MAYER BROWN JSM | 1 Asia Tax Bulletin Spring 2017 Americas | Asia | Europe | Middle East www.mayerbrownjsm.com 2 | Asia Tax Bulletin MAYER BROWN JSM | 3 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 Partner, Mayer Brown LLP +65 6327 0250 | email@example.com This Edition Dear reader, A new spring and many new developments on taxation in Asia. This edition of the Asia Tax Bulletin discusses the main tax developments over the past three months in Southeast Asia, India, China, Japan and Korea. A lot is happening, ranging from the new guidelines on foreign investment in the PRC to guidance on the application of the general anti avoidance rules in the PRC and India. Countries are also moving on the BEPS (Base Erosion and Profit Shifting) front: both Singapore and Hong Kong have been actively signing and promulgating new tax treaties with other countries in order to allow for automatic exchange of information on financial matters. Indonesia and Vietnam have issued new transfer pricing decrees, which in the case of Indonesia focus primarily on the related party documentation requirements which have dramatically lowered the threshold for documentation requirements. Malaysia has announced that is fully committed to adopting the BEPS principles and its minimum standards on dealing with tax treaty abuse and transfer pricing. Singapore has fine-tuned its transfer pricing guidelines based on the latest BEPS standards. Taiwan is looking to reform its dividend imputation system and to introducing a VAT registration for offshore ecom businesses. We hope you will find this useful for your purposes and as always we appreciate hearing from you if you have questions or need help with respect to the matters discussed in this tax bulletin. Sincerely yours, Pieter 4 | Asia Tax Bulletin MAYER BROWN JSM | 5 Contents THAILAND 42 Global Forum on Transparency and Exchange of Information 43 Tax deductions and tax holidays 43 Excise tax VIETNAM 44 New transfer pricing decree 44 Employment mobility 45 Deduction for depreciable assets 45 Personal income tax 46 Amendments to Investment Promotion Act 46 International tax developments PHILIPPINES 30 Revised tax reform package 30 Estate tax 31 Revision of donors tax rate SINGAPORE 32 Common reporting standard 32 Transfer pricing guidelines 33 Budget 2017 34 Property tax 34 Real estate investment trusts 34 New minimum salary for an Employment Pass 34 Guidance on mutual agreement procedure for tax treaties 35 Simplified corporate income tax return 36 International tax developments TAIWAN 38 Reform of dividend imputation 39 VAT registration threshold for foreign e-commerce enterprises announced 39 Exchange of information 39 Depreciation Table of Fixed Assets 39 Securities transaction tax reduction expected 39 Guidelines enterprise income tax audit 40 Withholding tax on income from debt-claims 40 Amendments to estate and gift tax 40 Penalties for failure to fulfil withholding obligation 40 Deductibility of interest on tax payments and penalties 41 Tax credit on R&D 41 International tax developments CHINA 6 Guidelines on foreign investment 8 Special tax adjustments (GAAR) 9 Teachers and researchers 9 Tax incentives for technological innovations and scientific research 9 Imports of goods and equipment used for oil and gas industry 9 New export VAT refund rates 10 Charitable donation HONG KONG 11 Aircraft leasing 12 Budget for 2017 13 Stamp Duty 13 Regulatory capital securities 13 Business registration fees 13 Mobility news: Indian citizens 14 Paper on tax issues affecting Hong Kong as financial centre published 14 Beneficial ownership public register 14 International tax developments INDIA 15 Indirect transfer provisions to offshore investment funds 15 Harsh punitive actions against shell companies 16 Guidance on place of effective management 16 GAAR implementation 17 Budget 2017 19 New GST Act 19 International tax developments INDONESIA 21 Transfer pricing documentation 22 Automatic exchange of country-by-country reports 22 International organisations 22 International tax developments JAPAN 23 Trans-Pacific Partnership 23 Permanent residency for highly skilled visa holders 23 US limited partnerships treated as transparent entities 24 2017 tax reforms passed 24 International tax developments KOREA 25 Permanent establishments 26 Tax incentives 27 International tax developments MALAYSIA 28 Budget 2017 enacted 28 Malaysia adopts the BEPS standards 29 Administrative assistance in tax 29 Automatic Exchange of Financial Account Information 29 Convention on Mutual Administrative Assistance in Tax Matters 29 Multilateral Competent Authority Agreement on CbC reporting 29 Companies Act 2016 comes into operation Key: Jurisdiction (Click to navigate) 6 | Asia Tax Bulletin MAYER BROWN JSM | 7 China (PRC) Guidelines on foreign investment On 17 January 2017, the State Council released the Circular on Several Measures on Expanding the Opening to and Active Use of Foreign Investment (国务院关 于扩大对外开放积极利用外资若干措施的通知) (Guidelines). The Guidelines set out the blueprint for China’s policies on attracting foreign investment in the upcoming years. Background According to the latest statistics from the Ministry of Commerce (MOFCOM), foreign direct investment in China recorded a growth of 4.1% in 2016. Although the investment amount has continued to increase each year, the growth rate has declined. The rising costs of production in China during the global economic slowdown have driven many investors to other emerging markets. Against this background, the Guidelines are generally seen as the central government’s revived attempt to attract foreign investment by calling on various ministries to take concrete action to implement the principles set out in the Guidelines. Highlights The Guidelines provide high-level guiding principles which include the following: • China will focus on liberalisation of the following sectors to foreign investment: - Financial sectors, such as banks, securities companies, fund management companies, futures companies, insurance firms and insurance agencies; - Accounting and auditing services, architecture design and credit-rating services; - Manufacturing sectors, such as manufacturing of rail transportation equipment and motorcycles, edible fats and oils processing and production of fuel ethanol; - Unconventional oil and gas production, such as development of shale deposits and shale gas; and - For Sino-foreign co-operative projects of oil and gas exploration, the current approval regime will be replaced by a record-filing system. Most of the previous changes have already been reflected in the latest draft of the revised Foreign Investment Industry Catalogue (外商投资产业指导目 录(修订稿), which was issued in December 2016 (please refer to our earlier legal update “China plans to revise the Foreign Investment Catalogue” for details). • China will seek to open up to foreign investment, in an “orderly way”, sensitive areas such as telecommunications, education, internet, culture industry, and transportation. • Foreign-invested enterprises (FIEs) will enjoy favourable policies designed for the “Made in China 2025” strategy. In particular, foreign investment is encouraged in the following sectors to help upgrade traditional industries: high-end manufacturing, intelligent manufacturing, green manufacturing, industry design and innovation, engineering consultancy, modern logistics and inspection, testing and certificating services. • Foreign capital is encouraged to participate in infrastructure projects in China by way of concession arrangements focusing on the following fields: energy, transportation, water conservancy, environmental protection and public utilities. Foreign-invested projects operated under a concession agreement will enjoy the same preferential policies as are available for domestic-funded projects. • FIEs are encouraged to set up research and development centres (R&D centres) and join the national science and technology programme on equal terms with domestic entities. The favourable policies offered to domestic R&D centres and hi-tech enterprises are equally available to foreign investors. • China will continue its efforts to create a level playing field for foreign investors and domestic investors. In particular, the Chinese government will: - Work towards a more fair environment for FIEs when they apply for permits/licences and participate in public bidding projects; - Offer FIEs more opportunities to participate in formulating industrial standards; - Enhance intellectual property (IP) enforcement mechanisms and have more international IP arbitration institutions set up branches in China to better protect IP rights of foreign investors; and - Explore diversified financing channels for FIEs, such as listing on the main board, secondary board, SME board or the new OTC market, and issuance of bonds by FIEs. • As part of the reform on the registered capital system, any minimum capital requirements must be removed for FIEs as long as they are not specified by law or administrative regulations. • The central government will grant greater autonomy to local governments on offering local incentives to attract foreign investment. • The Foreign Investment Catalogue in Central and Western China (中西部地区外商投资优势产业目 录) is being revised, and foreign investment in central and western China and northeast China will enjoy more favourable policies in terms of tax, land grants and government subsidies. • FIEs in encouraged industries can continue to benefit from lower land use cost, which is set at 70% of the minimum land grant price. • China will continue to encourage foreign investors to set up regional headquarters in the country and will facilitate capital pooling among FIE group companies. • China will unify the administrative regime on foreign debt for both FIEs and domestic companies, and will further simplify relevant foreign exchange formalities. • China will push forward the “negative list” reform on foreign investment. • High-level foreign talents setting up hi-tech enterprises in China will, together with their families, be entitled to more preferential treatment in terms of residency status and visa policies. The Guidelines serve as a guiding document which sets out the main frame of reforms that China will roll out to attract foreign investment. Although the State Council has designated specific ministries to take charge in implementing these policies, it is unclear what detailed rules will be formulated under what timeframe. According to news reports, MOFCOM is now working with other authorities to form a timetable of relaxation measures concerning financial industries. MOFCOM officials also indicated that reforms relating to sensitive sectors will first be tested in the free trade zones. While the issuance of the Guidelines is a welcome move by the Chinese government, foreign investors will need to wait and see what follow-up measures will be launched in the future. JURISDICTION: According to the latest statistics from the Ministry of Commerce (MOFCOM), foreign direct investment in China recorded a growth of 4.1% percent in 2016.” “ 8 | Asia Tax Bulletin MAYER BROWN JSM | 9 Teachers and researchers Certain (old) tax treaties concluded by China contain a provision on teachers and researchers under which payments are exempt from tax in China if they are received by a resident individual of a contracting state who is temporarily present in China for teaching and conducting research at a university, college, school, or research and educational institution. The State Administration of Taxation (SAT) issued an announcement on 29 December 2016 (SAT Gong Gao  No. 91) providing guidance on the interpretation of schools, research and educational institutions etc. under the treaty provision and revising an administrative procedure for the treaty benefit entitlement. According to the announcement, all pre-schools, elementary schools, middle schools, universities and special educational institutions qualify for the treaty benefit. In concrete terms, it includes kindergartens, elementary schools, elementary schools for adults, middle and high schools, vocational schools, schools for adults, technical schools, schools for special education, international schools (for children of foreign workers), colleges and universities. Training institutions or centres are not considered schools according to the announcement and therefore they do not qualify for the treaty benefit. As to the administrative procedure, a Foreign Expert Certificate is no longer the only document that can be used to prove the status of a teacher or researcher. A foreign worker’s work permit may also suffice. The announcement applies from the date of its issuance. With the publication of this announcement, Guo Shui Han  No. 37 and Guo Shui Fa  No. 153, both on the same subject, cease to apply. Tax incentives for technological innovations and scientific research On 14 January 2017, the Ministry of Finance, the Ministry of Education, the National Development and Reform Commission, the Ministry of Science and Technology, the Ministry of Industry and Information Technology, Special tax adjustments (GAAR) On 28 March 2017, the State Administration of Taxation (SAT) issued an announcement concerning new administrative rules for the special tax adjustment and mutual agreement procedures (SAT Gong Gao  No.6). The Shanxi local tax bureau published the announcement on its website on 27 March 2017. The announcement applies from 1 May 2017. The announcement contains 62 provisions, also including the definitions of related enterprises, related transactions, contemporaneous documentation and profit level monitoring. The announcement states that the focus of transfer pricing investigations will be on: • Enterprises engaged in related party transactions with relatively large transaction amounts or involved in a variety of related transactions; • Enterprises having incurred losses for a considerable period of time and enterprises with low profits or fluctuating profitability; • Enterprises whose profitability is lower than that of other enterprises in the same industry; • Enterprises whose profit levels do not match the functions they perform and risks they assume; • Enterprises having transactions with related parties located in countries with low tax rates; • Enterprises that fail to submit the statements on related party transactions or fail to prepare contemporaneous documentation; • The proportion of associated parties’ debt investments received by enterprises and equity investments received by enterprises not in compliance with the relevant regulation; • The profits of enterprises set up by resident enterprises, or controlled by resident enterprises and Chinese residents, not being allocated or reduced distribution without reasonable business explanation if the enterprises are located in countries (regions) with an actual tax burden of less than 12.5%; and • The implementation of other tax planning or arrangements that do not have a reasonable commercial purpose. The announcement also clarifies that a comparability analysis must be conducted in order to select appropriate transfer pricing methods. A comparability analysis mainly covers the following five aspects: • Characteristics of assets transacted or services provided, including the physical characteristics, quality and quantity of tangible assets; characteristics and scope of services provided; as well as types, transactional forms, terms and scopes, and expected returns on intangible assets; • Functions performed and risks assumed by parties to transactions. Functions primarily include research and development, design, procurement, processing, assembly, manufacturing, inventory management, distribution, after-sale services and advertising, logistics and storage, financing, accounting and legal issues, and human resources management. The analysis of functions will focus on the similarity of the assets employed by the parties concerned in performing the functions. Risk analysis will include research and development risks, procurement risks, manufacturing risks, distribution risks, marketing risks, and management and finance risks; • Contractual terms, mainly including transaction subject matters, transaction amounts, prices, methods and conditions of charges and payments, delivery conditions, scopes and conditions of aftersale services, agreements on provision of additional services, the right to change and modify contracts, duration of contracts, and the right to terminate or renew contracts; • Economic circumstances, mainly including industry profiles, geographic locations, market scales, market segments, market shares, degree of market competition, consumers’ purchasing power, substitutability of products and services, prices of production factors, transportation costs, and government control; and • Business strategies, mainly including innovation and development strategies, business diversification strategies, risk avoidance strategies, and market share strategies. China (PRC) cont’d the Ministry of Civil Affairs, the Ministry of Commerce, the General Administration of Customs, the State Administration of Taxation and the State Administration of Press, Publication, Radio, Film and Television jointly published a notice (Cai Guan Shui  No. 71) issuing administrative measures on applying tax incentives for supporting technological innovations and scientific research, subject to notice Cai Guan Shui  No. 70. The notice applies from 1 January 2016. Imports of goods and equipment used for oil and gas industry The Ministry of Finance, the General Administration of Customs and the State Administration of Taxation jointly issued two notices on 29 December 2016 (Cai Guang Shui  No. 69 and Cai Guang Shui  No. 68) stating that imports of goods and equipment directly used for the marine and (designated) land exploration and exploitation of oil and gas are, in the period from 1 January 2016 to 31 December 2020, exempt from import duties and value added tax at the import stage, provided that such goods or equipment cannot be produced in China or do not meet the specifications of business. For the purposes of the implementation of the notices, several attachments are enclosed in the two notices, including the lists of exempt goods or equipment, administrative procedures for the application of the exemption, the list of the exempt amounts and the list of the designated areas of land exploration and exploitation projects. New export VAT refund rates On 24 January 2017, the State Administration of Taxation (SAT) issued a notice (Shui Zong Han  No. 42) releasing the 2017A version of the overview on export VAT refund rates in accordance with the new version of the Chinese National Import and Export Tariff and the Harmonized Commodity Description and Coding System. The overview is available on the SAT computer system (FTP 188.8.131.52), and local tax authorities are required to inform relevant enterprises. JURISDICTION: 10 | Asia Tax Bulletin MAYER BROWN JSM | 11 China (PRC) cont’d Charitable donations On 24 February 2017, the Standing Committee of the People’s Congress passed the decision on the amendment to article 9 concerning the deductibility of charitable donations for the purposes of public welfare or interest of the Enterprise Income Tax Law (EITL). Based on the amendment, charitable donations for the purposes of public welfare or interest made by an enterprise are deductible up to 12% of the enterprise’s total annual profit. Donations in excess of such percentage may be carried forward to the subsequent three years. The amendment became effective on the date that the amendment was passed and promulgated by the People’s Congress, i.e. 24 February 2017. This minor amendment has become an eye-catching event because it is the first time that the EITL has been amended through the legislative procedure of the People’s Congress. Hong Kong It is expected that over 6,000 commercial aircrafts will be delivered globally over the next 20 years, with a high proportion being delivered to Asia.” “ Aircraft leasing On 23 January 2017, the Hong Kong government briefed the Legislative Council Panel on Economic Development about a proposed new tax regime for aircraft leasing in Hong Kong. This is a very welcome development for which the Hong Kong government should be commended. Aircraft financing presents a major opportunity that complements Hong Kong’s traditional strengths in the fields of financial and professional services. It is expected that over 6,000 commercial aircraft will be delivered globally over the next 20 years, with a high proportion being delivered to Asia. Hong Kong, with its established business infrastructure, should be a natural venue for aircraft operating lessors. However, the current tax law in Hong Kong is a major impediment, because it taxes the full rental income while denying deductions for aircraft depreciation and certain interest costs. Ironically, Hong Kong has the most competitive withholding tax rate for aircraft leases into China, but other jurisdictions such as Ireland and Singapore are currently much more attractive options overall. To make Hong Kong more competitive for operating leases, a new set of tax rules for offshore aircraft leasing (i.e. leasing to non-Hong Kong airlines) is being proposed. The main features of the new regime are: • The tax rate on the profits of “qualifying aircraft lessors” and “qualifying aircraft leasing managers” will be only 8.25% (i.e. half the normal Hong Kong profits tax rate); and • This reduced tax rate for lessors will be applied to only 20% of the usual tax base (i.e. gross rentals less deductible expenses, excluding tax depreciation). Implicitly, this suggests a 1.65% tax rate on gross rental income before deductions. • The new regime will contain anti-abuse features including: - Measures to ensure that the concessions will not apply where the rental payments are tax-deductible in Hong Kong to the lessee; - Requiring qualifying aircraft lessors and qualifying aircraft leasing managers to be standalone JURISDICTION: JURISDICTION: 12 | Asia Tax Bulletin MAYER BROWN JSM | 13 Stamp Duty On 27 January 2017, the amendment to the Stamp Duty Bill 2017 (the Bill) was gazetted. The Bill, announced on 4 November 2016, introduces a new flat rate of 15% for the ad valorem stamp duty (AVD) chargeable on residential property transactions concluded after 5 November 2016, in lieu of the existing AVD rates at Scale 1 (i.e. the “doubled ad valorem stamp duty” (DSD) rates). A government spokesman stated that except for specified exemptions, the new rate of 15% would apply to all transactions for residential property acquired by individuals or companies. The existing arrangement of applying DSD rates to non-residential property transactions is not affected. Moreover, a Hong Kong permanent resident (HKPR) buyer who does not own any other residential property in Hong Kong at the time of acquiring residential property will continue to pay AVD under the lower rates at Scale 2. To cater for the situation where a HKPR acquires a new residential property before disposing of his single residential property, the bill proposes to maintain the existing refund mechanism under the DSD regime for a HKPR-buyer who replaces his single residential property. The Bill was introduced into the Legislative Council on 8 February 2017. Regulatory capital securities On 16 February 2017, the Inland Revenue Department published the Inland Revenue (Amendment) (No. 2) Ordinance 2016 (“the Amendment Ordinance”). Among other points, the Amendment Ordinance clarifies the stamp duty treatment in respect of regulatory capital securities (RCSs) issued by financial institutions in compliance with the Basel III capital adequacy requirements. The Basel III capital adequacy requirements are minimum standards promulgated by the Basel Committee on Banking Supervision, under which financial institutions must hold a certain amount of regulatory capital expressed as a percentage of their treaty network, this proposal has the potential to finally make Hong Kong truly competitive in the global aircraft leasing market. Budget for 2017 The Financial Secretary proposes the following tax measures which require legislative amendments before implementation: • A one-off reduction of profits tax, salaries tax and tax under personal assessment for YA 2016/17 of 75%, subject to a USD 20,000 cap for each case. This measure will be effected by amending the Inland Revenue Ordinance. • An increase in the marginal tax bands from USD 40,000 to USD 45,000 as from YA 2017/18. The present marginal tax bands and the proposed tax bands are shown in the table below. • An increase in the disabled dependant allowance from USD 66,000 to USD 75,000, and the dependent brother or dependent sister allowance from USD 33,000 to USD 37,500 as from YA 2017/18. • An increase in the deduction ceiling for self-education expenses from USD 80,000 to USD 100,000 as from YA 2017/18. • An extension of the entitlement period for deduction for home loan interest from 15 to 20 years of assessment as from YA 2017/18, while maintaining the current annual deduction ceiling of USD 100,000. total risk-weighted assets. Financial institutions may seek to comply with the Basel III requirements by strengthening their capital base through, among other means, issuing specified securities. Before the enactment of the Amendment Ordinance, the RCSs regarding interest on money borrowed from or lent to associated corporations were not treated as debt securities. Correspondingly, the Stamp Duty Ordinance (SDO) has been amended so that the transfer of RCSs is, as are other transfer transactions relating to debts, exempt from stamp duty. With these amendments, a contract note is not required to be executed or stamped for the sale or purchase of a RCS. Further, any other transfer of RCS is exempt from stamp duty under heads 2(3) and 2(4) of the First Schedule to the SDO. Business registration fees The Inland Revenue Department published an announcement on its website stating that registration of businesses or their branches commencing activities on or after 1 April 2017 is subject to a business registration fee or prescribed branch registration fee, as the case may be, which is payable together with the annual levy. In addition, the announcement sets out a number of administrative issues relating to the registration of companies or branches. Mobility news: Indian citizens As of January 23, 2017, Indian nationals seeking to travel to Hong Kong as visitors must complete prearrival registration through the online “Pre-arrival Registration for Indian Nationals.” Indian nationals must complete this pre-arrival registration before visiting Hong Kong visa-free or travelling through Hong Kong. The registration result will be provided to the traveller at the time of registration. There is no fee to complete the registration. Pre-arrival registration is valid for six months or until the passport expiration date, whichever is earlier. During the validity of the registration, the Indian national may make multiple entries into Hong Kong and stay for a period of 14 days for each entry. Hong Kong cont’d corporate entities; they must also conduct business transactions with associated parties on an arm’s length basis; and - Imposing a substance requirement, by stipulating that the central management and control of these entities, as well as their profit-generating activities, must be located in Hong Kong. The Director is planning to submit an official proposal in April 2017 to the Legislative Committee introducing a special tax regime for offshore aircraft leasing which will contain provisions with regard to a special tax rate, depreciation and anti-abuse measures. The current tax regime has needlessly impeded the development of the aircraft leasing business in Hong Kong. The proposal to effectively allow tax depreciation through a deemed profit of 20% of the net rental income is a simple solution to what has been a big problem. In addition, the tax rate concession is very attractive to leasing managers. At face value, these proposals should make the Hong Kong tax regime competitive globally, especially if foreign tax credits are allowed for withholding taxes paid outside Hong Kong by lessees. As always, the devil is in the detail, particularly around the question of whether the overall economics will make sense compared to operations in Ireland, Singapore and the special free trade zone regimes in mainland China. Recent experience with enhancements to concessionary regimes such as the expanded offshore funds regime and Corporate Treasury Centres, while good proposals on paper, have proved to be less useful in practice due to the overly complex anti-abuse measures. We hope that these new leasing proposals will not suffer the same fate. It will be interesting to see how these new rules will tie with the existing aircraft owning provisions in Sections 23C and 23D of the Hong Kong Inland Revenue Ordinance. There is also an important issue relating to the distinction in the current law between operating leases and hire purchase agreements (i.e. finance leases), especially in light of the impending changes to the accounting rules for lessees in IFRS 16. All in all, these proposals are a step in the right direction. Along with a continued focus on expanding Hong Kong’s double tax Present marginal tax band (YA 2016/17) Proposed marginal tax band (from YA 2017/18) Net chargeable income (tax band) (USD) Rate (%) Net chargeable income (tax band) (USD) Rate (%) On the first 40,000 2 45,000 2 On the next 40,000 7 45,000 7 On the next 40,000 12 45,000 12 On the remainder 17 17 JURISDICTION: 14 | Asia Tax Bulletin MAYER BROWN JSM | 15 Hong Kong cont’d Paper on tax issues affecting Hong Kong as financial centre published On 29 December 2016, the Financial Service Development Council (FSDC) published A Paper on Tax Issues Affecting Hong Kong to Become a Preferred Location for Regional and International Financial Institutions to Originate and Trade International Financial Products (FSDC Paper No. 26). FSDC is a government inter-departmental advisory organisation for (international) financial services. The paper discusses the key challenges against the backdrop of the changing international tax environment and provides recommendations for possible improvements. The main issues discussed include interest deductibility, regulated capital requirements and total loss absorption capacity, Hong Kong sourcing rules and offshore claims, BEPS and transfer pricing, and tax treaties with tax jurisdictions where financial products are issued or where clients are resident. The paper advocates the continuation and improvement of Hong Kong’s simple and effective tax system. The Chairman of FSDC even points out that an improved tax system may attract more foreign investment as companies from other jurisdictions may consider relocating their businesses because of the changed tax landscape of their home countries or jurisdictions. Beneficial ownership public register The Financial Services and Treasury Bureau in Hong Kong has recently issued a consultation paper (consultation ended on 5 March 2017) putting forward proposals to enhance the transparency of beneficial ownership of Hong Kong companies, including requiring such companies to maintain a register of persons with significant control (a PSC register) over the company. This register will be open to public inspection. Individuals who directly or indirectly own 25% or more of the shares or voting power of a Hong Kong company or who exercise control over the company by being able to influence the appointment of directors would be included in the register. International tax developments Belarus On 16 January 2017, the Belarus - Hong Kong Income and Capital Tax Agreement (2017) was signed in Hong Kong. Japan On 31 December 2016, the competent authority agreement on automatic exchange of information between Hong Kong and Japan, signed on 20 September 2016, entered into force. The agreement is intended to ensure that Hong Kong and Japan will be able to commence, as of 2018, the automatic exchange of financial account information related to taxable periods or charges to taxes beginning on or after 1 January 2017 in accordance with the OECD Automatic Exchange of Information Agreement (2014) (MCAA), on the basis of the Council of Europe - OECD Convention on Mutual Administrative Assistance in Tax Matters (1988), as amended by the 2010 protocol. UK On 31 December 2016, the competent authority agreement on automatic exchange of information between Hong Kong and the United Kingdom, signed on 19 October 2016, entered into force. The agreement is intended to ensure that Hong Kong and the United Kingdom will be able to commence, as of 2018, the automatic exchange of financial account information related to taxable periods or charges to taxes beginning on or after 1 January 2017 in accordance with the OECD Automatic Exchange of Information Agreement (2014) (MCAA), on the basis of the Council of Europe - OECD Convention on Mutual Administrative Assistance in Tax Matters (1988), as amended by the 2010 protocol. Pakistan On 17 February 2017, the Hong Kong - Pakistan Income Tax Agreement (2017) was signed in Hong Kong. Zimbabwe On 29 September 2016, the China (People’s Rep.) - Zimbabwe Income Tax Treaty (2015) entered into force. The treaty generally applies from 1 January 2017. India Indirect transfer provisions to offshore investment funds In a welcome move1 , the Central Board of Direct Taxes (CBDT) has issued a press release on January 17, 2017, keeping in abeyance the operation of Circular No 41 of 2016 (“New Circular”). The New Circular was issued on December 21, 2016 clarifying various aspects of the indirect transfer provisions and their applicability to offshore investment funds. The press release mentions that foreign portfolio investors (FPIs), venture capital funds and other stakeholders have raised concerns with the CBDT that the New Circular does not address the issue of possible multiple taxation of the same income. The concerns raised by stakeholders are under consideration by the CBDT and, pending a decision on the matter, the operation of the New Circular has been kept in abeyance. Harsh punitive actions against shell companies On 10 February 2017, the Ministry of Finance issued a press release stating that deviant shell companies will be heavily penalized if found to be engaging in money laundering and tax evasion. The release states that such harsh punitive actions include the freezing of bank accounts, striking off the names of dormant companies, and invoking the Benami Transactions (Prohibition) Amendment Act, 2016. In addition, disciplinary action will be taken against professionals involved in such malpractices and assisting in setting up such shell companies. A special task force with members from various regulatory ministries and enforcement agencies has been set up under the co-chairmanship of the Revenue Secretary and Corporate Affairs Secretary to monitor the actions taken against deviant shell companies by various agencies. A system of “red flag” indicators will also be adopted to identify shell companies. A database of such companies and their directors will be set up with information gathered from various agencies. 1 Courtesy BMR Advisers. Deviant shell companies will be heavily penalised if found to be engaging in money laundering and tax evasion.” “ JURISDICTION: JURISDICTION: 16 | Asia Tax Bulletin MAYER BROWN JSM | 17 Based on an initial analysis that has been carried out, as reported in the release, shell companies have: • nominal paid-up capital; • high reserves and surplus on account of receipt of a high share premium; • investments in unlisted companies; • no dividend income; • a high cash in hand; • private companies as majority shareholders; • low turnover and operating income; • nominal expenses; • nominal statutory payments and stock-in-trade; and • minimum fixed assets. Guidance on place of effective management Further to the draft guidelines issued for comments and suggestions previously, the Central Board of Direct Taxes (CBDT) issued Circular No. 06/2017, dated 24 January 2017, the Guiding Principles for Determination of Place of Effective Management (POEM) of a company under the Income Tax Act, 1961. The fundamental structure of the guiding principles remains the same as in the draft. However, in the Circular, the CBDT has attempted to differentiate between shareholder control, management control and routine decisions through various examples. In summary, with effect from 1 April 2016 (i.e. assessment year 2017-18), a company is regarded as an Indian resident under section 6(3) of the Income Tax Act, 1961 if: • It is a company incorporated in India; or • It is a company incorporated outside India but its POEM in that year is situated in India. The CBDT has issued Circular No. 8/2017 of 23 February 2017 clarifying that the existing POEM provisions will not apply to companies with turnover or gross receipts of INR 500 million or less in a financial year. The concept of POEM in determining the residential status of a company, other than an Indian company, was introduced by the Finance Act, 2015 and took effect from 1 April 2017. The CBDT previously issued Circular No. 6/2017 of 24 January 2017 providing guiding principles for determining the POEM of a company. GAAR implementation The Central Board of Direct Taxes (CBDT) issued Circular No. 7/2017 of 27 January 2017 providing clarifications relating to the implementation of general anti-avoidance rule (GAAR) provisions. In order to ensure that GAAR will be invoked in rare cases dealing with highly aggressive and artificially pre-ordained schemes, the proposal of the tax authority to declare an arrangement as an impermissible avoidance agreement under GAAR will be vetted initially by the Principal Commissioner/Commissioner (PCIT) and subsequently by an approving panel headed by the judge of a High Court. If the PCIT/approving panel has held the arrangement to be permissible in a year and the facts and circumstances remain the same, based on the principle of consistency, GAAR will not be invoked for that arrangement in a subsequent year. The provisions of Chapter X-A of the Income Tax Act, 1961 (ITA) relating to GAAR entered into force on 1 April 2017. In June 2016, the CBDT had constituted a working group for the purpose of dealing with queries from stakeholders in respect of the implementation of GAAR. The CBDT considered the comments of the working group and issued the following clarifications: • Specific anti-avoidance provisions (SAAR) may not address all situations of abuse, and there is a need for GAAR in domestic legislation. The provisions of GAAR and SAAR can co-exist and are applicable, as may be necessary, to the facts and circumstances of the case concerned; • Adoption of anti-abuse rules in tax treaties may not be sufficient to address all tax avoidance strategies; the same are required to be tackled through domestic anti-avoidance rules. If a case of avoidance is sufficiently addressed by a limitation of benefits (LOB) clause in the treaty, GAAR need not be invoked; • The role of GAAR is not to interfere with the rights of taxpayers to plan tax; therefore, it will not affect the right of taxpayers to select or choose methods of implementing a transaction; • Grandfathering will be available to investments made before 1 April 2017 in respect of instruments compulsorily convertible from one form to another, at terms finalized at the time of issue of such instruments. Shares brought into existence by way of split or consolidation of holdings, or by bonus issuances in respect of shares acquired prior to 1 April 2017 in the hands of the same investor, will also be eligible for grandfathering under Rule 10U(1)(d) of the Income Tax Rules. Further, grandfathering is available in respect of income from transfers of investments made before 1 April 2017; • In respect of foreign portfolio investors (FPI), if the jurisdiction of FPI is finalized based on non-tax commercial considerations and the main purpose of the arrangement is not to obtain tax benefits, GAAR will not apply. GAAR will not be invoked merely on the ground that the entity is located in a tax-efficient jurisdiction. The issue regarding the choice of entity, location, etc. will be resolved on the basis of the main purpose and other conditions provided under section 96 of the Income Tax Act, 1961 (ITA); • GAAR will not apply if the arrangement is held as permissible by the Authority for Advance Rulings. Furthermore, where the Court has explicitly and adequately considered the tax implication while sanctioning an arrangement, GAAR will not apply to such arrangement; • GAAR will not be invoked in respect of the admissibility of claims under tax treaties and domestic laws in different years; • In the event of a particular consequence being applied in the hands of one of the participants as a result of GAAR, corresponding adjustment in the hands of another participant will not be made. GAAR is an antiavoidance provision with deterrent consequences, and corresponding tax adjustments across different taxpayers could militate against deterrence; India cont’d • As stated earlier, for the applicability of GAAR, the threshold amount of tax benefits is INR 30 million or more (approx. USD 450,000). For determining this threshold, the tax benefits need to be considered for each assessment year and with respect to the tax benefits gained under the ITA. The tax benefits threshold is limited to an arrangement or part of an arrangement and not specifically to a single taxpayer; • If the arrangement is covered under section 96 of the ITA, the arrangement will be disregarded under GAAR and necessary consequences will follow. Thus, GAAR can lead to assessment of notional income or disallowance of real expenditure; and • Penalty proceedings can be initiated pursuant to additions made under GAAR. The assessee may, at its option, apply for benefits under section 273A of the ITA, if it satisfies conditions prescribed therein. Budget 2017 On 1 February 2017, the Finance Minister presented the Budget for 2017-18. The proposed Budget was approved by the lower house of parliament on 22 March 2017. Key points are listed below. Corporate tax • The corporate tax rate is reduced to 25% for enterprises with an annual turnover of up to INR 500 million (approx. USD 7.5 million). • A presumptive tax is imposed on businesses with a turnover of less than INR 20 million (approx. USD 300,000), with the exception of those in the business of plying, hiring and leasing goods (section 44AD of the Income Tax Act, 1967 (ITA)). If the turnover is received in full through a bank account, a presumptive tax rate of 6% will apply. However, if the turnover is received through any other means, the presumptive tax rate will be set at 8% of the total turnover. • The disallowance for cash expenses exceeding the INR 20,000 threshold applicable to a person on a per-day basis is reduced to INR 10,000. • A new section will be introduced to restrict interest deductions to up to 30% of earnings before interest, tax, depreciation and amortization (EBITDA) if the amount of interest paid to non-resident associated enterprises (AEs) exceeds INR 10 million (approx. JURISDICTION: 18 | Asia Tax Bulletin MAYER BROWN JSM | 19 India cont’d USD 150,000). Banks and insurance companies are excluded. On 22 March, the lower house of parliament subsequently amended this as follows. Proposed section 94B of the Income Tax Act, 1961 (ITA) limiting the deduction of interest paid to non-resident associated enterprises contains the phrase “pays interest or similar consideration”, which was changed to “incurs any expenditure by way of interest or of similar nature”. • The holding period for categorizing immovable property as long-term capital assets is reduced from three to two years. • Issues relating to application of indirect transfer taxes to foreign portfolio investors (FPIs), which have been a big cause for concern in recent months, have been addressed, albeit partially. The Budget has exempted investors (direct/indirect) in category I (sovereign funds) and category II (broad-based funds) FPIs from the application of the indirect transfer tax provisions. This move will hopefully address the significant concern that had been raised by FPIs in respect of multiple layers of taxation and also the potential retroactive application. This exemption must be extended to Category III (other than broadbased) FPIs too. The Finance Minister has also announced that offshore redemptions/buybacks of shares of foreign companies, consequent to sale of an investment in India, which could have triggered an inadvertent application of indirect transfer tax will also be exempted, though this has not yet been included in the Finance Bill. It is hoped that this will be addressed soon since it is of significant importance to the PE/VC industry and corporates. Concerns continue to linger on various other aspects of the application of the indirect transfer tax provisions such as offshore mergers and reorganisations, disclosure and reporting requirements. On 22 March, the lower house of parliament amended this point as follows. Foreign institutional investors are excluded from the provisions of indirect transfer of shares as explained in Explanation 5 of section 9(1)(i) of the ITA. This exclusion is applicable for assessment years from 1 April 2012 to 1 April 2015. Furthermore, Category I and II foreign portfolio investors are excluded from the provisions of indirect transfer of shares as explained in Explanation 5 of section 9(1)(i) of the ITA, such exclusion being applicable from assessment years beginning on 1 April 2015. • The base year for calculating capital gains will be changed from 1981 to 2001. • Income from the transfer of carbon credits will be taxed at 10% on the gross consideration. • The monetary limit for cash transactions proposed under section 269ST of the ITA has been reduced from INR 300,000 to INR 200,000. • Consequential amendment was made to the definition of “income” (under section 2(24)) to provide reference to the proposed new section 56(2)(x) of the ITA. Proposed section 56(2)(x) extends the taxability of gifts, if received, to all taxpayers, i.e. companies, firms etc. However, it was amended to exclude gifts received from an individual by a trust created for the sole benefit of his relative, or gifts received by or from a charitable trust. • It is proposed to restrict the scope of domestic transfer pricing compliance requirements to entities which enjoy specific profit-linked deductions and are involved in related party transactions. A new section will be introduced to provide for secondary adjustments similar to the OECD Transfer Pricing Guidelines. A notional capital gains concept has been provided for in respect of sale of shares where the consideration received is less than FMV. This can be a matter of concern since it can give rise to a double taxation, first on a notional capital gains amount in the hands of the seller, and second on the same notional amount in the hands of the buyer as income from other sources. Individual tax • Taxation of dividend income exceeding INR 1 million will be extended to include all resident persons, with the exception of domestic companies, funds or charitable trusts. • Cash donations made to political parties and charitable organisations will be restricted to INR 2,000. • The tax authority will rectify an assessment order to provide for foreign tax credit within six months after a dispute has been settled. • A penalty of INR 10,000 (approx. USD 150) will be imposed on professionals for including incorrect information in statutory reports or certificates; however, immunity from the penalty will be granted if there was a reasonable cause for providing such information. • No cash receipts are allowed for amounts exceeding INR 300,000 (approx. USD 4,500) so as to curb black money. • The existing tax rate of 10% for individuals with income between INR 250,000 and INR 500,000 will be reduced to 5%; and • A 10% surcharge will be introduced for individuals with income between INR 5 million and INR 10 million. Indirect tax The concept of ‘beneficial owner’ has been introduced for customs law purposes. It is defined to mean a person on whose behalf the goods are imported or exported or a person who exercises effective control over the goods being imported or exported. Corresponding to this change, the definition of importer and exporter has been expanded to include ‘beneficial owner’, supposedly to bring persons other than the importer or exporter on record within the ambit of the customs law. It would be interesting to observe the implications – ie entitlements or liabilities of the beneficial owner – and the evolution of this amendment. The Authority for Advance Rulings (AAR) for indirect taxes has now been merged with the income tax AAR. The AAR constituted under the income tax law will now also dispose indirect tax applications, including pending applications. The chief justice of a High Court or a judge of a High Court for at least seven years is also eligible to be appointed as the Chairman of the AAR. The time period for pronouncing the ruling has been increased from 90 days to six months from the date of receipt of application. New GST Act The Union Cabinet approved the following four goods and services tax (GST)-related bills (the Bills) on 20 March 2017: • The Central Goods and Services Tax Bill 2017 (the CGST Bill); • The Integrated Goods and Services Tax Bill 2017 (the IGST Bill); • The Union Territory Goods and Services Tax Bill 2017 (the UTGST Bill); and • The Goods and Services Tax (Compensation to the States) Bill 2017 (the Compensation Bill). The Bills will be tabled and discussed by the lower house of parliament (Lok Sabha) on 29 March 2017. They are required to be passed by parliament, while the State Goods and Services Tax Bill 2017 (the SGST Bill) will go to the relevant state assemblies. The plan is for the GST provision to take effect on 1 July this year, but this may or may not be delayed subject to its handling in parliament. International tax developments Kuwait On 15 January 2017, India and Kuwait signed an amending protocol to the India - Kuwait Income Tax Treaty (2006). Israel On 19 December 2016, the amending protocol, signed on 14 October 2015, to the India - Israel Income and Capital Tax Treaty (1996), entered into force. The protocol generally applies from 1 January 2017 for Israel and from 1 April 2017 for India. The provision of article 27 (exchange of information) generally applies from 19 December 2016. Cyprus Details of the tax treaty with Cyprus have become available. It provides for a 10% withholding tax rate on dividends, interest, royalties and technical fees. Royalties includes the use of equipment (rentals/operating lease payments). The permanent establishment (PE) definition contains a protection against having a PE for projects lasting less than six months or for services/ consultancy services rendered for a period aggregating less than 90 days in any 12-month period. The treaty also contains a wide scope for having a PE if agents are employed who regularly deliver goods located in a stock kept in the other country. The non resident capital gains tax protection has been dropped for sales of shares acquired after 1 April 2017. Finally, the treaty provides for assistance in the collection of taxes. JURISDICTION: 20 | Asia Tax Bulletin MAYER BROWN JSM | 21 India cont’d Indonesia A parent company reporting consolidated gross income of IDR 11 trillion must prepare a master file, local file and CbC report. ” “ Transfer pricing documentation The Minister of Finance recently released MoF Regulation 213/PMK.03/2016 (the Regulation) on transfer pricing documentation. The Regulation took effect on 30 December 2016, providing guidance on when a taxpayer has to prepare a master file, local file and country-by-country (CbC) report. Essentially, a taxpayer must prepare master and local files in the following cases: • If the gross income for a tax year is more than IDR 50 billion; • If the value of related-party transactions involving tangible goods for a tax year exceeds IDR 20 billion; • If the value of other related-party transactions (e.g. service fees, interests, income from intangible assets) for a tax year exceeds IDR 5 billion; or • If related parties are located in a lower-income tax jurisdiction. A parent company reporting consolidated gross income of IDR 11 trillion must prepare a master file, local file and CbC report. If the parent company of a taxpayer is not a tax resident in Indonesia, the taxpayer must prepare the CbC report if the country of residence of the parent company: • Does not require a CbC report; • Has not entered into a Tax Information Exchange Agreement with Indonesia; or • Has entered into a Tax Information Exchange Agreement with Indonesia, but the tax authorities of Indonesia have not been able to obtain the CbC report from the country of residence of the parent company. The master and local files must be prepared within four months of the end of the relevant tax year. The CbC report must be prepared within twelve months of the end of the relevant tax year. The master file must include the following information: • The organisational structure of the group and the tax residence of each company in the group; • The business activities, intangible assets, financial activities and source of funds of each company in the group; and Germany On 1 May 2017, the Germany - India Social Security Agreement (2011) will enter into force. The agreement generally applies from 1 May 2017. From this date, the new agreement generally replaces the Germany - India Social Security Agreement (2008). Singapore On 27 February 2017, the amending protocol, signed on 30 December 2016, to the India - Singapore Income Tax Treaty (1994), as amended by the 2005 and 2011 protocols, entered into force. The protocol generally applies from 1 April 2017. Lithuania On 23 February 2017, the Lithuania - Singapore Competent Authority Agreement on Automatic Exchange of Information (2017) 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). Australia, Canada, Italy, Korea and Latvia On 27 February 2017, Singapore’s Competent Authority Agreements on Automatic Exchange of Information (2016) with Australia, Canada, Italy, Korea and Latvia, entered into force. The agreements are intended to ensure that each of these countries and Singapore will be able to commence, as of 2018, the automatic exchange of financial account information related to taxable periods or charges to taxes beginning on or after 1 January 2017 in accordance with the OECD Automatic Exchange of Information Agreement (2014) (MCAA), on the basis of the Council of Europe - OECD Convention on Mutual Administrative Assistance in Tax Matters (1988), as amended by the 2010 protocol. Uruguay On 14 March 2017, the Singapore - Uruguay Income and Capital Tax Treaty (2015) entered into force. The treaty generally applies from 1 January 2018. JURISDICTION: JURISDICTION: 22 | Asia Tax Bulletin MAYER BROWN JSM | 23 Indonesia cont’d • The consolidated financial report of the parent company and the related party transactions. The local file must include at least the following information: • The identity, business activities and financial information of the taxpayer; • Related party transactions and non-related party transactions entered into and the application of the arm’s length principle; and • Non-financial factors which affect the pricing and the profit margin. Samples of the CbC report which have to be prepared by the taxpayer are attached as appendices to the Regulation for reference. Details of the companies within the group that must be included in the reports are, inter alia, allocated income, paid and unpaid taxes, business activities, gross income, profit or loss before tax, capital, accumulated retained earnings, number of employees, and non-cash tangible assets. Automatic exchange of country-by-country reports According to a press release of 27 January 2017, published by the OECD, Indonesia joined the Multilateral Competent Authority Agreement (MCAA) (2016) on the automatic exchange of country-by-country reports (CbC MCAA), which is based on article 6 of the Convention on Mutual Administrative Assistance in Tax Matters, as amended by the 2010 protocol. The agreement was signed at a signing ceremony held during the second meeting of the Inclusive Framework on BEPS on 26 and 27 January 2017. The agreement was developed within the scope of the OECD’s BEPS project on corporate taxation and has now been signed by 57 jurisdictions. International organisations On 19 January 2017, the Minister of Finance issued Regulation No. 5/PMK.010/2017, which adds the Asian Infrastructure Investment Bank and European Investment Bank to the list of international organisations recognized under Regulation No. 157/PMK.010/2015 issued on 12 August 2015. In general, Regulation No. 157/PMK.010/2015 states that, where there are inconsistencies between the domestic income tax law and the international agreements entered into by the government and organisations or countries listed in the regulation, the provisions in the international agreements will take precedence. International tax developments Laos On 11 October 2016, the Indonesia - Laos Income Tax Treaty (2011) entered into force. The treaty generally applies from 1 January 2017 for withholding taxes and from 1 January 2018 for other tax matters. Japan Currently, highly skilled professionals are required to wait at least four-and-a-half years before applying for permanent residency. ” “ Trans-Pacific Partnership On 20 January 2017, the Japanese government notified the government of New Zealand, which is the designated country for the depositary of the agreement, about the completion of the Japanese domestic procedures for the Trans-Pacific Partnership agreement, signed on 3 February 2016. The Trans-Pacific Partnership agreement is a trade pact among the 12 countries in the Asia-Pacific region. The signatories of the Trans-Pacific Partnership agreement are Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam. Permanent residency for highly skilled visa holders Foreign nationals in Japan who hold highly skilled professional visas will benefit from a recent measure introduced by the Ministry of Justice that will shorten the wait period to obtain permanent residency. Currently, highly skilled professionals are required to wait at least four-and-a-half years before applying for permanent residency. The new policy will reduce the wait time to three years for some highly skilled professionals and to as little as one year for others, based on the number of points awarded to an individual. Points are given based on several factors, including academic credentials, professional career, and salary. US limited partnerships treated as transparent entities The National Tax Agency (NTA) of Japan has posted a notification on its website entitled “The tax treatment under Japanese law of items of income derived through a US limited partnership by Japanese resident partners”. This notification clarifies that the NTA considers the Supreme Court’s case as an exception and that the NTA would continue to treat a US limited partnership as a transparent entity, provided the US limited partnership does not elect to be classified as a corporation for US federal income tax purposes. JURISDICTION: JURISDICTION: 24 | Asia Tax Bulletin MAYER BROWN JSM | 25 Japan cont’d This is a favourable development for Japanese investors using Delaware or other US limited partnerships as a means of investing into the US. As reported in the Autumn 2015 edition of this tax bulletin, the Japanese Supreme Court held in its decision dated 17 July 2015, case number Heisei 25 (2013) gyou-hi No.166, that a Delaware limited partnership is, for Japanese tax purposes, a corporation. Further to this decision, there was uncertainty as to whether other US limited partnerships would be treated by the NTA as fiscally transparent entities. 2017 tax reforms passed On 27 March 2017, the parliament (National Diet) passed the 2017 tax reform key proposals. The key items of the tax reform were reported in the previous edition of this bulletin. International tax developments Bahamas On 9 February 2017, the Bahamas and Japan signed an amending protocol to the Bahamas - Japan Exchange of Information Agreement (2011), in Nassau. Panama On 12 March 2017, the Japan - Panama Exchange of Information Agreement (2016) entered into force. The agreement generally applies from 12 March 2017 for criminal tax matters and from 1 January 2013 for all other tax matters. Saudi Arabia On 7 April 2017, the investment protection agreement (IPA) between Japan and Saudi Arabia, signed on 30 April 2013, entered into force. Permanent establishments In 2016 2 , the Korean Supreme Court issued several rulings shedding light on its approach when analysing whether a foreign company conducting business in Korea may be found to have a permanent establishment (PE). These recent cases highlight some of the PE issues on which the tax authorities are currently focusing. In one recent case, a Canadian company provided project management services to a Korean subsidiary, a project owner for the building of a bridge in Korea. Employees of the Canadian company performed their services at the office of the subsidiary. The Supreme Court, affirming the lower court’s decision, held that such space should be regarded as a PE of the Canadian company, citing the “six-month rule” and the “two-year rule” under Korean corporate income tax law (Supreme Court decision 2014Du13812, 18 February 2016). Accordingly, the Court effectively found that the sixmonth rule and the two-year rule under Korean tax law can be applied in the context of a tax treaty. The Supreme Court also rendered a decision in another related case on the same day (Supreme Court decision 2014Du13829, 18 February 2016). A UK affiliate of the Canadian company subsequently took over the above project management services under separate agreements for onshore and offshore services. The UK company registered a branch (PE) in Korea and complied with income taxes and VAT on the onshore services portion, but the Korean tax authority challenged and assessed corporate income tax and VAT also on the offshore portion. The Supreme Court found that the onshore and offshore services were by nature a combined provision of one service and since the onshore services were important and essential to the provision of the entire services, the offshore services were effectively also provided through the PE and subject to Korean tax. Korea The Supreme Court ultimately ruled that the provided space constituted a PE of the foreign service provider. ” “ 2 Courtesy Kim & Chang in Seoul, through whom the following news was brought to our attention. JURISDICTION: JURISDICTION: 26 | Asia Tax Bulletin MAYER BROWN JSM | 27 Korea cont’d This case appears to depart from the “attribution principle” for a PE under domestic law as well as treaties, taxing income from services not performed in Korea, but the Supreme Court appears to have applied a substanceover-form principle, determining that form did not agree with substance and that there was no justifiable reason to split the contract into two. In another case, a Korean casino paid commission to a service provider based in the Philippines for the solicitation of foreign customers pursuant to a services agreement (Supreme Court decision 2015Du51415, 14 July 2016). Under the agreement, the foreign service provider had the right to use a certain area within the casino’s office, provided rent-free by the casino. Employees of the service provider carried out (i) hotel, airport and casino business-related services for foreign customers; and (ii) casino chip exchange services for foreign gamblers at the casino site. The Supreme Court ultimately ruled that the provided space constituted a PE of the foreign service provider on the ground that the services provided at that space were essential and important parts of the foreign company’s business; thus, the space provided at the casino constituted a PE of the Philippines-based company. In recent years, the Korean tax authorities have again focused their attention on examining whether a foreign company’s operations in Korea should give rise to a PE. This trend is noteworthy also in light of the OECD’s BEPS Action 7, which strengthens taxation of PEs. Once a foreign company is regarded as having a PE in Korea, such a finding potentially triggers the imposition of corporate income taxes and VAT and since the statute of limitations in case of non-filing of returns is extended to seven years, finding a PE can result in a significant amount of taxes, penalties and interest. While not common, and depending on the facts, tax criminal charges can be made as well. Accordingly, it is important for foreign companies conducting business activities in Korea with or without any registered presence to analyze potential PE risks by closely examining all facts and circumstances, including the roles and functions of all parties involved, to develop and establish a persuasive defence against a possible future PE challenge. In addition, when employees of a Korean subsidiary of a multinational enterprise (MNE) visit foreign affiliates to provide services, there may be a PE risk in the foreign country. This overseas PE risk of a Korean subsidiary of an MNE is particularly notable in China, where the Chinese tax authorities have aggressively raised PE issues. Tax incentives Further to several tax bills being passed by the National Assembly, the government passed the enforcement decrees of a number of tax laws on 3 February 2017. Unless otherwise stated, the majority of the decrees took effect from 1 January 2017. Tax incentives for foreign investment in “new growth industries” (article 121-2 of the Special Tax Treatment Control Law (STTCL) and article 116-2 of the Presidential Decree of the STTCL) Tax incentives for foreign-invested companies will be provided based on 11 categories of “new growth industries”, including future-generation motor vehicles, intelligence and information, next-generation software and security, virtual and cultural contents, next-generation electronic information devices, next-generation broadcasting and telecommunications, biotechnology and healthcare, environment-friendly energy, new advanced materials, robots, and aerospace. Technologies eligible for tax reduction or exemption across a total of 650 industries have been renamed from “high-level technologies accompanied by manufacturing business, etc.” to “new growth engines or source technologies subject to the R&D tax credit”. In addition, although tax reduction was applicable only to “income occurring from the business eligible for tax reduction” under the previous STTCL, if the income realised from businesses eligible for tax reduction represents more than 80% of the foreign-invested company’s entire income, the amended law allows a tax reduction for the entire income. Expansion of tax-free mergers of foreign subsidiaries (article 14(1) of the Enforcement Decree of the Corporate Income Tax Law (CITL)) Under the old Enforcement Decree of the CITL, if a foreign subsidiary of a Korean company is merged into a foreign company, the difference between the consideration received by the Korean company for the merger and the acquisition cost of the shares in the dissolving foreign subsidiary is treated as a deemed dividend distributed to the Korean company, and subject to tax as a result. However, the taxation of a deemed dividend is deferred if a party to the merger is a company domiciled in a foreign jurisdiction with which Korea has concluded an income tax treaty, or if no taxes are imposed on the Korean company in the relevant foreign country where the merger arises. Also, if a merger takes place between a foreign subsidiary and its whollyowned foreign company (i.e. second-tier foreign subsidiary of the Korean company), the tax deferral for a deemed dividend of the Korean company is allowed. Article 14(1) of the new Enforcement Decree of the CITL extends the existing tax deferral (as explained above) to include deemed dividends arising from a merger between the foreign subsidiaries wholly owned by the same Korean company. International tax developments Switzerland On 1 January 2017, the automatic exchange of financial account information agreement between Korea and Switzerland entered into force. The agreement was signed on 26 October 2016 by Switzerland and on 16 November 2016 by Korea and generally applies from 1 January 2017. The agreement is intended to ensure that Korea and Switzerland will be able to commence the automatic exchange of financial account information in accordance with the OECD Automatic Exchange of Information Agreement (2014), on the basis of the Council of Europe - OECD Convention on Mutual Administrative Assistance in Tax Matters (1988) (MAA), as amended by the 2010 protocol, and is confirmed by the Korea (Rep.) - Switzerland Joint Declaration on Automatic Exchange of Information (2016). The agreement provides the legal basis for the automatic exchange of information for tax purposes based on the OECD/G20 Common Reporting Standard. JURISDICTION: 28 | Asia Tax Bulletin MAYER BROWN JSM | 29 Malaysia The Convention and the amending protocol will enter into force three months after the instrument of ratification has been deposited.” “ Budget 2017 enacted On 16 January 2017, the Finance Bill 2016 was enacted as the Finance Act 2017. This means that the Budget 2017 proposals reported in the previous edition of this newsletter have now become law. Malaysia adopts the BEPS standards On 27 January 2017, it was reported that Malaysia joined the inclusive framework for the global implementation of the Base Erosion and Profit Shifting (BEPS) Project. The inclusive framework was proposed by the OECD and endorsed by the G20 in February 2016. Under this framework, all state and non-state jurisdictions that commit to the BEPS Project will participate as BEPS Associates of the OECD’s Committee on Fiscal Affairs. Further to the report on Malaysia joining the Inclusive Framework on Base Erosion Profit Shifting (BEPS) as an associate, the OECD officially announced on 6 March 2017 that Malaysia is part of the framework. The inclusive framework allows participating countries to work with the OECD on (i) developing a monitoring process with regard to the four minimum standards of BEPS-related issues, and (ii) reviewing and implementing the whole BEPS package. The four minimum standards are: • Countering harmful practices effectively; • Preventing tax treaty abuse; • Implementing country-by-country reporting for transfer pricing; and • Making cross-border tax disputes more effective. Administrative assistance in tax On 3 January 2017, Malaysia deposited its instrument of ratification for the multilateral Convention on Mutual Administrative Assistance in Tax Matters, as amended by the 2010 protocol. The Convention and the amending protocol will enter into force three months after the instrument of ratification has been deposited. Automatic Exchange of Financial Account Information On 23 December 2016, the Income Tax (Automatic Exchange of Financial Account Information) Rules 2016 were gazetted. This is in line with the OECD Standard for Automatic Exchange of Financial Account Information in Tax Matters (AEOI) (2014): • The Rules are applicable to financial institutions (FIs) that are resident in Malaysia and any branch of a FI located in Malaysia; and • The reporting and furnishing of the information is to be made annually before 30 June of the year following the calendar year the return relates to. The first reporting deadline is 30 June 2018 for the calendar year 2017. In addition to the Rules, the Income Tax (Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information) Order 2016 was gazetted on the same day. The Schedules in the Order contain the arrangements made by the Malaysian government and other governments that have signed the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information with a view to exchanging information relevant to taxation. The Rules became effective from 1 January 2017. Convention on Mutual Administrative Assistance in Tax Matters On 23 December 2016, the Income Tax (Convention on Mutual Administrative Assistance in Tax Matters) Order 2016 was gazetted. The Schedule in the Order contains the arrangements made by the Malaysian government and other governments that have signed the Convention on Mutual Administrative Assistance in Tax Matters to foster all forms of administrative assistance in matters concerning taxes of any kind. Multilateral Competent Authority Agreement on CbC reporting On 23 December 2016, further to the Income Tax (Country-by-Country Reporting) Rules 2016, the Income Tax (Multilateral Competent Authority Agreement on the Exchange of Country-byCountry Reports) Order 2016 was issued in the Federal Gazette. The Schedule of the Order contains the arrangements made by the Malaysian government and other governments which have signed the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports with a view to exchanging information relevant to taxation. Companies Act 2016 comes into operation On 26 January 2017, the Appointment of Date of Coming into Operation (Order P.U. (B) 50/2017) for the Companies Act 2016 was issued in the Federal Gazette. The Order states that the Companies Act 2016 comes into operation on 31 January 2017 except for section 241 (registration of secretaries) and Division 8 of Part III (The central Depository System – A Book-Entry or Scripless System for the transfer of Securities). JURISDICTION: 30 | Asia Tax Bulletin MAYER BROWN JSM | 31 Philippines Revised tax reform package On 17 January 2017, the Chairman of the House Committee proposed the following revisions to the tax reform package that had been submitted on 29 September 2016. The reform package is pending enactment from the Congress. It contains the following proposals: • Exemption from income tax for individuals earning under PHP 250,000 and widening of existing tax brackets. • Taxation at a rate of 35% for those earning more than PHP 5 million a year. • Repeal of tax exemption on sweepstake and lotto winnings. • Repealing VAT exemptions: - in special laws, with the exception of those applicable to senior citizens and people with a disability; - for co-operatives, with the exception of those selling raw agricultural produce; - for low-cost and socialized housing; - for power transmission; - for leasing of residential units; - for domestic shipping importation; and - for boy scouts and girl scouts. Revision of donors tax rate On 27 February 2017, parliament approved House Bill 4903 (“the Bill”) proposing to exempt gifts below PHP 100,000 from donors’ tax and setting the donors’ tax rate at 6% for gifts exceeding PHP 100,000. The Bill also sets the current tax rate applicable to donations made by strangers at 6% (currently 30%). In addition, it provides clarification on the definition of “stranger” as someone who is not: • a brother, sister, spouse, ancestor or lineal ascendant or descendant; or • a relative by consanguinity up to the fourth degree. The Bill still needs to be approved by the Senate before it can be gazetted into law. The Bill also sets the current tax rate applicable to donations made by strangers at 6% (currently 30%).” “ Estate tax On 13 February 2017, the House of Representatives approved House Bills 4814 and 4815 proposing to grant amnesty for estate tax payments and revising the estate tax rate, respectively. House Bill 4814 exempts a taxpayer from payment of estate tax on inherited properties payable for 2016 and earlier years. Instead, pursuant to House Bill 4815, a flat rate of 6% will be imposed on the value of the net assets. However, the estate tax amnesty does not apply: • In the case of properties involving cases pending before the Presidential Commission on Good Government; • With respect to cases involving unexplained wealth or addressed under the Anti-Graft and Corrupt Practices Act; • With respect to cases addressed under the AntiMoney Laundering Act; • In the case of properties involving tax evasion cases; or • With respect to tax cases subject to final and executor judgment by the courts. The bills still need to be approved by the Senate before they can be gazetted into law. JURISDICTION: 32 | Asia Tax Bulletin MAYER BROWN JSM | 33 Singapore Common reporting standard On 6 January 2017, the Inland Revenue Authority of Singapore (IRAS) announced on its website that under the Common Reporting Standard (CRS) effective since 1 January 2017, Singapore-based financial institutions (SGFIs), depository institutions such as banks, specified insurance companies, investment entities and custodial institutions are now required to establish the tax residency status of all their account holders and report to IRAS the financial account information of account holders who are tax residents of jurisdictions with which Singapore has a Competent Authority Agreement (CAA) to exchange the information. When requested by their respective financial institutions (FIs), all account holders of SGFIs should provide their FIs with information and supporting documents to establish their tax residency status. For accounts opened before 1 January 2017, FIs may contact the account holders to confirm their tax residency status if the FIs hold information that indicates they could be foreign tax residents. For new accounts opened on or after 1 January 2017, FIs will use a self-certification form, to be completed by the account holders, to collect tax residency information. Transfer pricing guidelines On 12 January 2017, the Inland Revenue Authority of Singapore (IRAS) issued the fourth edition of the e-Tax guide on the transfer pricing guidelines: • IRAS subscribes to the principle that profits should be taxed where the real economic activities generating the profits are performed and where value is created; • IRAS enhanced the guidance on functional analysis of functions performed, assets used and risks assumed; • If the taxpayer is the ultimate parent entity of a Singapore multinational enterprise (MNE) group, in addition to the transfer pricing documentation (TP documentation), it may be required to file a countryby-country report providing information about the global allocation of the MNE group’s revenues, profits, taxes and economic activity. The details are provided in the e-Tax guide on country-by-country reporting; Taxpayers may seek resolution on double taxation issues that recur over multiple tax years, subject to the time limits provided in the relevant DTA.” “ • TP documentation at group level is to include information on the group’s existing unilateral advance pricing arrangements (APAs) and other tax rulings relating to the allocation of income among countries (paragraph 6.11 (c)) while the documentation at entity level is to include a copy of the existing unilateral and bilateral/multilateral APAs and other tax rulings to which IRAS is not a party and which are related to related party transactions (paragraph 6.13 (c)); • IRAS also enhanced its guidance on mutual agreement procedure (MAP) and APA and therefore amended sections 8 to 10 of the e-Tax guide to include information on compulsory spontaneous exchange of information on cross-border unilateral APAs, roll-back years and information to be included in APA applications; and • IRAS has put in place an indicative margin which taxpayers can apply on their related party loans obtained or provided from 1 January 2017. The indicative margin is published on IRAS’ website and will be updated at the beginning of each year. Taxpayers can choose to apply the indicative margin to each related party loan that does not exceed SGD 15 million at the time the loan is obtained or provided. The threshold is based on the loan committed and not the loan utilised. If taxpayers choose to apply the indicative margin for their related party loans, they are not expected to prepare TP documentation for such loans. The indicative margin – which is 250 basis points, or 2.5% for 2017 – would be applied to a base reference rate, such as LIBOR or the Singapore Interbank Offered Rate. The indicative margin is not mandatory. It gives taxpayers an alternative to performing detailed transfer pricing analysis on their related party loans. Taxpayers may adopt a margin that is different from the indicative margin. This should be supported based on the guidance provided by IRAS to determine the arm’s length interest rates. The new edition includes the substance over form principle as a key consideration when applying the arm’s length principle. For this reason, a functional analysis is now a crucial step in any transfer pricing study, and it should include all commercial and economic circumstances to demonstrate that profits earned by a taxpayer are consistent with the economic activities performed. The revised guidelines also update country-by-country reporting requirements that IRAS initially issued in October 2016. The tax authority now requires that taxpayers report all advance pricing agreements and tax rulings, including those to which IRAS is not a party. Budget for 2017 The Budget for 2017 was presented to Parliament on 20 February 2017. The Budget includes the following tax provisions: • Corporate income tax. The corporate income tax rebate will remain unchanged at 50%, with an increase in the annual cap from SGD 20,000 to SGD 25,000 for the year of assessment (YA) 2017. The rebate will also be extended to YA 2018, at a lower rate of 20%, with a reduced annual cap of SGD 10,000. • Individual income tax. A personal income tax rebate for tax residents will be introduced at a rate of 20%, with an annual cap of SGD 500 for YA 2017. • Other taxes: - Carbon taxation will be imposed on the largest emitters of greenhouse gases (e.g. power stations and direct emitters) between ranges from SGD 10 to SGD 20 per tonne of greenhouse gas emissions. This will be implemented in the 2019 calendar year. - With respect to diesel taxation, a volume-based duty at SGD 0.10 per litre will be imposed on consumers for the usage of automotive diesel, industrial diesel and biodiesel, a diesel component, from 20 February 2017 onwards. - The special tax on diesel cars and taxis will be reduced by SGD 100 and SGD 850 respectively. - A road tax rebate will be provided to commercial diesel vehicles at a rate of 100% for one year, and a partial road tax rebate for the subsequent two years. - Additional cash rebates will be provided to diesel buses ferrying schoolchildren. - A water conservation tax on water will be imposed at 10% of the water tariff as from 1 July 2017. JURISDICTION: 34 | Asia Tax Bulletin MAYER BROWN JSM | 35 Singapore Property tax The Inland Revenue Authority of Singapore (IRAS) issued the Investor’s Guide to Property Tax e-Tax Guide (“the Guide”) on 20 February 2017. The Guide provides general property tax information to investors developing properties for the purpose of carrying out their business operations in Singapore and replaces the earlier e-Tax Guide that was published on 22 June 2006. The Guide has been updated to reflect the changes to the property tax exemption and relief following the announcement made in Budget 2017 that the Approved Building Project (ABP) scheme would be allowed to lapse after 31 March 2017. Previously, a property development project which was granted ABP status was eligible for a property tax exemption under the Property Tax (Exemption of Land Under Development) Order 2001 for a period of up to three years (subject to conditions). Any ABP application received by IRAS after 31 March 2017 will not be considered. Real estate investment trusts On 6 January 2017, the Inland Revenue Authority of Singapore (IRAS) issued an e-Tax guide on the income tax treatment of real estate investment trusts (REITs) and approved sub-trusts. This e-Tax guide replaces the following e-Tax guides: • Income tax treatment of REITs published on 3 November 2015; and • Income tax treatment of approved sub-trust of a REIT published on 14 May 2008. The e-Tax guide provides details on the tax transparency treatment (where the trust is treated as transparent and the beneficiary is the taxable party) on certain types of income derived and distributed by the trustee of a REIT and an approved sub-trust of a REIT as well as the administrative procedures relating to the tax treatment. The following information is available in the e-Tax guide: • Tax transparency treatment; • Tax treatment of the trustee; • Withholding tax applicable to REIT distributions; • Tax treatment of the unit holder; and • Administrative procedures relating to the tax treatment as follows: - Application for tax transparency treatment; - Application for an approved sub-trust of a REIT; - Units held by unit holders who are individuals; - Units held by nominees; - Information and documentation of unit holders; - Claim for refund of tax over-deducted from distributions; - Return of capital by the trustee; and - Filing of tax returns and estimated chargeable income. New minimum salary for an Employment Pass The Ministry of Manpower has introduced changes to Employment Pass (EP) salary criteria. The last minimum salary change for an EP was in 2014. Starting 1 January 2017, the mandatory minimum monthly salary for individuals seeking a Singapore EP increased to SGD 3,600, up from SGD 3,300. More experienced workers are required to have a higher salary commensurate with their experience and skills and consistent with the local labour market. With regard to the implementation of the new salary for existing EP holders, the government has authorised a transition period: • Between 1 January 2017 and 30 June 2017 (both dates inclusive), employers may renew EPs for a period of one year using the previous EP salary criteria. • Starting 1 July 2017, all renewal EP applications must meet the new EP salary criteria. Guidance on mutual agreement procedure for tax treaties On 12 January 2017, the Inland Revenue Authority of Singapore (IRAS) introduced new content on its website providing guidance on the mutual agreement procedure (MAP). The guidance includes details on MAP relating to matters other than transfer pricing. MAP is available to: • Taxpayers resident in Singapore; and • Taxpayers not resident in Singapore but having a branch in Singapore. However, the MAP application must be made by the taxpayer in the jurisdiction in which it is a tax resident and with which Singapore has concluded a double taxation agreement (DTA). Taxpayers may seek resolution on double taxation issues that recur over multiple tax years, subject to the time limits provided in the relevant DTA. Taxpayers must only initiate MAP when double taxation has occurred or is almost certain. Double taxation cannot be just a possibility based on the mere occurrence of audits or examinations. MAP must be initiated within the time limit specified in the MAP article of the relevant DTA (e.g. three years). Failure to do so may result in the competent authorities (CAs) rejecting the MAP request. Taxpayers that intend to apply for MAP must observe the four-step MAP procedure: 1. MAP application: taxpayers must submit the MAP application to IRAS within the time limit specified in the MAP article of the DTA; 2.Evaluation: IRAS evaluates the MAP application and may contact the taxpayer for more information. Where the application is acceptable, IRAS will issue an acceptance letter within one month from the date of receipt of all required information; 3.Review and negotiation: IRAS informs the taxpayer of the MAP outcome within one month of reaching agreement with the CAs; and 4.Implementation: the taxpayer and IRAS implement the MAP outcome. Simplified corporate income tax return On 7 March 2017, the Second Minister of the Ministry of Finance (MOF) announced in the MOF Committee of Supply Speech 2017 that the Inland Revenue Authority of Singapore (IRAS) will increase the annual revenue threshold for filing Form C-S (simplified corporate tax return) from the current SGD 1 million to SGD 5 million. This will take effect from the year of assessment (YA) 2017. All other conditions will remain unchanged. This measure will reduce the compliance cost of businesses. The criteria for the waiver of the requirement to file estimated chargeable income (ECI) will be revised as follows: Company financial year-end Criteria for ECI waiver In or before June 2017 – Annual revenue does not exceed SGD 1 million for the financial year; and – ECI is nil for the YA. In or after July 2017 – Annual revenue does not exceed SGD 5 million for the financial year; and – ECI is nil for the YA. JURISDICTION: 36 | Asia Tax Bulletin MAYER BROWN JSM | 37 Singapore International tax developments The Inland Revenue Authority of Singapore (IRAS) issued the Investor’s Guide to Property Tax, the e-Tax Guide (“the Guide”) on 20 February 2017. The Guide provides general property tax information to investors developing properties for the purpose of carrying out their business operations in Singapore and replaces the earlier e-Tax Guide that was published on 22 June 2006. Iceland, Ireland, Japan, Malta, the Netherlands, Norway, South Africa and the UK On 31 January 2017, Singapore’s Competent Authority Agreement on Automatic Exchange of Information with the following countries entered into force: Iceland, Ireland, Japan, Malta, the Netherlands, Norway, South Africa and the UK. The agreement is intended to ensure that these countries and Singapore will be able to commence, as of 2018, the automatic exchange of financial account information related to taxable periods or charges to taxes beginning on or after 1 January 2017 in accordance with the OECD Automatic Exchange of Information Agreement (2014) (MCAA), on the basis of the Council of Europe - OECD Convention on Mutual Administrative Assistance in Tax Matters (1988), as amended by the 2010 protocol. Estonia On 14 February 2017, the Estonia - Singapore Competent Authority Agreement on Automatic Exchange of Information (2017) 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). France On 27 March 2017, the France - Singapore Competent Authority Agreement on Automatic Exchange of Information (2017) was signed in Singapore. The Netherlands Details of the Automatic Exchange of Information agreement between Singapore and the Netherlands have become available and provide useful insight into what this type of agreement covers. Key aspects are summarised below. With respect to reportable accounts, information will, inter alia, be exchanged about: • The name, address, tax information number (TIN) and date of birth of each reportable person that is an account holder of the account; • Any entity that is an account holder and that, after application of due diligence procedures consistent with the Common Reporting Standard, is identified as having one or more controlling persons that is a reportable person: the name, address, and TIN of the entity and the name, address, TIN(s) and date of birth of each reportable person; • The account number (or functional equivalent in the absence of an account number); • The name and identifying number (if any) of the reporting financial institution; • The account balance or value (including, in the case of a cash value insurance contract or annuity contract, the cash value or surrender value) as of the end of the relevant calendar year or other appropriate reporting period or, if the account was closed during such year or period, the closure of the account; • In the case of any custodial account: - The total gross amount of interest, the total gross amount of dividends, and the total gross amount of other income generated with respect to the assets held in the account, in each case paid or credited to the account during the calendar year or other appropriate reporting period; and - The total gross proceeds from the sale or redemption of financial assets paid or credited to the account during the calendar year or other appropriate reporting period with respect to which the reporting financial institution acted as a custodian, broker, nominee, or otherwise as an agent for the account holder; • In the case of any depository account, the total gross amount of interest paid or credited to the account during the calendar year or other appropriate reporting period; and • In the case of any account not described above, the total gross amount paid or credited to the account holder with respect to the account during the calendar year or other appropriate reporting period with respect to which the reporting financial institution is the obligor or debtor, including the aggregate amount of any redemption payments made to the account holder during the calendar year or other appropriate reporting period. The amount and characterisation of payments made with respect to a reportable account may be determined in accordance with the principles of the tax laws of the jurisdiction exchanging the information. The information exchanged will identify the currency in which each relevant amount is denominated. Information will be exchanged with respect to 2017 and all subsequent years and will be exchanged within nine months after the end of the calendar year to which the information relates. Information on the total gross receipts from the sale or redemption of financial assets will be exchanged from 2018. The agreement will be effective after the competent authorities of both states have informed each other that the laws, necessary procedures, data protection and confidentiality safeguards are in place to give effect to this agreement. JURISDICTION: 38 | Asia Tax Bulletin MAYER BROWN JSM | 39 Taiwan At present, Taiwan is one of few countries in the world to maintain an imputation tax system.” “ Reform of dividend imputation On 20 January 2017, the Ministry of Finance (MoF) published a report with regard to the dividend imputation tax system. A study undertaken by a tax reform research team commissioned by the MoF indicates that the current imputation tax system has three controversial aspects: • The income tax burden for resident individuals is too high because only 50% of the corporate income tax may be credited against individual income tax, and dividends are included in the taxable income and could be taxed at a rate as high as 45%; • The tax treatment of dividends derived by a resident is different from that of dividends derived by a nonresident because an imputation tax credit is not available to non-resident individuals who are subject to withholding tax; and • There is a large discrepancy between the corporate income tax rate (17%) and the individual income tax rate (45%). In order to resolve these issues, the tax reform research team proposes the following solutions: • Abolishing the imputation tax system and resuming the traditional tax system on investment income; • Subjecting the dividends distributed to resident and non-resident individuals to withholding tax; • Providing an exemption to resident individuals when filing annual tax returns for dividend income below a certain amount; and • Increasing the corporate tax rate from 17% to 20%. The proposals for these changes are expected to be submitted to parliament in May 2017. At present, Taiwan is one of few countries in the world to maintain an imputation tax system. Significant debates on abolishing this system have been going on for many years. The government intends to implement this tax reform before the end of 2017 to pursue economic efficiency, simplification of tax administration, equity of the tax system, improvement of fiscal revenue and a stronger capital market. VAT registration threshold for foreign e-commerce enterprises announced On 22 March 2017, the Ministry of Finance announced the threshold for VAT registration for foreign e-commerce enterprises selling digital products to individual consumers in Taiwan. According to the announcement, from 1 May 2017, all foreign e-commerce enterprises whose sales exceed TWD 480,000 per calendar year are required to register with the tax authority, either themselves or through a tax agent. Moreover, it is stated that the registration threshold is the same as that for domestic enterprises, which means that foreign e-commerce enterprises will be treated equally. Exchange of information It has been reported that Taiwan is planning to amend its tax collection law to accommodate the exchange of tax information with other countries or jurisdictions, such as the USA and PRC. According to a spokesman of the Ministry of Finance (MoF), a proposal to amend the act will be submitted by the MoF to the cabinet for review. Currently, Taiwan has a Model 2 intergovernmental agreement with the United States for the implementation of the Foreign Account Tax Compliance Act (FATCA) and is considering the adoption of the OECD Common Reporting Standard (CRS). Taiwan has signed 32 tax agreements with other countries and jurisdictions that contain a provision on exchange of information, but it still does not have an applicable tax agreement with China (People’s Rep.) or the United States. Depreciation Table of Fixed Assets On 3 February 2017, the Ministry of Finance published amendments to the Depreciation Table of Fixed Assets. The amendments apply to fixed assets that are acquired or self-manufactured after 1 January 2016 and the remaining depreciation period of those assets acquired before that date. The amendments are also still subject to the statutory minimum depreciation period. The main amendments include the adding of: • Cloud computing equipment such as data machines, storage and other data processing equipment; • Equipment for the agriculture and horticulture sectors; and • Automation equipment for the storage and packing industry. The depreciation period of some machinery and equipment such as industrial robots is shortened from four to two years and that of certain types of cooling storage equipment is shortened from eight to five years. The depreciation period of metal constructions (e.g. oil platforms), solar electricity equipment and electronic vehicles is also reduced. Securities transaction tax reduction expected On 23 March 2017, in order to revive the depressed securities market, parliament passed an amendment to the Securities Transaction Tax Act reducing the securities transaction tax on day trading to 0.15% for a period of one year. Guidelines enterprise income tax audit On 4 January 2017, the Ministry of Finance published an amendment to the Guidelines on Enterprise Income Tax Audit (EITAG), aligning it with the Enterprise Accounting and Reporting Standard (EARS). The enterprise income tax returns of 2016, which are required to be filed before 31 May 2017, will be subject to the amended EITAG. Since 1 January 2016, the EARS has been amended in accordance with the International Financial Reporting Standards (IFRS), and the amendment caused significant divergence between financial reports and tax returns. The newly amended EITAG follows most of the principles in the EARS. The main amendments to the EITAG include among others: (i) adding the cost recovery method to profit and loss calculations for construction businesses; (ii) a new financial lease accounting method; (iii) major JURISDICTION: 40 | Asia Tax Bulletin MAYER BROWN JSM | 41 inspection fees to be recognized as capital expenditure; (iv) a change in the depreciation of fixed assets; and (v) a labour pension scheme expenses deduction. Withholding tax on income from debt-claims On 7 February 2017, the National Taxation Bureau of the Central Area issued an announcement on withholding tax on interest from short-term commercial papers and other securities. The announcement states that a withholding agent is required, regardless of the amount, to withhold 10% income tax on the gross amount paid on interest to a (non-resident) enterprise with a fixed place of business in Taiwan. The same applies to the interest payment to a legal entity or an organisation of mainland China with a fixed place of business or agent in Taiwan. The tax exemption threshold of TWD 2,000 for the withholding tax provided for in the law does not apply. Interest payment as referred to in the announcement includes, inter alia, interest from the excess amount of the initial offer price of short-term commercial papers upon their expiration, interest from beneficial securities or asset-based securities issued in accordance with the Financial Asset Securitization Act and the Clauses of the Real Estate Securitization Act, and interest from securitized products, state and corporate bonds, etc. Amendments to estate and gift tax On 11 January 2017, parliament passed amendments to the estate and gift tax and the tax on tobacco. Under the amendments, the estate and gift tax will be changed from a single flat rate of 10% to a progressive tax rate structure consisting of 10%, 15% and 20% tax rates (amendments to articles 13 and 19 of the estate and gift tax law). The tax on tobacco will be increased from TWD 590 per kg to TWD 1,590 per kg. The reason for these changes is the amendment to the Long-term Care Service Act, according to which a special government fund will be established to finance long-term care expenditure for sick people. To raise the funds for that purpose, the estate and gift tax and the tax on tobacco will be increased, with the additional revenues being allocated to the special fund. The amendments to both taxes are expected to be enacted in June 2017. Penalties for failure to fulfil withholding obligation The Southern Bureau of the Ministry of Finance issued an announcement stating that a withholding agent failing to withhold tax need not make up for it by filing a tax return and making the payment if individual taxpayers to whom the withholding tax applies have reported and paid the tax to be withheld. However, the withholding agent is subject to penalties for failure to fulfil the withholding obligation. Deductibility of interest on tax payments and penalties The tax bureau of Gao Xiong of the Ministry of Finance issued a statement clarifying that interest on the recovery of taxes payable due to the incorrect declaration of costs, expenses or losses and interest on tax payments due to the rejection in an administrative complaint procedure are deductible for income tax purposes. However, the penalties for late tax payments and other violations may not be considered expenses and are non-deductible in determining taxable income. Tax credit on R&D On 7 March 2017, the National Taxation Bureau of the Southern Area issued a notice reminding taxpayers of the application deadline for tax credit on research and development (R&D) for 2016. According to the notice, tax credits for R&D are available for up to 15% of qualifying R&D expenses incurred in 2016, or up to 10% for the next three years, both with the maximum amount of tax credit capped at 30% of the tax payable for the year in which the expenses were incurred. In accordance with relevant laws, the eligibility and application procedures are as follows: • Eligibility: Legally established companies must not violate the environmental protection, labour or food safety and health-related laws without serious consequences, or engage in creative innovation activities of scientific or technical means. Companies engaged in R&D activities must have a high degree of innovation. As for small and medium-sized enterprises (SMEs), those that are in line with the standards set by the benchmark of SMEs and show a certain degree of innovation to initiate new activities may be eligible. • Application period: The application must be submitted in the year for the profit-seeking enterprise income tax settlement period, from three months before the start of the declaration period to the deadline. As for applications for 2016, the application period is from 1 February 2017 to 1 June 2017. • Acceptance of the application: The application must be submitted to the authorities of the main industry category, such as the Industrial Development Bureau of the Ministry of Economic Affairs if an enterprise is mainly engaged in manufacturing, or the Council of Agriculture of the Executive Yuan if an enterprise is mainly engaged in agriculture. • Application procedure: Credit application forms in accordance with the provisions of the competent authorities of the industry category as well as relevant verifying documents of the project must be prepared to identify the R&D activities in order to be eligible for the investment incentives. Special identification must be applied for with the application if the expenditure items contain the following: - Special technology for the purpose of R&D; - Special databases, special software programmes and special systems for R&D; - Expenses for commissioned research programmes conducted by foreign universities or research institutions or the hiring of teachers or researchers of foreign universities or foreign research institutions; and - Expenses for R&D activities with domestic or foreign companies. International tax developments USA On 22 December 2016, Taiwan and the United States signed an intergovernmental agreement to improve international tax compliance with respect to the US Foreign Account Tax Compliance Act (FATCA). Poland On 30 December 2016, the Poland - Taiwan Income Tax Agreement (2016) entered into force. The agreement generally applies from 1 January 2017. Relevant documents should be submitted to the local taxation authorities for the approval of the investment tax credit. If the approval fails, revisions must be done before the expiration of the tax declaration period. Taiwan cont’d JURISDICTION: 42 | Asia Tax Bulletin MAYER BROWN JSM | 43 Thailand Global Forum on Transparency and Exchange of Information According to a press release of 26 January 2017, published by the OECD, Thailand has become the 139th member of the Global Forum on Transparency and Exchange of Information for Tax Purposes. The Global Forum’s aim is to ensure that all jurisdictions adhere to the same high standard of international cooperation in tax matters and that governments come together to fight and prevent tax evasion. Thailand has committed to implement the international standards on transparency and exchange of financial account information with other members of the organisation, upon request and on an automatic basis. Excise tax The new Excise Tax Act (ETA) B.E. 2560 was announced in the National Gazette on 20 March 2017 and will be effective from 16 September 2017. The ETA is a consolidation of seven excise duty regulations and adopts international standards in excise tax collection If the approval fails, revisions must be done before the expiration of the tax declaration period. ” “ Law Gazette date Summary Royal Decree No. 631 11 February 2017 Corporate entities will be allowed to deduct a corporate social responsibility tax allowance amounting to 200% of support donations provided to approved small and medium-sized enterprises. The deduction, which is subject to a maximum amount, is effective from 1 January 2016 to 31 December 2018. Royal Decree No. 638 13 February 2017 Corporate entities and resident individuals will be allowed to deduct a corporate social responsibility tax allowance amounting to 150% of donations made between 1 January 2017 and 31 March 2017 to southern area flood victims. The deduction will be subject to different caps depending on the corporate entities or resident individuals. Royal Decree No. 637 financial yearend 13 February 2017 A start-up business incorporated between 1 January 2017 and 31 December 2017 will be granted a tax holiday, subject to the taxpayer meeting all the rules and conditions set out by the Thai Revenue Department, for five financial years. Ministerial Regulation No. 325 (B.E. 2560) 17 February 2017 Gifts received by athletes exceeding THB 10 million in a tax year will be exempt from tax. The exemption will apply retrospectively from 1 February 2016. Gifts up to THB 10 million in a tax year will be exempt under section 42 of the Revenue Code. Tax deductions and tax holidays The Revenue Department has released a number of laws granting tax deductions and tax holidays. They are summarised below. JURISDICTION: 44 | Asia Tax Bulletin MAYER BROWN JSM | 45 Vietnam Penalties for not filing may range from VND 1 to 2 million dong (about USD $45 to $90).” “ New transfer pricing decree On 24 February 2017, the government released the Transfer Pricing (TP) Decree No. 20/2017/ND-CP (TP Decree) to replace the existing TP regulation, Circular 66/2010/TT-BTC. The TP Decree will take effect on 1 May 2017. Some of the changes introduced in the TP Decree are set out below. • Two entities are related if a party owns at least 25% (previously 20%) of the equity of the other party. • Guidance on the benchmarking exercise is provided in the TP Decree. • Interest on total loans is capped at 20% of earnings before interest, taxes, depreciation and amortization. • If related-party services are rendered, the related parties must ensure, inter alia, that the services rendered are beneficial to the recipient and that such services are not duplicative in nature. • A Vietnamese ultimate parent company with worldwide consolidated revenue in a fiscal year exceeding VND 18,000 billion must prepare a master file, a local file and a country-by-country report. Other Vietnamese companies must prepare such documents if their ultimate parent companies are required to prepare the three-tiered TP documentation in their home tax jurisdiction. The following taxpayers are exempt from preparing TP documents: • Taxpayers with annual total revenue below VND 50 billion and total related-party transaction values below VND 30 billion; • Taxpayers that have concluded advance pricing agreements (APAs) and submit annual reports for APAs; and • Taxpayers that have revenue below VND 200 billion, perform simple functions and achieve the prescribed earnings-to-tax ratio. Employment mobility The Department of Labour, Invalids and Social Affairs of Ho Chi Minh City recently changed the filing criteria for intracompany transfers. Previously, an assignment letter signed by a human resources official of the Vietnamese entity was sufficient for visa application purposes. Now, assignment letters must be signed by an owner or shareholder of the Vietnamese host company. In addition, the letter must be sealed, notarized, translated and legalised. In addition, the Vietnamese labour authorities have issued a new form that employers must submit quarterly to report on foreign labour use. Foreign experts and managers travelling to Vietnam for 30 days or less must be included in the quarterly reports. Penalties for not filing may range from VND 1 to 2 million (about USD 45 to 90). Finally, work permits must be returned to the Vietnam Labour Department within 15 days of an employee’s termination. Failure to comply will result in a fine ranging from VND 30 to 75 million. Deduction for depreciable assets On 24 January 2017, the government resolved to amend Royal Decree No. 604, which was gazetted on 21 April 2016. The amendment allows for an additional corporate tax deduction of 50% of the expenditure incurred on additions, alterations, extensions and/or improvements of property, plant and equipment which qualify as a deduction under section 65 Bis (2) of the Revenue Code. This means that taxpayers who meet the conditions prescribed in Royal Decree No. 604 would be able to claim 150% of the qualifying expenditures as a deduction. This will be effective from 1 January 2017 to 31 December 2017. Before the amendment, eligible taxpayers were able to claim a corporate tax deduction of 200% of the qualifying expenditures for the period from 3 November 2015 to 31 December 2016. Personal income tax On 27 January 2017, the Revenue Code Amendment Act (No. 44) and Royal Decree (No. 629) were gazetted to revise some of the income tax brackets, tax deductions and tax allowances affecting personal income tax. The bracket for the 30% tax rate category has been increased to THB 5 million (from THB 4 million) with the excess taxed at the 35% rate. The changes to the legislation are as follows: Prior to 2017 From 2017 Income tax brackets Net income between THB 2 million to 4 million is taxed at 30%. Net income exceeding THB 4 million is taxed at 35%. Net income between THB 2 million to 5 million is taxed at 30%. Net income exceeding THB 5 million is taxed at 35%. Tax deductions – for employment income 40% of assessable income (capped at THB 60,000) 50% of assessable income (capped at THB 100,00) – for income from services rendered 40% of assessable income (capped at THB 60,000) 50% of assessable income (capped at THB 100,000) – for construction income 70% of assessable income 60% of assessable income – for business, commerce, agriculture, industry, transport and other income 65%-85% of assessable income 60% of assessable income Tax allowances – for taxpayer THB 30,000 THB 60,000 – for spouse THB 30,000 THB 60,000 – for children under 25 years old and receiving full time education THB 15,000 per child (capped at three children) THB 30,000 per child (capped at three children) – for child education THB 2,000 per child Repealed JURISDICTION: 46 | Asia Tax Bulletin MAYER BROWN JSM | 47 Vietnam cont’d Amendments to Investment Promotion Act The amendments to the Investment Promotion Act B.E. 2520 contained in the Investment Promotion Act No. 4 B.E. 2560 (2017) took effect on 25 January 2017. The major changes are as follows: • The corporate income tax exemption period for certain promoted activities has been extended from eight to thirteen years; • The investment tax allowance to be granted will be varied; and • Projects that do not qualify for a total corporate income tax exemption will be allowed a partial corporate income tax reduction for a maximum of 10 years. International tax developments India According to a press release of 17 January 2017, published by the Vietnamese government, Vietnam has approved the amending protocol, signed on 3 September 2016, to the India - Vietnam Income Tax Treaty (1994). USA On 10 February 2017, the US Internal Revenue Service (IRS) released the official text of the competent authority agreement (CAA) that the United States has signed with Vietnam in accordance with the United States - Vietnam FATCA Model 1B Agreement (2016) for implementation of the Foreign Account Tax Compliance Act (FATCA). Article 3(6) of the US-Vietnam IGA, signed on 1 April 2016, requires the competent authorities of the United States and Vietnam to enter into an agreement or arrangement in order to establish and prescribe the rules and procedures necessary to implement certain provisions in the IGA. The US-Vietnam CAA was entered into under the mutual agreement procedures provided for in article 8 of the US-Vietnam IGA. Paragraph 7.1 of the US-Vietnam CAA provides that the CAA becomes operative on the later of the date the US-Vietnam IGA enters into force, or the date the CAA is signed by the US and Vietnamese competent authorities. USA Vietnam has ratified the United States - Vietnam Income Tax Treaty (2015), by way of Resolution No. 29/NQ-CP of 24 February 2017. JURISDICTION: 48 | Asia Tax Bulletin MAYER BROWN JSM | 49 About Mayer Brown JSM Mayer Brown JSM is one of Asia’s largest and longest-standing law firms. Representing some of 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 The International Who’s Who Legal: Corporate Tax (2013) 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 | firstname.lastname@example.org “One of five Most Highly Regarded Individuals” Americas | Asia | Europe | Middle East |www.mayerbrownjsm.com Mayer Brown JSM is part of Mayer Brown, a global legal services organisation, advising many of the world’s largest companies, including a significant proportion of the Fortune 100, FTSE 100, CAC 40, DAX, Hang Seng and Nikkei index companies and more than half of the world’s largest banks. 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