Americas | Asia | Europe | Middle East www.mayerbrown.com AUTUMN 2018 Asia Tax Bulletin Asia Middle East Bangkok Dubai Shanghai Hong Kong Ho Chi Minh City Hanoi Beijing Singapore Tokyo This Edition Pieter de Ridder Partner, Mayer Brown LLP +65 6327 0250 | [email protected] Recent months have seen a move toward rationalisation and clarification in many countries’ tax legislation, as well as measures to boost investment in the information economy. China has passed a proposed amendment, reported in the previous issue of this Bulletin, for reforming individual income tax by eliminating the five-year tax facility for foreigners living in China. It has also implemented a number of changes to VAT, in part in response to the imposition of tariffs on US products. As discussed in the previous edition of this Bulletin, Hong Kong has gazetted an ordinance to expand tax relief for intellectual property purchasing. In addition, Hong Kong has extended the loss carryforward period for high- and new-technology enterprises and scientific technology SMEs, and made amendments to transfer pricing and information exchange in keeping with the OECD’s BEPS package. In Japan, an initiative has been introduced granting tax benefits to promote the uptake of advanced information technology, and changes have been made to CFC rules in keeping with OECD recommendations. Korea has seen the announcement of a raft of changes to be implemented in 2019, including revisions of tax exemptions for foreign-invested companies and amendments to the treatment of investment funds established overseas. Adjustments have been made to requirements and rates for departure tax for individuals, and changes have been made to the rules for PE and dependent agents and the criteria for determining foreign corporations. In Malaysia, the GST has now been replaced by the Sales and Service tax discussed in the previous issue of this Bulletin. Singapore has seen the opening of a public consultation on changes to its Goods and Services Tax, and in Taiwan regulations have been published for dealing with tax treaty disputes. Thailand has extended the 7% VAT rate. Vietnam has implemented changes to technology transfers and related-party royalty payments. We hope you will enjoy reading this Bulletin and that you will find it useful. Please let us know if we can be of assistance. With kind regards, Pieter de Ridder We are pleased to present the autumn 2018 edition of our firm’s Asia Tax Bulletin and hope that you will find it useful and interesting. Vietnam Taiwan Philippines Thailand Contents 30 How to deal with tax treaty disputes 31 Reduced VAT rate extended 31 International tax developments 32 Technology transfers and related party royalty payments 33 Transfer pricing risks 33 International tax developments 23 Sales and Services Tax implemented on 1 September 2018 24 Accelerated capital allowance for information and communication technology equipment 24 Malaysia’s participation in Forum on Harmful Tax Practices 25 Qualifying building expenditure and industrial building allowances 26 Regulation on deficiency and delinquency interest 27 Public consultation on Goods and Services Tax 27 Additional conveyance duties (ACD) on property holding entities 28 Additional Buyer’s Stamp Duty (ABSD) rates 28 Customs law 28 International tax developments 6 Tax depreciation 6 Amendments to individual income tax 7 VAT refund rates for certain products increased 8 VAT exemption for interest on loans to small enterprises and sole traders 8 Retaliation tariffs imposed on US products 8 Automatic exchange of information between China and Hong Kong 8 Withholding tax deferral 9 Super deduction for R&D activities 9 International tax developments 10 BEPS and transfer pricing changes 11 Intellectual property tax relief 11 Loss carry-forward for high- and new-technology enterprises and scientific technology SMEs 11 International tax information exchange 12 International tax developments 13 Extensive operational control of hotel in India could result in PE in India 14 International tax developments 15 IT Investment Incentive 15 Changes to the Japanese CFC regime 16 International tax developments 17 2019 tax amendments proposal – summary 17 Corporate taxation 17 Individual taxation 18 International taxation 21 Supreme Court ruling on requirements for tax qualified spin-off 22 International tax developments Key: Jurisdiction (Click to navigate) China India Hong Kong Japan Malaysia Singapore Korea JURISDICTION: 6 | Asia Tax Bulletin MAYER BROWN | 7 Tax depreciation On 23 August 2018, the State Administration of Taxation (SAT) issued a notice (Notice  No. 46) announcing detailed rules regarding depreciation for purposes of enterprise income tax. • From 1 January 2018 to 31 December 2020, any costs incurred for purchasing new machinery and equipment with a value less than CNY 5 million may be deducted in the current period (which means that they do not need to be included in the balance sheet as assets for depreciation). • The term “machinery and equipment” refers to fixed assets other than buildings and constructions. • The term “purchase” includes self-manufacturing of machinery and equipment. • All costs of machinery and equipment may be deducted in the month following that in which the machinery and equipment is taken into use. • Enterprises are free to choose whether to adopt the one-off deduction method. If the one-off deduction is adopted, the discrepancy between accounting and tax treatments with regard to the relevant fixed asset is permitted. • Once enterprises elect not to adopt the one-off deduction method, they cannot reverse their earlier choice in the following years. • With respect to machinery and equipment with a value exceeding CNY 5 million, the depreciation rules contained in corporate income tax law and implementation regulations (Circular  No. 75, Circular  No. 106, Notice  No. 64 and Notice  No. 68) continue to apply. Amendments to individual income tax It has been reported that the individual income tax amendments proposed in June 2018 (discussed in the previous edition of this bulletin) were passed by the parliament on 31 August 2018. As a transitional measure, the increase in the monthly standard deduction from CNY 3,500 to CNY 5,000 and the new tax brackets will be implemented from 1 October 2018. Other amendments, such as progressive taxation of services, copyright and royalties, and special deductions depending on personal circumstances (deductions related to children’s education, etc.) will be effective from 1 January 2019. Under prior law, a foreigner was not considered a tax resident until the individual was in China for a year or more. The new law will more closely resemble other countries’ tax residency rules, with foreigners considered tax residents after 183 days. This will increase taxes for some expats. It is unclear what will happen to the current “5-year tax rule” under which a foreigner’s global (non-PRC sourced) income is only taxed if the individual has stayed in China for an uninterrupted 5-year period. Without any specific implementation rules for foreign individuals, the 5-year tax rule will probably no longer apply. On 31 August 2018, amendments to the individual income tax were passed by the Standing Committee of the People’s Congress. Pursuant to the amendments, the monthly standard deduction has been increased and will be implemented, along with new tax brackets, from 1 October 2018. On 7 September 2018, the Ministry of Finance (MoF) and the State Administration of Taxation (SAT) jointly issued Circular  No. 98, clarifying that the rules related to the application of the new monthly standard deduction and tax China (PRC) brackets will apply in the fourth quarter of 2018. The circular provides that the increased monthly standard deduction of CNY 5,000 and the new tax brackets will apply to wages and salaries received on or after 1 October 2018. The monthly standard deduction of CNY 5,000 will also apply to business income derived by individual entrepreneurs, including partners of a partnership, and the income will be subject to the new tax rate table in the fourth quarter of 2018. For income derived in the first three quarters, the monthly standard deduction remains CNY 3,500, and the old tax rate table is applicable. Based on the circular, only wages and salaries will be taxed according to the new monthly standard deductions and tax brackets. Labour services, income from copyright and royalties that will be added to the income, which is taxed at progressive rates, will be subject to the new tax rules only from 1 January 2019. It is not yet clear how the allocation of income (wages/salaries or business income) to the months in the fourth quarter must be made (i.e. on a cash or accrual basis). Effective from 1 October 2018, the following tax rates will apply to wages and salaries: Effective from 1 October 2018, the following tax rates will apply to business income of individual entrepreneurs: The circular also states that Circular  No. 62 on the deduction standard for individual entrepreneurs will be abolished from 1 October 2018. VAT refund rates for certain products increased On 5 September 2018, the Ministry of Finance (MoF) and the State Administration of Taxation (SAT) jointly issued a circular (Circular  No. 93) increasing the value-added tax (VAT) refund rates for exports of electromechanical, cultural and other products. Details of the adjustments, which will be effective from 15 September 2018, are summarised below: • an increase in the export tax refund rate for multicomponent integrated circuits, non-electromagnetic interference filters, books, newspapers and other products to 16%; • an increase in the export tax refund rate for bamboo carvings, wood fans and other products to 13%; and • an increase in the export tax refund rate for basalt fibre and related products, safety pins and other products to 9%. Exports of goods and services are in principle zero-rated in China. However, the input tax on these products is only partially refunded, with the VAT refund rates being determined by the government. The refund rates are adjusted from time to time, depending on a variety of Monthly taxable income (CNY) Marginal tax rate (%) Up to 3,000 3,001 - 12,000 12,001 - 25,000 25,001 - 35,000 35,000 - 55,000 55,001 - 80,000 Over 80,000 3 10 20 25 30 35 45 Up to 30,000 30,001 - 90,000 90,001 - 300,000 301,001 - 500,000 Over 500,000 5 10 20 30 35 Taxable income on an annual basis (CNY) Rate on excess (%) JURISDICTION: 8 | Asia Tax Bulletin political and economic considerations. The aforementioned adjustments are believed to be a response to the imposition of import tariffs by the United States. VAT exemption for interest on loans to small enterprises and sole traders On 5 September 2018, the Ministry of Finance (MoF) and the State Administration of Taxation (SAT) jointly issued a circular (Circular  No. 91) exempting interest income derived by financial institutions on loans granted to small enterprises and sole traders. According to the circular, interest derived by qualified financial institutions on loans granted to small enterprises and sole traders is exempt from VAT in the period between 1 September 2018 and 31 December 2020 provided that the amount of the loan does not exceed CNY 10 million and the interest charged on the loan is less than 150% of the contemporaneous benchmark interest rate of the People’s Bank of China. Interest derived by financial institutions on loans amounting to less than CNY 1 million to small enterprises and sole traders is already exempt from VAT under Circular  No. 77). In the case of a loan of less than CNY 1 million, the Circular  No. 77 continues to apply. In effect, the new circular (Circular  No. 91) is an expansion of the exemption of Circular  No. 77. Retaliation tariffs imposed on US products On 18 September 2018, the Customs Tariff Commission of the State Council issued a public notice (Shui Wei Hui Public Notice  No. 8) imposing import tariffs on US products with a value of USD 60 billion. The tariffs will be effective at 12:01 on 24 September 2018. For the goods attached to the taxation list of the US on Shui Wei Hui Public Notice  No. 6, a 10% tariff will be imposed on the 2,493 tax items listed in Annex 1 and the 1078 tax items listed in Annex 2, and a 5% tariff will be imposed on the 974 items of tax items listed in Annex 3 and 662 items listed in Annex 4 separately. Automatic exchange of information between China and Hong Kong According to a press release of 11 September 2018, published by the Hong Kong government, the competent authority arrangement on automatic exchange of information between China and Hong Kong entered into force on 6 September 2018. The arrangement specifies the details of which information will be exchanged and when, as set out in the OECD Automatic Exchange of Information Agreement (2014). Withholding tax deferral With retroactive effect from 1 January 2018, China has extended the withholding tax deferral policy on foreign shareholders’ investment of profits in China from “encouraged projects” to cover all foreign investment projects/sectors other than prohibited projects/sectors, according to Caishui  102, dated 29 September 2018. As a result, foreign shareholders should generally be able to defer paying Chinese withholding tax on the dividends/ deemed dividends from their Chinese subsidiaries (there are some exceptions for listed Chinese companies) if the dividends are reinvested into China in accordance with the conditions. The withholding tax will become due when the foreign shareholder disposes of the shares in the Chinese entity or liquidates the Chinese company. China (PRC) cont’d Super deduction for R&D activities On 20 September 2018, the Ministry of Finance (MoF), the State Administration of Taxation (SAT) and the Ministry of Science and Technology jointly issued a circular (Circular  No. 99) increasing the super deduction for research and development activities (R&D). According to the Circular, the actual costs and expenses incurred on R&D activities of an enterprise may be increased by 75% for deduction in determining the enterprise’s profits if the R&D activities have not yet resulted in an intangible. In cases where the R&D activities have created an intangible, the amortisation base of that intangible may be increased by 175% for enterprise income tax purposes in the period between 1 January 2018 and 31 December 2020. For the eligibility of the super deduction, Circular  No. 119, Circular  No. 64 and SAT Public Notice  No. 97 remain applicable. International tax developments Congo On 5 September 2018, China and Congo signed a tax treaty in Beijing. Gabon On 1 September 2018, China signed a tax treaty with Gabon. Like the treaty with Congo, this treaty contains a low 5% dividend withholding tax rate if the pertinent conditions are met. MAYER BROWN | 9 10 | Asia Tax Bulletin JURISDICTION: Hong Kong BEPS and transfer pricing changes On 13 July 2018, the Inland Revenue (Amendment) (No. 6) Ordinance 2018 came into effect. The Amendment Ordinance implements the minimum standards of the Base Erosion and Profit Shifting (BEPS) package promulgated by the OECD and codifies the transfer pricing principles into the Inland Revenue Ordinance (IRO). Under the Amendment Ordinance, the ultimate parent entity of a multinational enterprise (MNE) group (which is a tax resident in Hong Kong) is required to file country-bycountry (CbC) reports to the Inland Revenue Department (IRD) for exchange with other relevant jurisdictions if the annual consolidated group revenue is not less than HKD 6.8 billion. It is important to note that the new law will also apply to domestic arrangements, with broad exemptions in place to ensure that only high-risk transactions are caught. In particular, only domestic transactions giving rise to an actual difference to the Hong Kong tax base will be subject to the transfer pricing rules. The most commonly observed example would be where the two entities have a different tax profile due to carry-forward losses or the application of an offshore tax exemption. The new law gives a statutory basis to the cross-border dispute resolution mechanism (i.e. mutual agreement procedure and arbitration) and advance pricing arrangement (APA), which were previously implemented based on IRD’s administrative rules. While any proposed double tax relief must be negotiated and effected by the Commissioner, the new law is comforting to taxpayers in that cases can be further referred for arbitration. The key elements of the Amendment Ordinance are summarised in the following table: MAYER BROWN | 11 Key element Effective date Enhancements to double taxation relief provisions Apply to tax payable for a year of assessment beginning on or after 1 April 2018 Transfer pricing rules and related provisions Apply to a year of assessment beginning on or after 1 April 2018 for arm’s length principle, APA and changes in trading stock; apply to a year of assessment beginning on or after 1 April 2019 for separate enterprise principle and taxation of income from intellectual property accrued to non-Hong Kong resident associates; and grandfathering of transactions effected or income accrued before 13 July 2018 TP documentation requirements relating to master file, local file and CbC reporting Amendments to preferential regimes, including extension of tax concession to domestic transactions and prescription of thresholds for substantial activities requirements Apply to an accounting period beginning on or after 1 January 2018 for CbC reporting; apply to an accounting period beginning on or after 1 April 2018 for master file and local file; and voluntary filing of CbC reporting allowed for an accounting period beginning in 2016 or 2017 Apply to tax payable for a year of assessment beginning on or after 1 April 2018; and threshold requirements will be prescribed after consulting the relevant stakeholders. The IRD will promulgate guidance to facilitate taxpayers’ understanding of the requirements under the new law in due course. Further developments will be reported in due course. The new law also introduces administrative penalties up to 100% of the undercharged tax where incorrect statements are disclosed on a tax return using incorrect transfer pricing information. In more severe cases of non-compliance with the CbC reporting obligations, the IRD is able to seek criminal charges against directors and tax agents of the offending entity. Hong Kong previously included guidance on the application of bilateral and multilateral APAs, with unilateral APAs considered in exceptional circumstances only. The new rules, contained in Sections 50AAP-50AAW, serve to legislate the existing APA regime with the intention of enticing more taxpayers into entering APAs, thereby securing tax and transfer pricing certainty for both the IRD and the taxpayer. While the new administrative procedures underlying the application for an APA are broadly in line with the existing framework, it should be noted that the new rules allow unilateral APAs in more cases. In addition, the application is no longer subject to a fixed application cost, and instead is calculated on the hourly rates of the IRD case officers, capped at a maximum of HKD 500,000 (approx. USD 64,000). Intellectual property tax relief On 29 June 2018, Inland Revenue (Amendment) (No. 5) Ordinance 2018 was gazetted. The Ordinance enables Hong Kong to expand the scope of profits tax deductions for capital expenditure incurred by enterprises for the purchase of intellectual property (IP) rights from five types to eight with effect from the year of tax assessment 2018/19. The Ordinance also expands the scope of tax deductions originally provided for registration expenses related to trademarks, designs and patents to include plant variety rights. With the expansion in scope of tax deductions provided therein, the eight types of IP rights eligible for profits tax deductions are: • patents; • know-how; • copyrights; • registered designs; • registered trademarks; • rights in layout design (topography) of integrated circuits; • rights in plant varieties; and • rights in performances. Loss carry-forward for high- and new-technology enterprises and scientific technology SMEs On 11 July 2018, the Ministry of Finance (MoF) and the State Administration of Taxation (SAT) jointly issued a circular (Circular  No. 76) regarding an extension of the number of years for the carry-forward of losses. According to the circular, high- and new-technology enterprises, as well as small to medium-sized scientific technology enterprises which have not offset their losses within the statutory period of 5 years, may carry forward these losses for another 5 years. As a result, the loss carry-forward period for these enterprises has been extended from 5 to 10 years. The circular applies from 1 January 2018. International tax information exchange The Inland Revenue (Convention on Mutual Administrative Assistance in Tax Matters) Order (the Order) was gazetted and came into operation on 13 July 2018. The Convention on Mutual Administrative Assistance in Tax Matters (the Convention) has entered into force in Hong Kong on 1 September 2018 and allows Hong Kong to effectively implement the automatic exchange of financial account information in tax matters (AEOI) and the Base Erosion and Profit Shifting (BEPS) package promulgated by the OECD. Hong Kong also follows the Convention to take forward the automatic exchange of CbC reports and spontaneous exchange of information on tax rulings under the BEPS package. Pursuant to the reservations made under the Convention, Hong Kong will not render assistance to other tax authorities in terms of recovery of tax claims or fines or the service of documents. JURISDICTION: India JURISDICTION: 12 | Asia Tax Bulletin Hong Kong cont’d MAYER BROWN | 13 International tax developments New Zealand On 9 August 2018, the amending protocol to the Hong KongNew Zealand Income Tax Agreement, signed on 15 June 2017 by Hong Kong and on 28 June 2017 by New Zealand, entered into force. The protocol generally applies from 1 April 2019. Saudi Arabia On 1 September 2018, Hong Kong’s tax treaty with Saudi Arabia entered into force. The tax agreement generally applies from 1 January 2019 for Saudi Arabia and from 1 April 2019 for Hong Kong. Ireland On 3 September 2018, the Irish Revenue published eBrief No. 166/18, which clarifies that certain interest payments will be exempt from withholding tax and corporate income tax in Ireland under sections 256(3)(h)(l) and 198(1)(c)(ii)(l) of the Taxes Consolidation Act 1997 if they are paid from Ireland to a Hong Kong-resident company for the purposes of the Hong Kong-Ireland Income Tax Treaty and subject to the full corporate income tax rate in Hong Kong (on the basis that it is treated as derived from a Hong Kong source by virtue of the law of Hong Kong). Switzerland On 17 September 2018, the Swiss Council of States (Ständerat) approved the Hong Kong-Switzerland Competent Authority Agreement on Automatic Exchange of Information (CRS). The agreement has been provisionally applied since 1 January 2018, with the first exchange of data expected in the autumn of 2019. Extensive operational control of hotel in India could result in PE in India On 24 May 2018, the New Delhi Authority for Advance Rulings (AAR) gave its decision in the case of Re, FRS Hotel Group (Lux) S.a.r.l. (Now FRHI Hotels & Resorts S.a.r.l.) (the applicant) stating that a permanent establishment (PE) was constituted on account of extensive operational control exercised by the applicant in respect of a hotel in India. The applicant was based in Luxembourg and provided services in connection with hotel management and hotel operation. It entered into various contracts with an Indian hotel owner to provide such services, including the development of hotel standards and policies, sales and marketing, centralised reservations, etc. The agreements entered into were a hotel management agreement, centralised services agreement, hotel licence agreement, hotel advisory agreement and a technical services agreement. The applicant sought a limited advance ruling from the AAR, i.e. whether the payments received for the provision of global reservation services would be chargeable to tax in India as “fees for technical services” (FTS) or “royalty” under the provisions of the Income Tax Act, 1961 in conjunction with article 12 of the India-Luxembourg Income and Capital Tax Treaty (the treaty). In considering the question posed by the applicant, the main issue dealt with suo moto by the AAR is whether the applicant has a PE in India and whether the payment received is effectively connected to that PE. The AAR gave its ruling stating that the applicant has, in substance, undertaken all the important functions in relation to the operation and management of the hotel in India. The applicant is carrying on its business operations through the same and, hence, the hotel in India would be the fixed place of business of the applicant. In giving its ruling, the AAR read all the agreements together to determine the nature of business and whether a PE is constituted or not. The applicant operates and manages vital aspects of the business of the hotel in India and this conclusion was drawn from the following inferences: • the applicant has absolute control over the operation and management of the hotel, including employmentrelated decisions, sales and marketing, reservation software system, etc. Even the vendor that would supply goods and services for the operation of the hotel would be designated by the applicant; and • for certain services as referred to in the technical services agreement, the applicant would “advise” the Indian hotel owner on certain matters such as training of staff, etc. And even in these matters, the Indian hotel owner is bound to take advice and be under the supervision of the applicant. It is under these circumstances that the AAR gave its ruling that the hotel in India satisfies all the three tests for a fixed place PE (existence of a fixed place, fixed place at the disposal of the applicant and the applicant carrying on its business through such fixed place). The hotel in India constitutes a fixed place PE of the applicant as per the treaty and the payments received by the applicant from the Indian hotel owner for the provision of global reservation services would be chargeable to tax in India as business income under the Income Tax Act, 1961 in conjunction with articles 5 and 7 of the treaty. Therefore, the AAR did not consider it necessary to answer the question of whether these payments are FTS or royalty. JURISDICTION: IT Investment Incentive The IT Investment Incentive, a tax policy initiative introduced by the 2018 Tax Reform, grants tax benefits in the form of either accelerated depreciation or tax credits to eligible taxpayers. This tax incentive is part of the Special Measures Law to Enhance Industrial Productivity (“SMLEIP”) which entered into force from 6 June 2018. SMLEIP is intended to improve the productivity of certain businesses by promoting the development and utilisation of advanced information technology (such as the internet of things and artificial intelligence) and data analytics (such as “Big Data”). Businesses are eligible to enjoy the relevant tax benefits subject to satisfaction of certain conditions and accreditation under the SMLEIP. The incentive is not restricted to the manufacturing sector. It can be claimed by businesses operating across all sectors, except the following: (i) Leasing (ii) Research and development (iii) Software (iv) Data processing and other internet-related services The incentive is not only restricted to entities registered in Japan, but may also be claimed by Japanese branches of foreign corporations. Unlike a number of Japanese tax incentives, which are restricted to the manufacturing sector only, the IT Investment Incentive is available to almost all industries and sectors; thus, it provides the opportunity for a wider range of taxpayers to enjoy benefits. As mentioned above, however, the incentive has certain eligibility conditions. It is therefore of the utmost importance to assess the need for investment in various kinds of IT in advance, and, at the planning stage, to seek advice from Information Security Specialists and tax advisors so that the required conditions can be met. Changes to the Japanese CFC regime The Japanese CFC (“JCFC”) rules were fundamentally revised under the 2017 and 2018 Japan Tax Reforms. The updated rules now more closely reflect the recommendations of Article 3 of the OECD’s final BEPS reports, and abolish the “trigger rate” used under the old rules to determine whether a foreign subsidiary is a CFC. CFC status is determined based on the economic activities undertaken by the foreign subsidiary. Three new categories of CFC were also introduced – “Paper Companies”, “Cash Box Companies” and companies based in a “Black List” territory. New rules were also introduced which exclude capital gains arising on certain group restructuring transactions from any JCFC charge. The changes set out in both the 2017 and 2018 tax reforms will apply to fiscal periods beginning on or after 1 April 2018. Under the previous JCFC rules, CFC status was determined by the corporate tax rate (a trigger rate) of a foreign subsidiary (foreign related corporation or “FRC”), and secondly by the economic substance of the FRC (as determined by the Active Business Exemption (“ABE”) Tests). As a result, income earned by FRCs for which the effective corporate income tax rate was on or above the trigger rate of 20% was not subject to CFC rules even if such FRCs did not have economic substance. On the other hand, income earned by an FRC for which the effective corporate tax rate was lower than the trigger rate was subject to a JCFC charge even if such CFCs had economic substance (unless the ABE Tests were satisfied). To fix these issues that could hinder foreign expansion of Japanese corporations, the old CFC Rules were fundamentally revised under the 2017 and 2018 tax reforms. Japan 14 | Asia Tax Bulletin MAYER BROWN | 15 International tax developments France The investment protection agreement (IPA) between France and India, signed in Paris on 2 September 1997 and in force as of 17 May 2000, was terminated on 15 April 2017. The Indian letter denouncing the IPA, dated 7 April 2016, was received by France on 14 April 2016, and, following the one year notification period required under the terms of the IPA, the termination was announced in France by way of Decree No. 2018-737 of 22 August 2018, as published in Official Gazette No. 0194 of 24 August 2018. For investments made before 15 April 2017, the agreement shall remain in force for a period of fifteen years, i.e. until 15 April 2032. For more information on the conditions of termination reference is made to article 13 of the official text of the IPA. Armenia On 14 June 2017, the amending protocol, signed on 27 January 2016, to the Armenia-India Income Tax Treaty entered into force. The protocol generally applies from 14 June 2017. The entry into force news was published in the Indian Official Gazette on 5 July 2018 by way of Notification No. 30/2018. Both Armenia and India have signed the OECD Multilateral Convention(MLI) and included the 2003 treaty and the amending protocol in their list of Covered Tax Agreements under Article 2(1)(a)(ii). Chile On 5 July 2018, the Chinese State Administration of Taxation (SAT) issued a public noticeannouncing that the conditions for the activation of the most favoured nation clause (MFN) on interest contained in the final protocol of the ChileChina Tax Treaty have been met. The Chilean and Chinese tax authorities have confirmed the activation by way of an exchange of letters dated 16 April 2018 and 6 June 2018 respectively. The MFN clause was triggered on 1 January 2017 following the entry into force of the Chile-Italy Income Tax Treaty and the Chile-Japan Income Tax Treaty. Due to the MFN clause, the interest withholding tax can be reduced to 4%, 5% or 15%. Qatar On 29 April 2018, the mutual agreement in the form of an exchange of letters, signed on 16 March 2018 by India and on 29 April 2018 by Qatar, to the India-Qatar Income Tax Treaty entered into force. The mutual agreement clarifies clause (ii) of paragraph 3 of article 11 of the 1999 treaty, granting tax exemption on interest income under article 11(3)(ii) from the date the mutual agreement was reached. The mutual agreement generally applies from 29 April 2018. Finland The investment protection agreement (IPA) between Finland and India, signed in New Delhi on 7 November 2002, will be terminated from 1 August 2019, following the oneyear notification period required under the terms of the IPA. According to information published by the Finnish Ministry of Foreign Affairs, India terminated the IPA on 1 August 2018. For investments made before 1 August 2019, the agreement shall remain in force for a period of 15 years, i.e. until 1 August 2034. For more information on the conditions of termination, please consult article 15 of the official text of the IPA. Portugal On 8 August 2018, the amending protocol, signed on 24 June 2017, to the India-Portugal Income Tax Treaty entered into force. The protocol generally applies from 8 August 2018. JURISDICTION: 2019 tax amendments proposal – summary The Ministry of Strategy and Finance (MOSF) announced its proposed tax law amendments for 2019 (the 2019 tax amendments) on 30 July 2018. According to the MOSF, the purposes of the 2019 tax amendments are to promote creation of jobs, improve redistribution of income and rationalise the tax system. Unless stated otherwise, upon approval from the National Assembly, the 2019 tax amendments will be effective from 1 January 2019. Corporate taxation In accordance with the current STTCA, if certain requirements are met, foreign-invested companies are exclusively eligible for: (i) a reduction of, or exemption from, corporate income tax and personal income tax with respect to income from business subject to tax reduction and exemption; (ii) an exemption from VAT and customs duty with respect to imported capital goods; and (iii) an exemption from acquisition tax and property tax with respect to relevant properties. As a result of this amendment, these exclusive provisions granting foreign-invested companies a reduction of, or exemption from, corporate income tax and personal income tax with respect to income from business subject to tax reduction or exemption will be abolished. Thus, foreign companies expecting tax reduction or exemption for foreign investments should re-review their after-tax profit margins. However, in the case of foreign investors that have been granted or will be granted tax reduction or exemption before the end of 2018, it is highly likely that they can enjoy tax reduction/exemption benefits due to the grandfather clause. In order to enhance fairness in taxation between domestic corporations and foreign corporations, the proposed 2019 tax amendments will also reduce the limit for claiming NOL carry-forwards for foreign corporations from 80% of income for a taxable year to 60%. The 60% limit will apply to the fiscal year beginning on or after 1 January 2019. Individual taxation According to the current Personal Income Tax Law (PITL), with respect to an entity other than a corporation, where: (i) the method of profit distribution or the distribution ratio among members of the organisation is pre-determined; or (ii) such profit is confirmed to be practically distributed, each of the partners will be taxed. Otherwise, the entity will be deemed either as one individual resident or non-resident and taxed accordingly. Under the proposed amendment, with respect to (i) above, where only some of the partners are identified, the identified partners will be taxed accordingly. Also, where a partner is a corporation, the Corporate Income Tax Law (CITL) will apply. With this amendment, the tax treatment of an investment fund established in a foreign country which is classified as an entity other than a corporation has become clearer. This rule will be effective for taxable years beginning on or after 1 January 2020. Under the current PITL, domestic shares (excluding real property shares) held by a majority shareholder are subject to departure tax at a rate of 20%. Also, the person who leaves Korea has the obligation to report the current status of the shares held at the end of year immediately preceding the year in which the person leaves Korea. Korea JURISDICTION: 16 | Asia Tax Bulletin Japan cont’d Under the new JCFC rules: (i) income earned by an FRC which satisfies the Economic Activity Tests (broadly equivalent to the ABE under the old rules) will not generally be subject to a JCFC charge regardless of the corporate tax rate (passive income may still be subject to the CFC rules when the corporate tax rate is less than 20%); (ii) income earned by an FRC which does not satisfy the Economic Activity Tests and which is subject to a corporate tax rate of less than 20% will be subject to the CFC rules on an entity level basis; and (iii) income earned by an FRC which is a Paper Company, a Cash Box or a Black List Company and which is subject to a corporate tax rate of less than 30% will be subject to the CFC rules on an entity level basis. Under the New CFC Rules, the de minimis exemption rule for passive income has also been updated. International tax developments EU On 17 July 2018, the European Union (EU) and Japan signed an economic partnership agreement (EPA) as well as a strategic partnership agreement in Tokyo. Estonia On 29 September 2018, Japan’s tax treaty with Estonia entered into force. The treaty will generally apply from 1 January 2019. Lithuania On 31 August 2018, Japan’s tax treaty with Lithuania entered into force. The treaty generally applies from 31 August 2018 for tax matters relating to the exchange of information (article 27) and for assistance in the collection of taxes (article 28) and from 1 January 2019 for other tax matters. Russia On 10 October 2018, the Japan-Russia Income Tax Treaty (2017) will enter into force. The treaty generally applies from 10 October 2018 for tax matters relating to the exchange of information (article 25) and for assistance in the collection of taxes (article 26) and from 1 January 2019 for other tax matters. From these dates, the new treaty generally replaces the Japan-former USSR Income Tax Treaty (1986), in relations between Japan and Russia. MAYER BROWN | 17 JURISDICTION: 18 | Asia Tax Bulletin Korea cont’d As a result of this amendment, real property shares have been newly added as the taxable object of departure tax, and the applicable departure tax rate has been adjusted as follows: 20% for a tax base below KRW 300 million; and 25% for a tax base exceeding KRW 300 million. The person concerned will also have the obligation to report the current status of the shares held on the day immediately preceding the reporting date. In addition, a non-reporting/underreporting penalty (par value of stock x 2%) will be imposed. It is expected that the taxable object of departure tax will be continuously expanded after 2019 and the sanction imposed for non-fulfilment of the reporting obligation will be strengthened every year. This new rule will be applicable to departures made on or after 1 January 2019. International taxation Strengthening of the requirement for places where certain activities are conducted that are excluded from the definition of domestic place of business (article 94(4) and (5) of the Corporate Income Tax Law (CITL), article 133(3) of the Presidential Decree on the CITL, article 120(4) and (5) of the Personal Income Tax Law (PITL) and article 180 of the Presidential Decree on the PITL). Under the current law, the scope of permanent establishment (PE) included in the CITL or PITL does not include any of the following places: (i) places used by a foreign corporation only for purchasing assets; (ii) places used by a foreign corporation only for storing or keeping assets not for sale; (iii) places used by other persons only for processing a foreign corporation’s own assets; and (iv) places used by a foreign corporation for advertisement, publicity, gathering and providing information, market research, or for performing other preparatory and auxiliary business activities (the places where certain activities are conducted). According to the 2019 tax amendments, even if activities conducted in places where certain activities are conducted are preparatory and auxiliary in nature, such places fall under a PE if any of the following conditions are met: • the conditions below are met: o a PE of the relevant non-resident/foreign corporation or its related party exists at the same place as the places where certain activities are conducted or at another place in Korea; and o activities conducted at the places where certain activities are conducted are complementary to business activities conducted at the PE of the relevant non-resident/foreign corporation or its related party; and • the overall activity resulting from the combination of the activities carried out by the relevant nonresident/foreign corporation or its related party at the places where certain activities are conducted is complementary, and is not of a preparatory and auxiliary character. Expansion of the scope of dependent agent and clarification of types of contracts applicable to determination of dependent agent (article 94(3) of the CITL and article 120(3) of the PITL). Under the current law, any person having the authority to conclude contracts in Korea on behalf of a non-resident or a foreign corporation and repeatedly exercises such authority is considered a dependent agent and thus falls under a PE of such non-resident or foreign corporation. As a result of this amendment, even if the agent does not have the authority to conclude contracts, where the agent repeatedly plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the principal (non-resident/foreign corporation), such agent is considered a dependent agent PE. In addition, the types of contracts that are applicable in determining a dependent agent PE have been clarified as: MAYER BROWN | 19 (i) contracts in the name of a non-resident/foreign corporation; (ii) contracts relating to the transfer of ownership or the grant of the right to use intangibles held by the nonresident/foreign corporation; and (iii) contracts relating to the provision of services by the non-resident/foreign corporation. Rationalisation of the criteria for determining a foreign corporation (article 1 of the Presidential Decree on the CITL). Under the current Presidential Decree on the CITL, a foreign corporation means any of the following organisations: (1) an entity endowed with legal personality pursuant to the law of the state in which it was incorporated; (2) an entity formed only with limited partners; (3) a domestic entity whose type of business is the same as, or similar to, the type of business of a foreign entity that is a corporation under domestic law; or (4) an entity that owns an asset, becomes a party to a lawsuit, or directly holds a right or owes an obligation, independent of its members. The proposed 2019 tax amendments will delete the aforementioned fourth criterion (the subject of rights and obligations). This rule will be effective for taxable years beginning on or after 1 January 2020. Special rule treating OIV as substantive owner of domestic source income (article 121 of the PITL and article 93-2 of the CITL). The 2019 tax amendments may allow withholding agents to regard an OIV as the substantive owner of domestic source income, if it falls under one of the following cases. With respect to an OIV that is not a corporation, only (2) and (3) below are relevant. (1) In cases where the following conditions are all met: (i) the OIV is liable to tax in its residence country; and (ii) the OIV should not be established for purposes of unduly reducing the amount of personal income tax or corporate income tax with respect to domestic source income; (2) The OIV fails to show investors (or if the OIV does not show all investors, the portion not shown only). However, even if the OIV is deemed as the substantive owner, it will be taxed in accordance with domestic tax law (i.e. the application of benefits under the tax treaty concluded with the residence country of the OIV will be denied). (3) The OIV is considered the substantive owner under the relevant tax treaty. By prescribing reasonable cases where tax treaty benefits can be granted to OIVs under law, this amendment will correct imperfections in the current system. This rule will be effective for taxable years beginning on or after 1 January 2020. Under the current LCITA, the arm’s length price for a transaction with a foreign-related party is the price that is expected to be applied in an ordinary transaction with a person other than a foreign-related party. The 2019 tax amendments will prescribe that the tax authority must clearly delineate the actual transaction in consideration of the commercial and financial conditions between a resident and its foreign-related party, the terms of transaction, etc. and determine whether such international transaction is a reasonable one. Also, the proposed amendments will prescribe that the tax authority must compare the tested transaction with the one to be made between independent companies under similar circumstances, and if the relevant transaction considerably lacks commercial reason, it must deny such transaction or properly recharacterise the transaction and thereafter calculate the arm’s length price. JURISDICTION: 20 | Asia Tax Bulletin Korea cont’d MAYER BROWN | 21 Under the current LCITA, the provisions of the tax treaty will preferentially apply to the characterisation of domestic source income of a non-resident or foreign corporation, notwithstanding the domestic tax law. The proposed 2019 tax amendments will delete the above provision. Under the current VAT Act, where a foreign entrepreneur supplies any game, audio or video file, software or other services prescribed by the Presidential Decree on the VAT Act (electronic services), VAT will be imposed. The 2019 tax amendments will newly include “cloud computing services” in the scope of electronic services. Accordingly, a foreign entrepreneur supplying cloud computing services will bear the obligation to report and pay VAT. The new rule will be applicable to services provided on or after 1 July 2019. Tax administration and other matters Under the current NTBA, where a decision or judgment is made final on the objection, a request for examination, adjudication or any disposition may be made within one year from the date the decision or judgment is made final, even if the statute of limitations for the imposition of national taxes has expired. According to the proposed amendment, even where the substantive owner of relevant domestic source income is confirmed through a decision or judgment made by a proper judicial court, the special rule relating to the statute of limitations for the imposition of national taxes will also apply. With this amendment, where the substantive owner has been changed through the court decision, the tax authority has obtained a legal basis to impose tax on the changed substantive owner, despite the lapse of the statute of limitations for the imposition of national taxes. This rule will be effective for court decisions which are made final after 1 January 2019 (if the statute of limitations for the imposition of national taxes expires before 31 December 2018, the previous rule will apply). Under the new rule, the scope of “partial tax investigation” is to be expanded to cover onsite confirmation procedures to be conducted by the tax authority in responding to a taxpayer’s refund request applied by the non-resident/ foreign corporation relying on the benefits of a tax treaty. Based on the above new rule, the tax authority is expected to closely review the relevant cases in a similar manner to tax audit procedures at the stage of the tax authority’s decision on the refund requests. Under the current NTBA, for an international transaction, the statute for limitations for the imposition of national taxes is 15 years (for fraud or other illegal act); seven years (for non-reporting); and five years (for under-reporting). According to the 2019 tax amendments, the concept of offshore transaction has been introduced, and the statute of limitations for the imposition of national taxes has been extended. International transactions and transactions made between residents relating to foreign assets or foreign services will be classified as offshore transactions, and for an offshore transaction, the statute of limitations for the imposition of national taxes will be 15 years (for fraud or other illegal act) and 10 years (for non-reporting and underreporting), respectively. In addition, with respect to the exchange of information, a special rule allowing the extension of the statute of limitations for the imposition of national taxes was recently introduced. Where a request for exchange of information is filed to a foreign tax authority within the statute of limitations for the imposition of national taxes, such period will be extended to one year from the date the information is received (up to three years from the date the request for exchange of information is filed). As it is expected that taxation relating to offshore tax evasion will be strengthened, a close review on reporting of offshore transactions and appropriateness of transaction prices will be required. The new rule will be effective at the following times: • extension of the statute of limitations for the imposition of national taxes with respect to offshore transactions applicable to establishment of the obligation to pay taxes on or after 1 January 2019; and • extension of the statute of limitations for the imposition of national taxes in accordance with the exchange of information applicable to requests of exchange of information filed on or after 1 January 2019. Supreme Court ruling on requirements for tax-qualified spin-off On 28 June 2018, the Supreme Court of Korea (Rep.) gave its decision in a case relating to requirements for a tax-qualified spin-off under the Corporate Income Tax Law (CITL). In 2008, a large Korean chemical company transferred its chemical business unit, which was located in its Incheon factory, to a newly established company (NewCo) in a vertical spin-off, while its remaining business continued to operate within the legacy company (OldCo). The taxpayers, NewCo and OldCo, claimed tax benefits under the Korean tax laws based on the belief that the vertical spin-off met the conditions to be treated as a qualified spin-off. The local government (Incheon City) assessed acquisition tax and capital registration tax on NewCo, arguing that the conditions for a qualified spin-off were not satisfied. Following these assessments, the National Tax Service (NTS) assessed the taxpayers’ corporate income tax and VAT. NewCo and OldCo subsequently appealed both the local and national tax assessments. The Trial Court, High Court and Supreme Court all decided in favour of the taxpayer, confirming that the transaction met the conditions for a qualified spin-off. The Supreme Court interpreted the qualified spin-off requirements as follows: • The “independent business requirement” is met if the spun-off business is able to operate independently after the spin-off. This requirement is satisfied even in cases where: o only one business place is spun off from a business unit that has other business places (e.g. where a company operating two factories chooses to spin off only one); o certain employees engaged in manufacturing, purchasing or other functions remain at OldCo due to the nature and operations of the business; or o NewCo relies heavily on OldCo for the sale of products and purchase of raw materials. • The “comprehensive asset/liability transfer requirement” is met if the assets and liabilities relating to the business being spun-off are comprehensively transferred to NewCo. This requirement is satisfied even if certain common assets and liabilities that are difficult to separate remain with OldCo. The Court ruled that the “comprehensive asset/liability transfer requirement” would still be deemed met where OldCo obtained a bank loan secured by the land immediately before the spin-off while only a portion of the loan proceeds were transferred to NewCo, so as to enable OldCo to have sufficient cash for its operations (including but not limited to the payment of corporate income tax and redemption of corporate bonds). • The “fixed asset usage requirement” is met if NewCo (i) uses at least 50% of the spun-off fixed assets in its business operations; and (ii) does not dispose of the transferred assets within a certain period. (i) The first requirement can be satisfied even if the fixed assets are not directly used by the employees of NewCo. The Court ruled that assets should be viewed as being used by NewCo for purposes of the usage requirement even if the fixed assets are used by employees of OldCo, to which the manufacturing function is outsourced. (ii) The second requirement can be satisfied even if the fixed assets are held by a trust company as security for debt transferred to NewCo, in which case the assets held in the trust are not deemed to have been disposed of. JURISDICTION: 22 | Asia Tax Bulletin Korea cont’d MAYER BROWN | 23 secured by the spun-off land, the fact that some of the loan proceeds remained at OldCo will not negatively affect the above requirement. This case has great significance as it confirmed the legislative intent of the spin-off provisions prescribed by the CITL. The guidance provided in the decision is expected to be widely referred to by corporations seeking greater clarity on whether they are eligible for tax benefits provided for qualified spin-offs under the CITL. International tax developments Turkey On 1 August 2018, the free trade agreement between Korea and Turkey, signed on 26 February 2015, entered into force. The new agreement will replace the 2012 agreement, which entered into force on 1 May 2013. JURISDICTION: Malaysia Sales and Services Tax implemented on 1 September 2018 The political scene in Malaysia has taken a very dynamic turn and it serves as a timely call for all international and local companies operating in the country to wake up and review their operations there. The winning of the general elections in May by the new Alliance of Hope (Pakatan Harapan) coalition government saw the dramatic return to power of now Prime Minister Dr. Mahathir. One of their key promises was to abolish the Goods and Services Tax (GST) and reintroduce updated Sales and Services Taxes (SST) within his first hundred days in office. Malaysia had the SST for 40 years before it was replaced by the GST in 2015. On 1 June 2018 the new Prime Minister issued an Order that lowered the GST rate to zero; this does not cover supplies that are already exempted. All GST registrants will continue to be subject to all other GST requirements, including the filing of GST returns, bad debt adjustments, claiming of input tax credits where applicable and issuance of tax invoices. The Order effectively removes GST in Malaysia, but abolishing it would require Parliament’s approval. The Bill for the Goods and Services (Repeal) Act 2018 is expected to be passed within the next few days. On 16 July 2018, the Finance Minister announced that the Sales and Services Tax (SST) will be implemented on 1 September 2018, after the passing of the SST Bill. Under the proposed SST Bill, the provision of services will be taxed at 6%, while the sale of goods will be taxed at 10%. No further details were provided. The current Goods and Services Tax, which replaced the previous SST regime, has been zerorated since 1 June 2018, and it is expected to be abolished once the SST comes into effect again. On 19 July 2018, the Royal Malaysian Customs Department (RMCD) issued the following with regard to Sales and Services Tax (SST): • the SST will be a single-stage tax, where the sales tax is charged upon taxable goods manufactured and sold by a taxable person in Malaysia and taxable goods imported into Malaysia, and the service tax is charged on taxable services provided in Malaysia and not on imported or exported services; • taxable persons are defined as manufacturers of taxable goods or providers of taxable services with annual turnover exceeding MYR 500,000; • sales tax will be imposed at the rate of 5%, 10% or a specific rate for petroleum products, and the service tax will be at the rate of 6%; • SST returns are required to be submitted on a bimonthly basis; • registered persons are required to keep relevant records of SST submissions for a period of seven years; • certain manufacturers will be exempted from sales tax regardless of turnover (i.e. tailors, jewellers, opticians, etc.) and there will be exemptions for certain transactions between specific areas; and • where services span over both the GST period and the Services Tax period, the invoicing for the services must be apportioned between the two periods (i.e. before 1 September and from 1 September onwards). On 31 July 2018, it was reported that the following bills relating to the repeal of the goods and services tax (GST) and reintroduction of the sales and service tax (SST) had been tabled in the parliament: • the GST (Repeal) Bill 2018; • the Sales Tax Bill 2018; • the Service Tax Bill 2018; • the Customs (Amendment) Bill 2018; and • the Free Zones (Amendment) Bill 2018. The Sales Tax and Service Tax Bills aim to reintroduce the SST, which will replace the GST, and empower the minister in charge to appoint the effective date for charging and levying 24 | Asia Tax Bulletin MAYER BROWN | 25 JURISDICTION: Malaysia cont’d the tax. The Customs (Amendment) Bill and the Free Zones (Amendment) Bill contain consequential amendments to the Customs Act and the Free Zones Act due to the implementation of the SST. On 8 September 2018, the Royal Malaysian Customs Department (RMCD) issued the following Director’s General Decisions on their website: Further to the above, the following were issued in relation to SST: • a guide on sales tax rates for various goods; • a general guide on SST; • transitional rules; and • a guide on return and payment. Accelerated capital allowance for information and communication technology equipment On 5 July 2018, the Income Tax (Accelerated Capital Allowance) (Information and Communication Technology Equipment) Rules 2018 (“Rule”) were gazetted to grant accelerated capital allowance for capital expenditure on information and communication technology equipment used in a business. The Rule is effective from the year of assessment 2017 onwards. “Information and Communication Technology Equipment” is listed in the schedule provided in the Rules, such as computer and components, central processing units, scanners/printers, accessories, software system or software packages, etc., and includes the installation of the equipment. The Rules grant a 20% initial allowance and a 20% annual allowance for information and communication technology equipment costs incurred by a person resident in Malaysia and as part of capital expenditure for his business. The Rules do not apply to a person who has claimed the following in respect of the equipment: • investment tax allowance under the Promotion of Investment Act 1986; • reinvestment allowance; • accelerated capital allowance under any other rules; or • tax exemption under any orders made. Malaysia’s participation in Forum on Harmful Tax Practices On 12 June 2018, the Ministry of Finance (MoF) released a statement on Malaysia’s participation in the Forum on Harmful Tax Practices (FHTP). As a result of Action 5 of the BEPS Action Plan, the FHTP has identified jurisdictions that provide preferential regimes for mobile geographical Issuance of tax invoice on or after 1 September 2018 Declaration of importation by licensed manufacturing warehouse 1 Item Title Description Provides clarification on the issuance of invoices for GST taxable goods and services after 1 September 2018 Provides procedures and clarifications on chargeability of sales tax on importation of raw materials for manufacturing by a licensed manufacturing warehouse Retention payment (GST transitional issue) Provides clarification on issuance of invoice, claiming of input tax and payment of GST on retention sums during the GST transitional period 2 3 services activities related to intellectual property (IP) and non-intellectual property (Non-IP). Accordingly, a number of Malaysian IP and non-IP incentives have been identified for FHTP evaluation, such as MSC Malaysia, principal hub, pioneer status, financial sector (including Labuan) and biotechnology sector incentives. The incentives are evaluated based on the following criteria: • IP incentives: Nexus approach and transparency; and • non-IP incentives: transparency, ring fencing and substantial activities test. The MoF together with Inland Revenue Board of Malaysia and related ministries/agencies are currently reviewing Malaysian tax incentives in order to meet criteria set under the FHTP. The MoF has also set timelines to implement the necessary legislative changes, as follows. With respect to IP incentives: • legislation to amend incentives will be gazetted by 31 December 2018; • cut-off date for new applicants will be 30 June 2018, after which they will be subject to the new evaluation criteria; and • grandfathering will be allowed until 30 June 2021. With respect to non-IP incentives: • legislation to amend incentives will be gazetted by 31 December 2018; and • grandfathering will be allowed until 30 June 2021 for incentives approved on or before 16 October 2017, and until the earlier of the gazette date of the relevant legislative change and 31 December 2018 for incentives approved after 16 October 2017. Qualifying building expenditure and industrial building allowances On 12 September 2018, the Inland Revenue Board of Malaysia (IRBM) issued Public Ruling (PR) No. 3/2018 – Qualifying Expenditure and Computation of Industrial Building Allowance. The PR explains the tax treatment in relation to qualifying building expenditure (QBE) and the computation of industrial building allowances (IBA). The PR provides examples of the types of building expenditure that qualify for IBA, such as cost of construction of buildings, additions, renovations and alterations, cost of purchase and other qualifying expenditure to prepare a site for installation of plant and machinery. The PR also clarifies the date QBE is deemed to be incurred, eligibility to claim IBA, and the tax treatment in special scenarios such as partial use of a building and temporary disuse. Prior to the issuance of the PR, there were two separate PRs explaining the types of buildings that qualify as industrial buildings (i.e. PR 8/2016 and 10/2016). 26 | Asia Tax Bulletin Regulation on deficiency and delinquency interest On 14 September 2018, the Philippines Bureau of Internal Revenue (BIR) issued Revenue Regulations No. 21-2018 prescribing the imposition of deficiency and delinquency interest on tax due under the Republic Act 10963. Deficiency interest is imposed on deficiency tax due and will be assessed and collected from the prescribed due date of its payment until full payment is made or upon issuance of a notice and demand by the commissioner. Delinquency interest, on the other hand, is imposed on the failure to pay: • the amount of the tax due on any returns to be filed; • the amount of tax due for which no returns are required; or • deficiency tax, surcharge or interest imposed by the commissioner until the amount is fully paid. The rate is imposed at 12% for both types of interest and under no circumstance will both be imposed simultaneously. JURISDICTION: Singapore JURISDICTION: Philippines Public consultation on Goods and Services Tax The Ministry of Finance has been conducting a public consultation on the GST (Amendment) Bill 2018 from 28 June 2018 to 18 July 2018. The amendments to the GST Act include changes announced in the 2018 Budget. They also include five other proposed amendments to the existing tax policies and administration, as well as to strengthen Whole-of-Government law enforcement. These non-Budget amendments are summarised below: • Enhancing the power of Inland Revenue Authority of Singapore (IRAS) to investigate tax crimes. o Enhancing IRAS’ enforcement powers for investigation of specified serious tax crimes, or where the suspect attempts to destroy evidence (i.e. power of forced entry, power of arrest without warrant and power of body search subject to conditions). These powers will be exercised only by trained IRAS investigation officers and where necessary. o Expanding IRAS’ power to gather all information relevant to its investigation from any person. • Sharing of information by IRAS with law enforcement agencies (LEAs) to combat serious crimes. o IRAS will be allowed to share with prescribed officers in the LEAs information that IRAS assesses as being critical for investigation or prosecution of serious crimes (as listed in the First and Second Schedules of the Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act). o Further disclosure of such information which is not for the purpose of investigation or prosecution will be an offence. • Countering unauthorised GST collection. Presently, non-GST registered persons issuing an invoice or receipt with an amount purported to be GST are punishable by a penalty and a fine. The amendments will protect customers and further strengthen deterrence against unauthorised collection of GST by: o allowing the use of alternative evidence besides invoices or receipts to prove unauthorised collection of GST; o introducing a custodial sentence where the offence is committed without reasonable excuse or through negligence; and o introducing a new offence where a GSTregistered business, without reasonable excuse or through negligence, collects more GST than allowed under the GST Act. • Extending customer accounting to transactions with the government. o Customer accounting will be extended to transactions with the government to help ease business compliance. • Providing for the disposal of documents or things seized under the GST Act. o Where a matter has not proceeded to prosecution, the amendment will allow for the disposal of documents or things seized during investigation if the owner of the seized items fails to collect the items upon the end of investigation. Additional conveyance duties (ACD) on property holding entities On 5 July 2018, the Inland Revenue Authority of Singapore (IRAS) published the revised e-tax guide on ACD on property-holding entities. The salient change is the increased rate in ACD for buyers (ACDB). Beginning from MAYER BROWN | 27 JURISDICTION: 28 | Asia Tax Bulletin Singapore cont’d 6 July 2018, the ACDB rate of up to 34% may apply on an instrument. The following table summarises the ACDB rates since its introduction. Additional Buyer’s Stamp Duty (ABSD) rates On 6 July 2018, some of the ABSD rates were adjusted to promote a stable and sustainable property market. The adjustments made are as per the table below. In line with the adjustments above, the government released the following related legislation on 5 July 2018: • Stamp Duties (Housing Developers) (Remission of ABSD) (Amendment) Rules 2018 • Stamp Duties (Instruments on or before 5 July 2018) (Remission) Rules 2018 • Stamp Duties (Non-Licensed Housing Developers) (Remission of ABSD) (Amendment) Rules 2018 • Stamp Duties (Transfer of Interest in Property which Buyer has Interest) (Remission of ABSD) (Amendment) Rules 2018 • Stamp Duties Act (Amendment of First Schedule) (No. 2) Notification 2018 Customs law On 9 July 2018, the Customs (Amendment) Bill 2018 was passed. The proposed measures reported on 11 May 2017 were largely adopted as amendments to the Customs Act, except for amendments to sections 39 and 41, which allow the Director-General of Customs the discretion to exempt the submission of manifest data for vessels, airplanes or trains arriving in or departing from Singapore. Following feedback from the public consultation exercise, the Ministry of Finance will study the proposed amendments to these two sections in more detail. International tax developments Latvia On 3 August 2018, the amending protocol, signed on 20 April 2017, to the Latvia-Singapore Income Tax Treaty entered into force. The protocol generally applies from 3 August 2018 for the exchange of information and from 1 January 2019 for other tax matters. Both Latvia and Singapore have signed the OECD Multilateral Convention (MLI) and included the amending protocol in their list of Covered Tax Agreements under Article 2(1)(a)(ii), which may affect the text and interpretation of this amending protocol. Nigeria On 1 November 2018, the Nigeria-Singapore Income Tax Treaty will enter into force. The treaty generally applies from 1 January 2019. Gabon In line with Singapore’s ambition to expand its tax treaty network with African countries, on 28 August 2018, the Gabon-Singapore Income Tax Treaty was signed in Singapore. Switzerland On 17 September 2018, the Swiss Council of States (Ständerat) approved the Singapore-Switzerland Competent Authority Agreement on Automatic Exchange of Information. The agreement has been provisionally applied since 1 January 2018, with the first exchange of data expected in the autumn of 2019. MAYER BROWN | 29 Date of execution Before 20 February 2018 On/After 20 February 2018 Up to 18% ACDB rate On/After 6 July 2018 Up to 19% Up to 34% Profile of buyer Singapore Citizens (SC) buying first residential property SC buying second residential property 0% ABSD rates from 12 January 2013 to 5 July 2018 ABSD rates on and after 6 July 2018 SC buying third and subsequent residential property 7% 10% 0% (no change) 12% (revised) Singapore Permanent Residents (SPR) buying first residential property 5% 5% (no change) SPR buying second and subsequent residential property 10% 15% (revised) Foreigners buying any residential property 15% 20% (revised) Entities buying residential property 15% 25% (revised) plus additional 5% for housing developers (non-remittable) 15% (revised) JURISDICTION: Reduced VAT rate extended On 3 July 2018, the Cabinet approved the extension to maintain the VAT rate at 7% (reduced from the statutory rate of 10% since 1 April 1999) for another year, beginning from 1 October 2018 until 30 September 2019. International tax developments International According to an update of 29 June 2018, published by the OECD, Thailand has expressed its intention to join the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI). BEPS stands for Base Erosion and profits shifting and connotes the international effort to avoid tax abuse. Thailand JURISDICTION: 30 | Asia Tax Bulletin How to deal with tax treaty disputes On 25 June 2018, the Ministry of Finance (MoF) published “Regulations Governing Application of Mutual Agreement Procedure for Double Taxation Agreements” (the MAP Rules) to fulfil one of the three minimum standards under Action 14 of the BEPS Projects and: (i) ensure that MAP cases are fully implemented in good faith and resolved in a timely manner; (ii) ensure the implementation of administrative processes that promote the prevention and timely resolution of disputes; and (iii) ensure that taxpayers can access the MAP when eligible. All current 32 double taxation agreements (as Taiwan is not recognised as an independent state according to international tax, the term “agreement” instead of treaty is used) concluded by Taiwan with other jurisdictions include a MAP article. The MAP Rules provide standardised administrative procedures to taxpayers and tax authorities for making the dispute resolution mechanism more effective and settling the cases within a reasonable time frame. The MAP Rules apply from 25 June 2018. Where a person is of the opinion that the actions of the competent authorities of one or both jurisdictions result or will result in taxation not in accordance with the provisions of an agreement, the person may, irrespective of the remedies provided by the domestic law, apply for MAP with the competent authorities. According to article 2 of the MAP Rules, their scope of application is as follows: • dual residence; • permanent establishment and double taxation of business profits; • tax deduction/exemption under tax treaties; • transfer pricing corresponding adjustment; • bilateral or multilateral advanced price agreement; • non-discrimination; • elimination of double taxation; • other double taxation issues arising from the application or interpretation of an agreement; and • any double taxation issues which cannot be eliminated by an agreement. All MAP cases must meet the following conditions: • The applicant is a tax resident of one or both of the jurisdictions. • The MAP is concerned with taxes on income unless otherwise provided in an agreement. • Disputed tax cases occur during the period in which an agreement is applicable. • The applicant has filed the MAP to the competent authorities within three years from the date the tax notice is received. If the competent authority accepts the MAP case, the case will be transferred to local tax authorities for their review of whether it can be resolved unilaterally. If it cannot be resolved unilaterally, the competent authority will contact the other jurisdiction for processing MAP. If it is a transfer pricing case, the competent authority will delegate local tax authorities to negotiate an APA with the other jurisdiction. If any conclusion is made for MAP cases, the local tax authorities will execute the conclusion within 90 days. If the competent authority believes that the dispute has been resolved (for example, one of the jurisdictions has eliminated double taxation or the MAP case is withdrawn) or cannot be resolved under certain circumstances or the applicant cannot provide necessary assistance, the competent authority may notify the other jurisdiction to terminate the MAP case. The competent authority in Taiwan refers to the Department of International Fiscal Affairs of the Ministry of Finance. Taiwan MAYER BROWN | 31 JURISDICTION: Technology transfers and related party royalty payments The new Law on Technology Transfer No.07/2017/QH4 (Law 07/2017) (replacing Law on Technology Transfer No.80/2006/QH11 (Law 80/2006)) and Decree 76/2018/ NĐ-CP (Decree 76), both effective from 1 July 2018, have provided legal basis for stricter requirements and challenges for related party royalty payments in Vietnam. Law 07/2017, Decree 76 and subsequent guidance in the latest draft circular provide clearer stipulations on compliance requirements including the registration of a technology transfer contract (“TTC”), payment and audit of technology transfer fees and royalty payments. Registration of TTC Royalty will be deemed as nondeductible for income tax purposes if the TTC is not duly registered. It is required that a taxpayer’s TTC must be registered to government agencies for any type of technology transfer from overseas to Vietnam that covers technology transfer contribution in certain cases, especially investment projects, capital contributions, commercial franchises and purchases/sales of machinery and equipment with attached technology content (see Articles 4, 5-2, and 31-1, Law 07/2017). The registration is also encouraged for other types of technology transfers and is applicable for agreements starting from 1 July 2018 onwards, including any TTC which will be renewed after 1 July 2018. Both the TTC and the actual technology transfer can only be implemented after the Ministry of Science and Technology (MOST) has issued the certificate of successful registration (including the case of renewed agreements of technology transfer), and it may take days for the certificate issuance. Risks As the compulsory conditions that trigger registration under Article 4, 5 and 31 of Law 07/2017 could be interpreted in a broad understanding, the tax authority may view any unregistered TTC as unacceptable. The superseded Law on technology (Law 80/2006) did not strictly require the registration of a TTC. Thus, those TTCs which were signed previously but renewed on an annual basis may be overlooked by enterprises while in fact these routine TTCs must also be registered under the new regulations. Enterprises may conduct the technology transfer and even the make payment of any charges under the TTC without notice of the new requirements or make a late registration. In both cases of non-registration or late registration of the TTC (or the renewal of the TTC), any type of charges (including but not limited to technology transfer fee royalty, technical support fee, etc.) would be deemed as nondeductible for corporate income tax purposes. Price testing requirement for technology transfer between related parties • Clause 3, Article 27 of Law 07/2017 stipulates that any price/charge regarding the technology transfer between related parties (as defined by tax regulations) must be tested upon the tax authority’s requests. • The testing of a transfer price for technology must be done by a competent and certified organisation/agency among those listed on MOST’s website. However, as of July 2018, there has been no organisation listed due to very high requirements for qualifying as a technology price valuation agency, and due to the unavailability of relevant training programs by MOST. • Law 07/2017 and Decree 76 stipulate that the testing of price/charge relating to the technology transfer must be done in accordance with transfer pricing regulations, i.e., Decree 20/2017/ND-CP effective from 1 May 2017. Vietnam 32 | Asia Tax Bulletin MAYER BROWN | 33 Transfer pricing risks With the advent of the TTC registration requirement as well as payment requirements, taxpayers will need to conduct a comprehensive report and benchmarking analysis to justify the price and nature of related-party technology transfers. It is noted that the report and the benchmarking study would serve as a defence documentation during an audit. For technology transfer agreements with related parties that are subject to compulsory registration, enterprises will have to prepare a registration Form (i.e. Form 01) including supporting documents to submit to MOST. Form 01 has several sections which will need to be consistent with the supporting documentation and benchmarking study or risk the technology transfer being rejected by both MOST and the tax authority. Where companies transfer technology to affiliated companies it is recommended to: • revisit existing TTC to identify whether these TTC or the amendments/renewal of such TTC fall into compulsory registration provisions. • review the availability of documents and information to evidence the nature of technology transfer before filling Form 01. • complete registration for new technology transfer agreements and/or existing agreements with automatic renewal date after 1 July 2018 as soon as possible. International tax developments Brazil On 2 July 2018, the Brazil-Vietnam Air Transport Agreement was signed in Brasília. Croatia On 27 July 2018, Croatia and Vietnam signed an income tax treaty in Zagreb. Latvia On 6 August 2018, the Latvia-Vietnam Income Tax Treaty entered into force. The treaty generally applies from 1 January 2019. Macao On 27 August 2018, Vietnam approved the Macau-Vietnam Income Tax Agreement, by way of Resolution No. 111/NQ-CP. 34 | Asia Tax Bulletin About Mayer Brown Mayer Brown is a distinctively global law firm, uniquely positioned to advise the world’s leading companies and financial institutions on their most complex deals and disputes. With extensive reach across four continents, we are the only integrated law firm in the world with approximately 200 lawyers in each of the world’s three largest financial centers—New York, London and Hong Kong—the backbone of the global economy. We have deep experience in high-stakes litigation and complex transactions across industry sectors, including our signature strength, the global financial services industry. Our diverse teams of lawyers are recognised by our clients as strategic partners with deep commercial instincts and a commitment to creatively anticipating their needs and delivering excellence in everything we do. Our “one-firm” culture—seamless and integrated across all practices and regions—ensures that our clients receive the best of our knowledge and experience. 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] MAYER BROWN | 35 Mayer Brown is a distinctively global law firm, uniquely positioned to advise the world’s leading companies and financial institutions on their most complex deals and disputes. With extensive reach across four continents, we are the only integrated law firm in the world with approximately 200 lawyers in each of the world’s three largest financial centers—New York, London and Hong Kong—the backbone of the global economy. We have deep experience in highstakes litigation and complex transactions across industry sectors, including our signature strength, the global financial services industry. Our diverse teams of lawyers are recognized by our clients as strategic partners with deep commercial instincts and a commitment to creatively anticipating their needs and delivering excellence in everything we do. 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