Post on 28-Oct-2021
transcript
32nd Annual Asia Pacific Tax
Conference
10 – 11 November 2016
JW Marriott Hotel Hong Kong
Alternative A: Source country
taxation, evolving PE rules and
unilateral measures
Chair: Gary Sprague, Palo Alto
John Walker, Australia
Sanjiv Malhotra, India
Yi Lyn Tan, Malaysia
James Choo, Singapore
Sai Ree Yun, Yulchon LLC, South Korea
Jane Tang, China
Ponti Partogi, Indonesia
© 2016 Baker & McKenzie
Mechanisms for Enhancing Source Based
Taxation
‒ Treaty PE threshold
Dependent person “the principal role” standard
Service PE
Limits on preparatory or auxiliary exceptions
Profit attribution framework
‒ Withholding taxes
Rents and royalties
Technical or other services
Software
UN paper
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Mechanisms for Enhancing Source Based
Taxation
‒ Transfer pricing
Accurate delineation of the contract
Risk assumption, management and control
Marketing intangibles
Transactional profit split method
Use (and misuse) of Value Chain Analysis
Other theories
Market premium
Location specific advantages
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Mechanisms for Enhancing Source Based
Taxation
‒ Deemed PE
MAAL
DPT
DPT2
Attribution of royalty to PE
‒ Capital gains
Indirect stock transfer rules
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Mechanisms for Enhancing Source Based
Taxation
‒ Market access conditions
Indonesia OTT Regulation requiring PE
Italy virtual PE proposal
‒ Anti-haven measures
Higher WHT rates for transactions with noncooperative tax
jurisdictions
Disallowance of royalty deduction for payments to havens
‒ Task Force on the Digital Economy
Phase one – VAT
Phase two - ?
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Mechanisms for Enhancing Source Based
Taxation
‒ Business model targeted withholding tax
India equalization levy
‒ Treaty disregard
LOB / “a principal purpose” condition
Anti-abuse justification
Definitional justification
‒ Deduction disallowance
Intercompany service fees
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Policy Justifications
‒ Existence of market creates value
‒ “Fair share” of tax
‒ “Level playing field” for domestic sellers
‒ Nonreciprocal trade flows
‒ Prevent corporate tax base erosion
‒ Exchange of user data creates value
‒ Stamp out nowhere taxed income structures
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India
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India
‒ Has been a strong advocate of “source-based” taxation
‒ Transfer Pricing
IRA advocates use of locational savings / locational specific
advantages
IRA has been making large adjustments on account of
marketing intangibles
‒ Royalties / fee for technical services
Disputes on definition of royalty and fee for technical services
Matters pending at the Federal court
Amendments made to the domestic law to increase the scope
of royalty
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India
‒ Permanent Establishment
Indian DTAAs have the concept of Service PEs
Secondment of personnel may create PE in India
‒ Unilateral measures – Equalization Levy
IRA views such a levy to be consistent with BEPS Action 1
Value created by getting access to data of the Indian market
not getting taxed
‒ India working closely at UN on software related taxation
‒ India reserves the right to impose higher withholding taxes
for transactions with “notified jurisdictions”
‒ Rules on indirect transfer tax enacted retrospectively
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China
© 2016 Baker & McKenzie
Treaty PE Taxation
‒ Stepped up enforcement of service PE provision
Income tax and turnover tax on PE
Revenue and profit determined based on deemed profit rate and
split of onshore / offshore services
Reject actual attributable profit arguments on basis of no
accurate and proper books and records
Individual income tax on employees
Remuneration deemed to be borne by PE, loses treaty
exemption
‒ General anti-avoidance rule and procedural guidance can
achieve anti-fragmentation of complementary functions
forming part of a cohesive business
© 2016 Baker & McKenzie
Withholding Tax
‒ Technical service fees vs. royalties
‒ Rent vs. royalties
‒ Deemed…
Dividend for long term interest-free loan
Interest for guarantee fees
Royalty for use of IP
Rental for provision of free equipment?
‒ Can impose withholding tax with late payment surcharges
and not allow corresponding deduction
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Withholding Tax (cont’d)
‒ Domestic interpretation of “beneficial ownership”
requirement for dividends, interest and royalties
Economic substance and not a conduit
‒ “Beneficial ownership” requirement effectively extended to
capital gains exemption
‒ Domestic interpretation of conditions for capital gains
exemption
Direct and indirect shareholding covers the entire group
No expressed look back period for 25% shareholding means
unlimited look back period
‒ Affects ability to rely on treaty safe harbor for indirect
transfers 15
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Indirect Transfers
‒ Indirect transfers of “Chinese taxable property”
Chinese company, Chinese real estate, Chinese taxable
establishment
‒ Specific anti-avoidance rules, taxability depends on
“reasonable commercial purpose”
‒ Blacklist
Target company with insufficient economic substance deriving
vast majority of value, assets and revenue directly or
indirectly from China
‒ Safe harbor
Public trading, treaty exemption, intragroup restructuring
‒ Voluntary reporting of indirect transfers 16
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Deduction Disallowance / Anti-haven Measures
‒ Non-deductible outbound payments to affiliates
All payments to affiliate with no economic substance
Service fees that give China no economic benefit
Royalties to affiliate with no economic ownership of
intangibles
Royalties to listed affiliate for incidental benefits from listing
activities
‒ Transfer pricing rule or deduction rule?
‒ Impacts group IP structures, group expense recharging
structures, headquarters management fees charge-out
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Transfer Pricing
‒ Marketing intangibles from brand-building activities
‒ Location specific advantages
Location savings - Existence of talents and infrastructure that
lowers cost
Market premium - Existence of market that gives
disproportionately high return
Intrinsic value of in-country functions?
‒ Emphasize value chain analysis
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Policy Justifications
‒ Protecting China’s taxation rights
‒ Combating international tax evasion and avoidance
‒ Preventing corporate base erosion
‒ Aligning tax with economic activities
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Malaysia
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Amendments to “Royalty” Definition
‒ Finance Bill 2016 (“Bill”): proposed amendment to the
“royalty” definition to include consideration for the use of, or
the right to use software and other like property or rights
‒ Issues:
Conflict with the Guidelines on Taxation of E-Commerce,
which states that payments for purchase of a product are not
royalties
Current application of the rights-based approach by the
Malaysian courts
Scope of “software” – does it include SaaS products?
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Deemed Derivation Rules for Services
‒ Special classes of income (in section 4A), including service
fees, are subject to withholding tax if derived from Malaysia
‒ Current position under Section 15A : S4A Income shall be
deemed derived from Malaysia if -
responsibility for the payment lies with the government, state
government, local authority or a person who is resident in
Malaysia; or
the payment is charged as an outgoing or expense in the
accounts of a business carried on in Malaysia,
provided that this section shall apply to the amount
attributable to services which are performed in Malaysia.
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Deemed Derivation Rules for Services (cont’d)
‒ Proposed amendment to remove the proviso which limits
the deemed derivation provisions to only services which are
performed in Malaysia
‒ Issues:
Service fees paid by Malaysian resident to a non-resident
deemed to be derived from Malaysia even if services are
performed outside Malaysia?
Can the non-resident rely on the business profits article in
double tax agreement?
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Proposal on New Tax for Online Businesses
‒ Various announcements by the Ministry of Finance (“MOF”)
on the intention to tax “online businesses”
‒ Special digital economy committee has been set up within
the IRB to evaluate the current income tax regime and put
forward recommendations
‒ No indication thus far on changes to the GST regime to
implement the BEPS Action 1 recommendations
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Singapore
© 2016 Baker & McKenzie
General Remarks
‒ Singapore is in a unique position because it has to “balance
both sides”
‒ Policy interests in protecting Singapore’s tax base:
Ensuring “fair share” of taxation
BEPS Associate
Maintaining an open economy and encouraging cross border
investment
‒ Typical regional principal in an APAC supply / value chain
Not as aggressive on source-based taxation compared to
jurisdictions with large markets
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Mechanisms for Enhancing Source Based
Taxation
‒ Withholding taxes
Rent: 15%
Royalties / license fee: 10%
payments for the right to use moveable property
payments for the use of or the right to use scientific,
technical, industrial or commercial knowledge or
information
Service fee: 17%
applies generally only to services provided in Singapore
(subject to other conditions)
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Mechanisms for Enhancing Source Based
Taxation
‒ Withholding taxes
Software – rights based approach adopted
characterisation of payments depend on whether payer
acquired a “copyrighted article” or “copyright right”
copyright right: payer is allowed to commercially exploit
the copyright
copyrighted article: rights acquired are limited to those
necessary to enable the payer to operate the software
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Mechanisms for Enhancing Source Based
Taxation
‒ Treaty PE threshold
Some existing treaties have Service PE thresholds
Practical issues in interpreting this threshold creates uncertainty
Method in counting time in Singapore
Subcontracting of work to a local party counted?
Singapore has not committed to implementing BEPS Action 7 which
introduced the concept of “the principal role” standard etc
Singapore is currently part of a working group that is developing a
multilateral instrument for incorporating BEPS measures into existing
bilateral treaties to counter treaty abuse. The changes to the definition
of permanent establishment will likely be among the changes proposed
for inclusion in the multilateral instrument. It is unclear whether
Singapore will be a signatory to the multilateral instrument.
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Mechanisms for Enhancing Source Based
Taxation
‒ Treaty abuse
Domestic general anti-avoidance rule available
Anti-abuse provision in some treaties – E.g., PPT in new
France treaty
Limitation of relief / benefit clause in double tax treaties which
requires that the Singapore resident taxpayer receives the
payment in Singapore in order to enjoy treaty benefits
Singapore has committed to implementing BEPS Action 6 and
confirmed that it does not condone treaty shopping
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Mechanisms for Enhancing Source Based
Taxation
‒ Transfer pricing
Singapore follows current OECD’s guidelines for transfer pricing
Historically not aggressive but evidence points to a changing trend
Many companies now under TP audits, including those that
have significant substance and have tax incentives
Audits both on incomings and outgoings to ensure integrity of
tax base
Uncertain whether Singapore will adopt measures to implement the
recommendations made by the OECD in BEPS Actions 8, 9 and 10
– This is not a minimum standard that Singapore signed up for.
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Policy Considerations
‒ IRAS is aware that BEPS is being used by some jurisdictions to
strengthen source-based taxation in source states
‒ As a principal location, likely that Singapore will face challenges from
market jurisdictions
‒ Actions taken by Singapore
improve its treaty network
ramp up transfer pricing capabilities
strengthen competent authority’s capabilities
‒ Objectives for Singapore
committed to implementing minimum standards as a BEPS associate and is
on board in stamping out “nowhere taxed income”
also supports tax planning by MNCs in a fair and appropriate manner – the
“fair share of tax” argument
Protect Singapore’s tax base from overly aggressive foreign tax authorities
while ensuring that businesses do not suffer double taxation costs
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Indonesia
© 2016 Baker & McKenzie
Mechanisms for enhancing source based
taxation
Indonesia ‒ There is still no (legal/tax) specific regulation for digital economy groups
‒ Draft OTT Regulation requiring the registration of PE
‒ The Income Tax Law describes that a PE contains the concept of the
existence of place of business, namely facilities that may be in the form
of computer or automated equipment owned, leased or used by
electronic transaction operator to conduct business activities
through internet.
‒ In April 2016, the Indonesian tax authority started to audit 4 big digital
economy companies and deemed that these companies to have a PE in
Indonesia.
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South Korea
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‒ Domestic PE rules
Already reflects most BEPS recommendations in Action 7
(e.g., “principal role” standard)
‒ Recent trend: Aggressive taxation based on finding of PE
by the Supreme Court (Holiday Case in July 2016)
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‒ Withholding tax (I)
Proposed bill (2016): to strengthen taxation of multilateral IT
companies under domestic corporate income tax law
Expands the scope of Korean source royalties by including
royalties arising from “overseas computer program rights” in
Korean source income
Should not affect treaty jurisdictions: Under Korean law, treaty
law supersedes domestic law
Caveat: if the bill is passed, Korea may seek to amend
treaties in order to give effect to the revised domestic rules
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‒ Withholding tax (II)
Supreme Court decisions (2014 – 2016) on royalties arising
from patents
Common facts
Korean company paid royalties to U.S. company for use of U.S.
company’s U.S. patents in Korea (no registration in Korea)
Korean company withheld 16.5% under Korea-U.S. Tax Treaty
Holding: Royalties are not Korean source income
Domestic law: patents registered abroad and used for
manufacture/sale in Korea are considered to have been used in
Korea without regard to whether they are registered in Korea
Korea-U.S. Tax Treaty: Korean source income “only if paid for
the use of, or the right to use, such property in Korea”
Rationale: Patents not registered in Korea are not patents for
Korean tax purposes → no royalty at all?
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‒ Legislative action relating to Digital Economy
Amendment of Korean VAT Law (in effect since July 2015)
The amendments benchmarked BEPS Action 1
Non-residents/foreign companies engaged in e-commerce with
customers in Korea: required to effect simplified online VAT
registration system
E-commerce is defined to include services such as providing
games, sounds, video files, software, etc.
VAT registration must be made even if no PE in Korea
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‒ Disallowance of deduction for intercompany service fees
Conditions for deductibility under domestic law
Execution of an agreement in advance
Actual provision of services
Expectation of additional revenues or cost savings
Service fees must be arm’s length prices
Extremely detailed and objective evidence required by Korean
tax authorities to meet the above conditions
Virtually no taxpayer has successfully met the conditions at the
audit and pre-trial appeal levels
Korean courts may require relatively lower standards
A court has recently accepted the evidence proffered by the
taxpayer at least in one case (Busan Regional Court Decision
2013Guhap21114 dated July 11, 2014)
Alternative A: Source country
taxation, evolving PE rules and
unilateral measures
Chair: Gary Sprague, Palo Alto
John Walker, Australia
Sanjiv Malhotra, India
Yi Lyn Tan, Malaysia
James Choo, Singapore
Sai Ree Yun, Yulchon LLC, South Korea
Jane Tang, China
Ponti Partogi, Indonesia