Asia Newsletter
January 2012
The information below is produced by Loyens & Loeff in Singapore. It is designed to alert those (interested in) doing business in the
Asian region to recent developments in the region. Such developments are discussed in brief terms and are based on generally available
information. The materials contained in this publication should not be regarded as a substitute for appropriate detailed professional
advice. The information below was assembled based on information available as at 31 December 2011.
1LOYENS & LOEFF Asia Newsletter – January 2012
Loyens & Loeff will open in Hong Kong!
• We are proud to announce that Loyens & Loeff has opened a
new office in Hong Kong as of 15 January 2012. The Hong
Kong office advises international corporations on international
tax (re)structurings, investment funds, investment management,
M&A, financing and wealth management. Loyens & Loeff has
focused on China for many years, particularly on Chinese
outbound investments and transactions. Asian investors can
benefit from the attractive Benelux tax climate, while being
protected by an excellent network of bilateral investment treaties.
Being present in the middle of the dynamic Asian market, we
can act on developments proactively and promptly.
• The office is located on 8 Wyndham Street and will be led by
two senior partners, Carola van den Bruinhorst, tax adviser
and Thierry Lohest, attorney who in the course of 2012 will
join Carola in Hong Kong. The full address details are shown
on the back cover of this newsletter.
200 Customs administrations to classify international trade. It
marks an important step towards the realisation of the ASEAN
Economic Community by 2015.
• The harmonised tariff nomenclature can be likened to a “trade
dictionary” used by traders and ASEAN Customs administrations
to classify traded goods. All goods are identified by a unique
eight-digit code, with the tariff rates tagged to them, by individual
ASEAN member countries. With the adoption of a common
tariff nomenclature in ASEAN, traders benefit from a unified and
consistent way of classifying goods.
• From the tariff classification codes, traders will also be able to
determine whether the goods are eligible for preferential tariffs
under the different free trade agreements (FTAs). At the national
and regional levels, the AHTN serves as the basis for negotiations
on FTAs and customs treaties, as well as the collection of trade
statistics. It is also used by customs administrations to monitor
the movement of goods, for purposes such as food security,
public health, environmental protection and counter-terrorism.
ChinaFirst thin capitalisation case
• In China’s first thin capitalization case, a tax bureau of the State
Administration of Taxation (SAT) in Shanxi Province made an
adjustment of more than CNY 30 million (about $4.72 million)
in enterprise income tax on a Chinese subsidiary of an
anonymous Japanese multinational company, according to a
5 December China Taxation News report.
• The tax bureau received a net EIT payment of more than CNY
11 million (about $1.73 million) on November 25. (The EIT was
reduced under various preferential tax treatments.) During
analyses of taxpayers’ tax data and information in 2011, the
tax bureau reportedly noticed that the Chinese subsidiary
maintained abnormally high debt-to-asset ratios, reaching
91.26% in 2007, 87.32% in 2008, and 93.86% in 2009. The
Chinese taxpayer reportedly accrued and paid considerable
interest expenses and guarantee fees abroad, claiming
deductions totalling more than CNY 22 million (about $3.46
million) for interest expenses during those three years.
ASEANHarmonised tariff codes
• It was reported on 30 November 2011 that the customs
administrations of ASEAN member countries will implement
a new set of tariff codes for the classification of all goods
traded within and outside the region from 2012. The ASEAN
Harmonised Tariff Nomenclature (AHTN) 2012 is a common
tariff classification system of ASEAN. The AHTN is also an
initiative by ASEAN member countries to provide a transparent
and uniform goods classification system to facilitate trade in
ASEAN. It is based on the latest version of the Harmonised
Commodity Description and Coding System (HS) developed by
the World Customs Organisation (WCO).
• To incorporate the requirements of the ASEAN member states,
the AHTN 2012 saw an increase in the number of tariff lines
from 8,300 to 9,558. Most increases came from products related
to fishery, machinery and vehicles. The AHTN 2012 was
endorsed by the ASEAN Directors-General of Customs at their
20th annual meeting held in June this year in Myanmar.
According to the statement, the WCO HS is used by more than
2LOYENS & LOEFF Asia Newsletter – January 2012
• While continuing to report net operating losses since its inception
in 2003, the Chinese company received capital increases
(originally denominated in U.S. dollars) of $1 million in 2007
and $13.77 million in 2010 from the Japanese parent company,
which had a total investment of $54.7 million in the Chinese
company. The Chinese company also obtained $55 million
from a foreign bank loan secured by the Japanese company.
The tax bureau filed an anti-avoidance request with the SAT to
start a thin capitalization investigation. After several months
and more than 10 meetings with the taxpayer, the tax bureau
concluded that the Chinese company had avoided EIT by taking
significant cross-border loans with large interest expenses and
other related costs. As a result, the taxpayer was subject to a
tax adjustment under China’s thin capitalization rules.
• China introduced the thin cap regime in 2008. In general, an
enterprise (other than a financial institution) is permitted to
deduct arm’s-length interest expenses paid to related parties
to the extent that its debts to the related parties do not exceed
200% of the equity investment. Interest expenses in excess of
the debt-to-equity limitation are generally non-deductible.
• The thin cap rules define debt broadly to include any
compensated debt financing that is obtained, directly or indirectly,
from a related party. For example, a loan provided by a related
party in the name of an unrelated third party falls under the
thin cap rules, as does a loan offered by an unrelated third
party but secured by a related party with joint liability. Guarantee
fees, mortgage expenses, and any other costs that have the
nature of interest are deemed interest expenses for thin
cap purposes.
• There is, however, a favourable exception for taxpayers. It
states that an enterprise is allowed to deduct (arm’s-length)
interest expenses actually paid to domestic related parties if it
can, in accordance with China’s transfer pricing rules, provide
contemporaneous transfer pricing documentation certifying
that the transactions at issue were in compliance with the
arm’s-length principle, or if its effective EIT rate is not greater
than that of the domestic related parties. Notably, the 2008
exceptional rule does not cover interest expenses paid to foreign
related parties.
• The thin cap rules are still in early development in China and
have not addressed some common issues. For example, it
may be unclear whether account payables arising from a trade
or business (for example, purchases of goods) with related
parties constitute a debt for thin cap purposes. That may be
determined on a case-by-case basis, looking at the specific
facts and circumstances of each case.
New Foreign Investment Catalogue
• The Chinese government issued the new Foreign Investment
Industrial Guidance Catalogue (2011 Amendment) in an effort
to further liberalize the market entry for foreign investors and
improve foreign investment structure and development in certain
sectors and regions.
• China’s National Development and Reform Commission (NDRC)
and Ministry of Commerce (MOFCOM) jointly promulgated the
new Foreign Investment Industrial Guidance Catalogue (2011
Amendment) (the New Catalogue) on 24 December 2011. The
New Catalogue, approved by the State Council, will come into
effect 30 January 2012, and the existing catalogue - as amended
in 2007 (the 2007 Catalogue) - will simultaneously expire and
become void.
• Initially issued in 1995, and subsequently revised several times
by the NDRC and MOFCOM, the New Catalogue is consistent
with the Chinese government’s strategy to open up China’s
market to foreign investors, and serves as a basic guide for
foreign investors by categorizing industries into “encouraged”,
“restricted” or “prohibited” categories. Any industry not so
classified is deemed “permitted”.
• The two prevailing themes in the New Catalogue are: expanding
access to foreign investors and relaxing restrictions on foreign
investment, and improving foreign investment structure and
promoting development in certain sectors and regions.
Pilot program to subject certain servicesto VAT
• The Ministry of Finance and the State Administration of Taxation
(SAT) jointly issued a notice on 16 November 2011 (Cai Shui
[2011] No. 110) releasing the pilot program with regard to the
partial integration of business tax and VAT previously announced
by the State Council. The program is implemented from 1
January 2012. The main points are as follows.
VAT rates for taxable services
Services Rate of VAT
Leasing of tangible assets 17%
Transportation and construction services 11%
Insurance, service of household nature 6%and modern services (except leasing)
Other modern services to be determined 0%
3LOYENS & LOEFF Asia Newsletter – January 2012
• Under the VAT regulation the difference is made between the
general calculation method and simple calculation method
(the simple calculation method refers to the method which
adopts the low rate, but may not deduct input tax). The general
calculation method of VAT applies to transportation, construction,
telecommunication, modern services, cultural and sport activities,
sale of real properties and disposal of intangibles whereas
the calculation of VAT on financial and insurance services, and
services related to domestic household must take place on the
basis of the simple calculation method.
• In general the tax base is the total amount of the transaction.
Exceptions are transactions in which a lot of advances (payments
on behalf of others) are involved. Import of taxable services is
subject to VAT whereas export of taxable services is zero-rated
or exempt from VAT.
• Business tax incentives granted to the services under the
business tax regime may be continued after inclusion in the
VAT scope. However, in cases where the double taxation
(charged to both business tax and VAT) is removed due to this
integration, the incentives granted under the business tax regime
will be discontinued.
• Taxpayer is liable to VAT on the services in the place where
his business establishment is situated. The amount of business
tax paid in other region (outside the pilot zone) may be deducted
from the VAT payable. The taxpayers who are situated outside
the pilot zone, but carry on business inside remain to be liable
to business tax on the services being taxable under the business
tax regime.
International Tax Developments
• Denial of tax arrangement between China and Hong Kong.
• It was reported by IBFD that the local tax bureau of Shenzhen
had refused to apply the tax arrangement between for the
gains on the transfer of shares derived by a non-resident.
The decision of the tax bureau resulted in a tax bill of CNY
12 million which has been paid by the taxpayer, according to
the report.
• A company incorporated in Hong Kong, owned by a company
in the Cayman Islands, disposed of part of its shares in
an enterprise located in Shenzhen China and derived a
considerable amount of gains from the transaction. The Hong
Kong company claimed the application of the tax arrangement
between China and Hong Kong which provides for either
no taxation of such gains in China (if the recipient of the gains
had a participation of less than 25%) or a withholding tax of
10%. However, the local tax bureau of Shenzhen refused
the application of the tax arrangement between China and
Hong Kong.
• The tax authority’s decision is based on the following facts:
• the Hong Kong company and the enterprise in Shenzhen
were established at almost the same time, indicating that the
main purpose of the incorporation of the Hong Kong company
was to make investments in China;
• the paid-up capital of the Hong Kong company is only HKD
100 and therefore disproportionate to the gains derived from
the investment;
• given the fact that the staff of the Hong Kong company consists
of a director, a secretary and an accountant, no investment
specialist being employed, the function of the Hong Kong
company is not commensurate with the gains derived;
• the capital of the Hong Kong company is minor. The primary
capital invested in the Shenzhen enterprise comes from the
parent holding company in the Cayman Islands;
• apart from the investment in the Shenzhen enterprise, the
Hong Kong company does not carry on any substantial
business or operations, nor does it derive any income from
them; and
• although the Hong Kong company is an investment company,
the decisions on investment, financing and reduction of
shareholding are taken outside the company.
• The tax authority concluded that the Hong Kong company
was interposed for the investment in China because the China
does not have a tax treaty with the Cayman Islands, an
international tax haven. The Hong Kong company should be
deemed to be a “conduit company” by reference to its paid-up
capital, business scope, personnel and decision making
procedure. The tax authority of Shenzhen refused the application
of the tax arrangement on the basis of the substance-over-
form principle.
Hong KongInvestment in IPRs
• Through Inland Revenue (Amendment) (No. 3) Ordinance 2011
issued on 16 December 2011, Hong Kong provides tax deductible
amortization allowances over a 5 year period to patent rights,
any know how rights, copyrights, registered designs and
4LOYENS & LOEFF Asia Newsletter – January 2012
registered trademarks. The buyer must have economic and
legal ownership to the IPRs. Certain anti-avoidance provisions
apply, such as e.g. the denial of tax deductions for IPRs
purchased from affiliated parties. Also sale and licensing back
situations are not eligible for tax deductions.
Advance rulings
• As per 18 November 2011, Departmental Interpretation and
Practice Notes No. 31 (“Advance Rulings”) has been revised to
provide more information to enable taxpayers to better understand
the advance ruling service provided by the Department. New
paragraphs have been added to cover issues like discretion,
extent of disclosure, quality and completeness of information,
class rulings and incorrect information or false answer. In
addition, issues like ruling shall not apply, processing of ruling
requests and publication of rulings are elaborated in greater
detail in the present update.
International Tax Developments
• Malta. On 8 November, Hong Kong signed a double tax treaty
with Malta. The treaty contains a 3% withholding tax rate on
royalties and no withholding tax on dividends and interest. It
must still be ratified by both jurisdictions.
• The Netherlands. The new double taxation treaty between
Hong Kong SAR and the Netherlands signed in 2010 will take
effect in the Netherlands from 1 January 2012 and in Hong
Kong from 1 April 2012. The treaty provides for a 0% dividend
withholding tax rate on dividends paid by a Dutch company to
a Hong Kong corporate shareholder provided that the latter is
a headquarter company or a company approved by the Dutch
tax authorities. The combination of this treaty with the Dutch
participation exemption regime and extensive tax treaty network
makes the Netherlands a tax-efficient gateway into Europe
and, indeed, the rest of the World for companies and individuals
from Hong Kong and Mainland China.
• Switzerland. On 4 October 2011, a new Hong Kong - Switzerland
Income Tax Agreement (2011), was signed by an exchange of
letters (NB: the Hong Kong - Switzerland Income Tax Agreement
(2010), signed on 6 December 2010, is superseded by the new
treaty and will therefore never enter into force).
• France. The France - Hong Kong Income and Capital Tax
Agreement (2010) entered into force on 1 December 2011.
The agreement generally applies from 1 January 2012 in France
and 1 April 2012 in Hong Kong.
IndiaEmployment Visas to foreign nationals
• In relation to employment visas for expatriate assignees, the
Ministry of Home Affairs (“MHA”) had earlier clarified that a
foreign national should draw a salary of at least USD 25,000
per annum for grant of an employment visa. The term “salary”
includes salary and all other allowances paid in cash. The
perquisites received in kind such as housing, telephone, transport,
etc. are not to be included in the said term. The MHA has
recently widened the scope of term “Salary” clarifying that the
taxable perquisites will also be considered while working out
the threshold salary limit of USD 25,000 per annum for
employment visa purposes.
Shrink wrap software payment subject towithholding tax
• The Karnataka High Court in the recent case of CIT vs. Samsung
Electronics & Co has held that payment made for supply of
shrink wrap software is royalty under the provisions of the Double
Taxation Avoidance Agreement and hence liable to tax in
India, thereby requiring the remitter to withhold tax under section
195 of the Act. This decision is likely to have a deep impact
on the principles for characterizing a ‘royalty’ and a substantial
economical impact on the software industry.
Mauritius tax treaty protection
• The Authority for Advance Rulings (“AAR”) has delivered an
important ruling in the case of Ardex Investments Mauritius Ltd
on the chargeability of gains arising from transfer of shares of
an Indian company held by a Mauritian Company. The AAR
has ruled that such gains would not be chargeable to tax in
India as per the provisions of the Double Taxation Avoidance
Agreement (“Tax Treaty”) between India and Mauritius.
• Ardex Investments Mauritius Ltd (“the applicant”) was a tax
resident of Mauritius holding a valid Tax Residency Certificate
(“TRC”). The only asset held by the applicant was the equity
shares of Ardex Endura (India) Pvt Ltd [“Ardex India”], a limited
company incorporated in India. The applicant proposed to sell
its holding in Ardex India to a German entity of the applicant’s
group. The sale was proposed to be carried out at the prevailing
market value of the shares, which resulted in capital gains for
the applicant. The applicant applied to the AAR seeking a
ruling on taxability in India on the proposed transfer of shares
of Ardex India.
5LOYENS & LOEFF Asia Newsletter – January 2012
IndonesiaTransfer pricing
• In December, the Director General of Taxes has updated the
Transfer Pricing Regulation through PER-32/PJ/2011. There
are two significant changes. Firstly, related parties transactions
which should be documented and tested by Transfer Pricing
Documentation (TP Doc) changed from both domestic and cross
border related parties transaction to only cross border transactions
(except for 3 special domestic transactions). Secondly, related
party transactions subject to the transfer pricing analysis will
only apply to transactions of at least IDR 10 billion (approximately
USD 1,000,000). The circular stipulates that the TP method is
now based on the most appropriate method, and no longer on
the hierarchy of TP methods.
International Tax Developments
• ASEAN-Australia-New Zealand. On 21 November 2011, the
Minister of Trade announced that Indonesia had completed its
internal ratification procedures to enable the ASEAN-Australia-
New Zealand Free Trade Agreement (FTA) to enter into force
for Indonesia. The FTA is already in force for New Zealand,
Australia and the other nine members of ASEAN.
• Malaysia. On 20 October 2011, Indonesia and Malaysia signed
an amending protocol to the income tax treaty of 12 September
1991, as amended by the 2006 protocol. Further details will be
reported subsequently.
JapanIslamic bonds introduced
• New requirements for Islamic bonds (quasi-bond beneficial
interests (QBIs)) have been added in the Asset Liquidation Act
and preferential tax measures for QBIs have been introduced
by the Special Taxation Measures Law as follows:
• When providing for QBIs in an SPT contract, the following
conditions must be included:
- the principal should be redeemed at a predetermined point
of time; and
- beneficiary certificate holders of the QBIs have no voting
rights for resolutions at a beneficiary certificate holders’
meeting except for important matters.
• The AAR ruled the following:
• Since the initial shares were acquired by the applicant 10
years back, it substantiates that the proposed transaction
does not arise out of a short term arrangement;
• Even if the company was incorporated in order to take
advantage of the Tax Treaty, it cannot be viewed as
objectionable treaty-shopping, as the Supreme Court ruled
in the case of Azadi Bachao Andolan that treaty-shopping
itself is not taboo;
• When the shares are held for a considerable period of time
before they are sought to be sold under a regular commercial
arrangement, it is not possible to enquire into aspects such
as the source of the original investment;
• The proposed transaction was not a case of a gift of the
shares or a transfer of the shares without consideration and
furthermore the sale was proposed at market rate; and
• As per the Indo-Mauritius Tax Treaty, a gain arising to the
company from the sale of the shares is not chargeable to tax
in India and consequently, there would not be any obligation
to withhold tax in India. However, since the gain was chargeable
to tax under the provisions of the Act, the company is obliged
to file an income tax return in India.
• This is a reaffirmation of the position under the India-Mauritius
Tax Treaty that capital gains arising to a resident of Mauritius
from a transfer of shares of an Indian company should not be
chargeable to income tax in India. The AAR has also noted
that the principles laid down by the Supreme Court that treaty
shopping is not a taboo and taking advantage of a Tax Treaty
by itself cannot be objected to. Since the ruling is binding only
on the Mauritius company, the outcome of this ruling could
encourage other Mauritius holding companies to secure a ruling
in their cases as well.
• With the proposed introduction of General Anti Avoidance
Rules (“GAAR”) under the Direct Taxes Code (“DTC”), which
seeks to apply rigorous business purpose tests, it will be
interesting to see whether the ratio of the Supreme Court’s
ruling in Azadi Bachao Andolan will apply under the DTC as
well, and similarly, whether this and other rulings issued by the
AAR would continue to be binding on the Revenue.
International Tax Developments
• The Netherlands. The Social security agreement between
India and the Netherlands came into force on 1 December 2011.
6LOYENS & LOEFF Asia Newsletter – January 2012
• Preferential tax measures for QBIs
- A special rule applies for Japanese corporate bonds
(issued by 31 March 2013) managed under the Book-
Entry System, whereby interest and gains on corporate
bonds received by non-resident individuals or foreign
companies are exempt from withholding tax provided
that the relevant application forms are submitted and
certain conditions are met. This rule has been expanded
to QBIs issued by 31 March 2013;
- Capital gains from a sale of the following shares by non-
resident individuals or foreign companies are treated as
Japanese-source income and subject to Japanese tax;
- shares in a Japanese company if the non-resident
individuals or foreign companies owned 25% or more
of the outstanding shares at any time during the past
3 years, including the year of sale, and sold 5% or
more of the outstanding shares of the company; or
- shares in a company with more than 50% of its total
property consisting of real estate located in Japan on
a fair market value basis.
• The amendments explicitly exclude QBIs from the application
of this rule, thus capital gains arising from a disposal of QBIs
by non-resident individuals or foreign companies are tax exempt
in Japan.
Tax reform proposals 2011
• The proposed Tax Reform Bill was not passed in its original
form. The main changes approved are summarized below:
• The corporate tax rate will be reduced from 30% to 25.5%
for fiscal years beginning from 1 April 2012;
• The corporate tax rate for SMEs for the taxable income not
exceeding JPY 8,000,000 will be reduced from 18% to 15%
for fiscal years beginning between 1 April 2012 and 31
March 2015;
• As the tax bill to fund reconstruction of Great East Japan
Earthquake was passed, the corporate tax rates for fiscal
years beginning between 1 April 2012 and 31 March 2015
will be 28.05% (25.5%*110%) for ordinary companies and
16.5% (15%*110%) for SMEs;
• The tax loss carry-forward period will be extended from 7
years to 9 years for tax losses accrued from 1 April 2008;
• For companies other than SMEs, deductible tax losses
carried forward will be limited to 80% of the taxable income
for fiscal years beginning from 1 April 2012;
• Provision for bad debts will not be allowable for companies
other than SMEs, banks, insurance companies and similar
companies for fiscal years beginning from 1 April 2012.
• A transitional measure will be applicable as follows to gradually
phase out the deduction for the non-eligible companies:
- Fiscal years beginning from 1 April 2012 to 31 March 2013:
Allowable limit before the amendments * 3/4.
- Fiscal years beginning from 1 April 2013 to 31 March 2014:
Allowable limit before the amendments * 2/4.
- Fiscal years beginning from 1 April 2014 to 31 March 2015:
Allowable limit before the amendments * 1/4.
International Tax Developments
• The Netherlands. On 17 November 2011, the Netherlands
ratified the income tax treaty and protocol between the
Netherlands and Japan, signed on 25 August 2010. The new
tax treaty provides a number of benefits for Japanese companies
investing in or through the Netherlands. The new treaty will
come into force as of 1 January 2012. The most important
reduction considers a full dividend withholding tax exemption
for beneficial owners of shareholdings representing at least
50% of the voting rights in a subsidiary (subject to other specific
requirements such as a 6 month holding period and the limitation
of benefits requirements). Under the current treaty a minimum
5% dividend withholding tax rate applies. In order to qualify for
the benefits of the treaty certain strict criteria need to be met.
Current structures should be reviewed in order to determine
whether the new lower withholding tax rates apply and whether
the limitation of benefits requirements is met. Due to the
introduction of the participation regime in the Japanese tax
regime, the current 5% dividend withholding tax cannot be
credited against Japanese taxable income and therefore results
in a significant tax cost upon repatriation of profits. The new
treaty will eliminate this cost (provided that the requirements for
the 0% rate are met). The introduction of the 95% participation
exemption regime in Japan and the elimination of dividend
withholding tax under the new treaty will make it more attractive
for Japanese companies to repatriate dividends to Japan. The
difference between the Dutch corporate tax rate (25%) and the
corporate tax rate in Japan (approx. 40%) may however make
it more attractive to retain cash in the Netherlands instead of
repatriating it to Japan. The withholding tax on royalties will
also be reduced to 0% (from 10%). This is only relevant for
royalty payments by Japanese companies to a Dutch company
as the Netherlands does not levy royalty withholding tax. The
interest withholding tax rate will also be reduced to 0% for
qualifying financial institutions such as banks (note that the
7LOYENS & LOEFF Asia Newsletter – January 2012
Netherlands does not levy withholding tax on interest). The
new treaty and especially the proposed new withholding tax
rates will strengthen the position of the Netherlands as a good
investment route for Japanese companies.
Korea
• USA. On 22 November 2011, the National Assembly of Korea
(Rep.) ratified the free trade agreement (FTA) between Korea
(Rep.) and United States signed in Washington, D.C. on 30
June 2007. As a result of this, one of the US major law firms
announced its plan to open an office in South Korea in 2012.
MalaysiaBudget 2012
• On 7 October 2011 the Malaysian Prime Minister presented the
Budget for 2012. On the corporate tax side, it inter alia proposes:
• Corporate tax incentives to encourage the establishment of
treasury management centres (TMCs). Centres that establish
themselves in Malaysia would be granted (i) a five-year 70%
income tax exemption; (ii) withholding tax exemption for
interest payments on loans; (iii) stamp duty exemption for
loan and service agreements; and (iv) an expatriates regime
which taxes expatriates working in TMCs only on the portion
of their chargeable income attributable to the number of
days they are in Malaysia. This TMC incentive would
have to be applied for with the Malaysian Investment
Development Authority (MIDA) between 8 October 2011 and
31 December 2016.
• Corporate tax incentives to accelerate development of the
Kuala Lumpur International Financial District (KLIFD): (i) a
ten-year total income tax exemption; (ii) stamp duty exemption
on loan and service agreements for KLIFD status companies;
(iii) industrial building allowance and accelerated capital
allowance for KLIFD marquee status companies; and (iv) a
five-year 70% income tax exemption for property developers
in KLIFD. These incentives would take effect as of the year
of assessment 2012 (tax year 2011).
• Corporate tax incentive to promote creativity and modern
technology. Industrial design services would be given pioneer
status with a five-year 70% income tax exemption if applied
for with MIDA between 8 October 2011 and 31 December
2013.
• Corporate tax incentive to encourage investment in hotels.
Hotel operators in Peninsular Malaysia investing in new four-
and five-star hotels would be given pioneer status with a five-
year 70% income tax exemption or a five-year investment tax
allowance of 60% if applied for with MIDA between 8 October
2011 and 31 December 2013.
• Islamic Finance. Expenses incurred on the issuance of Islamic
securities (Wakalah) would be tax deductable until year of
assessment 2016. The issuance of such sukuk must be
approved by the Securities Commission of the Labuan Financial
Services Authority. Similar deductions exist for Mudharabah
and Bai’ Bithaman Ajil (based on tawarruq) Islamic securities.
The existing tax exemption on issuance and trading of non-
ringgit sukuk (i.e. fees from undertaking activities and profits
originating from Malaysia) has been extended until year of
assessment 2014.
• The 100% income tax exemption for shipping companies
would be reduced to 70%.
• Real Property Gains Tax (RPGT). RPGT will be raised to 10%
for residential and commercial properties disposed of within
2 years of their purchase. The 5% rate will continue to apply
to disposals within 3-5 years of purchase. Properties disposed
of after 5 years of purchase will remain exempt from RPGT.
This applies to resident and non-resident corporate and
individual owners.
• Real Estate Investment Trusts (REIT). The 10% final withholding
tax on dividends received from REITs listed on Bursa Malaysia
which is set to expire this year is proposed to be extended until
31 December 2016.
• Stamp duty. Micro enterprises and SMEs, as well as professional
firms setting up in rural areas, would be grated a full stamp duty
exemption on loan agreements up to MYR 50,000. Full stamp
duty exemption on loan agreements used for the purchase of
certain residential property up to MYR 300,000 between 1
January 2012 and 31 December 2016.
• As of year of assessment 2013 (tax year 2012) the time bar
for tax audits would be reduced from 6 to 5 years from the
assessment date. As of that date, delays in tax refunds are
proposed to be compensated 2% per day if the due date is
exceeded by 90 days (if e-filed tax returns) or if exceeded by
120 days (for manually filed returns).
Public ruling on expat taxation in Malaysia
• On 16 November 2011 the Malaysian Inland Revenue Board
(IRB) has issued Public Ruling (PR No. 8/2011) on the tax
8LOYENS & LOEFF Asia Newsletter – January 2012
treatment of foreign nationals working in Malaysia, effective as
of year of assessment 2011. The PR provides guidance on
when a foreign national working in Malaysia is subject to tax on
the employment income derived in Malaysia.
• As a general rule, employment income is taxed in the country
where the work is actually performed, irrespective of the place
where the employment contract is entered into or where
remuneration is paid. In other words, an expat working in
Malaysia is subject to tax on his employment income derived
in Malaysia under Malaysian domestic law.
• The tax rates applicable to foreign nationals depend on their
residence status in Malaysia. Generally, an individual is a tax
resident if his physical presence in Malaysia is 183 days or
more in a tax year. Tax residents can generally claim personal
tax relief and are taxed at progressive rates. Non-residents
however, are not entitled to any personal tax relief. Non-residents
are subject to 27% (year of assessment 2009) and 26% (year
of assessment 2010) income tax rates.
• The PR also provides guidance and examples on when a foreign
national would qualify for the tax exemption where the
employment is exercised in Malaysia for less than 60 days, and
on how to calculate unilateral and bilateral foreign tax credits
in the case of double taxation.
Public ruling on co-operative society
• On 16 November 2011 the IRB has issued Public Ruling (PR
No. 9/2011) on the tax treatment of Co-operative Societies in
Malaysia, effective as of year of assessment 2011.
• For income tax purposes, a Co-operative Society (Coop) is
a society registered as such in Malaysia and includes
Farmers’ and Fishermen’s Associations. Foreign registered
Coops are not recognized and will be taxed as non-resident
companies.
• Income from both mutual and non-mutual activities will be
subject to tax, and will be computed as prescribed by Sec. 5 of
the Income Tax Act 1967 (ITA). Allowed deductions include
sums paid/transferred to: a statutory reserve fund; any educational
institution and/or co-operative organization established for the
furtherance of the co-op; or a co-op education trust fund, as
prescribed by Sec. 65A (a) of the ITA. Pursuant to Sec. 65A
(b), a Coop may also deduct a (8%) percentage of its members’
funds (defined in Schedule 6 of the ITA).
Public ruling on gratuity
• On 5 December 2011 the IRB has issued Public Ruling (PR No.
10/2011) on the tax treatment of gratuity, effective as of year
of assessment 2011.
• In general, gratuity payments refer to lump-sum payments by
an employer to an employee which are attributable to the past
services of the employee, such as those paid upon retirement.
Other payments such as for the loss of employment are
considered to be compensation, not gratuity.
• Gratuity is normally taxed at the level of the employee, however,
an employee receiving a gratuity upon retirement can qualify
for full tax exemption, when one of the following conditions
is fulfilled:
• The retirement was due to ill-health;
• The retirement takes place upon or after reaching the age of
55, or on reaching the compulsory age of retirement from
employment as specified under any written law, and in either
case that employment lasted for at least 10 years with the
same employer or with companies in the same group; or
• The retirement takes place upon reaching the compulsory
age of retirement pursuant to a contract of employment or
collective agreement at the age of 50 but before 55 and that
employment lasted for at least 10 years with the same employer
or with companies in the same group.
Discussion papers on Islamic financetransactions
• On 19 December 2011, the Malaysian Accounting Standards
Board (MASB) published the following three discussion papers
exploring the accounting treatment of a number of Islamic
financial transactions.
• DP i-1 Takaful. In many material respects, takaful can be
likened to conventional insurance, but has a number of distinct
features and the paper notes “little has been written about
accounting for takaful under International Financial Reporting
Standards (IFRS)”. The paper explores issues such as:
• whether takaful meets the definition of an insurance contract
in IFRS 4 Insurance Contracts;
• whether a takaful operator should prepare consolidated
financial statements;
• accounting for any qard, an interest-free loan extended to a
participant’s fund that is in deficit; and
9LOYENS & LOEFF Asia Newsletter – January 2012
• retakaful, participating contracts, revenue recognition, and
additional disclosures.
• DP i-2 Sukuk. Sukuk is commonplace in the Malaysian capital
market and can be compared to a conventional bond. Issues
discussed include the classification of sukuk by the issuer
and investor in the statement of financial position, fair value
measurement, impairment, derivatives, guarantees and related
party disclosures.
• DP i-3 Shariah Compliant Profit-sharing Contracts. These
contracts are similar to conventional profit-sharing or partnership
contracts but raise questions of the classification of items in
the statement of financial position, accounting implications of
smoothing techniques to stabilise returns on capital, and
consolidation, joint ventures and investments in associates.
• The discussion papers do not seek to provide prescriptions for
the accounting questions raised but instead put forward the
MASB’s understanding of the issues and alternate solutions to
solicit public views on preferred solutions.
• The MASB has requested comments on the discussion papers
by 16 March 2012.
International Tax Developments
• Indonesia. An amending protocol to the income tax treaty
between Malaysia and Indonesia of 12 September 1991 was
signed on 20 October 2011.
• Bahrain. South Africa. The amending protocols to the income
tax treaties concluded by Malaysia with Bahrain (1999) and
South Africa (2005) have both been ratified by Malaysia’s
counterparties early December 2011.
• Senegal. The income tax treaty and protocol between Malaysia
and Senegal of 17 February 2010 has been ratified by Senegal.
PhilippinesInterest imputation
• On 19 July 2011 it was ruled in the Commissioner of Internal
Revenue v. Filinvest Dev’t Corp. (G.R. No. 167689), that the
Commissioner of Internal Revenue’s (CIR) power of distribution,
apportionment or allocation of gross income and deductions
under the tax code does not include the power to impute
‘theoretical interest’ to the taxpayer’s transactions.
• The Court held that there must be proof of the actual or probable
receipt or realization by the taxpayer of the gross income item
sought to be distributed, apportioned or allocated by the CIR.
An examination of the records did not reveal any actual or
possible evidence that the taxpayer’s advances extended to its
affiliates had resulted in the interests subsequently assessed
by the CIR. While the CIR asserted that the taxpayer had
sought credit from commercial banks, it could not prove that
said funds were, indeed, the source of the advances the former
provided its affiliates. Moreover, there is no factual basis for
the imputation of theoretical interests as, pursuant to Article
1956 of the Philippines Civil Code, no interest shall be due
unless it has been expressly stipulated in writing.
Philippines defers capital gains tax on non-compliant listed companies
• On 1 November 2011 the Philippine BIR announced a deferral
of imposing a higher capital gains tax (CGT) on stock transactions
connected to companies that fail to meet the 10% minimum
public ownership requirement. The 5% to 10% CGT was
originally planned to be imposed as of 30 November 2011. The
government now aims to implement the CGT as of 1 January
2012. The announcement comes as a compromise to settle a
dispute between the BIR and the Philippine Stock Exchange
(PSE) regarding listed companies that have less than 10%
public ownership.
• The BIR had argued that those non-compliant companies
should be delisted, which would trigger a 6% CGT on sales of
their shares, instead of the 0.5% stock transaction tax granted
to listed companies. According to the PSE’s internal rules, firms
must meet the minimum public-float requirement by 30 November
2011, followed by a three-year “curing” period, during which it
would charge higher listing fees to non-compliant companies.
Only then would such firms be delisted.
• The PSE President pointed out that the move would possibly
penalize shareholders and investors, instead of the companies
responsible for meeting the public-float requirement, according
to media reports. He said furthermore argued the tax would
alarm local and foreign investors who may already be on edge
over the recent controversy over the PEACe bonds, which were
supposedly exempt from a withholding tax upon maturation in
mid-October (see above coverage). The BIR however levied
a 20% tax on the bonds anyway, citing previous rulings that
overturned the exemption.
VAT exemption thresholds for real property
• On 27 October 2011 the BIR issued Revenue Regulations No.
16-2011 on the amended thresholds for value added tax (VAT)
10LOYENS & LOEFF Asia Newsletter – January 2012
exemptions on real property transactions, taking into account
consumer price index adjustments. The new thresholds, effective
as of 1 January 2012, are as follows: (i) when gross annual
receipts on the sale or lease of goods or properties or
performance of services does not exceed PHP 1,919,500 shall
be subject to 3% percentage tax instead of the 12% VAT; (ii)
the sale of a residential lot valued or sold at maximum PHP
1,919,500, or house and lot and other residential dwellings
valued or sold at maximum PHP 3,199,200 is exempt from VAT;
and (iii) the lease of residential units with a maximum rental of
PHP 12,800 per month per unit is exempt from VAT, irrespective
of the annual gross receipts of the lessor.
Philippines consider environmental designationto increase mining tax revenue
• The Philippine government is considering reclassifying mines
as “mineral reservations” as an attempt to increase tax revenue
from the mining sector. Such designation would trigger a 5%
royalty tax in addition to the 2% excise tax that mining companies
are liable to.
• The president of the Philippine Chamber of Mines said that
would only stop large mining companies from investing in the
country. He noted that currently many small mine operators
escape taxation by simply ignoring the law and failing to submit
tax returns.
International Tax Developments
• India. On 17 October 2011 negotiations have been announced
for a revision of the income tax treaty and protocol between the
Philippines and India of 12 February 1990 and signing of this
revised treaty is expected in January 2012.
SingaporeIncome Tax Bill Amendments
• On 13 October 2011 the Ministry of Finance (MOF) has
accepted 23 out of the 55 suggestions on the draft Income Tax
(Amendment) Bill 2011 received during the public consultation
exercise from 11 July 2011 to 1 August 2011. The suggestions
will be incorporated into the revised Income Tax (Amendment)
Bill 2011 and include an improvement to the productivity and
innovation credit (PIC) scheme, an umbrella incentive for the
maritime sector, implementation of foreign tax credit pooling,
deduction of pre-commencement expenses for start-up
companies, an enhanced tax deduction for equity-based
remuneration (EEBR) schemes, a one-off corporate income tax
rebate of 20% up to SGD 10,000 and an amendment of the
personal income tax rate structure.
• On 22 November 2011 the Finance Minister addressed these
legislative changes and announced that the on-going periodic
review of the income tax system also triggered some legislative
changes, most of which from a technical nature of to improve
the tax administration. Worth mentioning are:
• Implementation of greater clarity and certainty in the timely
resolution of income tax disputes, providing for an extention
of the time to file an appeal from 14 days to 30 days and
enabling taxpayers to approach the Income Tax Board of
Review even if their case is non-taxable for that year;
• An amendment of the exchange of information provisions
in the Income Tax Act (ITA), which currently allow for the
exchange of information under double tax arrangements, but
are amended to also provide for the exchange of information
under separate Exchange of Information agreements.
Tax deductibility of losses causedby fraud
• On 17 October 2011 the High Court ruled in AQP vs. Comptroller
of Income Tax [2011] SGHC 229 in an appeal for the tax
deduction of losses caused to a company by a fraudulent director
under section 14(1) of the ITA.
• The appellant is a Singapore resident company listed on
the Singapore stock exchange. The former managing director
(former MD) was appointed in 1995. In 1999 he was dismissed
for misuse of the company’s funds; inter alia, he made out false
purchase orders and claimed reimbursements from the company
for supposedly advancing the payment of the orders from his
personal bank account. The stolen money was used to repay
his gambling debts. He was charged and tried in the District
Court and sentenced to nine years in prison.
• After this fraud came to light, the appellant made provisions
for doubtful debts in the year of assessment (YA) 2000, but
no claim for deduction for the loss was made in that YA. In
2003, the appellant took legal action against the former MD
to recover the stolen money but it proved irrecoverable. In
2005, the appellant lodged an “error or mistake” claim for the
loss under section 93A of the ITA. The claim was denied as
the Comptroller of Income Tax (CIT) was of the opinion that
“there is no error or mistake within the meaning of section
93A of the Act”. Appellant’s subsequent appeal was with the
Board of Review (Board).
11LOYENS & LOEFF Asia Newsletter – January 2012
• The Board referred to a 1925 UK case (Curtis (HM Inspector
of Taxes) v J & G Oldfield, Limited (1925) 9 TC 319) on the
deductibility of losses arising from an employee’s fraud and
applied “the Curtis test” to appellant’s case. In Curtis it was
ruled that losses resulting from subordinate empoyees’
fraud are normally deductible, but that money misused by
a controlling individual was not considered an expense in
earning profits (but rather an application of profits). Hence,
there must be a nexus between the expense and the income
produced. The Board concluded that the loss of the appellant
was not deductible under section 14(1) of the ITA and decided
in favour of the CIT. The subsequent appeal to the High Court
was dismissed.
• Although not required due to the dismissal, the High Court’s
Tay Yong Kwang J explained that in his view an error or mistake
under s. 93A ITA constitutes a “genuine mistake of law.”
Although technically such comments are no binding precedent,
it will have persuasive powers in future cases.
Additional buyer’s stamp duty on purchase ofresidential properties
• On 7 December 2011 the government announced an additional
buyer’s stamp duty (ABSD) to be imposed on certain categories
of residential property purchases.
• The objective is to create a sustainable residential property
market where prices move in line with economic fundamentals.
Prices of private residential properties have continued to rise
as demand remains strong, even during the current economic
uncertainties. To protect the Singapore private residential
property market, the government now imposes ABSD, with a
higher rate for foreign buyers in particular.
• The ABSD is levied on top of the current buyer’s stamp duty
(i.e. 1% on first SGD 180,000, 2% on the next SGD 180,000
and 3% for the remainder) as of 8 December 2011 and applies
to the purchase price or market value of the property (whichever
is higher) for the following purchases:
• Foreigners and non-individuals buying any residential property
are subject to a 10% ABSD;
• Permanent Residents (PRs) owning one and buying the
second and subsequent residential property are subject to
a 3% ABSD; and
• Singapore citizens (Singaporeans) owning two and buying
the third and subsequent residential property are subject to
a 3% ABSD.
• For joint purchases by two or more parties of different categories,
the higher applicable ABSD rate is imposed.
• Singaporean first time buyers and buyers of HDB flats
are not affected by the new measure. Certain reliefs are
provided so that the measure does not impact home occupation
demand by residents. For example, relief is provided for
Singaporean-foreigner/PR married couples buying their homes.
Reliefs will also be provided for qualifying developers and for
purchases falling within the scope of Singapore’s international
trade agreements.
Goods and Services Tax Bill amendments
• On 22 November 2011 the Finance Minister addressed the
legislative changes in the Goods and Services Tax (Amendment)
Bill 2011. Worth mentioning are:
• Implementation of the new GST scheme for approved marine
customers; they will enjoy zero-rated purchase or rental of
goods as long as they are used or installed on commercial
ships for international travel. Marine repair businesses may
zero-rate their invoices if they deliver ship parts to Singapore
shipyards or to approved marine customers.
• Extension of the existing approved contract manufacturer
and trader scheme (ACMT), allowing local contract
manufacturers to disregard (for GST purposes) services
rendered to overseas clients even if the processed goods are
delivered in Singapore, to qualifying biomedical contract
manufacturers. The ACMT scheme has furthermore been
enhanced by allowing contract manufacturers to disregard
services rendered on failed and excess production and
to recover GST on locally purchased goods used in the
contract manufacturing process.
• Implementation of zero-rating the supply of certain goods to
overseas persons from qualifying approved warehouses,
aiming to encourage overseas persons to store their high
value goods in Singapore warehouses. The zero-rating
extends to the storage renting.
• Expansion of the scope of GST recovery for local agents on
goods imported on behalf of overseas persons. Currently,
local agents are not able to claim input GST on the goods
imported for the overseas persons if the goods have undergone
a treatment or process that changes the nature or form of
the goods, before being supplied in Singapore. The GST Act
will be amended to enable local agents to recover GST on
such goods. In addition, local agents who are approved
under GST suspension or deferment scheme may use the
12LOYENS & LOEFF Asia Newsletter – January 2012
• Canada. An amending protocol to the income tax treaty between
Singapore and Canada of 6 March 1976 has been signed on
29 November 2011.
• Mexico. The amending protocol to the income tax treaty between
Singapore and Mexico of 9 November 1994, signed on 29
September 2009, will enter into force on and generally apply as
of 1 January 2012.
• Qatar. The amending protocol to the income tax treaty between
Singapore and Qatar of 28 November 2006, signed on 22
September 2009, will enter into force on and generally apply as
of 1 January 2012.
• Estonia. The amending protocol to the income tax treaty
between Singapore and Estonia of 18 September 2006, signed
on 3 February 2011, has been ratified by Estonia on 23
November 2011.
• Panama. The income tax treaty and protocol between
Singapore and Panama of 18 October 2010 have entered into
force on 19 December 2011 and will generally apply as of
1 January 2012.
Taiwan (R.O.C)
Limitation of royalty withholdingtax exemption
• Under Taiwanese income tax law, royalties paid to a foreign
enterprise for the use of its patent rights, trademarks, and/or
various kinds of special licensed rights in order to introduce
new production technology or products, improvement of product
quality, or reduce production cost under the approval of the
competent authority as a special case (i.e. to improve Taiwan’s
economic development), are exempt from Taiwanese withholding
tax. The Supreme Administrative court however has recently
dismissed a claim from a foreign company that had signed a
patent license agreement with a domestic company and
applied for tax exemption. The court argued that the domestic
company had transferred the licensed patent to its subsidiary
in China for manufacturing. Following this decision, the Taipei
National Tax Administration (TNTA) has announced that the
scope of the income tax exemption on royalties paid to foreign
companies is now limited to domestic use of the licensed right
as the tax exemption is meant for the promotion of Taiwan’s
economic development.
scheme to suspend or defer payment of import GST on goods
imported for overseas persons for subsequent re-export.
Stamp Duty Bill amendments
• On 22 November 2011 the Finance Minister addressed the
legislative changes in the Stamp Duties (Amendment) Bill 2011.
These are:
• In a speech before Parliament, Josephine Teo, the Minister
of State for finance and transport, addressed changes in
Stamp Duties (Amendment) Bill 2011 to include limited liability
partnership duty relief and remove most fixed and nominal
stamp duties of SGD 2 and SGD 10.
• Stamp duty relief will be made available for a company
converting into a Limited Liability Partnership (LLP), subject
to conditions. This relief provides more flexibility for companies
restructuring to LLPs.
• Most fixed and nominal stamp duties of $2 and $10 on
documents executed on or after 19 February 2011 will be
removed. This streamlines the stamp duty regime and reduces
taxpayers’ compliance cost.
• The conditions for stamp duty relief for qualifying mergers
and acquisitions (M&As) announced in the Budget 2010,
such as the qualifying period, will be changed to align more
closely to the conditions in the income tax allowance for
qualifying M&As. This will provide for greater consistency
and ease compliance.
International Tax Developments
• Uzbekistan. The amending protocol to the income tax treaty
between Singapore and Uzbekistan of 24 July 2008, signed on
14 June 2011, has entered into force and generally applies as
of 1 November 2011.
• Czech Republic. End October 2011, negotiations for an
amending protocol to the income tax treaty between Singapore
and Czech Republic of 21 November 1997 took place in Prague.
• Mexico. The amending protocol to the income tax treaty
between Singapore and Mexico of 9 November 1994, signed
on 29 September 2009, has been approved by Mexico on
29 September 2011.
• Spain. The income tax treaty and protocol between Singapore
and Spain of 13 April 2011 will enter into force on 1 February
2012 and will generally apply from 1 January 2013.
13LOYENS & LOEFF Asia Newsletter – January 2012
International Tax Developments
• Switzerland. The income tax agreement between the Trade
Office of Swiss Industries in Taipei and the Taipei Cultural and
Economic Delegation in Switzerland of 8 October 2007 has
been recognised by the Swiss Federal Council on 9 December
2011. It contains provisions which are typical of agreements
between two states on the avoidance of double taxation in the
area of taxes on income. It follows standard Swiss practice for
agreements in the area of double taxation and is based on the
OECD Model Convention. It contains provisions on the exchange
of information in line with the internationally applicable standard.
The double taxation agreement serves the economic interests
of Switzerland in relation to Chinese Taipei. The date of entry
into force has not yet been announced.
ThailandApproved corporate tax cuts
• The corporate income tax cut proposal – as reported in the
previous edition of this newsletter – has been approved by the
cabinet through Royal Decree 530. The corporate income tax
rate has been reduced from 30% to 23% for 2012 and will be
reduced to 20% in 2013.
Tax incentives for infrastructure fund
• On 15 November 2011, the Thai cabinet approved the draft
legislation, consisting of the following tax incentives, to promote
the Infrastructure Funds (“IFF”):
• An exemption from VAT, specific business tax and stamp duties
for the transfer of the assets from the originator to the IFF,
provided the assets will eventually be returned to the originator
or transferred to the government authorities or state enterprises.
• A reduction of registration fees charged by the Land
Department (i) on the transfer of immovable property from
the originator to IFF (from the normal rate of 2% to 0.01% of
the properties’ value), and (ii) for the mortgage and lease of
immovable property (from 1% to 0.01% - not to exceed THB
100,000 for the mortgage registration).
• A ten-year exemption of personal income tax on the profits
distributed from IFF to the individual unit holders, starting
from the day IFF is established. After such ten-year period,
the investors will be subject to the normal tax rate that is
currently applicable to a mutual fund, i.e. 10% flat tax (instead
of progressive tax rates). It has not been confirmed whether
foreign resident individuals will be entitled to this tax exemption.
• The draft legislation does not exempt the transaction from
corporate income tax. Foreign corporate unit holders are
normally not taxed for the profits distributed from the mutual
funds established under the securities exchange laws
(including IFF). Thai corporate unit holders are normally
exempted from income tax on 50% of the profits distributed
from IFF where the recipient is a non-listed company, and
fully exempted for listed companies, provided that the
investment units are held for at least 3 months before the
distribution and remain un-transferred for 3 months after
the distribution.
Tax incentives for vessel replacement
• Pursuant to a 1996 Royal Decree ((Vol. 299) B.E. 2539 (1996)),
a Thai limited company or a Thai registered partnership in the
business of international sea transportation of goods, is exempt
from income tax on the gains from the sale of its vessels, provided
that all the proceeds are spent on a replacement vessel.
• On 6 December 2011 the Thai cabinet approved changes to
relax the tax incentives rules for the replacement of vessels.
The conditions for applying such tax incentive are to be
changed as follows:
• The proceeds from the sale of the old vessel can be used -
in addition to purchasing a new vessel - to build a new vessel;
• The replacement vessel can now also be purchased prior
to the sale of the old vessel, if the old vessel is sold within 1
year from the purchase of the replacement vessel;
• The replacement vessel must be registered as a Thai ship
within 2 years from the sale of the old vessel;
• Where a replacement vessel is purchased, and it is second-
hand vessel, that vessel cannot be older than the vessel it is
replacing. Additionally, the replacement vessel must not be
smaller than the old vessel; and
• The Revenue Department must be notified of the above.
VietnamOne-year enterprise income tax deferral forselected industries
• On 11 October 2011 the Vietnamese Prime Minister issued
Decision 54/2011/QD-TTg allowing eligible taxpayers to defer
payment of enterprise income tax for one year. Eligible taxpayers
include enterprises or cooperatives with 300 or more employees
with a minimum three-month employment engaging them in
14LOYENS & LOEFF Asia Newsletter – January 2012
manufacturing, processing agricultural products, forestry products,
aquaculture products, textiles/garments, footwear, electronic
components; and construction and installation of certain
infrastructure projects. EIT amounts already paid for the first
three quarters of 2011 can be offset against the EIT payable
for other income not eligible for tax deferral or the EIT payable
in subsequent periods.
Representative offices of tradepromotion agencies
• The Government issued Decree No. 100/2011/ND-CP dated
28 October 2011 regarding the establishment and operation
of representative offices by foreign trade promotion organisations
in Vietnam. The decree will take effect on 15 December 2011.
• Accordingly, the foreign trade promotion organization is entitled
to set up not more than one representative office in one province
or centrally-run city. A foreign trade promotion agency will be
licensed if it meets two conditions: it is a legally established
organisation under foreign law and it has a charter and operating
principles that comply with Vietnamese law.
• Also under the Decree, the representative office, as a subordinate
unit of the foreign trade promotion organization, is not permitted
to set up a representative office under it. A representative office
can function as a contact agency and promote the activities of
a foreign company, including assisting the foreign enterprise in
exploring the domestic market, performing market research and
providing economic, trade and market information to foreign
companies and organisations. However, a representative office
cannot directly conduct profit-making operations in Vietnam.
Vietnam clarifies VAT regime
• Vietnam’s General Department of Taxation has recently issued
official letters (2524/TCT-C, and 2524/TCT-CS), clarifying the
following in relation to input VAT credits:
• Foreign contractors with VAT-registered project operation
offices who wish to claim input VAT credits must make
payments directly from their own bank accounts opened in
Vietnam if the value of the purchased goods or services
exceeds VND 20 million (approximately $956).
• Vietnamese project operation offices can claim an input VAT
credit even if their overseas headquarters make payments
directly to Vietnamese suppliers on behalf of the project
operation office. The input VAT claim must in that case
include (i) confirmation of the payments by the relevant foreign
bank; (ii) documents supporting the actual transactions;
(iii) documents showing that the Vietnamese suppliers
claimed output VAT based on the relevant invoices issued;
(iv) documents showing that the goods or services providers
in Vietnam received the full amount transferred from the
overseas headquarters in accordance with the relevant
sales contracts and invoices; and (v) authorization from the
project operation office for its headquarters to make payments
directly from overseas bank accounts, clearly stated in the
sales contracts with the Vietnamese suppliers.
• The Ministry of Finance issued official letter 15514/BTC-TCT,
which sets out the conditions for Vietnamese traders to apply
to 0% VAT rate to goods exported on spot:
• The export contract with the foreign trader should clearly
provide that the goods shall be delivered to a recipient in
Vietnam;
• Customs Office certification that the goods have already
been delivered to the on-spot importer as instructed by the
foreign party;
• The foreign buyer shall pay the Vietnamese seller in a freely-
converted currency, the bank payment of which should be
documented as evidence. FX regulations apply when the
foreign trader authorizes the on-spot importer to make the
payment; and
• The export or VAT invoices clearly state the names of the
foreign buyer, the on-spot importer (the recipient of the goods)
and the place of delivery.
International Tax Developments
• Netherlands. An amending protocol to the air transport agreement
between Vietnam and the Netherlands of 1 October 1993 has
been signed on 29 September 2011 and - awaiting its ratification
- provisionally applies as of 28 September 2011.
• Kazakhstan. A double tax treaty between Vietnam and
Kazakhstan has been signed on 31 October 2011.
• Peru. An agreement on the mutual assistance in customs matters
has been signed between Vietnam and Peru on 11 November
2011. It deals with technical and professional contents and
exchange of information relating to taxes and customs fees.
• Chile. A free trade agreement (FTA) between Vietnam and
Chile has been signed on 12 November 2011.
• Qatar. The income tax treaty between Vietnam and Qatar of
8 March 2009 has entered into force and generally applies as
of 1 January 2012.
w w w . l o y e n s l o e f f . c o m
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Fax +33 1 49 53 94 29 (tax)
SINGAPORE
80 Raffles Place
# 14-06 UOB Plaza 1
Singapore 048624
Telephone +65 6532 3070
Fax +65 6532 3071
TOKYO
15F, Tokyo Bankers Club Building
1-3-1 Marunouchi, Chiyoda-ku
TOKYO 100-0005
Japan
Telephone +81 3 3216 7324
ZURICH
Dreikönigstrasse 55
CH-8002 Zurich
Switzerland
Telephone +41 43 266 55 55
Fax +41 43 266 55 59