32nd Annual Asia Pacific Tax Conference November 2016 JW Marriott Hotel Hong Kong

Transcription

1 32nd Annual Asia Pacific Tax Conference November 2016 JW Marriott Hotel Hong Kong

2 Alternative A: Source country taxation, evolving PE rules and unilateral measures Chair: Gary Sprague, Palo Alto John Walker, Australia Sanjiv Malhotra, India Yi Lyn Tan, Malaysia James Choo, Singapore Sai Ree Yun, Yulchon LLC, South Korea Jane Tang, China Ponti Partogi, Indonesia

3 Mechanisms for Enhancing Source Based Taxation Treaty PE threshold Dependent person the principal role standard Service PE Limits on preparatory or auxiliary exceptions Profit attribution framework Withholding taxes Rents and royalties Technical or other services Software UN paper 3

4 Mechanisms for Enhancing Source Based Taxation Transfer pricing Accurate delineation of the contract Risk assumption, management and control Marketing intangibles Transactional profit split method Use (and misuse) of Value Chain Analysis Other theories Market premium Location specific advantages 4

5 Mechanisms for Enhancing Source Based Taxation Deemed PE MAAL DPT DPT2 Attribution of royalty to PE Capital gains Indirect stock transfer rules 5

6 Mechanisms for Enhancing Source Based Taxation Market access conditions Indonesia OTT Regulation requiring PE Italy virtual PE proposal Anti-haven measures Higher WHT rates for transactions with noncooperative tax jurisdictions Disallowance of royalty deduction for payments to havens Task Force on the Digital Economy Phase one VAT Phase two -? 6

7 Mechanisms for Enhancing Source Based Taxation Business model targeted withholding tax India equalization levy Treaty disregard LOB / a principal purpose condition Anti-abuse justification Definitional justification Deduction disallowance Intercompany service fees 7

8 Policy Justifications Existence of market creates value Fair share of tax Level playing field for domestic sellers Nonreciprocal trade flows Prevent corporate tax base erosion Exchange of user data creates value Stamp out nowhere taxed income structures 8

9 India

10 India Has been a strong advocate of source-based taxation Transfer Pricing IRA advocates use of locational savings / locational specific advantages IRA has been making large adjustments on account of marketing intangibles Royalties / fee for technical services Disputes on definition of royalty and fee for technical services Matters pending at the Federal court Amendments made to the domestic law to increase the scope of royalty 10

11 India Permanent Establishment Indian DTAAs have the concept of Service PEs Secondment of personnel may create PE in India Unilateral measures Equalization Levy IRA views such a levy to be consistent with BEPS Action 1 Value created by getting access to data of the Indian market not getting taxed India working closely at UN on software related taxation India reserves the right to impose higher withholding taxes for transactions with notified jurisdictions Rules on indirect transfer tax enacted retrospectively 11

12 China

13 Treaty PE Taxation Stepped up enforcement of service PE provision Income tax and turnover tax on PE Revenue and profit determined based on deemed profit rate and split of onshore / offshore services Reject actual attributable profit arguments on basis of no accurate and proper books and records Individual income tax on employees Remuneration deemed to be borne by PE, loses treaty exemption General anti-avoidance rule and procedural guidance can achieve anti-fragmentation of complementary functions forming part of a cohesive business

14 Withholding Tax Technical service fees vs. royalties Rent vs. royalties Deemed Dividend for long term interest-free loan Interest for guarantee fees Royalty for use of IP Rental for provision of free equipment? Can impose withholding tax with late payment surcharges and not allow corresponding deduction 14

15 Withholding Tax (cont d) Domestic interpretation of beneficial ownership requirement for dividends, interest and royalties Economic substance and not a conduit Beneficial ownership requirement effectively extended to capital gains exemption Domestic interpretation of conditions for capital gains exemption Direct and indirect shareholding covers the entire group No expressed look back period for 25% shareholding means unlimited look back period Affects ability to rely on treaty safe harbor for indirect transfers 15

16 Indirect Transfers Indirect transfers of Chinese taxable property Chinese company, Chinese real estate, Chinese taxable establishment Specific anti-avoidance rules, taxability depends on reasonable commercial purpose Blacklist Target company with insufficient economic substance deriving vast majority of value, assets and revenue directly or indirectly from China Safe harbor Public trading, treaty exemption, intragroup restructuring Voluntary reporting of indirect transfers 16

17 Deduction Disallowance / Anti-haven Measures Non-deductible outbound payments to affiliates All payments to affiliate with no economic substance Service fees that give China no economic benefit Royalties to affiliate with no economic ownership of intangibles Royalties to listed affiliate for incidental benefits from listing activities Transfer pricing rule or deduction rule? Impacts group IP structures, group expense recharging structures, headquarters management fees charge-out 17

18 Transfer Pricing Marketing intangibles from brand-building activities Location specific advantages Location savings - Existence of talents and infrastructure that lowers cost Market premium - Existence of market that gives disproportionately high return Intrinsic value of in-country functions? Emphasize value chain analysis 18

19 Policy Justifications Protecting China s taxation rights Combating international tax evasion and avoidance Preventing corporate base erosion Aligning tax with economic activities 19

20 Malaysia

21 Amendments to Royalty Definition Finance Bill 2016 ( Bill ): proposed amendment to the royalty definition to include consideration for the use of, or the right to use software and other like property or rights Issues: Conflict with the Guidelines on Taxation of E-Commerce, which states that payments for purchase of a product are not royalties Current application of the rights-based approach by the Malaysian courts Scope of software does it include SaaS products? 21

22 Deemed Derivation Rules for Services Special classes of income (in section 4A), including service fees, are subject to withholding tax if derived from Malaysia Current position under Section 15A : S4A Income shall be deemed derived from Malaysia if - responsibility for the payment lies with the government, state government, local authority or a person who is resident in Malaysia; or the payment is charged as an outgoing or expense in the accounts of a business carried on in Malaysia, provided that this section shall apply to the amount attributable to services which are performed in Malaysia. 22

23 Deemed Derivation Rules for Services (cont d) Proposed amendment to remove the proviso which limits the deemed derivation provisions to only services which are performed in Malaysia Issues: Service fees paid by Malaysian resident to a non-resident deemed to be derived from Malaysia even if services are performed outside Malaysia? Can the non-resident rely on the business profits article in double tax agreement? 23

24 Proposal on New Tax for Online Businesses Various announcements by the Ministry of Finance ( MOF ) on the intention to tax online businesses Special digital economy committee has been set up within the IRB to evaluate the current income tax regime and put forward recommendations No indication thus far on changes to the GST regime to implement the BEPS Action 1 recommendations 24

25 Singapore

26 General Remarks Singapore is in a unique position because it has to balance both sides Policy interests in protecting Singapore s tax base: Ensuring fair share of taxation BEPS Associate Maintaining an open economy and encouraging cross border investment Typical regional principal in an APAC supply / value chain Not as aggressive on source-based taxation compared to jurisdictions with large markets 26

27 Mechanisms for Enhancing Source Based Taxation Withholding taxes Rent: 15% Royalties / license fee: 10% payments for the right to use moveable property payments for the use of or the right to use scientific, technical, industrial or commercial knowledge or information Service fee: 17% applies generally only to services provided in Singapore (subject to other conditions) 27

28 Mechanisms for Enhancing Source Based Taxation Withholding taxes Software rights based approach adopted characterisation of payments depend on whether payer acquired a copyrighted article or copyright right copyright right: payer is allowed to commercially exploit the copyright copyrighted article: rights acquired are limited to those necessary to enable the payer to operate the software 28

29 Mechanisms for Enhancing Source Based Taxation Treaty PE threshold Some existing treaties have Service PE thresholds Practical issues in interpreting this threshold creates uncertainty Method in counting time in Singapore Subcontracting of work to a local party counted? Singapore has not committed to implementing BEPS Action 7 which introduced the concept of the principal role standard etc Singapore is currently part of a working group that is developing a multilateral instrument for incorporating BEPS measures into existing bilateral treaties to counter treaty abuse. The changes to the definition of permanent establishment will likely be among the changes proposed for inclusion in the multilateral instrument. It is unclear whether Singapore will be a signatory to the multilateral instrument. 29

30 Mechanisms for Enhancing Source Based Taxation Treaty abuse Domestic general anti-avoidance rule available Anti-abuse provision in some treaties E.g., PPT in new France treaty Limitation of relief / benefit clause in double tax treaties which requires that the Singapore resident taxpayer receives the payment in Singapore in order to enjoy treaty benefits Singapore has committed to implementing BEPS Action 6 and confirmed that it does not condone treaty shopping 30

31 Mechanisms for Enhancing Source Based Taxation Transfer pricing Singapore follows current OECD s guidelines for transfer pricing Historically not aggressive but evidence points to a changing trend Many companies now under TP audits, including those that have significant substance and have tax incentives Audits both on incomings and outgoings to ensure integrity of tax base Uncertain whether Singapore will adopt measures to implement the recommendations made by the OECD in BEPS Actions 8, 9 and 10 This is not a minimum standard that Singapore signed up for. 31

32 Policy Considerations IRAS is aware that BEPS is being used by some jurisdictions to strengthen source-based taxation in source states As a principal location, likely that Singapore will face challenges from market jurisdictions Actions taken by Singapore improve its treaty network ramp up transfer pricing capabilities strengthen competent authority s capabilities Objectives for Singapore committed to implementing minimum standards as a BEPS associate and is on board in stamping out nowhere taxed income also supports tax planning by MNCs in a fair and appropriate manner the fair share of tax argument Protect Singapore s tax base from overly aggressive foreign tax authorities while ensuring that businesses do not suffer double taxation costs 32

33 Indonesia

34 Mechanisms for enhancing source based taxation Indonesia There is still no (legal/tax) specific regulation for digital economy groups Draft OTT Regulation requiring the registration of PE The Income Tax Law describes that a PE contains the concept of the existence of place of business, namely facilities that may be in the form of computer or automated equipment owned, leased or used by electronic transaction operator to conduct business activities through internet. In April 2016, the Indonesian tax authority started to audit 4 big digital economy companies and deemed that these companies to have a PE in Indonesia. 34

35 South Korea

36 Domestic PE rules Already reflects most BEPS recommendations in Action 7 (e.g., principal role standard) Recent trend: Aggressive taxation based on finding of PE by the Supreme Court (Holiday Case in July 2016) 36

37 Withholding tax (I) Proposed bill (2016): to strengthen taxation of multilateral IT companies under domestic corporate income tax law Expands the scope of Korean source royalties by including royalties arising from overseas computer program rights in Korean source income Should not affect treaty jurisdictions: Under Korean law, treaty law supersedes domestic law Caveat: if the bill is passed, Korea may seek to amend treaties in order to give effect to the revised domestic rules 37

38 Withholding tax (II) Supreme Court decisions ( ) on royalties arising from patents Common facts Korean company paid royalties to U.S. company for use of U.S. company s U.S. patents in Korea (no registration in Korea) Korean company withheld 16.5% under Korea-U.S. Tax Treaty Holding: Royalties are not Korean source income Domestic law: patents registered abroad and used for manufacture/sale in Korea are considered to have been used in Korea without regard to whether they are registered in Korea Korea-U.S. Tax Treaty: Korean source income only if paid for the use of, or the right to use, such property in Korea Rationale: Patents not registered in Korea are not patents for Korean tax purposes no royalty at all? 38

39 Legislative action relating to Digital Economy Amendment of Korean VAT Law (in effect since July 2015) The amendments benchmarked BEPS Action 1 Non-residents/foreign companies engaged in e-commerce with customers in Korea: required to effect simplified online VAT registration system E-commerce is defined to include services such as providing games, sounds, video files, software, etc. VAT registration must be made even if no PE in Korea 39

40 Disallowance of deduction for intercompany service fees Conditions for deductibility under domestic law Execution of an agreement in advance Actual provision of services Expectation of additional revenues or cost savings Service fees must be arm s length prices Extremely detailed and objective evidence required by Korean tax authorities to meet the above conditions Virtually no taxpayer has successfully met the conditions at the audit and pre-trial appeal levels Korean courts may require relatively lower standards A court has recently accepted the evidence proffered by the taxpayer at least in one case (Busan Regional Court Decision 2013Guhap21114 dated July 11, 2014) 40

41 Alternative A: Source country taxation, evolving PE rules and unilateral measures Chair: Gary Sprague, Palo Alto John Walker, Australia Sanjiv Malhotra, India Yi Lyn Tan, Malaysia James Choo, Singapore Sai Ree Yun, Yulchon LLC, South Korea Jane Tang, China Ponti Partogi, Indonesia