Asia Tax Bulletin Autumn 2015

As of 30 September 2015

Dear Reader, We are pleased to present to you the Autumn issue of our firm’s Asia Tax Bulletin. This is a quarterly publication in which we report on tax developments in Southeast Asia, China, Japan, Korea and India. The style and concept of this publication aim to provide the reader with a per country brief summary of recent tax developments. We hope you will enjoy this publication.

Trade Alert: TPP Member Countries Announce Conclusion of Negotiations...... 1

CHINA Administrative Measures on Treaty Benefits for Non-Residents Published...... 2 China Ratifies the Multilateral Convention on Mutual Assistance in Tax Matters...... 3 Customs Duty...... 3 Expanded Work Permit and Visa Eligibility in the Shanghai Free Trade Zone (FTZ)...... 3 China Eases Rules on Foreign Investment in the Real Estate Market...... 4 Prior Approval for 22 Tax-Related Items Abolished...... 5 Special Tax Adjustments (Anti-Avoidance, Transfer Pricing)...... 5 Asia Tax Bulletin | autumn 2015

Methods of Transfer Pricing...... 5 Qianhai Preferential Tax Rate...... 6 International Tax Developments...... 6

HONG KONG International Tax Developments...... 7

India Presumptive Basis of Taxation Under Tax Treaties...... 7 FATCA Agreement with the United States...... 7 Management and Procurement Services Not Taxable...... 8 MAT Does Not Apply to FIIs/FPIs and Foreign Companies...... 8 International Tax Developments...... 8

Indonesia Debt to Equity Ratio Introduced...... 9 Increase in Personal Allowances ...... 9 Services Subject to Withholding Tax...... 10 New Tax Holiday Scheme...... 11 International Tax Developments...... 11

Japan Delaware LP is a Corporation...... 12 Bermuda LP is not a Corporation ...... 12 Introduction of Taxpayer ID Numbers...... 14 International Tax Developments...... 14

Korea Supreme Court Decision on Engineering Services...... 14 Transfer Pricing...... 15 Tax Incentives...... 15 VAT on Inbound Electronic Supplies...... 15 Non-Resident Income Tax on Sale of Korean Real Property Companies...... 16 Voluntary Disclosure Programme Announced...... 16 Incentives for Foreign Investment...... 16 Capital Gains...... 17 High Income Foreign Workers...... 17 Asia Tax Bulletin | autumn 2015

VAT...... 18 International Transactions...... 18 Arm’s Length Price...... 18 International Tax Developments...... 18 mALAYSIA Double Deduction for Consultation and Training Costs...... 19 Guidelines on Tax Treatment Related to Implementation of MFRS 121...... 19 Public Ruling on Failure to Furnish Information Within a Stipulated Period...... 20 Public Ruling on Entertainment Expense – Revised...... 20 Multimedia Super Corridor Tax Incentive...... 20 Tax Audit Framework on Withholding Tax Issued...... 20

Philippines New Exclusions to the Alien Employment Permit...... 21 International Tax Developments...... 22

Singapore Mergers and Acquisitions...... 22 Higher Salary Requirement for Workers Sponsoring Dependants ...... 23 Corporate Tax Filing for 2015...... 23 Social Security (CPF)...... 23

Taiwan Sale of Real Property...... 23 VAT on Inbound Digital Supplies...... 24 International Tax Developments...... 24

Thailand Inheritance and Gift Tax...... 24 Tax Incentive for Research and Development (R&D)...... 25 Vat Rate to Remain at 7 Percent...... 25

Vietnam Corporate Income Tax Changes (Circular 96)...... 25 Guidance on Tax Administration via Electronic Means Issued ...... 26 International Tax Developments...... 26 Asia Tax Bulletin | autumn 2015

Trade Alert: TPP Member Countries Announce Conclusion of Negotiations

The 12 member countries of the Trans- 3. Biologics – The TPP arrived at an Pacific Partnership (“TPP”; TPP member elaborate compromise to protect the countries include Australia, Brunei intellectual property of complex drugs Darussalam, Canada, Chile, Japan, Malaysia, (or “biologics”). TPP member countries Mexico, New Zealand, Peru, Singapore, the are said to have an alternative of either Pieter De Ridder United States, and Vietnam) announced providing eight years of exclusivity to Partner, Mayer Brown LLP conclusion of negotiations at the Atlanta biologic drugs, or providing five years of +65 6327 0250 Ministerial on October 5, 2015. This came so-called data exclusivity plus up to pieter.deridder@ after five years of intensive, and sometimes three more years under a regulatory mayerbrownjsm.com acrimonious, negotiations on a trade framework. agreement which is expected to affect 4. Currency Manipulation – Negotiations trade, investment and economic are apparently on-going on a side development of about 40 percent of the agreement with nonbinding global economy. commitments on exchange rate While the text of the TPP Agreement is not policies. yet publicly available, the outcomes of The TPP countries will now continue negotiations on the last “sticky” issues are technical work, including legal scrubbing, summarized below: and prepare for the signing, domestic 1. Auto Market Access – The US will ratification and finally, implementation of eliminate its 25 percent tariff on trucks the agreement. after 30 years, and the 2.5 percent tariff on automobiles after 25 years. About Comment 80% of auto parts tariff lines will be With the conclusion of TPP negotiations, immediately eliminated upon entry into countries will now need to focus on the force, while tariffs on some lines will be often long and arduous domestic process to phased out over 15 years. However, ratify the Agreement. As legal scrubbing of there is no detail on the modality for the TPP text will take a few months, it is likely tariff reduction/elimination. that the TPP will only be placed on the 2016 2. Agriculture Market Access U.S. Congressional calendar. Given the 2016 U.S. Presidential elections, the TPP »» Dairy – The United States, Japan, ratification fight in the US is expected to be Mexico and Canada have committed very tough. Domestic scrutiny of the TPP to opening up their dairy markets, to Agreement is also expected to be rigorous a small extent, with tariff rate quotas for countries like Malaysia, Japan, Australia, (“TRQ”) for certain dairy tariff lines New Zealand and Canada. and for others, full access after specific transition periods. »» Sugar – Australia obtained additional TRQ for sugar imports into the US.

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CHINA

Administrative Measures on Treaty Benefits certificates of payment, etc. which relate to for Non-Residents Published generation and ownership of income; and • On 27 August 2015, the State Administration of Taxation »» other documents on obtaining treaty benefits (SAT) issued an announcement (SAT Gong Gao [2015] required under other tax regulations. No. 60) concerning administrative measures on how • A non-resident taxpayer may provide other documents non-resident companies or individuals may apply for, to demonstrate his/her entitlement to treaty benefits. and obtain benefits, provided under tax treaties (or tax • The timing of the submission of documents varies arrangements in the case of Hong Kong and Macau) depending on the different treaty articles applicable to concluded by China. The announcement will take effect non-resident taxpayers. In respect of articles on on 1 November 2015 and replaces Circular 124 issued in independent personal services, employment income, 2009. government service, teachers/researchers and • Treaty benefits are referred to as an exemption from, or students, the submission of relevant documents is on a reduction of, domestic enterprise income tax and one-off basis, provided that the conditions for the individual income tax provided under a tax treaty or entitlement to treaty benefits and information reported international transportation agreement. Non-resident in these documents have not been subject to any taxpayers that are entitled to treaty benefits may apply changes. In so far as permanent establishments, for tax exemption or reduction at the time of filing their business profits, shipping and air transport, dividends, tax returns or when the tax is withheld by a withholding interest, royalties and pensions are concerned, relevant agent. The tax authority will monitor the legitimacy of documents must be submitted every 3 calendar years, the application. In the case of self-assessment, a provided that the conditions for the entitlement to non-resident is required to assess he/she entitlement to treaty benefits and information reported in these the treaty benefits itself, file the tax return and provide documents have not been subject to any changes. With the relevant documentation. If tax is withheld and a respect to capital gains and other income, e.g, artistes non-resident is of the opinion that he/she is entitled to and athletes, the relevant documents must be treaty benefits, he/she must notify the withholding submitted every time income is derived. agent accordingly and provide the latter with the • If the facts have changed, relevant treaty benefits will relevant documentation. The withholding agent will cease to apply from the day the change occurs and then withhold the tax on the basis of the documentation non-resident taxpayers are required to pay tax provided by taking account the treaty benefits and according to domestic tax laws and regulations. submit the relevant documents to the competent tax bureau for filing. If a non-resident fails to notify the • In implementing follow-up administration on the withholding agent of the entitlement, or the documents entitlement of treaty benefits for non-resident provided by he/she do not satisfy the requirements, the taxpayers, the competent tax authority may take the withholding agent must withhold tax according to the following measures, including: domestic tax laws and regulations. »» requesting supplementary documents from the • The following documents must be submitted in Chinese: non-resident taxpayer or withholding agent if the documents submitted are insufficient, or the »» a form on tax residence status of a non-resident non-resident taxpayer is suspected of having taxpayer; tax-avoidance intentions; »» a form on the entitlement of a non-resident taxpayer »» initiating a GAAR investigation procedure, mutual to treaty benefits; agreement procedure or exchange of information »» a certificate of tax residence issued by the procedure with the treaty partner if needed; and competent tax authority of treaty partner; »» tax recovery from the non-resident taxpayer that is »» contracts, agreements, resolutions of boards of not entitled to treaty benefits but has enjoyed them. directors or meetings of shareholders, and

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• It is expected that this administrative change will bring other requirements, the SAT will require Chinese about much pressure on tax treaty claimants to ensure enterprises to hold greater transfer pricing that they have their documentations in order, as failure documentation. This means that the Chinese entity will to provide all the required documents means that the have in its possession key information on the global PRC tax authority can revoke the tax treaty benefit enterprise, its transfer pricing policy and fee structure. claimed when the payment was made, and impose This also means that such information will be accessible penalties for late payment (0.05 percent of the tax per to China Customs during an audit. The transfer pricing day). In this light we are noticing a marked change in the documentation will reveal all payments made to related Hong Kong tax authority’s practice of issuing tax entities and it is very likely that China Customs will ask residency certificates. Over the past six months, this has the enterprise to justify such payments. The SAT’s developed from a routine matter to a procedure with an requirement that related party fees be based on “arms uncertain outcome unless the Hong Kong tax resident length” principle will also apply in case of a China satisfies specific substance conditions in Hong Kong. Customs query. • Based on past experience, we understand that many China Ratifies The Multilateral Convention on existing royalty agreements, technology transfer Mutual Assistance in Tax matters agreements and trademark agreements were drafted • On 1 July 2015, the National People’s Congress Standing more than 10 years ago and continue to be in use today. Committee (the “NPC Standing Committee”) ratified We suggest that enterprises review their existing royalty the Multilateral Convention on Mutual Administrative agreements, technology transfer agreements and Assistance in Tax Matters (“the Convention”), which trademark agreements, as well as their tax strategies, to was designed to strengthen international co-operation ensure compliance and for a better understanding of on tax administration worldwide. After ratification, it will their Chinese subsidiaries and the entire group’s not take long before the Convention becomes effective transfer pricing policy. in China. The Convention will extend the scope of • It should be noted that China Customs and the tax exchange of information (EoI) between China and other authority are two separate enforcement agencies. Thus, Contracting States. Apart from income taxes, other if the related party fees are not clearly spelt out in the taxes will also be covered in the EoI network. contracts or in the transfer price, the enterprise may Nevertheless, since China has reservations on a number end up having to make duty/tax reparations to both of articles, some forms of administrative assistance like agencies. assistance in recovery, measures of conservancy and service of documents stated in the Convention will not Expanded Work Permit and Visa Eligibility in apply between China and other Contracting States. the Shanghai Free Trade Zone (FTZ) • For Multinational corporations (MNCs), strengthened • Shanghai has introduced a number of measures to relax international cooperation on tax administration means work permit and visa requirements for foreign nationals that their cross-border transaction information will be working in the Shanghai FTZ. The measures, which available to tax authorities in the jurisdictions that their became effective in July 2015, include extending the businesses are involved. As such, it has become validity period of residency permits, expanding increasingly important for MNCs to improve tax permanent residency eligibility and easing work visa compliance in their cross-border transactions. application requirements. • Foreign employees of the 70,000 registered companies Customs Duty in the Shanghai FTZ who have lived in Shanghai for three • From Tax Documentation to Customs Actions: MNCs consecutive years are eligible to apply for a two-year Should Review Royalty and/or Technology Transfer residence permit. Agreements with Chinese Subsidiaries. The State • Foreign nationals employed by the 3,500 companies Administration of Taxation (“SAT”) has established a registered with the Shanghai Science and Technology vigorous policy to police transfer pricing and the Commission may apply for the newly created five-year payments made between related parties. Amongst

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residence permit. After working in Shanghai for an certificate; and (3) funds injected in the real estate additional three years, these foreign nationals may apply project has reached 35 percent of the project’s total for a permanent residence permit. investment amount. Now, Notice 122 provides more • Foreign nationals are eligible to apply for permanent flexibility by removing the first requirement on full residency if they have worked in Shanghai for four payment of registered capital, i.e., as long as conditions consecutive years (residing in China for at least six (2) and (3) are satisfied, the Real Estate FIE is eligible to months of each of those years), earned an annual salary obtain loans. of at least CNY 600,000 (approx. USD 97,000) and paid • Nevertheless, Notice 122 fails to address a major taxes of more than CNY 120,000 in each of those years. practical hurdle that Real Estate FIEs face when seeking Previously, only senior executives and professors were foreign loans. According to relevant regulations issued eligible to apply for permanent residency. by the State Administration of Foreign Exchange (SAFE), • Foreign nationals who enter China on a non-work visa any Real Estate FIE approved and registered with the are no longer required to exit China to apply for a work Ministry of Commerce on, or after, 1 June 2007 is not visa prior to re-entry. The application for a work visa may permitted to register its foreign debts with SAFE. Such now be made at one of Shanghai’s two airports. restriction is not changed by Notice 122. Therefore, unless SAFE makes further clarifications on this point, China Eases Rules on Foreign Investment in the the benefits and flexibility brought by Notice 122 will be Real Estate Market limited for Real Estate FIE obtaining financing. • To boost its real estate market in the current economic • Notice 122 also makes it easier for foreign individuals slowdown, the Chinese government recently issued the intending to purchase real estate in China for their own Notice Adjusting Policies on the Access and use. Previously under Circular 171, only foreign Administration of Foreign Investment in the Real individuals who have been studying or working in China Property Market which came into effect on 19 August for more than one year are allowed to purchase real 2015 (Notice 122). This Notice 122 relaxes a number of estate – such one-year limit is now lifted by Notice 122. It restrictions on foreign investment in the real estate is worth noting that purchase of real estate must still be sector which were first introduced in 2006. for the foreign individuals’ own use and be subject to relevant restrictive policies on real estate purchase as • Under PRC law, any foreign-invested enterprise (FIE) is implemented by the municipal government of the city subject to a mandatory ratio between its registered where such property is located. capital amount and the amount of total investment. Such ratio determines an FIE’s capability of borrowing • As a continuing policy to simplify foreign exchange foreign loans. For an ordinary FIE, the ratio varies registration formalities, Notice 122 provides that for between 1/3 to 70 percent depending on the total foreign exchange registration of direct investment amount of investment. In 2006, as a measure to curb the matters, Real Estate FIEs no longer need to register with then overheated real estate market, Chinese SAFE; instead, they may complete such formalities with government promulgated Circular 171 which imposed a the relevant handling bank. Such change is in line with much higher ratio on foreign-invested real estate earlier reforms launched by SAFE which applies to all enterprises (Real Estate FIE) – its equity must be at least FIEs. 50 percent of its total investment if the latter exceeds • Since 2006, the Chinese government has tightened its USD10 million. Now, such restriction is removed by policies on foreign investment in the overheated real Notice 122. Real Estate FIEs may enjoy the same equity- estate market. However, with the country’s economy to-debt ratio as other FIEs and will have a lower level of slowing down in recent years and the depreciation of the equity and a higher level of leverage. Renminbi, the issuance of Notice 122 seems to signal a • According to Circular 171, a Real Estate FIE must satisfy change in government policymaking in this sector. The the following requirements before it may borrow relaxations brought by Notice 122 will no doubt facilitate domestic loans or foreign loans or convert foreign foreign investors investing in the Chinese real estate exchange loans into Renminbi: (1) its registered capital market. However, whether Real Estate FIE can has been fully paid; (2) it has obtained the land use right substantially benefit from the new policies, especially in

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relation to its capability to obtain foreign loans, further of related parties, contemporaneous clarifications or implementing rules will need to be documentation and transfer pricing methods; issued by the government. »» investigation and tax adjustments, including a description of potential risks of the tax audit for an Prior Approval for 22 Tax-Related Items enterprise, such as related transactions with tax Abolished havens, reporting low profits or losses for a large • On 18 August 2015, the SAT issued an announcement number of years, etc.; concerning a list of 22 tax-related items for which prior »» intangibles; approval from it is no longer needed (Gong Gao [2015] »» intra-group services; No.58). Those items mainly focus on tax incentives, including: »» advance pricing agreements (APAs); »» tax incentives for western regions; »» cost contribution arrangements (CCAs); »» tax incentives on income from technology transfers »» controlled foreign companies (CFCs); made by a resident enterprise; »» thin capitalization rules; »» tax incentives for the simplified collection method »» general anti-avoidance rules (GAARs); and tax sparing credit method on enterprise foreign »» corresponding adjustments; and income; »» interest/penalties in the case of non-compliance. »» tax incentives for venture capital investment enterprises; Methods of Transfer Pricing »» tax exemption on income derived by non-profit According to the draft rules, methods of transfer pricing organizations; must be established at arm’s length and include: »» tax incentives on income from projects concerning »» the comparable uncontrolled price method; public infrastructure, environmental protection, energy and water conservation; »» the resale price method; »» stamp duty exemption on state-owned equity »» the cost-plus method; transactions carried out by a listed company; and »» the transactional net margin method; »» stamp duty exemption on equity transfers of listed »» the profit split method; and companies by four financial assets management »» other methods. companies. Other methods expressly refer to the value contribution Special Tax Adjustments (Anti-Avoidance, allocation and asset methods. The latter includes the cost, Transfer Pricing) market and benefit methods. To establish an appropriate method, a comparability analysis has to be carried out, • On 17 September 2015, the SAT released new draft which may contain an analysis of: implementation rules on special tax adjustments (“the draft”) for public comments. The draft is an update of »» features of assets or services; Notice Cai Shui Fa [2009] No. 2, consisting of 16 chapters »» functions performed by parties involved in related and 168 articles. Once enacted, it will replace Cai Shui Fa transactions; [2009] No. 2. Interested groups may submit their »» terms of contract; responses until 16 October 2015. The full text of the »» economic environment; and draft (in Chinese) may be downloaded from the SAT website. »» business strategy. • The draft mainly addresses the following on special tax • The draft rules also provide details as to how each of the adjustments: above methods has to be applied. The most striking »» basic transfer pricing rules, including the definition point is the introduction of two new methods, i.e. the

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value contribution allocation method and the asset includes business operations, group structure, profit method. According to the draft rules, the value level and the position in the value chain in terms of contribution allocation method applies to cases in which functions and risks of an enterprise carrying out information on transactions is difficult to obtain, but the transactions with related parties. consolidated profit of the group and contribution to • The tax authorities will encourage enterprises to value creation can be asserted. The method is based on self-adjust taxable income, filing and complying with the an analysis of value creation factors that contribute to arm’s length principle on their own initiatives. the consolidated profit of the group which will be Enterprises failing to submit related transaction forms, allocated among related parties in different countries by or failing to maintain or refusing to submit reference to assets, costs, expenses, sales revenue, contemporaneous documentation will be penalized number of employees or a composition of factors. The according to the relevant articles of Tax Collection Law, introduction of this method is controversial as it is Corporate Income Tax Law and their Implementation questionable whether it is consistent with the arm’s Rules. length principle. • Penalty interest payable on a daily basis is to be charged • With regard to the asset method, which is meant to be on underpaid enterprise income tax due after 1 January used for valuation purposes, the basis of the cost 2008 following a special tax adjustment. The applicable method is the replacement value of a (similar) asset, the interest rate is the benchmark rate published by the market method is the market price paid for the same or People’s Bank of China on 31 December of the relevant similar asset, while the current value of anticipated year, plus 5 percent. Enterprises that are exempt from benefits is the basis of the benefit method. the submission of contemporaneous documentation, or • The tax authorities will establish a risk level mechanism have prepared contemporaneous documentation, do on related transactions and implement a corresponding not need to pay the 5 percent penalty interest if tax is strategy for enterprises with different risk levels. recaptured. Interest charged in connection with a Enterprises having a low risk level and high compliance special tax adjustment cannot be deducted for awareness will be guided and warned by the tax enterprise income tax purposes. authorities in respect of compliance with special tax adjustment rules. Enterprises with a high risk level run Qianhai Preferential Tax Rate the risk of being audited and receiving special tax • Qianhai-Shenzhen-Hong Kong Modern Services adjustments without prior guidance or warning. Industry Cooperation Zone (Qianhai) is one of the four Compliance awareness of enterprises is assessed by: regions in mainland China that currently has a 15 percent »» an examination and analysis of related tax filings; preferential Corporate Income Tax (CIT) rate. The State »» an examination of contemporaneous Council released the CIT Incentive Catalogue in March documentation focusing on a description of the 2014, which formally launched the CIT preferential pricing system, functional risk analysis, profit level treatment for Qianhai at the state level. Since then, the and allocation standard of a group value chain, Qianhai Administrative Committee, jointly with the methods of transfer pricing, price data support and Shenzhen State Tax Bureau (Shenzhen STB) and the other information disclosure; and Shenzhen Local Tax Bureau (Shenzhen LTB) have issued a number of local implementation regulations in order »» information on risks collected from internal control that enterprises located in Qianhai can enjoy the CIT tests of related transaction compliance for preferential treatment in practice. enterprises preparing for contemporaneous documentation. International Tax Developments • The tax authorities will set up a special tax adjustment • Taiwan. As a historic first, China signed a tax treaty with database to be shared by different departments of the Taiwan on 25 August 2015. The agreement was government. The database information can be concluded only in the Chinese language and generally generated from the internal control system of the tax follows the OECD Model. A deviation from the OECD authority and other government departments, and

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Model is that any entity that is incorporated under the anti-avoidance provision. The maximum rates of law of a third party and has its effective place of withholding tax are: management in one of the parties is regarded as »» 10% on dividends and 5% if the beneficial owner is a resident for the purposes of the treaty. The reason for company which holds directly at least 25% of the adding this phrase is to include the (mainly Taiwanese) capital of the company paying the dividends; companies that previously had to incorporate in a third »» 7% on interest, subject to some exceptions; and country to carry out their business due to the »» 7% on royalties; restrictions on direct trade and investment between Mainland China and Taiwan. The treaty also contains an

HONG KONG

International Tax Developments • Italy. The Italy/Hong Kong tax treaty will take effect in Hong Kong on 1 April 2016.

INDIA

Presumptive Basis of Taxation Under Tax • The provisions of taxation for services are based on Treaties whether the nature of the service provided for falls within the definition of FTS under ITA. If it does not fall • The Supreme Court (SC) ruled in favour of the taxpayer within the definition of FTS, it would be covered under a that, where the services in substance are inextricably presumptive basis of taxation wherein income is connected with prospecting, extraction or the presumed to be 10 percent of the gross receipt. production of mineral oil, though there may be certain ancillary services, consideration received by non- FATCA Agreement with the United States residents or foreign companies would be taxable under • On 7 August 2015, the Indian Central Board of Direct the presumptive basis of taxation on gross basis and not Taxes issued Notification No. 62/2015 to amend the as fees for technical services (FTS). Further, Income Tax Income Tax Rules 1962 for the purpose of implementing Act 1961 (“the ITA”) does not define terms such as the US Foreign Account Tax Compliance Act (FATCA). “mines” or “minerals”. The definition of the said terms The amendments enter into force upon publication in under the Mines Act, 1952 and the Mines and Minerals the Official Gazette. (Regulation and Development) Act, 1957 includes drilling operations in relation to exploration of petroleum and • The amendments include: the definition of minerals includes natural gas and »» definitions of relevant terms; petroleum. »» information to be maintained and reported; • Circular No. 1862 of 1990 states that the imparting of »» due diligence requirements for a reportable training and carrying out drilling operations for account; and exploration or exploitation of oil and natural gas would »» Form 61B on Statement of Reportable Account and be excluded from the definition of FTS. instructions for completion.

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Management and Procurement Services Not submitted its final report on this matter to the Taxable Government of India on 25 August 2015. • On 29 July 2015, the Authority of Advanced Rulings • The Committee recommended that section 115JB of the (AAR) issued its ruling in the case of Measurement Income Tax Act be amended to clarify the inapplicability Technology Limited (AAR/966/2010). It is a case covered of MAT provisions to FIIs/FPIs. Alternatively, the by India’s tax treaty with the UK. The ruling states that Committee suggested that a Circular be issued clarifying when services rendered by a non-resident entity to its the same. group company in India are in the form of management • The Government has accepted the recommendation of services, then in order to be considered as FTS as the Committee to clarify the inapplicability of MAT to mentioned in article 13 of the India-UK Tax Treaty (“the FIIs/FPIs and decided that an appropriate amendment to Tax Treaty”), they must make available technical the Income Tax Act will be carried out. Through the knowledge, experience, skill, know-how or processes, or amendment, the Government proposes to clarify that consist of the development and transfer of a technical MAT provisions will not be applicable to FIIs/FPIs that do plan or technical design. not have a place of business or permanent • The AAR observed that the “managerial services”, which establishment in India for the period prior to 1 April 2015. were included in the previous provisions of article 13 of Pending such amendment, the Central Board of Direct the Tax Treaty, had been removed by the subsequent Taxes (CBDT) will convey to the field formations the amendments. However, the said services will continue to decision of the Government to accept the be governed by the article if they make available recommendation. The Report of the Committee is technical knowledge, experience, skill, know-how or available on the website of the Finance Ministry and the processes, or consist of the development and transfer Income Tax Department at www.finmin.nic.in and www. of a technical plan or design. In the present case, upon incometaxindia.gov.in. perusing the submissions by the Applicant, including the • In a press release dated 24 September 2015, the details of their stay in India, the AAR concluded that the commissioner of income tax of India announced that the services provided under the first agreement are in the Government has decided that with effect from 1 April form of routine managerial services and thus, held that 2001, the MAT provisions of section 115JB shall not be the same cannot be classified as technical or applicable to FII’s and FPI’s, and neither to a foreign consultancy services. In the absence of the “make company if: available” criteria, in spite of falling within the purview of »» the foreign company is a resident of a country which the term “managerial services”, the said services will be has a double tax treaty with India and such foreign covered by the exclusion in article 13 and will not be company does not have a permanent establishment taxable in India under the ITA. Further, the AAR ruled within the definition of the term in the relevant tax that procurement services can never be classified as treaty; or technical or consultancy in nature as they do not make »» the foreign company is a resident of a country which available any technical knowledge, experience or does not have a tax treaty with India and such foreign know-how etc. The AAR thereby issued its ruling in company is not required to seek registration under favour of the Applicant. section 592 of the Companies Act 1956 or section Mat Does Not Apply to FIIs/FPIs and Foreign 380 of the Companies Act 2013. Companies • An appropriate amendment to the Income Tax Act in this • A Committee on Direct Tax Matters (“the Committee”) regard will bemade. chaired by Justice A.P. Shah, having been constituted with the initial mandate to examine the matter relating International Tax Developments to the levy of minimum alternate tax (MAT) on foreign • Germany. During a meeting in Berlin on 17 August 2015 institutional investors (FIIs) and foreign portfolio between the Indian Revenue Secretary and the German investors (FPIs) for the period prior to 1 April 2015, State Secretary and other senior officers of the Federal

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Ministry of Finance, issues relating to exchange of laying out the technical details of such exchanges. tax-related information, the BEPS Project, tax treaty »» India and Germany agreed to resume negotiations negotiations, etc. were discussed. Three important on a partial revision of the tax treaty between the outcomes of the visit of the delegation as agreed two countries with a view to bringing the provisions between the two sides are as follows: relating to exchange of information to international »» It was agreed that India and Germany will continue standards. It was also agreed that both sides would to exchange tax-related information spontaneously meet in New Delhi in September 2015 and strive to on the basis of the existing agreements. Both sides agree on a final version to ensure that it is signed also agreed to explore other possibilities of soon. (An amending protocol to the existing tax enhancing exchange of information. treaty was last discussed in April 2011, but no further »» As signatories to the Multilateral Competent progress in the matter was achieved.) Authority Agreement regarding automatic • Seychelles. On 26 August 2015, India and Seychelles exchange of information on financial accounts, signed an exchange of information agreement relating Germany and India will begin negotiations as soon as to tax matters. possible towards a memorandum of understanding

INDONESIA

Debt to Equity Ratio Introduced1 ratio and has not yet expired), companies which are subject to final income tax treatment (e.g., construction • The Minister of Finance issued Regulation 169 on 9 service companies) and companies engaged in September 2015, which for the first time prescribes a infrastructure (not defined). debt to equity ratio for income tax purposes for corporate taxpayers in Indonesia. Any interest incurred • Interest covered by the regulation includes interest on excessive debt will not be treated as a tax deductible under indebtedness, guarantee fees, finance lease interest expense. The regulation takes effect on 1 payments, arrangement fees, discounts or premiums in January 2016. relation to debt and forex resulting from all of the above. • The debt to equity ratio is 4:1 and applies to both • The regulation requires that foreign loans must be external debt and related party debt. Equity for reported in a prescribed report to the Director General purposes of the regulation comprises both of Taxation, failing which interest under the loan will not shareholder’s equity and interest-free related party be tax deductible. loans and any other debt which is treated as equity • The regulation mentions that further details will be under financial accounting standards. If a company finds provided in due course. itself in a negative equity situation, it cannot claim any interest deductions for income tax purposes. Increase in Personal Allowances • The regulation will not apply to banks, financial • The Directorate General of Taxes (DGT) announced on institutions generally and insurance companies, 4 August 2015 that the Ministry of Finance (MoF) issued companies engaged in oil and gas mining, general mining Regulation 122/PMK.010/2015 dated 29 June 2015 to and other mining, parties to a Production Sharing revise the personal allowances for individual taxpayers Contract (PSC), contracts of work (CoW) or Mining from tax year 2015 onwards. This regulation replaces Cooperation Agreement (in all these cases: provided MoF Regulation 162/PMK.011/2012. Details of the that the existing contract has a specific debt to equity revisions are as follows:

1 Source: Harsono Strategic Consulting.

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tax rate (%) allowance (idr) • City planning and landscape architecture Taxpayer 36,000,000 • Creation of film promotion tools, advertisements, posters, photos, slides, banners, pamphlets, and Spouse 3,000,000 billboards Wife’s income combined with 36,000,000 • Website development or maintenance taxpayer’s • Internet including connection Each dependant (maximum 3,000,000 • Storage, processing, and/or distribution of data, of three) information, and/or programs • Although legislated on 29 June 2015, the DGT has • Maintenance of vehicle and/or land, marine, and air clarified that the PKTP revisions will apply retroactively transportation means from 1 January 2015 onwards. As such, income tax for • Suction of septic tank the period of January to June 2015 that has already been • Pool maintenance reported based on the previous PKTP can be adjusted • Freight forwarding based on the new regulation. There are no details on • Logistics how adjustments will be made but taxpayers may • Document handling contact the DGT for further information. • Loading and unloading • In the event the taxpayer incurs an overpayment due to • Laboratory and/or testing, except for those the adjustment of PKTP for the period from January to performed by educational institutions in July 2015, the employer may offset the excess payment academic research against the tax to be withheld for the period from July • Parking management 2015 to December 2015. • Soil testing • Land preparation and/or cultivation Services Subject to Withholding Tax2 • Seeding and/or planting seeds • The MoF issued Regulation 141 which took effect on 26 • Plant maintenance August 2015, which amended and added a number of • Harvesting services which are subject to 2 percent article 23 • Processing of agricultural, plantation, fishery, withholding tax (this is not the final withholding tax but livestock, and/or forestry products prepaid income tax for the recipient of the service fees, • Decorating and hence can be claimed by the recipient as a tax credit • Printing/publishing against the recipient’s income tax liability for the year • Translation concerned). This regulation replaces the previous • Freight/expedition, except for those subject to regulation 244 on this subject. It is a favourable Article 15 income tax development as the additional services were previously • Port services subject to 15 percent withholding tax. • Transport via pipelines • Child care Amended: • Training and/or course • Support for geothermal, oil and gas mining • Delivery and loading money to ATM • Computer related (i.e. software, hardware or • Certification system) • Survey • Provision of space and/or time in mass media, • Tester outdoor media and other media for the • Services other than those mentioned above for dissemination of information, and/or advertising which payment is charged to central or regional government budget Added: • Legal • Architecture

2 Source: Harsono Strategic Consulting.

mayer brown jsm 10 Asia Tax Bulletin | autumn 2015

New Tax Holiday Scheme3 the plan. • On 18 August 2015, the MoF issued Regulation 159, which • Satisfy certain debt to equity ratios as stipulated by the took effect on 16 August 2015. It replaces the previous MoF. MOF regulations on tax holidays i.e. regulations 130/2011 • The tax facility can be utilized after the eligible taxpayer and 192/2014. The main changes are that the new has started their commercial operation and has realized scheme covers a wider range of pioneer industries and their capital investment according to the plan. gives tax holidays for a longer period. Details are as • Income other than income from the taxpayer’s main follows. business activities, such as capital gains, interest, royalty, • A “pioneer industry” is an industry having a wide range rental of asset are subject to normal income tax of connections, provides high-added value and treatment. externality, introduces new technology, and has • The application must be submitted to the Investment strategic value for the national economy. Eligible Coordinating Board (BKPM) and the decision will be taxpayers may be granted the following tax facilities: made by the MoF. It is no longer necessary to have a »» 10%-100% reduction of Corporate Income Tax (CIT) consultation with the President as part of the process. due for a period of 5-15 years from the start of commercial production. International Tax Developments »» Up to 50% reduction of CIT for telecommunications • The Netherlands. On 30 July 2015, Indonesia and the and information industries. Netherlands (finally) signed an amending protocol to »» The period can be extended to 20 years if in the the Indonesia - Netherlands Income Tax Treaty (2002), in national interest. Jakarta. The new protocol increases the interest withholding tax rate on qualifying loans from 0 to 5 To be eligible for this scheme, a corporate taxpayer must percent, while the dividends withholding tax rate will be meet the following criteria: reduced from 10% to 5% if the Dutch investor has an • Be a company established on, or after, 15 August 2011. interest in the Indonesian company of at least 25% (either 10% or 15% in other cases). The reduced • Engage in one of the following pioneer industries: withholding tax rate applies provided that the recipient »» Base metal is the beneficial owner of the interest or dividends, with »» Oil refinery and/or base organic chemical sourced the term ‘beneficial owner’ to be interpreted in from oil and natural gas accordance with the OECD Commentaries unless either »» Machinery country makes a reservation in the OECD Commentary. »» Telecommunication and information The new protocol is expected to take effect on 1 January 2016. The protocol contains a wider exchange of »» Sea transportation information provision (including taxes which are not »» Processing in agriculture, forestry and fishery part of the tax treaty) and it now contains an assistance products in tax collection provision. The new provisions with »» Processing industry in a special economic zone respect to interest and dividend withholding tax will »» Economic infrastructure, with certain exceptions provide interesting opportunities to interested lenders and equity investors interested in Indonesia (including • Have an approved new capital investment plan of at least private equity, venture capital and investment funds) as IDR 1 trillion (approximately USD 70 million), or IDR 500 the withholding tax rates are the lowest rates possible billion for taxpayers in telecommunication and under the country’s tax treaties. information. • Guernsey. The Guernsey - Indonesia Exchange of • Deposit at least 10 percent of the investment plan value Information Agreement (2011) came into force on 22 in a bank in Indonesia within seven days of the approval; September 2014. this deposit cannot be withdrawn before realization of

3 Source: Harsono Strategic Consulting.

11 Asia Tax Bulletin Asia Tax Bulletin | autumn 2015

• Jersey. The Indonesia - Jersey Exchange of Information • On 25 June 2015, the Bahamas and Indonesia signed an Agreement (2011) came into force on 22 September exchange of information agreement relating to tax 2014. matters.

JAPAN

Delaware LP is a Corporation “legal entity” in Delaware constitutes a “corporation” in Japan. Additionally, the General Corporation Law of the • The Japanese Supreme Court held in its decision dated State of Delaware uses “a body corporate” to mean a 17 July 2015, case number Heisei 25 (2013) gyou-hi “corporation” in Delaware. Therefore, it is not explicitly No.166, that a Delaware Limited Partnership (LP) is, for clear whether a “separate legal entity” in Delaware has Japanese tax purposes, a corporation. the same legal status as a “corporation” in Japan. • The plaintiffs (Japanese resident individuals) • At the second stage of determination, it is clear that the participated in a LP pursuant to the Delaware Revised LP is a subject to which rights and duties attribute. The Uniform Limited Partnership Act (hereafter, DRULPA). partners of the LP only have abstract rights on the whole The LP invested in the leasing of used collective housing assets of the LP. They do not have concrete interests on in California and Florida, which subsequently incurred the respective goods or rights belonging to the LP. losses. The plaintiffs filed their individual income tax returns treating the LP as transparent and taking the • Therefore, the losses in the leasing business did not arising losses into account when reporting their taxable belong to the Japanese partners. Stating that an LP in income as per article 26 of the Income Tax Act (ITA). The the US was generally treated as transparent, it remains Japanese tax authorities, however, argued that the LP to be seen by the Nagoya High Court if the taxpayers had was in fact a corporation (and opaque) and therefore “justifiable grounds” in understating their income. the losses did not belong to the partners, but to the Article 65(4) of the Act on General Rules for National corporation. Taxes provides that additional tax for understatement will not be charged if a taxpayer has justifiably • The issue was whether the Delaware LP was a understated his taxable income. Note: The other corporation. The Supreme Court overturned the partners of the same LP had similar suits in Tokyo and Nagoya High Court’s decision on 24 January 2013 (case Osaka. The Tokyo High Court on 13 March 2013 (case number Heisei 24 (2012) No. 8) which had ruled in favour number Heisei 23 gyou-ko No. 302) and Osaka High of the taxpayers. Instead, the Supreme Court held that Court on 25 April 2013 (Heisei 23 (2011) gyou-ko No. 19) article 2(1)(7) of the ITA defines a “foreign corporation” both ruled that the LPS was a corporation. Accordingly, as “a corporation that is not a domestic corporation”, The Supreme Court has indicated it will rule that the LP but does not go on to define a “corporation”. Therefore, was a corporation in both cases. whether or not a foreign entity is a “corporation” (houjin) is based on whether it would be considered a • However, it should be noted that on 5 February 2014, the “corporation” in Japanese law. There are two stages to Tokyo High Court (case number Heisei 24 (2012) this. Firstly, whether the wordings or mechanics of the gyou-ko No. 345), ruled that a Bermuda LP was not a incorporating law explicitly (meihakuni) gives, without corporation. It is not clear if the Supreme Court will question, legal status to the entity as a corporation or it uphold that decision. explicitly does not. If it is neither, then, at the second stage, whether the entity is a subject to which rights and Bermuda LP is Not a Corporation duties attribute. • On 17 July 2015, the Japanese Supreme Court disallowed • In this case, at the first stage, DRULPA uses the wordings an application by the tax authorities to appeal a Tokyo of “separate legal entity”, but it is not clear whether a High Court decision, in which an LPS registered in

mayer brown jsm 12 Asia Tax Bulletin | autumn 2015

Bermuda was held not to be a corporation for Japanese • The Supreme Court did not allow the tax authorities’ tax law purposes. further appeal of the respondent, whereupon the • The taxpayer (Tokyo Star Holdings LP) is an LP based on matter was finalized. Bermuda law (Partnership Act 1902 and Limited • With respect to the first issue, article 36(1) of the Partnership Act 1883). The taxpayer is also an exempted Japanese Civil Code provides that “... no establishment partnership (EPS) based on Bermuda law (Exempted of a foreign juridical person shall be approved; provided, Partnerships Act 1992), which is not subject to tax on however, that, this shall not apply to any foreign juridical income in Bermuda. person which is approved pursuant to the provisions of a • A Delaware LLC and two Cayman corporations entered law or treaty.” The courts held that whether a business into several silent/sleeping partnership agreements with entity is considered a “foreign corporation” (a foreign the former as silent/sleeping partners (tokumei juridical person under the Civil Code) is determined with kumiaiin) and the latter as business operators reference to the relevant foreign law governing the (eigyousha). The Cayman corporations as eigyousha had corporate legal personality of the business entity in branches in Japan and were in the business of collecting question. In this case, the courts held that Bermuda law claims. did not provide the taxpayer with a corporate legal personality. Therefore, the taxpayer was not a “foreign • The Delaware LLC then sold the interests in the silent/ judirical person” under civil law and neither is the sleeping partnerships to an Irish corporation. The taxpayer a “foreign corporation” under the CTA. taxpayer and the Irish corporation (as tokumei kumiaiin) subsequently entered into a swap contract under which • For the second issue, the courts held that a “non-judicial the business profits of the eigyousha were distributed to association, etc.” (jinkaku no nai shadan tou) under the the tokumei kumiaiin and, in turn, to the taxpayer. CTA was equivalent to an “association without capacity to hold rights” (kenri nouryoku naki shadan) under civil • The Japanese tax authorities argued that the law, which had been defined by the Supreme Court distribution received by the taxpayer from the tokumei decision on 15 October 1964 (case number Shouwa 35 kumiai constituted domestic source income under (1960) o No. 1029), reported in Minshû 18-8-1671.In its article 138(11) of the Japanese Corporate Tax Act (CTA). ruling, the Supreme Court stated that an “association The taxpayer argued that since, as a Bermuda LP, it was without capacity to hold rights” must have (1) an not a corporation within the meaning of the CTA, it was organization as a body, (2) a decision by majority, (3) not a taxable entity. continuation of the body despite the change of the • The first issue was whether the taxpayer was a members, and (4) a defined rule concerning corporation for Japanese tax law purposes. If not, the representation, operation of a general meeting, second issue was whether the taxpayer was a “non- management of properties, etc. In this case, the courts jinkaku no nai shadan tou judicial association, etc.” ( ) held that the requirements of (1), (2) and (4) were not within the meaning of article 3 of the CTA, which satisfied; therefore, the taxpayer was not a “non-judicial provides that such an association is treated as a association, etc.” and was not subject to Japanese corporation. corporate tax. • The Tokyo District Court, in its decision on 30 August • In conclusion, the tax authorities erred in taxing the 2012 (case number Heisei 23 (2011) gyou-u No. 123), Bermuda LP. Instead, the partners of the LP (being Kinyû Shôji Hanrei reported in 1405-30, ruled that the corporate entities) should have been subject to tax. taxpayer was neither a corporation nor a “non-judicial • The Supreme Court, in its other decision on 17 July 2015, association, etc.”, and that taxation of the taxpayer was ruled that a Delaware LP was a corporation. In that case, not void but illegal. the Supreme Court applied a “second stage of • The tax authorities appealed, but the Tokyo High Court, determination” where the attribution of rights and in its decision on 5 February 2014 (case number Heisei 24 duties was concerned. Although the attribution of rights Kinyû Shôji Hanrei (2012) gyou-ko No. 345), reported in and duties was argued by the tax authorities in this 1450-10, upheld the Tokyo District Court’s decision. Bermuda LP case, the Tokyo District Court and High

13 Asia Tax Bulletin Asia Tax Bulletin | autumn 2015

Court explicitly rejected this argument in arriving at numbers for their employees, including part-time their decisions on 30 August 2012 and 5 February 2014 workers, in order to withhold taxes. However, employers respectively. Since the Supreme Court, in disallowing will not be allowed to use the numbers as employee the appeal, did not mention the second stage of identification numbers. The number will serve determination, it is reasonable to assume that the individuals for their lifetime. Individual numbers must be Supreme Court would have found that the Bermuda LP presented to employers for notation on certificates of was not a corporation, even if the second stage of income and withholding tax. Employers should note the determination in the Delaware LP case had been applied. numbers for individuals and dependents on the certificate of income and withholding tax before Introduction of Taxpayer ID Numbers submitting them to the tax office and municipality. • A new tax identification number system in Japan will go into effect on 1 January 1 2016. Individuals will be notified International Tax Developments of a unique 12-digit personal number beginning in • United Kingdom. On 23 September 2015, United October 2015, to be used for administrative procedures Kingdom’s Revenue and Customs released the text of related to social security, taxation and disaster the Memorandum of Understanding (MoU), signed on responses. 25 November 2014 by Japan and on 2 December 2014 by • Under the Social Security Tax Number System, a number the United Kingdom. The MoU sets out the mode of will be assigned to each individual who has legally application and operating procedures of the process resided with a resident registration in Japan. Therefore, provided under paragraph 5 of article 25 (the mutual both Japanese nationals and foreign residents in Japan agreement procedure (MAP)) of the Japan - United who have registered with a local municipality will be Kingdom Income Tax Treaty (2006), as amended by the assigned the 12-digit number. Short term visitors will not 2013 protocol. The arbitration provisions added by the be eligible for a number. 2013 protocol took effect from 12 December 2014, regardless of the period to which the matter relates. • Employers will be required to collect and manage the

KOREA

Supreme Court Decision on Engineering the blueprint) constituted personal services income as Services per article 7 of the Treaty and should not be subject to withholding tax for the following reasons: • This concerned a case under the Korea/Germany tax treaty. A Korean iron manufacturer paid an engineering »» The main object of the contract between the service fee relating to the design of its plant facility and plaintiff and the Korean iron manufacturer was the drawing up of a blueprint, which was undertaken in supply of the plant facility, with the engineering Germany. service consisting of the design and drawing up of the blueprint being an essential service for the • Unlike a royalty, personal services income relating to provision of the plant facility. services provided outside Korea is not subject to tax in Korea. On that basis, the plaintiff brought an action »» It is not possible to conclude that the engineering against the Korean tax authorities to claim a refund of service provided by the plaintiff was of such a nature the tax withheld arguing that the payment was for that it was unique to it, i.e. it could not be expected services provided and was not a royalty payment. from any other engineering service provider. • The Supreme Court held that the engineering service »» The confidentiality provision used in the contract is fee (i.e. consideration for the design and drawing up of a typical confidentiality provision used in service and

mayer brown jsm 14 Asia Tax Bulletin | autumn 2015

sales contracts generally. 13 – “Guidance on the Implementation of Transfer »» The engineering service was undertaken over a long Pricing Documentation and Country-by-Country term of 2 years and 6 months. Reporting” are summarized below. »» The engineering service fee mostly related to labour • The proposed amendments (under article 11(1) and cost and was not considered excessive. article 12(1) of the International Tax Coordination Law

»» The plaintiff guaranteed the performance and result (ITCL) and article 19(1) of Presidential Decree of the of the engineering service. ITCL, all of which are applicable to the fiscal year »» While there may have been a disclosure or transfer commencing on or after 1 January 2016) aim to adopt of plaintiff’s know-how in the course of providing the transfer pricing documentation submission system the blueprint to the Korean iron manufacturer, such under the OECD BEPS Action Plan 13. That said, the disclosure or transfer was ancillary to the provision specific submission requirements relating to two of the of the personal services. requisite documents (i.e. the “master file” and “local file • The Supreme Court decision is meaningful in that it is reports”), are only scheduled to be legislated in 2016. the first case which held that an engineering service fee The MOSF has also announced that the country-by- related to the design and drawing up of the blueprint in country reporting will be introduced progressively, the course of supplying a technologically complex plant keeping pace with other countries’ legislation. facility is regarded as personal services income. It is • Nonetheless, the proposed amendments will require considered that the principle of this decision may be taxpayers to submit a “Comprehensive Report of applied in similar cases involving supply of Taxpayer’s International Transactions” at the time of technologically complex equipment such as machinery filing the corporate tax return of the fiscal year and automobile parts. commencing on, or after, 1 January 2016. Information to be included in such a report will be as follows (more Transfer Pricing details will be made available once the corresponding • Further to the report on the proposed amendments to Presidential Decree and Ministerial Decree are the tax laws to take effect from 1 January 2016, the announced): particular proposals relating to the OECD BEPS Action

report contents • legal structure of multinational enterprise (MNE) and geographical location of its subsidiaries/offices Comprehensive Report I • details of top-5 goods or services transactions constituting at least 5% of report of taxpayer’s (master file) MNE’s total revenue international • explanation on key organizational restructuring, shares acquisition, sale of transactions business, etc. that took place during the fiscal year concerned Report II • for each type of related-party transaction, list of related parties involved and (local file) relationship with the taxpayer

Tax Incentives incentive or the incentive will be forfeited. Finally, the emphasis for an incentive award will be on employment • Based on new legislation pertaining to tax incentives, in Korea rather than on the amount of the investment. with effect from 1 January 2016, round tripping has been restricted from 10 percent to a maximum of 5 percent. VAT on Inbound Electronic Supplies This is so that, fewer Korean investors will trigger the anti-round tripping rules. Further, investments must be • With effect from 1 July 1 2015, VAT has been imposed on executed within three years of the awardance of the tax inbound electronic supplies provided by overseas

15 Asia Tax Bulletin Asia Tax Bulletin | autumn 2015

parties if these supplies are made to end-users. The and the foreign corporation makes an investment in overseas party supplier must register and file Korean Korea, the investment amount corresponding to the VAT returns accordingly. shares owned by the Korean person. Non-Resident Income Tax on Sale of Korean »» Where a Korean person owns directly, or indirectly, Real Property Companies more than 5 percent (currently 10 percent) of the shares of a foreign invested company or exercises • The test whether a Korean company is a real property substantial influence over such foreign invested company for Korean non-resident income tax liability company, and the amount lent to a foreign investor purposes will require one to consider not only the by the Korean person. Korean real property owned by the Korean company but also other Korean property owned by the same foreign Discouraging the deferral of foreign investor. investment after a decision allowing a tax Voluntary Disclosure Programme Announced reduction is issued • Under the current STTCL, if an initial investment is not • On 1 September 2015, a voluntary disclosure programme made within three years from the date on which the was jointly announced by the Ministry of Strategy and Korean tax authorities issue a decision granting the tax Finance and the Ministry of Justice. The programme is reduction, that grant will be invalidated. The purpose of designed for resident individuals and corporations to this amendment is to discourage excessive delays in report on foreign income and assets for which no tax making the actual foreign investment. return has been filed. Resident taxpayers voluntarily filing returns on unreported income will still need to pay • In addition to the amendment discouraging the deferral the taxes due plus a late-payment interest of 0.03 of foreign investments, the proposed 2015 Tax percent per day. However, all other penalties will be Amendments add a new provision. This new provision waived and criminal prosecution will generally not occur, prescribes that where a business has not started within except in cases where unreported assets have been five years from the date on which the decision to grant a derived from criminal activity. tax reduction was issued, the business shall be deemed to have started on the last day of the five year period. Incentives for Foreign Investment This provision will apply to applications for tax reduction • On 6 August 2015, the Ministry of Strategy and Finance made after 1 January 2016. announced its proposed tax law amendments for 2015 Increase the tax reduction benefits to foreign invested (the 2015 Tax Amendments). companies with regard to criteria relating to employment • The proposed 2015 Tax Amendments limit the eligibility • Under the current STTCL, a foreign invested company is for tax reductions for foreign investments. allowed to claim a tax reduction of income tax up to (i) Limits on indirect investments by Korean the limit based on the criteria relating to the investment persons amount and (ii) the limit based on the criteria relating to employment. • In order to limit indirect investment made by Korean persons through foreign invested companies, this • The 2015 Tax Amendments propose to reduce the limit amendment excludes the following from the scope of based on criteria relating to the investment amount, and tax reductions: increase the limit based on criteria relating to employment. This amendment will be applicable to »» Where a Korean person owns directly, or indirectly, (initial) investments made from 1 January 2016 and is more than 5 percent (currently 10 percent) of the intended to boost employment by foreign invested shares of a foreign corporation or exercises companies. substantial influence over such foreign corporation

mayer brown jsm 16 Asia Tax Bulletin | autumn 2015

limit on tax current sttcl 2015 tax amendments reduction 7-year tax reduction: 7-year tax reduction: Criteria relating to the the amount of foreign investment x 70% the amount of foreign investment x 50% investment amount 5-year tax reduction: 5-year tax reduction: the amount of foreign investment x 50% the amount of foreign investment x 40% 7-year tax reduction: Criteria relating to Up to the maximum limit of “the amount of up to the maximum limit of “the amount of employment foreign investment x 20%”, plus foreign investment x 40%”; and 5-year tax reduction: up to the maximum limit of “the amount of “the number of newly employed persons x KRW foreign investment x 30%”, plus 10 million (ordinary employees), KRW 15 million “the number of newly employed persons x KRW Criteria relating to (employees between the ages of 15 and 29, 10 million (ordinary employees), KRW 15 million employment disabled employees and employees over 60), (employees between the ages of 15 and 29, KRW 20 million (employees that graduated disabled employees and employees over 60), from special technical high schools)” KRW 20 million (employees that graduated from special technical high schools)”

• Depending on their circumstances, foreign invested percentage. This amendment will be applicable to the companies that have decided to invest in Korea may share transfers made after 1 January 2016. want to submit their application for a tax reduction as • Non-residents/foreign corporations should check soon as practicable in order to receive a decision within whether the shares transferred by them are those of a this year. RPHC based on the new criteria for calculating the real property percentage and determine whether they have Capital Gains to pay tax on capital gains derived from the share • This concerns an adjustment of the criteria with regard transfer. to real property holding corporations (Article 119(9) of the Personal Income Tax Law (PITL) and article 93(7) of High Income Foreign Workers the Corporate Income Tax Law (CITL)). • A proposal to impose a duty to withhold tax on Korean • Under the current PITL and CITL, whether the shares companies that utilize high income foreign workers transferred by a non-resident/foreign corporation are dispatched from a foreign company was also deemed to be shares of a real property holding company announced. This amendment is intended to strengthen (RPHC) is determined based on whether the total value the collection of tax revenues. of real property held by the RPHC is more than 50 • The amount subject to withholding tax is the percent of the total amount of the assets of the non- consideration for services or work provided to high resident/foreign corporation (real property income foreign workers. The withholding tax rate is percentage). 18.7% (17% plus a 10% local surtax). The foreign • Under the proposed 2015 Tax Amendments, the value of company that dispatches the high income workers to the shares of other RPHCs held by the non-resident/ the Korean company may be able to seek a refund of a foreign corporation (the amount precisely portion of the withholding tax amount through filing a corresponding to the real property holding percentage) refund request with the head of the relevant tax office. shall be added to the value of real property held by the The details of the subject, requirements and procedures non-resident/foreign corporation (that is, which is made for the duty to withhold tax will be separately provided consistent with the criteria relating to RPHCs applicable for in the Enforcement Decree of the PITL. to Korean residents) when calculating the real property

17 Asia Tax Bulletin Asia Tax Bulletin | autumn 2015

• The amendment will be effective beginning on, or after, 1 OECD as a part of the BEPS (Base Erosion and Profit January 2016. Shifting) project. With the imposition of the duty to submit information relating to international VAT transactions, multinational enterprises will be required • Under the current VAT Act, if non-residents/foreign to systematically adjust their documentation procedure companies provide electronic services (defined as for international transactions. games, sounds, video files or software) in Korea, they must register for VAT purposes using a simplified online Arm’s Length Price VAT registration system. They must also report and pay • The proposed 2015 Tax Amendments shorten the period VAT on their “taxable supply of electronic services” in which the government has to decide on whether to occurring from 1 July 2015 onwards. grant unilateral prior approval of the arm’s length price • The proposed 2015 Tax Amendments excludes non- calculation method for determining the price of a global residents/foreign companies providing electronic headquarters intangibles. The government will be services to Korean companies (B2B transactions) from required to grant a decision “within one and a half years the scope of taxable supply of electronic services. If from the date of application” (generally, the period is enacted, this amendment will be effective from the “within two years from the date of application”). This is taxation period that includes the publication date of the effective for applications received from 1 January 2016 proposed 2015 Tax Amendments. onwards. • This amendment will reduce tax compliance costs of International Tax Developments foreign companies and the risk of double VAT taxation. Further, the scope of application for the taxable supply • Belgium. On 4 and 12 June 2015, the Supreme Court (Hof of electronic services will be limited to transactions with van Cassatie/Cour de Cassation) rendered three ordinary consumers (B2C transactions). decisions on the abolished 20 percent foreign tax credit provision under the Belgium - Korea (Rep.) Income Tax International Transactions Treaty (1977) (as amended through 1994) (the Korean • The proposed 2015 Tax Amendments impose a new Treaty) (Case Nos. F.14.0080.N, F.14.0185.F and obligation on multinational enterprises to submit F.14.0164.F) and the 15 percent foreign tax credit information on their international transactions. The provision under the since replaced Belgium - Italy purpose of this obligation is to tighten the Korean tax Income Tax Treaty (1970) (the Italian Treaty) (Case No. authority’s supervision of multinational enterprises’ F.14.0165.F). On these occasions, the Supreme Court transfer pricing practices. had the opportunity to reconsider its decision of 9 January 2003 on granting a tax sparing credit under the • This amendment is applicable to Korean companies and Korean treaty, pursuant to the supplementary treaty foreign multinationals with a permanent establishment with Korea. In this case, the Supreme Court held that the (PE) in Korea and whose transactions and assets fall allowance of a tax credit had to be followed by an under the specific criteria (to be prescribed by the increase in the taxable base of the taxpayer to an Enforcement Decree of the LCITA). The obligation will amount equal to that tax credit. However, this gross-up be effective beginning on, or after, 1 January 2016. The was limited to the amount of foreign withholding tax companies subject to this amendment will be required paid. As a common practice, at the end of the previous to submit to the Korean tax authority a comprehensive century, Belgian resident companies purchased foreign report that provides information relating to (in these cases, Korean or Italian) bonds closely before international transactions including management the maturity date of the coupons. They collected the information and the present condition of transfer interest and sold the bonds shortly thereafter without pricing related transactions by the due date for filing a the coupons, recording a loss on the bonds. The loss was corporate tax return. A penalty of no more than KRW 10 practically neutralized by the taxable interest income. million will be imposed for non-compliance. However, based on article 22(1)(b) of the Korean Treaty • This amendment reflects the revisions to the Guidance and article 23(3) of the Italian Treaty, the companies on Transfer Pricing Documentation suggested by the claimed foreign tax credits of 20 percent and 15 percent

mayer brown jsm 18 Asia Tax Bulletin | autumn 2015

respectively, thereby limiting the corporate income tax the Belgian tax administration and lower courts have liability on their ordinary profit. In 1989, the Belgian refused the deductibility of losses and/or foreign tax legislator discouraged this technique through the credits because the underlying transactions were either introduction of a pro-rata credit based on the holding sham or were not covered by the company’s objectives period of the bonds. However, article 22(1)(b) of the and purpose as defined in its articles of association. The Korean Treaty remained applicable until 31 December Supreme Court rephrased its decision of 9 January 1996. The provision was stipulated as follows: “(b) 2003, acknowledging that the scope and application of Where a resident of Belgium derives interest dealt with international treaties cannot be limited by domestic in paragraph 2 or 7 of Article 11, Belgium shall allow a provisions. It also revoked its “established” case law on credit against its tax charged on such income of an the tax deductibility of expenses and losses. Contrary to amount equal to 20 percent of the gross amount of the the Court’s prior position, it clearly stated that expenses dividends, interest, or royalties which is included in the and losses remain tax deductible even if they have been taxable base of the said resident.” As treaty provisions incurred in respect of activities or transactions not have priority over domestic provisions, companies covered by the objectives and purpose of the articles of continued purchasing Korean bonds, claiming the association of the company (e.g. decisions of 18 January foreign tax credit and/or rejecting the adjustments 2001, 19 June 2003 and 9 November 2007). made by the Belgian tax administration. Traditionally,

MALAYSIA

Double Deduction for Consultation and • The double deduction is allowed for a period of three Training Costs years commencing from the year of assessment (YA) in which the certification by Talent Corporation Malaysia • The Income Tax (Deduction for Consultation and Berhad is granted. The total amount of deduction must Training Costs for the Implementation of Flexible Work not exceed MYR 500,000 for each YA. Applications for Arrangements) Rules 2015 [P.U.(A) 134/2015], proposed certification are to be submitted to Talent Corporation in the 2014 Budget , was gazetted on 29 June 2015. Malaysia Berhad between 1 January 2014 and 31 • Pursuant to the Rules, a qualifying person is entitled to a December 2016. double deduction on the expenses incurred on consultation fees and employee training costs for the Guidelines on Tax Treatment Related to implementation of flexible working arrangements Implementation of MFRS 121 (FWAs) or to enhance existing FWAs. The costs allowed • On 24 July 2015, the Inland Revenue Board of Malaysia include: (IRBM) issued Guidelines on Tax Treatment Related to »» training course/programme fees; the Implementation of Malaysian Financial Reporting »» internal trainer fees; Standard (MFRS) 121 (or Other Similar Standards). For »» training materials; the purpose of financial reporting in Malaysia, all transactions must be reported in Malaysian ringgit »» rental of training space; (MYR). As such, the guidelines were issued to provide an »» examination fees; and explanation on the tax treatment of foreign currency »» training-related travelling expenses incurred by the conversion as prescribed by MFRS 121 (or any other employees and trainers, i.e. transportation cost, similar accounting standard). accommodation (maximum of MYR 300 per day) • In principle, forex gains or losses which are revenue in and sustenance (maximum of MYR 150 per day). nature are either taxable or deductible when realized. On the other hand, forex gains or losses which are

19 Asia Tax Bulletin Asia Tax Bulletin | autumn 2015

capital in nature are neither taxable nor deductible for Multimedia Super Corridor Tax Incentive income tax purposes but may have an impact on the • The Income Tax (Exemption) (No. 2) Order 2015 [P.U.(A) qualifying expenditure claimed. 50/2015] gazetted on 19 March 2015, provides tax • The guidelines consider the above and provide examples exemption incentives effective from YA 2015 for based on the three different types of payment method Multimedia Super Corridor (MSC) status companies. permitted by MFRS 121 as follows: The incentives are as follows: »» businesses that use MYR currency as a mode of »» 70 percent tax exemption of statutory income for a transaction; qualifying company (QC) carrying out qualifying »» businesses that use neither MYR currency nor a activities (QA) outside the designated MSC cyber functional currency unit as a mode of transaction; cities or centres for five years. and »» 100 percent tax exemption of statutory income for »» businesses that use a functional currency unit as the extended exemption period of 5+5 years granted mode of transaction. to a QC carrying out QA within the designated MSC cyber cities or centres. Public Ruling on Failure to Furnish Information »» Any unutilized losses and unabsorbed capital Within a Stipulated Period allowances arising during the exemption period can • On 29 July 2015, the IRBM issued Public Ruling (PR) No. be carried forward to the subsequent basis period 3/2015 on the Failure to Furnish Information Within a after expiry of the exemption period. Stipulated Period. »» The QC must keep a separate account for income • The PR provides guidance on the deductibility of derived from the QA for the basis period for each YA expenses claimed by a taxpayer relating to official as the QA is to be treated as a separate and distinct requests from the IRBM for additional supporting source of income. documentation during a tax audit. The PR further • These incentives are not applicable where the following provides administrative process in relation to such a have been claimed by or granted to a QC: request where the application of extension of time is granted and for circumstances which are beyond the »» a claim for reinvestment allowance or investment control of the taxpayer to furnish the documentation. allowance; The full PR is available on the IRBM’s website. »» the granting of any incentive under the Promotion of Investments Act 1986 in respect of similar qualifying Public Ruling On Entertainment Expense – activity; Revised »» the granting of an exemption under section 127 of • The IRBM issued Public Ruling No. 4/2015 on 29 July 2015. the ITA 1967 in respect of similar qualifying activity; The Public Ruling (PR) replaces PR No. 3/2008 which was or issued on 22 October 2008. »» a claim for deduction under any rules made under • The initial PR No. 3/2008 provided guidance on the tax section 154 of the ITA (except allowance claims treatment of entertainment expense as a deduction under Schedule 3 of the ITA, deductions for audit against gross income of a business and the steps to expenditure, deduction for employee training costs determine the amount of entertainment expense for the implementation of goods and services tax allowable as a deduction. The revised PR No. 4/2015 (GST), and the secretarial fee and tax filing fee). generally incorporates the same guidance as PR No. 3/2008 but has amended and included several examples Tax Audit Framework on Withholding Tax for greater clarity. The PR also includes the definition of Issued entertainment under section 18 of the Income Tax Act • The IRBM recently issued the Tax Audit Framework on (ITA) as amended by the Finance Act 2014. The full PR is Withholding Tax, with the objective of assisting the audit available on the IRBM’s website. officers in carrying out their duties more efficiently and

mayer brown jsm 20 Asia Tax Bulletin | autumn 2015

effectively, and helping taxpayers in fulfilling their purposes only; obligations. This framework took effect from 1 August »» offences, penalties and increase of assessments. 2015. Where the taxpayer fails to pay or has underpaid any • Details provided in the framework include: of the withholding tax, an increase in tax will be »» statutory provisions of the ITA 1967 which are imposed under subsections 107A(2)/ 109(2)/ 109B(2)/ applicable to tax audits for withholding tax 109D(3)/ 109E(4)/ 109F(2)/ 109G(2) of the ITA. A purposes; concessionary penalty rate may be granted to a taxpayer who voluntarily discloses his offences (in »» an explanation of what a tax audit is and the types of writing) to the Director General of Inland Revenue audits carried out by the IRBM, i.e. desk audits and (DGIR) prior to the tax audit; field audits; »» the avenues for complaints if the taxpayer is »» the objective of tax audits, which is to encourage dissatisfied with the manner in which an audit is voluntary compliance with tax laws and regulations being carried out; to ensure that a higher tax compliance rate is achieved through the self-assessment system; »» payment procedures for the settlement of the total tax liability; and »» years of assessments covered in tax audits, which are generally up to three years. However, this may be »» appeals against the assessment resulting from a tax extended up to five years depending on the issues audit. Appeals must be made to the Special identified during an audit. Where there is fraud, Commissioners of Income Tax (SCIT) by the payer wilful default and negligence, the statutory within 30 days from when the notice of assessment limitation on years covered will not be applicable; is served, except in the following cases: »» how the tax investigation is carried out. Cases are oo where a non-resident has filed an appeal to SCIT normally selected based on risk analysis, in relation to withholding tax under section 4A information received from third parties, specific or paragraph 4(f) of the ITA; industries, specific issues concerning groups of oo where payments have been disallowed as a taxpayers and on location, etc.; deduction under section 39 of the ITA in relation »» how tax audits are carried out including audit venue, to withholding tax payments made to non- commencement of an audit, audit visits, residents under section 4A or paragraph 4(f) of examination of records, the time frame of a field the ITA; or audit and the settlement of an audit; oo where the withholding tax due has not been paid »» the rights and responsibilities of investigation to the DGIR by the taxpayer. officers of the IRBM, taxpayer and tax agent/ • If either party is dissatisfied with the decision of the SCIT, representative appointed by the taxpayer; the aggrieved party may apply to have the case heard in »» confidentiality of information as all information the High Court and henceforth, to the Court of Appeal. obtained from the taxpayer will be utilized for tax

PHILIPPINES

New Exclusions to the Alien Employment foreign nationals who are excluded from securing an Permit employment permit. The categories that are now excluded are: • Effective August 2015, the Philippine Department of Labor and Employment has updated the categories of • Members of a company’s governing board with voting rights only;

21 Asia Tax Bulletin Asia Tax Bulletin | autumn 2015

• Corporate officers as defined under the Corporation executives, or specialists and who are employed by a Code of the Philippines; foreign service supplier that has no commercial • Consultants who do not have an employer in the presence in the Philippines. Philippines; International Tax Developments • Intra-company transfers who are managers, executives, • Luxembourg. On 27 July 2015, the Council of Ministers of or specialists and have been employed with a related Luxembourg approved the social security agreement foreign company for at least one year prior to their between Luxembourg and the Philippines, signed on 15 assignment to the Philippines; and May 2015. Further details will be reported subsequently. • Contractual service providers who are managers,

SINGAPORE

Mergers and Acquisitions of directors of the target company or its operating subsidiary. • The Inland Revenue Authority of Singapore (IRAS) issued a revised e-Tax guide on 13 July 2015 to provide • Effective 1 April 2015, the 75 percent shareholding more details on the refinements to the mergers and threshold was removed. However, Singapore companies acquisitions (M&A) scheme as announced during that had taken steps before 1 April 2015 to acquire Budget 2012. Under the M&A scheme, a Singapore ordinary shares in a target company with the intention company (acquiring company) making a qualifying of crossing the 75 percent threshold may still be eligible acquisition of ordinary shares of another company for the M&A tax benefits during a oneyear transitional (target company) may, subject to conditions, enjoy the period. following tax benefits: • To be eligible for M&A tax benefits based on the 75 »» an M&A allowance on the purchase consideration; percent threshold during the one year transitional »» stamp duty relief on the sale agreement or period from 1 April 2015 to 31 March 2016: instrument of transfer; and »» the acquiring company or any of its acquiring »» a double taxation deduction on transaction costs subsidiaries must have acquired ordinary shares of incurred in respect of the qualifying share the target company before 1 April 2015; and acquisition. »» the acquisition referred to above and the acquisition that results in the acquiring company owning, • A new shareholding eligibility threshold of 20 percent whether directly or indirectly, 75 percent or more of was introduced with effect from 1 April 2015, whereby the ordinary shares in the target company is not share acquisitions qualify for M&A tax benefits if they more than 12 months apart. result in the acquiring company owning 20 percent of the ordinary shares of a target company, but not more • The option to elect a 12-month look-back period in a step than 50 percent (if the acquiring company owns less acquisition was removed with effect from 1 April 2015. than 20 percent of such shares before the date of share For Singapore companies having started step acquisition). Specific conditions that must be met are: acquisitions before 1 April 2015, the election option is »» the target company being considered an associate allowed during the one year transitional period from 1 of the acquiring company or acquiring subsidiary, as April 2015 to 31 March 2016. the case may be, upon the share acquisition; and • For qualifying share acquisitions made on, or after, 13 »» the acquiring company or the acquiring subsidiary, July 2015, the conditions for a waiver of an independent as the case may be, being represented on the board professional valuation report are revised as follows:

mayer brown jsm 22 Asia Tax Bulletin | autumn 2015

»» the acquisition is made by a company or registered received the Form C or Form C-S package. business trust listed on the Singapore Stock • This is the first year that all companies in Singapore have Exchange, or its subsidiaries; or the e-filing facility. Companies that opt for e-filing get a »» the value of the share acquisition is SGD 5 million or 15-day extension up to 15 December 2015 to file their tax below. returns.

Higher Salary Requirement for Workers Social Security (CPF) Sponsoring Dependants • Singapore’s social security (CPF) rates will change as per • Effective 1 September 1 2015, the minimum salary 1 January 2016, as follows: threshold required for Employment Pass and S Pass CPF Salary Ceiling: from SGD 5,000 to SGD 6,000. holders to sponsor family members for Dependant Passes will go up from SGD 4,000 per month to at least CPF Annual Limit: this will be increased from SGD 31,450 SGD 5,000 (approx. USD 3,642) per month. to SGD 37,740. CPF Additional Wage Ceiling: this will now be increased Corporate Tax Filing for 2015 from SGD 85,000 to SGD 102,000. • The IRAS reminded all companies to file their income tax CPF Contribution Rates for Singapore Citizens and returns for the 2015 assessment year by 30 November Singapore Permanent Residents ( third year of 2015. All companies are required to file a tax return, even contribution): if no business was conducted, so long as they have

MAXIMUM CONTRIBUTION PER CONTRIBUTION BY AGE OF EMPLOYEE MONTH FROM 1 January 2016 EMPLOYEE EMPLOYER EMPLOYEE EMPLOYER 50 years and below 20% 17% SGD 1,200 SGD 1,020 Above 50 years to 55 years 20% 17% SGD1,200 SGD 1,020 Above 55 years to 60 years 13% 13% SGD 780 SGD 780 Above 60 years to 65 years 7.5% 9.0% SGD 450 SGD 540 Above 65 years 5.0% 7.5% SGD 300 SGD 450

TAIWAN

Sale of Real Property property in Taiwan as much as they affect the decisions of domestic home buyers and investors to purchase or sell In order to curb the increase in property prices in Taiwan, property. the Legislature has passed amendments to the Income Tax Act imposing a capital gains tax of up to 45 percent on • The amendments to the Income Tax Act will apply to: (1) profits made on the sale of property. Once the new capital all properties purchased after 1 January 2016; and (2) gains tax takes effect on 1 January 2016, a portion of the property purchased on or after 2 January2014 and held Specifically Selected Goods and Services Tax Act (Luxury for no more than two years at the time of sale after 1 Tax Act), which imposed the so called “luxury tax” on the January 2016. sale of houses and land will be abolished. However, these • Change in the Basis of Capital Gains Tax. Capital gains amendments may affect foreign investment of real taxes will be calculated on the basis of the real market

23 Asia Tax Bulletin Asia Tax Bulletin | autumn 2015

value (actual transaction price) of the housing and land the Income Tax Act of a 45 percent tax for sales within instead of the current practice of separately calculating one year, and a flat 35 percent tax for sales of property housing and land according to government-assessed held longer than one year. The rate also applies to a property values, which can often greatly undervalue the direct or indirect share transfer transaction by such property. foreign companies with holdings in buildings and land in • The New Tax Rates for Individual Owners. As per 1 Taiwan exceeding 50 percent of its equity value. January 2016, and subject to certain exemptions, • These amendments should affect the strategies of owners who are natural persons (Individual Owners) foreign companies that invest or plan to invest in real who sell their property within one year of purchase will estate development in Taiwan. The Luxury Tax Act be subject to a 45 percent capital gains tax. Individual provided a luxury tax exemption for developers Owners who sell their property after one year of (including foreign companies) for first time ownership purchase will be subject to a 35 percent tax. For transfers of their completed buildings to customers. Individual Owners who are residents in Taiwan, the tax However, the newly approved capital gains tax scheme rate falls to 20 percent if a property is sold between two does not provide the same exemption and further and ten years of ownership, and falls further to 15 impose higher tax rates (35 percent to 45 percent) on percent if they hold their properties for more than ten foreign companies compared to that on domestic years. companies (17 percent), which aims to achieve the • End of the Luxury Tax on Real Property. The portion government’s aim of to deter foreign investors from regarding sales of houses and land in the Luxury Tax Act, propping up property prices. As a result, foreign which enacts a tax of 15 percent on the sales price of an developers will have to carefully plan and structure their owner’s second property that is sold within one year of investments and development projects in Taiwan to purchase and a tax of 10 percent if sold between one and cope with the implications of the amendment. two years of purchase, will be abolished. VAT on Inbound Digital Supplies • For Taiwan companies, proceeds from the sale of property of Taiwan companies will be deemed as part of • It was reported on 20 September 2015 that the the corporate income and continue to be subject to a 17 Taiwanese government is considering to introduce a percent corporate income tax. VAT on inbound digital supplies. Korea, Japan and Indonesia have taken similar measures recently. • Effect on Foreign Companies with Property in Taiwan. For foreign companies with a Taiwan presence, whether International Tax Developments as a foreign branch or a registered office, their rates of capital gains tax will be subject to the amendments in • PRC. A double tax treaty has been signed with the PRC. See the China section of this tax bulletin.

THAILAND

Inheritance And Gift Tax and 10 percent for others. That compares with a previously planned threshold of THB 50 million and a tax • With effect from 1 February 2016, Thailand will introduce rate of 10 percent. According to the Finance Ministry, a inheritance tax. This is part of the country’s tax with a tax rate of 5 percent, the government is expected reforms to broaden the tax base and boost revenue in a to collect about THB 3 billion per year. The inheritance lackluster economy. Inheritors of assets worth more tax is among the overall tax reforms which Prime than THB 100 million (US$3 million) will be liable to pay Minister General Prayuth Chan-ocha previously said tax above that threshold - at 5 percent for descendants would terminate benefits that favor the rich.

mayer brown jsm 24 Asia Tax Bulletin | autumn 2015

• A gift tax of 5 percent will also now apply to gifts in excess Amount of revenue Corporate income of THB 10 million per tax year, unless the gifts are or sales (in Thai Baht) tax exemption received from a legitimate parent, spouse or child, in (R&D expenses as % which case the taxable threshold is THB 20 million per of revenue or tax year. sales) Tax Incentive For Research And Development 0 – 50,000,000 up to 60% (R&D) 50,000,001 – 200,000,000 up to 9% • The Thai Cabinet recently approved a tax incentive for 200,000,000 and over up to 6% expenses incurred in the R&D of technology and innovation. The incentive is effective between 1 January VAT Rate to Remain at 7 Percent 2015 to 31 December 2019. • The Cabinet has approved the extension of the reduced • A tax deduction of up to three times (i.e. 300 percent) of VAT rate of 7 percent for another year, until 30 the actual expense incurred is granted. However, this September 2016. The general VAT rate is 10 percent. “triple deduction” is capped as follows: However, the VAT rate was reduced to 7 percent from 1 April 1999 and the application period of the reduced rate has been extended on a regular basis ever since.

VIETNAM

Corporate Income Tax Changes (Circular 96) contracting with a foreign entity in which the contract terms clearly states such expenses are borne by the • On 22 June 2015, the Ministry of Finance promulgated Vietnamese entity. Circular No. 96/2015/TT-BTC dated 22 June 2015. This circular provides guidance on the implementation of the • Expenses relating to employees’ uniforms. This law on Corporate Income Tax (CIT). This circular eliminates the cap on the expenditure incurred for amends and supplements a number of regulations employees’ uniforms which are paid in kind. Expenses relating to CIT declaration and payment by Vietnamese are fully deductible provided legitimate invoices, proper enterprises investing in foreign countries and simplifies supporting documents are available. the dossiers for tax declaration and payment by these • Elimination of the cap on travelling allowances for enterprises. It amends the timing of revenue recognition business trips. Enterprises can include such expenses in for the purpose of calculating taxable income relating to the deductible expenses if adequate invoices, provision of services. Circular 96 takes effect from 6 supporting documents can be provided in accordance August 2015 and is applicable for the 2015 tax period with the regulations. In instances where the enterprises onwards. provide per diem allowance for its employees during • It abolishes the provision relating to the consumption their business trip which is in compliance with the norms of raw materials, supplies, fuel, energy, goods company’s financial and internal policy, such per diem used in production and business by eliminating the allowances can be regarded as deductible. provision that any excess of the consumption norm shall • Differences in exchange rate. In instances where the not constitute tax deductible expenses. differences of exchange rate incurred which are not • Accommodation expenses for expatriates. This relates directly related to the revenue and expenses generated to the deductibility of accommodation expenses for during the enterprise’s main production/business expatriates during their business trip to Vietnam if such activities, any forex losses shall be recorded as financial expenses are settled by the Vietnamese entity expenses. On the other hand, any forex gains shall be

25 Asia Tax Bulletin AsiAsiaa T aTaxx Bulle Bulletintin | |a uSptringumn 2015

treated as other income when determining taxable Guidance on Tax Administration via Electronic income. Similarly, forex gains or losses due to the Means Issued revaluation of loans denominated in foreign currency at Circular 110/2015/TT-BTC was issued on 28 July 2015 and the end of the financial year which are not directly provides guidance on Vietnam’s tax administration via related to the revenues/expenses generated through the electronic means. The Circular, however, does not include main production/business activities, shall be treated as guidance on electronic tax transactions for goods during other income or financial expenses when calculating the export and import stage by customs authorities. The taxable income. Circular replaces earlier Circulars 35/2013/TT-BTC and • CIT Incentives. In instances where enterprises have 180/2010/TT-BTC, and includes guidance on: investment, which are entitled to CIT incentives based on geographical location and have generated revenue »» tax registration; outside of such investment area, that income shall be »» tax declaration; treated as follows. Such enterprises are not entitled to »» tax payment; and the CIT incentives for the income generated in an area »» tax refund. that does not belong to the preferential investment areas. Income generated within other preferential International Tax Developments investment areas is entitled to CIT incentives. As such, • United States. Vietnam signed a double tax treaty with the CIT incentives shall be determined for such income the United States (with an accompanying protocol) on 7 based on the specific area where the investment July 2015. This is the first income tax treaty between the projects are undertaken, taking into account the time two countries. The treaty must first be ratified by both and level of CIT incentives allowed in these areas. countries before it can take effect. Some details are set • Enterprises having expansion investment projects which out below. have been certified by the authorised authorities or has • Importantly, the treaty provides that a building site or been implemented for the period 2009-2013, up until construction project can give rise to a permanent 2014, have met the requirements for tax incentives establishment (PE) after only six months. The treaty (preferential fields or areas including the industrial similarly provides that a services PE can exist for zones, economic zones, high technology parks), shall consultancy services continuing for six months within continue to be entitled to tax incentives for income any 12-month period. Moreover, new language derived from the expansion project for the remaining appearing in the PE article may signal a shift in US tax period from 2015 onwards. Enterprises having treaty policy regarding an enterprise’s exclusive unfinished production expansion investment projects relationship with an independent agent. The treaty does before 31 December 2008 that have continued in 2009 contain a Limitation of Benefits (LoB) provision. and finished and commenced operations in 2010, However, it does not contain a derivative benefits provided that they satisfy the conditions for tax provision, nor does it contain the restrictions found in incentives (preferential fields or areas including the 2013 protocol to the US-Spain treaty with respect to industrial parks, economic zones, high technology the grant of discretionary benefits. parks) stipulated at the time of deciding to implement the expansion investment project, can choose the CIT • Source-country taxation on dividends is limited to 5%if incentive schemes applicable for the increasing income the beneficial owner of the dividend is a company from the expansion project for the remaining period directly owning at least 25% of the voting stock (in the from 2015 onwards. Enterprises having investment in case of a US-resident payor) or at least 25% of the capital industrial zones during the period from 2009 to 2013 (in the case of a Vietnam-resident payer) of the which, up until the 2014 tax period, met the conditions company paying the dividend. Source-country dividend for tax incentives (preferential fields or areas), shall be taxation is limited to 15% in all other cases. Branch entitled to tax incentives for the remaining period from profits tax is limited to 5%. An exemption applies to a 2015 onwards. dividend if its beneficial owner is a pension fund that is a resident of the other contracting state and the dividend

mayer brown jsm 26 Asia Tax Bulletin | autumn 2015

is not derived from the carrying on of a trade or business by the pension fund or through an associated enterprise. Source-country taxation on dividends is limited to 15% in the case of a dividend paid by a US Regulated Investment Company (RIC). Source-country taxation is similarly limited to 15%in the case of a dividend paid by a US Real Estate Investment Trust (REIT) or a Vietnamese Real Estate Investment Fund (VREIF); provided, however: (i) the beneficial owner of the dividend is an individual or pension fund, in either case holding an interest of 10% or less in the REIT or the VREIF; (ii) the dividend is paid with respect to a class of stock that is publicly traded, and the beneficial owner of the dividend is a person holding an interest of 5% or less of any class of the REIT’s stock or the VREIF’s stock; or (iii) the beneficial owner of the dividend is a person holding an interest of 10% or less of the REIT or the VREIF and the REIT or the VREIF is diversified. Vietnam, itself, currently does not levy withholding tax on dividends under its domestic tax legislation. • Interest payments. The treaty limits source-country taxation to 10% of the gross interest amount. Contingent interest is subject to source-country taxation at a maximum rate of 15%. An exemption applies if the beneficial owner is a resident of a contracting state and the interest is paid by the other contracting state, the central bank, or a political subdivision or local authority thereof. Vietnam presently levies only 5% withholding tax on interest payments under its domestic tax legislation. • Royalty payments. Source-country taxation is reduced to 5 or 10% of the gross amount of the royalty, depending on the type of property to which the royalty relates. Source-country taxation on payments of any kind received as consideration for the use of, or right to use, industrial, commercial, or scientific equipment is reduced to 5% of the gross amount, and source-country taxation on payments of any kind received as consideration for the use of, or the right to use, any copyright of literary, artistic, scientific or other work (including cinematographic films, films or tapes used for radio or television broadcasting), any patent, trademark, design or model, plan, secret formula, or process, are reduced to 10% of the gross amount of the payment.

27 Asia Tax Bulletin About Mayer Brown JSM

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