WINTER 2018/19. Asia Tax Bulletin

Transcription

1 WINTER 2018/19 Asia Tax Bulletin Americas Asia Europe Middle East

2 This Edition We are pleased to present the winter 2018/2019 edition of our firm s Asia Tax Bulletin. Dubai Middle East Hanoi Bangkok Singapore Beijing Tokyo Shanghai Hong Kong Ho Chi Minh City Asia The winter months have seen a range of significant measures in tax legislation, from tax incentives for foreign investment and various measures to promote the technology sector to building on earlier measures to increase tax collections. China reformed its individual income tax law and has extended, with adjustments, its policy on retail imports through e-commerce. Hong Kong has gazetted proposals to enable private equity funds to be established in Hong Kong, in order to close in on Singapore s regulations in this regard. Indonesia amended, for the second time in the space of two years, its anti-treaty shopping rules, tightening them compared with the previous edition. Japan has announced the framework of its 2019 tax reform plan, which includes changes to its CFC rules, transfer pricing and earnings stripping rules. Korea has seen the passage of the tax reform bill covered in the previous issue of this Bulletin, albeit with some amendments to the proposed changes. It also saw an interesting supreme court case dealing with beneficial ownership which was favourable for the taxpayer. Malaysia has seen a raft of tax changes as part of its Budget 2019, as well as rulings from the IRBM on income from and taxation of real estate. Singapore has approved the passage of its Variable Capital Companies Bill, designed to make Singapore a suitable alternative to the Cayman Islands as the preferred choice of jurisdiction for fund vehicles. Thailand has reformed its International Business Centre tax regime, replacing three prior tax incentive regimes, and has implemented changes to the taxation of technology transfers. Vietnam has issued a decree on social insurance for foreign employees in Vietnam. We hope you will enjoy reading this Bulletin and that you will find it useful. Please let us know if you need assistance with Asian tax matters. With kind regards, Pieter de Ridder Pieter de Ridder Partner, Mayer Brown LLP pieter.deridder@mayerbrown.com

3 Key: Contents Jurisdiction (Click to navigate) China Hong Kong Japan Singapore 6 Individual income tax changes 7 Rules on withholding individual income tax released 8 Withholding tax deferral on dividends/profits reinvested by non-resident investors 12 Inland Revenue (Amendment) (No. 7) Bill 2018 gazetted 12 Tax deduction of qualifying premium for eligible health insurance products 12 Individual income tax treatment of gains on disposal of listed shares tax reform 19 International tax developments Korea 21 Beneficial ownership under tax treaties 28 Variable Capital Company 29 International tax developments Thailand 30 New tax incentive 8 e-commerce 9 Tax exemptions on export of retail goods through integrated cross-border e-commerce pilot zone 9 Import duties and VAT exemption on key technical equipment 13 Exemption of gains derived by individuals from Hong Kong mutual funds 13 Tax credits against salaries tax 13 Tax exempt funds in Hong Kong 22 Tax reform 22 International tax developments Malaysia 30 Transfer pricing 31 International tax developments Vietnam 10 Adjustments to customs duties for VAT export refund rates adjusted 14 Tax deductions for annuity premiums and MPF voluntary contributions 14 R&D expense deductions enhanced 23 Budget tax changes for Public Ruling 12/2018 on income from letting of real property 32 Compulsory social insurance for foreigners 33 International tax developments 10 Deduction of liability insurance premiums 11 Temporary exemption for interest on bonds derived by foreign institutions 15 Three concessionary tax measures in Budget 2018/19 implemented 15 International tax developments 25 Taxation of unit holders of REITs/PTFs 25 Tax incentives for investment in bionexus status company 11 International tax developments India 16 International tax developments 26 Income tax exemption for Islamic banking Philippines Indonesia 27 Tax Reform approved by House of Representatives 17 Tax audits 17 New tax treaty qualification requirements 18 International tax developments

4 China (PRC) Individual income tax changes On 18 December 2018, the State Council published the revised Implementation Rules on Individual Income Tax (IIT) Law (State Council Decree No. 707, the Decree). The Decree takes effect from 1 January In total, six special additional deductions are available, all of which are to be implemented from 1 January They are set out below. The deduction amounts to CNY 1,000 per child per month (CNY 12,000 per year) if the child or children follow pre-school education (from the age of three), or elementary, middle school, high school, college or university education. Both parents may each claim 50% of the deductible amount or elect to allocate the total deductible amount to one parent. A fixed deduction of CNY 400 per month (CNY 4,800 per year) is available for academic education and CNY 3,600 per year for vocational education, which can be claimed by either the taxpayer him/herself as deduction for continuous education purposes or by the parents of the taxpayer as deduction for children s education. A deduction of up to CNY 60,000 per year is allowed if medical expenses exceed CNY 15,000 and are borne by the taxpayer him/herself (and not reimbursed under medical insurance) on an annual basis. The taxpayer must substantiate the expenses by submitting receipts. A deduction of up to CNY 1,000 per month (CNY 12,000 per year) is allowed for a mortgage loan in connection with the purchase of a first residential property, provided that the loan is granted by a commercial or housing fund. Both spouses may choose who will apply the deduction. If the taxpayer does not have his/her own dwelling, a deduction for rent paid for housing in connection with work is allowed as follows: o up to CNY 1,200 per month (CNY 14,400 per year) in municipalities, cities at the provincial level and other cities designated by the State Council; o up to CNY 1,000 per month (CNY 12,000 per year) in cities with a population of more than 1 million; or o up to CNY 800 per month (CNY 9,600 per year) in cities with a population of less than 1 million. This deduction cannot be claimed together with the deduction for interest of a mortgage loan. A fixed deduction of CNY 2,000 per month (CNY 24,000 per year) is allowed for supporting the elderly aged 60 or higher, regardless of the number of elderly people involved. If there is more than one child, the fixed deduction may be divided among the children. Moreover, all deductions must be made in the current tax year and cannot be carried forward. Foreign workers are entitled to deductions for children s education, continuous adult education, interest on a mortgage loan and housing rent; however, they may also choose to enjoy the current allowances for children s education, language training and rental subsidy. In discussions with the tax authorities it was clarified that the existing policy for foreigners working in China to be treated as non-resident taxpayers, and hence taxable only on China-source income, will continue to apply under the revised income tax law. This is good news for expats working in China. Foreign income derived by an individual who is not domiciled in China but has resided continuously for less than six years (previously five years) in China is exempt from income tax if such income is neither sourced in China nor paid by a Chinese enterprise or individual. The difference with the previous practice however is that the foreign individual will as of 1 January 2019 be required to disclose his/her worldwide salary in the income tax return. Under the policy applicable till 1 January 2019, the individual was required to disclose only his/her local salary income. Tax collection and administration requirements relating to special additional deductions are regulated. In principle, foreigners working in China will qualify as tax resident if they are in China for more than six months (previously, the threshold was one year). On 20 October 2018, the Ministry of Finance (MoF) and the State Administration of Taxation (SAT) jointly published the draft revised implementation rules on the Individual Income Tax Law on their respective websites for public consultation. The following implementation rules were revised: o the scope of taxable income for individual residents who do not have a domicile in China; o the scope of income sourced from China; o provisions on taxable income, including income from production and business operations, deemed income from transfer of property, special deductions, the method used to calculate the taxable income sourced from foreign jurisdictions and the credit method applied to foreign income; o introduction of anti-avoidance measures; and o tax collection and administration requirements. Rules on withholding individual income tax released On 19 December 2018, the State Administration of Taxation (SAT) issued a notice (SAT Public Notice [2018] No. 56) announcing the computation methods of withholding individual income tax (IIT) on wages and salaries, personal services, author s remuneration and royalties derived by individuals. The Notice will apply from 1 January 2019 and the details are set out below. Those who make payments of wages and salaries, payments for personal services, fees for copyrights and royalties to resident individuals must act as withholding agents, withhold IIT and file the return. Where the IIT payable calculated based on the annual income is different from the IIT withheld, the individual must file the annual withholding IIT return and settle the final tax liability during the period from 1 March to 30 June of the following year. Depending on the outcome of the final tax settlement, the taxpayer may have to pay a supplement due to underpayment or claim a refund because of overpayment. When paying wages and salaries, a withholding agent is required to use the so-called accumulative method in computing withholding tax on a monthly basis, and file the return for all employees. The accumulative method is as follows: withholding tax payable for the current period = (accumulated withholding taxable income x withholding rate the quick calculation deduction) accumulated tax deduction accumulated withholding tax paid. Accumulated withholding taxable income = accumulated income accumulated exempt income accumulated standard deduction accumulated special deduction accumulated special additional deductions accumulated other lawful deductions. When paying personal services income, author s remuneration or royalties, a withholding agent is required to withhold IIT on a per payment basis or on a monthly basis. The taxable income is determined as follows: o the difference between revenue per payment and expenses is considered to be taxable income from personal services, author s remuneration or royalties; however, only 70% of author s remuneration is included in this income; o CNY 800 may be deducted as expenses in cases where the payment at a time does not exceed CNY 4,000; and o where each payment is more than CNY 4,000, 20% of the revenue may be deducted as expenses. Personal services income is subject to progressive withholding tax rates ranging from 20% to 40% whereas author s remuneration or royalties are subject to a flat withholding tax rate of 20%. For payments to non-residents, when paying the four items of income mentioned above, a withholding agent is required to withhold the IIT on a per payment basis or on a monthly basis. The taxable income for each item of income is calculated as follows: o Wages and salaries: wages and salaries of the employee minus CNY 5,000 per month; o Personal services income and royalties: each payment minus 20% of the payment; and o Author s remuneration: 70% of the payment after deducting 20% of the payment. Three withholding tax tables are included in the Notice, two for residents and one for non-residents. 6 Asia Tax Bulletin MAYER BROWN 7

5 China (PRC) cont d Withholding tax deferral on dividends/profits reinvested by non-resident investors On 29 October 2018, the State Administration of Taxation (SAT) issued SAT Public Notice [2018] No. 53 providing further rules in respect of Circular [2018] No. 102 regarding the deferral of withholding tax on dividends/ profits reinvested by non-resident investors. The Notice applies retroactively from 1 January 2018 and replaces Notice [2018] No. 3 on the same date. The Notice clarifies the implementation issues of Notice [2018] No. 3 as discussed below. The withholding tax deferral applies to foreign investment in all industries and sectors that are not prohibited under Chinese law and regulations. The following situations are treated as having fulfilled the conditions of the deferral as described under Circular [2018] No. 102: o the non-resident investor uses the distributed dividends or profits to pay up the subscribed shares, or increase the share capital or mandatory company reserves; and o a designated deposit account for reinvestment in CNY is used to transfer the payment from the bank account of the company distributing the dividends/profits (hereafter referred to as the distributing company) to that of the invested company for the purposes of reinvestment which is eligible for the tax deferral. If the deferred withholding tax needs to be recouped by the tax authority, the non-resident investor may apply the withholding tax rate provided in the tax treaty applicable at the time that the dividends or profits are distributed unless a later tax treaty provides otherwise. The non-resident investor that enjoys the withholding tax deferral treatment must file the Reporting Form on Information of Withholding Tax Deferral by Non- Resident Enterprise with the distributing company. The form which is included in Circular [2018] No. 102 is an attachment. The distributing company is required to examine the information submitted by the nonresident investor and implement the withholding tax deferral upon confirmation of the correctness and completeness of the information. Furthermore, the company implementing the tax deferral must submit the following documents to the competent tax authority within seven days after the dividend/profits distribution: o Reporting Form on Withholding of Enterprise Income Tax completed by the distributing company; and o Reporting Form on Information of Withholding Tax Deferral by Non-Resident Enterprise submitted by the non-resident investor and supplemented by the distributing company. In cases where an equity interest of a non-resident investor is disposed of and that disposed interest comprises both the tax deferred interest and interest that has never enjoyed tax deferral treatment, the entire disposed interest must be treated as tax deferred interest. A foreign investor or distributing company may appoint a tax agent to handle the tax deferral by filing the matter with the relevant tax authority. e-commerce On 21 November 2018, the Ministry of Finance reported on its website that the State Council had decided to extend and improve the policy on the import of retail goods through e-commerce. From 1 January 2019, the current administrative policy on import through e-commerce, which is not subject to import permits, registration or filing, will be continued. Such import will continue to be treated, administratively, as import by individuals for personal use. Furthermore, the current policy will be extended from 15 cities to 22 cities, including Beijing, Shenyang, Nanjing, Wuhan, Xian and Xiamen. Other cities may introduce the same policy for import through direct purchase. The number of goods eligible for zero customs duty and partial exemption from import VAT and consumption tax will be increased by 63 products, with the current tax incentives being amended. At present, import VAT and consumption tax are imposed on 70% of the taxable amounts, with import duty being zero if the value of a single import transaction does not exceed CNY 2,000 (USD 290) and the annual amount of total transactions conducted per person is less than CNY 20,000. From 1 January 2019, these limits will be increased to CNY 5,000 and CNY 26,000, respectively. As part of the decision, it was also announced that export through e-commerce will be promoted further, and the related input tax (VAT) refund on export will be studied in more detail. The State Council also called for the further development of logistics and information infrastructure for e-commerce purposes. Tax exemptions on export of retail goods through integrated cross-border e-commerce pilot zone On 28 September 2018, the Ministry of Finance (MoF), the State Administration of Taxation (SAT), the Ministry of Commerce and the General Administration of Customs jointly issued a circular (Cai Shui [2018] No. 103) exempting the export of retail goods through the cross-border e-commerce comprehensive pilot zone from value-added tax (VAT) and consumption tax. The circular takes effect from 1 October According to the circular, if the exporting enterprise is unable to present the relevant input (purchase) documents relating to the retail goods exported through an integrated e-commerce pilot zone, the exemption from VAT and consumption tax will still apply, provided that the following conditions are satisfied: the exporting enterprise has registered the export date, cargo name, unit of measurement, quantity, unit price and amount of the transaction at the cross-border e-commerce service platform; the exporting enterprise has settled the customs procedures for the declaration of e-commerce export with the customs authority based in the integrated pilot zone; and the exported goods are not sanctioned by the MoF or SAT as goods not eligible for the export VAT refund (exemption). Import duties and VAT exemption on key technical equipment On 14 November 2018, the Ministry of Finance (MoF), the National Development and Reform Commission, the Ministry of Industry and Information Technology, the General Administration of Customs, the State Administration of Taxation (SAT) and the Energy Bureau jointly issued a circular adjusting the exemptions for key technical equipment (Circular MoF, Customs and SAT [2018] No. 42). All adjustments will apply as from 1 January A list of key technical equipment and products supported by the State and a list of imported key parts and raw materials for key technical equipment and products are included in the circular as Annex 1 and Annex 2, respectively. Both lists will be effective from 1 January Import of the equipment and products listed in Annexes 1 and 2 by domestic enterprises meeting the prescribed conditions will be exempt from import duties and import value-added tax. The tax exemption for equipment such as the 1 million kilowatt nuclear power unit (second generation improved nuclear power unit) will be repealed from 1 January Projects and enterprises, including encouraged domestic and foreign investment projects, foreign loan projects, foreign equipment imported for processing trade enterprises without consideration, foreign-invested projects in the central and western regions, and foreigninvested enterprises/research centres established by foreign investors using their own funds for technological transformation projects, will be subject to import duties on equipment and spare parts for own use as listed in Annex 3, 8 Asia Tax Bulletin MAYER BROWN 9

6 China (PRC) cont d provided that the projects are approved on or after 1 January 2019 and enjoy the preferential tax policy. The Circular on the Adjustment of the Catalogue of Import Tax Policies for Major Technical Equipment (MoF, Customs and SAT Circular [2017] No. 39) will be abolished on 1 January Adjustments to customs duties for 2019 On 22 December 2018, the Customs Tariff Commission of the State Council issued adjustments to customs duties (Shui Wei Hui [2018] No. 65). The adjusted tariffs generally apply from 1 January According to the adjustments, 706 commodities are subject to provisional most-favoured nation tariffs. As from 1 July 2019, the tariffs on 14 information technology (IT) products will be abolished and the scope of application of one provisional import duty will be narrowed down. Tariffs on the IT products listed in the Amendments to WTO Tariff Concessions Schedule of the People s Republic of China will be further reduced from 1 July Tariffs will also be reduced based on trade or customs agreements with other countries or jurisdictions, and zero tariffs on some products originating in Hong Kong and Macau will be fully implemented. Conforming to the Asia- Pacific Trade Agreement, the preferential tariffs under the Asia-Pacific Trade Agreement are further reduced. Furthermore, export duties are imposed on 104 products, such as ferrochromium, and export duties on 94 products are abolished. There are no changes in tariff quota rates. The following tables are included in the publication: provisional tariffs for import products; most-favoured nation tariffs for certain IT products; tariffs for products subject to quota; tariffs for export products; and tariffs for import products based on international agreements. VAT export refund rates adjusted On 22 October 2018, the Ministry of Finance (MoF) and the State Administration of Taxation (SAT) jointly issued a circular (Circular [2018] No. 123) (the Circular) announcing the new VAT refund rates for the export of certain products. Details of the Circular, which applies from 1 November 2018, are summarised below. VAT refund rates for photographic paper and film, plastic products, bamboo flooring, wild vetch knitting, tempered safety glass and lamps have been increased to 16%; those for lubricants, aircraft tyres, carbon fibre and some types of metal products to 13%; and those for some types of agricultural products, bricks, tiles and fibreglass to 10%. VAT refunding for the export of bean pulp has been repealed. In addition, VAT refund rates for products other than those referred to above have been increased as follows: o for products to which a refund rate of 15% applied before 1 November 2018, to 16%; o for products to which a refund rate of 9% applied before 1 November 2018, to 10%; and o for products to which a refund rate of 5% applied before 1 November 2018, to 6%. Deduction of liability insurance premiums On 31 October 2018, the State Administration of Taxation (SAT) issued a public notice (SAT Public Notice [2018] No. 52) stating that insurance premiums paid by entities for employer liability insurance and public liability insurance are deductible for corporate income tax purposes. This notice applies to the settlement of corporate income tax for 2018 and subsequent years. Temporary exemption for interest on bonds derived by foreign institutions On 7 November 2018, the Ministry of Finance and the State Administration of Taxation issued Circular [2018] No. 108 announcing that interest on bonds derived by foreign institutions from the Chinese bond market is temporarily exempt from enterprise income tax and value-added tax from 7 November 2018 to 6 November The circular states, however, that this temporary exemption does not apply to interest on bonds derived by Chinese establishments or sites of foreign institutions where that interest is effectively connected with such an establishment or site. International Tax Developments India On 26 November 2018, China and India signed an amending protocol to update the China-India Income Tax Treaty in New Delhi. The protocol updates, inter alia, the existing provisions for exchange of information to the latest international standards and incorporates the changes required to implement treaty-related minimum standards under the Action reports of the Base Erosion and Profit Shifting (BEPS) Project. Argentina On 2 December 2018, China signed a double tax treaty with Argentina in Buenos Aires. Angola On 9 October 2018, Angola and China signed a tax treaty in Beijing. Singapore On 12 November 2018, China and Singapore signed an amending protocol, to update the 2008 free trade agreement (FTA) between the two countries, in Singapore. The FTA was signed on 23 October 2008 and entered into force on 1 January Spain On 28 November 2018, China and Spain signed a tax treaty in Madrid. Once in force and effective, the new treaty will replace the current tax treaty. 10 Asia Tax Bulletin MAYER BROWN 11

7 Hong Kong Inland Revenue (Amendment) (No. 7) Bill 2018 gazetted The Inland Revenue (Amendment) (No. 7) Bill 2018 was gazetted by the government on 2 November By amending the Inland Revenue Ordinance, the Bill seeks to: align the tax treatment of financial instruments with their accounting treatment; allow the deduction of interest expenses payable to overseas export credit agencies; refine the provisions that implement the arrangement for automatic exchange of financial account information in tax matters (AEOI); avoid potential double non-taxation of income of visiting teachers and researchers arising from the introduction of tax exemption for teachers and researchers in tax agreements signed by Hong Kong; and revise the definition of the sibling relationship to cover some cases related to adopted persons in determining the eligibility for the dependent brother or dependent sister allowance. The Amendment Bill was introduced into the Legislative Council on 14 November Tax deduction of qualifying premium for eligible health insurance products On 31 October 2018, the Inland Revenue (Amendment) (No. 4) Bill 2018 was passed by the Legislative Council. The new Ordinance gives effect to a concessionary tax measure proposed in the Budget. Under the new arrangement, with effect from 1 April 2019, a taxpayer can claim tax deductions under salaries tax and personal assessment for the Voluntary Health Insurance Scheme (VHIS) premiums procured for the benefit of the taxpayer and all specified relatives (including the taxpayer s spouse and the children, parents, grandparents and siblings of the taxpayer s spouse). The annual tax ceiling of premiums for tax deduction is HKD 8,000 per insured person. Individual income tax treatment of gains on disposal of listed shares On 30 November 2018, the Ministry of Finance (MoF), the State Administration of Taxation (SAT) and the Securities Regulatory Commission jointly issued a circular (Circular [2018] No. 137) clarifying the individual income tax treatment of gains on the disposal of shares of companies listed on the NEEQ (the National Equities Exchange and Quotation). The NEEQ, also known as the New Third Board, is China s third national stock market following the Shanghai and Shenzhen Stock Exchanges. The NEEQ is an over-the-counter market that mainly serves innovative, entrepreneurial and growthoriented small-to-medium enterprises. According to the circular, from 1 November 2018, gains derived by individuals from the disposal of non-founder shares of NEEQ-listed companies are exempt from individual income tax, whereas gains derived by individuals from the disposal of founder shares remain subject to individual income tax as income from transfer of property at a rate of 20%. Founder shares are shares issued at the time the company is listed on the NEEQ. Before 1 September 2019, transferees of shares are required to withhold the tax, but from 1 September 2019, the security agencies holding the security account of the disposed shares will be responsible for withholding the tax. The concrete collection measures refer to those laid down in Circular [2009] No. 167 and Circular [2010] No. 70 with respect to restricted shares (i.e. shares issued when an enterprise is converted into a limited liability company or in the case of an initial public offering, and in both cases the shares are not permitted to be transferred within a certain timeframe). The China Securities Depository and Clearing Corporation Limited (CSDC) must clearly distinguish between founder and non-founder shares within the registration and settlement system. The CSDC and security agencies are required to actively cooperate with the tax authorities in the tax collection. Exemption of gains derived by individuals from Hong Kong mutual funds On 17 December 2018, the Ministry of Finance, the State Administration of Taxation and Securities Regulatory Commission jointly issued a circular (Circular [2018] No. 154) continuing the individual income tax exemption with respect to gains derived by individuals from the trading of units in a recognised Hong Kong mutual fund (investment fund). The exemption was initially granted by Circular [2015] No. 125 for the period from 18 December 2015 to 17 December Circular [2018] No. 154 has extended this exemption until 4 December Tax credits against salaries tax The Inland Revenue (Amendment) (No. 6) Ordinance 2018 (the Amendment Ordinance), enacted on 13 July 2018, was gazetted by the government on 26 October Among other things, the Amendment Ordinance provides the following new requirements relating to double taxation relief: the relief under section 8(1A)(c) of the Inland Revenue Ordinance (Cap. 112) (IRO) does not apply to income derived by a taxpayer from services rendered in a territory with which Hong Kong has concluded a tax treaty or arrangement (the treaty). For income derived from services rendered in such a territory, the taxpayer will be entitled to claim credit in respect of foreign tax payable on the income under section 50 of the IRO; the relief under section 8(1A)(c) or foreign tax credit granted under section 50 of the IRO must not exceed the relief that would be allowed had the taxpayer taken reasonable steps to minimise his/her foreign tax liability under the laws of the foreign territory or the treaty concerned; and if the relief under section 8(1A)(c) or tax credit under section 50 of the IRO is granted to a taxpayer and, subsequently, such relief or credit becomes excessive as a result of an adjustment to his/her foreign tax liability, the taxpayer is required to issue a written notice to the Commissioner within three months after the adjustment is made. The above requirements apply to salaries tax payable for the year of assessment beginning on or after 1 April 2018 (i.e. from 2018/19 onwards). Tax exempt funds in Hong Kong On 5 November, the Financial Services and Treasury Bureau ( FSTB ) released a briefing paper for the Legislative Council Panel on Financial Affairs (the Briefing Paper ), outlining its proposed changes to the HKPT funds exemption. The Briefing Paper builds on the FSTB s earlier work, having taken into consideration the industry s feedback to its original consultation paper released in May Based on the latest proposals, the tax exemption would apply to all funds operating in Hong Kong, regardless of the structure under which they are established or their location of central management and control. This is a positive step forward in modernising Hong Kong s fund regime, ensuring Hong Kong remains a competitive player in the asset and wealth management industry. It also demonstrates Hong Kong s commitment to adhering to the OECD s BEPS project and specifically, addresses the European Union s ring-fencing concerns (i.e. the discrimination features inherent in the current funds tax exemption regime for Hong Kong entities at both the fund and investment level). The proposals contain three key changes: 1. Both offshore and onshore funds will be able to enjoy the tax exemption, subject to satisfying certain conditions including the definition of a fund. As currently drafted, the definition of a fund includes sovereign wealth funds, but further discussion is needed to confirm that pension funds and funds of one are included. 12 Asia Tax Bulletin MAYER BROWN 13

8 Hong Kong cont d 2. Gains derived by a fund on the disposal of shares in both offshore and onshore private companies can enjoy the HKPT funds exemption, provided that they meet the immovable property test and holding period test. Where the holding period test cannot be satisfied, a substitute short-term asset test can be applied instead. 3. Tainting will be removed so that a fund will not lose its tax exemption and instead only be subject to HKPT on profits from non-qualifying transactions. There are a number of questions that need to be clarified (e.g. the definition of a fund ). Nonetheless, it is certainly an encouraging step forward in developing Hong Kong s onshore platform for private equity funds. The Inland Revenue (Profits Tax Exemption for Funds) (Amendment) Bill 2018 was gazetted by the government on 7 December 2018 to provide profits tax exemption for eligible funds operating in Hong Kong. Under the current Inland Revenue Ordinance (IRO), both onshore and offshore public offered funds are exempted from profits tax. For private offered funds, only offshore funds and onshore privately offered open-ended fund companies are exempted from profits tax. Other onshore private offered funds cannot enjoy profits tax exemption like their offshore counterparts. By introducing new and self-contained provisions in the IRO, the Bill aims to ensure that all funds operating in Hong Kong, regardless of their structure, location of central management and control, size or the purpose that they serve, can enjoy profits tax exemption from their transactions in specified assets subject to certain conditions. A fund can also enjoy profits tax exemption from its investment in both overseas and local private companies. To minimise the risk of tax evasion, the Inland Revenue Department will put in place certain anti-abuse measures, including certain requirements on a fund s investment in private companies in relation to holding of immovable property and assets, as well as holding period. In addition, the current anti-round tripping provisions for resident persons will be retained. The Bill was introduced into the Legislative Council on 12 December Tax deductions for annuity premiums and MPF voluntary contributions The Inland Revenue and MPF Schemes Legislation (Tax Deductions for Annuity Premiums and MPF Voluntary Contributions) (Amendment) Bill 2018 was gazetted by the government on 7 December The Bill seeks to implement the Budget initiative of introducing tax deductions for deferred annuity premiums and Mandatory Provident Fund Tax Deductible Voluntary Contributions (MPF TVCs) to encourage voluntary savings for retirement. The maximum tax-deductible limit on contributions to MPF TVCs and deferred annuity premiums for each taxpayer will be HKD 60,000 per year. A joint assessment for couples will be allowed to claim a total deduction of HKD 120,000, provided that the deductions claimed by each taxpayer do not exceed the individual limit of HKD 60,000. The Bill was introduced into the Legislative Council on 12 December R&D expense deductions enhanced The Inland Revenue (Amendment) (No. 3) Bill 2018 (Amendment Bill) passed its third reading in the Legislative Council on 24 October 2018 after one minor amendment and has become new law to grant enhanced tax deductions for qualifying research and development (R&D) activities carried out in Hong Kong. The new R&D tax deduction regime has retrospective effect for R&D expenditure incurred on or after 1 April The old section 16B has been substituted by a new section 16B and Schedule 45 which sets out the details of the deduction. Under the enhanced R&D deduction regime, R&D expenditures are classified into two types: type A expenditure qualifies for a basic 100% tax deduction whereas type B expenditure qualifies for the enhanced twotiered tax deduction (300% tax deduction for the first HK$2 million and 200% for the remaining amount), subject to meeting certain conditions. The tax deduction for type A expenditures is largely the same as the deduction under the old section 16B while type B expenditures will qualify for enhanced deduction. In simple terms, type B expenditures refer to qualifying expenditures on qualifying R&D activities wholly undertaken and carried on in Hong Kong. To qualify for type B expenditure, the following conditions must be met: a) the expenditure arises from an activity that falls into the definition of a qualifying R&D activity and related to the trade, profession or business; and b) the expenditure incurred falls into the definition of R&D expenditure. Qualifying R&D activity refers to the R&D activity that is wholly undertaken and carried on in Hong Kong and falls within one of the following: a) an activity in the fields of natural or applied science to extend knowledge; b) an original and planned investigation carried on with the prospect of gaining new scientific or technology knowledge and understanding; or c) the application of research findings or other knowledge to a plan or design for producing or introducing new or substantially improved materials, devices, products, processes, systems or services before they are commercially produced or used. Qualifying R&D expenditure that enjoys the enhanced twotiered deduction comprises: a) payment made to a designated local research institution; or b) in-house expenditure in relation to: (i) an employee engaged directly and actively in a qualifying R&D activity; or (ii) a consumable item that is used directly in a qualifying R&D activity. Expenditure in relation to an employee means any salary, wages, contributions to a recognised occupational retirement scheme/mandatory provident fund scheme and any other benefit that constitutes a cash outlay paid by the employer. Director s remuneration is specifically excluded. Three concessionary tax measures in Budget 2018/19 implemented The Inland Revenue (Amendment) (No.5) Bill 2018 was passed by the Legislative Council on 14 November It gives effect to three concessionary tax measures proposed in the Budget. These measures include, effective from the year of assessment 2018/19: allowing husband and wife the option of electing for personal assessment separately; allowing enterprises to claim a 100% tax deduction for capital expenditure incurred in procuring environmental protection installations in one year instead of over five years; and extending the scope of tax exemption for debt instruments under the Qualifying Debt Instrument Scheme. International Tax Developments Finland On 30 December 2018, the new Finland-Hong Kong Income Tax Agreement signed in 2018 entered into force. The agreement generally applies from 1 January 2019 for Finland and from 1 April 2019 for Hong Kong. From this date, the new agreement generally replaces the previous Finland- Hong Kong Transport Tax Agreement. 14 Asia Tax Bulletin

9 India Indonesia International Tax Developments China On 26 November 2018, China and India signed an amending protocol to update the China-India Income Tax Treaty in New Delhi. The protocol updates, inter alia, the existing provisions for exchange of information to the latest international standards and incorporates the changes required to implement treaty-related minimum standards under the Action reports of the BEPS Project. Hong Kong On 30 November 2018, the Hong Kong-India Income Tax Agreement, signed earlier in 2018, has entered into force. The agreement generally applies from 1 April Tax audits The Director General of Taxation (DGT) issued a tax circular SE-15/PJ/2018 regulating the tax audit selection and process in order to create more transparency in the conduct and selection of tax audits. It contains criteria for the selection (e.g. high indication of non-compliance and what noncompliance means). New tax treaty qualification requirements 1 In an effort to simplify and ease the administration of taxpayers, the Director General of Tax ( DGT ) has revised the procedure for applying tax treaty benefits. DGT Regulation No. 25/PJ/2018 ( DGT-25 ) was issued on 21 November 2018 and comes into effect 1 January DGT-25 revokes DGT Regulation No. 10/PJ/2017 ( DGT-10 ). DGT-25 revises the certificate of domicile form which is required in order to utilise tax treaty benefits. Highlights of the main changes are: Previously there were two forms (DGT-1 for non-banks and DGT-2 for banks and other financial institutions), now there is only one form ( DGT Form ). The foreign taxpayer need only submit the DGT Form once for the period stated in the form, and it is no longer attached to the tax return. The foreign taxpayer no longer has to provide details about the income earned. The DGT Form is valid for up to 12 months, and it is no longer based on the fiscal year. Under DGT-10, each transaction with a foreign taxpayer required that the DGT Form be attached to the relevant tax return in order to enjoy treaty benefits. If the DGT Form wasn t attached, the treaty benefit could not be utilised and the tax office would impose withholding tax at 20%, not the reduced tax treaty rate. The procedure has been simplified and under DGT-25 only one DGT Form must be obtained for up to a 12 month period, and it is not required to be attached to the return. The general procedure is summarised below: The form is completed by the foreign taxpayer and certified by the competent authority in the country where the foreign taxpayer resides. The Indonesian tax withholder submits the DGT Form to the DGT electronically and receives a receipt. The receipt is then given to the foreign taxpayer. The Indonesian withholder is required to prepare a withholding tax slip, even if there is no income tax payable, and submit a copy of the DGT Form receipt with the tax return. If the foreign taxpayer engages in transactions with more than one Indonesian withholder, it can provide a copy of the DGT Form receipt to the other/subsequent withholder(s) as evidence the DGT Form has been submitted in order to utilise a tax treaty benefit. In other words, a new DGT Form is not required for each withholder. 1 Courtesy Harsono Strategic Consulting in Jakarta. 16 Asia Tax Bulletin MAYER BROWN 17

10 Indonesia cont d Japan The new DGT Form is divided into seven sections: Part I Part II Part III Part IV Part V Part VI Part VII Details regarding the income recipient Certification by the competent authority or authorised tax office of the country of residence Declaration against treaty abuse by the income recipient which is a banking institution or pension fund Declaration against treaty abuse by an individual income recipient Declaration against treaty abuse by a nonindividual income recipient Beneficial ownership test for dividend, interest, royalty Declaration of residency status by the income recipient The sections to be completed are based on the status of the income recipient, as follows: Banks and pension funds: Parts I, II and III Individuals: Parts I, II, IV and VII Corporations/non-individuals: Parts I, II, V, VI and VII Note that the competent authority or authorised tax office of the income recipient s country of residence completes Part II. There must be no tax treaty abuse in order for the foreign taxpayer to take advantage of tax treaty benefits. The criteria for abuse are the same as in DGT-10, with one addition: there is no transaction arrangement with either the direct or indirect objective of obtaining a benefit under the treaty, such as to reduce the tax cost or result in no tax imposition in either country (double non-taxation), which is contrary to the intent and purpose of the tax treaty. In order for a foreign taxpayer to show no abuse of a tax treaty, it must demonstrate that it meets the requirements set out in DGT-25. This is shown by answering YES to questions 5-10 and NO to question 11 in Part V of the DGT Form. If the income earned is a dividend, interest or royalty, the recipient must be the beneficial owner (if required by the relevant tax treaty). The test for beneficial ownership is the same as before. However, there is one difference regarding the requirement that no more than 50% of corporate income shall be used to meet obligations to other parties. DGT-25 excludes, as an obligation to other parties, compensation granted (i) to employees that is given fairly and (ii) to other parties on other costs generally spent in running the business. However, dividends paid to shareholders are no longer specifically excluded from the 50% threshold. The reason for the change is unclear. It could be that a dividend, by its nature, is not compensation and, therefore, should not be regarded as an obligation to other parties. However, because dividends are no longer specifically excluded, the intention is unclear and arguably leaves this open to interpretation. For a corporation to demonstrate that it is the beneficial owner of the income, it must meet the criteria by answering NO to questions 1 and 5 and YES to questions 2-4 in Part VI of the form. International Tax Developments Singapore On 11 October 2018, Indonesia and Singapore signed an investment protection agreement (IPA) in Bali. Serbia On 13 December 2018, the Indonesia-Serbia Income Tax Treaty entered into force. The treaty generally applies from 1 January tax reform On 14 December 2018, the ruling coalition, i.e. the Liberal Democratic Party of Japan and Kōmeitō, announced the outlines of the 2019 tax reform plan. The background of the reforms and further details of the major reform items are set out below. Earnings stripping rules. Net interest payments will be subject to earnings stripping rules; however, interest payments taxable in Japan on the part of the recipient will be excluded from the scope of the earnings stripping rules. The ceiling for deductible interest payments will be reduced from 50% to 20% of adjusted income. Dividends received which are not taxable will be excluded from adjusted income. Transfer pricing. The discounted cash flow method will be added as an allowed method of calculating arm s length prices. The commensurate with income standard will be introduced for transactions involving hard-tovalue intangibles, and the tax authorities will have the ability to make pricing adjustments when the results of transactions of hard-to-value intangibles differ from initial projections. Controlled foreign company (CFC) rules. Certain categories of foreign related companies, including those whose principal business is the holding of subsidiary shares or real property, will be excluded from the scope of shell companies ( paper companies ) subject to CFC rules. Individual income tax. The duration of the mortgage deduction will be extended by three years, from 10 years to 13 years. Local car tax. The tax rates of the local car taxes imposed on the owners of cars will be reduced for cars registered on or after 1 October Corporate tax. With respect to tax credits for the total amount of R&D expenses, tax credit rates will be revised to enhance incentives to increase R&D expenses, and the tax credit ceiling of a certain category of start-up companies will be raised from 25% to 40% of corporate tax. Local corporate business tax. A special corporate business tax and a special corporate business transfer tax will be spun off from the local corporate business tax. Special corporate business taxes collected by prefectural governments will be paid to a special account in the national treasury. The amounts collected in this account will then be distributed among prefectural governments based upon prefectural population as special corporate business transfer tax. Information reference procedure. In response to the diversification and globalisation of economic activities such as those using cryptocurrency and other Internetbased trading methods, the tax authorities will have the ability to make information inquiries in a more effective manner to businesses and other entities on the condition that such inquiries are necessary to identify large-scale, malicious tax evaders. International Tax Developments USA On 12 October 2018, the Japan-United States Competent Authority Arrangement on the Exchange of Country-By- Country (CbC) Reports (2018), which was signed on the same date, entered into force. Spain On 16 October 2018, a new Japan-Spain Income Tax Treaty was signed in Madrid. Once in force and effective, the new treaty will replace the Japan-Spain Income Tax Treaty concluded in Asia Tax Bulletin MAYER BROWN 19

11 Japan cont d Korea Austria Colombia The amended DTT between Austria and Japan will enter info force as of 1 January The treaty offers interesting scope for Austrian companies holding Japanese subsidiaries. The treaty contains a full exemption of withholding tax on dividends, interest and royalties. Dividends are fully exempted if the beneficial owner of the dividends is either a company that has owned at least 10% of the voting power of the company paying dividends for at least six months or a pension fund. In other cases, a withholding tax rate of 10% applies. Only the state of residence of the seller has the right to tax capital gains. Austria has the right to tax certain gains from the disposal of shares in Austrian companies. After 31 December 2018, capital gains from the disposal of shares in Austrian companies are only taxable in Japan. Hidden reserves accrued before 1 January 2019 remain taxable in Austria. The new tax treaty applies to hidden reserves that accrue after 31 December Japanese shareholders that hold shares of at least 25% in Austrian companies should determine and document the fair market value of the shares in the Austrian company at 1 January Other changes relate to employment income and the introduction of an LOB clause in line with the MLI. Denmark On 27 December 2018, Japan s tax treaty with Denmark has entered into force. The treaty generally applies from 27 December 2018 for the provisions concerning exchange of information (article 25) and the assistance in the collection of taxes (article 26), and from 1 January 2019 for withholding and other tax matters. Interestingly, the treaty provides for arbitration. Bahamas On 12 December 2018, the amending protocol, signed on 9 February 2017, to the Bahamas-Japan Exchange of Information Agreement entered into force. The protocol generally applies from 1 January On 19 December 2018, Colombia and Japan signed a tax treaty in Tokyo. Belgium On 19 January 2019, the Belgium-Japan Income Tax Treaty will enter into force. The treaty generally applies from 1 January From this date, the new treaty generally replaces the previous tax treaty between the two countries. In addition, an individual who is entitled to the benefits of article 20 of the Belgium-Japan Income Tax Treaty (1968), as amended by the 1988 and 2010 protocols, at the time of the entry into force of this treaty shall continue to be entitled to such benefits until such time as the individual would have ceased to be entitled to such benefits if the prior treaty had remained in force. EU On 1 February 2019, the economic partnership agreement (EPA) between the European Union and Japan, signed on 17 July 2018, will enter into force. Beneficial ownership under tax treaties 2 Many foreign investors would agree that the General Anti- Avoidance Rule ( GAAR ), such as the substance-over-form principle in Korean law, has been utilised too frequently and too aggressively by the Korean tax authorities to the point where it has deterred foreign investment. Considering the frequently referenced French retail company case in 2014, where the Korean tax authority denied an application of the capital gains tax exemption under the Korea-Netherlands tax treaty for capital gain realised by a Dutch holding company of the French retail company, and the French energy company case in 2016, where the Korean tax authority denied the application of the reduced withholding tax rate under the Korea-UK tax treaty for dividends received by a UK holding company of a French energy company, the Korean tax environment for foreign investors is often viewed as not being at par with the general perception of treaty application among foreign investors. However, by holding in favor of the taxpayer in the subject case, the Korean Supreme Court is now showing a balanced view in the realm of tax treaty application for foreign investors. In the case at issue, the Korean tax authorities applied the GAAR to a company in the IP industry and the Supreme Court was successfully persuaded that a foreign company receiving royalties from a Korean company should be respected as beneficial owner and not be denied tax treaty benefits even if the relevant tax treaty provides for zerowithholding at source for royalty payments. The instant case involved royalties paid by a Korean entertainment company to an unrelated Hungarian company, which licensed the right to broadcast movies 2 Courtesy Kim & Chang in Seoul. and films created by a Hollywood film/entertainment company. The Hungarian company was established as a result of a corporate restructuring, which took place not long before the execution of said license agreement, and due to the tax treaty between the Republic of Korea and Hungary, the royalties received by the Hungarian company were free from withholding tax in Korea (prior to the restructuring, the royalties were paid to a Dutch company and subject to a 15% withholding tax). The Korean tax authority argued that (i) the Hungarian company was established in order to take advantage of the Korea-Hungary tax treaty and should be denied tax treaty benefits under the Korean GAAR, and (ii) the Hungarian company failed to meet the requirements provided under the tax treaty in order to be treated as the beneficial owner of the royalty income. Despite the tendency to disfavour the taxpayer in situations where an entity is recently established and happens to enjoy an advantageous tax treaty (this was in fact the lower courts holding in the instant case), the Supreme Court reversed the lower court s ruling that the Hungarian company was merely a conduit for purposes of tax treaty application. The Supreme Court reasoned, among others, that the mere fact that there were tax benefits due to the relevant tax treaty should not serve as basis for denying beneficial ownership status of a foreign entity that was otherwise genuinely engaged in business activities in line with the entity s business purpose and that the beneficial ownership status of the foreign entity under the relevant tax treaty should be honoured despite the Korean GAAR because the foreign entity substantively owned, i.e., had the ability to and actually did manage and control, its license rights and the income received therefrom. 20 Asia Tax Bulletin MAYER BROWN 21

12 Korea cont d Malaysia This recent case stands for the proposition that, at least at the Supreme Court level, when properly argued and represented, a court should treat disputes regarding beneficial ownership status more in line with OECD principles, potentially providing more certainty for foreign licensors and investors doing business in Korea or with other Korean entities. Tax reform On 8 December 2018, the National Assembly approved the 2019 tax reform bill. Most of the tax proposals were passed without modifications. However, a summary of some of the major changes to the approved tax reform bill is given below. Expansion of scope of electronic services provided by a foreign enterprise or non-resident. The earlier proposal includes cloud computing services within the scope of electronic services. Under the current approved bill, the scope has been expanded to include advertising placement services and intermediary services. Expansion of scope for accelerated depreciation. Qualifying assets such as research and development (R&D) facilities and facilities for commercialisation of new-growth technology will be allowed up to a 50% tax deduction of the standard useful life of the asset concerned. This accelerated depreciation incentive has been expanded to include small and medium-sized enterprises (SMEs), being effective from 1 July 2018 to 31 December Increased capital gains tax rate for SME shareholders postponed. The increase in capital gains tax on the gains from the transfer of shares, from 20% to 25%, for large shareholders in SMEs has been postponed until 1 January Expansion of scope and extension of tax incentives for enterprises returning to Korea. Large enterprises enjoy tax incentives for relocating their overseas businesses back to Korea. The existing tax exemption rates of 100% for the first three years and 50% for the subsequent two years will be extended to qualifying enterprises located in certain metropolitan areas. Qualifying enterprises located in non-metropolitan areas will be entitled to 100% tax exemption for the first five years and 50% for the subsequent two years. SMEs and qualifying large enterprises will also be entitled to customs duty reduction on capital goods imported into Korea, effective from 1 January 2019 to 31 December International Tax Developments Peru On 1 January 2019, the Social Security Agreement between Korea and Peru entered into force. The agreement generally applies from 1 January Argentina On 27 November 2018, Argentina and Korea signed a social security agreement in Buenos Aires. Costa Rica On 13 November 2018, the Costa Rica-Korea Exchange of Information Agreement entered into force. The agreement generally applies from 13 November 2018 for criminal tax matters and from 1 January 2019 for all other tax matters. Croatia On 18 December 2018, Croatia and Korea signed a social security agreement in Seoul. Budget tax changes for 2019 Corporate tax changes: Income derived from intellectual property will be tax-free for five years to encourage innovation and entrepreneurship. The existing double tax deduction policy pertaining to additional expenditure for the issuing of certain bonds and sukuk will be extended. Companies that are operating in the business of producing environmentally friendly plastic materials based on bio-resin and biopolymer will be entitled to obtain pioneer status or investment tax allowance incentives. Carry-forward of business losses and allowances including unutilised allowances from tax incentives such as reinvestment allowance, investment tax allowance and pioneer losses is now capped at seven years. At present, there is no time limit on the carrying forward of business losses and allowances for these tax reliefs or incentives. The existing tax exemption on interest earned on wholesale money market funds will expire on 31 December The election of a Labuan entity to be charged tax of MYR 20,000 under the Labuan Business Activity Tax Act will be abolished. Individual income tax changes: The currently combined tax relief for EPF contributions and life insurance or takaful deductions of MYR 6,000 per annum will be separated into two separate categories of deduction: EPF contributions (up to MYR 4,000) and takaful or life insurance premiums (up to MYR 3,000). First-time home buyers with household income up to MYR 5,000 per month will be entitled to stamp duty exemption on legal agreements for homes worth up to MYR 300,000 for a period of two years until December First-time home buyers buying a property priced between MYR 300,000 and MYR 500,000 will enjoy stamp duty exemption for the first MYR 300,000. This is applicable to sales and purchase agreements entered into between 1 January 2019 and 31 December Deduction for net savings in the National Education Saving Scheme will be increased from MYR 6,000 to MYR 8,000. Households with children aged below 18 years (limited to four children) or disabled children will be entitled to an additional deduction of MYR 120 per child. Indirect tax changes: Sales and service tax Imported services such as architecture, graphic design, information technology (IT) and engineering design services will be subject to service tax to ensure a fair level playing field for domestic suppliers. Sales and services tax (SST) exemptions will be granted to specific services provided by registered businesses to other registered businesses. A credit system will be introduced for sales tax deduction from January 2019 to avoid double taxation and to lower business costs. Small manufacturers who purchase materials from importers instead of registered factories will be entitled to a special tax cut credit system. Importation of online services such as software, music, videos or any digital advertising by domestic users will be required to register with the Customs Department. This measure is proposed to take effect from 1 January Asia Tax Bulletin MAYER BROWN 23

13 Malaysia cont d Other indirect taxation Stamp duty on property transfers worth more than MYR 1 million will be increased from 3% to 4%. Excise duty on sugared or sweetened beverages will be introduced effective from 1 April A levy of MYR 20 and MYR 40 will be imposed on Malaysian passengers travelling overseas to ASEAN countries and other countries respectively. This measure is aimed at passengers travelling via air routes, effective from 1 June Tax administration and other measures: The Malaysian Inland Revenue Board (IRB) will scrutinise and investigate unexplained extraordinary wealth received by individuals such as owning luxurious goods including jewellery, watches, handbags, luxury cars or real estate. A Special Voluntary Disclosure Programme will be introduced to provide an opportunity for taxpayers to voluntarily declare any unreported income. From 3 November 2018 to 31 March 2019, the tax penalty will be reduced to 10% of the tax payable for those who declare their unreported income. The penalty rate will be increased to 15% for those who make a declaration between 1 April 2019 to 30 June 2019 and it will increase to between 80% to 300% after 30 June Real property gains tax The real property gains tax rate on property owned for more than five years for companies, non-citizens and non-permanent residents will be increased from 5% to 10%. For citizens and permanent residents, the tax rate will be increased from 0% to 5%. Other measures To encourage employers to hire employees who are aged 60 years or older, the following incentives are proposed: o o mandatory employees provident fund (EPF) contributions from employers will be reduced from 6% to 4% for employing employees aged 60 year or older. This group of employees will also be exempted from contributing their share to the EPF; and tax incentives will be provided to companies that hire senior citizens with a minimum salary of MYR 4,000 a month. Capital Markets and Services (Prescription of Securities) Guidelines will be gazetted in early 2019 to monitor digital coins and token exchanges. Further to the announcement of Budget 2019, the Income Tax (Amendment) Bill 2018, the Labuan Business Activity Tax (Amendment) Act 2018 and Income Tax (Amendment) Bill 2018 were tabled in Parliament on 19 November The salient points from these bills are as follows and will be effective from 1 January 2019 unless stated otherwise. Only 3% of any payments made to Labuan companies will be allowed as deduction. Business losses and allowances will be allowed to be carried forward for seven years only. For a transitional period, any business losses or allowances incurred in or before the year of assessment (YA) 2018 will be allowed to be utilised by YA Any income derived from a place of business in Malaysia will be deemed derived from Malaysia and subject to tax. Such definition resembles the international term permanent establishment under the OECD Model Convention Service tax will be imposed on imported taxable services in addition to the withholding tax that may be applicable on such imported services. The scope of withholding tax on technical fees under section 4A(ii) of the Income Tax Act 1967 (ITA 1967) has now been expanded to include both technical and nontechnical services. Transfer pricing rules will apply to transactions between persons connected by a minimum shareholding of at least 20% (subject to conditions). The income of a foreign fund management company from the provision of fund management services to a foreign investor will be increased from 10% to 24%, effective from YA Public Ruling 12/2018 on income from letting of real property On 19 December 2018, the Inland Revenue Board of Malaysia (IRBM) issued Public Ruling (PR) 12/2018. PR 12/2018 provides explanation and examples of income from the letting of real property under both a business and non-business source. This PR replaces PR 4/2011 that was issued on 10 March Generally, the contents of PR 12/2018 remain mostly unchanged with the previous PR, except for rental income received in advance. Paragraph 9.2 is amended to clarify that rental income received in advance under a non-business source (section 4(d) of the Income Tax Act 1967 (ITA)) will be assessed in the basis period in which it is received. Any expenses incurred in relation to such advance rental income in the subsequent year of assessment(s) (YA) will be allowable and an amendment has to be made to the assessment for the YA concerned. Similar to paragraph 9.2, paragraph 9.3 is newly added to clarify the advance rental income received under a business source (section 4(a) of the ITA). Such rental income would be taxed in the basis period it is received. Any expenses incurred in relation to such advance rental income in the subsequent YA will be allowed for a deduction (subject to section 33 of the ITA). Taxation of unit holders of REITs/PTFs On 12 October 2018, the Inland Revenue Board of Malaysia (IRBM) issued a public ruling (PR) on the taxation of unit holders of real estate investment trusts (REITs)/property trust funds (PTCFs), which replaces previous PR 7/2012 of 29 October 2012 with the same title. The contents of the PR remain mostly unchanged compared with the previous PR. Among its salient points, the updated PR provides that if a tax-exempt unit holder receives a distribution of income from an REIT/PTF that is subject to withholding tax, the unit holder is entitled to a refund of the amount of tax paid. Tax incentives for investment in bionexus status company On 4 December 2018, the Inland Revenue Board of Malaysia (IRBM) issued Public Ruling 10/2018 (PR 10/2018). PR 10/2018 basically provides details and examples of the tax treatment of investors investing in an approved bionexus status company (BSC) and has to be read in conjunction with previously issued PR 8/2018. As a rule, an investor in a BSC will be allowed a tax deduction on the amount of the actual value of the investment made in the BSC from its business source income. Some of the conditions that the investor has to meet to obtain the tax deduction are as follows: the investment must be made between 1 January 2016 and 31 December 2020; the investment value must be approved by the Minister of Finance; and the sole purpose of financing activities at the initiation of commercialisation stage of a new business must be approved by the Minister of Finance. 24 Asia Tax Bulletin MAYER BROWN 25

14 Malaysia cont d Philippines Income tax exemption for Islamic banking On 5 October 2018, the Income Tax (Exemption) (No. 3) Order 2018 was gazetted. It provides an income tax exemption for the Islamic banking and takaful business and qualifying ringgit accounts. A qualifying ringgit account is defined as an investment account denominated in ringgit Malaysia relating to the business of a qualifying person and approved by the Central Bank of Malaysia. Qualifying persons include: an international currency business unit that is part of: o an Islamic bank licensed under the Islamic Financial Services Act 2013 that carries on Islamic banking business in any currency other than ringgit Malaysia; o a licensed institution authorised under the Financial Services Act 2013 that carries on Islamic banking business in any currency other than ringgit Malaysia; or o a licensed takaful operator under the Islamic Financial Services Act 2013 that carries on takaful business in any currency other than ringgit Malaysia; an international Islamic bank licensed under the Islamic financial services Act 2013 carrying on Islamic banking business in any currency other than ringgit Malaysia; and an international takaful operator licensed under the Islamic Financial Services Act 2013 carrying on a takaful business in any currency other than ringgit Malaysia. The exemption only applies to the years of assessment 2017 to Full details of the order are available on the Federal Gazette s website. Tax Reform approved by House of Representatives On 10 September 2018, the House of Representatives approved House Bill 8083 (the Bill). The Bill, also known as the Tax Reform for Attracting Better and High-Quality Opportunities (Trabaho) Bill, is the second package of the Comprehensive Tax Reform Program. It aims to encourage investments by bringing down the corporate income tax rate and modernising investment tax incentives to enhance fairness, improve competitiveness, plug tax leakages and attain fiscal sustainability. Some of the proposals made in the Trabaho Bill are listed below. The corporate tax rate (currently 30%) will be gradually reduced by 2% every two years from 2021 until it reaches 20% in The tax base will be broadened, as follows: o gross income taxation at 15% will no longer be available; o the preferential tax rate of 10% for educational institutions and hospitals, and outright tax deduction for capital expense will be subject to established performance criteria to be determined by the Commission on Higher Education, the Department of Education and the Department of Health; o the 10% preferential tax on regional operating headquarters will no longer be available two years after the Trabaho Bill comes into effect; and o the 40% optional standard deduction will be uniform for individual and corporate taxpayers at 40% of gross income, and will be limited to micro, small and medium-sized enterprises as determined by the Department of Trade and Industry; Tax incentives will be rationalised, as follows: o New sets of criteria will be introduced for determining the Strategic Investment Priority Plan for projects that qualify for special tax incentives; o Income Tax Holidays will be granted for not more than three years and, after the expiration of the tax holiday, other tax incentives may be applied for a period of not more than five years, which includes the tax holiday period; and o Registered export enterprises located in ecozones, freeports or utilising customs-bonded manufacturing warehouses with export sales of more than the 90% threshold may be given VAT zero-rating on export sales, or on importation or domestic purchases of capital equipment and raw materials used in the manufacture and processing of products. The Trabaho Bill will be sent to the Senate and subsequently to the President s office for approval before it becomes law. 26 Asia Tax Bulletin MAYER BROWN 27

15 Singapore International Tax Developments BEPS/Multilateral Instrument Variable Capital Company On 1 October 2018, the Variable Capital Companies Bill was moved for its second reading in the Singapore Parliament and was passed into law. The long-awaited implementation of the Singapore Variable Capital Company (also known as the VCC ) is now almost complete and is expected to become effective in the first quarter of The introduction of the VCC is intended to further enhance Singapore s appeal as an international fund management hub. It introduces a new business form for funds (the VCC) incorporated under Singapore law and aligns Singapore more closely with jurisdictions such as Hong Kong, Luxembourg, Ireland and the Cayman Islands. The VCC is a legal entity under Singapore law with limited liability. It has two features which distinguish it from the other limited-liability business forms under Singapore law: it enables the VCC to have separate, legally segregated, cells, which is intended to shield assets owned in one cell to be protected against any legal liability that may arise under liabilities of a different cell in the VCC. As a practical matter, this enables the VCC to have various sub-funds, with each sub-fund in substance functioning as a separate fund within the same legal entity. The other distinguishing feature is the concept of variable capital: the value of the paid-up capital of a VCC is at all times deemed to be equal to the net asset value of the VCC. Consequently, shares of a VCC can be redeemed or repurchased at a price equal to the proportional part of the net asset value of the VCC without the restrictions applicable to the other business forms. Also, dividends can be paid by the VCC without the need to show profits. A VCC can in principle be used as a tax-exempt fund under Singapore law provided that the VCC satisfies the pertinent conditions imposed under the relevant tax provisions, notably that it is managed by a qualifying fund management company in Singapore. The Monetary Authority of Singapore ( MAS ) has announced on 31 October the tax framework for VCCs. This announcement details the manner in which the tax exemptions of the Resident Fund Scheme of Section 13R and the Enhanced-Tier Fund Scheme of Section 13X of the Income Tax Act are to be extended to VCCs. In brief, the MAS states that the qualification requirements for tax exemption will apply per company and not per sub-fund. This is noteworthy as VCCs can be umbrella funds and have multiple sub-funds within the VCC. Specifically, this means that the annual expense requirement of SGD 200,000 applies to the VCC as a whole and not per sub-fund. Also, the prohibition for Section 13R funds to be owned 100% by Singapore based investors applies per VCC, thus enabling a VCC to have one or more sub-funds fully invested by Singapore investors so long as at least one other sub-fund is not fully invested in by Singapore investors. Also, the qualifying investor requirement under the Resident Fund Scheme applies per VCC, enabling the negative effect (the financial penalty) of having any non-qualifying investors to be diluted if the VCC has multiple sub-funds. On the other hand, if a VCC opens a new sub-fund with an investment objective different from that of the existing subfunds approved by MAS, then the VCC must obtain separate approval for the new sub-fund s investment objective in order not to lose its tax-exempt status. On 21 December 2018, Singapore became the 17th country to deposit its instrument of ratification for the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI). The convention will enter into force in respect of Singapore on 1 April The extent to which the MLI will modify Singapore s bilateral tax treaties will depend on the final adoption positions taken by other countries. Singapore submitted its MLI position at the time of signature listing its reservations and notifications and including 68 tax treaties that it wished to be covered by the MLI. The total number of listed agreements has increased from 68 to 86 in the final version. USA On 13 November 2018, the Singapore-United States FATCA Model 1A Agreement was signed in Singapore. Once in force and effective, the new agreement will supersede the Singapore-United States FATCA Model 1B Agreement signed in The new agreement will not affect the obligations for Singapore-based financial institutions under the current agreement. On the same day, Singapore and the United States signed an exchange of information agreement relating to tax matters. Kazakhstan On 21 November 2018, Kazakhstan and Singapore signed an investment protection agreement (IPA) in Singapore. Indonesia On 11 October 2018, Indonesia and Singapore signed an investment protection agreement (IPA) in Bali. 28 Asia Tax Bulletin MAYER BROWN 29

16 Thailand New tax incentive On 9 October 2018, the Cabinet introduced a single International Business Centre (IBC) regime and repealed the following tax incentive regimes: Regional Operating Headquarters (ROH); International Headquarters (IHQ) and Treasury Centre (TC); and International Trading Centre (ITC). Transfer pricing 3 Following the public hearing in mid-2017 and final approval by the Thai Cabinet in January 2018, Thailand s draft transfer pricing law sailed through the final reading session of the National Legislation Assembly on 27 September The law is intended to create transparency, reduce profit shifting between related entities and prevent double taxation issues in transfer pricing between related companies or enterprises. Section 71 ter requires the company under Section 71 bis, with total revenue not less than 200 million, to submit reports on transfer pricing (presumably in the prescribed form) within 150 days from the last day of the financial year. Within five years of the submission of the report on transfer pricing information, the Revenue Officers may notify the company to submit necessary documents or evidence in relation to its transfer pricing practices (including the Transfer Pricing Documentation Report) within 60 days. If necessary, the submission period may be extended (but not beyond 120 days from the receipt of the notification). First time recipients can apply for an extension of the submission period of 180 days after the receipt of the notification. Failure to submit transfer pricing documentation (or where one submits incorrect information) without justification is punishable by a maximum penalty of THB 200,000. International Tax Developments Bahrain According to information published by the government of Bahrain, the amending protocol, signed on 25 April 2017, to the Bahrain-Thailand Income Tax Treaty signed in 2001 entered into force on 28 March The protocol generally applies from 1 October 2018 for Thailand and from 1 January 2019 for Bahrain. Also, the investment protection agreement (IPA) between Bahrain and Thailand, signed in Bangkok on 21 May 2002, entered into force on 28 March The features are as follows: Corporate income tax rates will be reduced to 8%, 5% or 3%, depending on whether the respective annual local spending requirements of THB 60 million, THB 300 million or THB 600 million are met. Withholding tax on dividend distributions and interest payments to overseas will be exempted. Specific business tax will be exempted on income from qualifying Treasury Centre functions. Personal income tax of qualifying expatriates will be taxed at 15%. The conditions that must be fulfilled in order to be qualified as an IBC are: o a minimum of 10 employees (five employees if performing a Treasury Centre function); o a minimum annual local spending of THB 60 million; and o a minimum paid-up capital of THB 10 million. Further details of the IBC regime are expected to be released later and will be subject to further legislative processes. Previously, tax authorities and taxpayers alike relied on the old Departmental instruction (No. Paw 113/2545) as an interpretive guideline for their transfer pricing practices. It is believed that the new transfer pricing law will provide regulatory clarity over Thailand s transfer pricing regime. Section 71 bis empowers the Revenue Officer to adjust revenue and expenses of a company if the commercial and financial conditions for the transactions between the related parties are not determined according to the arm s length principle. Related parties means a company that directly or indirectly holds no less than a 50% stake in another company; or a company that directly or indirectly holds no less than a 50% stake in one company that, in turn, directly or indirectly holds no less than a 50% stake in another company; or a company that has relationships in terms of capital, management or control in another company rendering the other company unable to operate independently. On 21 November 2018, the Transfer Pricing Act was published on the Royal Gazette website and will take effect from 1 January Important points are: Tax officers are empowered to assess the additional revenue on related-party transactions. Related parties are defined as two or more legal entities wherein: o a person holds at least 50% (directly or indirectly) of the share capital of the other entity; o a shareholder holds at least 50% (directly or indirectly) of the share capital of both entities; or o a person has a dependent relationship through participation in the capital, management or control of another entity as prescribed by the Ministerial Regulations. An entity with annual revenue less than THB 200 million will be exempted from requirements to prepare and submit a report. 3 Courtesy Kim & Chang in Seoul. 30 Asia Tax Bulletin MAYER BROWN 31

17 Vietnam Compulsory social insurance for foreigners The long-awaited Decree No. 143/2018/ND-CP providing detailed guidance on compulsory social insurance applicable to foreign employees working in Vietnam (Decree No. 143) was finally issued on 15 October 2018 and will take effect on 1 December Contribution and entitlement of each benefit regime will come into effect on different dates as summarised below. Foreign employees who satisfy both the following conditions will be subject to compulsory social insurance: working in Vietnam under indefinite-term labour contracts, or definite-term labour contracts with a term of at least one full year with employers based in Vietnam; and having been granted either (i) a work permit ( gia phép lao đđo in Vietnamese), (ii) practicing certificate ( chin chh hành nghh in Vietnamese), or (iii) practicing license ( giin phép hành nghh in Vietnamese). Notwithstanding the above, the following foreign employees are not subject to compulsory social insurance: intra-corporate transferees in accordance with Article 3.1 of Decree No. 11/2016/ND-CP detailing regulations of the Labor Code for foreign employees working in Vietnam; and employees who have reached the statutory retirement age, as prescribed under Article of the Labor Code, which is 60 years old for males and 55 years old for females. These include benefit regimes for: (i) illness, (ii) maternity, (iii) labour accidents and occupational diseases, (iv) retirement, and (v) survivorship. However, the application of the five regimes to foreign employees will be phased differently as follows: The short-term benefit regimes for (i) illness, (ii) maternity, and (iii) labour accidents and occupational diseases will apply from 1 December 2018; and The long-term benefit regimes for (iv) retirement and (v) survivorship will apply from 1 January The contribution rates imposed on both employers and foreign employees will be the same as those applicable to Vietnamese employees, i.e. 8% from employees and 17.5% from employers, based on the salary used to contribute compulsory social insurance which is capped at 20 times the applicable general minimum salary as provided by the Government. The contribution rates are as follows: From 1 December 2018 to 31 December 2021: o Employer: 3.5%, including 3% for the fund of illness and maternity; and 0.5% for the fund of labour accidents and occupational diseases. o Employee: Not applicable. From 1 January 2022 onwards: o Employer: 17,5%, including 3% for the fund of illness and maternity, 0.5% for the fund of labour accidents and occupational diseases and 14% for the fund of retirement and survivorship. o Employee: 8% for the fund of retirement and survivorship. With respect to foreign employees who have multiple labour contracts with many employers and are subject to compulsory social insurance, contribution is only applied for the first labour contract, except that the contribution for labour accidents and occupational diseases benefits must be made by each employer in each labour contract. Lump-sum payout of retirement benefit: From 1 January 2022 onwards, foreign employees are entitled to claim a lump-sum payout of retirement benefit if satisfying one of the following requirements: reaching retirement age but having not contributed to social insurance for 20 years in full; having terminal illnesses as prescribed by law; being eligible to receive monthly retirement allowances but no longer residing in Vietnam; having labour contracts terminated or having expired practice licenses and work permits without extension. International Tax Developments CPTPP On 14 January 2019, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), signed on 8 March 2018, will enter into force in respect of Vietnam, 60 days after the country deposited its instrument of ratification. Vietnam completed its internal legal process to ratify the CPTPP on 12 November 2018 and notified the government of New Zealand, which is designated as the depositary of the CPTPP on 15 November 2018, becoming the seventh country to deposit its instrument of ratification. The CPTPP is already in force in respect of Australia, Canada, Japan, Mexico, New Zealand and Singapore. The 2018 CPTPP incorporates, by reference, the provisions of the 2016 Trans-Pacific Partnership (TPP) agreement, signed on 4 February Decree No. 143 stipulates that foreign employees will be covered for all five compulsory social insurance regimes, which are currently applicable to Vietnamese employees. 32 Asia Tax Bulletin MAYER BROWN 33

18 About Mayer Brown Asia Tax Practice Mayer Brown is a distinctively global law firm, uniquely positioned to advise the world s leading companies and financial institutions on their most complex deals and disputes. With extensive reach across four continents, we are the only integrated law firm in the world with approximately 200 lawyers in each of the world s three largest financial centers New York, London and Hong Kong the backbone of the global economy. We have deep experience in high-stakes litigation and complex transactions across industry sectors, including our signature strength, the global financial services industry. Our diverse teams of lawyers are recognised by our clients as strategic partners with deep commercial instincts and a commitment to creatively anticipating their needs and delivering excellence in everything we do. Our one-firm culture seamless and integrated across all practices and regions ensures that our clients receive the best of our knowledge and experience. Pieter de Ridder Partner, Mayer Brown LLP pieter.deridder@mayerbrown.com Pieter de Ridder is a Partner of Mayer Brown LLP and is a member of the Global Tax Transactions and Consulting Group. Pieter has over two decades of experience in Asia advising multinational companies and institutions with interests in one or more Asian jurisdictions on their inbound and outbound work. Prior to arriving in Singapore in 1996, he was based in Jakarta and Hong Kong. His practice focuses on advising tax matters such as direct investment, restructurings, financing arrangements, private equity and holding company structures into or from locations such as mainland China, Hong Kong, Singapore, India, Indonesia and the other ASEAN countries. 34 Asia Tax Bulletin MAYER BROWN 35