BEPS Action Plan 13, i.e. master file, local file and country-bycountry reporting (CbCR). Thus, an ultimate parent company that has a double tax treaty in force with Vietnam will be required to prepare such documents. • Tax deductibility of loan interest between related parties is capped at 20% of earnings before interest, taxes, depreciation and amortisation (EBITDA). • The definition of “related-party loan” is expanded to include back-to-back loans and other financing instruments granted by related parties. • Taxpayers with annual total revenue below VND 50 billion (approximately USD 2.2 million) and total related-party transaction values below VND 30 billion (approximately USD 1.3 million) are exempted from preparing TP documentation, subject to certain conditions. • Detailed guidance on comparability analyses for benchmarking, including application of TP methods endorsed by the OECD. The draft decree is expected to be submitted to the Prime Minister by 30 October 2016 for review and signature. The finalised version is expected to be released by December 2016 and will take effect from 1 January 2017. The guidance states that an overseas entity will generally not create a fixed place of business in Vietnam. 38 | Asia Tax Bulletin Vietnam cont’d JURISDICTION: MAYER BROWN JSM | 39 Service PE On 12 September 2016, the General Department of Taxation of Vietnam issued Official Letter 4123/TCTHTQT providing guidance on determining whether the provision of services by an overseas entity gives rise to a permanent establishment in Vietnam. The guidance states that an overseas entity will generally not create a fixed place of business in Vietnam if the entity’s expatriate performs services in Vietnam for a period of less than six months. International tax developments Malta On 25 November 2016, the Malta - Vietnam Income Tax Treaty (2016) entered into force. The treaty generally applies from 1 January 2017. Details of the treaty are as follows: • 5% on dividends paid by a company resident in Vietnam to a company resident in Malta which holds directly at least 50% of the voting rights, and 15% in all other cases; 0% on dividends paid by a company resident in Malta to a resident in Vietnam; • 10% on interest, subject to an exception for interest paid (i) to the government or the central bank of the other contracting state in relation to any loan, debtclaim or credit granted by such bodies, and (ii) in respect to a loan, debt-claim or credit guaranteed or insured by an institution for insurance or financing of international trade transactions wholly owned by the other contracting state or by the government of the other contracting state; • 5% on royalties paid as consideration for the use of, or the right to use, any patent, design or model, plan, secret formula or process, or for information concerning industrial or scientific experience; 10% on royalties paid as consideration for the use of, or the right to use, a trademark or for information concerning commercial experience; and 15% in all other cases; and • 7.5% on technical fees. • Article 5 (permanent establishment) provides for a sixmonth period for which a building site, construction, assembly or installation project or connected supervisory activities must exist in order to constitute a permanent establishment; • Article 5 (permanent establishment) extends the definition of a permanent establishment to include (i) the provision of services, including consultancy services, if activities of that nature continue for a period or periods aggregating more than six months within any 12-month period, and (ii) activities (including offshore activities) which relate to the exploration for and exploitation of natural resources. 40 | Asia Tax Bulletin MAYER BROWN JSM | 41 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 Asia Europe Middle Americas East Charlotte Rio de Janeiro* São Paulo* Palo Alto Los Angeles Houston Chicago Brussels Bangkok New York Washington DC Paris London Frankfurt Dubai Shanghai HongKong Ho Chi Minh City Hanoi Beijing Singapore Düsseldorf *Tauil & Chequer office Mexico City 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. 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