Asset Management Tax Highlights Asia Pacific

Transcription

1 Asset Management Tax Highlights Asia Pacific October to December 2014 In this edition s asset management tax highlights for the Asia Pacific region, we highlight industry developments from Australia,China, Hong Kong, India, and Thailand, which may impact your asset management business. We hope you find these updates of interest, and will be pleased to discuss these developments and issues with you further. Australia Australian Taxation Office provides guidance on equity over-ride rule The Australian Taxation Office (ATO) has provided long-awaited guidance on the application of the equity over-ride rule in section of the Income Tax Assessment Act The guidance represents initial efforts to deal with the ambiguity of the section and gives taxpayers some comfort that it will respect basic inbound investment structures. While there is still uncertainty associated with this provision, the draft determinations issued on 11 November 2014 provide welcome certainty to many taxpayers that have employed basic inbound investment structures. For further details, please refer to Australian Taxation Office provides guidance on equity over-ride rule China CSRC issued the new administrative regulations and subsidiary rules for privately placed, exchange-traded, and asset-backed securities in China The China Securities Regulatory Commission (CSRC) released the new Provisions on Administration of the Asset Securitization Business of Securities Companies and Fund Management Subsidiaries (the Regulation) in November The new Regulation sets out the basic administrative rules, information disclosures and due diligence requirements for securities companies and subsidiaries of fund management companies to operate asset-backed securitisation businesses. Market players should prepare themselves for the challenges arising from the new Regulation to capture the opportunities presented.

2 We summarise below the main changes and developments from the new Regulation as compared with the old regulation for asset-backed securitisation below: There is now a clearer legal framework and regulatory system. The Securities Law, the Securities Investment Fund Law, and the provisional measures on the administration and supervision of private equity funds are the host laws of the Regulation. The CSRC will be the supervisor, while the Securities Association of China (SAC) and the Asset Management Association of China (AMAC) will carry out industry self-discipline management. A change from advance approval to record filing. Securities companies and subsidiaries of fund management companies would now perform record filing with the AMAC within five working days upon setting-up specialised projects. Extending the qualified operating companies from securities companies to include subsidiaries of fund management companies. Using a negative list to enlarge the scope of eligible underlying assets instead of limiting the scope. More securities exchange markets are allowed for quotation and transfers of asset-backed securitisation. A clear definition of qualified investors is provided. Observation This new Regulation represents a big step for the regulatory authority towards strengthening the administration of asset-backed securities in China. Not only does the Regulation clarify the administration rules, the change to record filing rather than the original pre-approval system will reduce the regulatory risk and transaction costs significantly. It may make asset-backed securitisation a more routine business operation. In the meantime, the negative list and the inclusion of subsidiaries of fund management companies broadens the scope and offers a more convenient financing channel for companies with qualified underlying assets. However, the number of asset-backed securities holders is still limited to 200. This limit may lead to a liquidity shortage of the product, and is expected to be removed as the market gradually matures. Launch of the Shanghai-Hong Kong Stock Connect Scheme The CSRC and the Securities and Futures Commission (SFC) jointly announced the launch of stock trading under the Shanghai-Hong Kong Stock Connect Scheme (Stock Connect) on 17 November In conjunction with this, the Ministry of Finance (MOF), the State Administration of Taxation (SAT) and the CSRC jointly released Caishui [2014] No.81 (Notice 81), on the China taxation rules relating to Stock Connect. Under the Notice 81, the taxation policies of corporate income tax (CIT), business tax (BT), as well as individual income tax (IIT) were clarified as follows: 1. Taxation policies of China investors investments in eligible shares listed on the Hong Kong Stock Exchange through Stock Connect (southbound trading link) a) Southbound trading link China corporate investors Gains from the transfer of eligible shares listed in Hong Kong Dividend income from eligible shares listed in Hong Kong Observations Subject to CIT Will be taxed or exempted in accordance with the current BT regulations Generally subject to CIT; dividends from H shares held by the China corporate investor for no less than 12 months will be exempted from CIT China corporate investors should make a self-declaration and settle the tax payable b) Southbound trading link China individual investors Gains from the transfer of eligible shares listed in Hong Kong Dividend income from eligible shares listed in Hong Kong Temporarily exempt from IIT for the period from 17 November 2014 until 16 November 2017 Temporarily exempt from BT in accordance with the current regulation Dividends will be subject to IIT at 20%. The H share company has to withhold IIT relating to its dividend distribution / the China Securities Depository and Clearing Corporation has to withhold IIT on dividends from non-h shares Dividends paid to China securities investment funds would follow the same IIT treatment as above 2. Taxation policies of Hong Kong investors investments in eligible A shares listed on the Shanghai Stock Exchange through Stock Connect (northbound trading link) Gains from the transfer of eligible A shares Dividend income from eligible shares listed in Hong Kong Temporarily exempt from IIT/CIT Temporarily exempt from BT Stamp duty payable by the seller Dividend will be subject to 10% withholding tax and the listed company distributing the dividends has the withholding obligation If the recipient is entitled to a lower treaty rate, it can apply to the in-charge tax bureau of the payer for a refund The launch of Stock Connect is considered a securities trading milestone to those in the China and Hong Kong capital markets alike. Notable reasons include: 2 Asset Management Tax Highlights Asia Pacific

3 Launch of the Shenzhen-Hong Kong stock connect scheme As another important stock exchange in the China capital market, the Shenzhen stock exchange primarily serves the stock trading of entrepreneurial enterprises, which to some extent, represents the growth trend of the China economy. The launch of the Shenzhen-Hong Kong stock connect scheme will be warmly welcomed considering the trend of capital markets internationalisation, and closer relationships between the China and Hong Kong financial centres. The long awaited withholding tax policies for QFII/RQFIIs capital gains Together with the Stock Connect launch and the issuance of Notice 81, the authorities also released Caishui [2014] No. 79 (Notice 79), which provides a long-awaited clarification on the withholding tax (WHT) policy for capital gains in relation to QFIIs/RQFIIs schemes. Promotes RMB internationalisation The massive volume of foreign currency exchange under the north trading link stimulates the demand for RMB in Hong Kong s offshore market and enhances Hong Kong s status as an offshore RMB centre. At the same time, Stock Connect allows foreign investors to directly invest in RMB denominated A shares and also expands the scope and volume of investment in A shares. Stock Connect will undoubtedly enhance the long-term strength of the RMB and promote future RMB internationalisation. Attracting foreign investment Following the launch of Stock Connect, some structured products held by overseas listed A share tracking funds can now be converted to substantive A shares, and the value of blue chip stocks in the China capital market will increase. In view of this, investment in China may now be more attractive to foreign investors. Enhancing market vitality Given these developments, foreign investors demand for overseas listed China companies will reduce gradually. However, Stock Connect gives foreign investors more opportunities to invest in China and allows them enter into new industries. Since existing QFII investors may purchase A shares through Stock Connect, it will attract more overseas funds, which would develop the Shanghai stock market further and enhance its vitality. In addition, Stock Connect also makes it more convenient for China investors to invest in overseas capital markets and diversify their assets. Notice 79 stipulated that QFIIs/RQFIIs without an establishment or place (E&P) in China, or QFIIs/RQFIIs with E&P in China but the income so derived in China is not effectively connected with their E&P, are temporarily exempt from WHT on gains derived from the trading of equity investment assets (including shares) effective from 17 November Observations Notice 79 offered a temporary exemption on capital gains for QFIIs/RQFIIs so that they can start on a level playing field with Stock Connect from its launch. This blanket tax exemption is consistent with international practices and reinforces the promotion of China s A share market and the internationalisation of RMB. However, it is imperative to note that the exemption is only a temporary measure. It is unclear how long the exemption will be in place and what should be the grandfathering protection if the exemption is eventually removed. On the other hand, Notice 79 clearly stipulates that QFIIs/ RQFIIs would be subject to WHT in respect of the capital gains derived pre-17 November It answered a very important question that many QFIIs/RQFIIs (and their investors) have been asking over the years. However, there are still many key tax issues which have yet to be clarified by tax authorities such as clarification on the tax payment location, how taxable income is calculated, how treaty benefits can be applied, etc. Asset Management Tax Highlights Asia Pacific 3

4 State Council issued the notice regarding cleaning up and standardising preferential policies The State Council issued a circular (GuoFa [2014] No.45) on the decision to conduct an in-depth reform on the budget administrative mechanism, and notified the issues concerning the clean-up and standardisation of preferential policies on tax and other non-tax aspects. The notice addressed all municipal governments, and requires them to report the results of the clean-up of the preferential policies to the State Council by the end of March The State Council has set out the following major tasks: Regions (Province, Autonomous Regions, and Municipalities) are not allowed to formulate respective preferential tax policy, unless it is based on special tax law and regulation or the tax administration regulated in Law of the People s Republic of China Regional National Autonomy. Ministries and commissions of the State Council are not allowed to formulate specific preferential tax policy in their drafts of laws, regulations, development plans and regional policies, unless pre-approved by the State Council. Regions are not allowed to exempt, reduce or delay charging administrative fees, government fund, and social insurance fund from the enterprises. Regions are not allowed to provide financial incentives to enterprises unless approved by the State Council. Financial incentives related to tax revenue or non-tax revenue of fiscal expenditure shall be cancelled. Other kinds of preferential policies shall be progressively standardised, such as bearing the social insurance payment for the enterprises, reduction on electronic or water prices and attracting investment by providing fiscal incentives or subsidies etc. Observation Private equity and venture capital has always been a hot topic in driving local economic development. In recent years, local governments and authorities have published various preferential tax policies and financial incentives, such as individual income tax, value added tax, financial subsidies, etc. to attract investments. As a result, many private equity ventures put in place complex strictures and set up companies in these local areas to save large amounts of tax. As the State Council begins its clean up and regulation of local incentive policies, company structures may now lose their tax efficiencies. Market players should be prepared and be ready to adjust their structures. In saying that, although there is a set date for local governments to report the clean-up result (end of March 2015), it is uncertain as to what extent the clean-up will be conducted the procedures will still need to be defined. Local governments would still be motivated and be pressured into attracting investments, so preferential policies in other forms (e.g. paper documents) may be presented. As such, a risk assessment should be undertaken to ensure that any preferential policies can still be enjoyed. From a more positive angle, this clean-up and standardisation process may clarify and unify the various regulations throughout China. According to various reports, the CSRS and the National Development and Reform Commission are making progress to standardise regulations to promote the development of private equity. Hong Kong The latest Inland Revenue Department (IRD) s view on important profits tax and tax treaty issues In the 2014 annual meeting between the IRD and the Hong Kong Institute of Certified Public Accountants, the IRD expressed its views on a number of tax issues that are of interest to taxpayers. While the meeting minutes are not law and taxpayers can hold a different view from those expressed by the IRD in the meeting, the minutes serve as a good reference to the IRD s stance on various tax issues. Companies with business operations in Hong Kong or doing business with Hong Kong should take into account the views expressed by the IRD in the meeting minutes to effectively manage their tax matters. Salient points relevant to the asset management industry are summarised below. Source rule for dividends / distributions The IRD clarified that the source of dividends derived from the mere holding of an investment will generally be determined by the place of business operations of the investee company or the place where the investee company 4 Asset Management Tax Highlights Asia Pacific

5 derived the profits out of which the dividends were paid based on case law 1. As such, dividends received from the mere holding of an entity which operates its business or generates its profits outside Hong Kong would be offshore sourced and not taxable in Hong Kong. However, for an asset management business carried on in Hong Kong, the management fees or performance fees received (which may be payable in the form of dividends or distributions) are sourced in Hong Kong since they are derived from asset management services rendered in Hong Kong. Such dividends / distributions will be taxed under the normal charging section (i.e. section 14) of the Inland Revenue Ordinance if the tax exemption in section Taxation of Hong Kong investment managers / advisers The IRD disclosed in the meeting that it has examined the taxation affairs of a few Hong Kong investment managers or advisers who offered professional services in Hong Kong to offshore hedge funds or private equity funds and found that the management and performance fees paid to them (which were computed on a cost-plus basis) are far below the arm s length rate, taking into account the significant functions performed and risks borne by them in generating the profits of the funds. The IRD reiterated it expects that the investment managers or advisers in Hong Kong should be adequately remunerated after taking into account the functions, assets and risks attributed to the Hong Kong operation and the management / performance fees should be based on an arm s length rate. However, the IRD agreed that the place where the investment managers or advisers render their services should be considered in deciding the extent to which the arm s length management / performance fees should be chargeable to profits tax. Proposed stamp duty wavier for exchange traded funds (ETFs) The Stamp Duty (Amendment) Bill 2014 was gazetted on 5 December The Bill seeks to waive stamp duty payable on the transfer of units or shares of all Hong Kong listed exchange ETFs as proposed in the 2014/15 Budget. The Bill has yet to be enacted into law, pending the scrutiny and approval of the Legislative Council. Extension of the stamp duty waiver to all Hong Kong listed ETFs provides a level playing field for all Hong Kong listed ETFs and puts Hong Kong on par with other major financial markets. This should help strengthen Hong Kong s role as an international financial and asset management centre. 1. The Australian tax case cited by the IRD in the meeting is Nathan v FCT 25 CLR Under section 26 of the IRO, dividends from a corporation which is chargeable to profits tax or distributions from an unincorporated business which is chargeable to profits tax are exempt from profits tax to avoid double taxation. India Regulatory updates On 21 October 2014 the Government notified the Depository Receipts scheme, 2014 which will replace the existing scheme governing the issuance Depository Receipts (DR). The 2014 DR Scheme became effective from 15 December 2015 and is expected to give impetus to Indian entities seeking capital from overseas markets and allowing overseas investors to participate in the Indian markets. No specific approval is required except when it is in connection with the transfer of securities to a non-resident. The definition of permissible securities has also been considerably widened. On 29 October 2014, the Union Cabinet chaired by Hon ble Prime Minister, Narendra Modi approved liberalised Foreign Direct Investment (FDI) norms in Construction Development Sector permitting 100% investment under the Automatic Route. In particular, the policy relaxation is in the following aspects: minimum area requirement, minimum FDI and exit route for foreign investors before completion of projects. This policy is expected to boost Government s agenda of housing for all and investment in tier-2 and tier-3 cities. On 24 November 2014, Securities and Exchange Board of India (SEBI) issued a circular to align the eligibility and investment norms between Foreign Portfolio Investor (FPI) regime and subscription through the Offshore Derivative Instruments (ODI) route. The Circular intends to address the concerns over possible misuse of structures for round-tripping and money laundering. Earlier, the FPI regulations required the subscriber of ODI to be regulated or supervised by the securities market regulator or the banking regulator of the concerned foreign jurisdiction. SEBI has now restricted investment via ODI only from countries who are Financial Action Task Force (FATF) compliant and are members of the International Organization of Securities Commissions (IOSCO). Opaque structures have been specifically barred from subscribing to ODIs. SEBI (Research Analysts) Regulations, 2014 were notified on 1 September 2014 and came into effect from 1 December Taking a step further, on 28 November 2014 SEBI issued a press release stating that these Regulations shall come into effect from 1 December, 2014 and also separately issued instructions to be followed in applying as a Research Analyst. Further, on 9 December, 2014, SEBI issued FAQs to address the queries of various market participants on the applicability and interpretation of these Regulations. 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6 On 14 October 2014, the Ministry of Corporate Affairs (MCA) issued a general circular stating that a trustee (being a body corporate) of Real Estate Investment Trusts (REITs), Infrastructure Investment Trust (InvITs), or any other trust set up under the regulations prescribed under the SEBI shall not be barred from becoming a partner in a limited liability partnership (LLP). Tax updates On 17 October 2014, the Bangalore Bench of the Hon ble Income-tax Appellate Tribunal (the Tribunal) in the case of India Advantage Fund-VII [ITA No. 178/ Bang/2012] (the fund or the trust) held that in the case of a revocable trust, income had to be taxed in the hands of the beneficiaries of the trust and not in the hands of the trustee in the capacity of a representative taxpayer. This decision is very relevant and useful to the domestic alternative asset management industry. On 17 October 2014 the Central Board of Direct Taxes (CBDT) conveyed approval of Government for issue of long-term bonds, including long-term infrastructure bonds, by Indian companies (subject to certain conditions) to be eligible for concessional rate of tax on income thereon under section 194LC of the Act with effect from 1 October, Such long term bond issue carrying interest rate within the all-in-cost ceilings specified by the Reserve Bank of India (RBI) under External Commercial Borrowings (ECBs) Regulations and having a maturity of more than 3 years shall be eligible for deduction of tax under section 194LC. The Finance Minister (FM) in his maiden Budget Speech for financial year had indicated setting up a High Level Committee (HLC) for resolving industry s tax issues. On 3 December 2014, the FM set up a 3 member HLC under chairmanship of former Chief Economic Advisor to Government, Mr. Ashok Lahiri; HLC to interact with Trade and Industry bodies, consult experts and tax professionals, to ascertain areas that require clarity in tax laws; CBDT to issue requisite/ circulars/notifications/clarifications within 2 months of receiving recommendations from HLC; HLC to have term of 1 year, to submit half-yearly reports to FM. Thailand Reduced corporate income tax rate extension On 10 November 2014, Thailand officially passed a law extending the 20% corporate income tax rate for another year (for accounting periods beginning between 1 January 2015 and 31 December 2015). This will be the third consecutive year of the reduced corporate income tax rate. The normal corporate income tax rate in Thailand is 30%. Introduction of inheritance tax in Thailand On 18 November 2014, the cabinet of Thailand approved the draft Inheritance Tax Act proposed by the Ministry of Finance to impose inheritance tax in Thailand and the draft Revenue Code Amendment Act to include gift tax in the provisions of the Revenue Code. The following persons will be liable for Thai inheritance tax at a flat rate of 10% on estates valued at over Baht 50 million (approximately USD 1.6 million) that are located either in or outside of Thailand: i. a person of Thai nationality, ii. a person of Thai nationality who has had a domicile or headquarters situated in Thailand for three consecutive years on the date they are entitled to inherit the estate. Foreign nationals who inherit an estate situated in Thailand will also be liable for inheritance tax. The proposed gift tax will be imposed as a supplementary tax to the inheritance tax. According to the current draft Revenue Code Amendment Act, 5% tax will be imposed on the transfer of immovable property valued at over Baht 10 million (approximately USD o.3 million) to a legitimate child without remuneration. It s likely that the transfer of movable property valued at over Baht 10 million will also be subject to the 5% gift tax. At present (as at January 2015), the draft Inheritance Tax Act and the draft Revenue Code Amendment Act have been introduced into the National Legislative Assembly for debate and approval. Further details and changes are expected when the final acts are announced. Tax incentives for setting up international headquarters and international trading centres in Thailand IHQ A month after introducing inheritance tax, the cabinet of Thailand signalled some positive changes in Thai tax policy on 23 December 2014 by approving the Ministry of Finance s proposal to provide tax incentives for setting up international headquarters (IHQ) and international trading centres (ITC) in Thailand. An IHQ is a company incorporated under the laws of Thailand for the purpose of providing financial management, managerial services and technical or supporting services to its associated enterprises or branches. There are certain conditions that an IHQ must meet to enjoy tax privileges under this proposal, including the following key conditions: 6 Asset Management Tax Highlights Asia Pacific

7 i. It must have paid-up capital of at least Baht 10 million (approximately USD 300,000). ii. The IHQ s operating expenses in Thailand must not be less than Baht 15 million (approximately USD 490,000) each accounting period. iii. Its services must be provided to associated enterprises established under foreign law or to foreign branches of associated enterprises in at least one country. iv. An application must be submitted and approved by the Director General of the Revenue Department. The qualified IHQ will be granted tax privileges ranging from corporate income tax exemption to specific business tax exemption for 15 accounting periods. The key tax privileges offered are as follows: Tax Tax privileges CIT Business CIT exemption (out-out transactions) 10% reduced CIT (in-in and in-out transactions) Regional operating headquarters Service income and royalties Service income and royalties Treasury Trading Treasury management fee Interest on loans Income from buying and selling goods abroad without importing such goods into Thailand Income from international trade services Treasury management fee Interest on loans Income from buying raw materials or parts in Thailand and selling such items to affiliated enterprises located abroad for the purpose of manufacturing by such affiliated enterprises abroad WHT Holding Foreign branches Dividends Capital gains (Capital loss is non-deductible) Income of foreign branches (expenses of foreign branches are non-deductible) N/A N/A Tax exemption for foreign companies not carrying on business in Thailand for the following income received from the IHQ: Interest on loans borrowed by the IHQ for re-lending to onshore/offshore associated enterprises for treasury management purposes Dividends paid out of profit from income exempt from CIT PIT SBT 15% tax on the assessable income of an expatriate employee of the IHQ SBT exemption on interest on loans to onshore/offshore associated enterprises for treasury management purposes Asset Management Tax Highlights Asia Pacific 7

8 The qualified ITC will be granted tax privileges for 15 accounting periods. The key tax privileges offered are as follows: ITC An ITC is a company established under the laws of Thailand engaging in the business of buying and selling goods, raw materials and parts to affiliate enterprises, including providing services relating to international trade to foreign juristic persons. To enjoy the tax privileges under this proposal, an ITC must meet the following key conditions: Tax CIT WHT PIT CIT exemption (out-out transactions) Income from buying and selling goods abroad without importing such goods into Thailand Income from providing international trade services to foreign juristic persons received from or in a foreign country Tax privileges 10% reduced CIT (in-in and in-out transactions) Income from buying raw materials or parts in Thailand and selling such items to affiliated enterprises located abroad for the purpose of manufacturing abroad by such affiliated enterprises Tax exemption for foreign companies not carrying on business in Thailand for dividends received from the ITC that are paid out of profits from CIT-exempt income 15% tax on the assessable income of an expatriate employee of the ITC i. It must have paid-up capital of at least Baht 10 million (approximately USD 300,000). ii. It must have associated enterprises or foreign branches situated in at least one country. iii. An application must be submitted and approved by the Director General of the Revenue Department. This policy will encourage foreign investors to pilot investment in Thailand and use Thailand as their hub for regional management and treasury management. For more information, please contact the following territory tax partners: Country Partner Telephone address Australia Ken Woo +61 (2) ken.woo@au.pwc.com China Oliver Kang +86 (10) oliver.j.kang@cn.pwc.com Hong Kong Florence Yip* florence.kf.yip@hk.pwc.com India Gautam Mehra +91 (22) gautam.mehra@in.pwc.com Indonesia Margie Margaret +62 (21) margie.margaret@id.pwc.com Japan Akemi Kitou Stuart Porter akemi.kitou@jp.pwc.com stuart.porter@jp.pwc.com Korea Kwang-Soo Kim +82 (0) kwang-soo.tls.kim@kr.pwc.com Malaysia Jennifer Chang +60 (3) jennifer.chang@my.pwc.com New Zealand Mark Russell +64 (9) mark.r.russell@nz.pwc.com Philippines Malou Lim +63 (2) malou.p.lim@ph.pwc.com Singapore Anuj Kagalwala anuj.kagalwala@sg.pwc.com Taiwan Richard Watanabe +886 (0) richard.watanabe@tw.pwc.com Thailand Prapasiri Kositthanakorn +66 (2) prapasiri.kositthanakorn@th.pwc.com Vietnam Van Dinh Thi Quynh +84 (4) dinh.quynh.van@vn.pwc.com * Asia Pacific Asset Management Tax Leader This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors PricewaterhouseCoopers Limited. All rights reserved. PwC refers to the Hong Kong member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. HK C1