Asia Tax Bulletin - Mayer Brown...in order to enjoy tax treaty benefits. South Korea’s Supreme...

Spring 2019

Asia Tax Bulletin

MAYER BROWN | 32 | 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

In This EditionWe are pleased to present the Spring 2019 edition of our firm’s Asia Tax Bulletin.The past few months have witnessed some important tax changes, which are included in this edition of the Bulletin. I merely wish to highlight the following developments as being of particular interest to many of our clients. Hong Kong, India and Singapore issued their proposed tax changes for the current year in their respective governments’ budget proposals.

China introduced an individual income tax reform which took effect on 1 January 2019. In the first quarter of 2019, the Chinese authorities issued various implementing rules to clarify certain aspects of the tax reform. It is good to note that foreign individuals living in China will continue to enjoy the offshore source exemptions which they had prior to 2019 if they meet the foreign travel requirement at least once every six years (which used to be five years). China also carried through a second instalment of reducing its two highest VAT rates. We expect a third reduction to happen towards the last quarter of the year.

Hong Kong enacted legislation which will see qualifying tax-exempt funds managed in Hong Kong coming on par with their Singapore equivalents, showing that Hong Kong is busy catching up with Singapore on vital business sectors for its economy. India’s Supreme Court issued an important ruling on permanent establishment risks caused by foreign investors

having a liaison office in the country, showing that India takes the permanent establishment risk very seriously.

Indonesia updated its transfer pricing and information requirements for annual corporate income tax returns by requiring additional information to be disclosed in the returns. In Japan, the multilateral instrument entered into force, which introduces additional anti-avoidance issues that must be addressed in order to enjoy tax treaty benefits. South Korea’s Supreme Court issued a ruling on the application of gear on beneficial ownership, and Thailand replaced its headquarters, treasury and trading tax incentives with a new tax incentive regime called International Business Centre (IBC).

We hope you will enjoy reading this Bulletin and that you will find it useful. Please let us know if you need assistance with Asian tax matters.

With kind regards,

Pieter de Ridder

Pieter de RidderPartner, Mayer Brown LLP+65 6327 0250 [email protected]


Contents

6 Individual Income Tax Reform

8 Tax Treatment of Individual Partners of Venture Capital Enterprise

9 Fees for Tax Withholding and Collection Agents

9 Significant Amendments to VAT

10 Farmland Use Tax

11 New Foreign Investment Law

12 International Tax Developments

13 Tax-Exempt Funds Managed in Hong Kong

13 Budget 2019

14 Automatic Exchange of Information

14 Tax Deductions for Annuity Premiums and MPF Voluntary Contributions

14 Peer Review of Hong Kong’s Tax Transparency

15 Stamp Duty Exemption


China

Hong Kong

16 Interim Budget 2019

17 Indian Stamp Act, 1899

17 GST on Residential Property

18 Stamp Duty

18 Extension Granted for Filing GST Annual Return for Year 2017/18

11 Local Company and Liaison Office of Overseas Group Constitute PE in India


India Japan

Indonesia20 Foreign Tax Credit

21 Transfer Pricing Information in the Tax Return

21 Tax Free Asset Transfers

21 Tax Deductions of Benefits In Kind Paid to Employees

22 Tax Holiday


23 Multilateral Convention Enters into Force

23 Pre-Brexit Merger between UK Subsidiary and Dutch Subsidiary Considered Tax-Qualified Merger


Korea25 Supreme Court Rules on Application

of GAAR on Beneficial Ownership


Malaysia27 Withholding Tax on Special Classes

of Income

28 Professional Indemnity Insurance

28 Director’s Liability

28 Digital Business Taxation for Overseas Vendors


Philippines

31 Budget 2019

32 Certificate Of Residence (COR)

32 Public-Private Partnership Arrangements

33 Foreign Exchange Gains or Losses for Businesses


Singapore

34 Fixed Assets Written Off before End of Service Lives to be Reported

Taiwan


Vietnam

35 International Business Centre

35 Land and Building

36 Tax Amnesty Programme for SMEs

Thailand


China (PRC)

Individual Income Tax Reform

Individual income tax was substantially reformed in 2018. On 27 December 2018, the Ministry of Finance (MoF) and the State Administration of Taxation (SAT) jointly issued a circular (Circular [2018] No. 164) clarifying the measures on individual income tax during the transitional period until 1 January 2022. The measures apply from 1 January 2019 and are summarised below.

• Tax treatment of year-end bonus and other performance-related annual remuneration.

Subject to certain conditions (which are laid down in Circular [2005] No. 9), year-end bonuses derived by a resident individual may be calculated and taxed as a separate monthly salary before 31 December 2021.

The tax payable is calculated as follows:

>> Tax payable = [(the total lump-sum year-end bonus/ 12) x the applicable tax rate (see the rate table below)] – quick calculation deduction.

However, a resident individual taxpayer may elect to include year-end bonuses in comprehensive income and to be taxed accordingly. From 1 January 2022, it will be compulsory to include year-end bonuses and other performance-related remuneration in comprehensive income.

JURISDICTION:

• Tax treatment of stock incentive scheme granted by listed companies.

Before 31 December 2021, the total amount of annual income from stock incentives, such as stock options, stock appreciation, restricted shares and stock awards, may be calculated and taxed as a separate monthly salary to which the rate table for comprehensive income applies. The tax payable is calculated as follows:

>> Tax payable = (income from stock incentive scheme x applicable tax rate) – quick calculation deduction

• Tax treatment of commissions received by insurance agent or broker.

Income received by an insurance agent or a stock broker is regarded as personal services income and may be taxed as part of comprehensive income. The taxable income is calculated as follows:

>> Taxable income = income received (excluding VAT) - deemed expenses (20% of the income received) - deemed cost - additional taxes and fees.

>> 25% of income received (excluding VAT) less deemed expenses is considered to be deemed cost.

>> An appointed withholding agent is required to withhold the tax when paying commissions to an insurance agent or broker.

• Tax treatment of annuities.

When an employee reaches the pension age and receives an annuity from his former employer or an occupational annuity, the payment received may be taxed separately on a monthly or annual basis, depending on whether it is paid in monthly, quarterly or annual instalments.

• Tax treatment of lump-sum payment due to dismissal, early retirement or internal semi-retirement.

Lump-sum payments (including financial compensation, subsistence payment and other allowances) due to dismissal from employment are exempt from individual income tax if the

amount of the payment does not exceed three times the local average salary in the preceding year. The excess may be taxed separately.

Lump-sum payments due to early retirement may be divided by the number of years between the early retirement and mandatory retirement age and taxed separately. Lump-sum payments due to internal semi-retirement may be divided by the number of months between the internal semi-retirement and mandatory retirement age and added to the monthly salary received as prescribed in SAT Notice [1999] No. 58 and taxed accordingly.

• Tax treatment of employee benefit on acquiring a residential property at low price.

The benefit (the difference between market price and the actual price paid) from acquiring a residential property at a low price may be divided by 12 and taxed separately.

• Tax treatment of benefits in kind for foreign workers.

From 1 January 2019 to 31 December 2021, foreign individuals resident in China may choose to apply special additional deductions or benefits in kind under the benefit scheme prior to 1 January 2019. Once the choice is made, it may not be altered within one year. From 1 January 2022, the benefit scheme prior to 1 January 2019 for foreign individuals will be abolished and foreign individuals working in China may enjoy special additional deductions, the same as Chinese individuals.

CHINA (PRC)

Taxable Monthly Income

(CNY) – (year-end bonus/12)

0 – 3,000

3,001 – 12,000

12,001 – 25,000

25,001 – 35,000

35,001 – 55,000

55,001 – 80,000

over 80,000

Rate on Excess (%)

3

10

20

25

30

35

40

MAYER BROWN | 98 | Asia Tax Bulletin CHINA (PRC) CHINA (PRC)

Tax Treatment of Individual Partners of Venture Capital Enterprise

On 10 January 2019, the Ministry of Finance, the State Taxation Administration (previously the State Administration of Taxation), the National Development and Reform Commission (NDRC) and the China Securities Regulatory Commission (CSRC) jointly issued Circular [2019] No. 8, clarifying the tax treatment of individual partners of venture capital enterprises. The Circular applies from 1 January 2019 to 31 December 2023.

A venture capital enterprise may choose one of two methods to determine the individual income tax (IIT) on income derived by individual partners from the venture capital enterprise, i.e. the single investment fund method or the annual enterprise income method. For the purpose of the Circular, the term “venture capital enterprise” means any partnership or fund that is registered and operates in compliance with the provisions stipulated in the Administrative Measures on Venture Capital Enterprises (Order No. 39 of the NDRC) or the Provisional Regulations on the Supervision and Management of Private Equity Funds (Order No. 105 of the CSRC).

A venture capital enterprise may not change the method of calculating the IIT payable within three years from the time that the method is chosen. If a venture capital enterprise chooses the single investment fund method, it is required to file the method with the competent tax authority; otherwise the annual enterprise income method will apply. If a venture capital enterprise intends to change the method, it must re-file it with the competent tax authority before 31 January of the year following three years from the time of choosing the method being used.

Single investment fund method: the single investment fund method is used only for the purpose of calculating the IIT payable of the individual partners of venture capital enterprises. Gains on the transfer of shares, dividends and profit distributions derived by individual partners from the funds they invested in are taxed at a flat rate of 20%.

Taxable income and IIT payable are determined as follows:

• Gains on the transfer of shares:

>> A single investment fund, including a venture capital enterprise, may invest in many projects. The gains or losses of a project from a transfer of shares refer to the net proceeds (sale proceeds of the shares minus the original value) plus the taxes and fees associated with the transfer. The annual gain or loss of the single investment fund is calculated as the sum of the gains and losses of all projects in which the fund has invested. An annual gain is subject to IIT, while an annual loss is deemed as zero and may not be carried forward to the following years.

>> The IIT payable by an individual partner is calculated based on the gain derived by the individual partner from the annual gains of the single investment fund and is withheld by the venture capital enterprise before 31 March of the following year. If the requirements for venture capital enterprises and individual angel investors, as laid down in Circular [2018] No. 55, are met, the individual partner will be granted a tax deduction of 70% of the investment amount of the transferred project. If the allowable deduction cannot be fully utilised in a tax year, the balance amount may not be carried forward to the following tax years.

• Dividends and profit distributions:

>> The income of the single investment fund is calculated as the sum of dividends, profit distributions and income from fixed-income securities of all projects in which the fund has invested.

>> The IIT payable by an individual partner is calculated based on the income derived by the individual partner from the income of the single investment fund and is withheld by the venture capital enterprise upon payment.

Except for the above deductible costs and expenses, other expenses incurred by the single investment fund, including management fees and performance remuneration of investment fund managers, are not deductible in calculating taxable income.

Annual enterprise income method: the income derived by individual partners from venture capital enterprises is subject to IIT as business income at progressive rates ranging from 5% to 35%. Taxable income and IIT payable are determined as follows:

• The income of the individual partner is the proportion of the venture capital enterprise’s income attributable to the individual partner. The venture capital enterprise’s income is calculated as the gross revenue of the tax year less allowable costs, expenses and losses related to the business.

• If the requirements for venture capital enterprises and individual angel investors, as laid down in Circular [2018] No. 55, are met, an individual partner will be granted a tax deduction of 70% of the investment amount of the project transferred. If the allowable deduction cannot be fully utilised in a tax year, the balance amount may be carried forward to the following tax years.

• In calculating taxable income, an individual partner who does not receive comprehensive income (i.e. wages/salaries, income from independent personal services, royalties and author’s remuneration) can deduct from business income the standard deduction, special deduction, additional deduction and other deductions determined by the State Council. All business income received by the individual partner from different businesses should be aggregated for IIT purposes.

Fees for Tax Withholding and Collection Agents

On 2 February 2019, the Ministry of Finance, the State Taxation Administration (formerly known as the State Administration of Taxation) and the People’s Bank of China jointly issued a circular (Circular Cai Han [2019] No. 11) (the circular) clarifying the rules on fees that have to be paid by the tax authority to tax withholding and collection

agents that have been assigned to collect taxes. Unless specifically prescribed by law or administrative regulations, fees paid to agents are limited and/or capped at a maximum amount.

The following limitations apply:

The circular provides that one tax authority is not allowed to pay fees to another tax authority for the collection of taxes. The payment of the fees must be settled on an annual basis. In order to obtain the fees, the withholding or collection agent must submit the required information to the tax authority before 30 March of the following tax year.

The circular takes effect as from the date of promulgation. On that same date, the Circular on Further Strengthening of the Commission Management of Withholding Tax (Circular Cai Han [2005] No. 365) and the Circular on the Withholding Tax Commission of Insurance Company (Circular Cai Han [2007] No. 695) will be abolished.

Significant Amendments to VAT

Following the decision of the State Council and in conformity with the overall policy on tax cuts, the Ministry of Finance, the State Taxation Administration and General Custom Administration

Tax Limitation Cap

Income tax

Vehicle and vessel tax

Consumption tax consigned processing (no fee payment is allowed where the principal and the agent are related)

Vehicle purchase tax

Stamp duty collected by security company

Sale of stamps for stamp duty purposes

Taxes collected by postal services

Tax collected by markets or individuals

2% of the rax withheld

3% of the tax payable

2% of the tax payable

None

0.03% of the duty payable

5% of the amount of the stamps

3% of the tax collected

5% of the tax collected

CNY 700,000 a year

None

None

CNY 15 per vehicle

CNY 10 million a year

None

None

None


jointly issued a circular on 20 March 2019 (Circular [2019] No. 39) announcing the amendments to VAT which will apply from 1 April 2019.

The 16% VAT rate currently applicable to general VAT taxpayers will be reduced to 13%, whilst the 13% VAT will be reduced to 9%. Correspondingly, the VAT export refund rates will be respectively reduced from 16% to 13% and from 13% to 9%.

Input tax credit for VAT taxpayers purchasing agricultural products will be adjusted from 10% to 9%, and for those purchasing agricultural products for production or contract processing will be 10%. Input VAT on purchases made by real estate companies, including any remaining input VAT from the previous period, may be offset against output VAT in the current period, as opposed to the current rule that input VAT deduction must be spread over two years. Input tax on domestic passenger transport services purchased by VAT taxpayers may be offset against output VAT. The circular specifies that ordinary invoices or tickets may be used if no special VAT invoice is available.

From 1 April 2019 to 31 December 2021, the allowable input VAT in the current period may be increased by 10% for VAT taxpayers engaged in manufacturing or lifestyle services. Any “increased” input VAT that cannot be offset due to insufficient output VAT can be carried over to the following periods. Once the taxpayer elects to apply VAT super deduction, the choice may not be changed within one year. Whether the VAT super deduction can be applied in the subsequent years depends on the turnover of the preceding year. The VAT super deduction does not apply to export of goods or services and cross-border taxable events.

The VAT refund for foreign passengers leaving China will be reduced from 13% to 11%. Where the current refund rate is 9%, the refund rate will be reduced to 8%. From 1 April 2019, the tax authority will introduce refunds of non-offset input VAT that has been increased after March 2019 (currently, input VAT can in principle only be offset against output VAT). Non-offset input VAT can only be refunded at the request of VAT taxpayers if certain conditions are satisfied. The conditions include, among others, that the increased non-offset VAT within six months exceeds CNY 500,000 and the VAT taxpayer applying for the refund is rated as an A or B taxpayer (under a credit system for taxpayer behaviour).

Farmland Use Tax

The Law on Farmland Use Tax of the People’s Republic of China (FUT) was passed by the Standing Committee of the People’s Congress and promulgated on 29 December 2018. The Law will take effect from 1 September 2019 and on the same date, the Interim Regulations on the Farmland Use Tax of the People’s Republic of China, which was issued by the State Council on 1 December 2007, will be abolished.

Entities or individuals that use farmland to construct buildings or structures, or engage in non-agricultural constructions, are subject to the Farmland Use Tax (FUT). The tax base of the FUT is the farmland actually occupied by the taxpayer and the tax is levied on a one-off basis.

Depending on the population density of the farmland location, the FUT varies from place to place. The local government has the discretion to determine the tax amount per square metre within the ranges below:

However, a minimum tax (average tax amount) applies to the province, autonomous region or municipality as mentioned below:

The FUT may be increased by up to 50% of the applicable FUT in relevant provinces, autonomous regions or municipality where the farmland is less than 0.5 mu per capita and in the case of the use of farmland that is protected from use other than as farmland.

FUT is exempt if the farmland is used:

• for the purposes of military facilities, schools, kindergartens, social welfare institutions, and medical institutions;

• by rural residents who meet certain conditions to build their own homes;

• for farmland irrigation construction; and

• for agricultural production.

FUT is reduced in the following cases:

• CNY 2 per m2 applies to the use of farmland for railways, highways, airport runways or aprons, ports, water channels, hydraulic engineering projects; and

• in certain other cases, FUT may be reduced with the approval of the local government, but the reduction is limited to 50% of the applicable FUT.

The tax authority is responsible for the collection of FUT. The tax liability arises on the date on which the taxpayer receives a notice from the local natural resource government department to start the application for the use of farmland. The taxpayer must file the return and pay the FUT within 30 days of the notice. The local relevant government departments in charge of natural resources are required to provide the tax authorities with information on the use of farmland.

New Foreign Investment Law

On 15 March 2019, China published its Foreign Investment Law (the Law) which will take effect on 1 January 2020 and replace the current Law on Wholly Foreign-Owned Enterprises, the Law on Chinese-Foreign Equity Joint Ventures and the Law on Chinese-Foreign Cooperative Joint Ventures. The Law contains six chapters and 42 articles; its main provisions are summarised below.

• The Law applies to foreign investors (enterprises, individuals or other organisations)

that make direct or indirect investments in China, including establishing a foreign investment enterprise (alone or together with other partners), acquiring an interest such as shares or participation in a Chinese enterprise or making investments in a new investment project. A foreign investment enterprise is referred to as an enterprise that is wholly or partly invested in by foreign investors and established and registered in China in accordance with Chinese laws and regulations. As regards the legal forms of business organisation used to carry out the investment, the Company Law and the Law of Partnership will apply.

• Foreign investment is not allowed in projects or sectors listed in the “negative list” which is issued by the State Council. Foreign investment in sectors such as banking, insurance, and security is subject to relevant laws and regulations. Further, foreign investment is subject to the scrutiny of antitrust law and the Regulations on National Security.

• Foreign investors will be granted national treatment but are also entitled to treatment under an international treaty or agreement that is more favourable than the national treatment. The Law expressly states that foreign investors must be equally treated in government procurement activities and participation in standardisation. Foreign investors may not be dispossessed of their investment in China. Where expropriation is necessary in special circumstances, foreign investors must be fairly compensated. Foreign investors are permitted to transfer funds abroad or bring funds in for purposes of profit repatriation, returns of investment, capital gains, capital contribution, payments of royalties and lawful compensations in foreign or Chinese currency. Also, foreign investors are permitted to issue shares, bonds or raise capital in other forms. The Law firmly states that intellectual properties and commercial secrets will be protected and foreign investment enterprises and foreign investors will not be forced by government officials to transfer technology when making investments in China. Local governments are urged to fulfil the terms and conditions of the contracts concluded with foreign investors and honour any promises made. Foreign investors

Local Population Density

(x mu* per capita)

Less than 1 mu

More than 1 but less than 2 mu

More than 2 but less than 3 mu

More than 3 mu

FUT (CNY per

m2 farmland)

10-50

8-40

6-30

5-25

* One mu approximately equals 0.0777 hectare.

Province, Autonomous

Region or Municipality

Shanghai

Beijing

Tianjin

Jiangsu, Zhejiang, Fujian, Guangdong

Liaoning, Hubei, Hunan

Hebei, Anhui, Jiangxi, Shandong, Henan, Chongqing, Sichuan

Guangxi, Hainan, Guizhou, Yunnan, Shanxi

Shanxi, Jilin, Heilongjiang

Inter Mongolia, Tibet, Gansu, Qinghai, Ningxia, Xinjiang

Average Tax Amount

(CNY per m2)

45.0

40.0

35.0

30.0

25.0

22.5

20.0

17.5

12.5

se

CHINA (PRC) CHINA (PRC)


will be consulted in advance in respect of the introduction or amendment of (new) laws and regulations relevant to foreign investment enterprises. A complaints and appeal mechanism will be established for foreign investment enterprises in cases where their rights are infringed and their problems are not dealt with.

• In addition to observing the rules on business registration and licences, labour protection, social security insurances, accounting and taxation, etc., foreign investment enterprises are required to set up a workers’ union and provide information on their investment to the government agency in charge. Failure to provide such information will result in a fine of between CNY 100,000 and CNY 500,000.

• If Chinese outbound investment is discriminated in a foreign country or region, foreign investment from that country or region can be similarly treated on a reciprocal basis. Depending on development needs, China may establish “special economic zones” or designate specific regions where foreign investment is encouraged and special policies or incentives are trialled. Foreign investment enterprises operating as wholly foreign-owned enterprises, a Chinese-foreign equity joint venture or a Chinese-foreign cooperative joint venture may continue to conduct business in these forms for up to five years after 1 January 2020. The State Council will announce detailed rules for this transitional period.

International Tax DevelopmentsLUXEMBOURG

On 1 May 2019, China’s Social Security Agreement with Luxembourg has entered into force. The agreement generally applies from 1 May 2019.

ITALY

On 23 March 2019, China and Italy signed an income tax treaty in Rome. Once in force and effective, the new treaty will replace the current China-Italy Income Tax Treaty.

Hong KongJURISDICTION:

Tax-Exempt Funds Managed in Hong Kong

On 20 February 2019, the Inland Revenue (Profits Tax Exemption for Funds) (Amendment) Bill 2018 was passed by the Legislative Council to provide profits tax exemption on qualifying income for eligible onshore and offshore funds managed through fund management companies in Hong Kong. The Bill also seeks to address the concerns of the Council of the European Union over the ring-fencing features of Hong Kong’s tax regimes for privately offered offshore funds and enhance competitiveness of Hong Kong’s tax regimes by creating a level playing field for all funds operating in Hong Kong. The new tax regime will come into operation on 1 April 2019. We refer to the previous edition of this tax bulletin for more details. In essence, the new law provides profits tax exemption on gains derived from the sale of shares by offshore or onshore funds managed by a qualifying fund management company in Hong Kong. It applies to both closely held and open-ended private equity funds and brings Hong Kong closer to (and in many respect on par with) Singapore as the jurisdiction of choice for investment funds.

Budget 2019

The Budget for 2019/20 was presented to the Legislative Council by the Financial Secretary on 27 February 2019. The tax-related proposals require legislative amendments before implementation. Once enacted, the amendments will apply from 1 April 2019. The main proposals include:

• a one-off tax reduction of 75% on profits tax, salaries tax and tax under personal assessment for the year of assessment 2018/19, subject to a maximum of HKD 20,000 per case; and

• a waiver of business registration fees for 2019/20.

CHINA (PRC)


Automatic Exchange of Information

The Inland Revenue (Amendment) (No. 2) Ordinance 2019 (Amendment Ordinance) was gazetted by the government on 1 March 2019. The legislative framework of automatic exchange of financial account information in tax matters (AEOI) under the Inland Revenue Ordinance (Cap. 112) (IRO) will be refined with effect from 1 January 2020 for better aligning the relevant provisions with the requirements promulgated by the OECD.

The Amendment Ordinance requires Mandatory Provident Fund Schemes, Occupational Retirement Schemes registered under the Occupational Retirement Schemes Ordinance (Cap. 426), pooling agreements, approved pooled investment funds and credit unions to comply with the due diligence and reporting obligations relating to AEOI starting from year 2020. If members of the institutions concerned are tax residents of the reportable jurisdictions, such institutions are required to report for the first time to the Inland Revenue Department (IRD) the financial account information of the relevant members (covering the year 2020) for transmission to the relevant tax authorities in the year 2021.

In addition, Hong Kong’s network for tax information exchange has been expanded since the Convention on Mutual Administrative Assistance in Tax Matters came into force in Hong Kong on 1 September 2018. The Amendment Ordinance increases the number of reportable jurisdictions under the IRO from the current 75 to 126.

Tax Deductions for Annuity Premiums and MPF Voluntary Contributions

The Inland Revenue and MPF Schemes Legislation (Tax Deductions for Annuity Premiums and MPF Voluntary Contributions) (Amendment) Bill 2018 was approved by the Legislative Council on 20 March 2019. The new Ordinance gives effect to the tax deductions that were proposed in the 2018-19 Budget. From the year of assessment 2019/20, taxpayers are entitled to tax deductions under

salaries tax and personal assessment for their premiums paid to qualifying deferred annuities and contributions made to tax deductible Mandatory Provident Fund (MPF) voluntary contribution accounts. The maximum tax-deductible limit for a taxpayer is HKD 60,000 per year.

Under the new arrangement, a taxpayer can claim a tax deduction for deferred annuity premiums covering the taxpayer’s spouse as joint annuitant, or either the taxpayer or the taxpayer’s spouse as a sole annuitant. A taxpaying couple is allowed to allocate tax deduction for deferred annuity premiums between themselves in order to claim total annual deductions of HKD 120,000, provided that the deduction claimed by each taxpayer does not exceed the individual limit. Tax-deductible MPF voluntary contributions are subject to “preservation requirements”, meaning that the accrued benefits can be withdrawn only upon reaching the age of 65 or based on statutory grounds.

Peer Review of Hong Kong’s Tax Transparency

The Global Forum on Transparency and Exchange of Information for Tax Purposes on March 18 released peer reviews for Hong Kong, Liechtenstein, Luxembourg, the Netherlands, North Macedonia, Spain and the Turks and Caicos Islands. The reports assess compliance with the international standard governing transparency and exchange of information on request (EOIR). The process builds on the Global Forum’s two-phase peer review mechanism that evaluates compliance with the international standard on EOIR using revised terms of reference to assess beneficial ownership information availability, in line with the Financial Action Task Force’s international standard. Under the enhanced peer review process, jurisdictions are rated as compliant, largely compliant, partially compliant, or noncompliant.

Hong Kong has addressed most recommendations from its 2013 review, according to the 2019 report. However there were ongoing deficiencies related to “monitoring the compliance with ownership and accounting record-keeping requirements in respect of trusts managed by non-professional trustees”, And while it has the legal framework to facilitate accessibility of beneficial ownership information,

Hong Kong falls short when it comes to scope of application and the definition of beneficial owners, the report says.

Stamp Duty Exemption

The Securities and Futures (Amendment) Ordinance 2016 took effect from 30 July 2018 to provide stamp duty exemption for the sale and purchase of Hong Kong stocks in consideration of the allotment or redemption of shares or units of an authorised open-ended collective investment scheme.

According to the Securities and Futures Ordinance, an open-ended collective investment scheme means a collective investment scheme whose shares or units may be repurchased or redeemed at the request of any of its shareholders or unit holders:

• at a price calculated wholly or mainly by reference to the net asset value of the scheme; and

• in accordance with the frequency for repurchase or redemption, requirements and procedures set out in the offering document or constitutive documents of the scheme.

International Tax Developments

SOUTH AFRICA

On 30 November 2018, the Hong Kong-South Africa Memorandum of Understanding (MoU) on the Exchange of Country-by-Country Reports (CbC), in respect of the fiscal years 2017 and 2018, was signed in Hong Kong and in Pretoria.

JERSEY

The Hong Kong-Jersey Memorandum of Understanding (MoU) on the Exchange of Country-by-Country Reports (CbC) in respect of the fiscal years 2017 and 2018, was signed. In accordance with Section V (Term), paragraph 1, the MoU entered into force on 31 December 2018 and generally applies from that date.

MALTA

A competent authority arrangement on the exchange of country-by-country (CbC) reports between Hong Kong and Malta has been signed. Further developments will be reported as they occur.

GUERNSEY

On 9 January 2019, the Guernsey-Hong Kong Competent Authority Agreement on the Exchange of Country-By-Country (CbC) Reports was signed in Paris. In accordance with Section 8 (Term of Agreement), paragraph 1, the agreement became effective on the date of signature.

GEORGIA

The free trade agreement between Georgia and Hong Kong, signed on 28 June 2018, entered into force on 13 February 2019.

KOREA, JAPAN, NETHERLANDS AND NEW ZEALAND

According to an update of 18 January 2019, published by the Hong Kong Inland Revenue Department, Hong Kong signed a competent authority arrangement on the exchange of country-by-country (CbC) reports with Korea, Japan, the Netherlands and New Zealand, respectively.

AUSTRALIA

On 26 March 2019, Australia and Hong Kong signed an investment protection agreement (IPA) in Sydney. Once in force and effective, the new agreement will replace the 1993 agreement, in force as of 15 October 1993. A Free Trade Agreement was also signed on the same day.

HONG KONG HONG KONG


PERSONAL TAX

• The eligible rebate from income tax payable is increased to INR 12,500 for resident individuals whose total income does not exceed INR 500,000. Hence, resident individuals having a total income up to INR 500,000 will have no tax payable.

• The standard deduction for salaried individuals in a financial year is increased from INR 40,000 to INR 50,000 per annum.

• The second self-occupied property will not be subject to tax on a notional rent basis. The limit to claim house property loss in respect of interest on loans taken for both the properties in aggregate will continue to be INR 200,000. Hence, the maximum loss that can be claimed in respect of such properties in one financial year is INR 200,000.

• Income tax exemption on long-term capital gains from the sale of a residential house will be extended from re-investment in one residential house to two residential houses in India on a once-in-a-lifetime basis provided such long-term capital gains do not exceed INR 20 million.

Indian Stamp Act, 1899

• The levy and administration of stamp duty on the issue and transfer of financial instruments by the states is to be streamlined through stock exchanges, clearing corporations and depositories.

• The following definitions will be available in the Stamp Act: “allotment list”, “debenture”, “market value”, and “securities”, and the definition of “marketable security” will be amended.

• The levy of stamp duty will be on the market value of the securities and the rates are 0% for government securities and for other securities in the range of 0.00001% to 0.015%, and are to be levied on transfer of securities in dematerialised form.

• The proposed amendments include the procedure for payment and collection of such stamp duty. The proposed levy would also be subject to detailed rules to be specified in this regard.

The period for which the attachment or retention of property involved in money laundering or records seized or frozen will continue during an investigation is extended from 90 days to 365 days.

The final Budget is expected to be presented later during the year, after the general elections (around June-July 2019).

GST on Residential Property

In its 33rd meeting, held on 24 February 2019, the Goods and Services Tax (GST) Council recommended that the GST rates for under-construction residential properties be reduced as follows with effect from 1 April 2019 in order to invigorate this segment of the real estate sector:

• an effective GST rate of 5%, without input tax credit (ITC), for residential properties outside the affordable segment (currently, an effective rate of 12%, with ITC); and

• an effective GST rate of 1%, without ITC, on affordable housing properties (currently, an effective rate of 8%, with ITC).

The definition of “affordable housing” is expanded to include a residential house/flat of carpet area of up to 90 m2 in non-metropolitan cities/towns and 60 m2 in metropolitan cities, and valued at up to INR 4.5 million (for both metropolitan and non-metropolitan cities). Metropolitan cities are Bengaluru, Chennai, Delhi NCR (limited to Delhi, Noida, Greater Noida, Ghaziabad, Gurgaon, Faridabad), Hyderabad, Kolkata and Mumbai (whole of MMR). Guidelines for this recommendation will be drafted and subsequently approved by the GST Council.

India

Interim Budget 2019

The Finance Minister presented the Interim Union Budget 2019/20 in Parliament on 1 February 2019.

CORPORATE TAX

• The end date for obtaining approval from the competent authority to claim the profit-linked deductions by taxpayers engaged in the business of developing and building affordable housing projects is extended from 31 March 2019 to 31 March 2020. This will allow developers more time to complete ongoing projects which are otherwise qualified.

• The threshold in a financial year for deducting tax at source for payment of rent is increased from INR 180,000 to INR 240,000.

• The threshold in a financial year for deducting tax at source on interest income from deposits with a banking company or co-operative society engaged in banking business or post office business is increased from INR 10,000 to INR 40,000. This would benefit small depositors who do not have taxable income but were subjected to withholding tax on such income and had to file tax returns to claim an income tax refund.

• The period of exemption from tax on notional rent on unsold inventory of land and buildings is extended from one year to two years from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority. This is intended to provide relief to real estate developers.

JURISDICTION:

INDIA


Stamp Duty

On 21 February 2019, the President of India gave his assent to the amendments to the Stamp Act 1899 which had been proposed as part of the Finance Bill 2019 presented during the Interim Union Budget 2019/20. The amendments create the legal and institutional mechanism to enable the Indian states to streamline the collection of stamp duty on securities market instruments at one place by one agency (through stock exchanges, clearing corporations or depositories) on one instrument, and develop the mechanism for sharing the stamp duty with the relevant state governments.

Extension Granted for Filing GST Annual Return for Year 2017/18

In a press release issued by the Press Information Bureau on 7 March 2019, it was stated that the deadline for filing the annual return for goods and services tax (GST) – Form GSTR-9 and Form GSTR-9A – for the year 2017/18 had been extended to 30 June 2019. The forms are now available on the common portal for filing, and taxpayers are reminded that no facility exists to revise these forms after they have been filed.

Local Company and Liaison Office of Overseas Group Constitute PE in India

On 21 December 2018, the Delhi High Court issued its decision in the case of GE Energy Parts Inc. v. CIT (ITA 621/2017), stating that a liaison office (LO) of the GE Group, which participates in sales negotiations, constitutes a fixed place permanent establishment (PE) of the overseas GE Group entities; and that GE India, which acts as an agent of the overseas GE Group and participates in sales negotiations, constitutes a dependent agent PE (DAPE) in India under the India-United States Income Tax Treaty (1989) (the treaty).

The taxpayer (GE Energy Parts Inc.) was a US tax resident engaged in the business of manufacturing highly sophisticated products such as gas turbine parts and sub-assemblies. The modus operandi of the overseas GE Group entities was to supply products to worldwide customers on a principal-to-principal basis whereby the title to goods was passed from the overseas GE Group to Indian clients directly. A member of the overseas GE Group had also maintained an LO in India for its coordination activities and an Indian company (GE India Industrial Pvt. Ltd. or GE India) to provide limited marketing support services to the GE Group entities. According to GE’s written submission, the LO was merely providing market inputs and interface and creating awareness of the business products. The tax authorities carried out a survey at the premises of the LO and found that certain expatriates and employees of GE India carried on marketing activities together in India and were involved in the negotiation of prices and the finalisation of contracts.

The taxpayer contended that the LO carried on preparatory and auxiliary activities and, hence, did not constitute a fixed place PE in India. Further, it contended that, through mere participation in the negotiation of prices, it did not carry on core business activities of the overseas GE Group and, hence, would not be relevant for the determination of a fixed place PE in India. Also, GE India did not constitute a DAPE in the absence of the authority to conclude contracts. In addition, the mere participation in a negotiation process for multiple overseas GE Group entities should not be seen as being “devoted wholly or almost wholly” to one enterprise. The tax authorities did not agree with the taxpayer’s contention and deemed the LO and GE India to have constituted a PE of the overseas GE Group in India. The taxpayer appealed before the Income Tax Appellate Tribunal (ITAT), which held in favour of the tax authorities. The taxpayer then appealed the decision before the High Court.

The issue was whether the LO constituted a fixed place PE and whether GE India constituted a DAPE for the GE Group entities.

The High Court upheld the ITAT decision and held in favour of the tax authorities. It confirmed the constitution of a fixed place PE by the LO and DAPE by GE India. The High Court rejected the taxpayer’s contention that the LO activity is in the

nature of preparatory and auxiliary activities as per article 5(3)(e) of the treaty. The High Court observed from the order of the ITAT that GE India was located at the premises leased by an overseas GE entity for its LO activities. These premises were at its constant disposal. Further, specific chambers/rooms and secretarial staff were allotted to GE staff, which were used for their work, thereby ensuring the continuity of available space. It concurred with the ITAT’s findings that the core of the sales activities was done from the said premises. It then came to the conclusion that GE’s activities in India are wholly or partly carried on through its fixed place of business.

The High Court also rejected the contention of the taxpayer that, by merely participating in the negotiation of prices, the LO was carrying on preparatory and auxiliary activities. The High Court analysed the job descriptions, email exchanges, appraisal reports and assignment letters forming part of the survey documents, concluding that the GE professionals were involved in certain core functions such as the negotiation and finalisation of contracts, helping GE Overseas to develop their strategy in India, aligning GE solutions with customer needs, helping shape policy to realise opportunities, facilitating business development discussions, and finalising business contracts for offshore sales. The survey documents also alleged that a few expatriates were designated as “country heads” and were heading the operations of overseas GE group entities in India. The High Court therefore concluded that the LO was a fixed place of business through which GE Overseas carried on its core business activities and, hence, constituted a fixed place PE.

The High Court rejected the taxpayer’s contention that since GE India works on behalf of 24 overseas GE entities, it cannot be considered to be devoted wholly or almost wholly to one foreign enterprise and hence cannot form a DAPE. It held that since GE India was devoted to overseas GE entities forming part of the same group, it formed DAPE of GE Overseas in India. In the absence of specific annual financial statements in India, the tax authorities relied on Rule 10(iii) of the Income Tax Rules, 1962, which prescribes that attribution may be determined “in such other manner as the Assessing Officer may deem suitable”.

The High Court upheld the ITAT’s view on attributing 10% of the value of supplies made to clients in India as profit arising from such supplies and attributing 26% of such profits to the taxpayer’s PE in India, considering that GE Group’s activities of making sales in India is roughly 25% of the total marketing efforts.


BRUNEI

On 28 February 2019, Brunei and India signed an exchange of information and assistance in collection agreement with respect to taxes (TIEA), in New Delhi.

USA

On 27 March 2019, India and the United States signed an agreement on exchange of country-by-country (CbC) reports in New Delhi.

p the mechanism for sharing the stamp duty with the relevant st

INDIA INDIA


Transfer Pricing Information in the Tax Return

The Director General of Taxation (DGT) has issued Distribution II Attachment II to Regulation of the Director General of Taxation Number PER-02/PJ/2019. Through Distribution II, DGT clarifies the details of transfer pricing documents which need to be attached to corporate annual tax return form 1771.

Initially, the regulation required the “Master file, local file and/or country-by-country report.” This was changed into “In the form of summary of master file and local file; and receipt of the submission of Notification or submission of Country-by-Country Report.”

Thus, the master file, local file, and country-by-country report do not need to be attached to corporate annual tax return (form 1771). A corporate taxpayer only needs to attach the summary of the master file and local file as well as receipt of the submission of notification or country-by-country report to corporate annual tax return form 1771.

Subsequently, a report on the calculation of debt to equity ratio and/or report on external private debts must be attached to corporate annual tax return if a corporate taxpayer which is established or domiciled in Indonesia, the capital of which is divided into shares, has debts and deducts a borrowing fee in the calculation of taxable income and/or has external private debts.

Tax-Free Asset Transfers1

Minister of Finance (“MoF”) Regulation No. 205/PMK.010/2018, issued 31 December 2018, amends MoF Regulation No. 52/PMK.010/2017 (“MoF-52”) concerning the use of tax book value on a transfer and acquisition of assets in the context of a merger, consolidation, expansion, or business acquisition. The amendment is intended to promote foreign direct investment and support the government’s program to establish state-owned enterprise holding companies.

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

Two additional types of domestic taxpayers can now use tax book value for a transfer of assets in an expansion. These taxpayers, and the supplemental documents to be attached to their application, are:

Other procedures and requirements regarding the use of tax book value on transfer of assets remain the same as before.

Tax Deductions of Benefits In Kind Paid to Employees2

The general tax rule in Indonesia is that benefits in kind are tax-exempt in the hands of employees and not deductible for corporate tax purposes for the employee. MoF Regulation No. 167/PMK.03/2018 (“MoF-167”) revokes MoF Regulation No. 83/PMK.03/2009 (“MoF-83”) and amends the deductibility by employers of certain benefits in kind (“BIK”) provided to their employees.

Indonesia

Foreign Tax Credit

The Minister of Finance (MoF) issued Regulation 192/PMK.03/2018 (PMK 192) regarding the implementation of credit for tax paid on income from abroad. PMK 192 became effective from 31 December 2018 and replaced MoF Decision 164/KMK.03/2002 of 19 April.

PMK 192 provides clarification and detailed instructions regarding the procedure for calculating the amount of foreign tax credit that could be recognised and the procedures for reporting it, which include the following:

• determination of country of source of foreign income e.g. the calculation of the amount of foreign tax credit that could be credited is done separately based on the type of income and the source country;

• determination of the amount of foreign income, e.g. the foreign income included as taxable income is the net income;

• determination of the amount of foreign income tax that could be credited;

• rules regarding tax credit of husband and wife who carry out their tax obligations separately, e.g. tax credits are determined separately for each husband or wife;

• administrative requirements, e.g. the only documents required to substantiate foreign tax paid are the proof of tax payment or proof of foreign tax withholding; and

• rules concerning foreign tax credit for income from trusts.

JURISDICTION:

Domestic Taxpayer

A corporate entity that resulted from a business expansion and received a minimum of IDR 500 billion of additional capital from a foreign investor

A state-owned enterprise that received capital from the government to establish a holding company

Additional Document

to Submit

Deed of establishment or amendment of the Indonesian company resulting from the business expansion which states the amount of the new investment by the foreign investor

A letter of recommendation from the Minister of State-Owned Enterprises

Description

Provided by employers in general

Change or Additional Requirement

per MoF-167

1. Clarifies that vouchers for food and beverages which are provided to employees outside the workplace can be deducted from the employer’s gross income, provided the voucher value per employee is not more than that provided to employees at the workplace.

2. Clarifies that “necessary for work performance” relates to worker security or safety as required by government agencies in charge of manpower.

INDONESIA


Regarding deductibility of BIK provided by employers in remote areas, MoF-167 states that an approval that the area qualifies as a remote area is granted for a five-year period, with a possible five-year extension. However, the period is extended to 10 years (+10) for a holder of an IUPK-OP (Production Operation Special Mining Business Permit) whose contract was initially a contract of work (CoW) or coal mining CoW which stated the treatment of BIK. The decision that an area qualifies as a remote area applies from the month the decision was issued. This was previously from the tax year the decision was issued.

Approvals that a company operates in a remote area based on MoF-83 remain applicable up to the end of their validity period. Applications to qualify as a remote area which were pending when MoF-167 was issued will be decided based on MoF-167.

Tax Holiday

As part of the Economic Policy Package XVI, the Minister of Finance (MoF) has issued an updated Tax Holiday policy through Regulation No.150/PMK.010/2018 (PMK-150) dated 27 November 2018. PMK-150, which revokes the recently-issued MoF Regulation No.35/PMK.010/2018 (PMK-35).

The new regulation has expanded the number of activities which are eligible for the tax holiday and the minimum capital investment for the tax holiday has now been reduced to IDR 100 billion. Subject to how much capital will be injected in the Indonesian company, the holiday period could range from five to 20 years and the tax holiday could consist of a 50% tax rate reduction for a five- year holiday to a 100% tax holiday for a period between five and 20 years.


CAMBODIA

Cambodia ratified the Cambodia-Indonesia Income Tax Treaty signed on 13 October 2017 by Cambodia and on 23 October 2017 by Indonesia, by way of promulgation of 12 December 2018.

Description

Provided by employers located in remote areas

Change or Additional Requirement

per MoF-167

1. Clarifies that family members are entitled to healthcare and worship benefits.

2. Clarifies that transportation only covers relocation costs at the beginning and end of the assignment.

Continued

JapanJURISDICTION:

Multilateral Convention Enters into Force

On 1 January 2019, the Multilateral Convention (2016) (MLI) entered into force in respect of Japan. Japan signed the convention on 7 June 2017 and deposited its final MLI position on 26 September 2018, including the 39 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. In the case of Japan, this means that the following treaties will now be affected by the MLI:

• Australia-Japan Income Tax Treaty (2008);

• France-Japan Income Tax Treaty (1995) (as amended through 2007);

• Israel-Japan Income Tax Treaty (1993);

• Japan-New Zealand Income Tax Treaty (2012);

• Japan-Poland Income Tax Treaty (1980);

• Japan-Slovak Republic Income Tax Treaty (1977);

• Japan-Sweden Income Tax Treaty (1983); and

• Japan-United Kingdom Income Tax Treaty (2006).

Pre-Brexit Merger between UK Subsidiary and Dutch Subsidiary Considered Tax-Qualified Merger

On 7 March 2019, the National Tax Agency (NTA), Osaka branch, published an advance ruling in response to a request made on 18 February 2019. The taxpayer (A-co) was a Japanese corporation holding all the shares

INDONESIA


in a UK corporation (B-co). B-co controlled corporations located in other EU Member States. Following the United Kingdom’s decision to leave the European Union on 29 March 2019 (commonly referred to as Brexit), A-co planned to transfer B-co’s business to a newly established Dutch corporation (C-co) before 29 March 2019. All of C-co’s shares were held by A-co.

The issue was whether the merger between B-co and C-co, a merger conducted under foreign law, can be considered a tax-qualified merger in Japan. Generally, under the Corporation Tax Law, in the case of a tax-qualified merger, the corporation ceasing to exist is deemed to transfer to the acquiring corporation all its assets and liabilities at its tax book value. Accordingly, the transfer is non-taxable, and taxation of any unrealised appreciation in the assets of the disappearing corporation is deferred.

The NTA ruled that the merger between B-co and C-co is a qualified merger based on the facts and circumstances of the case presented. Consequently, the transfer is non-taxable: no deemed dividend is distributed from B-co to A-co, and taxation of any unrealised appreciation in B-co’s assets is deferred.


ECUADOR

On 15 January 2019, the Ecuador-Japan Income Tax Treaty was signed in Quito.

KoreaJURISDICTION:

Supreme Court Rules on Application of GAAR on Beneficial Ownership

On 27 December 2018, the Korean Supreme Court ruled on a beneficial ownership case involving patent royalties paid to an Irish company. A US patent management company had been providing intellectual property management services for various patents owned by US parent companies (US Parent Cos). The US patent management company had been in negotiations since 2004 with a Korean company regarding the patent license and settlement over patent infringement claims. In May 2010, US Parent Cos established a US company (US Co), which in turn established the Irish company (Irish Co) in June 2010. On 8 November 2010, US Parent Cos granted certain licensing rights to US Co, which provided the sub-licensing rights to Irish Co on the same day. Irish Co then entered into a USD 3.7 billion patent license and settlement agreement with the Korean company on 11 November 2010. On 30 November 2010, Irish Co received the royalties and settlement payment of USD 3.7 billion. Subsequently, approximately USD 3.4 billion was passed to US Parent Cos through US Co within a month. The Korean company, which was a withholding agent as well as the taxpayer, did not withhold any taxes based on the tax treaty with Ireland, which provides for a 0% withholding tax rate on royalties paid to an Irish beneficial owner. When the patent license and settlement agreement was made, Irish Co’s initial capital was EUR 20, had only three employees and a rented office space in Ireland. It had also entered into licensing agreements with various licensees in four other countries.

The Korean tax authority argued that Irish Co was established solely to take advantage of the 0% withholding tax rate and assessed additional taxes on the income at issue, alleging that US Co was the beneficial owner of the income and applying the reduced withholding tax rate

JAPAN


available under Korea’s tax treaty with the USA (i.e. 15% excluding the local income tax). The taxpayer argued that Irish Co was the beneficial owner, and added that even if it were disregarded and US Co were to be considered the beneficial owner, the Korean tax authority should not impose taxes on the portion of US Co’s income derived from the use of the patents that were not registered in Korea under the Korea/US tax treaty. In the present case, only approximately 5.7% of the patents were registered in Korea. Thus, the taxpayer argued that the tax assessment attributable to 94.3% of the patents needed to be cancelled.

Upon reviewing the evidence submitted, the Supreme Court affirmed the lower court’s decision that Irish Co was merely a conduit and that US Co was the actual beneficial owner of the royalties derived from said agreement. The Supreme Court pointed to multiple factors in support of its decision, including the following: (i) the business reasons for establishing Irish Co (it did not have sufficient commercial reasons justifying its existence in Ireland aside from tax avoidance); (ii) the company’s physical substance in Ireland (it had capital of approximately EUR 20 and three employees when the patent license and settlement agreement was made); and (iii) the flow of the income (more than 90% of the royalties and settlement payment flowed to US Co from Irish Co).

As to the application of the sourcing rules, upholding the taxpayer’s argument, the Supreme Court opined that the Korea/US tax treaty should be applied in classifying the source of the patent royalties derived by US Co since Article 28 of the International Tax Coordination Law provides that “in classifying domestic-source income of a non-resident or a foreign corporation, the provisions of the tax treaty shall prevail over the provisions of Korean domestic law.” Therefore, Article 93 of the Korean Corporate Income Tax Law, which asserts that patent royalties are sourced to Korea as long as relevant patents are registered or used in Korea, was not applicable to the case. This ruling aligned with the Supreme Court’s position in a number of other similar cases and affirmed that patent royalties are taxable in Korea only for the income attributable to patents registered in Korea.


USA

On 1 January 2019, the amending protocol to the 2007 Korea-United States Free Trade Agreement (KORUS FTA) and the amending protocol to the 2011 exchange of letters concerning issues relating to the KORUS agreement entered into force. Both protocols were signed on 24 September 2018.

PERU

On 1 January 2019, the administrative arrangement, signed in Lima on 22 November 2018, to the Korea-Peru Social Security Agreement, entered into force. The arrangement sets out the administrative procedures which Korea and Peru must follow in applying the social security agreement.

HONG KONG

According to an update of 18 January 2019, published by the Hong Kong Inland Revenue Department, a competent authority arrangement on the exchange of country-by-country (CbC) reports between Hong Kong and Korea has been signed.

MalaysiaJURISDICTION:

Withholding Tax on Special Classes of Income

On 5 December 2018, the Inland Revenue Board of Malaysia (IRBM) issued Public Ruling 11/2018 (PR 11/2018) to explain the special classes of income under section 4A of the Income Tax Act 1967 (ITA). PR 11/2018 was issued to replace PR 1/2014 dated 23 January 2014.

PR 11/2018 remains largely similar to PR 1/2014, except for the following salient points:

• definition of “resident person”, “non-resident person”, and “double tax agreement and protocols” (paragraphs 3.3, 3.5 and 3.6);

• examples of payments made to non-residents which are not subject to withholding tax have been deleted from the current PR;

• paragraph 16 provides guidance on the application of relief for taxpayers who have furnished the withholding tax return and have paid excessive due to a deduction which was not allowed in respect of a payment not due to be paid under section 109B of the ITA;

• paragraph 18 provides guidance in respect of withholding tax on payments made to non-residents in the following scenarios:

>> where a tax treaty has been signed between a particular country and Malaysia that generally includes a technical fees or fees for technical services article;

>> where a tax treaty has been signed between a particular country and Malaysia that may not have a technical fees or fees for technical services article; and

>> where no treaty has been entered into or only a limited treaty with a particular country.

KOREA


• withholding tax under section 109B will be applicable to non-residents in respect of income under section 4A of the ITA unless such payment is in relation to a contract project in Malaysia which results in setting up a permanent establishment or a business presence in Malaysia (of which then the withholding tax will be subject under section 107A of the ITA).

The PR also includes details and examples for existing contracts prior to the amendment of section 15A of the ITA, as well as a clarification of withholding tax exemption on income from services performed outside Malaysia on or after 6 September 2018.

Professional Indemnity Insurance

On 18 February 2019, the Inland Revenue Board of Malaysia (IRBM) issued Public Ruling (PR) 1/2019 on professional indemnity insurance (PII). PR 1/2019 was issued to replace PR 9/2017 of 19 December 2017. PR 1/2019 remains largely similar to PR 9/2017, except for the following:

• paragraph 8.4 explains that the amount of the proceeds received by a professional individual or company in connection with PII will be taxed in full, even if the actual expenses incurred to compensate a client (the claimant) are less than the amount received;

• however, paragraph 8.5 explains that any proceeds received in connection with the PII will be taxed in full as gross income, even if a professional individual or company chooses not to claim a deduction for the PII premium expenses.

Director’s Liability

On 14 March 2019, the Inland Revenue Board of Malaysia (IRBM) issued Public Ruling (PR) 2/2019. PR 2/2019 explains the liabilities of a director in respect of a company’s tax matters.

The definition of “director” is provided for under subsection 75A (2) of the Income Tax Act 1967 (ITA) and is summarised as follows:

• any person occupying the position of director (regardless of the title given), including a person engaged in the management of the company’s business; and

• any person who, either on his own or with an associate, holds at least 20% of the company’s ordinary share capital.

A person who qualifies as a “director” of a company will be held liable for the payment of corporate income tax, employees’ monthly tax deduction and any other debt that is due and payable by the company.

A director will not be held liable on the recovery of unpaid taxes or debts of a company if:

• he ceases to be a director of a company prior to a notice of assessment being served or deemed to be served;

• he is appointed as a director after the notice of assessment is served or deemed to be served; or

• the company is in the process of winding up.

A company director will be held liable for recovering any unpaid tax due and payable by the company:

• if he is appointed before the date of notice of assessment is served or is deemed to be served, and continues to be a director on the date when recovery action is taken; or

• if he is the director of the company during the period in which tax is due and payable, even though he ceases to be a director before the recovery action takes place (the notice of assessment is served before he ceases to be a director).

The recovery actions that can be taken against liable directors include preventing a director from leaving the country and/or a civil suit against both the company and the director(s).

Digital Business Taxation for Overseas Vendors

Malaysia’s MOF has issued a draft bill requiring overseas-based digital businesses operating an online platform to register for Service Tax purposes in Malaysia if their annual turnover on digital services provided to consumers in Malaysia exceeds RM 1 million, with effect from 1 January 2020. Digital services are defined to include any service that is delivered or subscribed over the internet and other electronic network and which cannot be obtained without the use of information technology and where the delivery of the service is essentially automated. This will include (i.a.) music, video and advertising. For digital services provided to businesses in Malaysia, a reverse charge system will apply to the Malaysian businesses buying these services.

MALAYSIA MALAYSIA


Philippines


ICELAND, NORWAY, SWITZERLAND, LIECHTENSTEIN/EFTA

According to a recent update published by the European Free Trade Association (EFTA), the multilateral free trade agreement (FTA) between the EFTA member states (Iceland, Liechtenstein, Norway and Switzerland) and the Philippines, signed on 28 April 2016, has been fully implemented. On 10 December 2018, the Philippines confirmed that their internal procedures were concluded and the FTA has been fully implemented since 24 October 2018.

JURISDICTION:

SingaporeJURISDICTION:

Budget 2019

CORPORATE TAXATION

• Incentive schemes for funds managed by Singapore-based fund managers are extended until 2024. In addition, the Budget announcements include refinements of the incentives that are designed to keep the incentives relevant and ease the compliance burden, which includes a removal of counterparty and currency restrictions on investments by qualifying funds.

PERSONAL TAXATION

• A personal income tax rebate of 50% of income tax payable (capped at SGD 200) is granted to all resident individuals for the year of assessment 2019 (YA 2019), i.e. the calendar year ended 31 December 2018).

• The Not Ordinarily Resident (NOR) scheme will lapse after YA 2020, which means that the last NOR status will be granted in YA 2020 and will expire in YA 2024. The NOR scheme allows time apportionment of Singapore employment income between the time spent in Singapore and time spent outside Singapore. The latter is subject to preferential taxation. Individuals becoming tax residents in 2019 will be granted NOR status until December 31, 2023. However, individuals becoming tax residents in 2020 will not qualify. Individuals who currently hold NOR status will not be affected.

GST import relief for travellers is reduced from SGD 600 to SGD 500 (and from SGD 150 to SGD 100 for travellers spending less than 48 hours outside Singapore).

CUSTOMS DUTIES

• The duty-free allowance for liquor products is reduced from three litres to two litres.


Certificate Of Residence (COR)

Taking into account situations where the tax treaty does not have an limitation of benefit clause, the organisation of accredited tax practitioners of Singapore (SIATP) suggested to IRAS that the online application form for COR be modified, by making the field in relation to “inputs for the amount of foreign income that will be remitted” non-mandatory.

IRAS acknowledged SIATP’s feedback and would remove the following fields from the e-COR application form:

(i) Income remitted – Yes/No

(ii) Date of remittance (if Yes)

(iii) The company undertakes that the foreign income will be remitted and subject to tax in Singapore and the expected year of remittance is (if No).

Public-Private Partnership Arrangements

The e-Tax guide on the tax treatment of Public-Private Partnership (PPP) arrangements was first issued on 10 September 2009, subsequently amended on 27 December 2013 and most recently amended on 22 February 2019. The guide explains the approach the Inland Revenue Authority of Singapore (IRAS) takes to establish the scope of services carried on by the private sector operator involved in a PPP project and provides details on the income tax treatment that would apply.

The IRAS will establish the scope of the PPP operator’s trade or business based on the accounting treatment of the PPP project.

The tax treatment for the typical category of PPP operator’s trade or business in Singapore is summarised below:

The tax treatment outlined in the above table would cover most PPP projects in Singapore that fall within the said category. However, in certain less typical PPP arrangements, the accounting treatment alone may not sufficiently reflect the scope of the operator’s trade for tax purposes. Therefore, it may be necessary for the IRAS to examine the specific terms surrounding the arrangements to determine the appropriate tax treatment. In such instances, the PPP operator may request a clarification or tax ruling from the IRAS to confirm the tax treatment for its PPP arrangement.

Foreign Exchange Gains or Losses for Businesses

On 14 March 2019, the Inland Revenue Authority of Singapore (IRAS) issued an updated e-Tax guide on tax treatment of foreign exchange gains and losses for businesses. The guide was first issued on 29 June 2012. The IRAS accepts, for tax purposes, the accounting treatment adopted by businesses for revenue exchange differences. In this regard, all revenue foreign exchange differences (regardless of whether they are realised or unrealised) will be taxable or deductible in the year that they are charged to the profit and loss account. This tax treatment is applied automatically to businesses other than banks since the year of assessment 2004 (unless the business opted out of this tax treatment when submitting the income tax for the year of assessment 2004).

The guide has been updated with information regarding the introduction of section 34AB of the Income Tax Act which provides the legislative basis for the tax treatment above. From 12 November 2018, businesses that had previously opted out of the tax treatment in 2004 (previously irrevocable) could now make an election to IRAS to adopt the tax treatment when filing their income tax returns.

The guide is also updated to specify the exclusions from the default capital tax treatment for bank accounts and also provides clarification as to when a bank account will not be regarded as a designated bank account. Additionally, the guide also provides guidance on the administrative requirements for businesses which intend to claim the revenue tax treatment for designated bank accounts.


EU

On 13 February 2019, the European Parliament approved the free trade agreement (FTA) between the European Union and Singapore, signed on 19 October 2018. On the same day, the European Parliament approved the investment protection agreement (IPA) between the European Union and Singapore, signed on 19 October 2018.

Category

Operation & Maintenance (O&M) service provider

Finance lease lessor and O&M service provider

Design, construction and O&M service provider

Tax Treatment

• unitary payments are subject to tax as and when they accrue to the PPP operator as service income

• operator may claim capital allowance or industrial building allowance, where applicable, on capital expenditure incurred on the PPP asset

• finance income of the lease component and service income are subject to tax as and when such income accrues to the operator

• principal repayment of lease component is not taxable

• operator is not entitled to claim capital allowance or industrial building allowance on the PPP asset

• construction revenue, service revenue and finance income are subject to tax as and when such income accrues in operator’s accounts

• construction costs, service costs and borrowing costs are deductible subject to sections 14 and 15 of the Income Tax Act

• operator is allowed to make an irrevocable election to be taxed on the construction profits only upon the completion of construction of the PPP asset

SINGAPORE SINGAPORE


Taiwan

Fixed Assets Written Off Before End of Service Lives to be Reported

The National Taxation Bureau of Kaohsiung (the Bureau) stated in an announcement on 26 March 2019 that fixed assets that are destroyed or abandoned before reaching the end of their service lives, as prescribed in the Table of Service Lives of Fixed Assets, due to specific incidents, must be reported by profit-seeking enterprises to the tax authority for review prior to the recognition of the losses for the year. This requirement is in addition to the provision of an audit and certification report by a certified public accountant, an audit and certification report of annual income tax, with supporting documents attached, or documents issued by the competent authority detailing the descriptions, quantities and amounts of the fixed assets destroyed.

Fixed assets that are no longer in use due to company relocation (such as interior decorating equipment), but that have not yet reached the end of their service lives, must be handled in accordance with the scrapping procedure prescribed in article 95, paragraph 10, of the Regulations Governing the Assessment of Profit-Seeking Enterprise Income Tax before being recognised as losses from the writing-off of fixed assets. The Bureau reminded taxpayers that income from the sale of fixed assets that are written off is recognised as profit and must be declared in the annual profit-seeking enterprise income tax return.

JURISDICTION:

ThailandJURISDICTION:

International Business Centre

On 28 December 2018, Royal Decree No. 674 was gazetted. This decree was enacted to repeal the following tax incentives regime and replace them with a single International Business Centre (IBC) regime:

• regional operation headquarters (ROH);

• international headquarters (IHQ) and treasury centre (TC); and

• international trading centre (ITC).

An IBC is a company incorporated in Thailand and engaged in the following activities with its affiliates in Thailand and other countries:

• providing administrative and technical support services;

• providing international trading services; and/or

• providing money management services.

Land and Building

The Land and Building Tax Act was published in the Governmental Gazette on March 12, 2019, and takes effect on January 1, 2020. Land and building owners, as of January 1 of any taxable year, will be taxed at progressive rates on the values of their property assets as appraised by the Treasury Department. Tax rates on land and buildings will vary depending on their use – agricultural, residential, commercial or unused.

The new tax regime, replacing the Household and Land Tax Act and the Local Land Development Tax Act, is expected to significantly affect owners, especially those holding land and buildings for commercial purposes. The new law provides certain relaxations from 2020 to 2022.


Tax Amnesty Programme for SMEs

On 25 March 2019, the tax amnesty programme for small and medium enterprises (SMEs) was published on the Royal Gazette’s website. The amnesty programme aims to waive tax penalties and surcharges, as well as any relevant criminal offences under the Revenue Code to qualified taxpayers. The measures took effect from 26 March 2019.

The tax amnesty programme is applicable to any qualifying SME that:

• is subject to Thai corporate income tax;

• has revenue not higher than THB 500 million for its last accounting period (of not less than 12 months) ended on or before 30 September 2018;

• has filed the corporate income tax return before 26 March 2019; and

• has not committed any criminal offence investigated by the Revenue Department prior to 26 March 2019.

The amnesty measures cover corporate income tax, value added tax, specific business tax, withholding tax and stamp duty (subject to conditions).

Qualifying SMEs can register with the Revenue Department by 30 June 2019.

VietnamJURISDICTION:


CAMBODIA

According to a press release of 27 December 2018, published by the General Department of Taxation of Cambodia, the Cambodia-Vietnam Income Tax Treaty has entered into force. Cambodia ratified the treaty by way of promulgation on 12 December 2018 and the Vietnamese government adopted Resolution No. 100 / NQ-CP on 31 July 2018. The treaty generally applies from 1 January 2019.

MACAU

The Macau-Vietnam Income Tax treaty has entered into force. The tax agreement generally applies from 1 January 2019.

THAILAND


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