ASEAN INVESTMENT & TAX NEWS FEATURE ARTICLE

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1 APRIL 2015 ISSUE 6 ASEAN INVESTMENT & TAX FEATURE ARTICLE READ MORE 2 & 3 READ MORE 4-8 FOREWORD CONTENTS P1 FOREWORD P2 FEATURE ARTICLE P4 Singapore: IRAS updates transfer pricing guidelines Indonesia: New implementation of the Mutual Agreement Procedure Incentives for international headquarters and international trading centers announced by the Thai Government Cambodia: Employment of foreign expatriates and tax incentives in the Securities Sector Malaysia: Current developments of the Tax Audit Framework Vietnam: Law of Investment (LOI) and Law of Enterprise (LOE) Greetings readers and welcome to the second edition this year of our regional quarterly newsletter the ASEAN Investment & Tax News (AITN). In our effort to continue to bring you the latest key tax and investment news in the region, our feature article in this edition is written by our BDO Singapore colleagues focusing on the second edition of transfer pricing guidelines issued by the Inland Revenue Authority of Singapore. Our counterpart from BDO Thailand shares on the incentives for the new International Headquarters and International Trading Centers schemes recently announced by the Thai government. From Indonesia, we have an article pertaining to the new regulation on the coverage of the Mutual Agreement Procedure. On the Malaysian front, we are homing in on the amended Tax Audit Framework issued by the Malaysian Inland Revenue Board on 1 February Meanwhile, colleagues providing Goods & Services Tax (GST) Advisory services remain busy given that April is a key milestone for all Malaysians as GST will be implemented on 1 April After monopolising headlines of local newspapers in recent times and becoming a much discussed topic for those in business as well as the lay people, the actual impact of the tax remains to be seen. Other updates in this newsletter include the employment of foreign expatriates and tax incentives in the securities sector in Cambodia as well as the introduction of Vietnam s new Law of Investment and Law of Enterprise which will take effect in July As always, we hope you find this issue of BDO s AITN informative and beneficial. Do feel free to contact any of our offices should you require more details or indepth advice on the topics covered herein. DATO GAN AH TEE DNS JP Regional Senior Partner

2 2 ASEAN INVESTMENT & TAX FEATURE IRAS UPDATES TRANSFER PRICING GUIDELINES by Frankie Chia Managing Partner, BDO Singapore The second edition of transfer pricing guidelines was issued by Inland Revenue Authority of Singapore (IRAS) on 6 January This edition consolidates the four previous e-tax guides on transfer pricing, that is, the first edition released in 2006, the transfer pricing consultation paper of 2008 and the supplementary guidelines on advance pricing arrangements, related party loans and related party services. The revised guidelines also set out IRAS position on certain transfer pricing matters. All in all, the content of this revised guidelines is largely in line with the previous e-tax guides. However, significant changes have been introduced around the documentation requirements with a clear message on the need to maintain contemporaneous documentation. The key changes are discussed in detail hereunder. ARM S LENGTH PRINCIPLE The revised guidelines reinforce the adoption of the arm s length principle in dealing with related parties under Section 34D of the Income Tax Act (ITA). However, IRAS is mindful and recognises that the application of the arm s length principle is not without difficulties for complicated and unique arrangements. Therefore, taxpayers are not expected to adhere rigidly to a defined set of rules to establish the arm s length pricing for these arrangements and deviation from the suggested approach will be acceptable. In applying the arm s length principle, IRAS recommends undertaking a comparability analysis. Whilst the guidance on the comparability analysis mirrors the text in 2006 guidelines, there are additional aspects on comparability analysis included within the revised guidelines. Of interest are the recommendations that the arm s length principle should be applied on a transaction-by-transaction basis and the aggregation approach is acceptable only when the individual transactions are highly inter-related. Further, the use of multiple year data as opposed to single year data is acceptable and factors to be considered in accepting loss generating comparable companies while undertaking a comparability analysis are included as well. Exhaustive and detailed commentary on the five transfer pricing methods is available in the revised guidelines. The commentary also provides examples of various net profit indicators/profit level indicators that may be used in applying the transactional net margin method, including the Berry Ratio; although the Berry Ratio can be used only when all the circumstances specified in the revised guidelines are present. IRAS has also provided further guidance in selecting the tested party, that is, the party upon which to apply the transfer pricing analysis. Paragraph 5.86 clearly articulates that the tested party is the one where: A transfer pricing method can be applied in the most reliable manner; and Most reliable comparables can be found. DOCUMENTATION Under the revised guidelines, taxpayers are required to keep contemporaneous transfer pricing records to support the pricing of their transactions with related parties. This has been clearly articulated in paragraph 6.2 of the guidelines: It is important that taxpayers prepare and keep contemporaneous records to support the pricing of their transactions with their related parties. By maintaining contemporaneous documentation, IRAS believes that taxpayers will be better equipped in demonstrating their compliance with the arm s length principle and also avoid the consequences of any double taxation through transfer pricing adjustments. The contemporaneous documents are defined as those prepared prior to or at the time of undertaking the related party transactions. In order to ease the compliance burden for taxpayers, IRAS has indicated that any documentation prepared at any time no later than the time of completing and filing the tax return for the financial year in which the transaction takes place will be acceptable as contemporaneous documentation. However, IRAS continues its position of taxpayers maintaining the documents and submitting them only upon request. The revised guidelines now specify the timeframe of 30 days for submitting the documents upon request. Further, IRAS has stated that in the event the taxpayers are unable to provide the documents, they may be penalised under Section 94(2) of the ITA for not complying with the record keeping requirements under the ITA which demonstrates that IRAS now expects taxpayers to strictly adhere to maintaining contemporaneous documentation. Drawing reference from the OECD initiative under its BEPS project, IRAS has also adopted a two tiered approach regarding the type of documentation to be maintained. IRAS now expects documentation to be organised at the Group level and Entity level.

3 FEATURE The Group level documentation is expected to provide a good overview of the group s businesses and should include details on the group s global business, organisation structure, the nature of the global business operations and overall transfer pricing policies. The Entity level documentation contains much of the similar information as was required previously, with new additions of the management structure of the Singapore taxpayer including a description of the individuals to whom the Singapore management reports, organisational chart of the taxpayer showing the number of employees in each department, segmented financial accounts with respect to the transactions, if any, etc. Notwithstanding the new documentation requirements, IRAS is mindful of the substantial compliance and administrative costs in preparing transfer pricing documentation. Hence, the revised guidelines introduce some administrative rules to simplify the transfer pricing documentation requirements. The revised guidelines excuse taxpayers from the documentation requirements in the following situations: if the taxpayer engages in transactions with another related party in Singapore subject to the same tax rate (excluding related party loans); for related domestic loan between taxpayer and the related party in Singapore, provided the lender is not in the business of borrowing or lending; if the taxpayer provides routine services and applies the 5% safe harbour mark-up; or if the transactions do not exceed specified thresholds per financial year. In spite of the simplication, taxpayers will still need to demonstrate compliance with the arm s length principle. Further, in the absence of any supporting documents, transfer pricing adjustments under Section 34D will be inevitable if IRAS establishes that the taxpayers have understated their profits through improper transfer pricing. However, IRAS has not clarified on the level of documentation needed for these exempted taxpayers. It will therefore be worthwhile if an indicative list of documentation or the process to be adopted is articulated to avoid any ambiguity. OTHER ISSUES Adjustments relating to transfer pricing IRAS has stated its views on the acceptability of year-end adjustments provided taxpayers have a contemporaneous transfer pricing documentation, symmetrical adjustments are reflected in the accounts of affected related parties and the adjustments are done before filing their tax returns. IRAS frowns on self-initiated retrospective adjustments arising from global transfer pricing policy changes, revisions in transfer pricing analyses or to avoid potential transfer pricing adjustments by a tax authority in the absence of transfer pricing documentation. Finally, relief through mutual agreement procedures provided in the tax treaty should be adhered to for avoiding any double taxation arising from transfer ASEAN INVESTMENT & TAX 3 pricing adjustments by a foreign tax authority. Taxpayers should not, on their own accord, make any corresponding adjustments in their tax returns or tax computations without informing IRAS. Related party loans The revised guidelines now provide a detailed commentary with examples on the process to conduct a comparability analysis for related party loans. Within the comparability analysis, adjustments for differences in the base reference rate and the margin are called for through adoption of sophisticated models i.e. credit estimation models. However, a further explanation regarding the application of these models, which is absent from the revised guidelines, will be worthwhile. However, to reduce compliance burden for taxpayers with multiple related party loans, IRAS is willing to accept an aggregation approach. In other words, taxpayers can choose to determine the arm s length interest rate for comparable loans on an aggregate basis using the comparability analysis.

4 4 ASEAN INVESTMENT & TAX IN SHORT Transfer pricing is here to stay for Singapore. This message is echoed in clear and unequivocal terms throughout the revised guidelines. As an offshoot, related party transactions will now cast an onerous responsibility on the taxpayers, coupled with the fact that IRAS is adopting a two tiered approach to documentation which will further increase the cost of compliance. And while this is just the beginning, one should not forget about the footnote to paragraph 6.2 which states that IRAS is monitoring the compliance level and may, if necessary, consider more stringent measures including specific record-keeping regulations for transfer pricing. All this is a clear sign for taxpayers to get their documentation in place if they want to avoid being penalised. Also, the maintenance of contemporaneous transfer pricing documentation will be a practice of good governance. IRAS has indeed taken a step in the right direction in providing guidance to Singapore taxpayers. The revised guidelines will serve as basis for taxpayers to get their transfer pricing right, though certain clarification points should clear the air. INDONESIA NEW IMPLEMENTATION OF THE MUTUAL AGREEMENT PROCEDURE The Indonesian Director General of Tax (DGT) has recently undertaken a number of action points as part of the commitment of G20 Communique members to the Base Erosion and Profit Shifting (BEPS) initiative, which focuses on the following: Review all the double taxation agreements in place; Strengthen the anti-avoidance rules; Propose debt-to-equity rules; Revise and strengthen the transfer pricing rules; Provide dispute settlement procedures; Increase tax transparency through exchange of information; Improve tax co-operation; and Active involvement in international taxation. With regards to dispute resolution, a new implementation of the Mutual Agreement Procedure (MAP) has been released through Minister of Finance (MoF) Regulation No. 240/PMK.03/2014 (PMK 240/2014) effective from 22 December 2014 in light of double taxation issues. The new regulation provides a clearer message on the coverage of the procedure, including Advance Pricing Agreement (APA); conditions under which a MAP cannot be filed; involvement of local taxpayers or permanent establishments in determining the termination of the MAP; and the supporting teams within the DGT that are undertaking the MAP, including the Director of Tax Regulations II and the Quality Assurance team. Under the new regulation, bilateral and multilateral APAs are conducted through MAP on a voluntary basis. In the event of a MAP being requested by a treaty partner, the local taxpayer has the obligation to file a corresponding MAP application; otherwise, the MAP filed by the treaty partner will not be considered by the DGT. PMK 240/2014 highlights on-going tax appeal cases, for which a MAP cannot be filed where the court proceedings have been sufficiently declared by the tax court. The Director of Tax Regulations II has to request the approval of a local taxpayer, permanent establishment and/or Indonesian resident that is a taxpayer of a treaty partner pertaining to discrimination issues, in executing the draft of the mutual agreement, except in particular conditions where the MAP is conducted on request of the DGT or where the double taxation agreement has been incorrectly interpreted. MAPs are undertaken by an execution team under the DGT which will prepare the draft position paper for the Director of Tax Regulations II, who in turn will submit the draft to the DGT for further analysis together with the quality assurance team. With input from the competent authority of the treaty partner, the Director of Tax Regulations II may have discussions with the quality assurance team on amendment of the draft of the mutual agreement.

5 ASEAN INVESTMENT & TAX 5 THAILAND INCENTIVES FOR IHQ AND ITC ANNOUNCED BY THE THAI GOVERNMENT With the purpose of promoting Thailand as a trade and investment hub and to take advantage of the formation of the ASEAN Economic Community (AEC), the Thai cabinet has approved new incentive packages for international headquarters (IHQ) and international trade centers (ITC). The new incentives have been introduced as an alternative to the existing Regional Operating Headquarters (ROH) scheme. The IHQ and ITC schemes relax some conditions that currently apply to an ROH and expand on the tax and non-tax benefits provided. IHQ Scheme Under the cabinet resolution, an IHQ is defined as a Thai incorporated company providing management or technical services, support services or financial management services to its affiliates or branches located either in Thailand or foreign countries. Its definition also covers an international trading business. To qualify for the tax benefits, an IHQ must have paid-up capital of at least Thai Baht (THB)10 million, provide services to affiliates or branches located in at least one foreign country and have administrative expenses in respect of the IHQ paid in Thailand of not less than THB15 million in each accounting period. An IHQ would be entitled to tax benefits for 15 years, which include a tax exemption on qualifying net profits deriving from a foreign associated company or branch and a reduced tax rate of 10% (currently 20%) on qualifying net profits derived from a Thai associated company or branch. Expatriates of an IHQ will be taxed on their earnings at a reduced rate of 15%. ITC scheme An ITC is defined as a Thai incorporated company conducting international trade i.e. procuring goods, raw materials and parts for manufacturing and providing services relevant to international trade to foreign entities. It is not required to procure goods or provide services to associates. To qualify for the tax benefits, an ITC must have paid-up capital of at least THB10 million and have associated enterprises or branches located in at least one foreign country. An ITC would be entitled to tax benefits for 15 years, which include tax exemption on qualifying net profits derived from the procurement and sale of goods in foreign countries, provided that the goods are not brought into Thailand, and a reduced tax rate of 10% (currently 20%) on net profits derived from the procurement of raw materials or parts in Thailand and sold to affiliates or branches in foreign countries for production purposes. Expatriates of an ITC will be taxed on their earnings at a reduced rate of 15%. Existing ROH companies When the incentives become law, existing ROH companies will be allowed to file an application to register as an IHQ and terminate their ROH registrations, with no impact on the ROH tax benefits received prior to termination. CAMBODIA EMPLOYMENT OF FOREIGN EXPATRIATES Prakas No. 196 was issued on 20 August 2014 by the Ministry of Labour and Vocational Training (MLVT) and governs the hiring of foreign employees by Cambodian employers. Under Prakas No. 196, employers are required to give preference to Cambodian locals when it comes to staff recruitment. Foreign workers can only be hired in the event that local qualifications are insufficient. This Prakas provides that, prior to employing foreign workers, an employer must submit a request letter to the MLVT. Further, prior to renewing the employment of its foreign workers for the following year, an employer must submit a letter requesting for a foreign manpower quota by stating clearly the number of current Cambodian and expatriate employees together with the reasons of the employment to the MLVT before the end of November of each year.

6 6 ASEAN INVESTMENT & TAX The annual number of foreign workers should not exceed 10% of the total number of Cambodian workers with all foreign employees possessing work permits issued by the MLVT. The 10% foreign workforce shall be divided as follows: i) Office employees : 3% ii) Specialised employees : 6% iii) Non-specialised employees : 1% Where the deployment of foreign labour is higher than 10%, the respective employer should make a written request to the MLVT stating the reason(s) for the additional hiring as well as the position, specialty, technology or professional skill of each foreign employee. Failure to comply with the above Prakas requirement shall be subject to penalties imposed by the MLVT under Chapter 16 of the Cambodian Labour Law. In order to facilitate the employment card and work permit for foreign workers, the MLVT also introduced new processes for receiving application and payment. Upon review and confirmation of the completeness of the application and payment, the official shall issue the prescribed receipt to the applicant. This receipt is the official document to confirm that the foreigner has applied for the employment card and work permit in accordance with the Cambodian Labour Law. TAX INCENTIVES IN THE SECURITIES SECTOR (SUB-DECREE) This Sub-Decree aims to determine the types, activities and conditions which govern tax incentives in the securities sector as provided in Article 12 of the Law on Financial Management for the year 2010, which was promulgated by the Royal Kram No. NS/RKM/1209/026, dated 16 December The issuance of this Sub-Decree is primarily to grant tax incentives in order to develop the securities sector in Cambodia. The implementation scope of this decree shall cover: Company/enterprise issuing for sale equity securities and/or public debt securities with permission from the Securities and Exchange Commission of Cambodia (SECC), and registered as securities trading in the permitted securities market; and Public investors holding and/or purchasing-selling state securities, equity securities, and/or debt securities which have been issued for sale to the public, and registered as securities trading in the permitted securities market. The definition of Incentives on profit tax for company/enterprise issuing for sale equity securities and/or public debt securities are stated as follows: Company/enterprise issuing for sale equity securities and/or public debt securities with permission from the SECC and registered as securities trading at the permitted securities market within a period of three years starting from the date of this sub-decree comes into force shall be required to complete formalities, submitting to the General Department of Taxation through the SECC, in order to obtain incentives by reducing the profit tax for 50% of the profit tax to be paid for the period of three years. Company/enterprise issuing for sale equity securities and/or public debt securities which obtained authorisation from SECC and registered as securities trading at the permitted securities market shall receive exemption from profit tax completely within the period of five years commencing from the date of the sub-decree entering into effect. This decree allows public investors a 50% reduction in withholding tax on the interest rate and/or premium received from the holding and/or purchase-sale of the state securities, equity securities and debt securities for a period of three years commencing from the date of this sub-decree entering into force. This sub-decree shall replace the sub-decree No. 70 ANKr. BK, dated 22 April 2011, on Tax Incentives in the Securities Sector.

7 ASEAN INVESTMENT & TAX 7 MALAYSIA CURRENT DEVELOPMENTS OF THE TAX AUDIT FRAMEWORK In 2002, the Government released the Income Tax (Amendment) Act 2002 which brought forth the change in the tax assessment system from the official assessment system to the self assessment system. The system was implemented in two stages, whereby the effective year for companies was in the year of assessment (YA) 2001 and the effective year for individual taxpayers was in YA Under the self assessment regime, the taxpayers are responsible for computing their tax liability in accordance with the tax laws, guidelines and public rulings issued by the Inland Revenue Board (IRB). The main objective of this system is to instil voluntary compliance by the taxpayers to the tax laws, guidelines and public rulings issued. The implementation of the self assessment system has resulted in several changes in the tax laws and guidelines as well as practices by the IRB. One such change in practice is the emergence of the tax audit. A tax audit is an examination of the taxpayer s business records and financial affairs in order to determine that the amount of tax liability reported and paid is in accordance with the tax laws and regulations. IRB carries out two types of tax audits. First, is the desk audit which is conducted at the IRB s office and is mainly concerned with issues or adjustments that can be conducted via correspondence and interviews. The second type is the field audit which is conducted at the taxpayer s premises and involves the examination of the taxpayer s business records and understanding of the client s business activities. The emergence of the tax audit has led to the development of a tax audit framework. The framework, first issued in January 2007, has been developed to ensure tax audits are carried out in a fair, transparent and impartial manner. The framework also aims to assist the audit officers to perform their duties efficiently and effectively and to help taxpayers in fulfilling their obligations. The framework mainly covers the following areas: How a tax audit is carried out; Selection of cases; Rights and responsibilities of the IRB, taxpayers and tax agent; Offences and penalties; and Appeals On 1 February 2015, the Malaysian IRB issued an amended tax audit framework. The major amendment in this framework is the introduction of the Monitoring Deliberate Tax Defaulters (MDTD) programme under section 7.7 of the framework in order to strengthen and enhance the effectiveness of the tax audit practices. This programme has been created to monitor taxpayers who are identified as having failed to comply with the tax laws and regulations. In addition, it also seeks to encourage voluntary tax monitoring through educational activities and ongoing monitoring. The concept and implementation of the MDTD programme are as follows: Taxpayers found to have failed to comply as a result of the tax audit activities, shall be listed in the MDTD for the purpose of continuous reporting; Taxpayers will be given an official notification letter in regards to the listing of their names in the MDTD list; and Taxpayers will be removed from the MDTD list once it is determined that they do not make errors in reporting their tax returns in the following years of assessment. Another amendment in the latest tax audit framework is the change in the timeline for the completion of a tax audit under section The 2015 framework highlights that a tax audit should be completed within 4 months from the date of commencement of the tax audit as opposed to 3 months as stated in the Tax Audit Framework In conclusion, the Tax Audit Framework 2015 has introduced a major development in the IRB s tax audit activities with the introduction of the MDTD programme. The introduction of this programme will require taxpayers to be more diligent with the reporting in their tax returns in order to avoid being additionally scrutinised by the IRB and will help the IRB to closely monitor the taxpayers that have been identified as deliberate tax defaulters.

8 8 ASEAN INVESTMENT & TAX VIETNAM LAW OF INVESTMENT (LOI) AND LAW OF ENTERPRISE (LOE) A new Law of Investment (LOI) and Law of Enterprise (LOE) passed in November 2014 will take effect from July Pertinent points of interest to foreign investors are as follows: Companies are now allowed to have more than one (1) legal representative, but at least one (1) must be residing in Vietnam. Changes to information of a company such as name and particulars of shareholder, name and particulars of legal representative, address(es), business activities, etc., currently requires the submission of an application to revise the business registration certificate (BRC) or investment certificate (IC), which is normally a time consuming process. Under the new law, only some pertinent information will be detailed in the enterprise registration certificate (ERC), while other information will be CONTACTS BRUNEI Tel: Fax: info@bdo-bn.com CAMBODIA Tel: Fax: info@bdo.com.kh maintained in the National Business Registration Portal (NBRP). Changes of information not in the ERC will only require a notification and update in the NBRP. This will significantly reduce the paper work required to change these particulars of a company. Previously, companies are allowed to operate in business lines listed in their BRC or IC. From July 2015, enterprises will be allowed to engage in other business activities not listed in their BRC or IC other than prohibited business activities. Previously, under the law, an enterprise can only have one seal, the form of which is stipulated in the law. The new law allows companies to decide the number of seals as well as the form of the seal. For newly established companies, the chartered capital must be contributed within 90 days from the issuance of the ERC, as compared to up to 36 months currently allowed. From July 2015, foreign investors that want to establish a company For more information, please contact the following BDO offices in ASEAN. INDONESIA Tel: Fax: bdoidn@bdo.co.id MALAYSIA Tel: Fax: bdo@bdo.my will be required to go through a 2-step process i.e. apply for an IC and thereafter obtain the ERC. Currently, foreign investors only need to apply for IC which is also the ERC of the company. The LOI introduces certain provisions that makes it easier for existing Vietnamese companies to seek foreign capital, by providing clearer guidelines on how a company is deemed to be foreign or domestic. The new provisions in the LOI stipulate that a Vietnamese company with a 51% or more foreign shareholding will be considered foreign owned. The number of prohibited business will be reduced to 6 (from 51) and the number of conditional business lines will be reduced to 267 (from 386). Some of the other changes are the change in quorum and voting percentages for general meeting of shareholders and easier rules for mergers. The above is a very brief prelude to the LOI and LOE which will hopefully make entry into Vietnam by foreign investors a more comfortable experience. MYANMAR Tel: Fax: myanmar@bdo.my PHILIPPINES Tel: Fax: cpas@bdoalbaromeo.ph SINGAPORE Tel: Fax: info@bdo.com.sg THAILAND Tel: Fax: bdo@bdo.co.th VIETNAM Tel: Fax: bdo@bdo.vn LAO PDR Please contact BDO Cambodia ASEAN Investment & Tax News is published by: BDO Tax Services Sdn Bhd 12th Floor, Menara Uni.Asia, Jalan Sultan Ismail, Kuala Lumpur Tel: Fax: bdo@bdo.my Printed by: Nets Creative Station Sdn Bhd 56, Jalan PBS 14/4, Taman Perindustrian Bukit Serdang Seri Kembangan, Selangor Tel: Fax: netscreative@gmail.com This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Tax Services to discuss these matters in the context of your particular circumstances. 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