Asia Tax Bulletin Autumn 2019 In This Edition

We are pleased to present the Autumn 2019 edition of our firm’s Asia Tax Bulletin.

Dear reader,

I’m happy to present this edition of our We hope you will enjoy reading about these quarterly Asia Tax Bulletin, reporting on and other developments and as always significant tax related developments in appreciate any suggestions for improvement. Southeast Asia, Greater China, Japan, Korea Please do not hesitate to contact us if you have CHICAGO SAN FRANCISCOand India. Included in this edition is the interN EWany YORK questions about taxation in Asia. BEIJING alia the trade war between the PRC and theW ASHINGTON DC PALO ALTO With kind regards, USA, transfer pricing circulars issued by theCHARLOTTE TOKYO LOS ANIRDGE inL ESHong Kong, India’s tax changesHOUS TON Pieter de Ridder SHANGHAI proposed in the recent government Budget for DUBAI 2019/2020 as well as the proposed tax reform, HANOI HONG KONG CFCMEXICO changes and CITY tax incentives in Indonesia, Korea’s Budget proposals, service tax BANGKOK developments in Malaysia and tax reform HO CHI MINH CITY Pieter de Ridder measuresAM Ein theR IPhilippines.CAS Partner, Mayer Brown LLP +65 6327 0250 SINGAPORE Singapore is one step closer to implementing [email protected] the long awaited Variable Capital Company legislation, which will effectively put it on a par with the company law of the British Virgin BRASÍLIA* Islands. Thailand introduced a VAT on foreign * ecommerce operators and is encouraging RIO DE JANEIRO foreign talent to relocate to Thailand by SÃO PAULO* offering attractive tax benefits. *TAUIL & CHEQUER OFFICE

2 | Asia Tax Bulletin MAYER BROWN | 3 Contents

China India (cont’d.) Korea Singapore (cont’d.) 06 Retaliation Increase of Tariffs 16 Management Services are not Subject to 27 Budget - Proposed Tax Changes 41 International Tax Developments Withholding Tax 06 Tax Incentive in Hengqin New Area 29 International Tax Developments Taiwan Extended to Tourism Industry 17 Finance Ministry’s Economic Stimulus Malaysia 42 Futures Transaction Tax in Case of Merger 07 US Trade War Subsidy 17 Consolidated Circular for Assessment of Start-ups 30 Restriction on Deductability of interest 42 Abolishment of Stamp Duty Act 07 Farmland Use Tax Implementation Rules Issued 18 Farm-in Expenditure Incurred by Oil 32 Wholly and Partly Irrecoverable Debts and 43 Law on Repatriation of Offshore Funds Exploration and Production Companies Debt Recoverie 07 Resource Tax Law published Thailand 19 New Direct Tax Law 33 Service Tax 09 Tax incentives for Lingang New Area in 44 VAT on Foreign E-commerce Operators Shanghai Free Trade Zone 20 Taxation Laws (Amendment) Ordinance 33 Service Tax Amendments Gazetted 2019 44 VAT Rate 09 International Tax Developments 34 Withholding Tax Exemption Withdrawn 20 Capital Gains Tax Liability on for Income from MSC 44 Tax Exemption on Interest Income Hong Kong Conversion into an LLP 34 International Tax Developments 45 New Relocation Package Incentive 10 Foreign Taxes Deduction for Profits Tax 21 Notification on Arm’s Length Tolerance Purposes Range for 2019-20 Assessment Year Philippines Vietnam 10 Tax Penalties 21 International Tax Developments 35 Proposed Passive Income and Financial 46 Taxation of Foreign Workers Intermediary Tax Act 46 Business Trip Allowances Paid to Experts 11 Transfer Pricing Guidelines Indonesia 36 Tax Reform 12 Package of Measures to Support 47 Transfer of Shares 22 VAT Exemption on Transportation Enterprises and Resident International Tax Developments Equipment 36 47 Tax Treatment of Liquidation of Assets 12 Charitable Institutions by Foreign Representative Office 22 Changes to the CFC Rules Singapore 13 International Tax Developments 47 Guidance on Provisions 23 Tax Incentives 37 FATCA 48 Tax Incentives for Investments in India 24 Reduction of Tax on Bond Interest 37 Variable Capital Company (VCC) Payments Expansion of Projects 15 Budget 2019/2020 Presented 38 Public Consultation on GST on Digital 48 Clarification on VAT Treatment for 24 Tax Incentives for Upstream Oil and Gas Payment Tokens 15 Sabka Vishwas (Legacy Dispute Sector Certain Services Provided for Foreign Resolution) Scheme 39 Responses to Public Consultation on Enterprises International Tax Developments 24 Draft Income Tax (Amendment) Bill 2019 15 Tax Deduction at Source on Cash 49 Social and Health Insurance Withdrawals Japan 39 MOF Invites Feedback on Proposed Contributions Increased Changes to GST Act 26 International Tax Developments 49 Withholding Policy Applicable to Online 40 Proposed Tax Framework for VCCs Advertising Services 49 International Tax DevelopmentsMAYER BROWN | 5 Retaliation increase • enterprise income tax incentives for other 13th round of negotiations in Washington, DC, in industries that are regarded as encouraged and September 2019. The CRS is an agency within the of tarriffs taxed at a reduced rate of 15% in Hengqin New US Library of Congress and serves the US Congress Area will continue to be implemented in throughout the legislative process by providing As a response to the US government’s accordance with Circular [2014] No. 26 which legislative research and analysis for an informed announcements to impose additional 10% stipulates the preferential tax policies in national legislature. tariffs on USD 300 billion worth of Chinese Shenzhen Qianhai, Shenzhen-Hong Kong goods, the Customs Tariff Commission of Modern Service Cooperation Zone, Fujian Farmland use tax the State Council has issued a public notice Pingtan Comprehensive Experimental Area and JURISDICTION: (Shui Wei Hui Public Notice [2019] No. 4) Hengqin New Area. implementation rules issued imposing import tariffs on US products.

• From 1 September 2019, 916 goods and US Trade war subsidy On 30 August 2019, the Ministry of Finance, China (PRC) products will be subject to 10% together with other ministries, published the additional tariffs, and 801 goods and It was announced in September 2019 that the Farmland Use Tax Implementation Rules (the rules). products will be subject to 5% Guangdong-province government authorities The rules contain 33 articles and will be effective additional tariffs. issued a policy granting allowances to companies in from 1 September 2019. The rules define and that province to mitigate the negative impact on specify certain concepts and terms used in • From 15 December 2019, another 912 those companies as a result of the “trade war” farmland use tax, such as users of farmland. They goods and products will be subject to between China and the U.S. As a key requirement, also define in more detail the institutions and 10% additional tariffs, and 2,449 goods a company’s quarterly gross revenue, quarterly constructions that are exempt from such tax. and products will be subject to 5% exported amount, or quarterly imported amount Moreover, the rules provide that the farmland use additional tariffs. must have decreased by more than 15% in two tax return must be filed by the taxpayer, and the • All goods and products subject to consecutive quarters as compared with the same tax collected by the tax bureau, in the place where additional tariffs are listed in four period of last year for purposes of qualifying for the farmland is located. The information concerning attachments to the Public Notice with the government subsidy. The subsidy to be granted size, type of farmland, etc., provided by the (local) specifications of the appropriate tariffs to a qualified company located in e.g. Zhuhai government department in charge of natural and dates of implementation. In total, would be CNY 9,288 (about $1300) multiplied by resources will be used for the tax assessment. 5,078 US products with a total value of the number of the average employees of the USD 75 billion will be affected. company who paid mandatory social security Resource Tax Law published expenses last year. Tax incentive in Hengqin The Congressional Research Service (CRS) of the US On 26 August 2019, the Resource Tax Law (the law) Library of Congress has released a report entitled was adopted at the 12th meeting of the 13th New Area extended to “US-China Relations”. The CRS report indicates an Standing Committee of the National People’s tourism industry updated date of 29 August 2019 and is designated Congress. The law will be implemented from 1 R45898. The United States has so far imposed September 2020; on that same date, the Resource Section 301 tariffs of 25% on three tranches of Tax Interim Regulations of 1993 will be repealed. The Ministry of Finance and State Taxation imports from China, valued at an estimated USD Entities and individuals exploiting taxable products Administration jointly issued Circular [2019] 250 billion, to pressure China to address its policy in China and in the waters under its jurisdiction are 63 (the circular) which extends the tax issues related to technology transfer, intellectual subject to resource tax. Depending on the incentives granted in Hengqin New Area to property, and innovation. The CRS report states resource, tax is imposed on the basis of ad valorem the tourism industry. The circular applies that President Trump tweeted on 23 August 2019 or per unit. The applicable rates will be determined from 1 January 2019 to 31 December 2020. that he would increase the tariff rate for USD 250 by local governments within the ranges provided Its contents are as follows: billion worth of imports from China from 25% to by the law. The rates for the major resources are • the tourism industry is added to the 30%, effective from 1 October 2019, and that he as follows:

Catalogue of Industries for Enterprise would increase the proposed tariff rate for the Income Tax Incentives in Hengqin New remaining imports from China from 10% to 15%, to Taxable product Rate (% of Area 2019, benefiting from the reduced go into effect for some products on 1 September value/price) enterprise income tax rate of 15% (the 2019, and for other products on 15 December 2019. enterprise income tax statutory rate The CRS report further states that trade negotiators Crude oil 6% being 25%); and from the two countries are scheduled to meet for a Natural gas 6%

6 | Asia Tax Bulletin CHINA (PRC) MAYER BROWN | 7 Resource tax is reduced in the following Taxable product Rate (% of Tax incentives for Lingang International Tax circumstances: value/price) • tax on crude oil and natural gas extracted from New Area in Shanghai Free Developments Coal 2% - 10% low-abundance oil and gas fields will be Trade Zone Rare earths 7% - 20% reduced by 20%; INDIA Tungsten 6.5% • tax on high-sulphur natural gas, tertiary oil On 30 August 2019, the Shanghai Municipal On 5 June 2019, the amending protocol, signed on Molybdenum 8% recovery and crude oil and natural gas Government released the announcement”Several 26 November 2018, to the China - India Income Tax Iron ore 1% - 9% extracted from deep-water oil and gas fields Opinions on Promoting the Implementation of Treaty, as amended by the 1995 exchange of notes, Gold 2%- 6% will be reduced by 30%; Special Support Policies for the Quality entered into force. The protocol generally applies Development of the Lingang New Area of the from 1 January 2020 for China and from 1 April Copper 2% - 10% • tax on heavy oil and high pour point oil will be China (Shanghai) Free Trade Zone” which 2020 for India. Bauxite ore 2% - 9% reduced by 40%; and introduced 50 measures with regard to the Lead-zinc, nickel, tin ore 2% - 6% • tax on mining products from depleted mines administration of the zone, professional talents, HONG KONG Other ferrous metals 2% - 10% will be reduced by 30%. finance and taxation, land planning, industrial On 19 July 2019, China and Hong Kong signed an Graphite 3% - 12% development, housing supply and infrastructure. Furthermore, local governments at provincial, amending protocol in Beijing to update the China Diatomite, kaolin, fluorite, 1% - 12% The measures apply from 1 September 2019 to 31 municipal or autonomous region level are - Hong Kong Income Tax Agreement, as amended limestone, pyrite August 2023. The tax incentives contained in the empowered to exempt or reduce resource tax in by the 2008, 2010 and 2015 protocols. The signed Phosphate rock ore, 3% - 8% announcement are as follows: potassium chloride the case of accidents, natural disasters or protocol adds a new article on teachers and Potassium sulphate 6% - 12% exploitation of low-grade (abundant) mines. • for qualified enterprises engaging in research researchers and incorporates measures to prevent tax treaty abuse, which are part of the Base Erosion Well salt, lake salt 1% - 6% Resource tax liability arises on the date when and development in key industries, such as payment or a collecting document is received. In integrated circuit (IC), artificial intelligence, and Profit Shifting project (BEPS). Sea salt 2% - 5% the case of own use, the liability arises on the date biomedicine and civil aviation within the zone, Extraction of underground 3% - 15% salt brine salt of the transfer of products. the enterprise income tax rate will be reduced from 25% to 15% for 5 years, starting from the Coal seam (into) gas 1% - 2% A taxpayer must file resource tax returns on a date of establishment of the enterprise; Clay, gravel ore CNY 1 - 5 per quarterly basis. Where resource tax cannot be tonne or CNY 0.1 - 5 per cubic metre calculated and paid based on a fixed term, the • qualified IC production and design enterprises relevant taxpayer may file returns on a pay-per-use and software enterprises may be exempt from Other non-ferrous 20% or > CNY 30 products not listed per tonne or cubic basis. enterprise income tax in the first 2 years and metre may enjoy an enterprise income tax reduction With effect from the effective date of this law, Mineral water 1%-20% or CNY 1 of 50% in the subsequent 3 years; and – 30 per cubic Chinese enterprises and foreign enterprises that metre exploit crude oil or natural gas on the basis of • a subsidiary tax may be granted to high-end Sino-foreign cooperative joint ventures and pay workers and talents working in the new zone to A taxpayer that exploits or produces taxable fees for using mining areas will pay resource tax in reduce individual income tax. accordance with this law, and will no longer pay the products that fall under different taxable categories Furthermore, a special tax policy relating to goods fees for using mining areas. must calculate sales separately. Higher tax rates will entering the zone plus transactions of goods and apply if the taxpayer fails to calculate them services between enterprises within the zone is separately or is unable to accurately provide the being developed, as is the VAT policy on export of sales revenue or sales volume per taxable item. services. Exploitation of taxable products for the taxpayer’s own use is equally subject to resource tax except where its use is for the continuity of the production of taxable products. The following are exempt:

• crude oil and natural gas used for heating in the process of crude oil extraction and transportation within the oil field; and

• coal-formed gas (CBM) extracted by coal mining enterprises for safety reasons.

8 | Asia Tax Bulletin CHINA (PRC) CHINA (PRC) MAYER BROWN | 9 Foreign taxes deduction Transfer Pricing guidelines >> transfers of intangibles do not exceed HKD 110 million; and for profits tax purposes On 19 July 2019, the Hong Kong Inland Revenue • DIPN 58 also sets out the obligations for filing Department issued three Departmental CbC returns, contents of the CbC report and its Foreign taxes deduction for profits tax Interpretation and Practice Notes (DIPN) to set out notification requirements. purposes the Department’s interpretation and practices on DIPN 59 discusses the arm’s length principle for On 19 July 2019, Hong Kong’s Inland the relevant rules and requirements, and the latest transactions between associated persons to be Revenue Department issued an updated international standards relating to transfer pricing. computed on an arm’s length basis. The DIPN 58 was issued to further supplement the JURISDICTION: Departmental Interpretation and Practice concepts and terminologies relevant to transfer Notes (DIPN) 28 to set out the implementation of the previously gazetted pricing are defined under DIPN 59, including Department’s interpretation and practice Ordinance to implement BEPS minimum standards provision, affected persons, transaction and a on the provisions relating to foreign tax and codifying the transfer pricing principles: series of transactions, participation, control, Hong Kong deduction after the enactment of the Inland • A Hong Kong entity should explain its transfer beneficial interest, indirect beneficial interest Revenue (Amendment) (No. 6) Ordinance pricing treatment by documenting all material through interposed person, and potential 2018. facts and circumstances making it clear how the advantage in relation to Hong Kong tax. All outgoings and expenses that are not Hong Kong entity understands the law that • DIPN 59 sets out the following exempted capital in nature, to the extent that they are applies to those facts and circumstances, and domestic transactions that are not subject to incurred in the production of taxable why and on what basis adjustments are made the operation of Rule 1, including actual profits, are deductible for profits tax for any material differences. provisions that do not give rise to any potential purposes. • The master file and local file must be prepared advantage, domestic nature condition, no If a foreign tax is paid in a territory outside within 9 months after the end of each actual tax differences, non-business loan Hong Kong that has a treaty in force with accounting period of the Hong Kong entity. condition, as well as non-tax avoidance condition. Hong Kong, and the relevant treaty pro- • A Hong Kong entity of a group is exempt from vides relief from double taxation by way of preparing both a master file and a local file if • DIPN 59 examines the key aspects in a a tax credit, a Hong Kong resident person they meet any of the two following exemption comparability analysis, the functional analysis, can only apply for a tax credit under section thresholds: economically relevant characteristics of 50 of the Inland Revenue Ordinance (IRO). comparability factors and contractual terms of A non-Hong Kong resident person not >> the total amount of annual revenue for the the transaction, as well as characteristics of covered under the relevant treaty may seek accounting period does not exceed HKD property transferred or services provided in unilateral relief from its residence jurisdic- 400 million; determining the arm’s length price. tion or bilateral relief under the treaty >> the total value of assets at the end of the • DIPN 59 explains the various transfer pricing between its residence jurisdiction and the accounting period does not exceed HKD treaty territory (if any). methods, which comprise the traditional 300 million; and transaction methods and the transactional >> the average number of the entity’s profit methods. As for the most appropriate Tax penalties employees during the accounting period method, DIPN 59 sets out that although both does not exceed 100. the traditional transaction method and the On 5 September 2019 the IRD announced transactional profit method can be applied in • A Hong Kong entity is exempt from preparing a that the webpage on penalty policy has an equally reliable manner, the traditional local file for a particular type of controlled been updated to include the major penalty transaction method is preferred to the transaction if the amount of that type of provisions in relation to relief from double transactional profit method. However, the controlled transaction does not exceed the taxation, exchange of information, transfer Commissioner of the Inland Revenue following threshold: pricing requirements, advance pricing Department agrees that MNE groups should arrangement, mutual agreement procedure >> transfers of properties (movable or retain the freedom to apply methods not and arbitration, etc., as well as the immovable, but excluding financial assets described above to establish that those prices Department’s penalty policy on transfer and intangibles) do not exceed HKD 220 satisfy the arm’s length principle. In cases pricing cases. million; where other methods are used, their selection should be supported by documentation >> transactions in respect of financial assets do including an explanation of why not exceed HKD 110 million;

10 | Asia Tax Bulletin HONG KONG MAYER BROWN | 11 OECD-recognized methods were regarded as On 28 August, a webpage was set up by the IRD to International Tax non-appropriate or non-workable in the explain the requirements in relation to master file circumstances of the case and of the reason and local file, and the Department’s approach to Developments why the selected other method was regarded ensure compliance with the requirements. as providing a better solution. AUSTRIA • DIPN 60 discusses mainly the attribution of Package of measures to On 9 April 2019, the Austria - Hong Kong profits to a Permanent Establishment (PE) in support enterprises and Competent Authority Arrangement on the Hong Kong. Rule 2 in section 50AAK of the Exchange of Country-by-Country (CbC) Reports, Inland Revenue Ordinance requires the income residents which was signed on the same date, entered into or loss of a non-Hong Kong resident person On 15 August 2019, the Financial Secretary of Hong force. In accordance with Section 8, paragraph 1, attributable to the person’s PE in Hong Kong to Kong announced a package of measures to counter the agreement became effective on the date of the be determined as if the PE were a distinct and the challenging external and local economic last signature. separate enterprise, taking into account the environments. The proposed measures aim to functions performed, assets used and risks support enterprises, in particular small and CHINA assumed by the non-Hong Kong resident medium-sized enterprises (SMEs), in safeguarding person through the PE. DIPN 60 also examines On 19 July 2019, China and Hong Kong signed an jobs and relieving people’s financial burdens. The the strategies that seek to avoid having a PE in amending protocol in Beijing to update the China tax-related measures are summarized below. Hong Kong, including fragmentation of - Hong Kong Income Tax Agreement, as amended activities between closely related parties, • Twenty-seven (27) groups of government fees by the 2008, 2010 and 2015 protocols. The signed complementary functions, commissionaire and charges will be waived for a period of 12 protocol adds a new article on teachers and arrangement and similar strategies. months, which will benefit a wide range of researchers incorporating measures to prevent tax sectors, including maritime, logistics, retail, treaty abuse, which are part of the Base Erosion • The rule for attribution of profits is the separate catering, tourism, construction, agriculture and and Profit Shifting project (BEPS). enterprises principle. Profits are attributed to fisheries. the PE in the amount that it would have made if SWITZERLAND it were a distinct and separate enterprise • Further to the Budget for 2019/2020 (see the According to a press release of 2 August 2019, engaged in the same or similar activities under previous edition of this Bulletin), a one-off published by the Swiss Tax Authorities, the Hong the same or similar conditions dealing wholly reduction of salaries tax, tax under personal Kong - Switzerland Competent Authority independently with the non-Hong Kong assessment and profits tax will be increased Agreement on Automatic Exchange of Information resident person. This includes the assumption from 75% to 100% for the year of assessment (CRS) entered into force on 1 July 2019. The that the PE would have such equity and loan 2018/2019, subject to a maximum of HKD arrangement specifies the details of what capital attributed to it, as it would reasonably 20,000 per case. information will be exchanged and when, as set out be expected to have if it were a separate entity. • An additional 1-month allowance is provided to in the OECD Automatic Exchange of Information • Expenses are only attributable to the PE in social security recipients based on the standard Agreement. Hong Kong where they are incurred for the rates of comprehensive social security purposes of producing chargeable profits of assistance (CSSA) payments, old age PORTUGAL allowances, old age living allowances and the PE. Meanwhile, expenses incurred for other On 27 August 2019, a competent authority disability allowances, respectively. purposes apart from those of the PE in Hong arrangement on the exchange of country-by- Kong alone will be subject to an apportionment The above proposals will be submitted to the country (CbC) reports between Hong Kong and method to calculate the amount that is Legislative Council for approval. Portugal has been signed. attributable to the PE of the non-Hong Kong resident person.

• The attribution of “free capital” (i.e. funding Charitable institutions that does not give rise to a tax-deductible interest expense) should be carried out in On 9 September, the IRD issued a Tax Guide for accordance with the arm’s length principle to Charitable Institutions and Trusts of a Public ensure that a fair and appropriate amount of Character, which has been updated to set out the profits is allocated to the PE. Department’s interpretation and practice in relation to the taxation of charitable institutions or trusts of • a public character and other related matters.

12 | Asia Tax Bulletin HONG KONG HONG KONG MAYER BROWN | 13 In regards to Commission payments to The scope of income is defined under sections 4 December 2019. The Scheme was introduced in the non-resident not subject to withholding tax. and 5 of the Income Tax Act, 1961 (ITA). Since the Union Budget 2019/20 to provide relief in dispute On 14 May 2019, the Income Tax Appellate payment of commission does not fall within the resolution and amnesty to taxpayers for closing Tribunal (ITAT) of Jaipur gave its decision in threshold of business connection or, in the context their pending tax disputes relating to legacy the case of Satyam Polyplast v. DCIT (ITA of a tax treaty, within the threshold of permanent Service Tax and Central Excise cases that are now 158/2019). According to the ITAT, establishment, the taxpayer is not obliged to subsumed under Goods and Services Tax (GST). commission paid to a sales agent for deduct taxes at source and, hence, the The Scheme provides substantial relief in the tax procuring sales orders outside India is not disallowance by the tax authorities is bad in law. dues for all categories of cases as well as full waiver taxable in India. The taxpayer (Satyam of interest, fines and penalties, and complete JURISDICTION: Polyplast) was a partnership firm registered amnesty from prosecution. In addition: in India and engaged in the business of Budget 2019/2020 presented • for all cases pending in adjudication or appeal manufacturing of polypropylene (PP) bags. in any forum, the Scheme offers a relief of 70% The taxpayer paid commissions to various The Indian Finance Minister (FM) presented the 1st from the duty demand if it is INR 5 million or India non-resident entities without deducting tax Budget of the newly formed NDA 2.0 government less, and 50% if it is more than INR 5 million; deducted at source (TDS). for financial year (FY) 2019-20. While there were many expectations before the Budget to revive • for cases under investigation and audit where The taxpayer argued that it was engaged in animal spirits in the economy, the Budget has the duty involved is quantified and the export of its end products and, for that presented a mixed bag. Key changes include: communicated to the party or admitted by him purpose, it had tied up with non-resident in a statement on or before 30 June 2019, the persons for procuring sales orders on its • Relaxation in investment norms in aviation, Scheme offers a relief of 70% from the duty behalf. After exporting the goods and media, insurance, insurance intermediaries and demand if it is INR 5 million or less, and 50% if receiving the payment in foreign currency, single brand retail sectors; it is more than INR 5 million; the taxpayer paid commission to such • Start up taxation – rationalisation measures; non-resident persons for services rendered • for cases of confirmed duty demand, where outside India. The taxpayer contended that • Incentives to Foreign Portfolio Investors; there is no appeal pending, the relief offered is 60% of the confirmed duty amount if it is INR 5 the payments made by it to the non- • Rationalisation of Non Banking Finance million or less, and 40% if it is more than INR 5 residents were not liable to tax in India and, Companies norms; therefore, the taxpayer was under no million; and obligation to deduct TDS. • Thrust to the International Financial Services • for cases of voluntary disclosure, the person Centre (IFSC); The tax authorities disagreed and availing of the Scheme will be required to pay proceeded to hold that the payment in • Changes to Alternative Investment Funds - pass the full amount of disclosed duty. question was a fee for technical services through taxation; and Further details and conditions to avail of the (FTS), since the taxpayer had made this • Buy-back tax on listed securities. Scheme are contained in sections 120 to 125 of payment for managerial or consultancy Finance (No.2) Act, 2019. The CBIC also notified the services rendered by the non-resident On 1 August 2019, the Finance (No. 2) Act 2019 (the Sabka Vishwas (Legacy Dispute Resolution) Scheme persons. Accordingly, the tax authorities Act) was enacted after it had received the assent of Rules, 2019 (the Rules) vide Notification No. 5/2019 disallowed a deduction for the commission the President. The Act gives effect to the financial Central Excise-NT dated 21 August 2019, which paid on the basis that there was non- proposals of the central government for the provides the procedural aspects of the Scheme. deduction of taxes at source. The aggrieved financial year 2019/2020. The amendments are in taxpayer appealed before the ITAT. line with the draft bill presented to Parliament on 5 July 2019. The issue was whether the commission paid Tax deduction at source on to various non-residents would be equal to cash withdrawals the payment for routine services or FTS. Sabka Vishwas (Legacy The ITAT held in favour of the taxpayer On 30 August 2019, the Central Board of Direct stating that the payment of commission is Dispute Resolution) Scheme Taxes issued a press release to clarify the not FTS but a regular payment to the applicability of tax deduction at source (TDS) on non-residents made in the ordinary course On 21 August 2019, the Central Board of Indirect cash withdrawals. The Finance (No. 2) Act, 2019 has of business. The tax authorities also could Taxes and Customs (CBIC) announced that the inserted a new section 194N in the Income-tax Act, not substantiate its contention that the Sabka Vishwas (Legacy Dispute Resolution) 1961 (the Act) to provide for the levy of TDS at 2% commission paid was of the nature of FTS. Scheme, 2019 (the Scheme) will enter into force on on cash payments in excess of INR 10 million in 1 September 2019 and will remain in force until 31

14 | Asia Tax Bulletin INDIA MAYER BROWN | 15 aggregate made during the year by a banking under the treaty since the treaty definition covered experience, know-how, skills, etc. enabling its • Goods and services tax (GST) refunds company or cooperative bank or post office to any only technical and consultancy services. In addition, Indian subsidiary to apply such technology >> All pending GST refunds due to micro, small recipient holding one or more accounts with the it was stated that, by providing core expertise, independently. and medium-sized enterprises (MSMEs) will above-mentioned organizations. This section came supporting its group company in growing, be paid within 30 days. into effect from 1 September 2019. expanding and achieving business independence, the taxpayer was not making available any technical Finance Ministry’s economic >> In the future, GST refunds on new In this regard, it is clarified that any cash withdrawal knowledge, experience, know-how, skills, etc., as applications will be paid within 60 days from prior to 1 September 2019 will not be subject to the stimulus the services rendered had not enabled its Indian the date of application. TDS under section 194N of the Act. However, as subsidiary in its own right to apply them for all its the threshold of INR 10 million is with respect to the On 23 August 2019, the Finance Minister future needs. Therefore, ultimately, it was held that perevious year, the calculation of the amount of announced several measures in order to encourage the payment received by the taxpayer from its Consolidated circular for cash withdrawal for triggering TDS under section some sectors to boost the Indian economy. Indian subsidiary was not of an FTS nature, and, 194N of the Act shall be counted from 1 April 2019 assessment of start-ups hence, not taxable in India. Accordingly, the tax The enhanced surcharge levied, in accordance with onwards. assessed by the tax authority was reversed. The tax the Finance (No. 2) Act 2019, on long- and short- According to a press release on 2 September 2019, As such, if a person has already withdrawn INR 10 authority then appealed before the ITAT. term capital gains arising from the transfer of equity the Central Board of Direct Taxes (CBDT) issued million or more in cash up to 31 August 2019 from shares and/or units by FPIs has been withdrawn. The issue was whether the payment for Circular No. 22/2019 (the circular) on 30 August one or more accounts held with a banking company The pre-budget position is restored. management services supporting the taxpayer’s 2019 to consolidate all the circulars/clarifications or a cooperative bank or a post office, the 2% TDS Indian subsidiary or ensuring capacity building of However, the above withdrawal has not been issued previously in relation to tax compliance shall apply on all subsequent cash withdrawals. the Indian subsidiary would be regarded as making extended to other securities such as debt matters of start-up entities (start-ups) following technical knowledge or skills available. securities, etc. several announcements made by the Ministry of Finance. Management services are The ITAT ruled in favour of the taxpayer, stating • Relief for start-ups that article 12(5) of the treaty does not include • It is mentioned that under Circular No. 16/2019 not subject to withholding >> To mitigate genuine difficulties faced by managerial services in the definition of FTS. dated 7 August 2019, the process of start-ups and their investors, angel tax paid tax Therefore, although some services rendered by the assessment of the start-ups recognized by the by the start-ups on the funding received taxpayer may have the trappings of technical or Department for Promotion of Industry and from investors in excess of its fair market On 30 April 2019, the Income Tax Appellate consultancy services, the core activity of the Internal Trade was simplified. Circular No. value, will be withdrawn for start-ups Tribunal (ITAT) gave its decision in the case of DCIT taxpayer under the agreement is providing 16/2019 covered cases under “limited scrutiny”, registered with the Department for v. Hyva Holding B.V. (ITA 3816/2017), stating that managerial services. Accordingly, the payment such as cases where multiple issues including Promotion of Industry and Internal Trade. the payment for management services does not fall received by the taxpayer from its Indian subsidiary the issue of section 56(2) (viib) of the Income within the definition of “fees for technical services” cannot be treated as FTS under article 12(5) of the • Measures to accelerate the automotive market Tax Act, 1961 (ITA) were involved, and cases (FTS) under the India - Netherlands Income and treaty. where Form No.2 was not filed by the start-up. >> An additional 15% depreciation allowance is Capital Tax Treaty (as amended through 2012) (the The detailed process of obtaining mandatory Moreover, the expression “make available” not only claimable on vehicles acquired from 23 treaty) where the taxpayer has not made available approval of the supervisory authorities for means that the recipient of the service is in a August 2019 until March 2020, increasing technical knowledge to its Indian subsidiary for its conducting an enquiry was also laid down by position to derive an enduring benefit out of the the total depreciation claimable to 30%. Circular No. 16/2019. independent use. utilization of the knowledge or know-how • Faceless assessment The taxpayer (Hyva Holding B.V.) was a company independently in future, without the aid of the • The time limit for completion of pending incorporated in the Netherlands. It entered into an service provider, but such technical knowledge, >> On or after 1 October 2019, all tax notices, assessments of start-ups was also specified agreement with its Indian subsidiary to render experience, know-how, skills, etc. must remain with summons, orders, etc. will be issued from a whereby all cases involving “limited scrutiny” certain services. The Indian tax authority took the the recipient even after expiry of the agreement. It centralized system with a computer- are to be completed preferably by 30 view that the services provided by the taxpayer was also held that the technology will be generated unique document identification September 2019. Other cases of start-ups are included managerial, technical and consultancy considered to have been made available when the number. to be disposed of on a priority basis and services, and, while rendering such services, the person acquiring the service is able to apply the preferably by 31 October 2019. >> All old tax notices will be decided by 1 taxpayer had made available technical knowledge technology independently. Hence, to come within October 2019 or will be uploaded again • It is mentioned that under the clarification and skills which would fall under the definition of the purview of FTS under article 12(5) of the treaty, through the centralized system. issued on 9 August 2019, the provisions of FTS under article 12(5) of the treaty. On first appeal, the rendering of services and making available of section 56(2)(viib) of the Act would also not be the Tax Commissioner (Appeals) concluded in technical knowledge, experience, know-how, skills, >> From 1 October 2019, all tax notices will be applicable in respect of assessment made favour of the taxpayer, stating that the services etc. must take place simultaneously. In the present disposed of within 3 months from the date before 19 February 2019 if a recognized rendered by the taxpayer were of a managerial case, the tax authority failed to demonstrate that, of reply. start-up had filed a declaration in Form No. 2. services nature which could not be treated as FTS while rendering services to its Indian subsidiary, the The timelines for disposal of appeals before the taxpayer had made available technical knowledge,

16 | Asia Tax Bulletin INDIA INDIA MAYER BROWN | 17 Commissioners of Income-tax (Appeal) was also rights (business or commercial right akin to a as an intangible asset (being a business or Common corporate tax rate for foreign companies specified. Further, the addition made under licence), will be treated as an intangible asset, with commercial right akin to a licence) eligible for and domestic companies section 56(2)(viib) of the Act would also not be amortization of the same being claimable under the claiming of amortization under provisions of the • Currently, domestic companies with turnover of pressed in further appeal. provisions of the Act. Act. up to INR 4 billion pay income tax at a lower • It is provided that the outstanding income-tax • The government offers exploration and rate of 25%, while larger companies, which demand relating to additions made under development rights through global bidding, New direct tax law account for the lion’s share of the government’s section 56(2)(viib) of the Act would not be with the successful oil and gas blocks being tax revenue, pay income tax at a rate of 30%. In pursued and no communication in respect of granted licence to explore, develop and carry addition, unlike domestic firms, foreign In November 2017, the government appointed a outstanding demand would be made with the on production operations. companies pay a higher corporate tax rate of task force to review and redraft the Income-tax Act, start-up. Other income-tax demands on the 40%, but do not have to pay dividend • Oil exploration and production companies 1961 (ITA), taking into account the direct tax start-up would not be pursued unless the distribution tax that is applicable to domestic generally buy (farm-in) and sell (farm-out) their systems prevalent in various countries, international demands were confirmed by the Income Tax companies. participating interests in the production sharing best practices and the economic needs of the Appellate Tribunal (ITAT). agreement entered into with the central country. The task force recently submitted a report • The task force has recommended a common • In order to redress grievances and to address government. to the Finance Minister recommending certain corporate tax rate of 25% for both domestic various tax related issues in the case of start- changes to be made to the ITA. The government is and foreign companies. • Farm-in expenditure is incurred when an entity ups, a Startup Cell has been constituted by expected to release the report of the eight- in this line of business acquires a participating Abolishment of dividend distribution tax CBDT. Grievances can also be filed online at member panel in the public domain for interest from other entities in oil/gas blocks and [email protected]. consultations after examining all the • Currently, dividend distribution tax is imposed becomes part of the production sharing recommendations, with the same being likely to be on domestic companies at a gross rate of 15% agreement. presented to Parliament as part of the Union plus applicable surcharge and cess. In addition, Farm-in expenditure Former practice Budget 2020/21 in February 2020. in the case of dividends exceeding INR 1 million paid by a domestic company, incurred by oil exploration • Such farm-in purchase price is accounted for as Although the report and the recommendations shareholders receiving the dividends are an asset as per the prescribed accounting therein have not been made public yet, some of the and production companies required to pay tax at a rate of 10% on those standards. major announcements likely to be made under the dividends. This results in taxation of the same new law for income tax are as follows: The Indian income tax law provides for a special • International accounting rules for oil and gas income at various stages. followed in Australia, Indonesia, the United Relief for individual taxpayers deduction for assessees engaged in the business of • The task force has suggested that dividend Kingdom, among other countries, also require prospecting for or extraction or production of • Currently, the personal income tax structure distribution tax be abolished, and that that such acquisition cost be capitalised and mineral oils. It specifically provides that, in the includes three categories: people below the dividends be taxed in the hands of the depreciated. event of a farm-out (selling) of participating age of 60; people above the age of 60 but shareholders. interests in the production sharing agreement by • Some of the case law on this issue also below 80; and people aged 80 years and Repatriation tax oil exploration and production companies, the supports the treatment of acquisition rights in a above. unamortized expenditure is allowed as a deduction production sharing agreement as an intangible • ­In the case of foreign companies, a “branch • The first category contains four brackets: zero and the surplus is taxed in the hands of the seller. asset. profits tax” is recommended to be levied on tax on income up to INR 250,000; 5% tax on However, in the hands of the buyer, no specific the amount repatriated to their foreign Recent update income between INR 250,000 and INR 500,000; provision is provided under the Income Tax Act, headquarters. (As a result, the rates of taxation 20% on income between INR 500,000 and INR 1961 (the Act). • In the circular, the CBDT clarifies that the of domestic and foreign companies may still be 1 million; and 30% on income above INR 1 amount paid for acquiring the participating different to some extent.) Thus, while taxability of a farm out is clearly laid million. interest will not be treated as the cost of out, no specific provision had been made regarding Change in tax assessment procedure the treatment of farm-in (buying) payments, which acquiring the share in a partnership or • The second category also contains four tax resulted in a conflict between oil exploration and investment for the acquisition of a member’s brackets but with the first bracket of zero tax on • The task force has recommended that the production entities and the tax department. interest in an association of persons or body of income up to INR 300,000. The third category concept of “assessing officer” be replaced by individuals. contains three brackets with the first bracket of “assessment unit”; also, scrutiny cases are Therefore, the Central Board of Direct Taxes (CBDT) zero tax on income up to INR 500,000. expected to be allotted centrally by the IT • The amount paid for acquiring the participating recently issued Circular No. 20/2019 dated 19 system on a random basis (“faceless interest will initially be treated as an amount • The task force has suggested a modification on August 2019 (the circular) clarifying that amounts assessment scheme”). paid by oil exploration and production companies paid towards acquiring the underlying asset. the current brackets and an introduction of a new rate between 5% and 20%. • The task force also recommended that transfer for acquiring participating interests in the • The amount paid for acquiring the participating pricing assessments be carried out by a production sharing agreement entered into with interest (after deduction of the component cost separate functional unit which will be set up for the central government, being in the nature of attributable to tangible assets) will be treated a period of 4 years.

18 | Asia Tax Bulletin INDIA INDIA MAYER BROWN | 19 Litigation management unit effective tax rate is 17.01% inclusive of the tax neutral, subject to conditions. This ruling International Tax surcharge and cess. Further, such companies assumes importance as it is the first decision which ­The task force has recommended a separate are not required to pay MAT. deals with taxability in the hands of the litigation management unit to be set up to manage Developments shareholders on the breach of conditions of a tax the entire litigation process, i.e. from deciding • A company which does not opt for the neutral transfer. which cases the appeals ought to be filed to concessional tax regime and avails the tax CHINA devising the strategy for defending a case. Further, exemption/incentive will continue to pay tax at On 5 June 2019, the amending protocol, signed on the officer raising the tax demand will be unable to the pre-amended rate. However, they can opt Notification on arm’s length 26 November 2018, to the China - India Income Tax file for litigation in the same case. for the concessional tax regime after the expiry Treaty, as amended by the 1995 exchange of notes, of their tax holiday/exemption period. After the tolerance range for 2019-20 Highlights of other recommendations entered into force. The protocol generally applies exercise of the option they will be liable to pay assessment year from 1 January 2020 for China and from 1 April • Introduction of the concept of mediation and tax at 22% and the option once exercised 2020 for India. settlement of litigation through negotiation. cannot be subsequently withdrawn. Further, the rate of MAT has been reduced from the existing On 13 September 2019, the Central Board of Direct • Individuals earning up to INR 5.5 million may SPAIN 18.5% to 15%. Taxes (CBDT) issued Notification No. 64/2019 (the obtain major tax relief. notification) to provide the accepted tolerance According to an update of 27 August 2019, • The enhanced surcharge introduced by the • Various incentives for start-ups are range for transactions to be considered as at arm’s published by the Indian Ministry of Finance, the Finance Act will not apply on capital gains recommended. length for the 2019-20 assessment year. amending protocol, signed on 26 October 2012, to arising on the sale of equity share in a company The notification provides that where the variation the India - Spain Income and Capital Tax Treaty • The proposed direct tax code will have fewer or a unit of an equity-oriented fund or a unit of entered into force on 29 December 2014. The sections than the current ITA. a business trust liable for securities transaction between the arm’s length price determined under section 92C of the Income-tax Act, 1961 (the Act) protocol generally applies In India from 1 April tax, in the hands of an individual, Hindu 2015 for other taxes and in Spain from 1 January Undivided Family (HUF), Association of Persons and the price at which the international transaction Taxation Laws (Amendment) or specified domestic transaction has actually been 2015. Special conditions apply for article 28 (AOP), Body of Individuals (BOI) and Artificial (Exchange of Information) and article 28A Juridical Person (AJP). The enhanced surcharge undertaken does not exceed 1% of the latter (i.e. Ordinance 2019 the actual transaction price) in respect of wholesale (Assistance in the collection of taxes) of the will also not apply to capital gains arising on amended convention. the sale of any security including derivatives, in trading and 3% of the latter (i.e. the actual During a press conference on 20 September 2019, the hands of Foreign Portfolio Investors (FPIs). transaction price) in all other cases, the price at the Finance Minister announced that the Taxation which the international transaction or specified Laws (Amendment) Ordinance 2019 (the ordinance) • Listed companies which have already made a domestic transaction has actually been undertaken has been brought in to make certain amendments public announcement of buy-back before 5 July will be deemed to be the arm’s length price for in the Income-tax Act, 1961 (the Act) and the 2019 will not be subject to the tax on the assessment year 2019-2020. Finance (No. 2) Act 2019 (the Finance Act). buy-back of shares. The term “wholesale trading” is further defined • With effect from fiscal year (FY) 2019-20, under the notification as an international domestic companies are provided with an Capital gains tax liability on transaction or specified domestic transaction of option to pay income tax at 22% provided that 1 trading in goods, which fulfils the following they will not avail any exemption/incentive. The conversion into an LLP conditions: effective tax rate is 25.17% inclusive of surcharge and cess. Further, such companies In the recent case of Domino Printing Science Plc., • The purchase cost of finished goods is 80% or are not required to pay the minimum alternate In Re (AAR 1290 of 2012 decided on 23 August more of the total cost pertaining to such tax (MAT). 2019), the Authority for Advance Rulings (AAR), trading activities. ruled that shareholders of a company are liable to • With effect from FY 2019-20, a new domestic • The average monthly closing inventory of such capital gains tax upon the conversion of a company manufacturing company which is incorporated goods is 10% or less of sales pertaining to such to a Limited Liability Partnership (LLP) as the on or after 1 October 2019 is provided with an trading activities. conditions of a tax neutral transfer are not fulfilled. option to pay income tax at 15%. This benefit is Under the Income Tax Act, 1961 (IT Act) any transfer available to companies that do not avail any of a capital asset by a company to an LLP or shares exemption/incentive and commence their held by the shareholder in the company, as a result production on or before 31 March 2023. The of conversion of a company into an LLP, would be

1 Courtesy Khaitan & Co in Mumbai.

20 | Asia Tax Bulletin INDIA INDIA MAYER BROWN | 21 VAT exemption on the scope of a CFC to cover indirectly owned CFCs. The Indonesian taxpayer will be taxed on dividends One of the most important changes in MoF-93 is deemed distributed from the CFC. Under MoF-93 a transportation that the definition of deemed dividend now deemed dividend is defined as originating from the excludes business profits. The intention is to following “certain income” (i) dividends, except for equipment provide greater certainty and fairness when taxing dividends received from the CFC, (ii) interest, investments in CFCs. Below is a summary of the unless received by a CFC which is owned by an On 8 July 2019, Indonesia passed general CFC rules, highlighting the new changes Indonesian taxpayer which has a banking license Government Regulation (PP) No. 50 / 2019 under MoF-93. MoF-93 is retroactively applicable (this exception does not apply if the interest is (the Regulation) which exempts the impor- from tax year 2019. received from an Indonesian resident taxpayer JURISDICTION: tation and supply of certain transportation which is a related party to the CFC), (iii) rental CFCs consist of (i) directly owned CFC: A non-listed equipment from VAT. The items exempted income from (i) land and/or building, or (ii) other foreign corporation in which an Indonesian from VAT under articles 1 and 2 of the rental income from a related party, (iv) royalties and taxpayer, individually or collectively with other Regulation include: (v) capital gains. Indonesia Indonesian taxpayers, owns 50% or more of the • water transportation equipment; foreign corporation’s paid-up shares or (ii) indirectly The calculation of deemed dividend is as follows: owned CFC: A non-listed foreign corporation which • underwater transportation equipment; • For a directly owned CFC, the deemed is controlled indirectly by an Indonesian taxpayer dividend is determined based on the • air transportation equipment; through: shareholding percentage multiplied by the net • trains and spare parts; • A directly controlled foreign corporation; or income after tax on certain income.

• shipping safety equipment, aviation • ­A directly controlled foreign corporation and an • For an indirectly owned CFC, the deemed safety equipment, human safety indirectly controlled foreign corporation in the dividend is determined based on the equipment and spare parts; preceding level of investment which owns at percentage of ownership in the respective least 50% of the paid-up shares at every level of indirectly owned CFC multiplied by the net • certain water transport vessels; and investment. income after tax on certain income. • aircraft, aviation and human safety • Net income after tax on certain income is the equipment, repairs and maintenance An indirectly controlled foreign corporation also gross amount of the certain income after equipment and spare parts. includes a foreign corporation in which at least 50% deducting costs to obtain, collect and maintain of the paid-up shares are jointly owned by: The exemption will be withdrawn and the the certain income; and any taxes due, paid, or unpaid VAT must be repaid if, within 4 years withheld on the certain income. from the time of importation and/or acquisi- • Indonesian taxpayers and a directly or indirectly As before, the deemed dividend from the CFC is tion, the items mentioned in articles 1 and 2 controlled foreign corporation; recognized by the Indonesian taxpayer at the end of the Regulation are not used in accor- • Indonesian taxpayer and another Indonesian of the fourth month after the CFC submits its local dance with the original purpose or are taxpayer through a directly or indirectly corporate income tax (“CIT”) return or, if no return transferred to another party by the entity. controlled foreign corporation; or is required, at the end of the seventh month after The Regulation will enter into force on 6 the end of the CFC’s fiscal year. September 2019. • ­A directly and/or indirectly controlled foreign corporation. 3 2 Changes to the CFC The 50% ownership threshold is determined as of Tax incentives the end of the Indonesian taxpayer’s fiscal year. For 21 rules an indirectly owned CFC, the 50% threshold is Government Regulation No. 45/2019 (“GR-45”) was determined based on the ownership of the indi- issued on 25 June 2019 and amends GR No. With the issuance of MoF Regulation 93/ rectly owned CFC. Note, however, that if less than 94/2010. GR-45 provides additional tax incentives PMK/03/2019 (“MoF-93”), the Minister of 50% of the CFC is held by another CFC in which the for certain pioneer industries in the form of reduc- Finance has amended certain provisions of Indonesian taxpayer has a direct interest, the tions to net or gross income. MoF Regulation 107/PMK/03/2017 (“MoF- shareholdings of other Indonesian taxpayers are 107”) regarding controlled foreign combined to determine whether the threshold is corporations (“CFC”). MoF-107 expanded met.

2 Courtesy Harsono Strategic Consulting in 3 Courtesy Harsono Strategic Consulting in Jakarta. Jakarta.

22 | Asia Tax Bulletin INDONESIA MAYER BROWN | 23 The tax incentives offered in GR-45 are set out Tax incentives for upstream MEXICO below: On 29 April 2019, Indonesia ratified the amending oil and gas sector protocol, signed on 6 October 2013, to the Eligible Taxpayer Incentive Indonesia - Mexico Income Tax Treaty, by way of Provides new A reduction in net On 27 August 2019, the government issued Presidential Decree No. 23 of 26 April 2019, as investment or business income at 60% of the Regulation of the Ministry of Finance (PMK) No. published in Official Gazette No. 79 of 2019. expansion in labor investment amount in 122/PMK.03/2019 (the regulation) which provides intensive industries fixed assets, including On 18 September 2019, the amending protocol, exemptions for oil and gas operators (relating to land that is used for the signed on 6 October 2013, to the Indonesia Mexico core business, which is upstream oil and gas business activities) from value Income Tax Treaty (2002), entered into force. The expensed for a certain added tax (VAT) or VAT and sales tax on luxury period of time protocol generally applies from 18 September 2019 goods, land and building tax, and from the tax Provides professional treatment of charging of joint facility operating A reduction in gross UAE placements, income up to a costs and head office indirect cost allocation apprenticeship, human maximum of 200% from expenditure. The regulation will be in force 30 days On 24 July 2019, Indonesia and the United Arab resource development the total cost disbursed Emirates signed an amending protocol to update for such activities from its promulgation on 27 August 2019 and notes: the Indonesia - United Arab Emirates Income Tax Provides certain R&D A reduction in gross Treaty (1995) in Jakarta. On the same day, both activities in Indonesia income up to a • VAT or VAT and sales tax on luxury goods will countries signed an investment protection maximum of 300% from not be collected for the acquisition of certain the total cost disbursed agreement as well. for certain R&D taxable goods or services that are used or activities which is utilized in the context of petroleum operations. SAN MARINO expensed for a certain period of time. • A reduction of 100% will be introduced for On 30 August 2019, the Indonesia - San Marino outstanding land and building tax related to oil Exchange of Information Agreement entered into and gas projects as stated in the tax notification force. The agreement generally applies from 30 It is hoped that these incentives will improve labor letter. August 2019 for criminal tax matters and from 1 quality efficiency and encourage innovations in January 2020 for other tax matters. technology. Further details are expected in a future • Incentives are granted to contractors in certain MoF regulation. work areas that do not achieve a certain internal rate of return. Reduction of tax on bond • The provision of taxable services in the upstream oil and gas sectors will be exempt interest payments from VAT if certain criteria are met. • The expenditure of indirect head office cost On 12 August 2019, Government Regulation (PP) allocations from contractors that fulfil certain No. 55/2019 (the regulation), which reduces the conditions is exempt from VAT. income tax rate on bond interest payments, was issued by the government. The regulation is the second amendment to PP No. 16/2009 concerning International Tax income tax on interest from bonds. The regulation entered into force on 12 August 2019. Developments

• Bonds are defined as debt securities, state debentures and regional bonds with a maturity BAHAMAS of more than 12 months. Bond interest is On 9 May 2019, Indonesia ratified the Bahamas received or obtained in the form of interest/ - Indonesia Exchange of Information Agreement discount by the holder of the bond. which was concluded in 2015, by way of Presidential Decree No. 29 of 8 May 2019, as published in • The interest/discount on bonds received or Official Gazette No. 96 of 2019. obtained by qualified taxpayers as provided under the regulation is reduced to:

­>> 5% up to and including 2020; and

­>> 10% from 2021 onwards.

24 | Asia Tax Bulletin INDONESIA INDONESIA MAYER BROWN | 25 International Tax Budget - proposed tax Developments changes

On 25 July 2019, the Ministry of Economy USA and Finance released its proposed tax On 17 July 2019, the United States Senate amendments for 2019 (the proposed approved the amending protocol, signed amendments). Once finalised and passed on 24 January 2013, to the Japan - United by the legislature, the amended law will be JURISDICTION: States Income Tax Treaty (signed in 2003). JURISDICTION: effective from 1 January 2020. On 30 August 2019, the protocol entered into force. It generally applies from 1 Corporate tax November 2019 for withholding taxes and • Where an in-kind contribution is made Japan from 1 January 2020 for other taxes for Korea to establish a holding company, any both Japan and the United States. The corporate income tax/capital gains tax provisions for article 26 (Exchange of that may arise from such transaction will Information) and article 27 (Assistance in be paid in instalments over a period of the collection of taxes) of the amended 3 years starting from the fifth fiscal year convention apply from 30 August 2019. The after the in-kind contribution is made provisions concerning arbitration will have (applicable to in-kind contributions/ effect with respect to cases that are under transfers of shares occurring on or after consideration by the tax authorities as of 30 1 January 2022). August 2019 and to cases that come under consideration after 30 August 2019. • The Promotion of Investment‧Mutual Cooperation Tax will not be applicable CROATIA to special-purpose companies (applicable to fiscal years commending On 5 September 2019, the Croatia - Japan on or after 1 January 2020). Income Tax Treaty will enter into force. The treaty generally applies from 5 September • Taxpayers are entitled to a deduction of 2019 for the provisions of article 25 up to KRW 15 million (previously, KRW (Exchange of Information) and article 26 10 million) for car expenses incurred for (Assistance in the Collection of Taxes) and business purposes without any records from 1 January 2020 for other taxes. (applicable to fiscal years commending on or after 1 January 2020). URUGUAY • De minimis safe harbour: taxpayers will Uruguay According to a press release of 13 be allowed to immediately deduct September 2019, published by the expenditures made for certain purposes government of Uruguay, Japan and Uruguay up to KRW 6 million (previously, KRW 3 have signed an income tax treaty in million) per item. Uruguay. • It is clarified that regardless of whether the accounting treatment for existing leases is changed, the current tax treatment for leases must continue to be applied.

• It is clarified that where a penalty is imposed for fraudulent or incorrect VAT invoice, etc., issued in connection with goods and services supplied, the amount that must be subject to the 2% penalty is limited to the amount that is deductible for tax purposes.

26 | Asia Tax Bulletin MAYER BROWN | 27 Individual income tax treats such error as non-issuance and applies a • ­Customs duties may be exempted where • A corporation subject to Master File/Local File 2% penalty). Under the proposed amendments, exported goods are re-imported due to submission will be exempt from the submission • ­An administrative fine for failure to report such erroneous issuance of VAT invoice will only defects in the goods within 1 year after the requirement of the schedule of international foreign accounts will be waived to the extent be subject to a 1% penalty of the supply value. date of export declaration, or where tools transactions and reporting of the transfer that a taxpayer is subject to a criminal fine or attached to exports for quality maintenance/ pricing method applied (applicable to fiscal administrative fine under a “notice disposition” • Where a penalty is imposed for erroneously status check during transportation or years commencing on or after 1 January 2020). (applicable to notice dispositions issued on or stating a supply value that is in excess of the equipment used temporarily for instalment/ after 1 January 2020). actual supply value (a penalty at a rate of 2% of • “Real estate securities” is based on the assembly/unloading are re-imported within 2 the supply value), the law is ambiguous as to definition of “real estate” under the Korea • ­The range of the penalty reduction ratio will be years from the date of export declaration whether the penalty for failure to correctly (Rep.) - United States Income Tax Treaty (1976) increased from 10%–70% to 30%–90% with (applicable to import declarations filed on or indicate the “necessary information” in the VAT (the treaty). respect to late or amended reporting of foreign after 1 January 2020). invoice must also be imposed (penalty of 1% of financial accounts (applicable to late or • Any manufacturing know-how, technical the supply value) (the supply value is part of the • An ex post facto application for preferential amended reporting filed on or after the information, etc., included in a patent not “necessary information” that is subject to the tariff under a Free Trade Agreement (FTA) will effective date of the relevant provisions). registered in Korea used for domestic 1% penalty). It is clarified that the 1% penalty be allowed for 45 days from the date of manufacturing, production, etc., will be • While a taxpayer is entitled to a deduction from for erroneous indication of “necessary payment notice of customs duties when deemed “remuneration for other similar his or her earned income, the allowed information” must not be imposed in addition imported goods are reclassified under the property, rights” under the treaty and classified deduction will be limited to KRW 20 million to the 2% penalty imposed for indicating a Harmonized System (HS) code which is different as royalty income. Further, indemnity for (applicable to income received on or after 1 supply value in excess of the actual value. from the HS code declared by the importer infringement of patents registered overseas January 2020). (applicable to ex post facto applications for • ­It is clarified that where a taxpayer is denied a (but not registered in Korea) will be classified as preferential tariff filed on or after 1 April 2020). • The amount of severance pay that officers are VAT credit for failing to correctly indicate the other income (subject to a 16.5% tax rate, entitled to on or after 1 January 2012 will be correct supply value, the amount of VAT credit International tax including the local income tax) (applicable to calculated based on a less favourable formula that will be denied is the amount that income paid on or after 1 January 2020). • Where a backdoor transaction results in a with downward adjustment of the applicable corresponds to the difference between the reduction in domestic tax burden by the • Results of a concluded Mutual Agreement statutory number (applicable to severance pay erroneous supply value and the proper supply amount stipulated under the Presidential Procedure (MAP) will prevail over conflicting received on or after 1 January 2020). value rather than the amount corresponding to Decree (PD) (e.g. 50%), the burden of proving court rulings (applicable to MAPs commenced the entire supply value. Indirect tax that there was no intent of tax avoidance will be on or after 1 January 2020). Other taxes placed on the taxpayer (applicable to fiscal • ­The VAT Law (VATL) allows small and medium- years commencing on 1 January 2020). sized enterprises (SMEs) that are in the • ­Securities Transaction Tax (STT) applicable to International Tax manufacturing business to defer VAT payments the transfer of shares (both listed and non- • The proposed amendments leave the CITL and on their purchases of imported goods if certain listed shares) outside the stock exchange is IITL as the unified rules concerning the refund Developments requirements are met. reduced from 0.5% to 0.45%. claim right of a non-resident individual or foreign corporation while placing the burden of • Whereas a VAT credit is granted to taxpayers • While taxpayers are currently not allowed to file UK proof on the taxpayer (applicable to relevant with accounts receivable or other receivables amended tax returns on past tax returns that income arising on or after 1 January 2020). On 22 August 2019, Korea and the United Kingdom that are ascertained as bad debt within 5 years were filed after the statutory due date, the signed a trade continuity agreement in London. of the supply date, the proposed amendments proposed amendments now allow for such • Non-submission of information/data requested The agreement replicates the existing trade allow such VAT credit to be granted to amended returns (i.e. refund requests and by the tax authorities will be subject to a agreements between the European Union (EU) and taxpayers with accounts receivable or other request for correction of taxes) to be filed even penalty of up to KRW 300 million every 30 days Korea as far as possible and will not enter into force receivables that are ascertained as bad debt if the taxpayer had submitted its initial tax until satisfactory submission thereof (applicable while the EU-Korea free trade agreement continues within 10 years from the supply date. return past its statutory due date. to fiscal years commencing on or after 1 to apply to the UK. January 2020). • ­Under the current rules, taxpayers with more • When valuing the shares owned by the largest than one registered place of business for VAT shareholder, the largest shareholder will be • Provisions are introduced allowing the tax purposes are subject to a penalty at a rate of supplied with a 20% premium in determining authorities to impose a transfer pricing 2% of the supply value where the taxpayer fails the value of its shares, unless the shareholder is assessment based on the arm’s length price to issue a VAT invoice from the proper place of an SME, in which case no premium will be presumed through the data collected from business (from which the goods or services applied. comparable companies within the same were supplied), but, instead, issues the VAT industry if the taxpayer does not submit the invoice from another place of business (the law requested information/data (applicable to fiscal years commencing on or after 1 January 2020).

28 | Asia Tax Bulletin KOREA KOREA MAYER BROWN | 29 Restriction on day of the basis period for the YA following the • a development financial institution which is year in which such amount was ascertained prescribed under the Development Financial deductibility of interest were substantially the same. Institutions Act 2002; The determination of tax-EBITDA is in accordance • a construction contractor as defined under the On 28 June 2019, the Income Tax with the formula A+B+C, where: Income Tax (Construction Contracts) (Restriction on Deductibility of Interest) Regulations 2007; Rules 2019 (the rules) were gazetted. The • A is the amount of adjusted income of the prescribed rules were gazetted for the person from its business sources; • a property developer as defined under the Income Tax (Property Developer) Regulations implementation of the earnings stripping • B is the total amount of qualifying deductions JURISDICTION: 2007; or rules (ESR) under Section 140C of the allowed in ascertaining the amount of the Income Tax Act 1967 (ITA). Section 140C adjusted income under A. “Qualifying • a person having been granted an exemption was enacted into the ITA via the Finance deductions” is defined as the special under paragraph 127(3)(b) or subsection Act 2018 after it had been first announced deductions given under specific rules or 127(3A) of the ITA in respect of the adjusted Malaysia during the presentation of the Budget for provisions (i.e. deduction equivalent to 200% of income of the person. 2018 to the parliament. the amount incurred and deduction under rules On 5 July 2019, the Restriction on Deductibility of made under section 154(1)(b) of ITA in The key points are the following: Interest Guidelines (the Guidelines) were issued by ascertaining adjusted income); and • the restriction came into operation on 1 the Inland Revenue Board (IRB) following the July 2019; • C is the total amount of interest expense issuance of the Income Tax (Restriction on incurred in relation to the gross income of the Deductibility of Interest) Rules 2019 (the Rules). The • the deductibility restrictions applies: person for any financial assistance in a objective of the Guidelines is to explain the >> to persons having been granted any controlled transaction from its business restriction on the amount of interest deductible in financial assistance in a controlled sources. relation to: transaction, with the total amount of The restriction does not apply to: • business interest expenses; and any interest expense for all such financial assistance exceeding MYR • an individual; • other payments which are economically equivalent to interest for the basis periods 500,000 in the basis period for a • a licensed bank, licensed investment bank, beginning on or after 1 July 2019. year of assessment (YA); and licensed insurer or professional reinsurer as >> in respect of the basis period defined under the Financial Services Act 2013; The key points are the following: beginning on or after 1 July 2019 • a licensed Islamic bank, licensed takaful • They provide the scenarios where “control” and subsequent basis periods; operator or professional retakaful operator as under subsection 140A(5A) can be applied as a • the total amount of interest expense for defined under the Islamic Financial Services Act “controlled transaction”. 2013; such financial assistance is deemed to • “Interest expense”, “Payment economically accrue evenly over that period or • a Labuan bank or Labuan investment bank equivalent to interest” and “Specific third party periods for a YA; licensed under Part VI of the Labuan Financial interest” are explained in more detail. Services and Securities Act 2010; • the maximum amount of interest • The Guidelines clarify that the legislation and referred to in section 140C of the ITA is • a Labuan Islamic bank or Labuan Islamic rules are applicable to: an amount equal to 20% of the amount investment bank licensed under Part VI of the >> a person within the charge to tax under the of tax–EBITDA of that person from each Labuan Islamic Financial Services and Securities Income Tax Act, 1967 (ITA) (except where business source for the basis period for Act 2010; a YA; and the non-application clause applies); and • a Labuan insurer or reinsurer, including a >> a person having interest expense from • the excess interest expense over the Labuan captive insurance business licensed financial assistance which is deducted in amount ascertained will be carried under Part VII of the Labuan Financial Services ascertaining the adjusted income before forward and deducted against the and Securities Act 2010; adjusted income of the company for the any restriction under section 140C from subsequent YAs until the whole amount • a Labuan takaful operator or retakaful operator, each of the business sources that are paid of that excess has been fully utilized, including a Labuan captive takaful business or payable to: licensed under Part VII of the Labuan Islamic provided that the shareholders of that – its associated person outside Malaysia; company on the first day and the last Financial Services and Securities Act 2010;

30 | Asia Tax Bulletin MALAYSIA MAYER BROWN | 31 – its associated person outside Malaysia irrecoverable debts as a deduction against gross • For the settlement of trade debts with assets, >> search engines and social networks; which operates through a permanent income from a business, and recoveries of wholly the net proceeds from the sale of the asset or >> databases and hosting (e.g. website hosting establishment in Malaysia; or and partly irrecoverable debts where a deduction the market value of the asset given in exchange and online data warehousing); has been made in ascertaining the adjusted income is the value to be taken as settlement for the – a third party outside Malaysia where the for an earlier year of assessment (YA). debt. Any balance of the debt still outstanding >> internet-based telecommunication; financial assistance is guaranteed by its can be claimed as a deduction for bad debt. holding company or any other • Definitions of the terms used are provided such >> online training (e.g. e-learning, webinars enterprises under the same MNE as bad debts, gross income, adjusted income, • Several examples are provided to explain the and online courses); Group. person, basis period, relative, related company above. >> other (e.g. a subscription to online and business or commercial considerations. With regard to the de minimis threshold: where a • The PR replaces PR No. 1/2002 dated 2 April resources). person has multiple business sources, the threshold • A trade debt could be written off as a bad debt 2002. • The provision of the above is not considered a of RM 500,000 should be accumulated from all and allowed as a deduction only when the debt digital service if the service can be obtained business sources while the calculation of interest has been included in the gross income of a without the use of IT and the transmission of restriction should be made separately on each of person for the basis period for a YA prior to the Service Tax the service is via e-mail which requires human the business sources. relevant YA and the debt is a debt which is intervention. irrecoverable. On 9 July 2019, the Service Tax (Amendment) Act The Guidelines provide sample calculations of 2019 (the Act) was enacted after it had been • An online platform that carries out transactions Tax-EBITDA and interest restriction, and numerical • Sound considerations should be taken by the passed by the parliament on 9 April 2019. The Act on behalf of an overseas service provider and examples of the maximum amount of interest person carrying the business before a trade will come into operation on a date to be set by the issues invoices or any other document under its expense allowable and the carry forward of interest debt can be written off. Minister by notification in the Gazette. The Act is in name will be regarded as an FSP. expense. • The amount of bad debt written off which was line with the draft bill presented to the parliament • The provisions of digital services are applicable For the non-application list, the Guidelines previously allowed as a deduction and on 4 April 2019. Importantly, with effect from 1 to both business-to-business (B2B) and specifically add a special purpose vehicle subsequently recovered must be included in January 2020, a 6% service tax will be imposed on business-to-consumer (B2C) transactions. established solely for the issuance of sukuk under the gross income for the basis period the digital services provided by foreign service subsection 60I(1) of the ITA in the list. However, the amount is received and subject to tax providers. • Businesses that have been charged service tax Guidelines did not include a person granted an accordingly. on digital services provided by a foreign exemption under Paragraph 127(3)(b) or Subsection SERVICE TAX ON DIGITAL SERVICES registered person (FRP) are exempted from • Specific provision of doubtful debts is allowed 127(3A) of the ITA in the list. On 20 August 2019, the Service Tax Guide on service tax in Malaysia on these imported as a tax deduction after ascertaining the Digital Services (the guide) was issued by the Royal taxable services. The Guidelines further clarify that if construction likelihood of recovery of each debt. Malaysian Customs Department. The guide has contractors and property developers have other • “Consumers” include businesses and • General provision for doubtful debts is not been prepared to assist taxpayers in understanding business income which is not specified under individuals in both designated and special allowed as a deduction since the provision is the imposition of service tax on digital services Income Tax (Construction Contracts) Regulation areas. made based on general information, even if provided by a foreign service provider (FSP). 2007 and Income Tax (Property Developers) there is a legal requirement or an accounting • Relevant administrative details (registration, Regulations 2007 [i.e. P.U. (A) 276/2007 and P.U. (A) • “Digital services” are services provided through convention for the particular trade or industry accounting, transitional rules, compliance and 277/2007], that business income will be subjected an information technology (IT) medium with to make such a provision. enforcement, and other related information) to section 140C of the ITA and the Rules. minimal or no human intervention from the regarding the service tax are provided. • A decision to forgive or to waive payment of a service provider. The services include the The restriction on deductibility of interest will only trade debt (either wholly or in part) should not supplies of the following items (the list is not be applicable to a business source where the basis be regarded as a valid business or commercial exhaustive): period of a person starts on or after 1 July 2019. Service Tax amendments consideration for tax purposes and no tax >> software, applications and video games deduction should be allowed. gazetted (e.g. online licensing and mobile apps); Wholly and partly • Non-trade debts that are written off as bad >> music, e-books and film (e.g. live streaming On 30 August 2019, the Service Tax (Amendment) debts or provisions made in respect of non- irrecoverable debts and services and subscription-based media and/ Regulations 2019 (the regulations) providing certain trade debts that are doubtful (either specific or or memberships); amendments to the Service Tax Regulations 2018 debt recoveries general) are not tax deductible. (the principal regulations) were gazetted. The >> advertisements and online platforms (e.g. • Stringent examination should be made in regulations entered into force on 1 September On 24 September 2019, the Inland Revenue Board online advertising space on an intangible relation to the debts due from related or 2019. media platform); (IRB) issued Public Ruling No. 4/2019 (the PR) to connected persons. explain the tax treatment of wholly and partly

32 | Asia Tax Bulletin MALAYSIA MALAYSIA MAYER BROWN | 33 The main amendments to the regulations are set Withholding tax exemption Proposed Passive out below.

• A definition of “courier service” has been withdrawn for income from Income and Financial included. MSC status companies Intermediary Tax Act • A formula has been provided to determine the value of taxable services where payment for The Malaysia Digital Economy Corporation Sdn Bhd On 27 August 2019, the House Committee taxable services is made to any machine or a (MDEC) has announced on its website that the On Ways and Means approved House Bill device operated by coins, etc. withholding tax exemption granted under the No. 304 (the bill), also known as the Income Tax (Exemption) (No. 13) Order 2005 JURISDICTION: proposed Passive Income and Financial • The following additional particulars are (P.U.(A)102/2005) (the Order) on the following types Intermediary Tax Act (PIFITA). The bill is the required in the invoices issued by a registered of income received by a non-resident company fourth package of the government’s person for the provision of any taxable service from an approved multimedia super corridor (MSC) comprehensive tax reform program (CTRP). to a customer exempted from payment of status company will be withdrawn: Philippines The bill will be submitted to the House service tax under section 34 of the Service Tax plenary for approval. Key aspects are the Act 2018: • fee for technical advice or technical services; following: • name and address of the customer; • licensing fee in relation to technology • Revamped withholding tax rates for development; and • the customer’s service tax registration number; certain passive income on domestic and and • interest on loans for technology development. foreign taxpayers, as follows:

• the customer’s total amount of service tax that The exemption will only be effective until 31 >> interest: 15% on gross interest is exempted. December 2019 and necessary steps will be taken payments or any other monetary to revoke the Order with effect from 1 January benefit realized from any debt • Only one application for registration is required 2020. instrument; if a taxable person in any prescribed group of taxable persons and services provides two or >> capital gains on unlisted securities: more taxable services specified in different International Tax 15% on the net capital gains realized prescribed groups, and the value of each during the taxable year from the taxable service exceeds the total prescribed Developments disposal of unlisted shares/debts threshold in the First Schedule of the principal instruments; regulations. CAMBODIA >> capital gains on listed securities: • Where a company in a group of companies On 3 September 2019, Cambodia and Malaysia 0.6% (to be reduced by 0.1% every acquires any taxable services specified in items signed an income tax treaty in Cambodia. year until 2024) on the gross selling (a), (b), (c), (d), (f), (g), (h) or (i) of Group G price from the disposal of listed (Professionals) in the First Schedule of the shares/debts securities; and principal regulations from any company within >> tax on initial public offerings will be the same group of companies outside Malaysia, removed. such services will not be considered imported taxable services. • Cash/property dividends received by a non-resident foreign corporation are • Certain amendments have been made to the proposed to be subject to a final list of taxable services provided in the First withholding tax of 15% (or lower treaty Schedule of the principal regulations. rates). • New forms are provided replacing the previous • Improperly accumulated earnings tax Form SST-01, Form SST-02 and Form SST-02A will be changed to 15% on improperly of the principal regulations. accumulated taxable income (exceptions available for certain institutions).

• Expenses incurred relating to exempt income/income not subject to tax will be disallowed.

34 | Asia Tax Bulletin MALAYSIA MALAYSIA MAYER BROWN | 35 • Deductibility of interest expense will be for approved activities will be given for a FATCA restricted to 50% of the interest income earned specific period which is renewable; and by taxpayers which is subject to withholding • existing taxpayers who are currently enjoying tax. To streamline the FATCA Reporting pro- incentives will be given a sunset provision. A cess, the Inland Revenue Authority of • Banks and non-banking financial intermediaries new application for incentives should be made Singapore (“IRAS”) has released amend- performing quasi-banking functions will be after the expiry of the sunset provision if the ments to the FATCA reporting requirements subject to gross receipts tax (GRT) of 5% on the taxpayers meet the qualification criteria. on 10 July 2019. The current practice of type of income listed in the PIFITA. Further, submitting paper based NIL FATCA return GRT of 2% will be imposed on entities carrying and reporting packages via the International Tax JURISDICTION: on life insurance business. International Data Exchange System • Documentary stamp tax (DST) will be abolished Developments (“IDES”) will no longer be possible from 1 for certain instruments. The DST rates will be April 2020. Reporting Singaporean Financial changed for certain documents (such as Singapore Institutions (“SGFIs”) will be required to file LUXEMBOURG property insurance and annuity policies). DST all FATCA returns electronically via IRAS’ on the sale of shares in domestic corporations On 1 January 2020, the Luxembourg - Philippines myTaxPortal using the ‘Submit CRS or will be removed. Social Security Agreement (2015) and its FATCA return’ e-service. This initiative administrative arrangement, signed on 19 January aligns FATCA reporting with the current On 4 September 2019, the House of 2018, will enter into force. The agreement and Common Reporting Standard (“CRS”) and Representatives approved House Bill No. 304 (the arrangement generally apply from 1 January 2020. as a result should lead to efficiencies for bill), also known as the proposed Passive Income The entry into force date was announced by way of both the IRAS and Reporting SGFIs. and Financial Intermediary Tax Act (PIFITA), on publication in the Journal Officiel du Grand-Duché The above changes which are effective from second reading after it was approved by the House de Luxembourg No. A639 and A640 of 27 1 April 2020 applies to all submissions of Committee On Ways and Means on 27 August September 2019. 2019. The bill will have to undergo a third reading new, NIL, amended or void FATCA returns, before it is transmitted to the Senate for approval. including returns relating to Reporting Years 2018 and earlier. Further information on the FATCA reporting requirements via the Tax Reform ‘Submit CRS or FATCA Return’ e-Service are expected to be released by end-September In a press release dated 18 August 2019, the 2019. Department of Finance announced that the House Committee on Ways and Means approved House Variable capital Bill No. 4157 (the bill), also known as the proposed Corporate Income Tax and Incentive Rationalization company (VCC) Act (CITIRA) bill. The bill represents the second package of the government’s comprehensive tax The Second Minister for Finance, Ms reform program. The bill has been submitted for Indranee Rajah, today moved the Variable approval to the House of Representatives. Capital Companies (Miscellaneous • the current corporate income tax rate (for Amendments) Bill 2019 (“the Bill”) for First resident and non-resident corporations) of 30% Reading in Parliament. The Bill amends the will be reduced by 2% every 2 years starting in (a) Variable Capital Companies Act 2018 the year 2021 until it reaches the rate of 20% in (Act 44 of 2018) (“VCC Act”), (b) Income Tax the year 2029; Act (Cap. 134) (“ITA”), (c) Goods and Services Tax Act (Cap. 117A) (“GSTA”); and • preferential tax rates of certain taxpayers will (d) Stamp Duties Act (Cap. 312) (“SDA”). be removed and the prevailing corporate tax rate will be applicable; The VCC Act provides for the incorporation and operation of a new corporate structure, • the fiscal incentives regime provided will be the Variable Capital Company (“VCC”), to revised and amended accordingly. Incentives cater to the needs of investment funds. The introduction of the VCC structure will encourage fund managers in Singapore to

36 | Asia Tax Bulletin PHILIPPINES MAYER BROWN | 37 domicile their investment funds in Singapore and The draft guide sets out the GST treatment for The proposed changes would bring Singapore’s • clarifying the revocation of tax incentive awards help strengthen Singapore’s position as a full-ser- transactions involving virtual currencies or crypto- treatment of digital payment tokens on par with when the conditions of a tax incentive are not vice international fund management centre. It is currencies that function or are intended to function Australia, Japan and the EU. met by an incentive recipient; expected that the VCC framework will be opera- as a medium of exchange (referred to as digital • clarifying that the amendment of the definition tional in 4Q 2019. payment tokens) which will take effect from 1 of qualifying debt securities under Section January 2020. Responses to public The proposed tax treatment, formulated in consul- 13(16) of the Income Tax Act will allow alterna- tation with the industry, recognises the unique IRAS is seeking feedback on this change of GST consultation on draft Income tive set of qualifying conditions for characteristics of VCCs, which combine the advan- treatment from businesses dealing in digital pay- Tax (Amendment) Bill 2019 insurance-linked securities; and tage of a single legal entity at the umbrella VCC ment tokens, including businesses: • clarifying the amendment relating to the fund level, with limited liability and segregation of • buying and selling digital payment tokens; lapsing of the Approved Unit Trust scheme. assets and liabilities at the sub-fund level. In a press release of 15 August 2019, the Ministry of • using digital payment tokens as payment and/ Finance (MOF) issued a summary of responses to The MOF received 46 suggestions, 28 of which Corporate Income Tax (“CIT”). To ease compliance or consideration; the public consultation on the draft Income Tax were accepted and led to revisions being made to burdens, an umbrella VCC only needs to file a (Amendment) Bill 2019 (the draft Bill). The MOF the draft Bill. The proposed legislative changes single CIT return with the Inland Revenue Authority • charging a fee or commission to facilitate the invited the public to provide feedback on the draft would be incorporated into the Income Tax of Singapore, regardless of the number of sub- transfer, purchase or sale of digital payment Bill from 19 June to 10 July 2019. The draft Bill (Amendment) Bill 2019 to be presented to funds that the umbrella VCC may have. Tax tokens; or proposes legislative amendments to effect tax Parliament in the last quarter of 2019. incentives under sections 13R and 13X of the ITA • issuing digital payment tokens, such as through changes announced in Budget 2019 and changes will be extended to VCCs. In the case of an an initial coin offering (ICO). arising from the periodic review of the income tax umbrella VCC, these tax incentives will be granted system, including the following key changes: MOF invites feedback on at the umbrella level. Deductions and allowances The draft guide also provides a table comparing for umbrella VCCs will be applied at the sub-fund the GST treatment of digital payment token trans- • the tax incentive schemes for funds managed proposed changes to GST level for determination of the sub-fund’s chargeable actions before 1 January 2020 and that applicable by Singapore-based fund managers will be Act or exempt income. Where applicable, an umbrella from 1 January 2020. extended and refined; VCC will enjoy start-up or partial tax exemption • a personal income tax rebate of 50% of income The objective of the change is that digital payment In a press release issued on 5 July 2019, the which will be applied once at the umbrella level, tax payable capped at SGD 200 will be granted tokens, such as Bitcoin, will no longer attract goods Ministry of Finance (MOF) invited interested parties regardless of the number of sub-funds the umbrella to all tax resident individuals for the year of and services tax starting January 1, 2020. The to provide feedback on the draft Goods and VCC may have. assessment (YA) 2019; consultation document outlines proposed changes Services Tax (Amendment) Bill 2019 until 26 July Goods and Services Tax (“GST”). GST will apply at to the draft GST (Amendment) Bill 2019 that would • the not ordinarily resident (NOR) scheme will 2019. The proposed amendments are as follows: the sub-fund level, as each sub-fund makes inde- allow a GST exemption for the exchange of digital lapse after YA 2020, which means that the last There are two proposed amendments relating to pendent sale and purchase decisions based on its payment tokens for other digital payment tokens NOR status will be granted in YA 2020 and will the planned introduction of GST on imported respective investment mandate. and would eliminate GST when digital payment expire in YA 2024; and tokens are used to pay for goods and services. services from 1 January 2020 as announced by the Stamp Duty (“SD”). SD treatment will be applied at Under current rules, the sale and transfer of digital • a prescribed deemed expense ratio, set at 25% Minister of Finance in Budget 2018: the sub-fund level. This is because each sub-fund of gross commission income, for tax resident payment tokens are treated as supplies of services • clarifying or improving GST administration on can, through its umbrella VCC, enter into transac- individuals who are self-employed commission subject to GST until January 1, 2020. imported services, such as by clarifying the tions relating to immovable property and shares. agents (i.e. general commission agents, insur- scope of the reverse charge mechanism, and The consultation draft sets out the characteristics ance agents, real estate agents and remisiers) allowing GST group registration for overseas of a digital payment token, which must meet five earning gross annual commission income of up Public consultation on GST business under the overseas vendor registra- requirements. It must be expressed as a unit; must to SGD 50,000 in respect of which there are tion (OVR) regime; and on digital payment tokens be fungible; must lack currency denomination and deductible outgoings or expenses, will be must not be linked to any currency by its issuer; introduced. • introducing an offence for misrepresentation of must be able to be electronically transferred, information in order for the Inland Revenue In addition to the feedback requested by the The key feedback received pertained to the follow- stored, or traded; and must be intended as a Authority of Singapore (IRAS) to enforce GST Ministry of Finance on the legislative amendments ing tax changes: publicly acceptable medium of exchange without on imported services effectively if a customer for Goods and Services Tax (GST) treatment of any substantial restrictions on its use as consider- • increasing the prescribed deemed expense were to provide false information and that digital payment tokens, the Inland Revenue ation. Businesses trading in digital payment tokens ratio, and increasing or removing the revenue information may be used by an overseas Authority of Singapore (IRAS) is conducting a will no longer be required to register for GST threshold, for self-employed commission supplier to determine whether GST is public consultation on the draft GST guide on purposes, even if their annual turnover exceeds $1 agents; chargeable. digital payment tokens (the draft guide) issued on 5 million. July 2019.

38 | Asia Tax Bulletin SINGAPORE SINGAPORE MAYER BROWN | 39 Currently, the sale and transfer of digital payment Capital Companies (Miscellaneous Amendments) International Tax structure; and “perpetual” business activity which is tokens are regarded as supplies of services and are Bill 2019 (the Bill). The MOF received 39 sugges- not limited in time). However, by taking into subject to GST. The proposed amendment seeks tions, 13 of which were accepted and led to Developments account the special requirements prescribed by to: revisions being made to the draft bill. Singapore legislation, the ruling establishes that Singapore REITs are similar in nature to a domestic • exempt from GST the exchange of digital The proposed tax treatment was formulated in ARMENIA OICR. Therefore, no withholding tax applies to payment tokens for fiat currency or other digital consultation with the industry and recognizes the On 8 July 2019, the Armenia - Singapore Income profit distributions made to a Singapore REIT. payment tokens as financial services; and unique characteristics of a VCC, which combines Tax Treaty was signed in Singapore. the advantages of a single legal entity at the • not subject to GST the use of digital payment TURKMENISTAN umbrella VCC fund level with the segregation of tokens as a means of payment for goods and LUXEMBOURG assets and liabilities at the sub-fund level. Salient Singapore signed a double tax treaty with services. aspects of the proposed tax treatment are as The amendments made by the MLI to Singapore’s Turkmenistan on 28 August 2019. It is the first The proposed amendment more accurately reflects follows: tax treaty with Luxembourg took effect on 1 August double tax treaty between the two countries. the characteristics of digital payment tokens, and is 2019. • Corporate income tax: an update of GST rules to ensure that they remain UKRAINE relevant in the digital economy. To align with the >> An umbrella VCC only needs to file a single THE NETHERLANDS On 16 August 2019, Singapore and Ukraine signed principle of open justice and in keeping with corporate income tax return, regardless of The amendments made by the MLI to Singapore’s an amending protocol to update the Singapore international trends, tax proceedings in the High the number of its sub-funds. tax treaty with the Netherlands took effect on 1 - Ukraine Income Tax Treaty, in Kyiv. Court and the Court of Appeal (the Courts) will no July 2019. >> Selected tax incentives under the ITA will longer be heard in private by default. The redaction be extended to the VCC at the umbrella of taxpayers’ names in published decisions of such SWITZERLAND level. judicial proceedings will also be discontinued. According to a press release of 2 August 2019, >> Where applicable, a VCC will enjoy a The proposed definitions are consistent with those published by the Swiss Tax Authorities, the start-up or partial tax exemption once at the in the Income Tax Act for the purposes of appeals Singapore - Switzerland Competent Authority umbrella level for its first 3 years of assess- heard before the Income Tax Board of Review. Agreement on Automatic Exchange of Information ment (determined with reference to the These new definitions are to safeguard the interests entered into force on 1 August 2019. The arrange- date of incorporation of the VCC), regard- of taxpayers lodging appeals to the GST Board of ment specifies the details of what information will less of the number of sub-funds. Review by ensuring that the representatives han- be exchanged and when, as set out in the OECD dling their appeals meet certain professional >> Deductions and allowances for the umbrella Automatic Exchange of Information Agreement. qualifications. VCC will be applied at the sub-fund level for the determination of the sub-fund’s charge- ITALY able or exempt income. The Italian Tax Authorities (ITA) published Ruling Proposed tax framework for Answer No. 302 of 26 August 2019 (the ruling) • Goods and services tax: GST will be applied at providing clarifications on the tax treatment of VCCs the sub-fund level because each sub-fund profit distributions made by resident real estate makes independent sale and purchase deci- funds to real estate investment trusts (REITs) In a press release of 5 August 2019, the Ministry of sions based on its respective investment established in Singapore and operating under the Finance (MOF) issued a summary of responses to mandate. Therefore, if liable, each sub-fund is supervision of the local Monetary Authority. Under public consultations on the proposed bill introduc- required to separately register, charge, account domestic law, profit distributions to foreign under- ing a tax framework for variable capital companies for and file GST returns. takings for collective investment (Organismo di (VCCs). The Variable Capital Companies Act 2018 • Stamp duty: Stamp duty treatment will be investimento collettivo del risparmio, OICR) are (VCC Act) was passed by Parliament on 1 October applied at the sub-fund level in view of the exempt from withholding taxes, provided that the 2018. The VCC Act provides for the incorporation segregation of assets and liabilities at the OICR is resident in a jurisdiction included in the and operation of a new corporate structure for sub-fund level. Italian “white list”. With regard to foreign REITs, the investment funds. In February and March 2019, for exemption is generally not applicable. In such a the purpose of introducing the tax framework for The bill is expected to come into effect in the last case, the ITA makes reference to the guidelines of VCC, the MOF invited the public to provide feed- quarter of 2019. the European Public Real Estate Association (EPRA), back on the proposed changes to the Goods and according to which the essential features of a REIT Services Tax Act (GSTA), Income Tax Act (ITA) and are inherently different from those of an OICR Stamp Duties Act (SDA). The proposed legislative under several aspects (for example, lack of a changes will be incorporated into the Variable pre-determined investment policy; corporate

40 | Asia Tax Bulletin SINGAPORE SINGAPORE MAYER BROWN | 41 Futures transaction tax The abolishment of stamp duty is projected to • once approvals are granted, enterprises and result in revenue loss of about TWD 12 billion per individuals must open foreign exchange special in case of merger year for local governments, but the central govern- bank accounts for transferring funds from ment will allocate special funds to cover all revenue foreign accounts to domestic accounts; shortfalls. On 7 August 2019, the Ministry of Finance • the authorized banks will withhold 8% or 10% of Taiwan issued a press release to clarify from the special bank accounts owned by the that in the case of a merger, the surviving Law on repatriation of taxpayers and pay the withholding tax to the company (domestic or foreign) or a new tax authorities; company established after a merger is not offshore funds JURISDICTION: liable for futures transactions tax on the • at least 70% of the funds after tax must be invested in certain industries, venture capital futures commodities held by the merged Following the legislation of the “Statute for funds or private equity funds with advance company prior to the merger because the Management and Taxation of Offshore Fund approval from the Ministry of Economic Affairs; futures commodities are not actually traded Repatriation”, the Cabinet has announced that the Taiwan during a merger. This is consistent with the Statute is effective from 15 August 2019, and • if the investment is completed within 2 years tax treatment of transferred securities, implemented from that date. Enterprises and (extendable for another 2 years) and the which are also not subject to securities individuals who file an application to the competent holding period is more than 4 years, tax author- transaction tax in the case of a merger. authority between 15 August 2019 and 14 August ities will grant a tax refund of 4% or 5% to the 2020 can apply a preferential tax rate of 8% to special bank accounts owned by taxpayers Abolishment of Stamp repatriated funds that are remitted into foreign based on a certification issued by the Ministry exchange special bank accounts within the desig- of Economic Affairs; nated period. For those who file an application Duty Act • no more than 25% of the funds after tax may be between 15 August 2020 and 14 August 2021, the used for portfolio financial investment in applicable preferential tax rate is 10%. On 12 September 2019, the Executive Yuan accordance with the rules of the Financial passed a proposal for the abolishment of To facilitate taxpayers in transferring offshore funds Supervisory Commission; the Stamp Duty Act as part of government to domestic bank accounts in a legitimate way, • no more than 5% of the funds after tax are free efforts to reform the tax system and pre- three procedural rules have been published: vent double taxation. The proposal has for any use except for the purchase of real been forwarded to the Legislature for • “Rules for Management and Taxation of property, real estate investment trusts and real deliberation and completion of the legisla- Offshore Fund Repatriation” under the supervi- estate asset trusts; sion of the Ministry of Finance; tive procedure for abolishment. • if any investment or the use of funds do not Currently four types of documents are • “Rules for Financial Investment Management of comply with the rules or the funds are not subject to stamp duty, i.e. specified mone- Offshore Fund Repatriation” under the supervi- deposited in special bank accounts, they will be tary receipts, contracts to perform a sion of the Financial Supervisory Commission; subject to the original tax rate of 20%, i.e. the specific job or task, contracts for sale of and authorized banks will withhold additional tax of 10% or 12% from the special bank accounts; moveable property, and contracts for sale, • “Rules for Investment Industries of Offshore and exchange or subdivision of real property. Fund Repatriation” under the supervision of the Since commercial deals are usually com- Ministry of Economic Affairs. • any portion of funds not being used and any prised of different elements, e.g. a contract funds transferred after investment must be kept The following summarise the application, manage- for sale of moveable property is also a in the special bank accounts for 5 years. From ment, and use of offshore fund repatriation under monetary receipt, disputes may arise when the 6th year, one third of the amounts may be the three procedural rules: the tax authorities and the taxpayers have withdrawn. different views on the tax liability. • applications by enterprises and individuals are All offshore funds deposited into the special back Cumbersome procedures for checking the filed with the tax authorities for a review of their accounts will become fully available for use in the tax liability have burdened taxpayers and qualification and taxation of income; brought about high auditing and collection 8th year after repatriation, thereby meeting the costs for the tax administration. Levying the • the source of funds will be investigated by statute of limitation of 7 years under the tax law. stamp duty also leads to double taxation in authorized banks for anti-money laundering many cases, e.g. VAT may also apply. and financing of terrorism; Elimination of stamp duty will benefit not only businesses and economic activities but the general public as well.

42 | Asia Tax Bulletin TAIWAN MAYER BROWN | 43 VAT on foreign • the taxpayer withdraws the tax-free time technology will also be eligible for special deposit before the due date. deduction. Moreover, the BOI will also upgrade its incentives scheme with a view to encourag- e-commerce operators Notification No. 352 provides that the following ing the industry to be actively engaged in conditions must be met by a taxpayer aged 55 or science, technology, engineering and mathe- It has been reported that the previously above who wishes to qualify for the tax exemption matics (STEM) training. drafted bill on value added tax (VAT) on granted under clause 2(69) of Ministerial Regulation foreign e-commerce operators will be No. 126 relating to interest income received from • Investments in automation systems will be introduced in 2020. The tax bill is expected fixed deposits up to THB 30,000 in a tax year. If the eligible for double deduction. to be presented to the parliament for taxpayer does not satisfy the conditions, no exemp- JURISDICTION: • An investment steering committee will be set approval later this year. tion is granted and a withholding tax of 15% will be up to coordinate the consideration and facilita- withheld by the bank and remitted to the Revenue tion of the investment projects, especially those department. The conditions are: VAT rate involving large investments. Thailand • the taxpayer must keep the fixed deposit for In addition, the government aims to reduce con- more than 1 year; The Finance Minister announced that the straints faced by foreign investors, especially in the Cabinet has agreed to retain the current • the taxpayer must notify the bank of, and targeted industries. Further facilitation measures value added tax (VAT) rate at 7% for present, his/her citizen ID number or taxpayer will be taken such as the extension of “smart visa” another year until September 2020 due to ID number for verification purposes; and to enhance the pool of foreign talents in Thailand. the slowing down of the country’s economic growth. • the taxpayer must complete the information and certification form provided in Notification No. 352 and submit it to the bank for inspec- Tax exemption on tion purposes. interest income New relocation package On 26 August 2019, the Director-General of Revenue issued Notification Nos. 351 and incentive 352 providing additional personal income tax compliance requirements relating to According to a press release of 9 September 2019 interest income derived from bank depos- issued by the Board of Investment (BOI), the its. Notification No. 351 provides that the Cabinet recently approved a proposed relocation following conditions must be met if a package incentive referred to as “Thailand Plus” taxpayer wishes to qualify for the tax with a view to attracting more foreign investment exemption granted under Royal Decree No. into the country, particularly expediting invest- 664 relating to interest income received on ments from companies seeking to relocate as a tax-free time deposits: result of the ongoing trade war. The features of the proposed Thailand Plus package are set out below. • the taxpayer can only have one tax-free time deposit account; • Companies with investment projects amounting to at least THB 1 billion in the identified activi- • the taxpayer must notify the bank of, ties will be entitled to a reduction of 50% of the and present, his/her citizen ID number corporate tax rate for a period of 5 years or taxpayer ID number for verification provided that the application is submitted to purposes. BOI by the end of year 2020 and the actual A withholding tax of 15% will be withheld investment is made by December 2021. by the bank and remitted to the Revenue • Employers will be entitled to a special deduc- department if: tion for training expenses relating to advanced • the taxpayer does not comply with the technology endorsed by the Ministry of Higher above conditions; Education, Science, Research and Innovation. Expenses incurred in hiring new highly skilled • the taxpayer does not comply with the manpower in the fields of science and rules for tax-free time deposits; or

44 | Asia Tax Bulletin THAILAND MAYER BROWN | 45 Taxation of foreign The letter states that where a company pays Tax treatment of liquidation business trip allowances to domestic experts who workers do not have a written employment contract with of assets by foreign the company, the company is required to withhold representative office On 19 July 2019, the Department of personal income tax (PIT) at 10% from the business Taxation of Hanoi City issued Official Letter trip allowances paid in accordance with article 25, On 13 August 2019, the Department of Taxation of No. 56770/CT-TTHT to clarify the personal clause 1, point i of Circular No. 111/2013/TT-BTC Ha Noi City issued Official Letter No. 64070/ income tax (PIT) policy applicable to foreign (the circular). CT-TTHT (the letter) providing clarification on the workers, as follows: If allowances are paid to foreign experts who do JURISDICTION: tax treatment of the liquidation of assets by a not reside in Vietnam, the company is required to • According to article 6, clause 1, point a foreign representative office. The letter states that, withhold 20% PIT from the payments made in of Circular No. 111/2013/TT-BTC, where according to clause 3, article 5 of Circular No. accordance with article 18, clause 1 of the circular. a foreign worker resides in Vietnam for 219/2013/TT-BTC and clause 1, article 2 of Circular Vietnam at least 183 days in any period of 12 Foreign experts who carry out official development No. 78/2014/TT-BTC, non-business organizations consecutive months, he will be assistance (ODA) projects will be exempt from PIT, will be exempt from value added tax (VAT) and considered a resident in Vietnam. In this provided that the Decision No. 119/2009/QD-TTg enterprise income tax (EIT) on the liquidation of regard, the foreign worker’s first tax regulations are met. assets. year is not determined according to the Accordingly, a foreign representative office without calendar year but is calculated based any business activities in Vietnam will be exempt on the 12 consecutive months from the Transfer of shares from declaring and paying VAT and EIT on the first day of his arrival in Vietnam. From liquidation of assets. the second tax year onwards, the tax On 6 August 2019, the General Department of years will be calculated on a calendar- Taxation issued Official Letter No. 3082/TCT- As such, the foreign representative office will not year basis. DNNCN (the letter) clarifying the personal income be required to buy separate invoices issued by the tax (PIT) policy with respect to the transfer of shares tax authorities to be provided to the acquirer of the • The deadline for submitting a PIT return by an individual. assets under clause 1, article 13 of Circular No. for the first tax year is the 90th day from 39/2014/TT-BTC. the end of the period of 12 consecutive The letter states that income from the transfer of months. The PIT payable will be shares by an individual must be declared and the calculated based on the progressive tax resulting PIT paid in accordance with the Guidance on provisions rates. regulations on securities transfers.

• If the foreign worker still resides in With respect to the transfer of listed shares, the On 8 August 2019, the Ministry of Finance issued Vietnam for the full 183 days in the share transferor is required to pay PIT at a rate of Circular No. 48/2019 (the circular) providing calendar year for the second tax year, 0.1% based on the price of the share transfer in guidance on several types of provisions. The the progressive tax rates will continue accordance with article 16 of Circular No. 92/2015/ circular will enter into force on 10 October 2019 to be applicable. The PIT payable will TT-BTC (the circular). and apply from fiscal year 2019 onwards. It replaces be determined according to article 26, Circular 228/2009/TT-BTC and its amendments. With respect to the transfer of unlisted shares, the clause 2, point e.2 of Circular No. applicable price of the share transfer for the • The guidance on provisions is the basis for 111/2013/ T T-BTC. purpose of PIT calculation in accordance with determining deductible expenses when article 16 of the circular is: determining income subject to corporate income tax according to the regulations. The Business trip allowances • the price shown in the share transfer contract; provisions for purposes of preparing financial paid to experts • the actual price of the share transfer; or statements are made in accordance with accounting regulations. • the price shown in the accounting records. On 9 August 2019, the Department of • The circular applies to enterprises that are Taxation of Ha Noi City issued Official established, conducting production and Letter No. 63381/CT-TTHT (the letter) business activities, under the provisions of clarifying the withholding of personal Vietnamese law (including foreign credit income tax on business trip allowances paid institutions and bank branches established in to domestic and foreign experts. Vietnam, with the exception of provisions for credit risks).

46 | Asia Tax Bulletin VIETNAM MAYER BROWN | 47 • The subject of provisioning and the formula for an industrial zone (the area where tax incentives • handling and lifting; and premiums are paid by the State budget is VND the level of provisioning for the following items: are made available), the company may choose to: 1.49 million per month; and • loading and unloading performed at port areas. >> provision for devaluation of inventories • enjoy the incentives in accordance with the • the salary on which HI premiums are based of Further, related expenses such as expenses of (including raw materials, materials, tools, initial project; or health insurance participants whose part of HI documents, surrendered bill of lading, sealing devices, goods and goods purchased on premiums is paid by the State budget • apply for a tax exemption or tax reduction for a charges and demurrage and/or detention charges transit, goods sent for sale, goods of (students, near-poor households) and period applicable to new investment projects in are exempted from VAT declaration and payment tax-guarantee warehouses and finished household HI participants is VND 1.49 million the same industrial zone, provided that according to Point d, Clause 7 Article 5 of the products); per month. Circular if the expenses are collected and/or paid • a project meets any of the three criteria on >> provision for loss of investments (including on behalf of the foreign party. expansion investment as regulated under listed and traded on domestic stock clause 4, article 10 of Circular No. 96/2015/ However, if the provision of such related services is Withholding policy markets and unlisted domestic securities); TT-BTC. the source of revenue of the company, they shall be applicable to online >> provisions for bad debts (amounts entitled to apply VAT at a rate of 0% if the If the company opts for a tax exemption or tax receivable including the debts lent by the conditions regulated in Article 9 of Circular No. advertising services reduction, the additional income from the enterprises and the bonds owned by the 219/2013/TT-BTC are met. Otherwise, the provision expansion investment will be exempt from tax for 2 enterprises which is not registered for of such related services shall be subject to VAT at a years, after which a 50% reduction of tax payable On 21 June 2019, the General Department of trading on the securities market yet). rate of 10%. for 4 subsequent years will apply pursuant to article Taxation issued Official Letter No. 2501/TCT-CS Separate provisioning levels are provided 6 of Circular No. 151/2014/TT-BTC. (the letter) providing clarification on the for enterprises engaged in Social and health insurance withholding tax policy applicable to online telecommunications services and retailing; The duration of the tax exemption or reduction will advertising services provided by foreign entities. and be calculated from the year in which the expansion contributions increased The letter clarifies that, pursuant to Circular No. project is completed and its operation commences >> provision for warranty of products, goods, 103/2014/TT-BTC (the circular), where foreign with taxable income being generated. If no taxable services and construction works. According to Decree No.38/2019/ND-CP issued on entities (such as Facebook, Google and YouTube) income is earned within the first 3 years from the 9 May 2019, the basic monthly salary is increased to provide advertising services to a local company, the • Enterprises are not allowed to make provisions first year in which the expansion project generates VND 1.49 million effective 1 July 2019. As such, the company is required to withhold and pay for foreign investments. Provisions carried revenue, the duration of the exemption or Ho Chi Minh city social insurance agency issued withholding tax on behalf of the foreign entities forward will be reversed and recorded as a reduction will be calculated from the fourth year in Announcement No. 1222/TB-BNXH dated 5 June even though the foreign entities do not have any decrease in expenses at the time of preparing which revenue is generated by the project pursuant 2019 which provides that the payment of social head office situated in Vietnam. the financial statements 2019. to clause 4, article 10 of Circular No. 96/2015/ insurance (SI) contributions and health insurance TT-BTC. In addition, the foreign entities are also liable to • Other specialized industries, such as insurance, (HI) premiums based on the basic monthly salary is value added tax (VAT) and enterprise income tax in securities, capital investment, debt trading or increased accordingly effective 1 July 2019. The Vietnam. The tax calculation will be determined in retail are also covered in the circular, but may Clarification on VAT details of the adjustments are as follows: accordance with articles 12 and 13 of the circular. also be subject to separate guidance issued by • in respect of cadres, public officials, public the Ministry of Finance. treatment for certain The company may use the documents showing the employees and employees whose salary scales payment of VAT on behalf of the foreign parties to services provided for foreign are determined by the state, their monthly declare the input VAT deduction as provided under Tax incentives for enterprises salary level on which SI contributions are based clause 1 of article 15 of Circular No. 219/2013/ is the total wage coefficient multiplied by the TT-BTC. investments in expansion of new basic wage level of VND 1.49 million per On 25 July 2019, the Department of Taxation of month; projects Hanoi issued official letter 58604/CT-TTHT International Tax clarifying that where a company provides package • the maximum salary on which compulsory SI On 3 July 2019, the Department of Taxation of Ha forwarding services for a foreign enterprise from an contributions are based is VND 29.8 million (i.e. Developments Noi City issued Official Letter No. 52637/CT-TTHT overseas port to Vietnam and vice versa, the 20 times higher than the basic salary level); (the letter) providing clarification on the enterprise following services shall be entitled to a VAT rate of • the maximum monthly income on which CROATIA income tax (EIT) incentives granted for investments 0% if the conditions regulated in Point d, Clause 2 optional SI contributions are based is VND 29.8 On 23 May 2019, the Croatia - Vietnam Income Tax made in expansion of projects. Article 9 of Circular No. 219/2013/TT-BTC (the million (i.e. 20 times higher than the basic salary Treaty entered into force. The treaty generally Circular) are met: level); The letter states that where a company increases its applies from 1 January 2020. capital to invest in the development and expansion • forwarding; • the salary on which HI premiums are based of of the production scale of an investment project in • checking and counting; health insurance participants whose HI

48 | Asia Tax Bulletin VIETNAM VIETNAM MAYER BROWN | 49 About Mayer Brown

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50 | Asia Tax Bulletin MAYER BROWN | 51 Mayer Brown is a distinctively global law firm, uniquely positioned to advise the world’s leading companies and financial institutions on their most complex deals and disputes. With extensive reach across four continents, we are the only integrated law firm in the world with approximately 200 lawyers in each of the world’s three largest financial centers—New York, London and Hong Kong—the backbone of the global economy. We have deep experience in high-stakes litigation and complex transactions across industry sectors, including our signature strength, the global financial services industry. Our diverse teams of lawyers are recognized by our clients as strategic partners with deep commercial instincts and a commitment to creatively anticipating their needs and delivering excellence in everything we do. Our “one-firm” culture—seamless and integrated across all practices and regions—ensures that our clients receive the best of our knowledge and experience. Please visit mayerbrown.com for comprehensive contact information for all Mayer Brown offices. This Mayer Brown publication provides information and comments on legal issues and developments of interest to our clients and friends. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek legal advice before taking any action with respect to the matters discussed herein. Mayer Brown is a global services provider comprising associated legal practices that are separate entities, including Mayer Brown LLP (Illinois, USA), Mayer Brown International LLP (England), Mayer Brown (a Hong Kong partnership) and Tauil & Chequer Advogados (a Brazilian law partnership) (collectively the “Mayer Brown Practices”) and non-legal service providers, which provide consultancy services (the “Mayer Brown Consultancies”). The Mayer Brown Practices and Mayer Brown Consultancies are established in various jurisdictions and may be a legal person or a partnership. Details of the individual Mayer Brown Practices and Mayer Brown Consultancies can be found in the Legal Notices section of our website. “Mayer Brown” and the Mayer Brown logo are the trademarks of Mayer Brown. © 2019 Mayer Brown. All rights reserved. Attorney Advertising. Prior results do not guarantee a similar outcome. Americas | Asia | Europe | Middle East mayerbrown.com