Autumn 2020

Asia Tax Bulletin

AMERICAS

CHARLOTTE

RIO DE JANEIRO*

SÃO PAULO*

BRASÍLIA*

PALO ALTO SAN FRANCISCO

LOS ANGELES HOUSTON

CHICAGO

BANGKOK

NEW YORKWASHINGTON DC

DUBAI

SHANGHAI

HONG KONG

HO CHI MINH CITY

HANOI

BEIJING

SINGAPORE

*TAUIL & CHEQUER OFFICE

MEXICO CITY

TOKYO

MAYER BROWN | 3

In This Edition

2 | Asia Tax Bulletin

We are pleased to present the Autumn 2020 edition of our firm’s Asia Tax Bulletin.

Dear Reader,

We hope you are well and are coping with the global virus situation affecting us all.

This edition contains news on various recent tax developments in East and Southeast Asia. One development in particular has been dominating the headlines: the introduction, in a number of jurisdictions, of an indirect tax liability on digital goods and services (e-books, music, movies, computer software, games, online advertising, etc.) supplied by overseas businesses. Over the past few months Indonesia, Malaysia and the Philippines have come out with measures to tax overseas businesses. You will find more about them in this edition of the Bulletin.

On another headline note, Indonesia, Korea and Malaysia have seen developments in connection with the Multilateral Agreement (MLI) aimed at avoiding abuse of tax treaties and shipping businesses are looking into the potential consequences of the US’ unilateral termination of its shipping tax treaty with Hong Kong.

We trust you will find this interesting and helpful and hope you will stay healthy.

Pieter de Ridder

Pieter de RidderPartner, Mayer Brown LLP+65 6327 0250 pieter.deridder@mayerbrown.com

Contents

6 Corporate and individual tax incentives in Hainan free trade port

7 Import tax reduction of certain commodities

8 Preferential policy for integrated circuits and software industry

9 Profits tax exemption for funds

10 Advance Pricing Arrangements (APAs)

10 Profits tax concession for insurance businesses

11 Sale and purchase of Hong Kong stocks by ETF market makers

11 Assessable profits, revenue

recognition and measurement of inventories

12 Tax treatment of regulatory capital securities

12 Exchange of information on request

13 Internal tax developments

China

Hong Kong

14 Liaison office is not a permanent establishment

14 Guarantee fees not subject to tax

15 Mandatory electronic invoicing

15 Transparent taxation platform

16 Preferential custom duty rates under treaties

16 Withholding tax on certain domestic payments

India

Japan

Indonesia

18 VAT collection threshold for e-commerce transactions

19 Value-added tax collectors for foreign digital goods and services

19 The reduced tax rate for public companies

20 Mutual Agreement Procedure (MAP) guidelines

20 Tax incentives for production sharing contracts in oil and gas sector

21 Tax incentives

22 Tax treatment of assistance, donations and grants

22 Multilateral Convention (MLI)

22 Electronic tax returns

24 International tax developments

Korea

25 Multilateral convention (MLI) enters into force

25 Supreme court’s decision on permanent establishment

26 Amendments to tax law proposals 2020

27 Cryptocurrency transactions

Malaysia

28 Service tax for digital services

29 Service tax treatment

of reimbursement and disbursement charges

29 Malaysia ratifies multilateral convention (MLI)

30 Special tax treatment of interest

income for banks and financial institutions

31 Digital transactions

32 Related party disclosure

33 Deficiency tax assessments

33 Permanent establishment and tax residence for individuals

34 Fair market value of shares

Philippines

35 Tax framework for variable capital companies

37 Tax avoidance penalty

37 Taxation of insurers under the revised risk-based capital framework

37 Income tax exemption of certain interest payments

38 Transfer pricing guidelines for COVID-affected businesses

39 Withholding tax exemption of

finance lease payments by shipping enterprises

40 International tax developments

Singapore

41 Capital gains from sales of unlisted shares

41 Securities transfer tax on sales of stock options

42 Transfer pricing regulations for intangibles

Taiwan

43 Online filing and payment of taxes

43 Transfer pricing and exchange of information

44 Debt restructuring tax exemptions

45 Tax incentives for foreign investment

45 7% VAT rate is continued

Thailand

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China (PRC)

Corporate and individual tax incentives in Hainan free trade port

China has granted corporate income tax (CIT) reductions, exemptions and accelerated depreciation for enterprises and individual income tax (IIT) exemption for individuals located in the Hainan Free Trade Port in a bid to boost the economy of the region. The incentives apply from 1 January 2020 to 31 December 2024.

• Reduced CIT rate: a reduced CIT rate of 15% applies to income derived by the head office and branches of enterprises engaged in encouraged industries that are registered and effectively operating in the Port, where more than 60% of the total revenue is derived from the business listed in the Catalogue as encouraged industry business activity (the statutory CIT rate is 25%).

• Exemption: foreign income of an enterprise engaged in tourism, modern services and new-high technology that is attributable to an increase in foreign direct investment is exempt from CIT if the following requirements are satisfied:

>> the increase is brought about by business profits derived from a branch newly established in a foreign country/jurisdiction or by dividends repatriated from foreign subsidiaries in which the enterprise has a shareholding of at least 20%; and

>> the CIT rate of the invested foreign country/jurisdiction is not less than 5%.

• Accelerated depreciation/amortisation: the purchase costs of fixed assets (excluding building and real property) and intangible assets of up to CNY 5 million may be fully written off in the year of purchase. Fixed assets and intangible assets of more than CNY 5 million may be depreciated or amortised at an accelerated rate.

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• The effective tax rate of the following income derived by qualified individuals in the Hainan Free Trade Port will be capped at 15% (the statutory progressive rate for IIT is from 3% to 45%):

• comprehensive income (which consists of employment income, income from personal services, author’s remuneration and royalties);

• business income; and

• other income from subsidies recognised by the government of Hainan Province.

• Income in excess of the effective tax rate of 15% will be exempt.

• Eligible individuals may enjoy the above incentive during the filing of their annual tax returns and their tax settlements.

• The incentives were announced by the Ministry of Finance and the State Taxation Administration in Circular (2020) No. 31 and No. 32 that are both dated 23 June 2020.

Import tax reduction of certain commodities

With effect from 5 August 2020, China allows the reduction of import duties and VAT or consumption tax on imports of 20 listed commodities that were previously prohibited in the Notice of State Council [1994] No. 64. The repeal of the prohibition was announced in Circular [2020] No. 36, jointly issued by the Ministry of Finance, General Customs and the State Taxation Administration. The 20 commodities concerned are:

• televisions;

• video cameras;

• video recorders;

• video players;

• audio equipment;

• air-conditioning equipment;

• refrigerators and freezers;

• washing machines;

• cameras;

• photocopy machines;

• stored program control telephone switching systems;

• microcomputers and peripherals;

• telephones;

• wireless paging systems;

• fax machines;

• electronic calculators;

• typewriters and text processors;

• furniture;

• lamps/lighting instruments; and

• food materials (condiments, meat, eggs and vegetables, seafood, fruit, soft drinks, alcohol drinks and dairy products).

CHINA (PRC)

8 | Asia Tax Bulletin CHINA (PRC)

Preferential policy for integrated circuits and software industry

China has renewed its policy of promoting the development of high-quality integrated circuits (ICs) and software, including tax and other incentives, for the industry. The main tax incentives announced are as follows:

Hong KongJURISDICTION:

Profits tax exemption for funds

The Inland Revenue Department (IRD) has provided clarification on the profits tax exemption for funds through the Departmental Interpretation and Practice Note No. 61 (DIPN No. 61) of 30 June 2020.

DIPN No. 61 sets out the IRD’s interpretation and practice relating to the provisions of the Inland Revenue (Profits Tax Exemption for Funds) (Amendment) Ordinance 2019, which removed the ring-fencing features for funds, unifying the tax treatment of onshore and offshore funds by extending the scope of profits tax exemption to privately offered funds operating in Hong Kong whether domiciled in or outside Hong Kong. Key topics covered by the DIPN are the following:

• applicability of the due diligence and reporting obligations under the Foreign Account Tax Compliance Act and Common Reporting Standard to privately offered funds;

• transfer pricing considerations for investment managers, especially in respect of management fees and transfer pricing documentation;

• the definition of a fund and an overview of the tax regimes related to funds both before and after 1 April 2019;

• scope of exemption and qualifying transactions;

• application of the exemption for special purpose entities and investments in private companies;

• treatment of losses incurred by funds and special purpose entities;

• clarification of the anti-round tripping provisions; and

• determination of the tax residence of funds and special purpose entities.

Incentives

Enterprises or projects engaged in manufacturing ICs with a line width of not more than 0.8 microns

Enterprises or projects encouraged by the state that are engaged in manufacturing ICs with a line width of not more than 65 nanometres

Enterprises or projects encouraged by the state that are engaged in manufacturing ICs with a line width of not more than 130 nanometres*

Enterprises engaged in the design, assemble, materials, packing and testing of ICs, and software enterprises that are encouraged by the state

Key encouraged enterprises engaged in the design of ICs and software enterprises

Exemption from enterprise income tax

first 10 years

first 5 years

first 2 years

first 2 years starting from first profit-making year

first 5 years starting from first profit-making year

Post-exemption reduced tax rate

none (normal rate of 25%)

12.5% for 5 years

12.5% for 3 years

12.5% for 3 years

10%

Minimum period of manufacturing operations

15 years

10 years

10 years

none

none

The tax incentives commence from the first profit-making year of the enterprise or, in the case of projects, the first year in which revenue is derived from manufacturing. A list of enterprises and projects that are eligible for the incentives will be compiled by the relevant ministries. In respect of indirect taxes:

• the current preferential policy on value-added tax (VAT) for ICs and software enterprises in relation to the refund of VAT exceeding 3% of the total VAT burden (thus after offset against input tax) continues to apply; and

• qualified enterprises are exempt from import duties on certain items and key IC projects may be allowed to pay VAT on import of new equipment in instalments.

It is noted that the incentives are available to all ICs and software enterprises established in China that have fulfilled the requirements stated therein, regardless of the source of their investment capital (thus regardless of whether they are state-owned or private, or domestic or foreign invested).

The State Council issued Notice of State Council [2020] No. 8, which came into effect on 4 August 2020 for the above incentives. In addition, Notice of State Council [2000] No. 18 and Notice of State Council [2011] No. 4 remain effective. However, in case of divergence, the provisions of Notice of State Council [2020] No. 8 will prevail.

MAYER BROWN | 1110 | Asia Tax Bulletin HONG KONG

Advance Pricing Arrangements (APAs)

Hong Kong’s IRD has updated the guidance on its advance pricing arrangement (APA) regime to reflect recent legislative changes and the streamlining of the APA process.

A new version of Departmental Interpretation and Practice Note (DIPN) No. 48 was issued by the Inland Revenue Department on 15 July 2020, replacing the previous DIPN issued in March 2012. It contains the following changes:

• the definition of controlled transactions, which refers not only to transactions between associated persons, but also transactions between different parts of the same person (such as between branches and head offices). In addition, attribution of profits to a permanent establishment of a non-resident person in Hong Kong can be the subject matter of an APA (paragraph 5);

• the latest relevant domestic legislation in relation to the APA regime, i.e. the Inland Revenue (Amendment) (No. 6) Ordinance 2018, which incorporated the international transfer pricing rules into the tax law and provided a statutory framework for the APA regime (paragraph 14 – 16);

• suitability of concluding an APA, with indicators provided where the Commissioner may be more/less likely to enter into an APA (such as whether the transfer pricing methodology adopted is consistent with OECD guidelines, the complexity of the transfer pricing issues, the probability of double taxation or non-taxation, and whether the proposed arrangements are primarily tax-driven), the treatment of carried forward losses, and the presence of tax avoidance issues (paragraphs 18-28);

• streamlining of the APA process from five stages to three stages, namely early engagement, APA application and monitoring and compliance. The key changes made are delivery of a more balanced approach to understand the totality of the controlled transactions, deliberate early engagement stage with a more rigorous approach if

necessary, and greater focus on identifying and appropriately considering collateral issues (paragraphs 29-30);

• the right of the tax authorities to refuse to make an APA (such as where fees have not been paid) and the applicant’s right to withdraw an APA application (paragraphs 152-154);

• the management of the APA process, particularly by the Deputy Commissioner (Technical), who takes overall charge of the APA programme (paragraph 181);

• introduction of offences and penalties, including penalties on more/less serious offences, additional tax, and consideration for taking penal action (paragraphs 182-196); and

• three updated annexes (Appendix 2, 3 and 5) on a model APA case plan, contents of an APA application and a Model APA respectively; three new annexes (Appendix 1, 4 and 6) on details to be provided in a request for early engagement, a template for spontaneous exchange of information on cross-border unilateral APAs and a model annual compliance report respectively.

Profits tax concession for insurance businesses

The Legislative Council passed a profits tax concession on 15 July 2020 that will reduce the rate from 16.5% to 8.25% for all general reinsurance business of direct insurers, selected general insurance business of direct insurers and selected insurance brokerage business. The government and the Insurance Authority will proceed with the next stage of preparatory work, which includes the formulation of implementation details and drafting of subsidiary legislation. The tax concession is expected to take effect by the end of 2020 or early 2021.

Sale and purchase of Hong Kong stocks by ETF market makers

The Inland Revenue Department (IRD) will exempt from stamp duty the sale and purchase of Hong Kong stocks involving the activities of Exchange Traded Fund (ETF) market makers in the course of allotting and redeeming ETF shares or units listed in Hong Kong upon meeting the prescribed conditions. The stamp duty exemption, which is effective from 1 August 2020, was announced in Stamping Circular No. 03/2020 of 17 August 2020.

Assessable profits, revenue recognition and measurement of inventories

The Inland Revenue Department (IRD) has substantially revised its guidance on the determination of assessable profits for profits tax purposes. Notably, the guidance sets out the generally accepted accounting principles (in other words, the Hong Kong Financial Reporting Standards [HKFRS]) that provide the starting point for computing assessable profits, revenue recognition and inventory valuation for tax purposes. The key aspects as provided in the Departmental Interpretation and Practice Note (DIPN) No. 1 (revised) are set out below. DIPN No. 1 replaces the previous DIPN issued in July 2006.

Financial statements prepared in accordance with the HKFRS form the basis for computing assessable profits, including the recognition of profits on an accrual basis, and outgoings and expenses. The guidance also discusses the interaction between accountancy and tax laws and the need for adjustments under tax law to arrive at the correct amount of taxable profits. Companies incorporated in Hong Kong are required to prepare annual financial statements in compliance with the HKFRS. Companies incorporated outside Hong Kong are allowed to follow other financial reporting standards, as long as they reflect true profits and losses.

HKFRS 15 replaces a number of Standards and Interpretations, in particular HKAS 11 (Construction Contracts) and HKAS 18 (Revenue). HKFRS 15 took effect on 1 January 2018 and provides comprehensive guidance on the recognition of revenue from contracts with customers. Under HKFRS 15, revenue is recognised when performance obligations of the contract are satisfied. In contrast, profits tax is charged when the profit is derived and the expense is incurred. Nevertheless, there should be no significant practical difference since the accounting treatment follows a substance-based approach which is based on the transfer of control of the goods or services, using the following five-step revenue recognition model:

• identifying the contract(s) with a customer;

• identifying the performance obligations in the contract;

• determining the transaction price;

• allocating the transaction price to the performance obligations in the contract; and

• recognising revenue when (or as) the entity satisfies a performance obligation.

HKAS 2 is still recognised as the accounting treatment for inventories as it was in the earlier DIPN, and the basic rule remains that inventories should be valued at the lower of cost or net realisable value. The revised DIPN provides additional guidance on the basis of valuation, including the deduction of inventory expenses, the use of alternative valuation bases, implications of changes to the basis of valuation, the applicable tax provisions in the case of a cessation of business and appropriation of inventory for non-business use, and relevant case laws. For profits tax purposes, the guidelines note that the IRD generally does not have the right to substitute one valid basis for another valid basis, or to adopt a different basis in computing profits.

HONG KONG

MAYER BROWN | 1312 | Asia Tax Bulletin HONG KONG

Tax treatment of regulatory capital securities

The Inland Revenue Department (IRD) has updated its guidance on the tax treatment of regulatory capital securities (RCSs) to reflect the latest legislative changes. The revised Departmental Interpretation and Practice Note (DIPN) No. 53 reflects the legislative changes made by the Inland Revenue (Amendment) Ordinance 2019 which expanded the definition of an RCS to include loss-absorbing capacity (LAC) debt instruments issued by financial institutions or LAC banking entities. DIPN No. 53 (revised) replaces the previous DIPN issued in February 2017.

• RCS is to be treated as a debt security. Generally, any payments under an RCS which are not repayments of principal are to be treated as interest for both deduction and taxation purposes. These include coupon payments, premiums paid and discounts given.

• The debt-like tax treatment is not intended to cover RCSs with essentially equity-like features.

• The tax treatment of profits and losses of issuers of RCSs and their specified connected persons is set out, including restrictions on deductions.

• Specific anti-avoidance provisions were enacted to prevent financial institutions and LAC banking entities from issuing RCSs for tax avoidance purposes. Chargeable profits from an RCS transaction between an issuer of the RCS and its associates will be determined in accordance with the arm’s length principle.

• Taxable profits of the Hong Kong branch of a non-resident financial institution with capital raised through the issue of RCSs will be determined in accordance with the separate enterprises principle.

Exchange of information on request

The Inland Revenue Department (IRD) has issued Departmental Interpretation and Practice Note (DIPN) No. 47 (revised) of 10 July 2020, which has been updated to include the Convention on Mutual Administrative Assistance in Tax Matters as one of the instruments for exchange of information (EOI) with other jurisdictions and reflect the latest international standard of EOI on request. DIPN No. 47 (revised) replaces the previous DIPN issued in 2014.

DIPN No. 47 contains updates in the following areas:

• addition of the latest relevant domestic legislation, i.e. the Inland Revenue (Amendment) Ordinance 2018 which provides the legal framework for Hong Kong to implement multilateral tax arrangements under the IRO, and the Inland Revenue (Convention on Mutual Administrative Assistance in Tax Matters) Order which gives effect to the Convention in Hong Kong. The Convention entered into force in Hong Kong on 1 September 2018 (paragraphs 15-17);

• the standard of “foreseeable relevance” (paragraphs 22-25), including for the purpose of requests for bank information (paragraph 28) and in respect of a third party (paragraph 44), and in various examples;

• common types of information that may be requested, such as tax returns, financial statements, tax paid abroad, property owned or used, income and expenses, company information, etc. (paragraphs 26 and 27);

• Hong Kong’s reservation in relation to the taxes of other jurisdictions described in Article 2(1)(b) of the Convention (paragraph 32);

• use of information requested for other purposes, particularly for non-tax use including by law enforcement agencies such as the Joint Financial Intelligence Unit (JFIU) jointly run by the Hong Kong Police Force and the Hong Kong Customs and Excise Department, which in general requires that such use is allowed in the EOI instrument and the domestic law, and

permission from the competent authority (paragraphs 45 and 47);

• retrospectivity of information exchanged, in particular that for tax matters involving intentional conduct which is liable to prosecution under the criminal laws of the requesting jurisdiction, information relating to taxable periods beginning on or after 1 January of the third year (i.e. 1 January 2015) preceding the one in which the Convention entered into force in respect of Hong Kong (i.e. 1 September 2018) is required to be provided to the requesting jurisdiction (paragraph 54);

• procedural matters, i.e. the notification and review system (in particular, Hong Kong’s reservation under article 4(3) of the Convention that a Hong Kong resident may be informed before information concerning that resident is transmitted to the requesting jurisdiction (paragraph 66)), processing of disclosure requirements and information collection; and

• a new annex on data security and confidentiality.

International tax developments

MACAO

On 20 August 2020, the Hong Kong–Macau Income Tax Agreement (2019) entered into force. The tax agreement generally applies from 1 January 2021 for Macau and from 1 April 2021 for Hong Kong.

USA

The U.S. Department of State informed the Hong Kong authorities on 19 August 2020 that the United States–Hong Kong International Shipping Agreement (Shipping Agreement) has been suspended or terminated – the exact treatment is not yet clear. The State Department made its announcement pursuant to Executive Order 13936 (July 14, 2020), which reflects growing tensions between the United States and the People’s Republic of China (PRC) regarding the PRC’s rule over Hong Kong. The Shipping Agreement was enacted by an exchange of diplomatic notes and provides that Hong Kong has an “equivalent

exemption” under section 883(a)(1) of the Code, which exempts certain gross international shipping income from U.S. income taxation.[1] As a result of the termination or suspension of the Shipping Agreement, Hong Kong residents and Hong Kong corporations will be subject to U.S. income taxation to the extent such income is from U.S. sources under section 863(c)(2). The precise effective date of this action and the particulars of its effect remain unclear, leaving the U.S. Department of Treasury with the obligation to provide more detailed guidance.

SERBIA

The Hong Kong–Serbia Income and Capital Tax Agreement was signed in Belgrade on 14 August 2020 and in Hong Kong on 27 August 2020. Due to Covid-19 travel restrictions, the signing ceremony took place by courier separately in Belgrade first and then in Hong Kong.

HONG KONG

India

Liaison office is not a permanent establishment

Courtesy Khaitan & Co in Mumbai, it was reported that in a recent ruling, the Supreme Court ruled that unless ‘core business activities’ are carried on in India by a project office, it cannot be regarded as a fixed place permanent establishment (PE) in India to attract taxation in India. This ruling also reiterates an important principle that the burden of proof that a foreign entity has a PE in India is initially on the Tax Authorities.

Additionally, in relation to tax treaties to which the provisions of the Multilateral Instrument (MLI) regarding specific activity-based exemption apply, it will be important to examine whether a particular activity in the exclusion clause of PE (advertising, storage, delivery, etc) is indeed ‘preparatory or auxiliary’ in nature.

Lastly, one cannot overemphasise the importance for Indian taxpayers to maintain adequate and accurate documentation on an ongoing basis in order to substantiate its position against any future challenges from the Tax Authorities.

Guarantee fees not subject to tax

The Income Tax Appellate Tribunal has held that corporate guarantee fees are not taxable in India under its tax treaty with the Netherlands. The Tribunal rendered its decision in the case of Lease Plan India Private Ltd v. DCIT (ITA No. 6461 & 6462/Del/2015) on 15 June 2020.

The Tribunal observed that the nature of services provided by the Dutch holding company as guarantor could at best be a financial service and cannot be called a consultancy service. Even otherwise, it does not satisfy the “make available” test under article 12(5)(b) of the treaty. Therefore, the Tribunal held that the guarantee fee paid by

JURISDICTION:

the taxpayer to the Dutch company cannot be covered in the definition of fees for technical services as per article 12 of the treaty.

The Tribunal also considered the decision in Johnson Matthey Public Ltd. Company v. DCIT (88 taxmann.com 127), which held that guarantee fees are not subject to tax as “interest” or FTS or business income. However, it could be subject to tax under the Other Income article of a tax treaty. The tax treaty with the Netherlands does not have an article on “Other Income”. Hence, the corporate guarantee is not subject to tax in India.

Mandatory electronic invoicing

The Central Board of Indirect Taxes and Customs has updated the scope of the mandatory electronic invoicing (e-invoicing) requirement which will be effective from 1 October 2020. The following changes were announced in Notification No. 61/2020 – Central Tax of 30 July 2020:

• taxpayers whose aggregate turnover exceeds INR 5 billion (from the previous limit of INR 1 billion) in a financial year will be required to issue e-invoices; and

• a special economic zone unit is exempt from the requirement.

The increase in the revenue threshold for mandatory e-invoicing aims to provide relief on compliance requirements for small companies. Insurance companies, banks, financial institutions, including non-banking financial institutions, goods transport agencies and passenger transportation services, which are covered by different invoicing rules, are exempt from the e-invoicing requirement.

Transparent taxation platform

With a clear agenda to build trust between the taxpayers and the administration, the Prime Minister has launched the “Transparent Taxation” platform to honour honest taxpayers amid the COVID-19 pandemic. The said platform focuses on major reforms such as faceless assessment, faceless appeal and the Taxpayers’ Charter.

The faceless assessment and faceless appeal schemes aim to simplify the assessment and appeal process, ensure anonymity of taxpayers and minimise direct contact between taxpayers and income tax officers. In this regard, the Central Board of Direct Taxes issued an order under section 119 of the Income Tax Act 1961 dated 13 August 2020 to support various e-governance initiatives, instructing that all assessment orders from now on be passed by the National e-Assessment Centre through the Faceless Assessment Scheme 2019, except for:

• assessment orders in cases assigned to Central Charges; and

• assessment orders in cases assigned to International Tax Charges.

The cases taken up for faceless assessment would include a mix of returns filed by individuals and businesses (micro, small and medium-sized enterprises, as well as large companies) and would be determined based on risk parameters and mismatches by a central computer. The National e-Assessment Centre would then allocate the cases to assessment units through an automated allocation system to ensure taxpayer anonymity. Assessees should then respond to notices electronically to the National e-Assessment Centre.

Taxpayers are assured of fair, courteous and rational behaviour with the introduction of the Taxpayers’ Charter 2020, which lists the Income Tax Department’s commitments to taxpayers, including treating taxpayers with honesty, providing mechanisms for appeal and review, providing complete information, and reducing the cost of compliance, among other things, as well as the department’s expectations from taxpayers.

The faceless assessment and the Taxpayers’ Charter are effective from 13 August 2020, while the faceless appeal is available across the country from 25 September 2020 onwards.

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16 | Asia Tax Bulletin INDIA MAYER BROWN | 17INDIA

The 1% withholding tax requirement under section 194-O of the Income Tax Act, 1961 (the Act), as introduced by the Finance Act, 2020, will not apply to the following situations:

• transactions in securities and commodities traded on recognised stock exchanges or cleared and settled by the recognised clearing corporation;

• transactions in electricity, renewable energy certificates and energy savings certificates traded on certain registered power exchanges;

• payment gateway operators will not be required to deduct the tax on a transaction if the e-commerce operators have already deducted the tax on the same transaction; and

• insurance agents or aggregators will not be required to deduct the tax for the years following the first year if they have no involvement in transactions between insurance companies and buyers for the subsequent years. However, insurance companies will be required to deduct the tax on any commission payment made to insurance agents or aggregators.

• For the financial year 2020/21, the calculation of the gross amount of sales of goods and services in relation to the withholding threshold of INR 500,000 is counted from 1 April 2020 up to 30 September 2020. Thus, the withholding requirement will apply to any sum credited or paid on or after 1 October 2020. The calculation applies both to withholding requirements under section 194-O and section 206C(1H) of the Act.

• In the case of tax collected at source (TCS) imposed under section 206C(1H) of the Act, no adjustment is required to be made on account of sales returns, discounts or indirect taxes since the collection is made with reference to receipts of the sale consideration.

• Sales of motor vehicles to a dealer will be subject to TCS under section 206C(1H) of the Act if it is not taxed under section 206C(1F) of the Act. Sales of motor vehicles to consumers will be subject to TCS under section 206C(1H) of the Act if the consideration exceeds INR 500,000 in the previous year.

• The proposed TCS under section 206C(1H) of the Act will not apply to payments received for fuel supplied to non-resident airlines in Indian airports.

The clarifications aim to minimise the anticipated difficulties in the application of the new withholding requirements set to begin on 1 October 2020. The new withholding tax requirements under section 194-O and section 206C(1H) of the Act were introduced in the Finance Act, 2020. Section 194-O requires e-commerce operators to deduct 1% tax of the gross amount of sales of goods or services, or both, in transactions facilitated through a digital or electronic platform, with exceptions to certain individuals and Hindu undivided family. Section 206C(1H) requires sellers that receive an aggregate value in previous year’s domestic sales of INR 5,000,000 to withhold 0.1% of the sale from the buyer.

Preferential custom duty rates under treaties

The Ministry of Finance has issued administrative rules for importers of goods claiming preferential duty rates under treaty agreements. The procedures in the Customs (Administration of Rules of Origin under Trade Agreements) Rules of 2020 (the Rules) require that an importer or his agent claiming the preferential duty rate:

• declare that the goods qualify as originating goods for preferential rate of duty under an agreement at the time of filing the bill of entry;

• indicate the respective tariff notification against each item on which preferential duty rate is claimed;

• produce the certificate of origin (CO) covering each item on which the preferential rate is claimed; and

• enter certain details from the CO in the bill of entry as prescribed by the Rules.

Importers claiming preferential rate of duty are expected to:

• possess information as indicated in Form I of the rules;

• keep all supporting documents related to Form I for at least five years from the date of filing of the bill of entry and submit the same to the proper officer on request; and

• exercise reasonable care to ensure the accuracy and truthfulness of the information and documents.

The claim of preferential duty rate may be denied without verification if the CO:

• is incomplete and not in accordance with the format prescribed in the Rules of Origin;

• has an alteration not authenticated by the issuing authority;

• is produced after its validity period has expired; or

• is issued for an ineligible item.

The claim may also be disallowed without further verification when:

• the importer relinquishes the claim; or

• the information or documents furnished by the importer and available on record are sufficient to prove that the goods do not meet the prescribed origin criteria.

An importer must provide information or documents requested for verification by an officer within 10 working days from the date of request. Where the importer fails to comply by the prescribed date or where the information and documents are found to be insufficient, the officer shall forward a verification proposal for the CO from the designated verification authority in the exporting country or country of origin.

Where it is established that an importer has suppressed the facts, made wilful misstatement or colluded with the seller or any other person, with the intention to avail undue benefit of a trade agreement, his claim of preferential rate of duty will be disallowed and the importer will be penalised accordingly. The Rules came into force on 21 September 2020.

Withholding tax on certain domestic payments

The Central Board of Direct Taxes (CBDT) has clarified that certain domestic payments made by electronic commerce (e-commerce) operators to e-commerce participants are exempt from the 1% withholding tax imposed under the Finance Act, 2020. The CBDT also clarified the withholding tax threshold, the effect of adjustments for sales returns, discounts and indirect taxes, and the applicability of the withholding tax requirement to the sale of motor vehicles and fuel supplied to non-resident airlines.

18 | Asia Tax Bulletin

Indonesia

VAT collection threshold for e-commerce transactions The Directorate General of Taxation (DGT) issued a regulation that stipulates the details regarding the registration thresholds for value-added tax (VAT) collections, appointment of VAT collectors and other compliance requirements for the implementation of the Ministry of Finance Regulation No. 48/PMK.03/2020 (PMK-48) of 5 May 2020. PMK-48 sets out the procedure regarding the collection, depositing and reporting of VAT to be imposed on the import of digital products in the form of intangible goods and services by domestic consumers.

The above measures are included in DGT Regulation No.PER-12/PJ/2020 of 25 June 2020 which came into effect on 1 July 2020 and the following are the key aspects.

• Foreign sellers and foreign service providers, foreign e-commerce marketplaces and domestic e-commerce marketplaces that conduct e-commerce transactions in Indonesia will be appointed as VAT collectors and be required to register for VAT collection purposes if they meet the following criteria:

>> the value of transactions with Indonesian customers exceeds IDR 600 million annually or IDR 50 million monthly; and/ or

>> the amount of traffic or access in Indonesia exceeds 12,000 users annually or 1,000 users monthly.

• The appointment as a VAT collector will be made officially by the DGT or by self-notification to the DGT. Once appointed, the VAT collector will be provided with a VAT collector ID, tax registration letter and the appointment becomes effective from the beginning of the following month.

JURISDICTION:

Appointed VAT collectors are required to comply with the following procedures:

• activate their account in the DGT system prior to the effective date of their appointment;

• collect 10% VAT from the sales value from the Indonesian customers and issue commercial invoices, billings, order receipts, or similar documents as proof of VAT collection;

• remit the VAT collected to the DGT electronically or by other means determined by the DGT by the end of the month following the month where the transaction was undertaken; and

• file a quarterly report via the DGT’s designated tax filing system on the VAT collection and payment with details of the number of users in Indonesia, amount of payment excluding VAT, and amount of VAT collected and remitted not later than the end of the month following the end of the quarterly tax period. A detailed VAT report for each calendar year may also be requested by the DGT.

Where the VAT collectors have imposed the VAT and the customers have also paid VAT on a self-assessment basis, the self-assessed VAT can be converted to other tax payments, refunded to customers, regarded as input tax credit or claimed as a deductible expense in the income tax calculation of the customers.

Value-added tax collectors for foreign digital goods and services

In addition to Amazon Web Services Inc; Google Asia Pacific Pte. Ltd; Google Ireland Ltd; Google LLC; Netflix International B.V.; Spotify AB, Facebook Ireland Ltd; Facebook Payments International Ltd; Facebook Technologies International Ltd; Amazon.com Services LLC; Audible, Inc; Alexa Internet; Audible Ltd; Apple Distribution International Ltd; Tiktok Pte. Ltd; The Walt Disney Company (Southeast Asia) Pte. Ltd., on 8 September 2020, the Directorate General of Taxation (DGT) appointed the following 12 companies as

value-added tax (VAT) collectors for foreign digital goods and services sold to customers in Indonesia. The appointment requires the companies to collect the 10% VAT on the sale of foreign digital products and services to consumers in Indonesia and remit the same to the DGT. The list of companies recently appointed as VAT collectors effective 1 October 2020 are LinkedIn Singapore Pte. Ltd; McAfee Ireland Ltd; Microsoft Ireland Operations Ltd, Mojang AB, Novi Digital Entertainment Pte. Ltd, PCCW Vuclip (Singapore) Pte. Ltd, Skype Communications SARL, Twitter Asia Pacific Pte. Ltd, Twitter International Company, Zoom Video Communications, Inc, PT Jingdong Indonesia First; and PT Shopee International Indonesia.

The reduced tax rate for public companies

On 27 June 2020, the Directorate General of Taxation announced additional conditions that must be met to be eligible for the reduced corporate tax rate from fiscal year 2020 by public companies with at least 40% of their total paid-up capital traded on the Indonesia Stock Exchange. The standard tax rate will be reduced by 3% if the conditions specified under Government Regulation No. 30 of 2020 (GR 30/2020) are met, and the rates applicable will be 19% in fiscal years 2020 and 2021, and 17% in fiscal year 2022.

The additional conditions stipulated under GR 30/2020 are as follows:

• 40% of the total issued and fully paid-up shares listed on the Indonesia Stock Exchange must be owned by at least 300 shareholders (excluding the issuers and controlling shareholders/ major shareholders);

• total ownership by each shareholder must be less than 5% of the total issued and fully paid-up shares; and

• the abovementioned requirements must be fulfilled for a minimum of 183 calendar days within a fiscal year.

The above provisions do not apply in the case of companies conducting share buybacks under a government policy or regulated by the Financial

MAYER BROWN | 19INDONESIA

20 | Asia Tax Bulletin INDONESIA MAYER BROWN | 21INDONESIA

Regulation 67/2020 provides a comprehensive regulatory framework for the tax incentives with the aim of enticing investors to invest in the upstream oil and gas activity. The tax incentives consist of the following:

• Exemptions from collecting value-added tax (Pajak Pertambahan Nilai or “PPN”) and luxury-goods sales tax (Pajak Penjualan Atas Barang Mewah or “PPnBM”) in relation to certain activities and objects which are used during oil operation activities, as follows: (i) procurement of taxable goods and/or taxable services; (ii) utilisation of intangible taxable goods from outside the customs areas within the customs areas; and/or (iii) utilisation of taxable services from outside the customs areas within the customs areas; and

• Reduction of land and building tax (Pajak Bumi dan Bangunan or “PBB”) amounting to 100% of payable PPB, as set out under the relevant tax returns.

As an overview, Gross-Split Production Sharing Contracts (each, a “Gross-Split PSC”) were introduced under the Minister of Energy and Mineral Resources (the “MEMR”) Regulation No. 8 of 2017 dated January 16, 2017 on Gross-Split Production Sharing Contracts, as lastly amended by MEMR Regulation No. 20 of 2019 dated August 29, 2017 (“Regulation 8/2017”). A Gross-Split PSC is defined as a production sharing contract in the upstream oil and gas business activities based on the principle of distributing gross production without the mechanism of operating costs recovery.

The above tax incentives are applicable only to contractors meeting the following criteria:

• Contractors that operate under cooperation contracts signed prior to the enactment of GR 53/2017 which were subsequently amended to adjust to GR 53/2017;

• Contractors that operate under the Gross-Split PSCs signed before GR 53/2017, provided that the Gross-Split PSCs are consistent with GR 53/2017; or

• Contractors that operate under the Gross-Split PSCs signed after GR 53/2017 which are consistent with GR 53/2017.

Tax incentives

The Ministry of Finance (MOF) has extended the incentives period previously provided under the MoF Regulation No.44/PMK.03/2020 (PMK-44) up to December 2020 and further expanded the list of business sectors that may qualify for the tax incentives available to taxpayers that are affected by the COVID-19 pandemic in the country.

In this regard, the MOF has issued Regulation No.86/PMK.03/2020 (PMK-86) and the salient features of PMK-86 are set out below.

The following incentives may be availed by qualifying taxpayers up to December 2020 (previously available from April to September 2020):

• withholding tax on employment income (article 21 of the Income Tax Law (ITL)) borne by the government for employees earning annual income not exceeding IDR 200 million;

• exemption from tax on import (article 22 of the ITL);

• reduction of 30% in monthly tax instalment payment (article 25 of the ITL); and

• preliminary value-added tax (VAT) refund automatically granted up to a maximum of IDR 5 billion.

The qualifying taxpayers are:

• companies engaged in specific industries as listed in the attachments to PMK-86;

• companies granted the Import Facility for Export Purposes; or

• companies licensed as businesses in the Bonded Zone area.

The 0.5% final tax on the gross revenue of qualifying small to medium enterprises (SMEs) borne by the government incentive will also be extended until December 2020.

PMK-86 also further expanded the list of industries that are eligible for the incentives applicable to articles 21, 22 and 25 of the ITL and the VAT refund accordingly. Taxpayers may refer to the specific list of business classification codes under PMK-86 here to confirm their eligibility for the aforesaid tax facilities.

Services Authority according to Government Regulation No. 29 of 2020 (GR 29/2020). GR 29/2020 stipulates that public companies that conduct share buybacks and, as a result, do not fulfil the requirements above, will be given exceptions until 30 September 2020 so that they can continue to qualify for the lower income tax rate.

Mutual Agreement Procedure (MAP) guidelines

The Directorate General of Taxation (DGT) has issued guidelines on the procedures to request and follow-up on the implementation of a Mutual Agreement Procedure (MAP). In this regard, the DGT has issued Regulation No. PER-16/PJ/2020 (PER-16) as the implementing regulation for MoF Regulation No. 49/PMK-03/2019 (PMK-49), previously issued regarding the procedures to implement a MAP. Where the request for MAP implementation has been made before PER-16 came into effect, a renewal of request can be made before 25 April 2021 subject to conditions. PER-16 came into force on 11 August 2020.

• Resident taxpayers may submit requests for the implementation of a MAP to the DGT as the competent authority, in the event that the tax treatment by the tax authorities of a treaty partner is not in accordance with the provisions of the tax treaty.

• Requests for implementation of a MAP may also be made by Indonesian citizens through the DGT, the DGT, or the tax authorities of the treaty partner through the competent authority of the respective jurisdiction concerned.

• A request for the implementation of a MAP by the DGT may be made if according to the resident taxpayer, the DGT’s tax treatments are not in accordance with treaty provisions in the case of:

>> double taxation from transfer pricing adjustments; and

>> differences in the interpretation of treaty provisions.

• The DGT will follow up on the requests for the implementation of a MAP as referred to above by conducting MAP negotiations with competent authorities of treaty partners within the time limit as stipulated in PMK-49.

• Where a request for a MAP implementation has been made without a mutual agreement being reached, a renewal of request can be made accordingly, subject to conditions.

• A request for the implementation of a MAP by the DGT based on a request from a resident taxpayer that is of the opinion that the DGT’s tax treatment is not in accordance with treaty provisions, must comply with the requirements specified under PER-16.

• Where a mutual agreement has been reached, the Director of International Taxation of the DGT is required to follow up with the drafting and signing of the decree on the mutual agreement reached not later than one month from:

>> the receipt of written notification from the competent authority of the treaty partner; and

>> the delivery of the respective written notification by the DGT to the competent authority of the treaty partner.

Tax incentives for production sharing contracts in oil and gas sector

On June 16, 2020, the Minister of Finance (the “MOF”) issued Regulation No. 67/PMK.03/2020 of 2020 on Incentives of Value-Added Tax or Value-Added Tax and Luxury-Goods Sales Tax, and Land and Building Tax on Upstream Oil and Gas Business Activity through Gross-Split Production Sharing Contracts (“Regulation 67/2020”). Regulation 67/2020 is an implementing regulation of Article 25 of Government Regulation No. 53 of 2017 dated December 28, 2017 on Tax Treatment for Upstream Oil and Gas Business Activity through Gross-Split Production Sharing Contracts (“GR 53/2017”). Regulation 67/2020 enters into force as of July 16, 2020.

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Taxpayers that are eligible for the incentives applicable to articles 21, 22 and 25 of the ITL and the SME final tax incentive will be required to prepare and submit a monthly realisation report in the prescribed format via www.pajak.go.id by the 20th day of the following month. Taxpayers who have submitted the notification or application under the previous regulations are not required to re-submit the application while taxpayers already granted with the said incentives earlier will still qualify for the incentives under PMK-86.

PMK-86 also includes examples for the calculation of withholding taxes borne by the government, notification procedures, the reporting format for the utilisation of tax incentives and other administrative details. PMK-86 came into force on 16 July 2020 and PMK-44 is revoked accordingly.

Tax treatment of assistance, donations and grants

The Ministry of Finance (MOF) has issued guidelines regarding the tax treatment of income derived from assistance, donations or grant of assets (collectively known as “contributions”) transferred or received by taxpayers. The assistance or donations referred to may be in the form of cash or goods.

Income from the contributions (for the recipient) as well as the profits resulting from the transfer of assets from the contributions (for the contributor) are excluded from the taxable income of the recipient and contributor for the following:

• contributions made to:

>> biological parents or biological children;

>> religious bodies which are non-profit oriented;

>> education agencies which are non-profit oriented;

>> social bodies, including foundations, which are non-profit oriented;

>> cooperatives; and

>> Individuals who run micro and small businesses; and

• transactions conducted between independent parties where there is no business, employment, ownership or control relationship between the contributor and the recipient.

If an ownership or control relationship exists between the transacting parties, profits due to the contributor or income from the contributions received by the recipient will remain excluded from taxable income provided that the contributor and recipient are religious, educational or social bodies including foundations. All contributions made are deductible from the contributing party’s gross income.

Further information on the above tax treatment is detailed in MOF Regulation No. 90/PMK.03/2020 of 21 July 2020, which came into force on that same date.

Multilateral Convention (MLI)

On 1 August 2020, the Multilateral Convention (MLI) entered into force in respect of Indonesia. Indonesia signed the convention on 7 June 2017 and deposited its final MLI Position on 28 April 2020, including the 47 tax treaties that it wishes to be covered by the MLI. For a treaty to be covered by the MLI, both signatories need to have a) joined the convention, b) included each other in their list of covered tax agreements, and c) deposited their instruments of ratification.

Electronic tax returns

The Directorate General of Taxation (DGT) has issued a decree that requires all taxpayers to submit electronic withholding tax (WHT) returns under articles 23 and 26 of the Income Tax Law (ITL) to submit the proof of tax withheld and periodic WHT tax returns online, effective 1 September 2020. The decree was issued through DGT Regulation No. KEP-368/PJ/2020 of 10 August 2020 which fully implements the requirement to report periodic returns for tax withheld under articles 23 and 26 of the ITL electronically according to the provisions under DGT Regulation No. PER-04/PJ/2017.

MAYER BROWN | 23INDONESIA

Pursuant to DGT Regulation 04/PJ/2017 of 31 March 2017, taxpayers that meet the following criteria are obligated to submit electronically the periodic returns for tax withheld under articles 23 and 26 of the ITL:

• the taxpayers have issued more than 20 proofs of deduction under articles 23 or 26 of the ITL within a tax period;

• the gross income amount subject to WHT is more than IDR 100 million under one proof of WHT deduction;

• the taxpayers have submitted the periodic tax returns electronically; and

• the taxpayers are registered at selected tax offices.

The following taxpayers are also required to submit electronically the periodic returns for tax withheld under articles 23 and 26 of the ITL once they have met the criteria above:

• taxpayers registered before 1 September 2020 but have yet to meet the criteria above; or

• taxpayers who register on or after 1 September 2020.

JapanJURISDICTION:

International tax developments

On 17 October 2020, the Japan–Uzbekistan Income Tax Treaty will enter into force. The treaty generally applies from 17 October 2020 for the provisions of article 25 (Exchange of Information) and article 26 (Assistance in the Collection of Taxes) and from 1 January 2021 for other taxes. Once in force and effective, the new treaty will replace Japan’s former USSR Income Tax Treaty concluded in 1986 in relations between Japan and Uzbekistan.

KoreaJURISDICTION:

Multilateral Convention (MLI) enters into force On 1 September 2020, the Multilateral Convention (2016) (MLI) entered into force. Korea signed the convention on 7 June 2017 and deposited its final MLI Position on 13 May 2020, including the 73 tax treaties that it wishes to be covered by the MLI. For a treaty to be covered by the MLI, both signatories need to have a) joined the convention, b) included each other in their list of covered tax agreements, and c) deposited their instruments of ratification.

Supreme court’s decision on permanent establishmentOn 25 June 2020, the Korean supreme court rendered an important decision on the determination of corporate income tax and value-added tax (VAT) imposed on a permanent establishment (PE) of a foreign enterprise. The Supreme Court has set forth a specific standard on the determination of corporate income tax and the VAT amount for a PE. The Court confirmed that corporate income tax may only be imposed on profits attributable to a PE in accordance with the tax treaty; in particular, even if a PE is found, the Court concluded that VAT is not due on all revenues earned from Korea.

A foreign company, “A”, recruited casino gamers outside of Korea, who would gamble at a casino in Korea operated by a Korean corporation, “B”. “A” received commission for such recruitment services including the provision of the below-mentioned services in Korea.

The Korean tax authorities concluded that A’s performance of activities related to the gamers (including provision of guidance to gamble and exchange gambling chips at an office located at the casino in Korea) constitutes A’s PE. Therefore, the tax

26 | Asia Tax Bulletin

authorities imposed corporate income tax and VAT on all commission earned by A based on the view that the commission in its entirety is attributed to the PE.

The supreme court first held that where a foreign enterprise carries on business through a PE in Korea, only the profits that have been derived from transactions that it had independently (as a distinct and separate enterprise) engaged with the foreign enterprise, would be attributed to the PE and taxable in Korea. The supreme court continued that the tax authorities would bear the burden of proof on the amount of profits attributable to a PE.

Based on the above conclusions, the supreme court found that:

• even if activities performed by A’s employees at A’s office in Korea constitute A’s essential and significant activities, A’s most essential and significant work took place outside of Korea and the costs of such work were mostly incurred outside of Korea;

• the revenues attributable to A’s PE are limited to the consideration that A received for work that it had performed at its office in Korea and that it cannot be concluded that the attributable revenues include the consideration for A’s activities performed outside of Korea; and

• the revenues attributable to A’s head office are clearly part of the commission that A received, and such attributable revenues would also be significant. Accordingly, the Supreme Court determined that the tax authorities’ assessment of corporate income tax and VAT would have to be cancelled in its entirety, because there were no materials upon which the profits and revenues attributable to the PE may be calculated in order to compute the justifiable tax amount.

Amendments to tax law proposals 2020Further to the Tax Development Review Committee meeting on 22 July 2020, the Ministry of Economy and Finance (MoEF) has released several proposed

tax law amendments of 2020, which will take effect from 1 January 2021, unless stated otherwise.

CORPORATE TAXATION

• increase of carry-forward period for net operating losses (NOL) from 10 years to 15 years; and

• increase of carry forward period for tax credits under the Special Tax Treatment Control Law up to 10 years (previously it varied from five to 10 years).

INDIVIDUAL TAXATION

• new top marginal income tax rate of 45% for individuals with taxable income over KRW 1 billion.

CAPITAL GAINS

• gains from transactions of listed shares between KRW 50 million and KRW 300 million will be taxed at 20%, while gains above KRW 300 million will be taxed at 25%. This is applicable from 1 January 2023; and

• gains from virtual assets will be taxed at 20%.

INTERNATIONAL TAXATION

• increase of carry-forward period for foreign tax credit and deduction of unused credits from five years to 10 years, subject to the condition that the current brought forward foreign tax credits are not expired when the corporate or personal income tax return is filed on or after 1 January 2021; and

• the maximum roll-back period for the advance pricing agreement (APA) will be extended from three years to five years for unilateral APAs and five years to seven years for bilateral APAs. This is applicable for applications filed on or after 1 January 2021.

VALUE-ADDED TAX (VAT)

• the eligibility for the simplified VAT reporting system scope will be expanded for taxpayers with yearly turnovers from KRW 48 million to KRW 80 million. This will take effect from July 2021.

KOREA

Cryptocurrency transactions

Following the Tax Development Review Committee meeting of 22 July 2020, the Ministry of Economy and Finance (MoEF) announced its decision to tax profits derived from cryptocurrency transactions. Under the new framework, any gains made from virtual assets (including cryptocurrency) will be taxed at 20%, with the exception of those that fall below the minimum threshold of KRW 2.5 million per year.

Reporting and payment of such gains must be made annually in May. Korean stock exchanges will be held responsible for deducting and paying the taxes from transactions of a non-resident or foreign corporation trading on the South Korean stock exchange. The rules will be presented to the parliament for further deliberation. If they are passed, they will be effective from 1 October 2021.

MAYER BROWN | 27KOREA

MAYER BROWN | 29MALAYSIA

Examples 17 to 21 of the guidelines clarify the transitional rules for the implementation of service tax on digital services. For example, where a consumer subscribes to music streaming through a music streaming platform on a yearly basis and the period is from 1 April 2019 to 31 March 2020, the services tax will only be charged by the FRP on the portion of services provided from 1 January 2020 (i.e. date of coming into operation of the services tax on digital services). The consumer is required to account for imported taxable services for the period before 1 January 2020.

Service tax treatment of reimbursement and disbursement charges

The Royal Malaysian Customs Department (RMCD) has clarified that out-of-pocket expenses (OPE) charged by a taxable person to customers may be subject to 6% service tax if such OPE are incurred by the taxable person as a principal. In particular, the RMCD has issued the service tax guide on disbursement and reimbursement (the guideline) dated 15 September 2020.

The determination of the service tax treatment of OPE depends on whether the claimant, or a registered person who recovers expenses incurred on behalf of a customer, acted as a principal or as an agent when he acquired the services from a service provider.

Where there is a written contractual agreement between the service provider and the claimant:

• as a principal: the claimant’s recovery of expenses (reimbursement charges) from the customer will be treated as a service provided to the customer and therefore, subject to 6% service tax; and

• as an agent for the customer: the claimant’s recovery of expenses (disbursement charges) will not be treated as a service provided by the claimant. However, if the recovered expenses from the client include a mark-up, the claimant will be treated as a principal and such recovery of expenses will be subject to service tax.

Where there is no contract or an ambiguous contract is in the picture, the following criteria must be considered in determining the service tax liability:

• contractual liability and assumption of responsibilities and risks;

• legal obligations to make payment or payment arrangement;

• alteration to the nature and value of expenses; or

• identities of parties and transaction involved.

OPE related costs will be treated as part of the value of the taxable service by the service provider if such OPE charges are not stated in the contract and/or agreement and will be subject to 6% service tax.

However, OPE charged separately are not a taxable service if they fulfil all of the following conditions:

the contract states that the charges will be borne by the customers;

• no mark-up will be made by the service provider; and

• the claimant provides the supporting documents when the OPE is charged to the customer.

Malaysia ratifies multilateral convention (MLI)

Malaysia ratified the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI), by way of the Double Taxation Relief (Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting) Order 2020, as published in the Official Gazette PU (A) 224/2020 of 13 July 2020, published on the government website on 4 August 2020. Malaysia submitted its MLI position at the time of signature, listing its reservations and notifications and including 73 tax treaties that it wishes to be covered by the MLI. Malaysia has yet to deposit the ratified instrument together with the final positions/reservations taken with the OECD.

Service tax for digital services

The Royal Malaysian Customs Department (RMCD) has updated its guidelines on the 6% service tax for digital services provided by foreign service providers (FSPs) by including the latest amendments in the services tax regulations. The guidelines provide further explanations on and examples of the implementation of the service tax for digital services.

For a service to be considered a digital service, the delivery of the service is ʺessentially automatedʺ or requires minimal or no human intervention from the service provider. The guidelines provide an example whereby the service provider does not have to perform any other activities and the consumers are able to acquire or download the digital service themselves.

The provision of online distance learning and online newspapers, journals and periodicals is exempt from digital service tax.

FSPs include online platform operators carrying out transactions to provide digital services on behalf of any service provider upon meeting certain conditions set out in the guidelines.

A foreign registered person (FRP; see Note below) must obtain at least two items of non-conflicting information to prove that the consumer is a Malaysian consumer before imposing the digital service tax.

Effective 14 May 2020, an FRP providing digital services to a company in Malaysia within the same group of companies is exempt from charging the service tax, provided that the FRP does not provide any digital services to any person outside the group of companies.

An administrative concession is available for FRPs to account for service tax on an invoice basis, instead of at the time of payment, upon approval by the Director General of Customs.

MalaysiaJURISDICTION:

30 | Asia Tax Bulletin MALAYSIA

Special tax treatment of interest income for banks and financial institutions

The government gazetted the special tax treatment of interest income derived by licensed banks and financial institutions from qualified customers during the loan moratorium period from 1 April 2020 to 30 September 2020 in the Income Tax (Special Treatment for Interest on Loan) Regulations 2020 of 25 August 2020. The government also announced a three-month extension on the loan moratorium period after 30 September 2020 for targeted groups in response to the COVID-19 pandemic. However, it remains to be seen whether the special tax treatment will apply to the extended loan moratorium period.

MALAYSIA

Philippines

Digital transactions

The Committee on Ways and Means has submitted to the House of Representatives the substitute bill regarding the imposition of value-added tax (VAT) on the sale of digital goods and services by resident and non-resident digital service providers.

• A “digital service provider” (DSP) is defined as a service provider of a digital service or good to a buyer through operating an online platform for the purposes of buying and selling of goods or services or by making transactions for the provision of digital services on behalf of any person. A DSP could be defined as any of the following:

>> a third party that acts as a conduit for goods and services offered by a supplier to a buyer and receives commissions;

>> a platform provider for promotion that uses the internet to deliver marketing messages to attract buyers;

>> a host of online auctions conducted through the internet, where the seller sells the products or services to the person who bids the highest price;

>> a supplier of digital services to a buyer in exchange for a regular subscription fee; and

>> a supplier of goods or electronic and online services delivered through the internet.

• A “buyer” refers to any person who resides in the Philippines and acquires taxable digital services in the Philippines from a DSP for personal consumption or for business purposes.

• A non-resident DSP will be liable to collect and remit the VAT on the transactions that go through its platform.

JURISDICTION:

32 | Asia Tax Bulletin PHILIPPINES

• Non-resident DSPs will be required to register for VAT if the gross sales or receipts from the digital service business for the past 12 months have exceeded the registration threshold of PHP 3 million or if they expect the gross sales or receipts to exceed the threshold within the next 12 months from filing the VAT return.

• Non-resident DSPs will not be allowed to claim creditable input tax.

• Simplified invoicing and registration requirements for VAT-registered non-resident DSPs, subject to the rules and regulations to be prescribed by the Secretary of Finance.

• Non-resident DSPs that are registered with the Bureau of Internal Revenue will be subject to VAT at the rate of 5% for the provision of services to the Philippine government, otherwise VAT will be imposed at 12%.

• Books and other printed materials sold electronically or online may be exempt from VAT.

The substitute bill (House Bill No. 7425) of 18 August 2020 consolidates House Bills No. 4531, 6765, 6944 and House Resolution No. 685.

Related party disclosure

The Bureau of Internal Revenue (BIR) has issued guidelines regarding the mandatory filing of the Information Return on Related Party Transactions (RPT Form) as an integral attachment to the annual income tax return for taxpayers with related party transactions. The RPT Form is to be completed by taxpayers with domestic and/or foreign related party transactions regardless of the amount and volume of transactions. Individuals who are considered related parties of a reporting entity are also required to submit the RPT Form in their individual capacities.

The required disclosures on transactions and outstanding balances must be made separately for each of the following categories: the parent, entities with joint control or significant influence over the entity, subsidiaries, associates, joint ventures which the entity is a party to, key management personnel of the entity or its parent and other related parties.

For each of the above said categories, the following information must be provided:

• the aggregate amount per transaction type;

• the amount of outstanding balances, including commitments, and their terms and conditions;

• provisions for doubtful debts related to the amount of outstanding balances; and

• bad debts expense recognised during the taxable year.

Detailed information to be furnished when completing the RPT Form, includes the following:

• business overview of the parent company that includes the profile of the multinational group that the taxpayer belongs to, including the name, address, legal status and country of tax residence of each of the related parties with whom intra-group transactions have been entered into by the taxpayer, and ownership linkages among them;

• the functional profile of the taxpayer including a broad description of the taxpayer’s business and the industry in which it operates, and of the business of the related parties with whom the taxpayer has transacted;

• documents to be attached to the RPT Form:

>> certified true copies of relevant contracts or proof of transaction;

>> withholding tax returns and proof of payment of taxes withheld and remitted to BIR;

>> proof of payment of foreign taxes or ruling issued by the foreign tax authority;

>> certified true copy of any Advance Pricing Agreement; and

>> any transfer pricing documentation.

The filing requirement came into effect on 25 July 2020. Taxpayers whose fiscal year ended on or after 31 March 2020 are required to file the RPT Form with their annual income tax return on or before 30 September 2020.

Further details including related parties and related party transactions information are set forth under Revenue Regulations No.19-202. BIR also issued Revenue Memorandum Circular No. 76-2020 to

MAYER BROWN | 33PHILIPPINES

clarify certain issues concerning the filing of the RPT Form. Note: The RPT Form or BIR Form No. 1709 replaces the BIR Form l702H – Information Returns on Transactions with Related Foreign Persons, series of 1992.

Deficiency tax assessments

The Bureau of Internal Revenue (BIR) has clarified that if a taxpayer is found to be liable for deficiency tax or taxes during a tax investigation/audit and no agreement is reached between the taxpayer and the BIR, the BIR will proceed to issue a deficiency tax assessment notice within 10 days (instead of seven days) from the conclusion of the discussion between the BIR and the taxpayer. In this regard, the BIR has updated the due process requirement for issuing a deficiency tax assessment, as part of which the BIR will issue a Notice of Discrepancy (ND), instead of a Notice of Informal Conference (NIC), to the taxpayer under investigation.

Both notices aim to provide a taxpayer with the opportunity to explain or reconcile the tax discrepancies found during an investigation/audit before the investigating officer’s findings are formalised in writing through the issuance of a deficiency tax assessment notice. However, the procedure under the ND is as follows:

• a taxpayer must submit all documents to support his explanation for the tax discrepancy during the discussion of tax discrepancy between the BIR and the taxpayer or within 30 days (no changes as compared to the NIC) from the receipt of the ND; and

• if, after the discussion with the BIR, the taxpayer is still liable for deficiency taxes and the taxpayer does not settle the tax due or does not agree with the findings, the investigating officer will endorse the case for the issuance of a deficiency tax assessment notice within 10 days (seven days under the NIC) from the conclusion of the discussion between the BIR and the taxpayer.

Details are provided in Revenue Regulations (RR) No. 22-2020, which have come into effect 15 days after the publication date of 17 September 2020. The NIC was restored as a due process requirement in RR No. 7-2018 of February 2018 after it had been removed in 2013.

Permanent establishment and tax residence for individuals

The Bureau of Internal Revenue (BIR) has issued guidelines regarding the determining of a permanent establishment (PE) for foreign enterprises and the tax residence status for cross-border workers in the Philippines in order to address the unintended creation of PE and the international tax issues related to individuals due to the quarantine measures and travel restrictions imposed in response to the COVID-19 pandemic. The BIR’s Revenue Memorandum Circular No. 83-2020 dated 17 August 2020 was issued for this purpose. Its main contents are set out below.

An employee of a foreign enterprise who has to work at home due to the government’s strict home quarantine measures will not create a PE for the foreign enterprise as there is a lack of a certain degree of permanency and the home office is not at the disposal of the enterprise. However, if the home office is used by the employee on a continuous basis even after the pandemic and the enterprise has required the employee to use the location to carry on the enterprise’s business, the home office may be considered to be at the disposal of the enterprise.

Temporary interruptions of construction activities due to the COVID-19 pandemic should be included in computing the duration of a site and in determining whether such construction site constitutes a PE.

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The extended period of stay of a dependent agent due to the pandemic will not be considered in computing the taxable presence of the foreign enterprise if:

• the foreign enterprise did not have a PE in the Philippines before the effects of COVID-19;

• there are no other changes in the company’s circumstances except for the extended stay of its employee, partner or agent in the Philippines because of travel restrictions; and

• the employee, partner or agent leaves the country as soon as the circumstances would permit.

A different approach will be applied if the employee, partner or agent was habitually concluding contracts on behalf of the foreign enterprise in the Philippines before the COVID-19 crisis.

An individual who is prevented from leaving the Philippines on his scheduled day of departure due to travel restrictions will not be regarded as being in the Philippines for the period after the scheduled day of departure, provided that the individual leaves the Philippines as soon as the circumstances would permit.

Whether an individual is a resident for tax purpose in Philippines is a question of fact that requires consideration of all surrounding circumstances. Each case will be assessed and evaluated independently based on the actual fact and unaltered evidence. In all cases, applications for relief from double taxation should be supported with records outlining the circumstances of the taxpayer’s extended stay. Furthermore, the individual or company concerned must submit to the BIR the relevant documents as specified in the circular as proof that the extended presence in the Philippines is due to COVID-19 restrictions.

Fair market value of shares

The Bureau of Internal Revenue has issued a regulation to amend the provisions to determine the fair market value (FMV) of shares of stocks not listed and traded through the stock exchange relative to the imposition of tax on the sale, barter, exchange, or other disposition of such shares of stocks.

The FMV will be determined based on the following rules:

• For common shares of stock, the FMV is the book value based on the latest available financial statements duly certified by an independent public accountant prior to the date of sale, but not earlier than the immediately preceding taxable year.

• For preferred shares of stock, the FMV is the liquidation value, which is equal to the redemption price of the preferred shares as of the balance sheet date nearest the transaction date, including any premium and cumulative preferred dividends in arrears.

• In case there are both common and preferred shares, the book value per common share is computed by deducting the liquidation value of the preferred shares from the total equity of the corporation and dividing the result by the number of outstanding shares as of the balance sheet date nearest to the transaction date.

• In determining the FMV of shares, the book value of common shares or the liquidation value of preferred shares need not be adjusted to include any appraisal surplus from any property of the corporation not reflected in the latest audited financial statements. The latest audited financial statements are sufficient in determining the FMV of the shares subject to sale, barter, exchange, or other disposition.

Prior to the issuance of the guidelines, the value of shares not listed or traded in the stock exchange is determined through the Adjusted Net Asset Method, whereby the book value of all assets and liabilities in the audited financial statements are adjusted to FMV.

The amended regulations are available in Revenue Regulations No. 20-2020, which will come into effect after 15 days following the date of its publication on 19 August 2020.

PHILIPPINES

SingaporeJURISDICTION:

Tax framework for variable capital companies

DIRECT TAXATION

On 28 August 2020, the Inland Revenue Authority of Singapore issued guidelines on the tax framework for variable capital companies (VCC). Taxpayers who are seeking to incorporate or register a VCC or who are managing one should refer to the guidelines for reference. The tax framework adopted the measures received from the public consultation held in 2019.

• A VCC is considered a tax resident of Singapore for a calendar year if the control and management of the VCC’s business is exercised in Singapore for that year. The tax residence of a sub-fund follows the residence of the umbrella VCC.

• Distributions made by a resident VCC are exempt from tax in the hands of its shareholders.

• VCCs would only be considered for certain incentives.

• VCCs will not be allowed a deduction for certain expenses. VCCs will also not be allowed to transfer or receive loss items under the Group Relief System.

• Any expense, capital expenditure, loss or donation of a sub-fund is not deductible against the income of another sub-fund or other income of the umbrella VCC.

• Unabsorbed capital allowances, losses and donations of a sub-fund can be carried forward or carried back to offset against the sub-fund’s future or past income if, amongst other things, the sub-fund passes the shareholding test.

• Income subject to the prevailing corporate income tax rate can enjoy partial exemption or the start-up tax exemption (SUTE) scheme. The guidelines provide the parameters and

conditions that apply to VCCs under the SUTE scheme. VCCs may also avail of corporate tax rebates.

• Gains derived by a company from the disposal of ordinary shares in another company are not taxable, subject to conditions.

• The existing tax framework for the re-domiciliation of companies into Singapore, as modified, applies to overseas investment funds that re-domicile in Singapore. In the case of a re-domiciled umbrella VCC, the modified framework applies at the sub-fund level.

>> Expenses incurred by a VCC before registration in Singapore are not deductible if incurred for the purpose of the sub-fund’s trade or business outside Singapore and for which a deduction or relief from tax law has been given. A deduction may be allowed subject to conditions.

>> Impairment losses incurred before a VCC’s registration in respect of financial assets on revenue account acquired for a sub-fund’s trade or business are not taxable when the impairment losses are reversed at a later date, subject to conditions. Losses incurred after the registration date would be allowed as a deduction, subject to conditions.

>> The SUTE scheme does not apply to re-domiciled VCCs.

• Resident VCCs may claim a tax credit on the amount of tax paid in a foreign jurisdiction against the Singapore tax payable on the same income.

GOODS AND SERVICES TAX (GST) TREATMENT

• Each sub-fund of an umbrella VCC is regarded as a separate person for GST purposes.

• A non-umbrella VCC or sub-fund of an umbrella VCC:

>> will be required to register for GST if the value of the taxable supplies or services from overseas suppliers exceeds SGD 1 million for the past calendar year or is expected to exceed SGD 1 million for the next 12 months; and

>> may be subject to reverse charge on imported services.

• Each sub-fund can claim GST on expenses incurred by the umbrella VCC in respect of that sub-fund only, subject to the existing input tax recovery and attribution rules. Allocations must be made for common expenses.

• Sub-funds can claim input tax where the tax invoices are addressed to the umbrella VCC on a concessionary basis, subject to conditions.

• The GST remission currently granted to allow funds to meet qualifying conditions to claim GST is applicable to qualifying funds that are incorporated as VCCs, subject to conditions.

STAMP DUTY

• Each sub-fund of an umbrella VCC is regarded as a separate person for stamp duty purposes.

• The guidelines provide detailed guidance on stamp duty imposed on instruments executed between an umbrella VCC and its sub-funds, or sub-funds of the same umbrella VCC; instruments involving shares in a non-umbrella or umbrella VCC; and on cancellation and issuance of shares in a non-umbrella or umbrella VCC.

ADMINISTRATIVE MATTERS

• A VCC, but not a sub-fund, can apply for a Certificate of Residence (COR) to support its claim for tax benefits under a double tax agreement. The COR will be issued in the name of the umbrella VCC with the name of the sub-fund, as the case may be.

• An umbrella VCC, being a single entity, needs to submit only one set of income tax forms in respect of the entire structure and regardless of the number of sub-funds.

• Where the umbrella VCC decides to wind up a sub-fund, a tax clearance must be obtained prior to the completion of the winding up process.

• In the case of liquidation of VCCs, the liquidator has to ensure that all outstanding tax matters in relation to the VCC are settled before the completion of the liquidation process.

•

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• GST-registered sub-funds are required to file their own GST returns.

• For claiming the GST incurred, the qualifying non-umbrella VCC or the sub-fund will have to file a quarterly Statement of Claims to the IRAS based on its financial year end.

• Each Statement of Claims is due one month after the end of the quarter.

TAX AVOIDANCE PENALTY

Singapore’s Ministry of Finance has proposed a 50% surcharge for tax avoidance, along with an amendment and extension of the current general anti-avoidance provision in the draft Income Tax (Amendment) Bill 2020. The consultation was open until 7 August 2020. Currently, the tax adjustments made under the anti-avoidance rules only restore taxpayers to their initial tax position, as if the arrangement had not been entered into. To further deter tax avoidance arrangements, the proposed amendment introduces a surcharge equal to 50% of the amount of additional income tax imposed by the Comptroller as a result of the adjustments made to counteract the tax avoidance arrangement. As a related amendment, it is also proposed to introduce in the Stamp Duties Act a surcharge equal to 50% of the amount of additional stamp duties imposed by the Commissioner as a result of the adjustments made to counteract the tax avoidance arrangement. A similar amendment will be proposed for the draft Goods and Services Tax (Amendment) Bill 2020.

TAXATION OF INSURERS UNDER THE REVISED RISK-BASED CAPITAL FRAMEWORK

On 14 August 2020, the Inland Revenue Authority of Singapore issued guidelines on the income tax treatment of insurers arising from the changes made to the risk-based capital (RBC) framework. Under the revised RBC (RBC 2) framework, the following changes will have an impact on taxation:

Notwithstanding the changes to the RBC framework, the Comptroller of Income Tax will maintain the existing tax treatment for insurers. The policy liabilities, as computed in accordance with the RBC2 framework and reported in the insurer’s insurance returns, will be accepted for tax purposes. As such, an increase in policy liabilities will be a tax deductible expense and a decrease in policy liabilities will be taxed accordingly.

With the introduction of the RBC 2 framework, insurers would have performed a one-off revaluation of policy liabilities as of 31 March 2020. The one-off adjustment of policy liabilities arising from the differences between the carrying amount computed under the original RBC (RBC 1) framework and the re-measured valuation amount under RBC 2 will be allowed as:

• a deduction, in case of an increase in policy liabilities; or

• an income, in case of a decrease in policy liabilities.

An illustration of the tax treatment of the one-off revaluation of policy liabilities for insurers is provided in Annex B of the guidelines.

Effective from 1 January 2022, the Monetary Authority of Singapore may de-recognise reinsurance arrangements between a head office and its Singapore-based branch regardless of whether a written agreement exists between them. The de-recognition will result in the following:

• increase in the policy liabilities, which will be allowed as a deduction; and

• de-recognition of reinsurance premiums paid to the head office for reinsurance ceded, the reinsurance recovery proceeds and commission income received from the head office, which will not be deductible or taxable.

The RBC 2 framework took effect on 31 March 2020. In addition, basis of taxation for life insurers under the RBC basis are provided in Annex A of the guidelines.

Income tax exemption of certain interest payments

On 2 September 2020, the Ministry of Finance gazetted the amendments to the income tax exemption of interest and other payments on loans, securities lending or repurchase arrangements or deposits from certain entities outside Singapore.

• The conditions for the tax exemption of (i) interest that a company with an approved finance and treasury centre is liable to pay on or after 18 February 2005 on any loan, and (ii) loan rebate fee or price differential that a company

MAYER BROWN | 37SINGAPORE

with an approved finance and treasury centre is liable to pay on or after 18 February 2005 in respect of any securities lending or repurchase arrangement have been amended and deemed to have come into effect from 18 February 2005.

• The exemption on interest on any bond to be paid on or after 5 September 2000, subject to conditions, has been deleted effective 1 January 2019.

• A new provision has been inserted which exempts interest that a company with an approved finance and treasury centre is liable to pay on or after 25 March 2016 on any deposit placed with the approved finance and treasury centre by any approved office or approved associated company outside Singapore, subject to conditions. This provision is deemed to have come into operation on 25 March 2016.

Transfer pricing guidelines for COVID-affected businesses

The Inland Revenue Authority of Singapore (IRAS) has issued transfer pricing guidelines for companies severely affected by the COVID-19 pandemic which includes guidance on documentation requirements, term-testing for related party transaction and Advance Pricing Arrangement (APA).

Affected companies should include the following information, among others, in the transfer pricing documentation:

• a broad analysis of how the company’s industry was affected by the pandemic;

• the direct impact of the pandemic to the company’s business;

• who and which entity within the group made decisions to manage risks related to COVID-19;

• the functional analysis of the company and related parties before and after COVID-19;

• contractual arrangements between the company and its related parties, highlighted where any obligation or material terms and conditions have been varied, amended or terminated due to COVID-19;

• a comparison of the pre-COVID-19 budget and actual results of the profit and loss analysis, with explanation and evidence to support variances;

• reasons and supporting evidence to justify how the company’s profitability has been negatively impacted by the pandemic; and

• details relating to COVID-19 specific government assistance that the company has received, or government regulations imposed on the company which has an impact on the company’s operations.

Generally, companies are required to consult the IRAS before applying term-testing. However, if the company views that annual testing may result in volatile results due to the impact of COVID-19, the company may apply term-testing (generally over a period of three years) for the year of assessment 2021, subject to conditions.

• A company may file a new APA application or request for renewal of an existing APA if the company’s business operations and economic performance are not significantly impacted by COVID-19.

• A company should consider filing a new APA application or request for renewal of an existing APA only when there is a greater level of certainty on the factors which may affect the determination of arm’s length transfer prices between related parties.

• If the company has an APA application under review, the company should assess whether there are any transfer pricing implications arising from COVID-19 which may impact the APA application and provide the information to the IRAS as soon as possible.

• If the company has an existing APA agreement with the IRAS, the company should review and assess whether there is any breach of the terms and conditions in the existing APA agreement as a result of COVID-19, and if so, notify the IRAS of any breach as soon as possible and provide an analysis of the impact of COVID-19, explain why the terms and conditions have been breached and suggest the next course of action.

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• The company should approach the IRAS when in doubt. In the case of ongoing bilateral and/or multilateral APAs, the IRAS will have to discuss the case with the other Competent Authorities.

Withholding tax exemption of finance lease payments by shipping enterprises

The Ministry of Finance is exempting finance lease payments by shipping enterprises, approved international shipping enterprises or approved shipping investment enterprises to non-resident persons from income tax. The exemption applies to payments due on or after 12 December 2018 under a finance lease entered into on or before 31 December 2023.

EXEMPTION FOR PAYMENT UNDER FINANCE LEASE OF A SINGAPORE SHIP

• Payments that a shipping enterprise is liable to make on or after 12 December 2018 to a non-resident person under finance lease of any Singapore ship is exempted from tax, with conditions.

• Where the finance lease is in relation to a provisionally registered ship, and the shipping enterprise is not an approved international shipping enterprise or approved shipping investment enterprise, the exemption is subject to the condition that the ship subsequently obtains a certificate of registry under the Merchant Shipping Act.

EXEMPTION FOR PAYMENT UNDER FINANCE LEASE OF A FOREIGN SHIP

• Payments that an approved international shipping enterprise or approved shipping investment enterprise is liable to make on or after 12 December 2018 to a non-resident person under a finance lease of any foreign ship is exempted from tax, with conditions.

• The exemption continues to apply to an international shipping enterprise or a shipping investment enterprise the approval of which has expired, but that is liable to make any payment under the finance lease or after the date of expiry of the approval.

EXEMPTION FOR PAYMENT UNDER FINANCE LEASE OF A CONTAINER BY A SHIPPING ENTERPRISE

• Payments that a shipping enterprise is liable to make on or after 12 December 2018 to a non-resident person under a finance lease of at least one container for the carriage of goods by sea and intermodal equipment is exempted from tax, with conditions.

• Where the shipping enterprise owns or operates only one ship, and that ship is provisionally registered under the Merchant Shipping Act, the exemption is subject to the condition that the ship subsequently obtains a certificate of registry under that Act.

EXEMPTION FOR PAYMENT UNDER FINANCE LEASE OF A CONTAINER BY AN APPROVED INTERNATIONAL SHIPPING ENTERPRISE OR APPROVED CONTAINER INVESTMENT ENTERPRISE

• Payments that an approved international shipping enterprise or approved container investment enterprise is liable to make on or after 12 December 2018 to a non-resident person under a finance lease of at least one container for the carriage of goods by sea and intermodal equipment, is exempted from tax, with conditions.

• The exemption continues to apply to an international shipping enterprise or a container investment enterprise the approval of which has expired, but that remains liable to make any payment under the finance lease on or after the date of the expiry of the approval.

The income tax exemptions were published in Subsidiary Legislation No. 789/2020 and 790/2020 on 16 September 2020 and both are deemed to have come into operation on 12 December 2018.

MAYER BROWN | 39SINGAPORE

Taiwan

Capital gains from sales of unlisted shares

The Minister of Finance (MOF) has proposed to impose tax on capital gains derived by individuals from the trading of shares of companies that are not listed on the stock exchange, over-the-counter market or emerging stock market. In this regard, the MOF has presented the bill for amendments to be made to Article 12 and Article 18 of the Income Basic Tax Statute.

Pursuant to Article 4-1 of Income Tax Act (ITA), capital gains derived from a transfer of securities are exempted from income tax. However, pursuant to Article 14 of the ITA, earnings distributed by companies to shareholders (dividend income) are subject to income tax. As such, individual taxpayers may avoid a tax liability by carrying out a share transfer instead of receiving dividends from the companies. In view of the above, the bill seeks to tax the capital gains from trading in unlisted shares. Once the bill is passed, the taxation of the above capital gains will come into effect on 1 January 2021.

Securities transfer tax on sales of stock options

The Minister of Finance (MOF) has proposed a reduction of securities transfer tax on sales of specific stock options from 0.3% to 0.1% for a period of five years. The MOF presented a bill dated 14 July 2020 for amendments to be made to article 2-3 and article 3 of the Securities Transfer Tax Statute.

The stock options qualifying for this reduction must be permitted by the competent authorities for the purposes of fulfilment of quotation obligations and risk management to be traded in hedging accounts from the issuance date to the maturity date. The tax rate on regular stock options traded in the markets remains unchanged at 0.3%.

JURISDICTION:

International tax developments

USA

According to an update of 28 August 2020, published by the Inland Revenue Authority of Singapore (IRAS), the Singapore–United States FATCA Model 1A Agreement (2018) will enter into force on 1 January 2021. Once in force and effective, the new agreement will supersede the Singapore–United States FATCA Model 1B Agreement (2014).

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Transfer pricing regulations for intangibles

The Ministry of Finance has issued for public consultation draft amendments to the Transfer Pricing Regulations (the amendments) relating to revising the intangibles-related article after taking into consideration BEPS Actions 8 to 10 and the OECD Transfer Pricing Guidelines updated in 2017. The amendments also ensure that local transfer pricing filing and auditing comply with international standards. The amendments announced on 18 August 2020 were available for public consultation for a period of 60 days on the Ministry’s website. It is expected that the amendments will be enacted before the end of 2020.

• The definition of “intangibles” will be revised in line with the OECD’s Transfer Pricing Guidelines (article 4).

• A single comparable uncontrolled transaction can be the most reliable result used in determining the arm’s length price for a controlled transaction (article 7).

• The relevant factors of economic substance must be considered when evaluating comparable situations and transactions (article 8).

• The risk assessment procedure and the management of risk will be updated accordingly. Further, the reward should be decided and adjusted in accordance with the level of risk controlled (article 8-1).

• The factors to be considered for selection of the most appropriate arm’s length method will be revised (article 9).

• In assessing the transactions for intangibles and analysing the degree of comparability, the functions executed, assets employed, risks pursued for development, enhancement, maintenance, protection and exploration must be considered (article 9-2).

• The income method of “discounted cash flow” for the transfer and use of intangibles will be introduced as one of the transfer pricing methods (article 11).

• Conditions and assumptions will be added for consideration in adopting the income method to assess the value of controlled transactions for the transfer and use of intangibles (article 19-1).

• The information to be disclosed in local files and country-by-country reports will be revised (article 22 and article 22-1).

• The penalty regimes for audited and adjusted cases will be revised (article 34).

TAIWAN42 | Asia Tax Bulletin

ThailandJURISDICTION:

Online filing and payment of taxes The government has mandated taxpayers to file returns and pay taxes electronically, which includes e-payment, mobile and online banking, from 1 July 2020 onwards. In addition, the participating financial institutions will waive the fees for the electronic payment made until 31 December 2020. The announcement aims to promote social distancing due to the COVID-19 outbreak and to improve the Revenue Department’s service standards.

However, the following taxpayers may continue to remit the payment at the counter:

• taxpayers that submitted an online tax form before 1 July 2020 and printed the payment slip with the Revenue Department Counter notation; and

• individual taxpayers who opted to pay in three instalments and have paid at least one instalment.

Transfer pricing and exchange of informationOn 1 September 2020, the Cabinet approved draft ministerial regulations in relation to transfer pricing and the exchange of information on request.

The key features of the approved draft transfer pricing regulations are:

• identifying the characteristics of commercial or financial arrangements that would make it reasonable to conclude that there had been profit shifting among related parties and setting guidelines for tax officers on the adjustment and assessment of revenue and/or expenses in respect of related party transactions;

MAYER BROWN | 45

Tax incentives for foreign investmentThe government has gazetted additional tax deduction incentives for taxpayers that have incurred certain expenses in hiring salaries related to the science, technology, engineering and mathematics (STEM) field, and training and investment in automation system development.

Companies will be allowed an additional deduction equal to 50% of actual salaries (capped at THB 100,000 per month) paid to newly hired highly skilled workers in the STEM field from 1 January 2019 to 31 December 2020, provided that the workers:

• receive relevant professional certification as highly skilled persons in the STEM field from relevant agencies and actually exercise employment in the position related to their professional skills;

• commence work under an employment contract between 1 January 2019 and 31 December 2020; and

• had not been previously employed by a company in the STEM field for one year before the commencement of work.

Companies will also be allowed an additional deduction equal to 150% of the cost of training employees in courses accredited by relevant government agencies from 1 January 2019 to 31 December 2020, provided that the training cost incurred is not in relation to the businesses that are exempt from corporate income tax.

Companies will be allowed the usual depreciation deduction and an additional deduction equal to 100% of the cost of investment in automation systems (machinery and software used with the machinery) paid between 1 January 2019 and 31 December 2020, subject to conditions. The incentives were proposed by the Board of Investment and previously approved by the Cabinet. Details are available in Royal Decrees No. 710, 711 and 712, which came into effect on 24 September 2020.

7% VAT rate is continuedThe Ministry of Finance has announced that the 7% reduced VAT rate will continue to be applied, from 1 October 2020 to 30 September 2021, to all imports and sales of goods and services subject to VAT. The extension of the reduced VAT rate is expected to help reduce consumers’ cost of living and help the economy recover from the COVID-19 pandemic. The reduced VAT rate was due to expire on 30 September 2020, after which date 10% VAT would apply.

THAILAND

• setting the revenue threshold in paragraph 3 of section 71 Ter of the Revenue Code; and granting exemption to companies with revenues not exceeding THB 200 million in an accounting period from the annual requirement to submit information on transactions with related parties, with effect from 1 January 2019.

EXCHANGE OF INFORMATION

Thailand became a signatory of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (the convention) on 3 June 2020. Afterwards, on 8 August 2020, the Revenue Department announced a public consultation on the draft bill on exchange of information in accordance with the convention. The public consultation for the bill was open until 23 August 2020.

• The competent authority of a party will be required to instruct persons to collect and transmit information upon request by the other party regardless whether the information will be useful in taxation under the Revenue Code or not.

• A person having the duty to report information is defined as a juristic person established under domestic law, except a branch of such a juristic person in a foreign country or a branch of a juristic person established under the law of the foreign country, having the following characteristics:

>> conducting money depository business, as in the nature of banking business;

>> engaging in depository business for financial assets, subject to conditions;

>> engaging in transactions in investments, such as trading financial instruments or foreign currency exchange, managing individual or group investments or investing and managing money on behalf of other persons;

>> being in the business of a life insurance company; and

>> a juristic person managed by any juristic person of the above, subject to conditions

• The draft bill also prescribes the following:

>> the duties of the person having the duty to report and the power of the competent authority to disclose information obtained from the information agreement;

>> exemption from application of the foregoing on the exchange of information agreement between Thailand and the United States to improve international tax compliance; and

>> penalties for non-compliance with the provisions.

Debt restructuring tax exemptionsThe government has gazetted tax exemptions for transactions relating to debt restructuring between debtors and financial institutions or other creditors conducted from 1 January 2020 to 31 December 2021.

The debt restructuring transactions that are exempted by the Ministry of Finance in accordance with the debt restructuring guidelines of the Bank of Thailand include the following:

• transfer of property, sale of goods or provision of services and arranging an instrument in relation to debt restructuring between a debtor and a financial institution or other creditor (exempt from income tax, value-added tax, specific business tax and stamp duty);

• income from the forgiveness of debt between a debtor and a non-financial institution (exempt from income tax only); and

• transfer of real estate pledged as collateral to financial institutions or other creditors, subject to conditions announced by the Director General (exempt from income tax, specific business tax and stamp duty only).

The tax exemptions are part of the stimulus package approved by the Thai cabinet to mitigate the impact of the COVID-19 pandemic on businesses. The details of the incentive are gazetted in Royal Decree No. 709 dated 12 July 2020, which came into effect on the day following the publication date of the gazette.

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46 | Asia Tax Bulletin

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MAYER BROWN | 47

Pieter de RidderPartner, Mayer Brown LLP+65 6327 0250 pieter.deridder@mayerbrown.com

Pieter de Ridder is a Partner of Mayer Brown LLP and is a member of the Global Tax Transactions and Consulting Group. Pieter has over two decades of experience in Asia advising multinational companies and institutions with interests in one or more Asian jurisdictions on theirinbound and outbound work.

Prior to arriving in Singapore in 1996, he was based in Jakarta and Hong Kong. His practice focuses on advising tax matters such as direct investment, restructurings, financing arrangements, private equity and holding company structures into or from locations such as mainland China, Hong Kong, Singapore, India, Indonesia and the other ASEAN countries.

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.

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