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Tax Update Seminar 16 August 2019

NEXIA TS PUBLIC ACCOUNTING CORPORATION

Investment Opportunities in South East Asia Henry TanGroup CEO & Chief Innovation Officer Nexia TS

Investment Climate

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In Singapore

Relatively low corporate taxes A liberal economic system More than 99 percent of all

trade through Singapore is duty-free.

Combined with the ease in establishing businesses

Why Singapore continues to be the hub for investments into South East Asia?

GDP growth in 2019 is expected to be around 1.5 percent to 3.5 percent - according to the Ministry for Trade and Industry

Ease of Doing Business 2nd in Ease of Doing Business Ranking

* According to World Bank Annual Report 2018 – Ease of Doing Business Ranking

M&A in Singapore Tech & Real Estate Rev Up

M&A activities by homegrown firms hit a historic four-year high as it climbed 19.1% to S$46.19b (US$33.8b) in the first half of 2018 – data from Thomson Reuters.

Capitaland US buying spree worth S$1.14b (US$835m)

The Grab-Uber merger buying 27.5% stake

Tech Real Estate

Fintech in SingaporeLeading Global Fintech Hub in Asia

Regional Powerhouse for TechMAS commitment of S$225 million

for Fintech developments

Fintech investments more than doubled to hit US$365 million ($492.3 million) in 2018 amid global surge

- Straits Times, 28 Feb 2019

Top five Fintech markets by funds raised in the Asia-Pacific 2018

- analysis by Accenture

Synergies, not Silos

WHAT CAN LOCAL COMPANIES DO TO STAY AHEAD?

The Future of Innovation in Singapore: Cross-Sector Collaboration

The Key to Innovation is Cross-sector Partnership

Investment Opportunities

Biotech, REITs, Infrastructure Developments in ASEAN countries e.g. Myanmar, Laos and Cambodia

Private Wealth Singapore named “most mature and respected” wealth management centre, representing 80% AMA.

AUM up 19% to S$3.3 trillion in 2017

SE Asia expected annual growth rate at ~5.2% from 2018 to 2022, to become the 4th largest single market in the work by 2030 – putting it

behind only the US, China and the European Union.

Fintech

Tax & Private Clients in SE Asia

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South East Asia Tax Comparison

SINGAPORE MALAYSIA THAILAND VIETNAM

TAX REGIME Quasi-territorialsystem. Only income accrued in or derived from Singapore and foreign income remitted / deemed remitted to Singapore is subject to tax.

Territorial system. Only income derived from Malaysia is taxed. Foreign income is exempt (other than those businesses carrying out banking, insurance, air transport or shipping).

Income is taxed on worldwide basis.

Income is taxed on worldwide basis.

CORPORATE TAX RATES

17% 24% 20% 20%

INDIVIDUAL TAX RATES (HIGHESTMARGINAL RATE)

22% 28% 35% 35%

FOREIGN EXCHANGE CONTROL

Funds may flow freely in and out of Singapore except for certain restrictions on lending of SGD to non-resident financial institutions.

Generally, repatriation of funds is freely permitted.

Bank of Thailand must approve remittance of funds exceeding certain ceiling sets by commercial banks.

Foreign currency may be remitted overseas. However, registration and / or tax requirements may need to be met.

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South East Asia – Ease of Setting Up Business

Singapore

Malaysia

Thailand

Vietnam

• Minimum 1 ordinarily resident individual director;

• 1 ordinarily resident corporate secretary;

• At least one shareholder. No minimum capital requirement.

• Can be incorporated immediately.

• Minimum 1 ordinarily resident individual director and one promoter

• At least 2 shareholders with minimum paid-up share capital of MYR 2;

• Takes no more than 30 days to incorporate.

• Minimum 1 individual director;

• At least 3 natural persons shareholders, where 25% of registered share capital needs to be paid up;

• Can be incorporated immediately.

• Minimum 1 individual director (may be foreigner but subject to conditions);

• At least 1 shareholder;

• Need to open capital account with local bank;

• Need to obtain approval for a foreign investment certificate;

• At least one month to incorporate.

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South East Asia – Tax Incentives

Singapore

Malaysia

Thailand

Vietnam

• Various incentives in the form of pioneer and development and expansion companies, headquarter activities, financial services, asset securitization, fund management, international maritime activities, global trading and R&D.

• Comes in the form of tax exemptions / concessionary tax rates and enhanced deductions.

• Various incentives available for industries such as manufacturing, hotels, healthcare services, IT services, biotech, Islamic finance, venture capital, tourism, energy conservation and environmental protection.

• Comes in the form of tax holidays, investment allowances, accelerated capital allowances, enhanced deductions.

• Generally, 3-8 years of tax holidays may be available for certain business activities;

• An International Business Centre regime was introduced in 2018, where a concessionary tax rate ranging from 3% to 8% may apply, subject to conditions..

• Concessionary tax rates ranging from 10% to 17% may apply for taxpayers engaged in encouraged investment projects or in socio-economically disadvantaged locations.

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Singapore focus – Wealth Planning Structures (1/2)

Direct holding Trust Trust + HoldCo Fund

Tax consequences for each type of investment

Stocks Dividends exempt

Gains from disposal of stocks exempt if considered as capital gains

Dividends exempt provided conditions in section 13(8) of the ITA are met (if income remitted into SG)

Dividends exempt (even if remitted into SG) under exempted list of Locally Administered Trust (“LAT”) and Foreign Trust (“FT”) tax incentive

Gains from disposal of stocks which fall into exempted list under LAT and FT tax incentive exempt

Dividends exempt providedconditions in section 13(8) of the ITA are met (if income remitted into SG)

Dividends exempt (even if remitted into SG) under exempted list of LAT and FT tax incentive

Gains from disposal of stocks which fall into exempted list under LAT and FT tax incentive exempt

Dividends generally exempt under the various Fund Tax incentives.

Certainty regarding non-taxation of trading gains from assets which fall under safe harbor rules.

Bonds Interest income exempt (whether remitted into SG or not)

Interest income exempt if not remittedinto SG

Interest income exempt under LAT and FT tax incentive (even if remitted into SG)

Interest income exemptif not remitted into SG

Interest income exempt under LAT and FT tax incentive (even if remitted into SG)

Interest income exempt if not remitted into SG

Interest income exempt under LAT tax incentive (even if remitted into SG)

Interest income exempt under various Fund Tax Incentives (even if remitted into SG)

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Singapore focus – Wealth Planning Structures (2/2)

Direct holding Trust Trust + HoldCo Fund

Main features of the structure

Cost Low Medium Medium Medium High4

Succession flexibility Low High High High Medium5/ High6

Reporting requirements Low to High1 Medium Medium Medium High

Segregation of risks No No No Yes Yes

Problems of substance N/A Medium2 Medium2 Medium2 Low/ High3

WHT at source DTT at reduced rates DTT at standard or reduced rates2

DTT at standard or reduced rates2

DTT at standard or reduced rates2

Depends on the perception of the Fund by the source country3

1 Depending on number of individual assets and associated reporting requirements2 Interposition of a trust is not a straightforward issue for the purpose of DTT application. It needs to be confirmed with the source country if the beneficiary can be considered as a “person” and “beneficial owner” of the respective income in order to benefit from DTT3 It needs to be confirmed how the fund is perceived by the source country (transparent or opaque for tax purposes). If transparent, the DTT between the source country and the beneficiary would apply, if opaque, a COR for the Fund might be required.4 Enhanced Tier incentive requires a minimum fund size of SGD $50m and at least SGD $200,000 local business spending5 If set up as a company or a limited partnership6 If set up as a trust

Opportunities in China

Introduction: A few notable trends

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Since January 2019: Continued FDI growth at a rate of ~ 6% per month (high of USD $135

billion reached in December 2018)

GDP growth has slowed to about 6.1% (thought to be sufficient to keep economy above water)

WFOE liquidations on the increase (particularly where manufacturing goods for export & related trading companies)

Increasing WFOE registrations (manufacturing and services intended exclusively for the China market)

The latest on China’s reforms

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Opening up opportunity for investment in State-Owned Enterprises (SOEs) Working to make SOEs more competitive in foreign markets

Working to continuously lower the huge corporate debt that peaked in 2015

Positive changes in FDI into Chinese SOEs have been overshadowed by the Belt & Road initiative

Relaxed restrictions on foreign investment in industries such as: Insurance

Banking

Asset management

Auto industry

Health care

Specific investment opportunities

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• Health and elder care services

• Mobile e-commerce and services provided over internet

• Services intended for the consumer market (growing at 8.6% monthly)

• High tech manufacturing (semiconductors for artificial intelligence, cloud computing and industrial automation)

• Robotics and process automation

• Environment and “green” technologies

• Education (tutoring and English language schools)

• Health products (skin care, dietary supplements)

• Pharmaceuticals and medical equipment

• Jewelry production

• Import/export trading

What to watch for:

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Withholding tax (10% or treaty rate) applies to: Dividends or equity-related bonuses

Interest

Royalties / licenses (and associated services)

Lease / rental of immovable property

Direct or indirect transfers of equity

Withholding tax on cross-border service transactions Applies when PE is formed (6 months or 183 days in 12-month period)

Several methods of calculation – most commonly “deemed profit”

Buyer acts as withholding agent (and should register service contracts)

o Law allows that non-resident can declare / pay tax on an actual basis –but seldom practiced

If treaty benefits are relevant (no PE), application for benefits is required

What to watch for:

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VAT misunderstanding in cross border transactions VAT is commonly withheld in error from payments made to overseas service

providers

The buyer of goods and services should pay VAT

Specify VAT responsibility in contracts

Regulatory compliance errors Must understand Individual Income Tax rules and Permanent Establishment

implications as related to foreign workers in China (including employees of overseas service providers)

Reporting of certain types of offshore transactions is required (e.g. equity transfer of a foreign entity that owns a taxable entity in China)

Some activities require a Chinese partner (e.g. a foreign event management company providing service in China)

Transfer pricing documentation requirements (e.g. annual reporting of all related party transactions by WFOEs)

SingaporeNexia TS Public Accounting Corporation

80 Robinson Road , #25-00Singapore 068898Tel: (65) 6534 5700Fax: (65) 6534 5766Email: [email protected]: www.nexiats.com.sg

ChinaNexia TS (Shanghai) Co., Ltd..

Room A, 20 Floor, Heng Ji Building, No. 99 East Huai Hai Road, Huang Pu District, Shanghai 20021, ChinaTel: (8621) 6047 8716Fax: (8621) 6047 8712Email: [email protected]: www.nexiats.com.cn

MalaysiaNTS Asia Advisory Sdn Bhd

Unit No 23A-06, Level 23AMenara Landmark, No. 12Jalan Ngee Heng80000 Johor Bahru, JohorTel: (60) 7 221 3285 Fax: (60) 7 221 3289 Website: www.ntsasia.com.my

MyanmarNTS Myanmar Co Ltd.

La Pyayt Wun Plaza, 410(B), 4th Floor, 37 Alanpya Pagoda Road, Dagon Township, Yangon, MyanmarTel: (951) 370 836, 370 837, 370 838 Ext- 406, 407, 408 Fax: (951) 376 945Website: www.nts.com.mm

Thank You

Contact Us

[email protected]


International Tax Updates• Taxation of the Digital Economy• Economic Substance Requirements• Transfer Pricing

Presented by Edwin Leow, Head of Tax

Taxation of the Digital Economy

Why Digital Service Tax?

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Digital Service Tax

Where are the services rendered?

Where are the services consumed?

Location of the enterprise

No physical presence

Fair share of taxesSolutions

Digital Service Tax

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- EU Commission

The first proposal (long-term solution, reform corporate tax rules)

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Digital Service Tax- EU Commission

Second Proposal: Interim tax

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Digital Services Tax- OECDProposed changes to profit allocation and nexus rules • User participation proposal

– Users create the value. Targeted at certain businesses, e.g. social media platforms, search engines, online marketplaces

• Marketing intangibles proposal– Market intangibles in the market jurisdiction e.g. customer

data, customer relationships. Not targeted at certain businesses.

• Significant economic presence proposal– Purposeful and sustained interaction with the jurisdiction via

digital technology e.g. sustained revenue, user base, sustained marketing and sales promotion activities

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Digital Service Tax- G20

• In 2018: Despite disagreements over potential consequences of digital taxation, G20 has explicitly acknowledged the possibility of a long-term, consensus-based solution on digital tax policy

• In 2019:Finance ministers have come to the agreement to come up with common rules to implement common rules to close loopholes used by tech giants to minimize corporate taxes by 2020

• The 2 pillars:– Pillar 1: The right to tax companies where their goods and services are

being sold/consumed, even when the company does not have a physical presence there.

– Pillar 2: To apply an agreed global minimum tax rates

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Digital Service Tax

Why digital services tax – on a practical level

Businesses with a substantial digital footprint but no physical presence in a jurisdiction (e.g. GAFA, Netflix, Spotify) – ‘fair’ share of taxes from revenues

Exploitation of the intangible presence by MNEs

Level the playing field between local companies and overseas companies (GST)

Digital Services Tax – A Global Perspective

• France• Spain• Italy • Switzerland• South Africa• India• Other jurisdictions

France

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Levy Digital Services Tax (DST)

Since when On 6 March 2019, the French government released a policy document outlining its DST proposal that will be taking effect in 2019 (retrospectively w.e.f. 1 January 2019)

The bill introducing a digital services tax was approved by the French National Assembly recently

On what • Interfaces and websites that connect clients and businesses• Advertising companies that provide targeted ads• Resellers of private data for advertisement purposes

Rate 3%

Threshold/ Exemptions

• Worldwide revenues from taxable services €750m (approx. S$1.1b) per annum; and

• Taxable revenue from taxable services obtained in France exceeding €25m (approx. S$38m) per annum liable for DST

Impact/Remarks Expected to raise €500m (S$762m) per year from the taxThe DST shall be abolished and replaced by an OECD solution if the latter incorporates the taxation of digital activities

France

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Spain

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Since when 23 Oct 2018 – the Spanish government released a preliminary draft bill

23 Jan 2019 – after a public consultation, the Spanish government published a revised version, which becomes the final bill

On what Gross income derived from certain digital services for which user participation is essential for creating value e.g.• Targeted online advertising• Online intermediation services • Sale of user data

Rate 3%


• Worldwide revenues of €750m (approx. S$1.1b) per annum; and• Taxable revenue obtained in Spain exceeding €3m (approx. S$4.6m)

per annum would be subject to DST

Impact/Remarks Expected to raise revenue of €1.2b (S$1.8b) by 2020

Italy

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Since when 1 Jan 2019 – introduced in the Italian Budget Law 2019. The Ministry of Finance was expected to issue an implementing decree by 30 April 2019. The decree is not passed.

The DST will be effective from the 60th day after publication of the decree in the Official Gazette

On what • Advertising routed on a digital interface to its users• Providing a multilateral digital interface• Transmitting data through the use of a digital interface

Rate 3%


• Worldwide revenue for the relevant taxable year exceed €750m (approx. S$1.1b); and

• Taxable revenues within the Italian territory during the relevant year exceeding €5.5m (approx. S$8.4m), liable to DST

• Digital services rendered between parties belonging to the same group exempt

Impact/Remarks Expected to raise revenue of €1.2b (S$1.8b) by 2020

Switzerland

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Levy No DST. Value Added Tax levied on certain e-services/digital products

Since when 2010

On what Supply of specified digital products/services to Swiss resident individuals or unregistered service recipient

Rate 7.7%


CHF100,000 (approx. S$138,000) on global income

Impact/Remarks At present, Switzerland is not planning to introduce interim measures such as the digital tax proposed in the EU.

Such interim measures based solely on turnover in market areas can lead to double taxation and over-taxation and make it difficult to achieve a global consensus for a definitive solution.

South Africa

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Levy Value Added Tax

Since when 2014

On what Electronic services supplied by non-resident supplies to residents

Rate 15%


Sales revenue up to ZAR 50,000 (approx. S$4,800)

Impact/Remarks It was recently revealed that SARS collected ZAR 585m (approx. S$56m) in 2016/2017 from tax on digital services

India

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Particulars EqualisationLevy

GST (Payable by Service Provider)

GST (Reverse Charge Mechanism)

SEP

Service/ Activity Online advertising of fashion brand through Google

Online course consisting of pre-recorded videos and downloadable PDFs

Online course consisting of pre-recorded videos and downloadable PDFs

Downloadingfilms on Netflix by Indian customers

Fees / Gross Consideration

INR 1,000,000 INR 1,000,000 INR 1,000,000 INR 1,000,000

Less:Expenses

INR 400,000 INR 400,000 INR 400,000 INR 400,000

Income INR 600,000 INR 600,000 INR 600,000 INR 600,000

EL @ 6% INR 60,000

GST @ 18% INR 180,000 INR 180,000 (RCM) –recipient pays

Income tax @40%

INR 240,000

Other Jurisdictions

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Malaysia W.E.F. 1 Jan 2020, service tax of 6% on any digital service that is provided by a foreign service provider (FSP) to a consumer in Malaysia.

FSPs who meet the mandatory registration threshold (likely to be RM500,000 per annum of digital services provided to Malaysian customers) are required to register for service tax with the Royal Malaysian Customs Department.

Thailand The Thai government is reviewing to change theirexisting VAT legislation. Interested in levying 5% VAT of all e-commerce goods and services transactions.

China The Chinese tax authority is working on reforming its VATsystem and they continue to investigate how to tax the digital economy.

United Kingdom Plan to introduce Digital Services Tax from April 2020

Digital Services Tax

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Singapore

• GST : effective 1 Jan 2020– reverse charge (B2B)– Overseas Vendor Registration (B2C)

• Will Singapore implement proposals by OECD/G20?


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Types of digital services tax


Direct Taxes EqualisationLevy

Indirect Taxes (e.g. GST reverse

charge)

Conclusion

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Are you prepared?

Economic Substance Requirements (“ESR”)

ESR: What is this all about?

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1

2

3

The ESR legislation was introduced in response to concerns expressed by the EUCode of Conduct Group about the lack of clear legal substance requirements forentities conducting business in and through certain offshore jurisdictions.

Serves to address situations where entities artificially shift profits into these offshore jurisdictions which do not actually reflect the true economic activities conducted and economic presence.

ESR legislation for each offshore jurisdiction may vary. However, the approach in tackling / addressing such situations are broadly similar.

Introduction

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ESR: Common Offshore Jurisdictions

The British Overseas Territories

THE BRITISH VIRGIN ISLANDS

THE CAYMAN ISLANDS

BERMUDAESR legislation for these jurisdictions became operative with effect from 31 December 2018 or 1 January 2019 (as the case may be). In other words, ESR legislation is applicable for accounting periods commencing on or after 1 January 2019!

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ESR: Who is in-scope?


Broadly, any company or limited partnerships established or incorporated within the legal remit of these jurisdictions should pay attention.

Such companies or limited partnerships should satisfy the requisite economic substance tests for any “relevant activities” carried out in these jurisdictions.

Relevant activities are broadly as follows:-

LEASING

HEADQUARTERS

FINANCINGFUND MANAGEMENTINSURANCEBANKING

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ESR: What are the economic substance tests?


Broadly, they are as follows:-

SHIPPINGDISTRIBUTION AND SERVICES CENTRE

INTELLECTUAL PROPERTY

ECONOMIC SUBSTANCE TESTS

Being managed and directed in that jurisdiction.

Carrying out of core income generating activities with respect to the relevant activity.

Maintains adequate presence.

Adequate full-time employees with suitable qualifications.Adequate operating expenditure

incurred with respect to the relevant activity.

Intellectual property activities are usually subject to ENHANCED substance requirements.

Pure equity holding entities are usually subject to REDUCED substance requirements.

ESR: What if I fail to comply?


In-scope entities that conduct relevant activities but fail to comply with the economic substance tests may expect:-

SHIPPINGDISTRIBUTION AND SERVICES CENTRE

INTELLECTUAL PTY

HOLDING ENTITY Progressive fines (for example in the Cayman Islands, the

first financial penalty of CI$10,000 would apply, with a subsequent CI$100,000 fine if the failure is repeated in the subsequent financial year.

Imprisonment

Strike off of entities, freezing of bank accounts.

Exchange of information mechanisms may be put in place for automatic exchange of information to the respective foreign tax authorities for the entities that may be found in breach of the substance requirements.

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ESR: Takeaways! (1/2)


Significant impact may ensue on a broad range of entities and parties, including but not limited to:-

• A Singapore listed group with a Cayman Islands listing vehicle or multi-tiered intermediate BVI/Cayman Islands investment holding companies. Although reduced substance requirements may apply to investment holding companies, they will still need to have adequate number of qualified employees and premises located in the BVI/Cayman Islands for holding and managing the equity investments. Also consider this, given that each holding company within the group is required to have adequate substance, the costs of maintaining these BVI/Cayman Islands holding companies to be incurred by the listed group may invariably increase.

• The same issues as mentioned above applies to a private business group or a family business / trust which uses multiple BVI/Cayman Islands companies for holding their equity investment or real estate property.

ESR: Takeaways! (2/2)


Significant impact may ensue on a broad range of entities and parties, including but not limited to:-

• A business group which utilises a BVI/Cayman Islands company to hold an IP and where the majority of profits derived from such IP is booked in such BVI/Cayman Islands company. Does the BVI/Cayman Islands company have adequate substance / performed the requisite development, enhancement, maintenance, protection and exploitation functions that commensurate with the profits booked?

• A Singapore parent company with a BVI/Cayman Islands subsidiary, where the BVI/Cayman Islands subsidiary is managed and operated from Singapore. If the BVI/Cayman Islands subsidiary is subject to, but fails to meet, the new ESR, the information of non-compliance of the BVI/Cayman Islands may be exchanged with the IRAS. This potentially may lead to current as well as past tax and non-tax (e.g. non-compliance with business registration requirement in Singapore) exposure of the BVI/Cayman Islands subsidiary in Singapore.

ESR: Potential Solutions!

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3

Take advantage of Singapore’s extended tax exemption schemes (e.g. fund tax exemptions / foreign trust exemptions) and the new Intellectual Property Development Incentive

Consider inward re-domiciliation

Discontinue the offshore entities and consider using a Singapore company to hold the equity / debt investments and / or IP assets.



ChinaNexia TS (Shanghai) Co., Ltd.




MyanmarNTS Myanmar Co Ltd


Review and discuss with us!

Transfer Pricing Updates

India

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Regulations: The transfer pricing laws are in force since 2001 under section 92 of the Indian Income Tax Act, 1961 andcorresponding rules.

Disclosure: Indian tax payers are required to disclose their related party transaction details in a separate form No. 3CEB to be filedalong with their income tax return.

Documentation: Transfer pricing documentation to be prepared on a contemporaneous basis. Exempt if international transactionvalue is less than INR 10 million (S$195,000).

Most Appropriate Method and preference for comparable: the Five methods as defined by the OECD as well as a “sixth method –“Other method as may be prescribed by the board”. However, there is no hierarchy for application of methods but predominantlythe Transactional Net Margin Method is used. Preference is given to local comparables only.

BEPS Update: In 2018 the latest update for master file and CbCR was introduced per Action Plan 13 of OECD’s BEPS Projectw.e.f 1-Apr-2016 CbCR compliances would be applicable for groups with a revenue threshold of INR 55 billion (S$1

bil)w.e.f 1-Apr-2016 Master File implemented as per OECD templates – with a threshold of INR 5 billion (S$97 mil) of thegroup revenue and INR 500 million (S$9.7 mil) of the international transactional value

Unique Inter-quartile Range: Use of multiple year data as opposed to single year data has been introduced. Taxpayers can use inter-quartile range of 35th to 65th percentile in cases where the comparable dataset contains more than six data points.

Safe Harbour Provisions have been rationalised and APAs have picked up pace.

Hong Kong

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Regulations: The transfer pricing laws were prescribed & implemented in the Inland Revenue Ordinance in 2018.

Disclosure: Hong Kong tax payers are required to disclose their related party transaction details in their annual income tax return.

Documentation: Transfer pricing documentation may be prepared in English or Chinese language. Master File and Local File to beprepared for each year with exemption in certain cases.

Most Appropriate Method: Hong Kong gives priority to the traditional methodologies and then the transactional methodologies. Ifboth cannot be applied, then Other Method may be used.

Royalty: Section 15F is newly added to the Bill to impose tax on Hong Kong taxpayers if they are involved in value creation activitiessuch as (DEMPE) functions in Hong Kong that contributed to an intellectual property held by any overseas related party.

BEPS Update: In 2018 the latest update for master file and CbCR was introduced per Action Plan 13 of OECD’s BEPS Projectw.e.f 1-Jan-2018 CbCR compliances would be applicable for groups with a revenue threshold of HKD 6.8 billion(S$1.2b)w.e.f 1-Jan-2018 Master File & Local File implemented per OECD templates

Interest on Loans - Companies should review if interest is indeed chargeable, and if so, the company should also ensure that the interest rates and the relevant terms of related party loans comply with the arm’s length principle.

Attribution of profits to a permanent establishment - The new transfer pricing regime effectively adopts the authorized OECD Approach by treating the PE as a separate and distinct entity in determining attributable income or loss

Vietnam

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Regulations: The local transfer pricing laws are contained in Decree 20 (of 2017)

Disclosure: Vietnamese tax payers are required to comply with mandatory disclosures of related party transactions and transferpricing information in Form No. 01. This includes voluntary transfer pricing adjustment (viz, operating results of taxpayers with threeforms for different sectors), to maintain and submit (CbyC), besides enhanced annual disclosures.

Documentation: Transfer pricing documentation to be prepared on a contemporaneous basis & exempt in cases i.e. if total revenueis less than VND 50 billion (S$3 million) and the related-party transaction value is less than VND 30 billion (S$1.8 million); amongstothers.

Most Appropriate Method and preference for comparable: the five methods as defined by the OECD and preference is given tointernal comparables only.

BEPS Update: In 2017 the latest update for master file and CbCR was introduced per Action Plan 13 of OECD’s BEPS Projectw.e.f 1-May-2017 CbCR compliances would be applicable for groups with a revenue threshold of VND 18 trillion (S$1billion)w.e.f 1-May-2017 Master File & Local File implemented per OECD templates

A new law for taxation of e-commerce transactions, remote digital sales (Effective 1 July 2020): if there are e-commerce activitiesprovided by non-resident suppliers, if there is no permanent establishment, the suppliers must register, declare, and pay tax inVietnam. While the system is not yet certain a withholding tax could be levied.

Expected changes to Decree 20 on Interest deduction rules: Currently Decree 20 limits deductions for related party total loan interest to 20% of total net profit generated from business activities plus loan interest and amortization costs arising in that period. Amendments are expected to be issued in 2019. it is expected that the interest deduction limits would only apply to taxpayers that are foreign-invested companies in Vietnam.

Malaysia

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Regulations: The local transfer pricing laws are contained in Section 140A of the Malaysia Income Tax Act 1967 and Malaysia TransferPricing Rules 2012. A new Chapter X has been introduced explaining the applicability of the CUP method for commodity transactions.

Disclosure: All Malaysian companies having related party transactions are required to disclose their domestic and cross-border relatedparty transactions under Part N of the income tax return (Form C). This includes Part R4 of Form C that explicitly requires taxpayers to statewhether documentation has been prepared or no. Additionally, taxpayers are also required to file Form MNE (cross-border transactions) orForm JCK (domestic transactions), as may be applicable.

Documentation: Transfer pricing documentation to be prepared on a contemporaneous basis & exempt in certain cases i.e. if annual gross income in the preceding taxable year no more than MYR 25 million (S$8 mil) and total related party transactions below MYR 15 million (S$5 mil); amongst others.

Most Appropriate Method: Transactional profit methods are encouraged only in cases when traditional transactional methods cannot bereliably applied. Furthermore, the guidelines specifically disregard global formulary apportionment (considering such arrangements asarbitrary). Preference is given to local comparables.

Intra-group loans: the CUP method is considered most reliable. Local indices such as the Kuala Lumpur Inter Bank Offered Rate (KLIBOR)may be readily used to benchmark intra-group loans

Intra-group services: a service recipient may apply an external Comparable Uncontrolled Price (CUP) method together with a benefit test.Whereas a service provider may apply CUP method or the Cost Plus Method (CPM).

BEPS Update: In 2017 the latest update for master file and CbCR was introduced per Action Plan 13 of OECD’s BEPS Projectw.e.f 1-Jan-2017 CbCR compliances would be applicable for groups with a revenue threshold of MYR 3 billion (S$1 billion)w.e.f 15-Jul-2017 Master File & Local File implemented per OECD templates

Indonesia

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Regulations: Transfer pricing laws are contained in Article 18 (of 1983) and formal transfer pricing guidelines were introduced in2010.

Disclosure: Indonesian tax payers are required to disclose their related party transaction details in their corporate income tax returnand additionally (in PMK-213) it is also required to file details on Master File and Local File applicability.

Documentation: Transfer pricing documentation (i.e. Local and Master File) to be prepared on a contemporaneous basis & exemptin cases i.e. if annual gross turnover in the preceding taxable year no more than 50 billion Rupiah (S$5 million); amongst others.

Most Appropriate Method and preference for comparable: While the five methods as defined by the OECD without any hierarchy.Comparable uncontrolled price (CUP) is considered to be the preferred method by the tax authorities. Pan-Asian comparables alsoaccepted, if adequate domestic comparables are not available.

Royalty: the arm’s length nature of royalty paid is generally a challenge, by deeming licensee to be contract manufacturers

Intra-group services: Taxpayers need to apply the ‘Benefit Test’ to substantiate that intra-group services actually received and thequantum of service charge is commensurate with the benefits derived

BEPS Update: In 2017 the latest update for master file and CbCr was introduced as per Action Plan 13 of OECD’s BEPS Projectw.e.f 1-Jan-2016 CbCr compliances would be applicable for groups with a revenue threshold of IDR 11 trillion (S$1billion)w.e.f 1-Jan-2016 Master File & Local File implemented as per OECD templates

APA is at a nascent stage and no APA has been concluded till date in Indonesia

Singapore

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Evolution of Transfer Pricing

Singapore

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Recent updates

• TPD mandatory starting YA 2019

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Private and Confidential

Tax Treatment Arising from Adoption of FRS 116 or SFRS (I) 16 - LeasesBy Mr. Koy Su HiangAssociate Director, Tax

16 August 2019

Tax Treatment Arising from Adoption of FRS 116 / SFRS(I) 16 – Leases

• FRS 116 / SFRS(I) 16 applies with effect from annual reporting periods on or after 1 Jan 2019. Replaces FRS 17.

• IRAS issued e-Tax Guide on 8 Oct 2018 for guidance on tax treatment for entities adopting FRS 116 or SFRS(I) 16.

Our Roadmap

Meaning of terms Classification of leases under FRS 17 Classification of leases for tax purposes Tax treatment of leases under FRS 17 Classification of leases under FRS 116 Tax treatment of leases under FRS 116 Singapore withholding tax implications Interest adjustment - Application of Total Assets Method Example to illustrate the tax treatment for leases


Meaning of terms

Finance lease (“FL”)For the purpose of Sec 10D of Income Tax Act (“ITA”), it means a lease of any machinery or plant with the effect of transferring substantially the obsolescence, risks or rewards incidental to ownership to the lessee.

Operating lease (“OL”)For the purpose of Sec 10D, it means the leasing of any machinery or plant, other than finance leasing.

Sec 10D RegulationsRefer to the Income Tax (Income from Finance Leases) Regulations.


Meaning of terms

Sec 10D Regulations.A finance lease (“FL”) shall be treated as a sale agreement if –a. The lessee has an option to purchase the machinery or plant during the

term of the lease including any extension or renewal thereof or upon its expiry;

b. The machinery or plant which is leased is a limited use asset;c. The machinery or plant in a sale and lease-back transaction has been

previously used by the lessee or any other person;


Meaning of terms

Sec 10D Regulations (cont’d)

d. The lessor and lessee are related to each other and –(i) The lessee or any other person related to the lessee lends to the lessor any of

the funds necessary to acquire the leased asset or guarantees any of the debt of the lessor incurred in connection with the lease;

(ii) The terms of the lease are determined otherwise than on the basis that there is no such relationship between the lessor and the lessee; or

(iii) The total value of the rentals or hire received or receivable for the terms of those finance leases entered into by the lessor with lessees, who are related to the lessor, at any time during the basis period for any year of assessment exceeds half of the total value of the rentals or hire received or receivable for the term of all finance leases entered into by the lessor in that basis period; or

e. The lease is a leveraged lease unless the Comptroller determines that it is otherwise.

Classification of Leases Under FRS 17

Classification of lease for accounting purpose

Classification of lease for tax purpose(under Sec 10D)

OL OL

FLFL not treated as sale

FL treated as sale (under Sec 10D Regulations)

Classification of leases for tax purposes

Does lease arrangement meet the definition of a FL under Section

10D(3) of ITA?

Is any of the conditions under paragraphs (a) to (e) of Regulation 4(1) of the Sec 10D Regulations

met?

Lease arrangement is a FL treated as a sale agreement.

Lease arrangement is a FLtreated not as a sale

agreement.

Lease arrangement is an OL.Section 10D Regulations are

not applicable.

No

No

Yes

Yes

Tax Treatment of Leases Under FRS 17

Classification of lease for tax purpose

Tax treatment for lessor

Tax treatment for lessee

OL Lease incometaxable.

Lease payments deductible.

Capital allowance (CA) available on leased asset.

CA not allowed on leased asset.


Classification of lease for tax purposes



FL not treated as sale agreement (under Sec 10D Regulations)

Taxed on full amount of lease income (i.e. sum of the interest and principal repayment).

Full amount of lease payments (i.e. sum of the interest and principal repayment) deductible.

CA available on leased asset but only against finance leasing income.






FL treated as sale agreement (under Sec 10D Regulations)

Taxed on interest income.Principal repayment not taxable.

Interest expense deductible.Principal repayment not deductible.


CA available on leased asset.

Classification of Leases Under FRS 116

Classificationof lease for lessor

Classificationof leasefor lessee


OL Single accounting model- Right-of-Use

(“ROU”) asset - Lease liability &

Interest expense

OL

FL FL not treated as sale (under Sec 10 Regulations)FL treated as sale(under Sec 10D Regulations)





OL Lease incometaxable.

Lease payments deductible. Add back interest expense and depreciation on ROU asset.

Capital allowance (CA) available on leased asset.






FL not treated as sale agreement (under Sec 10D Regulations)

Taxed on full amount of lease income (i.e. sum of the interest and principal repayment).

Full amount of lease payments (i.e. sum of the interest and principal repayment) is deductible.Add back interest expense and depreciation on ROU asset.

CA available on leased asset but only against finance leasing income.






FL treated as a sale agreement (under Sec 10D Regulations)

Taxed on interest income.Principal repayment not taxable.

Interest expense deductible.Principal repayment not deductible.


CA available on leased asset.

Singapore withholding tax implications Where lessor is a non-resident


Withholding tax implications

OL Withhold tax on the lease payment (under Sec 12(7)(d) of ITA – “payment for the use of any moveable property”)

FL not treated as sale agreement (under Sec 10D Regulations)FL treated as sale agreement(under Sec 10D Regulations)

Withhold tax on the interest portion of the lease payment (under Sec 12(6) of ITA)

Interest adjustment – Application of the Total Assets Method

Total asset method (“TAM”) – Formula for computing disallowable interest expense

Interest expense to be disallowed =

Cost of non-income producing assets as at B/S date x Common interest expenseCost of total assets* as at B/S date

* “Total assets” refers to all the assets financed by common loans. Where there are assets financed by specific interest bearing loans, deduct the costs of these assets from the total assets.

Interest adjustment – Application of the Total Assets Method

Application of TAM by lessee (where interest adjustment is applicable)

OL & FL not treated as sale agreement –• Lessee eligible to claim contractual lease payments. • Interest expense to be added back

FL treated as sale agreement – Lessee eligible to claim interest expense and CA on the leased asset instead of deduction on contractual lease payments

Application of TAM –• Interest expense not subject to interest adjustment • Total asset base should exclude ROU assets

Example to illustrate the Application of the Tax Treatment for Leases

81

Your client (“A”) has provided you with the following information:

A enters into a 5-year lease for a piece of equipment. The annual lease payments are S$60,000 payable at the end of each year. The interest rate implicit in the lease cannot be readily determined. Co. A’s incremental borrowing rate at the commencement date is 6% per annum. Co. A measures the lease liability at the present value of the 5 payments of S$60,000 discounted

at the interest rate of 6% per annum, which is S$252,742.

Lease payment ($)

Interest expense (6%)

PrincipalRepaid ($)

Ending balance ($)

Start of year 1 252,742

End of year 1 60,000 15,165 44,835 207,907

End of year 2 60,000 12,474 47,526 160,381

End of year 3 60,000 9,623 50,377 110,004

End of year 4 60,000 6,600 53,400 56,604

End of year 5 60,000 3,396 56,604 0

Total 300,000 47,258 252,742


(Cont’d)

Initial recognition and measurement of the lease by A (lessee):

Accounting entry Dr Cr

Start of year 1 Dr ROU assetCr Lease liability

$252,742$252,742

End of year 1 Dr Interest expenseCr Lease liabilityCr Cash (1st lease payment)

$15,165$44,835

$60,000

Dr Depreciation (S$252,742/5)Cr Accumulated depreciation

$50,548$50,548


(Cont’d)

Scenario A – Where the lease arrangement is regarded as an OL for income tax purposes

Assume that the useful life of the above equipment is 15 years. The lease does not transfer substantially the obsolescence, risks or rewards incidental to

ownership of the equipment to the lessee. The lease arrangement is regarded as an OL as it does not meet the definition of a FL

under Section 10D(3) of the SITA.


(Cont’d)

Scenario A – Where the lease arrangement is regarded as an OL for income tax purposes

Tax treatment for lessor ^^ Taxed on lease income of $60,000 each year during the 5-year lease period CA is allowed to the lessor on the equipment

^^ If the lessor is a non-resident for income tax purposes, the lessee will withhold tax based on the leasepayment of S$60,000 each year when the amount is due and payable.

Tax treatment for lessee Lease payment of $60,000 is deductible each year on an incurred basis during the 5-year

lease period No CA is allowed to the lessee on the leased equipment


(Cont’d)

Scenario B – Where the lease arrangement is regarded as a FL for income tax purposes and a sale is regarded to have taken place

Assume that the useful life of the equipment is 5 years. The equipment is a limited use asset. The lease transfers substantially the obsolescence, risks or rewards incidental to

ownership of the equipment to the lessee. The lease arrangement meets the definition of a FL under Section 10D(3) of SITA. In addition, the lease arrangement is a FL treated as a sale agreement since it meets the

condition under paragraph (b) of Regulation 4(1) of the Section 10D Regulations (i.e. themachinery or plant which is leased is a limited use asset).


(Cont’d)

Scenario B – Where the lease arrangement is regarded as a FL for income tax purposes and a sale is regarded to have taken place

Tax treatment for lessor ^^ Taxed on interest income as computed based on the lessor’s implicit interest rate Principal repayment is not taxable No CA is allowed to the lessor on the equipment

^^ If the lessor is a non-resident for income tax purposes, the lessee will withhold tax basedon the interest expense of S$15,165 in year 1 as recognised by the lessee. This is becausethe lessee has no knowledge of the lessor’s implicit interest rate.

Tax treatment for lessee Interest portion of lease payment is deductible (i.e. $15,165 is deductible in year 1,

$12,474 is deductible in year 2 and so on) Principal repayment is not deductible CA is allowed to the lessee on leased equipment of $252,742, over the tax writing-down

period for the equipment.









THANK YOU

Speak to us!

Koy Su HiangEmail: [email protected]

Contact Number: 6534 5700 (ext. 862)

mailto:[email protected]


Private and Confidential

Income Tax Treatment arising from the Adoption of FRS109

By Mr. Shaun ZhengAssociate Director, Tax

16 August 2019

FRS 109 Financial InstrumentsOverview

• FRS 109 replaces the existing FRS 39 and is applicable to entities for annual periods beginning on or after 1 January 2018 (i.e. YA 2019 or YA 2020, as the case may be). Early adoption is possible.

• Unless an election is made to apply FRS 109, the FRS 109 tax treatment is not applicable to taxpayers that qualify and have chosen to comply with Singapore Financial Reporting Standards for Small Entities.

• If FRS 109 is not applicable, taxpayers may continue to adopt pre-FRS39 tax treatment or FRS39 tax treatment (as the case may be).

• Unlike FRS 39, taxpayers are not allowed to opt out of the FRS 109 tax treatment, which invariably means that taxpayers currently under Pre-FRS 39 tax treatment would be required to apply FRS 109 for tax purposes.

• A new Section 34AA of the Singapore Income Tax Act (“SITA”) has been legislated on 26 October 2017 and sets out the tax treatment of financial instruments under FRS 109.

FRS 109 Financial InstrumentsKey differences between FRS 39 and FRS 109

90

Available-For-Sale (“AFS”) classification has been removed. AFS classification no longer exists under FRS 109.

Fair Value Through Other Comprehensive Income (“FVOCI”) classification has been introduced. FVOCI did not exist previously under FRS 39.

No longer necessary for impairment losses to be recognized in P&L only when there is an objective evidence of impairment due to a loss of events under FRS 109. Rather, an entity has to assess whether the credit risk on a financial instrument has increased significantly since initial recognition and recognize a loss allowance for Expected Credit Losses (“ECL”), representing either a 12-month ECL or lifetime ECL (for credit impaired or non-credit impaired financial asset).

FRS 39 tax treatment catered for AFS financial assets no longer relevant after entities transit to FRS 109.

FRS 109 tax treatment for FVOCI financial assets is new since such financial assets previously did not exist under FRS 39.

Unlike FRS 39 tax treatment, not all impairment losses recognized under FRS 109 are deductible.Only impairment losses recognized in the P&L with respect to credit-impaired financial instruments that are on revenue account rank for tax deduction.As such, it is imperative for entities to identify accurately impairment losses with respect to credit-impaired financial instruments on revenue account and justify the deduction claim.

FRS 109 Financial InstrumentsOverview of accounting treatment

Subsequent Measurement FVTPL FVTOCI

Amortised cost

Equity instrument Debt instrument

FV gain/(loss) To P/L;FL - gain/loss attributable to credit risk may go to OCI

OCI - Not reclassified to

P/L, but may be transferred

within equity

To OCI – Reclassified upon derecognition N.A.

Exchange differenceTo P/L; Interest recognised in P/L is computed based

on Effective interest method (EIR)

P/L

Impairment

Interest PL P/L - EIR

FRS 109 Financial InstrumentsFVTPL Tax Treatment

1) In P/L, tax adjustment is required if FI are under capital account.

2) No tax adjustment required on gain/loss recognized in OCI;

However, upon de-recognition of that FI which is on revenue account, accumulated gain/loss (not recycled to P/L) previously recognized in OCI will be taxed or allowed as a deduction -> tax adjustment required

Subsequent Measurement FVTPL

FV gain/(loss) 1) P/L; 2) FL - gain/loss attributable to credit risk may go to OCI

Exchange differenceImpairmentInterest

Tax implications

FRS 109 Financial InstrumentsFVTOCI Tax Treatment (Equity Instrument)

1) Not to tax or allow as a deduction, the unrealised gains or losses recognised in OCI if FI are under revenue account.

2) On de-recognition, to tax or allow as a deduction, the cumulative gains or losses previously recognised in OCI which may or may not be transferred within equity. Tax adjustment is required.

Subsequent Measurement FVTOCIEquity Instrument

FV gain/(loss) To OCI – Not reclassified to P/L, but may be transferred within equity

Exchange differenceImpairmentInterest To P/L

Tax implications

FRS 109 Financial InstrumentsFVTOCI Tax Treatment (Debt Instrument)

1) Not to tax or allow as a deduction, the unrealised gains or losses recognised in OCI if FI are under revenue account.

2) On de-recognition, to tax or allow as a deduction, the cumulative gains or losses reclassified from OCI to P/L.

3) To tax or allow as a deduction, the foreign exchange gains / losses recognised in the P/L.

Subsequent Measurement FVTOCIDebt Instrument (DI)

FV gain/(loss)To OCI – reclassified to P/L upon de-recognitionTo PL; Interest recognised in P/L is computed based on Effective Interest Method (EIR)

Exchange differenceImpairment

Interest

Tax implications

FRS 109 Financial InstrumentsAmortised Cost Tax Treatment

For DI on revenue accounts, same with the tax treatment for FVTOCI;

For interest income/expenses, same tax treatment with FVTOCI.

For DI on capital account, gain/loss recognized in PL will not be taxed or brought to tax.

Subsequent Measurement Amortised cost

FV gain/(loss) N.A.

Exchange difference P/LImpairmentInterest PL - EIR

Tax implications

FRS 109 Financial InstrumentsWhat you will see in your future tax computations

• Under FRS 39 tax treatment, taxpayers are required to submit to the IRAS a list of financial assets on capital account for CIT’s determination (i.e. to determine whether assets are indeed on capital account).

• Similarly for FRS 109 tax treatment, taxpayers are required to submit an itemized listing of all debt instruments (measured at FVTPL, FVOCI or amortized cost) and equity instruments measured at FVTPL held as financial assets on capital accounts annually, together with the tax returns.

• Taxpayers should also submit an itemized listing of all equity instruments measured at FVOCI (on both revenue and capital account) together with their tax returns in the YA of the basis period when the asset is derecognized.

FRS 109 Financial InstrumentsTax treatment on impairment losses, under FRS 109 ECL model (1/2)

• Only impairment loss recognized in P/L in respect of credit-impairedfinancial instruments that are on revenue account are allowable as a deduction.

• No deduction is allowed in respect of FI such as:– Credit-impaired financial instruments that are on capital account; or

– Non-credit-impaired financial instruments, regardless of whether they are on revenue or capital account.

FRS 109 Financial InstrumentsTax treatment on impairment losses, under FRS 109 ECL model (2/2)

A financial asset is considered credit-impaired if it includes observable data about the following events:-

a) Significant financial difficulty of the issuer or borrower;b) A breach of contract, such as a default or past due event;c) The lender(s) of the borrower, for economic or contractual reasons relating

to the borrower’s financial difficulty, having granted to the borrower a concession(s) that the lender(s) would not otherwise consider;

d) It is becoming probable that the borrower will enter bankruptcy or other financial reorganisation;

e) The disappearance of an active market for that financial asset because of financial difficulties; or

f) The purchase or origination of a financial asset at a deep discount that reflects the incurred credit losses.

FRS 109 Financial InstrumentsTransitional accounting treatments

On Date of Initial Application (DIA) of FRS 109:-

Carrying amount before & on DIA

Unrealized gain/(loss)

Opening retained earning or other components of

equity

Ending impairment allowance (FRS39) &

Opening loss allowance (FRS109) at DIA

Impairment gain/(loss)

Opening retained earning

FRS 109 Financial InstrumentsTransitional Tax Adjustments

• No tax adjustment is required for transitional accounting adjustment recognised in other components of equity at DIA

• Tax adjustment may be required for transitional accounting adjustments recognized in opening retained earning

– Where tax adjustment is required, show the details of how each tax adjustment is arrived at in the tax computation; and

– keep sufficient documents to support the tax adjustments and to submit to the CIT upon request

FRS 109 Financial InstrumentsTransitional Tax Adjustments – from FRS 39 to FRS 109

Transitional accounting treatments

Revenue account

Equity instrumentTax / deduction

allowed for unrealised gain/loss

Debt instrument

Tax / deduction allowed for

unrealized gain/loss

Tax allowed for Reversal of

impairment*

Tax deductible for impairment** Capital account No tax adjustment

* Reversal amount of impairment loss is taxable to the extent that the amount had been previouslyallowed as a deduction under FRS 39 tax treatment; and Impairment is tax deductible to the extent thatthe amount is in respect of a credit-impaired financial instrument** impairment loss in ORE in respect of credit-impaired FI









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