Asia Newsletter Special Edition - BEPS in Asia
In this edition Introduction... 4 China (PRC)... 6 Hong Kong... 9 India... 10 Indonesia... 11 Japan... 13 Korea... 14 Malaysia... 15 Philippines... 16 Singapore... 16 Taiwan... 18 Thailand... 18 Vietnam... 19 Key Observations... 21 Issue: November 2014 2
Dear Reader, Through this Asia Newsletter we aim to keep you abreast of the recent international tax developments in Asia. As an internationally oriented tax and corporate firm we follow international developments closely. One of the major topics concerns the proposed actions to mitigate Base Erosion and Profit Shifting (BEPS). BEPS is a topic that is relevant for any multinational when considering its corporate and investment structures and corresponding tax planning. Given our longstanding presence in the Asian region we have dedicated this issue to BEPS developments in the main Asian countries. This will give you a sense of the state of affairs in the respective jurisdictions concerned, as well as a forecast of future developments. These topics are discussed in brief terms and are based on publicly available information. About Loyens & Loeff As you may know, Loyens & Loeff has a strong focus on the dynamic Asian market. The firm s presence in the region dates back to 1921 and at present Loyens & Loeff has offices in Hong Kong, Singapore and Tokyo which are supported by the pooled multidisciplinary expertise of our firm s Asian team. Loyens & Loeff is an independent full service firm of civil lawyers, tax advisers and notaries, where civil law and tax services are provided on an integrated basis. Over 1400 people work for the firm, including 840 civil lawyers, tax advisers and notaries. Our size and range make the firm unique in our home markets Luxembourg, the Netherlands and Belgium. We hope you will enjoy reading this Asia Newsletter. Should it give rise to any questions, please feel free to contact us or your contact person within Loyens & Loeff. Yours sincerely, Carola van den Bruinhorst Partner Hong Kong office Joep Ottervanger Partner Singapore office 3
Introduction In the last few years political and media attention has increasingly focused on the corporate tax affairs of multinational enterprises (MNEs). This has resulted in a growing public perception that through cross-border tax structuring, MNEs have been reducing their global effective tax rates excessively and are therefore not paying their fair share of tax. Although this is legal, it is increasingly perceived as harmful for various stakeholders such as governments, individual taxpayers and businesses. Everyone will remember the headlines in the international newspapers when it was revealed that Starbucks, Google, Yahoo and Amazon paid very little corporate income tax in the UK despite their high sales. Public protests were organized at Starbucks branches and the matter became political when parliamentary hearings were organized. Since then various international initiatives have been launched. The first was the publication of an initial report on BEPS by the OECD, issued on 12 February 2013 (the BEPS Report). This was followed by the extensive action plan on BEPS published by the OECD on 19 July 2013 and endorsed by the Finance Ministers of the G20. (the Action Plan). On 16 September 2014, the OECD published the first deliverables on seven of the fifteen action points of the Action Plan (the 2014 Deliverables). Following the initiatives of the G20 and OECD, the UN has also taken action on BEPS by establishing the UN Subcommittee on BEPS. Its main purpose is to help facilitate the input of developing countries experiences and views to the Action Plan. Action Plan In a nutshell, the Action Plan contains fifteen action points addressing the identified weaknesses in existing international taxation principles. Examples of such weaknesses are the lack of exchange of information between countries; ineffectiveness of transfer pricing rules; and mismatches between countries tax systems. These and other weaknesses are assumed to have created the opportunity for MNEs to reduce their global effective tax rates. The fifteen actions are as follows: Action 1: Address the tax challenges of the digital economy Action 2: Neutralise the effects of hybrid mismatch arrangements Action 3: Strengthen CFC rules Action 4: Limit base erosion via interest deductions and other financial payments Action 5: Counter harmful tax practices more effectively, taking into account transparency and substance Action 6: Prevent treaty abuse Action 7: Prevent the artificial avoidance of permanent establishment (PE) status Actions 8, 9, 10: Assure that transfer pricing outcomes are in line with value creation Action 11: Establish methodologies to collect and analyse data on BEPS and the actions to address it Action 12: Require taxpayers to disclose their aggressive tax planning arrangements Action 13: Re-examine transfer pricing documentation Action 14: Make dispute resolution mechanisms more effective Action 15: Develop a multilateral instrument (to amend bilateral tax treaties) 2014 Deliverables The 2014 Deliverables contain the first set of reports and recommendations with a view to executing the Action Plan. They indicate that there is a general consensus among the 44 countries involved on a number of solutions to put an end to BEPS. Two reports are final and one is an intermediate report. The remaining action points have been further developed, but are not yet finalised, since they may be affected by the 2015 deliverables with which they interact. The 2014 Deliverables can be summarised as follows (ranked in order of importance). 4
Action 6: Preventing the Granting of Treaty Benefits in Inappropriate Circumstances The report on preventing treaty abuse proposes a limitation on benefits clause (LOB clause) in combination with a principal purpose test in the OECD Model Tax Convention. The proposal also provides for the possibility of choice in implementing the different tools. Alternative measures are considered to enable collective investment vehicles to be entitled to treaty benefits. The report is an interim report subject to improvement before September 2015. To secure access to tax treaty benefits, we expect a focus on the creation of more solid business substance in international tax planning structures. Action 8: Guidance of Transfer Pricing Aspects of Intangibles The report on transfer pricing of intangibles primarily contains (i) interim draft revisions and (ii) final revisions to the chapter on intangibles in the OECD Transfer Pricing Guidelines (the OECD Guidelines). It introduces a close link between the entitlement to intangible-related returns and people functions. The OECD expects to complete these revisions in 2015. Although it is unclear how far changes in the OECD Guidelines will affect transactions which have clear third party benchmarks, it is our experience that tax authorities are already taking positions in line with the report. Action 13: Guidance on Transfer Pricing Documentation and Country-by-Country Reporting The report on transfer pricing documentation and countryby-country reporting requires MNEs to prepare (i) a master file, (ii) a local file and (iii) to file annual reports for each jurisdiction in which they do business. The impact on MNEs will be substantial in terms of both additional administrative burdens and costs and an expected increase of discussions with tax authorities on profit allocation. Action 15: Developing a Multilateral Instrument to Modify Bilateral Tax Treaties (final) The final report on the feasibility of developing a multilateral instrument to modify bilateral tax treaties concludes that it is both desirable and feasible to develop a multilateral instrument with a view to streamlining the implementation of various tax treaty-related BEPS measures. According to the OECD, negotiations for such an instrument should be started early in 2015 and completed within two years. The multilateral instrument will potentially have the same effect as the simultaneous renegotiation of over 3,000 bilateral tax treaties. Action 2: Neutralising the Effects of Hybrid Mismatch Arrangements The report on neutralising the effects of hybrid mismatch arrangements recommends including linking rules in domestic law. Further guidance for these linking rules will be developed next year in the form of a commentary. The report also recommends amendments to the OECD Model Tax Convention to ensure that hybrid entities do not obtain treaty benefits unduly. The proposals could have a serious impact on international business structures that contain hybrid instruments or entities. Action 5: Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance An interim report has been released on the progress made in countering harmful tax practices more effectively, taking into account transparency and substance. This report focuses on the substantial activity that may be required in the context of intangible regimes and compulsory spontaneous exchanges on rulings related to preferential regimes. Action 1: Addressing the Tax Challenges of the Digital Economy (final) The final report on the digital economy recognises that the digital economy cannot be segregated or ring-fenced from the rest of the economy. Because it has no unique BEPS issues, but certain key features intensify BEPS concerns, these issues will be tackled via the other actions included in the Action Plan. Observations on the Action Plan and the 2014 Deliverables The Action Plan has already given rise to much discussion. Among other things, the discussion is focusing on the farreaching anti-abuse provisions and measures that have been proposed and the administrative burdens MNEs are likely to encounter. The 2014 Deliverables are not expected to end this discussion and show that substantial 5
steps are already being taken to combat BEPS. Although the proposed measures are not yet final, the OECD has stated that all 44 countries involved in the BEPS project (including all OECD and G20 members) agree with the proposals put forward in the 2014 Deliverables. While parts of them need to be codified in domestic law and implemented in tax treaties, these proposals may be expected to have a serious impact on international trade and business. For intangibles and country-by-country reporting, the direction is sufficiently clear to consider adjusting existing structures. Although the work of the OECD is far from finished, we give below some of our general views on the Action Plan and the 2014 Deliverables. The Action Plan, other similar international initiatives and the continuing political and media pressure have already resulted in a climate change in the international corporate tax world. MNEs are re-assessing their international tax structuring strategies. The Action Plan recognises that international consensus and cooperation by all countries is a prerequisite for the success of the BEPS project. Though the 2014 Deliverables indicate some form of consensus, it is doubtful whether that will translate any time soon into a global approach to substantial amendment of the well-established existing international taxation principles. Even if consensus could be reached, implementation would take a long time. The domestic tax rules of countries would have to be amended. Also, while the report on action 15 concludes that it would be desirable and feasible to develop a multilateral instrument in this respect, this would still require the consent of all interested parties. At the same time, competition between countries for capital is not diminishing; they will continue to lure MNEs to invest in their country. This may put the tax affairs of MNEs in an ambiguous situation where countries are simultaneously combatting tax avoidance and competing for capital, with no real international political consensus. Our expectations regarding the impact on MNEs tax structures It is rather difficult at present to predict what the effects of BEPS, the Action Plan and its deliverables will be. We nevertheless foresee a number of trends. Firstly, it will become more difficult for intermediary companies to have access to treaty benefits; the OECD proposes a large number of far-reaching tools aimed at limiting perceived inappropriate use of tax treaty benefits. Secondly, there will be more attention and pressure on transfer pricing aspects, with the emphasis perhaps put on taxing profits at the location where economic activities are carried out and people are located. Another trend is that there will be substantially more automatic and spontaneous exchanges of information between national tax authorities. Finally, we expect that there will be more attention to and pressure on hybrid mismatch arrangements and preferential tax regimes. An example is the adoption by the European Union (EU) of a set of rules dealing with hybrid instruments, which need to be implemented by the EU Member States into their domestic laws by 31 December 2015. All in all, therefore, BEPS and the Action Plan will translate into a much higher level of attention by MNEs to their tax structures than before. Asia and BEPS Although the BEPS project aims to deter the global effects of BEPS, the initiative does not directly involve every country. Only a few countries in Asia form part of the G20 and/or OECD community, raising the question of how far the countries in this region are monitoring the BEPS discussions, not to mention whether they will actively participate in and adhere to the BEPS deliverables in the future. The following paragraphs provide insight into the views of Asian countries on BEPS and the related measures that they have taken or are undertaking. China (PRC) Characterisation and position regarding BEPS China is not an OECD member, but participates in the BEPS project as an Associate Member and is taking an increasingly active role in it. China is a member of 6
the G20 and therefore endorses the BEPS project. On 17 September 2014 China s State Administration of Taxation (SAT) published on its website the Chinese translation of the 2014 Deliverables, together with a brief introduction. In the introduction, the SAT shows strong support towards the BEPS project and clearly states that China will keep actively participating in the BEPS project. The SAT considers the BEPS project as an opportunity to establish a fair and just international tax system and to voice the interest and needs of developing countries. Also, considering the BEPS achievements, the SAT will amend domestic anti-abuse rules, further prevent treaty abuse, complete cross-border tax administration and strengthen international tax management. The SAT has also established a task force to study, comment and implement the BEPS results. Prior to that, on 29 April 2014, the Jiangsu Provincial Office of the SAT (the Tax Authority) issued its 2014-2015 Administration Plan on International Tax Compliance (the Plan). The main aspects of the Plan are: without beneficial ownership would be denied treaty benefits; and (iv) mismatch arrangements would be targeted. Transfer pricing documentation should be more transparent. The BEPS Report indicates that a key issue in the administration of transfer pricing rules is the asymmetry of information between taxpayers and tax authorities. The Tax Authority agrees with the OECD that this information asymmetry must be solved. Chinese enterprises are encouraged to proactively disclose relevant information such as their global group structure and the amount of tax they pay in other countries. The taxation right of the source state should be revisited in the digital economy. The Tax Authority takes the position that as a consequence of the digital economy, new concepts should be introduced to allocate taxation rights properly between the states of source and residence. Transfer pricing and value creation. The BEPS Report states that transfer pricing results should be in line with value creation, and that measures for the allocation of income across jurisdictions should be looked at in relation to measures for value-creating activities. The Plan stresses that the role of the Chinese market should be considered in full. This means that location savings and market premiums, such as the huge market size of and fast growing demand in China, should be reflected in the allocation of global profits of MNEs. Taxation rights and economic substance. The BEPS Report states that the rights to tax should be aligned with the substance of the economic activities. The Plan states that taxable income should not be artificially segregated from business activities. Otherwise, by applying effective management rules, General Antiabuse Rules (GAAR), information exchanges, etcetera, the likely consequences would include: (i) offshore companies would be regarded as Chinese tax residents if their place of effective management was in China; (ii) shell companies without economic substance would be looked through; (iii) taxpayers Attention should be paid to overseas safe harbour rules in transfer pricing. The Tax Authority refers to India s safe harbour rules regarding the transfer pricing for certain associated transactions, and notes that these kinds of standards in other developing countries may be referred to when the Tax Authority assesses transfer pricing risks. Enterprises should reinforce tax governance and internal control. The BEPS Report states that enterprises should treat tax governance and tax compliance as important elements of a broader risk management. The Tax Authority stresses that internal control is foremost for preventing transfer pricing risks and announces that it is taking measures to evaluate internal control by enterprises. UN Subcommittee on BEPS questionnaire In March 2014 the UN Subcommittee on BEPS circulated a questionnaire to help facilitate contributions by developing countries of their experiences and views to the Action Plan. In its replies to the questionnaire China states that transfer pricing-related actions are most 7
important for China, and considers that it should work hard to establish methodologies to collect and analyse data on BEPS. Furthermore, in China s view, it is important for developing countries to know how to solve disputes between tax jurisdictions by Mutual Agreement Procedure (MAP) and how to tackle the challenges of the digital economy. BEPS related measures As China is following the BEPS project very closely, the SAT seems to aligning its focus and actions with the BEPS project. The following measures appear to be its main focus. The benefit test should be analysed from the perspectives of the provider and recipient of the service. A parent company should not charge a service fee for services provided to its Chinese subsidiary merely because the subsidiary may benefit from the services, since the parent company may benefit even more. Furthermore, the benefit test should consider whether a subsidiary actually needs the service(s) provided. For example, a manufacturing subsidiary in China may not need high-end services such as advisory or legal services, as these services may not confer any benefits on the subsidiary. Administrative Measures of the General Anti-Abuse Rules (draft) China s Enterprise Income Tax Law (EITL) contains a domestic GAAR which enables the tax authorities to adjust an arrangement by an enterprise that lacks a reasonable business purpose and really aims to achieve a tax benefit ( tax avoidance arrangement ). On 3 July 2014 the SAT released a draft discussion paper regarding administrative guidance on the GAAR, including a description of a tax avoidance arrangement, ways to make special adjustments and the general procedures to be observed. In particular, it clarifies the relation between the GAAR and treaty provisions and specific anti-abuse rules (SAARs). The guidance will only apply to crossborder transactions or payments, but not to tax-related violations such as failure to pay tax, tax fraud and tax evasion. Nor does it cover indirect transfers of Chinese shares by non-residents; separate guidance will be issued on this, but it is not yet known when. It should be considered whether the provision of various services by a parent company to its subsidiaries has already been remunerated through the transfer pricing policies of other related party transactions. For example, a parent company should not charge service fees to a subsidiary for purchasing raw materials at reduced costs on behalf of the group when the subsidiary sells finished goods to the parent on a full-cost plus mark-up basis. This is because the final beneficiary of the reduced cost is the parent company itself. If a subsidiary in a developing country has its own management team which only needs its management decisions to be approved by its parent company, the parent company should not charge management service fees. This is because the management services provided by the parent company are likely to be either duplicates or shareholder activities. Transfer pricing aspects of intra-group services In March 2014, the SAT released its contribution to the UN in relation to the update of the UN Practical Manual on Transfer Pricing (the UN TP Manual). The contribution gives interesting insights as to the SAT s views on the transfer pricing aspects of intra-group services. The SAT generally concurs with the benefit test as laid down in the OECD Guidelines in order to determine whether an intra-group service has been rendered. This basically means that a service should provide a benefit to the recipient. In addition, the SAT considers inter alia the following aspects: The provision of services and allocation method should be documented in line with the requirements for transfer pricing documentation (as set out in the Action Plan). For the same purpose, the SAT advises parent companies to disclose the transfer pricing policies for global intra-group services, the method and the amount of service fees allocated to each subsidiary in the Masterfile. Controlled foreign corporation (CFC) rules Action 3 of the Action Plan includes that recommendations will be developed regarding the design of CFC rules. The 8
first discussion draft on this action point is expected early April 2015. China s EITL contains CFC rules which have been effective since 1 January 2008. Pursuant to these rules, Chinese tax authorities can attribute a portion of a foreign company s profits to the taxable income of its Chinese shareholder(s) as deemed dividends. In the absence of detailed guidance, CFC rules seem not to be actively applied in practice. On 30 June 2014 the SAT issued SAT Notice [2014] No.38, which renews the reporting requirements on Chinese companies holding foreign shares and introduces a separate CFC reporting form, effective from 1 September 2014 (the Notice). Unlike the previous reporting requirements, the Notice requires the disclosure of a CFC s profit distribution information, such as total distributable profits, undistributed profits, deemed dividend distribution to the reporter and other Chinese shareholder(s), and related foreign tax credits. The reporter is also required to provide the CFC s annual financial statements according to Chinese accounting standards. Although the Notice mainly addresses procedural issues, it may be a signal that the SAT will invoke more actively the CFC rules in practice, thus taking into account BEPS developments. Exchange of information On 27 August 2013 China signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters. Among other things, the Convention enables China to exchange information easily with other contracting states and conduct simultaneous tax examinations both in and outside China. On 26 June 2014 China reached a reciprocal intergovernmental agreement in substance with the US under the FATCA regime, its main purpose being to combat cross-border tax evasion. Once it is in force, Chinese financial institutions will provide financial information on their US clients to the US Internal Revenue Service, and US financial institutions will exchange US bank account information on Chinese citizens with China. Outlook We expect that China will continue to monitor the BEPS developments closely and play an active role in the discussions on it. As stated by the SAT, China regards BEPS as an opportunity to voice the interest and needs of developing countries, to establish a fair and just international tax system and to amend relevant domestic rules. However, we expect that in practice China will continue to follow its own approach and policies. In the area of transfer pricing, China seems increasingly to be deviating from the OECD Guidelines. This is illustrated by its 2012 country chapter for the UN TP Manual, which contained deviations from the OECD Guidelines such as the concepts of location-specific advantages and local market intangibles. China s recently issued views on intra-group services may be seen as another deviation. With regard to action 6 (Preventing the Granting of Treaty Benefits in Inappropriate Circumstances), it may be observed that the recent deliverable on Action 6 recommends that tax treaties include a combination of an LOB clause and a principal purpose test (very similar to a GAAR), in order to prevent treaty abuse. At the same time, it admits that this combination may not be appropriate for all countries. Although China has not released any official comments on this recommendation, the inclusion of an LOB clause may not be consistent with its current tax treaty policy. For example, it follows from the Dutch parliamentary history on the re-negotiations of the tax treaty between the Netherlands and China that China was not in favour of including an LOB clause. The treaty includes specific anti-abuse provisions for passive income and introduces a GAAR. This policy was also reflected in other recent Chinese treaties, such as those with France and Denmark. Hong Kong SAR Characterisation and position regarding BEPS Hong Kong is not an OECD member and does not participate actively in the discussions on BEPS. The Hong Kong authorities have not published any official reactions on the BEPS Report, the Action Plan or the 2014 Deliverables. 9
On 20 November 2013 the Secretary for Financial Services and the Treasury, who is responsible for Hong Kong s Inland Revenue Department (IRD), answered certain questions regarding BEPS raised in the Legislative Council of Hong Kong. The Secretary stated that the IRD had been monitoring the latest developments of the Action Plan closely, but there was no plan to change the existing transfer pricing practices in Hong Kong, as Hong Kong s transfer pricing regime already generally follows the guiding principles of the OECD Guidelines and has operated well since its implementation in 2009. The Secretary nonetheless stated that the IRD will monitor further international developments related to BEPS closely and consider any need to introduce corresponding measures. partners if the conditions are met. According to the latest timeline allowed by the Global Forum on Transparency and Exchange of Information for Tax Purposes, the first automatic information exchanges are to begin by the end of 2018. Outlook We do not expect that the Hong Kong authorities will adopt a more proactive attitude in the BEPS discussions or introduce related measures in the short term. However, as Hong Kong operates a very attractive territorial tax system with a low income tax rate (16.5%), perceived facilitation of BEPS could lead to conflict. This may cause pressure to maintain the system in the future. BEPS related measures Hong Kong operates GAARs. Under these rules, if transactions are entered into or carried out for the sole or dominant purpose of obtaining a tax benefit, the tax assessor may disregard the transactions or counteract the tax benefit. Artificial or fictitious transactions reducing the amount of tax payable may also be disregarded. In addition, the following measures may be assumed to have a link to the BEPS developments. On 25 March 2014 Hong Kong and the US signed a tax information exchange agreement (TIEA), which entered into force on 20 June 2014. This was the first TIEA signed by Hong Kong. It provides the necessary basis for Hong Kong to provide for exchanges of information following US requests made in relation to the information reported by Hong Kong financial institutions under the US FATCA. India Characterisation and position regarding BEPS In general, India is perceived as having a complicated tax system, with taxes being collected at both national and local level. In recent years the Indian tax authorities have actively countered MNEs perceived as structuring and splitting their activities across jurisdictions, thereby benefiting from the arbitrage resulting from the gaps in the interaction between the respective domestic tax regimes. In landmark cases against Vodafone and others the Indian tax authorities tried to tackle such tax-planning exercises by creating permanent establishments, denying tax treaty benefits on the grounds of lack of substance or making huge transfer pricing adjustments. On 22 August 2014 Hong Kong signed TIEAs with six Nordic jurisdictions (Denmark, the Faroes, Greenland, Iceland, Norway and Sweden). Each TIEA will become effective after the completion of ratification procedures by Hong Kong and the respective Nordic jurisdictions. In addition, Hong Kong indicated on 15 September 2014 its support for the new global standard on automatic exchange of information for the purpose of enhancing tax transparency and combatting cross-border tax evasion. Hong Kong is committed to implementing the new standard on a reciprocal basis with appropriate India is not an OECD member but is part of the G20 community, and as such is actively and closely involved in the BEPS project. India submitted its inputs regarding BEPS in response to the questionnaire distributed by the UN Subcommittee on BEPS in March 2014. UN Subcommittee on BEPS questionnaire India s position is that many international tax rules allocate greater taxation rights to resident states and the UN needs to protect the taxation rights of developing countries as source states. In particular, India stresses: 10
(i) excessive passive payments (i.e. interest, service charges, management and technical fee and royalties) to foreign affiliates of Indian companies, (ii) aggressive transfer pricing practice to contractually reallocate risks and profits out of India, (iii) base erosion in the digital economy, (iv) artificial avoidance of permanent establishment status and treaty shopping, (v) attracting investments through tax incentives, and (vi) indirect transfer of assets situated in India to avoid tax. According to India, the challenges of the digital economy deserve greater consideration. In this respect India considers that physical presence is irrelevant for allocating taxation rights, and suggests withholding taxes on payments made for digital transactions. India has protected its taxation rights as source state by strengthening its domestic source laws for taxation of indirectly transferred Indian assets and taxation of royalties. BEPS related measures India has not issued any specific legislative measures in respect of BEPS. However, the measures below can be considered as relevant to BEPS. GAAR India s anti-tax planning efforts have not always been successful, which may have prompted India to reconsider its Income Tax Code several years ago. It is anticipated that India s GAAR provisions proposed long before BEPS will be become effective as from 1 April 2015. The GAAR provisions should deal with several of the BEPS measures, including more effective CFC rules, requiring taxpayers to disclose aggressive tax planning arrangements and priority for transparency, substance and prevention of treaty abuse. Transfer pricing The Indian tax authorities have already been very active in the area of transfer pricing. For example, Circular No. 06/2013 of 29 June 2013 lays down very strict rules for identifying a development centre in India as a contract R&D service provider. The principles used in this Circular are now confirmed by the BEPS. To reduce the increasing number of transfer pricing audits and disputes, the Indian Central Board of Direct Taxes issued final safe harbour rules on 18 September 2013. These rules lay down the situations where the Indian tax authorities will accept the transfer price declared by the taxpayer. For example, the rules provide a minimum ratio of operating profit to operating expense for certain types of eligible international transactions, such as provision of contract R&D services, software development services and inter-company loans. Exchange of information India has further expanded its network of TIEAs. For example, in July 2014 India held negotiations on TIEAs with Barbados, the Cook Islands, Costa Rica, Panama, Seychelles and some other countries. On 11 April 2014 India agreed in substance with the US on an intergovernmental agreement on the FATCA. Outlook We expect that India will continue its active involvement in and support for the BEPS project. It will be interesting to see the effect of the GAAR provisions and whether additional measures are deemed necessary. In the field of international tax treaties, we expect that India will negotiate LOB clauses in its new or renewed treaties. Indonesia Characterisation and position regarding BEPS Indonesia is not an OECD member, but does form part of the G20 community. In this capacity it endorses the BEPS project and as such participates on an equal footing with OECD countries. The Indonesian Directorate General of Taxation (DGT), as competent tax authority, is likely to be keen on actively safeguarding tax revenues. BEPS-related measures Indonesia has not published an official reaction to the publishing of the BEPS Report, adoption of the Action Plan and the 2014 Deliverables. However, on the basis of publically available information, the DGT is aligning its focus and actions with the BEPS project. The following topics appear to be its main focus. 11
Proposing GAAR and tax treaty context The Indonesian Income Tax Law (IITL) provides the legal basis for several SAARs. In addition, the DGT applies a substance over form principle to counter perceived tax avoidance. However no GAAR has yet been introduced, although the DGT has stated in general that implementation of a GAAR may be considered in the future. Whether such a GAAR would also be applicable in a tax treaty context is unknown. As Indonesia has already implemented quite strenuous domestic requirements to tackle perceived tax treaty abuse, a GAAR may not be deemed necessary. Thin-capitalisation (implementing) regulation Action 4 of the Action Plan deals with financial payments to target excessive interest and other financial payments that may erode the tax base. Like many other countries, Indonesia has long since introduced legislation to counter perceived excessive debt leveraging. The IITL authorises the Minister of Finance to fix the debt to equity ratio of a company for the purpose of computing the taxable income. There have been ongoing discussions and various proposals during the past decade, but so far the Ministry of Financed has not issued an implementing regulation. According to the DGT, a future action plan could include a proposal for a thin-capitalisation regulation that would provide guidance. Notwithstanding the above, in practice taxpayers are referred to the standard published by Indonesia s Investment Coordinating Board, which prescribes a debt to equity ratio of 3:1. Moreover, in some cases, the DGT has been known to curtail interest deductions and increase taxable income by reclassifying interest payments as deemed dividend, on the basis of transfer pricing related anti-avoidance provisions in the IITL. have been aligned with the OECD Guidelines. The latest update (PER-22/PJ/2013) requires taxpayers to use the arm s length principle for transactions during audits. In effect the DGT is aiming to gain insight into MNEs supply chain management and profit allocation so as to avoid any profit-shifting. New guidance in the form of one or more regulations is expected. Related discussions also show the DGT s intention to request taxpayers to provide the MNE s head-office Masterfile, which may be going rather too far. As noted above, implementation of these measures remains uncertain, as it may also be difficult for taxpayers to comply in practice. Providing MAP With respect to Action 14 of the Action Plan, a MAP has been available to taxpayers since the beginning of 2011 (PER-48/PJ/2010). Following government regulation no. 74/2011, taxpayers have the possibility to apply a MAP together with local dispute resolution. In practice the current MAP procedure often proves to be inefficient and time-consuming. As improvement is welcome in this respect, the DGT have targeted the MAP as an action point. Promotion of advance pricing agreement (APA) programme Although the legal basis for APAs has been in place since the beginning of 2011, in practice very few bilateral and unilateral APAs appear to have been concluded. Moreover, it appears that the tax-related matters being brought before the courts are increasingly related to transfer pricing. The DGT wants to actively promote the use of APAs, as this should reduce the number of disputes in future, and simultaneously provide valuable insight into the approach by taxpayers to transfer pricing. Revising and strengthening transfer pricing rules Transfer pricing guidelines were introduced in the early 1990 s, but only since 2008 has the DGT actively updated and increased its focus in this respect. Transfer pricing is perceived as an easy target with the potential of increasing tax revenue, and also as an effective measure in relation to tax avoidance and/or evasion. Following technical guidance regulations published in 2010, 2011 and 2013, domestic transfer pricing guidelines Exchange of information Numerous actions under the Action Plan aim at increasing transparency and exchanges of information. In line with this objective, the Ministry of Finance issued a new regulation on exchange of information on 27 March 2014. Although the regulation does not refer to the BEPS Report, its contents clearly relate to the Report. Under the regulation, exchange of information should be based on a tax treaty, a TIEA or a multilateral agreement. 12
The new procedure deals inter alia with international transactions. In this context, the DGT will spontaneously exchange information with the competent authorities of treaty partners in certain cases. The regulation states that following a (preliminary) tax audit or tax investigation, spontaneous exchange of information should take place if: subject to tax on a proportionate share of the total income or certain passive income of the tax haven subsidiary. In addition, thin-capitalisation rules and earnings-stripping rules apply to counter excessive debt leveraging. Japan operates transfer pricing rules, and since 2010 taxpayers are required to submit transfer pricing documentation to the tax authorities. there is an indication of a (potential) significant loss of tax revenue in the treaty partner s jurisdiction; an allegedly unreported payment has been made to a taxpayer residing in the treaty partner s jurisdiction; an Indonesian tax incentive is available, which may increase the taxpayer s tax liability residing in the treaty partner s jurisdiction; taxation has been reduced as a result of routing transactions through one or more countries. Outlook Although the IITL provides a mature anti-avoidance landscape in both a domestic and a treaty context, its practical implementation and technical guidance is not optimal in all cases. This leads to legal uncertainty and may facilitate BEPS. Although the DGT s action list is based on the existing anti-avoidance infrastructure, there appears to be a clear correlation with the BEPS focus, we expect that the Ministry of Finance and the DGT will closely monitor the BEPS project and its deliverables in future. Furthermore, we anticipate that the DGT will give increased attention to transfer pricing, to ensure that economic activities are taxed in the jurisdiction where they take place. On 19 July 2013 the Ministry of Finance officially expressed Japan s strong support for the Action Plan, noting that the results could be a turning point in the history of international cooperation on international taxation. Japan s Cabinet Office Tax Commission has given priority to four BEPS items, including Action 13 which relates to transfer pricing documentation. Other items given priority are Action 2 on hybrid mismatch arrangements, Action 3 on CFC legislation and Action 8 concerning transfer pricing for transactions involving intangibles. The Japanese business community has also received the BEPS initiative positively. However, it has raised strong concerns regarding the BEPS Action 13 deliverable, in relation to country-by-country reporting as part of the BEPS project. It is believed that this may result in the unreasonable and counter-productive imposition of additional and excessive administrative burdens on Japanese businesses which have never been involved with BEPS. BEPS related measures We have identified the following BEPS related measures in Japan. Japan Characterisation and position regarding BEPS As an OECD and G20 member, Japan is fully integrated in the BEPS project. Japan has a mature corporate income tax system, including anti-avoidance rules. It has had CFC rules in place for a long time. Under these rules, certain Japanese direct or indirect shareholders in a tax haven subsidiary may be Proposed amendments On 24 April 2014 the Government s Tax System Study Council released a discussion draft on a potential amendment to the foreign dividend exemption rules, based on the draft BEPS Action 2 (Hybrid Mismatch Arrangements), which is likely to be implemented in the 2015 tax reform measures. Under the current dividend participation regime, dividends paid by certain foreign subsidiaries are almost completely exempt from Japanese income taxation (i.e. 95%). On the basis of the proposed amendment, dividends that are deductible in the foreign subsidiary jurisdiction will not qualify for the exemption. 13
Recent developments in relation to SAARs Japanese tax laws include three separate SAARs for closely held companies. If the tax authorities consider that a transaction entered into by the closely held company results in an improper reduction in the tax burden for such a company, they may disregard that transaction. As from 1 April 2016, an additional SAAR with a similar broad scope to that of the existing ones will be introduced, applicable to income attributable to Japanese permanent establishments of foreign corporations. Exchange of information The Japanese tax authorities may exchange tax information with foreign countries with which Japan has concluded tax treaties, subject to the provisions and limitations in the tax treaties. From July 2014 the FATCA has been implemented. Outlook We expect that Japan will continue to support the BEPS project strongly and align its domestic anti-avoidance rules with developments regarding BEPS. Transfer pricing will have increased importance, to ensure that economic activities are taxed in the jurisdiction where they actually take place. Particular attention may be given to intangibles and intercompany transactions within Asia, as Japan currently has one of the highest income tax rates in Asia. The Japanese tax authorities seem to have increased their focus on transfer pricing already. General corporate tax audits are often combined with specific transfer pricing audits, whereas in the past these were separate investigations. Korea Characterisation and position regarding BEPS Korea has a complicated tax system, with taxes being collected at both national and local level. In addition, Korea has been very active in developing anti-avoidance measures in its tax laws, including a substance over form principle and a number of specific anti-tax avoidance provisions. These anti-avoidance measures also extend to the application of tax treaties, and in many cases treaty benefits have been denied. As an OECD and a G20 member, Korea is fully integrated in the BEPS project. However, it has not yet published an official reaction following the publication of the BEPS Report, the Action Plan and the 2014 Deliverables. BEPS related measures We have identified the following BEPS-related measures. 2014 tax law amendments At the end of 2013 Korea passed some tax law amendments: Reinforcement of the CFC rule. Previously, Korean CFC rules applied if the ratio of a CFC s passive income to gross income exceeded 50% (among other conditions). From 1 January 2015 the CFC rules will apply, even if the ratio is less than 50%. A Presidential Decree will set this level within a few months. Information reporting requirement of foreign subsidiaries. Previously Korean companies were obliged to report certain information (e.g. transaction records) on their foreign subsidiaries in which they held an interest of 50% or more. Since 1 January 2014 the information reporting requirement is expanded to foreign subsidiaries in which they hold an interest of 10% or more. In addition, information on loss-generating transactions by foreign subsidiaries should also be reported. If a company fails to report the required information, a penalty of up to Korean Won 10m may be due. Improved intergovernmental exchange of financial information related to tax. A law has been enacted to allow periodic exchanges of information between governments for both individual residents and domestic corporations, effective from 1 January 2014. Proposed tax law amendments On 6 August 2014 the Ministry of Strategy and Finance (MOSF) announced proposed tax law amendments. Once reviewed by the Ministry of Legislation and approved by the Cabinet Meeting and the National Assembly, these amendments will in general take effect from 1 January 14
2015. The proposed amendments below are related to BEPS developments: Tighter application of the thin-capitalisation rules. The scope of application would be expanded to cover borrowings from any party having a special relationship with the foreign controlling shareholder. In addition, the allowable debt to equity ratio would be reduced from 3:1 to 2:1 for non-financial entities. The debt to equity ratio for financial companies remains 6:1. Broader application of CFC rules. To be subject to Korean CFC taxation, a Korean resident should inter alia have a special relationship with a foreign company. One of the tests to determine the presence of a special relationship is an equity test. In applying this equity test, it has been proposed to include the equity ownership in a foreign company held by nonresidents who are related to the Korean resident. Higher penalties for tax evasion. The penalty would increase from 40% to 60% of the evaded tax if taxpayers fail to report or under-report the income from cross-border transactions. Harmonised APA and Advance Customs Valuation Arrangement. Under the amendment, as from 1 January 2015, a request for advance certainty may be filed for both transfer pricing and customs valuations, based on the same pricing methodology. Exchange of information Korea is actively building up its network of TIEAs, with a round of negotiations for TIEAs with Mauritius in February 2014, and with the Cayman Islands in March 2014. On 2 April 2014 Korea and the US reached an intergovernmental agreement in substance under the FATCA regime. In addition, on 24 June 2014 Korea released the implementation regulation which provides Korean financial institutions with domestic guidance on complying with the FATCA. Tax Treaty application It should be noted that in 2012 Korea introduced detailed forms to be completed by foreign investors, in order to prevent tax treaty abuse. A foreign investor who derives income from Korea and wishes to benefit from a reduced tax rate under a Korean tax treaty is required to submit these forms (and corresponding evidence) to a Korean withholding tax agent before the date of receipt of the income. The foreign investor should inter alia substantiate that he is the beneficial owner of the Korean-sourced income. Outlook As Korea is fully integrated in the BEPS project, we expect that it will continue to endorse the project and await the final outcome of the Action Plan. We also expect that Korea will consider the BEPS project as support for amending or applying its domestic anti-avoidance legislation even more actively. Malaysia Characterisation and position regarding BEPS Malaysia is neither an OECD nor a G20 member, but it is following the OECD s BEPS initiatives. The Malaysian Internal Revenue Board (MIRB) is keen on enforcing the diligence and compliance activities of MNEs. The Malaysian government recently answered the UN Subcommittee on BEPS questionnaire. UN Subcommittee on BEPS questionnaire The MIRB indicates that BEPS not only affects tax collection; it also undermines the credibility of the tax system due to negative public perception. It seems that the MIRB is predominantly focusing on transfer pricing to ensure that profits are taxed in the jurisdiction where economic activities are carried out. Commonly encountered BEPS structures include excessive and unwarranted intra-group payments such as interest on loans, management fees, technical fees or payment for IP whose arm s length nature is difficult to determine. Services rendered in the field of R&D and marketing also appear to be mispriced in practice, giving rise to a loss of tax revenue. According to the Malaysian government, the centralising of functions within modern business models 15
causes a shift in the global value chain model. Cases of supply chain restructuring have been encountered where risks were contractually transferred out, which resulted in profits being shifted from a Malaysian company to a foreign regional office. The MIRB counters these problems by carrying out transfer pricing audit activities and invoking specific transfer pricing provisions. The main obstacle encountered by the MIRB is that it is difficult to obtain information, especially from foreign stakeholders and operations. Also, MNEs may not always be sufficiently transparent with regard to the disclosure of relevant information. As Malaysia s domestic tax policy is currently focused on transfer pricing and countering base erosion, it is not surprising that Action 10 of the Action Plan (aligning transfer pricing outcomes with value creation with reference to other high-risk transactions) has priority. Preventing the artificial avoidance of permanent establishment status (Action 7) and neutralising the effects of hybrid mismatch arrangements (Action 2) are also considered important. BEPS related measures The Malaysian Income Tax Act contains a GAAR, which may have an impact if a taxpayer s business transaction is not carried out for bona fide commercial reasons. In brief, a substance-over-form principle has been introduced, which could lead to arrangements being considered void for tax purposes. From 1 January 2009 additional anti-avoidance legislation was introduced, in the form of transfer pricing and thin-capitalisation provisions. To date, implementation of the thin-capitalisation provisions has been deferred. align it with the OECD approach. However, in absence of implemented thin-capitalisation provisions, CFC rules and specific anti-treaty shopping provisions the Malaysian tax environment is not BEPS-proof. We therefore expect Malaysia to take action by choosing its preferred antiavoidance approaches from the 2014 and future deliverables, so as to reinforce its tax framework. In this light it is apparent that transfer pricing will receive continuing attention in in the near future, as this is perceived as one of the main causes of tax revenue loss. Philippines The Philippines is neither an OECD member nor a G20 member. The Philippines tax authorities have not so far released any official response to the BEPS Report or the Action Plan. Nonetheless, we believe the Philippines authorities are monitoring these developments carefully. With regard to BEPS-related measures, the Philippines do not have extensive anti-avoidance rules, although the courts have established certain test to deal with tax evasion. It should be noted that in 2011 the Philippines Supreme Court ruled that the power of the Bureau of Internal Revenue Commissioner to allocate income and expenses between related parties may only be invoked in cases of under-statement of taxable net income or evident tax evasion. On 21 November 2013 the Philippines signed a letter of intent to join the Multilateral Convention on Mutual Administrative Assistance in Tax Matters. The Convention aims to facilitate international cooperation to fight tax evasion and avoidance. A transfer pricing documentation requirement aimed at enhancing compliance with existing transfer pricing guidelines, leveraging the OECD Guidelines, was introduced in 2012. Companies are required to declare in their 2014 tax returns whether the required up-to-date transfer pricing documentation has been prepared (with a yes or no question). A negative answer could lead to a transfer pricing audit by the MIRB. Outlook Malaysia seems to be leveraging on transfer pricing to Singapore Characterisation and position regarding BEPS Singapore is neither an OECD nor a G20 member. As Singapore aims to retain its status as a widely accepted international business hub, it has expressed active support for the Action Plan. The Singapore Ministry of Finance (MOF) has provided its view on BEPS by answering the UN Subcommittee questionnaire on BEPS. 16
UN Subcommittee on BEPS questionnaire The MOF clearly pinpoints transfer pricing as the most important aspect of BEPS. Emphasis is put on Singapore s function as a business hub and gateway to Asia, which calls for robust transfer pricing guidelines to ensure profit allocation where economic activities take place and value is created. Taxation should be aligned with substance, meaning functions, risks and assets. An existing GAAR and internationally aligned transfer pricing guidelines are in place, but the MOF acknowledges that policy and legislation should be continuously updated in line with ever-changing global tax rules. Despite active support for the BEPS project, the MOF is against a one size fits all approach. Moreover, BEPS recommendations should not impede the growth of genuine substantive business activities. The MOF specifically refers to the use of tax incentives as a valuable tool for developing countries, to spur investment in under-invested sectors and regions. BEPS rules should not prohibit such tools as long as they are geared towards real development and substantial economic activities. Countries should be able to retain flexibility and sovereignty should not be undermined. BEPS related measures The Singapore Income Tax Act includes a GAAR, under which the Inland Revenue Authority of Singapore (IRAS) may disregard or vary an arrangement and make such adjustments as it considers appropriate. Following the BEPS Report and the 2014 Deliverables, Singapore has taken notice and acted to some extent. Consultation paper on transfer pricing documentation On 1 September 2014 the IRAS released a public consultation paper, in preparation for updating its transfer pricing guidelines on documentation to provide more comprehensive guidance. A requirement for contemporaneous documentation has been introduced, on the basis of which documentation should be prepared prior to or at the time of undertaking the transactions. Taxpayers should assess the adequacy and extent of their transfer pricing documentation, taking into account any high risks in respect of transactions and arrangements. In addition, it should be assessed whether not having adequate documentation in place may expose the taxpayer to other adverse consequences. Small and medium entrepreneurs (SMEs) and taxpayers that apply a safe harbour mark-up of 5% for routine services are exempt. The transfer pricing documentation only has to be made available on the IRAS s request. Tax guide regarding hybrid instruments In line with Action 2 of the Action Plan (neutralising the effects of hybrid mismatch arrangements), the IRAS issued a new technical guide on the tax treatment of hybrid instruments on 19 May 2014. It sets out the income tax treatment of hybrid instruments, including the factors generally used to determine whether they are debt or equity instruments for income tax purposes. In alignment with the BEPS approach, the Singapore characterisation of a foreign-issued instrument will partly depend on its foreign characterisation. Exchange of information Following the endorsement of the internationally agreed standard for exchange of information in 2009, Singapore has significantly strengthened its framework for international tax cooperation. Also, since 5 May 2014, Singapore is included in the US Treasury s list of jurisdictions treated as having an inter-governmental agreement in place to facilitate the application of the FATCA. Outlook Singapore is actively participating in countering BEPS. Its main focus is on transfer pricing, to create an alignment between allocation of profits and substance, and the recent consultation paper supports this. Remarkably, explicit emphasis is also given to the sovereignty of (developing) countries, to ensure that BEPS rules and/or recommendations do not jeopardise economic growth and development. The MOF suggests that end deliverables should be developed as a set of options from which countries can choose, rather than imposing one set of rules for implementation. 17
Singapore is clearly aiming to retain the balance between collectively countering tax avoidance and maintaining its attractive climate for businesses. In the future we expect Singapore to monitor BEPS developments closely, and to adhere to rules and regulations when necessary to safeguard that balance. Taiwan Characterisation and position regarding BEPS In general, Taiwan has a mature corporate taxation system. However, unlike the rules that have been implemented over the years elsewhere, this system does not include many anti-abuse rules which could serve as tools for countering BEPS. Taiwan has not so far been an active participant in the BEPS discussions. The Taiwanese tax authorities have not published any official comments on the BEPS Report or any of the 2014 Deliverables. However, like other countries, Taiwan is also exposed to BEPS and is likely to be keen on safeguarding its tax revenues. We understand that Taiwan is following the BEPS developments and evaluating whether it is necessary and feasible to introduce any amendments to the relevant domestic law or regulations. BEPS related measures We have identified a few recent measures that could be related to BEPS. On 1 April 2013 Taiwan introduced CFC rules and effective management rules which will take effect at the beginning of 2015. The CFC rules stipulate that if a Taiwanese enterprise directly or indirectly owns or has substantial control over a qualifying associated enterprise in a tax haven or a low-tax country, the undistributed profits of the foreign enterprise are proportionately taxable in Taiwan. The effective management rules stipulate that if a foreign enterprise has its place of effective management in Taiwan, it will be treated as a tax resident of Taiwan and consequently be subject to tax on its worldwide income. However, no detailed guidance on either rule has been published. On 23 June 2014 Taiwan and the US reached an intergovernmental agreement in substance under the FATCA regime. Outlook We do not expect Taiwan s position towards BEPS to change significantly in the near future, but although its active participation is not expected, it will definitely monitor developments closely. In the future some development in the field of domestic anti-abuse rules may be expected. As with other countries which are in the process of updating and redeveloping their anti-abuse legislative landscape, the 2014 and future Deliverables may be expected to be taken into consideration. Thailand Characterisation and position regarding BEPS Thailand is neither an OECD nor a G20 member. During the ECOSOC Special Meeting on International Cooperation in Tax Matters on 5 June 2014, the Revenue Department of Thailand (RDT) identified a few international tax trends, including BEPS and international cooperation in the form of exchange of information and MAP. By acknowledging that Thailand needs to be ready to confront these trends, the RDT implied that it is monitoring developments closely and giving attention to reducing the effects of BEPS. Compared to neighbouring countries Thailand has good infrastructure and relatively low corporate income taxes. Although foreign direct investments are crucial, the Thai economy, like that of many other developing countries, is largely built on SMEs, who form its real backbone. The RDT takes the view that MNEs have a competitive edge over SMEs, which do not have the same opportunities when it comes to fiscal optimisation. BEPS 18
may therefore be perceived as having a distorting effect on the Thai economy and its growth potential. CFC legislation, this is an area of focus. Furthermore, the implementation of a GAAR is also contemplated. The RDT has stated views on BEPS by answering the UN Subcommittee s questionnaire. UN Subcommittee on BEPS questionnaire The RDT acknowledges that developing countries are especially affected by BEPS as it leads to loss of revenue, while the source country bears the hidden costs of doing business, such as infrastructure development. Among the most common distorting practices, intra-group transactions and related expenses (e.g. excessive debt financing, outbound royalty payments) play a prominent role. In addition, the RDT highlighted artificial business restructurings within one group, artificial avoidance of permanent establishments in the e-commerce sector, high net-worth individuals seeking tax shelter elsewhere and treaty abuse. The RDT aims to counter these problems by carrying out tax audits and exchanging information with treaty partners. It is also reconsidering legislative or policy changes concerning transfer pricing, thin capitalisation, CFC regimes and treaty provisions. Regarding the Action Plan, Thailand points out that the digital economy, treaty abuse, transfer pricing and permanent establishment definition are key priorities. It also points out that developing countries in particular have trouble discouraging BEPS, due to the less sophisticated legal infrastructure and a lack of information. Besides the proposed Action Plan approaches, the RDT believes that implementing some sort of periodic supervision alongside existing methods such as performing tax audits will allow a better and faster response to any tax planning that may result in profit-shifting. BEPS related measures Thailand has not undertaken any concrete action as a result of the BEPS project. However, as it clearly regards reducing the effects of BEPS as urgent, the RDT is considering tax law reform with regard to international taxation. In the absence of any thin capitalization and Outlook Although anti-avoidance rules are not widely implemented in Thailand, the RDT is aware of the practices that cause loss of revenue and understands the need to adopt business models appropriate for the digital era. We expect that its international tax policy review will lead to proposals for new policies and legislation to tackle perceived distorting effects. It seems that the 2014 Deliverables may form a blueprint for this, together with existing anti-avoidance legislation in other jurisdictions. Emphasis will also be placed on linking the information from all stakeholders and improving the ability and infrastructure to gather information needed to assess the risk of tax loss. Improving the competences and skills of tax officers is equally important. Notwithstanding the foregoing, the RDT stresses the importance of maintaining a healthy balance between the investment climate and tax policy design. Vietnam Characterisation and position regarding BEPS Vietnam is neither an OECD nor a G20 member. To date Vietnam s tax authorities have not published any official comments on the BEPS Report or the Action Plan. However, the following measures appear to be related to the BEPS developments. BEPS related measures Increased transfer pricing audits In May 2012 the Vietnam Ministry of Finance of Vietnam issued its Action Plan on Transfer Pricing Management for the period 2012-2015 (the Plan). This Plan aims to target abusive transfer pricing arrangements, and as a result the number of transfer pricing audits increased significantly in 2013. According to the Plan, transfer pricing audits should focus on risk assessment. A 19
taxpayer s assessment is likely to be challenged under such circumstances as continuously reporting losses, showing a lower profit (level) than the industry standards, carrying out transactions with related parties in tax havens or deducting significant service fees or royalties paid to recipients outside Vietnam. In addition, for the financial year 2014 taxpayers in Vietnam are required to file a revised disclosure form on related-party transactions with their annual corporate income tax return. This implies that taxpayers will need to substantiate the arm s-length nature of the actual or re-adjusted value of their related party transactions by maintaining transfer pricing documentation. Anti-treaty shopping rules On 24 December 2013 the Ministry of Finance issued a Circular on the implementation of Vietnamese tax treaties, effective since 6 February 2014. Among other things, the Circular introduces a domestic GAAR to combat treatyshopping. It provides that tax treaty benefits should be denied if: (i) the main purpose of an arrangement is to obtain treaty benefits, or (ii) an income recipient is not the beneficial owner according to the substance-overform principle. advertising. Before a foreign website provider may post online advertisements for a Vietnamese entity, it should engage a nominated Vietnamese advertising company tocontract on its behalf with the Vietnamese entity. Consequently, the foreign website provider is considered to have a permanent establishment in Vietnam for Vietnamese tax purposes, regardless of the location of its server or the (in)dependent status of the Vietnamese advertising company. The Vietnamese advertising company must withhold a foreign contractor tax, consisting of VAT and income tax, on the advertising fees paid to the foreign website provider. The income tax may be reduced under a tax treaty if no permanent establishment is considered to exist. Outlook Although active participation in the BEPS discussions is not expected, Vietnam will definitely monitor developments closely. At the same time, Vietnam is gradually building up its domestic system of anti-abuse measures. We expect this will include increased attention to transfer pricing rules, which is in line with developments in the region. Under the Circular, an income recipient s beneficial ownership may be challenged if certain factors exist, including that (i) the recipient is obliged to distribute more than 50% of the received income to a third country within twelve months; (ii) the recipient has little or no business substance; (iii) the recipient s assets, business size and employee headcount are disproportionate to the income received; (iv) the recipient has little or no control over the received income or assumes no risks; (v) there is a back-to-back arrangement between the recipient and a third party; (vi) the recipient is a resident in a no-tax or low-tax (below 10%) country; or (vii) the recipient is an intermediate company or an agent. New withholding tax on online advertising On 14 November 2013, even before the OECD published the Discussion Draft on Action 15 (Addressing the Tax Challenges of the Digital Economy), Vietnam issued Decree 181/2013/ND-CP, which among other things imposes a withholding tax on outbound payments for online 20
Key observations In this special BEPS edition of the Asia Newsletter we have provided a brief update on the OECD s BEPS project by discussing the attitude of major Asian countries to the Action Plan and the 2014 Deliverables. Although the BEPS project aims to deter the global effects of BEPS, it is an initiative that does not directly involve all countries. As only a few countries in Asia form part of the OECD and/or G20 community, we have provided an overview of the perspectives and (related) measures that have been or are being undertaken by Asian countries. We point out that a number of Asian countries are actively involved in the BEPS project, either through their membership of the OECD (Japan and Korea) and/or G20 (China, India, Indonesia, Korea and Japan). These countries seem to endorse the BEPS project and have announced or are considering related measures in their domestic legislation. Other (developing) countries or regions, such as Taiwan, Thailand, Malaysia, the Philippines, Vietnam, Singapore and Hong Kong are adopting a more passive position in the discussions. Almost all the countries discussed have to some extent implemented anti-avoidance legislation or regulations that counter BEPS to a certain degree. Although there are significant differences in sophistication, existing measures are being compared and in some cases aligned with the OECD s approach. Concerning new measures, the 2014 and future Deliverables may act as a helpful blueprint for countries. Overall, we expect that Asian countries will continue to focus mainly on transfer pricing guidelines and treaty abuse. With regard to the latter, it will be interesting to monitor what kind of tax treaty policy Asian countries adopt (LOB clause vs. principal purpose test). It is inevitable that BEPS and the Action Plan will have a major worldwide impact on taxation. Although the final deliverables are still to be expected, different stakeholders have already shared their views. The current developments undoubtedly have caused MNEs to re-assess their tax structures and compliance framework. This heightened awareness can be expected to increase as tax authorities exchange information more and more. The management of tax risks should never be under-estimated; this applies not only for the Americas and Europe, but equally when doing business in Asia. 21
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