EY Tax Alert. Malaysian developments. Vol Issue no July Updated Real Property Gains Tax (RPGT) Guidelines

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1 EY Tax Alert Vol Issue no July 2018 Malaysian developments Updated Real Property Gains Tax (RPGT) Guidelines Extension of Common Reporting Standard (CRS) submission deadline Indirect tax matters Malaysian developments Updated Real Property Gains Tax (RPGT) Guidelines Overseas developments Hong Kong passes tax and transfer pricing legislation to counter BEPS India: Tribunal rules that allowances received outside India through a travel currency card are not taxable in India The Inland Revenue Board (IRB) has recently published on its website the RPGT Guidelines dated 13 June 2018 (2018 Guidelines) in Bahasa Malaysia, titled Garis Panduan Cukai Keuntungan Harta Tanah. This new 61-page 2018 Guidelines replaces the earlier Guidelines dated 18 June 2013 (see Tax Alert No. 15/2013). The 2018 Guidelines contain the following 25 sections and set out 15 examples: 1. Introduction 2. Objective 3. Scope of imposition 4. Rate of tax 5. Date of disposal and acquisition 6. Disposal price and acquisition price 7. Excluded expenditure 8. Chargeable gains or allowable losses 9. Deduction of allowable losses 10. Exemptions 11. Transfer of assets by way of gift 12. Transfer of assets by way of inheritance 13. Joint venture with developers EY Tax Alert Vol. 21 Issue no July

2 14. Transfer of assets to controlled companies 15. Transfer of assets into stocks 16. Shares in real property companies 17. Application of Paragraph 34A and Paragraph 34 of Schedule 2 of the Real Property Gains Tax Act 1976 (RPGT Act) are exclusive 18. Procedures for filing a RPGT return 19. Disposer s responsibilities 20. Acquirer s responsibilities 21. Acceptance of RPGT returns 22. Methods of filing RPGT returns 23. Cancellation of disposal / sales transaction 24. RPGT payments 25. Procedures for a RPGT refund Appendix The 2018 Guidelines introduce several new Sections that explain and restate various key provisions from the RPGT Act. The 2018 Guidelines also incorporate the changes introduced to the RPGT Act since the previous 2013 Guidelines. For example, Section 10 of the 2018 Guidelines provides guidance on the changes to Paragraph 2 of Schedule 4 of the RPGT Act, which were proposed during Budget 2016 and which took effect from 31 December 2015 (see Tax Alert No. 22/2015). The formula to compute the amount of exemption allowed for a partial disposal (by an individual) was amended such that the exempted amount is to be the higher of 10% of the chargeable gain, or the amount is to be ascertained based on the formula below: A/B x C Where A is part of the area of the chargeable asset disposed, B is the total area of the chargeable asset and C is RM10,000. acquirer is required to withhold either the whole amount of money received or 3% (previously 2%) of the total value of the consideration, whichever is lower. The sum withheld must be remitted to the IRB within 60 days from the date of disposal (see Tax Alert No. 21/2014). Pursuant to Finance (No. 2) Act 2017, a new Section 21B(1A) was introduced, which stipulates that where a disposer is not a Malaysian citizen or a permanent resident, the acquirer shall retain the whole amount of money received or 7% (previously 3%) of the total value of the consideration, whichever is lower. The amount withheld is to be remitted to the IRB within 60 days from the date of disposal (see Special Tax Alert: Highlights of 2018 Budget Part II). This was effective from 1 January Notwithstanding the above, Section 5 of the 2018 Guidelines, which provides guidance on the dates of disposal and acquisition, does not elaborate on conditional contracts or explain the change in law with effect from 1 January Further to this change, approval required from an authority or committee appointed by the Government would no longer impact the RPGT disposal date (unlike, for example, State Government approvals) (see Special Tax Alert: Highlights of 2018 Budget Part II). The procedure to obtain a RPGT refund has also been updated. Where the refund is to be remitted to the acquirer, an agreement letter as provided in the Appendix to the Guidelines will need to be completed and submitted accordingly. Extension of Common Reporting Standard (CRS) submission deadline Another example of an update is in Section 24.1 of the Guidelines, which has now incorporated the following changes on the withholding obligations of the acquirer of the chargeable assets: Pursuant to the Finance (No. 2) Act 2014, with effect from 1 January 2015 Section 21B(1) of the RPGT Act was amended to provide that an Following the enactment of the relevant rules for the Automatic Exchange of Information by the Malaysian Government (see Tax Alerts No. 2/2017, No. 1/2018, No. 4/2018 and No. 6/2018) under the Common Reporting Standard (CRS), Malaysian Financial Institutions (MYFIs) are required to collect and report to the Inland Revenue Board (IRB) the 2

3 financial account information of non-residents. The IRB will exchange this information with the participating foreign tax authorities of those nonresidents from The IRB has recently announced on its website that the due date of the first CRS report filing, which was originally due by 31 July 2018, has been extended to 15 August Indirect tax matters Framework Sales Tax Service Tax Registration and threshold Person who manufactures taxable goods and the annual turnover exceeds MYR500,000 Service provider who provides taxable services and the value of the taxable services provided for a period of 12 months exceeds MYR500,000 RMCD publishes FAQs and proposed implementation models for SST In preparation for the introduction of the Sales Tax and Service Tax (SST) on 1 September 2018, the Royal Malaysian Customs Department (RMCD) has released a list of frequently asked questions (FAQs) and details pertaining to the proposed implementation models for SST. Rate(s) 5%, 10% or a specific rate Fixed rate of 6%, and a specific rate of MYR25 for the provision of credit card or charge card services The table below summarizes the key points of the proposed SST implementation models: Framework Sales Tax Service Tax Scope Levied on: Taxable goods manufactured in Malaysia by a taxable person and sold, used or disposed by him; and Taxable goods imported into Malaysia Charged on any provision of taxable services made in the course or furtherance of any business by a taxable person in Malaysia Accounting basis Filing of returns Sales Tax is required to be accounted for at the time when the goods are sold, disposed of or first used (accrual basis) Submission on a bi-monthly basis via electronic filing or by post Service Tax is generally required to be accounted for at the time when the payment is received (payment basis) Submission on a bi-monthly basis via electronic filing / by post Certain goods will be exempted from sales tax The scope of the Service Tax has been expanded to include provision of IT services, electricity and domestic flights, excluding Rural Air Services. Below is the list of services which will be subject to Service Tax. 3

4 Hotel Insurance and takaful Food and beverage preparation Club Gaming Telecommunications Pay-TV Forwarding agents Legal Accounting Surveying Architectural Valuation Engineering Employment agency Security Management services Parking Motor vehicle service or repair Courier Hire and drive car Advertising Domestic flight except Rural Air Services IT services Credit / charge card Electricity Consultancy Along with the expansion in scope, it is anticipated that certain exemptions from the previous SST legislation will be removed or restricted under the new Acts, such as the exemption for the provision of services to companies within the same group and certain other exemption facilities. RMCD has also clarified that it will continue with Goods and Services Tax (GST) audits for closure purposes, after the SST comes into effect. To access the list of FAQs, the proposed implementation models for SST and the list of proposed goods exempted from Sales Tax, use the links below: Sales Tax FAQ (English) or Sales Tax FAQ (Bahasa Malaysia) Service Tax FAQ (English) or Service Tax FAQ (Bahasa Malaysia) Proposed Sales Tax Implementation Model Proposed Service Tax Implementation Model Proposed Goods Exempted from Sales Tax Between June and September 2018, businesses will have to consider two sets of indirect taxes the GST, that was reduced from 6% to 0%, and the planning for the transition from GST to the SST. During this period, businesses need to focus on the technical and operational aspects of transitioning between the two indirect tax regimes. In parallel to managing the transition, businesses also need to consider, among others, the Price Control and Anti-Profiteering Act 2014 (PCAP Act) and other regulatory requirements. In ensuring a smooth transition to SST implementation, businesses need to consider the following: People, processes and systems, to comply with the new indirect tax laws and regulations Relevant regulations that may have an impact post-sst implementation, e.g. the PCAP Act Stakeholder engagement on potential commercial implications Overseas developments Hong Kong passes tax and transfer pricing legislation to counter BEPS On 4 July 2018, the third and final reading of the (Amendment) (No. 6) Bill 2017 (the Amendment Bill) passed in Hong Kong s Legislative Council. The Amendment Bill was gazetted and formally became law on 13 July The Amendment Bill codifies certain transfer pricing (TP) principles, introduces mandatory TP documentation requirements into the Inland Revenue Ordinance (Cap. 112) (IRO), and implements the minimum standards outlined in the Consultation Report on Measures to Counter Base Erosion and Profit Shifting (BEPS) (the Consultation Report), dated 31 July

5 The Amendment Bill amends the IRO to: Codify TP rules Require income or loss from provisions between associated persons to be computed on an arm slength basis for tax purposes Provide for an advance pricing arrangement (APA) regime Require documentation for related party transactions (intra-group transactions and intraentity dealings) Introduce a statutory dispute resolution mechanism for cross-border tax treaty-related disputes Enhance the current tax credit system Amend certain profits tax concessions to introduce revised eligibility criteria (including eligibility for the half-rate concession for corporate treasury centre activities) Different effective dates apply for different purposes, for example: Accounting periods beginning on or after 1 January 2018 for Country-by-Country Reporting Accounting periods beginning on or after 1 April 2018 for master file/local file and APAs Years of assessment beginning on or after 1 April 2018 for profits taxes under the IRO Years of assessment beginning on or after 1 April 2019 for deeming provision on intellectual property and Authorized OECD Approach for permanent establishments This Alert highlights the key provisions in the Amendment Bill as clarified in a report by the Bills Committee (the Bills Committee Report). Detailed discussion Background BEPS refers to the exploitation (or perceived exploitation) of the gaps and mismatches in international tax rules by multinational enterprises, to artificially shift profits to low or no-tax locations where there may be little or no economic activity. The Organisation for Economic Co-operation and Development (OECD) released a package of 15 action plans in October 2015 to counter BEPS. In June 2016, Hong Kong indicated its commitment to implementing the BEPS package. In October 2016, the Financial Services and the Treasury Bureau (FSTB) launched a public consultation process on proposed measures to counter BEPS strategies. In July 2017, the Government released the Consultation Report, indicating that the Government received broad support during the consultation process for its implementation strategy with regard to the BEPS package. On 29 December 2017, the Government published the Amendment Bill for further reading at the Legislative Council (LegCo). The Amendment Bill codifies recommendations released in the Consultation Paper. From 10 January 2018 to 4 July 2018, the Amendment Bill received a total of three readings at the LegCo. A Bills Committee was also formed to study the Bill at nine Bills Committee meetings, which moved a series of Bills Committee Stage Amendments (CSAs) before the Bill was tabled for final reading. The following sections summarize the main issues covered in the Amendment Bill, as amended by the relevant CSAs: 1. TP regulatory regime 2. TP documentation 3. Other related matters TP regulatory regime Codifies the OECD s TP rules into the IRO The Amendment Bill codifies the arm s-length principle into the IRO through the proposed fundamental TP rule (Fundamental Rule). The Fundamental Rule allows Inland Revenue to adjust the profits or losses of an enterprise where the actual compensation made or imposed between two associated persons departs from the compensation which would have been made between independent persons (and that departure has created a tax advantage). 5

6 The scope of the Fundamental Rule covers persons who are associated and applies to transactions involving the sale/transfer/use of assets and provision of services. Financial and business arrangements between different parts of an enterprise, such as dealings between a head office and a permanent establishment, are also covered. Associated parties are defined based on tests of participation in the management, control and capital of another, or of common participation by a third party. The OECD s TP guidelines are relied on to provide guidance on how the TP principles should be interpreted, and a legal basis for its application is provided in the IRO. In particular, the Amendment Bill provides that the Fundamental Rule interpretation is to be consistent with the OECD s TP guidelines. The Fundamental Rule applies to years of assessment beginning on or after 1 April The implementation of the Authorized OECD Approach as reflected in the Amendment Bill on attributing income or loss to permanent establishments has been deferred by 12 months, i.e. it will apply to years of assessment beginning on or after 1 April In respect of fees for an APA application, the service charge will be capped at HK$500,000. This excludes direct costs of engaging external advisors as well as travelling costs, which will be fully reimbursed by the APA applicant. Coverage and risk-based approach The Bills Committee Report clarifies that the Fundamental Rule applies to both cross-border and domestic transactions. In practice, in applying the TP rules the Inland Revenue Department (IRD) will consider the overall Hong Kong tax position of the transactions involved. Specifically, insofar as domestic transactions between associated persons do not give rise to actual tax difference, or domestic transactions involving non-arm s length loans (e.g. interest-free loans) are not carried out in the ordinary course of money lending or intra-group financing business, and provided that such transactions do not have a tax avoidance purpose, then the relevant persons will not be obliged to compute the income or loss arising from these transactions on the basis of the arm s-length provision when preparing their tax returns and no corresponding assessment on that basis will be made by IRD. The IRD will provide further guidance in a Departmental Interpretation and Practice Note (DIPN) at a future date. In addition, the Fundamental Rule applies to all types of tax, including profits tax, property tax and salaries tax. This is because Hong Kong adopts a scheduler income tax system which is different from the comprehensive income tax regimes of many overseas tax jurisdictions whereby all sources of income are aggregated for assessment purposes. Deeming provision on intellectual property The Amendment Bill also incorporates the OECD guidance in the development, enhancement, maintenance, protection or exploitation (DEMPE) functions related to the creation of intangibles. Specifically, a new provision will be added to the IRO to target situations where a person in Hong Kong has contributed to the DEMPE functions in respect of certain intellectual property rights (IPRs), but income from such IPRs accrues to a nonresident outside Hong Kong. In such a case, the Hong Kong person will be taxed under the deeming provision. The tax will be imposed on an amount accruing in respect of the exhibition or use of the relevant IPRs as is attributable to the person s contribution in Hong Kong, even if the sum accrues to an associate of the person outside Hong Kong. 6

7 The Bills Committee Report clarifies that in applying the deeming provision, the IRD will make sure that a person will not be subject to double taxation in respect of the same income from intellectual property. The non-resident associate will also not be subject to the profits tax in respect of the relevant sum to the extent that the new deeming provision applies. To allow more lead time for taxpayers to prepare, the commencement of the deeming provision on IPRs will be postponed by 12 months. Hence, the deeming provision will be applicable to the years of assessment beginning on or after 1 April Penalties The Amendment Bill introduces administrative penalties relating to transfer pricing; however, given that transfer pricing is not an exact science, the penalties have been set at a level lower than the existing penalties for other non-compliance under section 82A of the IRO. Specifically, penalties will be imposed where a tax return is made with incorrect information on transfer pricing without a reasonable rationale or with the intent to evade tax. Taxpayers will be liable for an administrative penalty calculated as an additional tax not exceeding the amount of tax undercharged (instead of an amount trebling the tax undercharged, as is currently imposed for incorrect returns and other offences under section 82A of the IRO). That said, the IRD has not ruled out the possibility of imposing more stringent penalties or initiating criminal prosecutions on blatant cases, in accordance with the relevant provisions of the IRO. The availability of TP documentation alone will not qualify for an automatic exemption from penalties, but will be considered in determining whether individual taxpayers have a reasonable excuse to be exempt from the penalties. In assessing whether the taxpayer is able to substantiate his/her reported/claimed amount, the Bills Committee Report clarifies that: a) A taxpayer will be accepted as having substantiated his/her reported/claimed amount if such amount is within the arm s-length range. b) The proposed section 50AAF will not apply where the existing section 15C (valuation of trading stock on cessation of business) is applicable. TP documentation The Amendment Bill adopts the OECD s recommended three-tiered documentation structure, comprising a master file, local file and Country-by-Country Reporting. Master file and local file For fiscal years starting on or after 1 April 2018, Hong Kong taxpayers are required to prepare master file and local file documentation. Exemptions based on business size and/or relatedparty transaction volume have been adopted. A waiver on the requirement to prepare master file and local file documentation for domestic transactions has also been applied. Specifically, enterprises engaging in transactions with associated enterprises will not be required to prepare master file and local file documentation if they can meet either one of the following exemption criteria: Exemption based on size of business: Taxpayers meeting any two of the following three conditions are not required to prepare the master file and local files: Total amount of revenue not more than HK$400 million; Total value of assets not more than HK$300 million; and Average number of employees not more than 100 Exemption based on related party transactions: If the amount of a category of related party transactions (excluding domestic transactions) for the relevant accounting period is below the prescribed threshold, an enterprise will not be required to prepare a local file for that particular category of transactions: 7

8 Transfer of properties (other than financial assets and intangibles): HK$220 million; Transactions in respect of financial assets: HK$110 million; Transfers of intangibles: HK$110 million; and Any other transaction (e.g., service income and royalty income): HK$44 million Exemption in respect of domestic transactions: Master and local files need not be prepared for domestic transactions between associated persons. If an enterprise is fully exempted from preparing a local file (i.e. its related-party transactions of all categories are below the prescribed thresholds), it will not be required to prepare a master file either. The information to be included in the master file and local file is specified in the Amendment Bill and is broadly consistent with the OECD requirements. The master file and local file must be prepared within nine months after the end of the enterprise s accounting period. The master file and local file can be prepared in English or Chinese. Taxpayers must retain documentation for at least seven years. In-scope taxpayers who fail to prepare master file and local file documentation without reasonable excuse are liable to a Level 5 fine (HK$50,000), and may be ordered by the court to prepare such documentation within a specified time. Failure to comply with that order carries a Level 6 fine (HK$100,000) on conviction. Country-by-Country (CbC) Reporting (CbCR) The CbCR filing threshold is set in accordance with the OECD recommendation, i.e. 750 million, which is approximately HK$6.8 billion. The primary obligation of filing a CbC report falls on the ultimate parent entities (UPEs) of multinational groups that are resident in Hong Kong. But the Amendment Bill continues to also embrace the OECD s mandate in relation to the implementation of secondary and surrogate filing mechanisms. The information to be included in the CbCR is in line with the OECD s requirements. A CbC report has to be prepared for each accounting period beginning on or after 1 January The Amendment Bill announced a transitional arrangement for accepting voluntary filing of CbC reports for taxpayers with a UPE located in Hong Kong. These voluntary filings will cover accounting periods commencing between 1 January 2016 and 31 December A Hong Kong enterprise which is a constituent entity will be required to file a notification to the IRD within three months after the end of the enterprise s accounting period. Penalty and offense provisions have been introduced to cover matters such as failing to file reports or notifications; providing misleading, false or inaccurate information; or omitting information in the CbC report furnished by the Reporting entity. Penalties which may be applied include: a) On summary conviction a fine at Level 3 and imprisonment for six months b) On conviction on indictment a fine at Level 5 and imprisonment for three years Penalty and offense provisions will also apply to the service providers engaged by the reporting entity. Other tax matters Double taxation relief As previously announced, the Amendment Bill enhances the current tax credit system by extending the period for claiming a foreign tax credit from two years to six years. The stated objective of this measure is to counterbalance the increased number of claims for double tax relief that the IRD expects to receive as a result of the implementation of statutory TP rules and the continued expansion of Hong Kong s Comprehensive Double Taxation Agreement (CDTA) network. 8

9 However, the above change is accompanied by several new conditions for claiming a foreign tax credit, including: i) A requirement to make full use of all other available reliefs under CDTAs and the local legislation of foreign jurisdictions before claiming a foreign tax credit, which will only be satisfied if all reasonable steps are taken to minimize the amount of foreign tax payable before resorting to a foreign tax credit ii) A requirement to notify the IRD of any adjustment to foreign tax payments that could result in the foreign tax credit granted being excessive In addition, the Amendment Bill removes the option for a taxpayer to obtain relief from double taxation by way of either a foreign tax credit under section 50 of the IRO, or an income exclusion or deduction under section 8(1A)(c) or 16(1)(c) of the IRO where the claim involves a CDTA territory; in such case, only a foreign tax credit can now be claimed. According to the IRD, this change is consistent with the view that CDTAs provide comprehensive solutions for all tax matters within their scope and the expectation of Hong Kong s CDTA partners is that double taxation will be relieved by way of tax credit as agreed under the CDTAs. Commencing from the year of assessment 2018/19, the income exclusion or deduction approach under section 8(1A)(c) or 16(1)(c) of the IRO will be limited to cases involving non-cdta territories. As a result of the above changes, the IRD is expected to place greater scrutiny on foreign tax credit claims and require additional supporting documentation from taxpayers. The modifications are also likely to result in an increase of mutual agreement procedure (MAP) applications by taxpayers, in an effort to minimize foreign taxes where the foreign jurisdiction overly imposes taxes. Dispute resolution mechanism The Amendment Bill introduces a statutory dispute resolution mechanism to facilitate the handling of cross-border treaty-related disputes. This new mechanism replaces the current reliance on administrative guidance for defining the rules surrounding MAP applications. The new statutory dispute resolution mechanism specifies that a taxpayer may present a case for MAP and/or arbitration under the relevant Hong Kong CDTA. A key feature of the statutory mechanism is that it requires the IRD Commissioner to give effect to any solution, agreement or decision resulting from the application of MAP or arbitration under any of Hong Kong s CDTAs by making an appropriate adjustment. The form of an adjustment is left to the discretion of the Commissioner, but the Amendment Bill specifies that it may include a discharge or repayment of tax, the allowance of credit against tax payable, or the making of an assessment. In the course of the deliberations with the Bills Committee on the Amendment Bill, the IRD has advised that it would allow a taxpayer to apply for the holding-over of the tax in dispute under the IRO in a case where an application for MAP has been presented or an issue has been referred for arbitration under a CDTA. In light of the upcoming OECD peer review process on dispute resolution, which is scheduled to begin in December of this year with respect to Hong Kong, the administrative framework associated with the new statutory mechanism is expected to be formulated in accordance with the OECD s Model Tax Convention, BEPS Action 14 and the relevant peer review documents. Countering harmful tax practices To counter the artificial shifting of profits derived from internationally mobile activities (such as financial and other service activities) to low- or notax jurisdictions, BEPS Action 5 (countering harmful tax practices) includes a minimum standard requiring that preferential tax regimes present in a jurisdiction satisfy certain criteria in order to avoid being designated as harmful. 9

10 These criteria stipulate, among others, that preferential regimes must not be ring-fenced from the domestic economy, and require the eligibility for preferential regimes be subject to a minimum level of substance in the jurisdiction (the so-called substantial activities requirement ). On 5 December 2017, the European Union (EU) also released a list of non-cooperative tax jurisdictions, where fair taxation is one of the criteria in assessing a preferential tax regime. To satisfy commitments made by Hong Kong to the OECD and the EU in the area of preferential tax regimes, the Amendment Bill modifies the profits tax concessions for corporate treasury centres (CTC), and reinsurance and captive insurance activities, to remove their ring-fencing feature. With these amendments, the half-rate concessions under these three regimes are extended to profits derived from domestic transactions. These modifications essentially replicate the change made last year to the aircraft leasing regime, which made the benefits under the regime available in respect of onshore qualifying activities (in addition to the already covered offshore qualifying activities). Recently, legislation was also similarly passed to extend the profits tax exemption for privatelyoffered open-ended fund companies, to Hong Kong incorporated private companies. To prevent tax arbitrage where the payer concerned is associated with the recipient benefiting from a tax concessionary rate, the Amendment Bill however restricts the amount of deduction that can be claimed by the payer under all three concessionary regimes. The above changes to the CTC, reinsurance and captive insurance regimes are effective from the year of assessment onwards. As regards the substantial activities requirement, the Amendment Bill empowers the IRD Commissioner to prescribe substance threshold requirements in terms of minimum number of fulltime qualified employees and amount of operating expenditure in the tax regimes for CTCs, professional reinsurers, captive insurers, ship operators, aircraft lessors and aircraft leasing managers. A separate gazette will be published to specify the detailed full-time qualified employee and operating expense thresholds, after consultation with stakeholders. These changes are also expected to be effective from the year of assessment onwards, subject to adequate legislation being timely put in place. As a result of the announcement made last year by the Hong Kong Government that the five abovementioned preferential tax regimes would be amended to satisfy the BEPS Action 5 minimum standard, none of the regimes were found to be harmful in a progress report on BEPS Action 5 published in October 2017 by the OECD, and more recently in an OECD update on preferential tax regimes issued on 2 May This announcement also contributed to avoiding the inclusion of Hong Kong in the EU blacklist of uncooperative tax jurisdictions. Advance ruling application fees The Amendment Bill also increases the fees in respect of an application for advance ruling from HK$30,000 to HK$45,000, together with certain other related fees. India: Tribunal rules that allowances received outside India through a travel currency card are not taxable in India An Indian tax tribunal has ruled that allowances received through a travel currency card for services performed overseas, are not taxable under domestic law even though they are paid by an Indian employer. In light of this development, employers should evaluate the ruling and the means by which they 10

11 pay such allowances, to determine if their current approach to taxing these allowances remains valid. Background Many employers second employees overseas, while keeping them on an Indian payroll and paying their salaries into an Indian bank account. In addition to salary, employers also provide allowances to the employees to cover cost of living in the host country. These allowances are usually provided either through a travel currency card or payments to a bank account. In the case in question, the individuals were nonresidents in India and were on a short-term assignment overseas. Their salaries were paid into an Indian bank account and allowances were provided through a travel currency card issued by an Indian bank. The Indian employer paid the salaries and allowances after deducting normal withholding taxes. The individuals filed their tax returns in India, claiming the allowances received through the travel currency card were exempt under domestic law as they were received overseas and were for services performed overseas and therefore not taxable under domestic law. The exemption was denied by the tax authorities at lower levels on the grounds that there was an employer-employee relationship in India and the credit/receipt of the allowances was in India. The first appellate authority overruled the decision of the lower authority and provided an exemption to the taxpayers. domestic law. The conclusion of the tax tribunal was based on the following observations: The taxpayers performed the duties overseas and the allowances were received by them for these services. Though the instructions to pay the allowances were received from an Indian employer, the credit of the allowances happened outside India in the travel currency card through an overseas account maintained by the bank. The funds for making the payment of the allowances by the bank were made available by the Indian employer from an Exchange Earners Foreign Currency Account. The allowances were credited in the travel currency card for the first time outside India and the taxpayers were able to get control over the funds for the first time only in the host country and not in India. In the subsequent years, the tax authorities have allowed the exemption for allowances received overseas after a detailed examination. Next steps The ruling confirms that if the services are provided outside India and the income is received overseas, then the income is not taxable in India, even though it is paid by an Indian employer. The ruling also provides clarity on whether allowances are considered as received in India or overseas, when paid through a travel currency card issued by an Indian bank. In light of this, employers should evaluate the ruling and the means by which they pay such allowances. The tax authorities disagreed with the order of the first appellate authority and appealed to the tax tribunal. Ruling of the tribunal The tax tribunal held that the allowances received by the taxpayers through a travel currency card were accrued and received overseas. Therefore the allowances are outside the scope of tax under 11

12 Contact details Principal Tax contacts Yeo Eng Ping Amarjeet Singh Global Compliance and Reporting Simon Yeoh Julian Wong Datuk Goh Chee San (based in Sabah) Janice Wong Julie Thong Lee Li Ming (based in Johor) Liew Ai Leng Koh Leh Kien Mark Liow (based in Penang) People Advisory Services Tan Lay Keng Irene Ang Christopher Lim Business Tax Services Amarjeet Singh Farah Rosley Robert Yoon Wong Chow Yang Transaction Tax Services Yeo Eng Ping Sharon Yong International Tax Services Anil Kumar Puri Asaithamby Perumal Transfer Pricing Sockalingam Murugesan Vinay Nichani Hisham Halim Indirect Tax Yeoh Cheng Guan Aaron Bromley Financial Services Bernard Yap

13 Important dates 31 July th month revision of tax estimates for companies with January year-end 31 July th month revision of tax estimates for companies with October year-end 31 July 2018 Statutory deadline for filing of 2017 tax returns for companies with December year-end 15 August 2018 Due date for monthly instalments 31 August th month revision of tax estimates for companies with February year-end 31 August th month revision of tax estimates for companies with November year-end 31 August 2018 Statutory deadline for filing of 2018 tax returns for companies with January year-end EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com Ernst & Young Tax Consultants Sdn. Bhd. All Rights Reserved. APAC no ED None. This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. Publisher: Ernst & Young Tax Consultants Sdn. Bhd. Level 23A Menara Milenium Jalan Damanlela, Pusat Bandar Damansara Kuala Lumpur Tel: Fax: