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Australia
We would like to thank the tax lawyers of Finlaysons in Adelaide for their
contribution to the Australian section of this newsletter.
The information below is produced by Loyens & Loeff in Singapore and Tokyo. It is designed to alert those (interested in) doing business in
the Asian region to recent developments in the region. Such developments are discussed in brief terms and are based on generally available
information. The materials contained in this publication should not be regarded as a substitute for appropriate detailed professional advice. The
information below was assembled based on information available as at 31 July 2003.
L O Y E N S & L O E F F – A S I A N E W S L E T T E R – S U M M E R 2 0 0 31
Proposed international tax reforms
• In the May 2003 Federal Budget, the Treasurer announced reforms
to Australia’s international taxation arrangements to improve the
competitiveness of Australian companies with offshore operations.
Controlled foreign company (CFC) rules
• The CFC rules will be simplified for Australian companies operating
in countries where tax arrangements are comparable to those in
Australia. The changes will also ease the rules for certain services
provided in international markets.
• In particular, the scope of the “tainted services income” provisions
will be reduced to exclude from attribution, to a large extent,
the income of CFCs earned from providing services to non-
resident associates.
• This will allow Australian multinationals and regional headquarters,
that provide services to other group companies and joint ventures
through non-resident associates, to compete better in inter-
national markets.
Capital gains tax (CGT)
• Australian companies (and their CFCs) will be exempted from CGT
on the sale of certain non-portfolio interests in foreign companies
with an underlying active business.
• In addition, under the new “foreign income account” rules, which
will replace the current “foreign dividend account”, conduit taxation
relief will be extended to include branch profits, tax-exempt gains
on the sale of offshore subsidiaries with active businesses, and other
foreign income sheltered from Australian tax by foreign tax credits.
• The Government will also examine the feasibility of a CGT exemption
for gains on disposals by non-residents of non-portfolio interests
in Australian companies, to the extent the gain has an underlying
foreign source.
Foreign investment fund (FIF) rules
The Government proposes better targeting the FIF rules to reduce
compliance costs for Australian managed funds and superannuation
(pension) entities investing offshore by:
• increasing the “balanced portfolio exemption” (which exempts
interests in FIFs from the FIF rules where their aggregate value
is less than a prescribed percentage) from 5% to 10% for all
taxpayers; and
• exempting Australian complying superannuation entities from
the FIF rules.
Taxation of trusts
Certain aspects of the cross-border taxation of resident trusts will be
reviewed to improve the international competitiveness of Australian
managed funds. In particular:
• non-residents will be exempted from CGT when selling non-
portfolio interests in certain Australian managed funds; and
• non-resident beneficiaries will be exempted from tax on non-
Australian gains of Australian unit or other fixed trusts.
Foreign banks
• The “separate entity” treatment given to foreign bank permanent
establishments will be extended to branches of other financial
entities.
• Unfranked dividends received by foreign-owned branches will generally
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be taxed on assessment, instead of being subject to non-resident
withholding tax.
Tax treatment of foreign expatriates
The Government will:
• address the double taxation of employee share options for
individuals moving between countries;
• not proceed with a previously-announced measure requiring
security from departing residents for deferred CGT liabilities;
and
• establish a specialist section of the Australian Taxation Office to
deal with foreign expatriate issues.
Double tax treaties
• The Government will move towards a more residence-based treaty
policy, compared with the current source-based model.
• In addition, the “most favoured nation” clauses in a number of
Australia’s existing tax treaties will require Australia to enter into
negotiations with a view to providing to the other treaty partner
similar withholding tax outcomes (ie reductions) to those agreed
in the recent US Protocol.
Date of effect
The majority of reforms arising from the review will take effect on
or after 1 July 2004, subject to parliamentary approval and following
public consultation.
Foreign Hybrid Trusts Update
• Amendments have recently been introduced to Parliament to
give special tax treatment to certain foreign hybrids, including
UK and US limited partnerships and limited liability partnerships,
US limited liability companies and other companies to be listed
in regulations.
• The changes, which were reported in the Asia Newsletter (Spring
2003), will apply from the start of the 2003/2004 income year.
Taxpayers will have an option to apply the amendments from the
start of the 2002/2003 income year.
Infrastructure Financing
The Assistant Treasurer has released for comment a draft Bill that
would replace the existing infrastructure financing provisions on
leveraged leases and non-leveraged finance leases.
The main aim of the proposed Bill is to:
• ensure that only taxpayers that have a sufficient level of risk in
respect of assets under an arrangement with a tax-preferred entity
will be entitled to capital allowances deductions;
• restrict access to tax benefits to non-resident end users; and
• improve the “notional loan” tax treatment of arrangements
between taxpayers and non-taxable entities so that taxpayers
will have greater certainty and neutrality as to the tax treatment
of such arrangements.
Rio Tinto disputes ATO assessments
• The 2002 Annual Report and Financial Statements of Rio Tinto
state that the ATO has issued assessments of $500m against
the Rio Tinto Group. Those assessments, which include penalties
and interest, relate to transactions undertaken in 1997 to acquire
franking credits.
• It is understood that Rio Tinto acquired the franking credits
to overcome a short-term franking deficiency, allowing it to pay a
fully franked interim dividend in 1997.
• In the mid to late-1990s, it was not uncommon for non-resident
shareholders, that did not pay tax in Australia and had no use for
the credits attaching to franked dividends, to trade those credits
with Australian taxpayers who could utilize them.
• Rio Tinto argues it purchased the franking credits based on its
considered view of the law prevailing at the time (which was
subsequently amended to prevent such trading taking place).
The progress of the case will be followed with interest.
ChinaMOFTEC replaced by Ministry of Commerce
• The former Ministry of Foreign Trade and Economic Cooperation
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(referred to as MOFTEC) has been converted into a new ministry,
the Ministry of Commerce of the PRC with effect from 25 March
2003. The new Ministry of Commerce consists of all of the old
MOFTEC and certain departments of the ministries dealing with
domestic trade.
Rep office tax reporting method reform
• On 12 March 2003, the State Administration of Taxation issued a
notice (Guo Shui [2003] no.28) reiterating the tax filing methods for
foreign representative offices. All representative offices of foreign
enterprises should register with the tax authorities and report their
business operations on a regular basis. The notice took effect from
1 July 2003.
• The scenarios covered by the above-mentioned notice include:
• Foreign representative offices engaged in providing consulting
services, such as regulatory, legal, taxation, accounting and audit
services, should keep complete accounting records, calculate
service revenue and taxable income accurately, and pay the taxes
on the Actual Income basis.
• Foreign representative offices, which conduct activities in
connection with trading, advertising and tour agency business,
can (continue to) report for income tax and business tax purposes
on the cost-plus basis.
• The representative offices of foreign governments, international
organisations, non-profit organisations, civil organisations and
those representative offices who qualify as principal supplier for
manufacturing operations of their overseas head office can apply
to the local tax authorities for tax exemptions. However, the final
approval should be issued by the State Administration of Taxation.
For tax exemption purposes, a certificate issued by the head
office’s tax or government authority to certify the nature of the
organisation should be provided. Those representative offices
which are approved to be exempt from taxes should file an annual
report in respect of their business operations with the tax
authorities within one month after the end of the year.
Increased personal income tax enforcement measures
• By notice issued during the weekend of 19 July, the PRC State
Tax Administration has urged tax authorities to intensify personal
income tax collection and management, with particular emphasis
on high-income earners.
Circular on customs duty treatment of royalty payments
• It was announced on 31 July 2003 that the PRC’s General
Administration of Customs has published a new circular to clarify
the customs duty treatment of royalty payments, an issue of
considerable concern to foreign companies with operations in China.
The new circular, which came into effect on 1 July, represents one
of the most sweeping changes to PRC customs legislation since
China’s accession to the World Trade Organization.
• The circular, which supersedes the Customs Interim Provisions of
Tax Levy and Exemption of Software Charges of Import Goods (1993
No. 15), defines royalties and the conditions under which royalties
or like payments will be subject to or exempt from customs duty.
• Although the new circular is welcome in that it provides greater
clarity on how royalty payments should be treated by the PRC customs
authorities nationally, there is concern as to how the new rules will
be implemented by local customs offices and how some of the
circular’s provisions will be interpreted.
Free Trade Agreement with Hong Kong
• On 29 June, the PRC signed a landmark Free Trade Agreement with
Hong Kong, which is set to provide important advantages to
Hong Kong firms in comparison with other foreign investors, in
respect of investments into the PRC (meaning: the Mainland part
of the PRC, as opposed to the territory of Hong Kong). China will
apply a zero tariff rate on some 273 categories of goods, and many
items will be eliminated in 2006 subject to further details which are
still being discussed. Further, the FTA provides relaxations to Hong
Kong firms in the areas of banking, insurance, construction, real
property, securities, management consulting, accounting, legal
services, conventions, logistics and tourism. The changes are
scheduled to take effect on 1 January 2004.
• As well as scrapping tariffs on Hong Kong’s exports to the mainland,
the agreement will provide greater access to the mainland’s service
industries for Hong Kong businesses, and will generally help to
increase the flow of cross border trade. It is expected that the
territory will derive much benefit from the pact as multinational
companies hoping to exploit the vast Chinese market will very
likely set up their Chinese headquarters in Hong Kong. In addition,
Chinese firms are expected to establish offices in the city to take
advantage of investment opportunities.
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Non business expenses
• In a notice jointly issued by the State Administration of Taxation
and the Ministry of Finance on 16 July, the PRC set forth new
provisions designed to close an existing loophole in the tax system
that allows business owners and investors to avoid personal income
tax by passing off personal expenditures as company expenditures.
• With immediate effect, individuals who use their company money
for non-business purchases will be subject to personal income tax
on those purchases. Likewise, individual investors who borrow
company funds for personal use and do not repay the debt within
one year will be liable to personal income tax thereon.
Domestic enterprises becoming FIEs
• The State Administration of Taxation issued a notice on 28 May
2003 (Guo Shui Fa [2003] No. 60) regarding the taxation of domestic
enterprises transformed into foreign investment enterprises (FIEs)
as a result of the acquisition of the domestic enterprises’ shares by
foreign investors. The notice applies retroactively from 1 January
2003 and its contents are summarised below. The background for
this notice is that from 12 April 2003, foreign investors have been
allowed to acquire shares in domestic enterprises, thereby, in certain
circumstances, transforming these enterprises into FIEs.
• Foreign investors acquiring shares in a domestic enterprise or
purchasing shares issued by a domestic enterprise results in an
enterprise which is liable to income tax as an enterprise with foreign
investment or an FIE, i.e. to “foreign income tax”, if the foreign
shareholding, following the acquisition or purchase, exceeds 25%
of the total registered capital of the domestic enterprise.
• If foreign investors meet the requirements under the Foreign
Enterprise Income Tax Law and its detailed rules, they qualify for
the tax incentives available under the tax laws and regulations. The
commencement of operations is defined to be the date shown on
the new business licence issued by the State Administration of
Commerce and the operational period runs from that issuing date
to the date of termination shown on the licence. Losses incurred
before the acquisition or purchase of the shares in a domestic
enterprise remain deductible for an FIE (Foreign Investment
Enterprise) within the period provided for by Art. 11 of the Foreign
Enterprise Income Tax Law.
• The first profit-making year is defined as that in which the enterprise
realises a profit after the deduction of losses incurred before the
acquisition or purchase. If the duration of the first profit-making
period is less than 6 months, the enterprise may choose between
the current year and the next year as the year in which the first-profit
making year commences.
Tax rulings
• The PRC is expected to issue guidelines on advance pricing
arrangements (APAs) in the near future. It lacks regulations governing
the content of APAs and the application procedures for obtaining
them. It was not until autumn 2002 that article 53 of the
Implementation Rules of Tax Collection and Administration Law,
issued by the Chinese State Council, incorporated the APA concept
into law. APAs were first mentioned in the State Administration of
Taxation’s 1998 Circular 59.
Renewable tax holidays
• It was reported on 28 May that despite the many reports indicating
that the PRC is scheduled to phase out its tax incentives for foreign
investment, the PRC government has recently released a new incentive
that gives FIEs the ability to restart their tax holidays, provided that
their activities are classified as “encouraged” under the Catalog
Guiding Foreign Investment in Industry.
• Previously, encouraged FIEs could, for a second time, be exempt
from enterprise income tax for two years followed by a 50 percent
reduction in its nominal enterprise income tax rate for the next three
years. The catch was that the FIE would have to increase its registered
capital by at least US $15 million and that the second holiday would
apply only to the taxable income properly allocated to the new project
relating to the increase. Now, however, an FIE is able to aggregate
a series of smaller registered capital increases and still qualify for
that second-time exemption from enterprise income tax followed
by the 50 percent reduction for the following three years.
Mergers and acquisitions and venture capital
• It was reported on 24 June that the PRC’s State Administration of
Taxation recently released new tax guidance to clarify the enterprise
income tax treatment of certain M&A and venture capital transactions.
The clarification was provided in two notices: Issues Relating to
the Taxation of Foreign Investors’ Acquisitions of Equity Interests
in Domestic Enterprises (the M&A Notice) and Certain Questions
Regarding Payment of Income Tax by Foreign-invested Venture
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Capital Companies (the VC Notice) issued on 28 May and
4 June respectively.
Hong Kong
Advance tax rulings on Profits Tax
• The Hong Kong Inland Revenue Department (IRD) on 23 July
published two new advance ruling cases that concern section 14 of
the Inland Revenue Ordinance (IRO), which essentially defines what
falls into the charge to Hong Kong profits tax.
• One of the new advance rulings was in the taxpayer’s favor, the other
not. At high level, the favorable ruling shows that the IRD considers
it is still possible to have trading profits booked in Hong Kong that
are not taxable there, on the basis they do not arise in or derive from
Hong Kong. The unfavorable ruling is a reminder that this is perhaps
not always straightforward to achieve.
International Tax Developments
• China - Mainland: Free Trade Agreement - see the PRC section above.
• Germany. Germany and Hong Kong signed on 13 January 2003 an
agreement for the avoidance of double taxation in respect of
the taxes on income and on capital of shipping enterprises. The
agreement was concluded in the German and English languages,
each text having equal authenticity. Once in force, the agreement
will generally apply retroactively in Germany from 1 January 1998
and in Hong Kong from 1 April 1998. The new agreement follows
Arts. 8, 13 and 22 of the OECD Model Convention. The profits of
an enterprise of a state from the operation of ships in international
traffic are taxable only in that state. Equally, capital taxation and
capital gains taxation take place only in that state. The profit taxation
rule applies if the profits are derived from the participation in a pool,
a joint business or an international operating agency. The agreement
also contains a definition of profits from the operation of ships in
international traffic, including the profits from the use or rental of
containers. Finally, if an enterprise is an enterprise of both states,
its status is determined by mutual agreement.
• The Netherlands. The Dutch Ministry of Finance in May announced
that it intends to start negotiations with Hong Kong to conclude a
double tax treaty. The negotiations are scheduled to commence in
March 2004. This is the second attempt to arrive at a possible
tax treaty between the two jurisdictions. The previous attempt
was in 1999 but was discontinued because of lack of interest
from the Dutch side. A tax treaty with Hong Kong would likely
reduce the Dutch dividend withholding tax rate but would on
the other hand require assurances by Hong Kong to exchange
information if requested for by the Dutch tax authorities.
• India. It was reported on 14 July 2003 that Hong Kong and
India will soon sign a limited double taxation treaty which will exempt
shipping companies and airlines from having to pay income tax in
both countries.
India
VAT
• The imposition of Value Added Tax (VAT) in India has been postponed
yet again, as the country missed the 1 June deadline. Consequently,
a committee of state finance ministers and representatives from
political parties are now attempting to formulate a new “roadmap”
for implementation of the tax. The VAT issue has been contentious.
It has been postponed more than three times in the last two years.
The government’s plan to press ahead with the tax has sparked
bitter protest from traders and shopkeepers with many staging a
series of strikes in protest.
• The main stumbling block for the central government has been the
apparent inertia of the state legislatures. 11 states have drafted the
legislation necessary to introduce the new tax, but it has been found
that some of the bills drawn up by the state governments contained
“considerable” differences from the recommendations made by the
committee responsible for overseeing the new tax.
• A new deadline for the introduction of the tax has yet to be put in
place, although Finance Minister Jaswant Singh has let it be known
that VAT cannot be introduced piecemeal on a state by state basis,
as anything other than a complete consensus is likely to cause
economic chaos.
Deductibility of foreign head office costs to Indianbranches
• The Mumbai High Court gave its ruling on 30 April 2003 in the case
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of Commissioner of Income Tax v. Emirates Commercial Bank
Ltd. in which it dealt with the issue of the tax deductibility of, and
the restriction (if any) on, the head office expenses incurred by a
non-resident in respect of its branch in India. A foreign bank
had a branch office in Mumbai, India, whilst its head office was in
Abu Dhabi, United Arab Emirates. In the relevant year, certain
travel expenses were incurred for visits by head office staff members
to the Indian branch. These expenses were initially incurred by
the head office but later recovered from the Indian branch. Sec. 44C
of the Income Tax Act (ITA) states that, for non-residents, certain
head office expenses incurred outsid India are deductible in
computing the business income only to the extent of the lower of
(i) 5% of the taxable income or (ii) the head office expenditure
attributable to a taxpayer’s business in India.
• The issue before the High Court was whether or not all of the travel
expenditure was tax deductible as expenditure of the Indian
branch or, alternatively, if the expenditure was subject to restriction
under Sec. 44C of the ITA.
• The High Court held that Sec. 44C of the ITA applies only to
non-residents who carry on a business in India through branches.
The section is intended to avoid difficulties in scrutinizing claims
in respect of general administrative expenses incurred by a foreign
head office insofar as the expenses relate to their businesses in
India, having regard to the fact that foreign companies operating
through branches in India sometimes try to reduce their Indian
tax liability by inflating claims for the head office expenses.
Sec. 44C of the ITA seeks to impose a restriction on the deductibility
of head office expenses, but also contemplates the allocation
of expenses amongst various entities.
• The Court held that in the case in question, the travel expenditure
was exclusively incurred for the Indian branch. The head office
staff came from the head office in Abu Dhabi to Mumbai to attend
to the work of the Mumbai branch and the expenses were incurred
in connection with that work. Though the expenses were initially
incurred by the head office and later recovered from the Indian
branch, they were effectively incurred for the Indian branch.
As a result, the restriction on the deductibility of the expenses in
Sec. 44C of the ITA did not apply. Accordingly, the Court held that
all of the expenditure was eligible for deduction in computing the
business income of the Indian branch.
E-commerce
• The Ministry of Finance has set up an eight-member task force
on emerging issues headed by the Director General of Income
Tax (International Taxation). The other members of the task force
are senior revenue officers and tax professionals from the profession
and industry. The task force has been established to study and
analyse issues relating to electronic (or e-commerce taxation and
the taxation of non-residents and to make recommendations to
the government regarding the appropriate laws to be enacted.
• The task force’s terms of reference are:
• to make recommendations on e-commerce characterization;
• to consider withholding tax obligations in India if both the
payer and payee are non-residents;
• to look at the taxation of the partnerships and consortia of
non-residents and pass through certificates;
• to consider the economic evaluation of the presumptive basis
of taxation and withholding tax rates; and
• to look at transfer pricing issues.
Software development costs deductible as researchexpenditure
• The Income Tax Appellate Tribunal (ITAT) gave its ruling on 31 March
2003 in the case of CIL Bellsouth Ltd. v. Deputy Commissioner of
Income Tax - Delhi Tribunal, in which it held that expenditure
incurred on the development of computer software is eligible for a
deduction under Sec. 35 of the Income Tax Act (ITA) as scientific
research expenditure.
• The taxpayer was engaged in the business of the development and
sale of software and the export of software services. In the relevant
assessment year, the assessee incurred expenses on the development
of computer software which were capitalised in the accounts under
the heading “miscellaneous expenditure” as part of the capitalised
software costs and written off as “deferred revenue expenses” in
the accounts. These expenses were claimed as revenue expenses
in computing the business income in the relevant tax return filed
under Sec. 37 of the ITA. In the course of the assessment procedure,
the taxpayer made an alternative claim for a deduction under Sec.
35 of the ITA.
• The ITAT agreed with the taxpayer’s contentions that complex
and highly technical aspects were involved in the process of the
development of the software and that the R&D involved had to be
viewed in the context of the ever and rapidly changing high technology
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involved in the information technology industry. In addition, the
research activity was original and a planned investigation undertaken
in the hope of gaining new scientific or technical knowledge
and understanding, whereas development was the translation
of research findings or other knowledge into a plan or design for
the production of new or substantially improved devices, materials,
processes, products, services or systems. It was outside the
ability of ordinary businesses to develop such highly sophisticated
and intellectually inclined computer software. Specifically, the
development of the software involved highly skilled labour,
know-how and expertise and other related factors with a high
technical content. Accordingly, the ITAT held that the expenditure
on the development of computer software was eligible for a
deduction as scientific research expenditure under Sec. 35 of
the ITA.
Tax Breaks For Foreign IT Manufacturers
• It was reported on 13 June that the Indian government is preparing
a package of tax breaks aimed at developing an export-orientated
computer hardware and technology sector, which will help transform
the country into a key hi-tech manufacturing location.
• Among the more significant proposals contained in the government
sponsored National Electronics/IT Hardware Manufacturing
Policy is a ten year tax holiday for exporters of IT hardware and
other electronic goods. Other measures contained in the proposals
include the elimination of customs duty on all raw materials and
components used in the manufacture of IT equipment, as well
as the freezing of the forthcoming VAT (Value Added Tax) at 4%
on electronic and IT products. Special additional duty on imports
will also be scrapped.
• The policy document proposes the use of cash subsidies and further
tax incentives to attract large multinational firms. In addition, it
recommends increasing annual depreciation levels on computer
equipment to 100% from the present level of 60%.
Indonesia
Free Trade Zones and Batam
• It was reported on 8 July that the Indonesian government is currently
mulling a proposal to either turn the Riau island Batam into a full
Free Trade Zone (FTZ) or to designate specific areas on the island
as FTZs. Goods imported into an FTZ are not subject to import
duty or VAT (known as PPn in Indonesia) until they are released
from the FTZ. Currently, companies operating in industrial estates
on Batam are eligible for FTZ tax facilities. At this moment,
because of its proximity to Singapore, Batam is benefiting from
the potential offered by the recently signed Free Trade Agreement
between the USA and Singapore, which allows parts of the
manufacturing process to be done outside Singapore without losing
any privileges under the FTA.
Indonesian panel drafting new income tax law
• Mr Anggito Abimanyu, the chief of the Indonesian Department of
Finance’s Fiscal Analysis Board, who also heads the Amendment
of Income Tax Law Committee, on 16 July explained several important
provisions in the draft of Indonesia’s new income tax law. He
announced that in response to input from the IMF, the Indonesian
government is considering the simplification of current income tax
rates. The Minister of Finance subsequently stated that the new
rates will be ‘very competitive’ compared to other tax regimes in
Southeast Asia, and will attract foreign investors without reducing
state tax revenues.
• Mr Abimanyu said he expects to complete the draft and submit
it to the House of Representatives at the end of September 2003.
International Tax Developments
• Bangladesh and Indonesia signed an income tax treaty on 19
June in Dhaka. Bangladeshi Finance Minister M. Salifur Rahman
and Indonesian Minister for Trade and Industry Rini Soewandi
signed the treaty. Details have not yet been released.
• Indonesia signed a customs treaty with the Netherlands on
24 June 2003. This treaty will enable both countries to work
together closely in order to better enforce and monitor the customs
legislation of their respective countries. The treaty still has to
pass through the parliaments of both countries before it can take
effect. The treaty is expected to go into effect either late 2003
or early 2004.
• Russia. Details of the first-time income tax treaty and protocol
between Russia and Singapore, signed on 9 September 2002, have
become available. The treaty generally follows the OECD Model
Convention. The maximum rates of withholding tax are:
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• 10% on dividends in general and 5% if the beneficial owner of the
dividends is (i) the government (as defined) of the other state
or (ii) a company which holds directly at least 15% of the capital
of the company paying the dividends and has invested at least
USD 100,000 (or its equivalent);
• 7.5% on interest. Interest paid to the government (as defined)
of the other state is exempt from tax in the source state; and
• 7.5% on royalties. The definition of royalties includes payments
for the use of, or the right to use, industrial, commercial or
scientific equipment.
Japan
Japanese fifth biggest bank has received public funds
• In Japan, losses can be carried forward for five years. Resona bank,
Japanese fifth biggest bank, requested for an injection of public
funds of JPY 1,960 billion (approx. USD 16.5 billion) on 30 May
2003 since its adequacy ratio fell short. Generally, Japanese banks
have booked deferred tax assets derived from the writing off of
bad debt. In the Resona case, the auditor refused to take into
account more than three years of deferred tax assets. As a result,
it turned out that Resona bank is under capitalised. Resona has
been nationalised since 30 June 2003.
New authority regarding exchange of information withtreaty partners
• The 2003 tax reform provides the tax officials of the National
Tax Agency, regional taxation Bureaus and Tax offices with the
authority to ask questions and inspect books, records and other
documentation to the specified person’s business based on a
request from the tax treaty partner based on the applicable treaty
provision. Before the introduction of the new provision, the
authority to collect the information in connection with exchange
of the information was limited to the “domestic tax interest”.
No information will be gathered on the basis of this authority
if the tax official concerned finds that the tax treaty partner can
not provide the same information to Japan, that the exchange
of information would damage the national interests of Japan,
that the tax treaty partner can obtain the information by itself, and
if it regards criminal matters.
Initial new income tax treaty between Japan andUnited States
• On 10 June, it was announced that an agreement has been
reached in principle regarding the text of a new income tax treaty
between Japan and United States. The proposed new treaty
would substantially reduce the withholding taxes imposed on
dividends, interest and royalties paid between the two countries.
Particularly it would eliminate the withholding taxes on royalties,
certain inter-company dividends and certain interest. Further
details are expected to be published soon. The treaty is expected
to enter into force in 2005.
Tax reform 2004
• The Japanese Finance Ministry is considering abolishing tax on
yields from government bonds for individual investors. Currently,
a 20% tax is levied on the yield of government bonds. The
government thinks that eliminating the tax will promote the sale
of the government bonds. The proposal will be discussed by the
ruling parties in December as part of tax reforms for the year 2004.
Korea
Tax incentives
• The Korean government announced plans to amend the Free
Economic Zone Act providing tax breaks for foreign investors.
Amongst others this includes the establishment of another economic
free zone nearby Seoul. Foreign investor companies could benefit
from free rent of state owned land, state subsidies for construction
projects and corporate income tax facilities (exemptions up to
100% during the first three year period and up to 50% during the
two following years). Tax benefits for qualifying foreign employees
working in the free economic zones are planned as well by increasing
the tax deductions to up to 40% of annual income.
• In July the Korean Ministry of Finance decided to grant tax
exemptions with immediate effect to foreign companies that invest
in media related businesses such as computer games and movies.
The exemptions cover both local taxes and national corporate
taxes for as long as seven years, followed by 50% exemptions
for another three years. The facility applies to investments
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exceeding Won 50 million or a foreign holding of at least 10% of
the voting shares.
• Early May, the Korean Prime Minister of Finance announced that
plans to cut corporate income tax rates cannot be executed before
2005 or 2006. An earlier tax cut seemed not possible given the
status of Korea’s current budget. The current corporate income tax
rate consists of a first bracket (15% on the first Won 100 million)
and a second bracket (27% on the excess). Most of Korea’s
competitive and surrounding countries like Singapore, Taiwan and
Hong Kong have lower tax rates.
• VAT exemptions applicable for tourist hotels have been extended
for half a year in order to support the tourist industry that was
severely hit by the SARS outbreak.
Accounting principles adopted in tax regulations
• The Korean tax authorities will implement various amendments
of its tax legislation in order to minimise differences between
accounting principles and tax law. Accordingly, tax regulations
regarding amongst others development costs, amortizations,
refinancing acquisition costs, restructuring of (bad) debts and
dividend income will be changed. The changes generally apply
to tax returns filed as from 10 May 2003.
Tax evasion
• In an increased effort to decrease tax evasion, the Korean National
Tax Service announced that it has formed special investigation
teams that will focus their attention on high income earners such
attorneys and medical specialists.
Foreign credit card service companies
• The Ministry of Finance and Economy has ruled that (member) fees
paid to a non profit US credit card service company in exchange for
the services provided (such as transaction related services, fund
clearing, administration and global customer assistance) do not
qualify as royalty payment and are therefore not subject to withholding
tax, therewith overruling an announcement made earlier by the
National Tax Service.
International tax developments
• As mentioned in our Autumn 2002 edition, Korea and the Slovak
Republic signed a new tax treaty in August 2001. On 8 July, the
treaty was ratified by both states. The agreement has herewith
entered into force and the agreed withholding tax rates (5%-10%
maximum on dividend distributions, 10% maximum on interest
and royalty payments) apply from that date. As provided in article
28 of the treaty, its other provisions will apply to taxation years
starting on or after 1 January 2003.
• The Netherlands and Korea have concluded an investment protection
agreement on 12 July 2003. This agreement will substitute the
version applicable since 1974. Further information on this agreement
to follow.
Malaysia
Economic stimulus package
• On 21 May 2003, the Malaysian government released its widely
anticipated economic stimulus package. Key aspects of the package
are as follows:
• Real Property Gains Tax Exemption, the package exempts the
transfer of real estate for one year provided the transfer is done
prior to 1 June 2004.
• Liberalising the FIC Guidelines, Foreign equity restrictions with
respect to the acquisition of Malaysian assets are relaxed whereby
the acquisition is only subject to a 30% Bumiputera shareholding.
The previous FIC Guidelines will be streamlined into 2 main sets
of Guidelines ie. one for real property and the other for other
assets including shares. Effectively, foreign investors can now
hold up to 70% of the shareholding in Malaysian companies. At
present, Ministries governing non-manufacturing sectors such
as retail and wholesale, construction, telecommunications, logistics
etc, have specific guidelines for Bumiputera participation which
may differ with the equity policy under the FIC guidelines.
• The manufacturing sector continues to enjoy the existing liberalised
equity policy. In early June, the Ministry announced further
liberalisation to foreign equity for the manufacturing sector. Under
the liberalised rules, new investments in the manufacturing sector
will not be subject to any foreign equity or export condition ie.
new investments can be 100% foreign owned even if they sells
100% to the domestic market. Although this has already
been the temporary liberalisation as announced in 1998 to
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be effective until 31 Dec 2003, the announcement by the Minister
made this a permanent liberalisation.
• Liberalisation of Bumiputera equity conditions and foreign equity
restriction in companies listed on the Kuala Lumpur Stock Exchange
(KLSE) The 30% Bumiputera equity condition is required only
upon listing on the KLSE.
• Incentives for small companies: the package proposes that the
scope of the existing incentives for small companies is widened
by relaxing some of the qualifying conditions.
• Pioneer incentive, the income tax incentive available for companies
with Pioneer Status is increased from 70% to 100%. Increasing
statutory income that can be offset by Investment Tax Allowance
from 70% to 100%. The maximum period for Pioneer Status of
100% tax exemption be extended from 10 years to 15 years,
commencing with the first year the company registers profit.
The period of Investment Tax Allowance of 100% to be extended
from 5 years to 10 years.
• Incentive for export of locally produced goods, (i) the income
tax exemption for Malaysian International trading Companies
will be increased from 10% to 20% of their increased export
value, (ii) the package proposes an income tax exemption of
20% of the increased export value for Hypermarkets and Direct
Selling Companies.
• Group Relief, this is currently only available to companies in the
food production business and the stimulus package proposes
to extend the group relief to forest plantations, including rubber
plantations and manufacturers of selected products in the areas
of biotechnology, nanotechnology, optics and photonics.
• Research and Development Activities, the package proposes
that the Double Deduction for approved R&D expenditure incurred
during the pioneer period can be accumulated and brought
forward. The proposal indicates that the deduction can be offset
against income earned in the post pioneer period.
• Second Round Pioneer Status or Investment Tax Allowance for
R&D Companies The package proposes that R&D companies
will be eligible for a second round of Pioneer Status with 100%
income tax exemption for 5 years or Investment Tax Allowance
of 100% on capital expenditure incurred within 10 years.
• Operational Headquarters (OHQs), existing OHQs approved
prior to the 2003 Budget are eligible for 100% income tax exemption
for the remaining exemption period.
• International Procurement Centres (IPCs) and Regional Distribution
Centres (RDCs), IPCs that fulfil the approval criteria are eligible
for 100% income tax exemption for 10 years.
• Service Tax, a service tax exemption will be granted to hotels and
restaurants for the period from 1 June 2003 until 31 December 2003.
Liberalisation of exchange control rules
• Malaysia’s Central Bank, Bank Negara Malaysia, has liberalised
some of the exchange control rules with effect from 1 April 2003.
The most important changes are (1) an increased limit of RM50
million (Euro 11.64 million) for ringgit credit facilities now also
applies to Non Resident Controlled Companies (“NRCCs”); (2)
NRCC’s can now obtain more than 50% of their ringgit credit facilities
from foreign-owned banks, and (3) the limit on overnight balances
that can be retained by exporters in foreign currency accounts is to
be increased to a maximum of RM50 million (depending on the
level of exports).
Transfer pricing guidelines issued
• The Inland Revenue Board issued transfer pricing guidelines on
2 July 2003, which generally follow the OECD Transfer Pricing
Guidelines. The purpose of the guidelines is to provide multinational
enterprises with information on existing domestic legislation,
acceptable methodologies for determining arm’s length prices and
administrative regulations including the types of records and
documentation expected. The guidelines apply to transactions
between associated enterprises when one enterprise is subject to
tax in Malaysia and the other is located overseas.
• Legal basis. The general anti-avoidance provision under Sec. 140
of the Income Tax Act empowers the Director General to disregard
certain transactions which he believes have the direct or indirect
effect of altering the incidence of tax, including non-arm’s length
transactions. To counteract the effects of such transactions, Sec.
140 also empowers the Director General to make adjustments as
he considers appropriate. This provision is applied in the adjustment
of transfer prices. In addition, the guidelines set out the concept
of comparability in the application of the pricing methodologies and
the factors which may determine or affect comparability.
• Acceptable methodologies. The acceptable methods for determining
arm’s length prices are:
(1) the comparable uncontrolled price method: this method, which
is ideal only if comparable products are available, involves
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a direct price comparison with transactions of a similar product
between independent parties;
(2) the resale price method: this method is generally most appropriate
when the final transaction is with an independent distributor;
(3) the cost-plus method: this method is often useful when semi-
finished goods are sold between the associated parties, the
parties have concluded joint facility arrangements, the manu-
facturer is a contract manufacturer or the controlled transaction
involves the provision of services; and
(4) other methods: these methods should only be considered
when the methods referred to in (1) to (3) are not applicable.
Similar to the OECD Transfer Pricing Guidelines, the guidelines
list two types of transactional profit methods which may be
used: the profit split method and the transactional net margin
method. The tax authorities will not accept methods based
on global formulary apportionment, i.e. methods which involve
the allocation of global profits among associated enterprises
in different countries.
• Documentation. The following documents should be maintained:
(1) Documentation on company details, including the ownership
structure showing linkages between all associated enterprises,
the organization chart and operational aspects of the business;
(2) Transaction details, including a summary of transactions with
associated enterprises, similar transactions with independent
parties, economic conditions at the time of the transactions,
the terms of transactions, the pricing policy for a 7-year period,
a breakdown of product manufacturing costs and a product
price list; and
(3) Documentation relating to the pricing methodology adopted
and the justification for using that method.
• Currently, there are no provisions or facilities for advance pricing
agreements with the tax authorities.
International Tax Developments
• Lebanon and Malaysia concluded their first-time income tax treaty
and protocol on 20 January 2003. The treaty generally follows the
OECD Model Convention. The maximum rates of withholding tax
are 5% on dividends, 10% on interest, and 8% on royalties. The
tax treaty has the usual definition of royalties. Under the treaty,
projects can be carried out in the other country without constituting
a taxable presence there, provided it does not exceed a duration of
9 months, and furthermore, certain services can be carried out in
the other state without creating a taxable presence there provided
they do not exceed 3 or 6 months in any 12-month period (the
threshold depends on the prescribed type of service) Both
states also grant a tax sparing credit in respect of tax reduced or
exempted in accordance with the provisions of the treaty and special
incentives under their domestic laws for the promotion of economic
development or investment, as defined. The treaty makes no specific
reference to special tax regimes in either Lebanon or Malaysia and
it is assumed that the treaty applies to entities qualifying for any
such regimes including Labuan.
New Zealand
We would like to thank Buddle Findlay, Lawyers, Auckland, Wellington and
Christchurch in New Zealand, for preparing the materials for the New Zealand
section of this newsletter.
GST and financial services
• In New Zealand, goods and services tax (New Zealand’s consumption
tax, broadly equivalent to VAT) is not charged on supplies of financial
services, and financial service providers are unable to claim a credit
or “input tax” deduction for GST paid on purchases acquired in
the course of making supplies of financial services. This leads to
inefficiencies as financial service providers are effectively over-
taxed and may be required to pass this GST cost to consumers of
their services.
• The New Zealand government has recently introduced draft legislation
which aims to enable financial service providers to increase their
recovery of GST input tax, by proposing to “zero-rate” business to
business supplies of financial services. “Business-to-business”
supplies means those where the recipient of the financial services
is GST registered and at least 75% of their total supplies in a given
twelve-month period are taxable supplies. Zero-rating means that
instead of being exempt or “outside the GST net”, these “business-
to-business” supplies of financial services will be charged with GST
at the rate of 0%. This will enable financial service providers to
claim GST input tax credits for goods and services acquired in the
course of making these zero-rated supplies of financial services.
GST and the reverse charge
• Recent draft legislation also contains amendments to introduce a
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“reverse charge” to impose GST on certain imports of services into
New Zealand. Under the proposal, GST-registered recipients of
imported services will be required to account for GST where:
• the supply, if had been made in New Zealand by a registered
person, would be a taxable supply (i.e. subject to GST); and
• the supply is acquired for purposes other than the purpose of
making taxable supplies (i.e. is a supply in relation to which the
recipient would not generally have received an input tax deduction)
• The amendment aims to minimise the current disparity between
imported services (no GST) and domestically supplied services
(which are subject to GST). This will also align New Zealand’s
treatment of imported services with that of imported goods (currently
subject to GST), and will bring New Zealand’s GST treatment of
imported services in line with that of most other countries’ GST or
VAT systems.
GST and zero-rating of warranty services
• Recent changes now ensure that non-registered offshore warrantors
are relieved of a GST impost on payments made under a warranty
agreement that has been included in the purchase price of an
imported good. This is achieved by zero-rating the supply of services
to a non-registered offshore warrantor, in relation to goods sold in
New Zealand.
• Previously a double impost of New Zealand GST could occur when
GST was paid by the final consumer, and an irrecoverable GST
impost was also paid by the non-registered warrantor on the actual
cost of the warranted repairs.
• To overcome this potential double taxation, supplies of goods and
services made under a warranty agreement are zero-rated where:
• the warranty agreement is included in the purchase price of goods
which attract GST on importation into New Zealand; and
• consideration for the supply is paid by a non-registered warrantor.
GST and telecommunication services
• The GST treatment of cross-border supplies of telecommunications
services has been recently clarified by providing specific place of
supply, registration and zero-rating rules.
• The changes ensure that unless the supplier and recipient agree
otherwise, supplies of telecommunications services from a non-
resident to a registered person in New Zealand, for the purposes
of carrying on the registered person’s taxable activity, are to be
treated as not being supplied in New Zealand.
• The specific place of supply rules also require an offshore
telecommunications supplier to register for GST if it makes
more than NZD 40,000 per annum of supplies to persons in
New Zealand.
• Telecommunications services will be zero-rated if provided by
New Zealand telecommunications suppliers to non-resident tele-
communications suppliers when a telecommunications service is
initiated outside New Zealand and if the services are provided to
any other overseas persons when a telecommunication service is
initiated outside New Zealand.
• Non-resident cell phone companies whose only activity in New
Zealand is the supply of services to non-resident “roaming” customers
will not be caught.
Trans-tasman triangular taxation
• As discussed in the Australian update in the Spring 2003
newsletter, early in 2003 the Australian and New Zealand
governments announced proposals to relieve the “triangular
taxation” problem that results in double taxation of certain invest-
ments in Australian and New Zealand companies that operate in
both countries.
• On 23 June 2003, the New Zealand government introduced draft
legislation to bring the proposals into effect. Under the proposed
amendments, shareholders of trans-Tasman companies can be
allocated on a pro-rata basis (based on the proportion of their
ownership in the company) imputation credits representing New
Zealand tax paid and franking payments representing Australian
tax paid. The amendments also allow a new form of imputation
grouping that will enable any Australian or New Zealand company
within a wholly-owned group to pay an imputed dividend if
another Australian or New Zealand company in the group has
imputation credits.
• It is proposed that the amendments to enable Australian companies
to maintain New Zealand imputation credit accounts and the new
imputation grouping rules will apply retrospectively from 1 April
2003. The amendments allowing Australian companies to pay
imputed dividends will apply from 1 October 2003.
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Proposed film grant incentive
• Last month the New Zealand Government announced a film and
television grants scheme in the hope of attracting big budget
productions to New Zealand.
• Generally, the scheme provides that:
• film or television productions which spend more than NZD 50
million in New Zealand will qualify for a 12.5% tax exempt
“production expenditure grant”;
• film or television productions which spend between NZD 15
million and NZD 50 million, are also eligible where the spending
equates to at least 70% of the total production expenditure.
• The New Zealand Government has indicated that up to NZD
40 million is available in a grant pool for the first year of
the scheme. The system is similar to that in Australia and will be
reviewed after 3 years. Exact details of the scheme are still
being developed.
• While the changes are welcomed, potential investors need to be
aware of effects from proposals to combat mass market tax
schemes in New Zealand. Of greatest significance is the proposal
to defer tax deductions for net losses until matching income
is earned, to the extent that tax deductions claimed exceed the
amount the investor actually has at risk in the scheme.
Philippines
Clarification of Value Added Taxation of banktransactions
• The Finance Department has approved amendments to the VAT
Reform Act of 1997. The amendments clarify taxability for VAT
purposes of bank transactions. Application of the VAT to bank
transactions was deferred repeatedly and finally went into effect on
1 January 2003. VAT is now chargeable on all interest, commissions,
fees, and other charges of banks.
Philippines considers to introduce new taxes
• The Philippines Government announced that it may introduce new
taxes for those sectors of the economy which have demonstrated
to be successful. The introduction would form part of an effort to
generate more tax revenue and to avoid a debt crisis. The sectors
which were mentioned in this regard are the telecom services,
tobacco, alcohol, and petroleum sectors.
Court states which facts must be demonstrated forrefund of excess withholding taxes
• Proof of the following is required for a refund claim for excess
creditable withholding taxes: (i) the claim for refund was filed within
the required two year period, (ii) the withholding of tax is supported
by a copy of a statement issued by the payer / withholder of tax to
the recipient, stating the amount paid and the amount of tax withheld;
and (iii) the income from which the taxes were withheld was included
in the income tax return of the recipient.
Singapore
One tier corporate income tax system, foreign, non-remitted income
• In 2002, Singapore’s imputation system of taxation was abolished
and replaced by the one tier income tax system. Under the one tier
system, foreign income will only be taxed in Singapore in so far the
income is remitted, or is deemed remitted in to Singapore. The
Singapore income tax Act contains a number of provisions on the
basis of which income will be deemed to have been remitted into
Singapore. For instance, repayment of debt out of income kept
offshore triggers a deeming provision resulting in the foreign income
becoming taxable in Singapore. The initial conclusion was that the
declaration of an interim dividend should not trigger mentioned
deeming provision as the payment of an interim dividend could not
be regarded as a repayment of debt.
• The Inland Revenue Authority of Singapore (IRAS) has published
a Supplementary Circular on the one-tier corporate tax system. This
Circular confirms that foreign sourced income kept offshore out of
which dividends are distributed, will not be considered to have been
remitted into Singapore. Final dividends too can therefore be
distributed out of such income.
• On the basis of this clarification, Singapore has become a very
interesting location for distributing foreign income to foreign
shareholders. It is important to note, however, that if the Singapore
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company would wish to claim the treaty benefits in respect of such
foreign income, Singapore tax treaties generally include a provision
which stipulates that treaty benefits can only be claimed in respect
of remitted foreign income. With respect to remitted foreign
income, Singapore taxpayers should claim the foreign sourced
income exemption (see next item).
Tax exemption for foreign sourced, remitted income
• On 21 May 2003 the IRAS released a Circular which contained
further details on the “Tax exemption for foreign-sourced dividends,
foreign branch profits and foreign-sourced service income.”, as
proposed in the Budget 2003 (see the previous edition of
this newsletter).
• The tax exemption applies to the specified foreign sourced income
received in Singapore on or after 1 June 2003; the income does
not need be earned on or after mentioned date. The exemption is,
where applicable, available to Singapore based corporates and
individuals resident in Singapore. The conditions for qualifying are
as follows. In the year the income is received in Singapore, the
headline tax rate of the foreign jurisdiction from which the income
is received is at least 15%. Furthermore, the income has been
subjected to tax in the foreign jurisdiction from which these
were received.
• In the previous edition of our newsletter we noted that the Budget
2003 left a number of questions unanswered. More particularly,
how to interpret the ‘subject to tax condition’. In a letter to the
IRAS, we sought further clarification on this issue. In their reply, it
was stated that the IRAS envisaged a ‘tracking’ system; the
Singapore recipient should determine whether it had received
dividends distributed out of exempted income (for instance, dividends
from exempt participations) or whether it had received dividends
which have been taxed. This seems confusing, as one of the
considerations for introducing the exemption system was to reduce
the administrative burden for Singapore taxpayers. We do not believe
that a tracking system would achieve this goal.
• In the meantime, the Ministry of Finance released the draft
amendments to the income tax Act. The amendments do not refer
to the tracking method as expressed by the IRAS. Interestingly, for
the first time in Singapore legislative history, the Ministry of Finance
initiated a public consultation procedure whereby the public could
submit comments to the draft. Together with tax professions of
a number of law firms in Singapore, we submitted a letter to the
Ministry in which we provided our views on the proposals with
suggestions for improvement. The letter concentrates on the
differences which would arise in Singapore tax treatment with respect
to income received from shareholdings in companies in different
countries. More in particular, the letter discusses the ‘subject to
tax’ requirement.
• The Ministry has indicated that it will publish by 30 August 2003
a summary of the main comments it received together with their
responses. The summary will not separately address or acknowledge
every comment received. However, since we understand that the
comments submitted by other parties (such as the International
Fiscal Association and big accountant firm) also seek clarification
/ offer suggestions on this particular issue, we expect that it will
be addressed by the Ministry of Finance in mentioned summary.
Singapore’s inland revenue authority clarifies changesto withholding tax regime
• The IRAS has released the details of the administrative amendments
to the withholding tax regime in two circulars. The changes take
effect from 1 April 2003. Payments of withholding tax are now due
by the 15th (previously by the 10th) day of the month that follows
the date of payment of income to a non-resident. The new deadline
also affects the timing of penalties. The amounts for the penalties
have not been amended. Under the new circulars, non-residents
may choose to be taxed at the current income tax rate of 22 % of
net income rather than at 15 percent of gross income.
Singapore unveils major reform of tax incentives forfinancial services
• The Monetary Authority of Singapore recently announced details
of a major reform of Singapore’s tax incentives for financial services.
Seven existing tax incentive schemes for financial services will be
merged into a single streamlined scheme, the Financial Sector
Incentive Scheme. The reform will be implemented in 2004.
Expansion of approved third party logistics scheme
• Previously, a qualifying third party logistics company that manages
an inventory hub for its overseas principals and supplies goods to
overseas manufacturer’s customers may apply for a waiver of GST.
As such, GST on goods imported and stored in the bonded warehouse
will be suspended, and GST will be waived on local delivery to the
manufacturers who have approved Major Exporter Scheme (MES)
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status. After consultation with the industry, the Government has
decided that the existing scheme will be extended. The new scheme
allows qualifying logistics companies to import goods belonging to
them, or to their overseas principals without paying GST; and to
move the goods to customers approved under the Major Exporter
Scheme (MES); or other logistics companies which are also approved
under this scheme without charging GST on the goods removed.
Under this new scheme, there is no longer a requirement to operate
a bonded warehouse.
• To qualify as an approved third party logistics company, the aggregate
of the company’s exports, supplies to MES customers and to other
approved logistics companies must exceed 50% of its total supplies.
The logistics company should furthermore be engaged in the business
of logistics; provide value-added activities for overseas principals;
be registered as a taxable person; have good tax compliance records;
maintain good internal controls and use a computerised Warehouse
Management System.
Withholding tax exemption on interest
• By letter dated 19 February 2003, the MAS (Monetary Authority
of Singapore) has extended until 27 February 2008 the withholding
tax exemption applicable to bonds, notes, commercial paper and
certificates of deposits which are arranged mainly through Approved
Bond Intermediaries (ABI) in Singapore. This measure enables
investors to provide loans to parties in Singapore without any
withholding tax on the interest on these loans provided the loans
are given through ABI’s.
New corporate income tax incentive for R&D activities
• In July 2003 Singapore has released further details of its new corporate
tax incentive scheme announced in the 2003 budget, which aims to
boost research and development activity in the country. A company
approved under the scheme will be granted tax exemption for a
period of five financial years for foreign-source royalties or foreign-
source interest (relevant foreign income) remitted to Singapore,
subject to qualifying conditions.
International Tax Developments
• Belgium. The Belgian Ministry of Finance announced the details
of the application of the supplementary protocol to the treaty between
Belgium and Singapore. The protocol has not yet entered into force.
The details provide for extending the deadline for raising assess-
ments, even if this would no longer be possible under Belgian
domestic law.
• Russia. Details of the first-time income tax treaty and protocol
between Russia and Singapore, signed on 9 September 2002, have
become available. The treaty generally follows the OECD Model
Convention. The maximum rates of withholding tax on dividends
is 10% in general and 5% if the beneficial owner of the dividends is
(i) the government (as defined) of the other state or (ii) a company
which holds directly at least 15% of the capital of the company paying
the dividends and has invested at least USD 100,000 (or its
equivalent). The maximum rate of withholding tax on interest is
7.5%. Interest paid to the government (as defined) of the other
state is exempt from tax in the source state. The maximum rate of
withholding tax on royalties is also 7.5%. The definition of royalties
includes payments for the use of, or the right to use, industrial,
commercial or scientific equipment. The treaty contains the limitation
of benefits provision by requiring the income to be remitted to
Singapore in order to enjoy the treaty benefits, in accordance with
Singapore’s tax treaty policy. Finally, a tax sparing provision applies
under which tax paid in Russia includes tax which would otherwise
have been paid but for special incentive measures to promote
economic development and foreign investments. This provision
will apply for the first 5 years for which the treaty is effective, but the
competent authorities of the states may consult to determine if
the period should be extended.
• Kuwait. The income tax treaty between Kuwait and Singapore has
entered into force on 2 July 2003. The provisions of this treaty shall
have effect on income derived on or after 1 January 2004. The
maximum withholding tax rates are 7% in respect of interest and
10% in respect of royalties received by a beneficial owner - resident
of the other state.
• USA. The United States and Singapore signed a free trade
agreement (FTA) on 6 May in Washington. It is the United States’
first free trade agreement with an Asian country. The FTA has
meanwhile been approved by the U.S. Congress and will gradually
eliminate customs duties on all goods imported from Singapore.
The main benefit to the United States would be greater access
to Singapore’s banking, insurance, legal, and other service sectors,
as Singapore already imposes few import duties. Under the
FTA, Singapore would immediately eliminate customs duties on
all U.S. goods. For Singapore goods entering the United States,
U.S. customs duties would be phased out at different stages; the
least sensitive products would enter duty-free once the FTA enters
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into force, while tariffs on the most sensitive goods would be phased
out over 10 years.
Thailand
Reduction of administrative Customs procedures
• Thailand’s Customs Department has announced that it will simplify
administrative procedures concerning imports and exports. Export
orientated industries already benefited from such simplification
in special export zones which cater for lower tariffs and duties.
However, for import-orientated firms there is no such arrangement
and these firms are often confronted with elaborate and time
consuming administrative procedures. Custom import clearance
is required from a number of agencies. The new measures will allow
firms in the new import zones to import some 10,000 products
without prior approval from these agencies.
Transfer pricing regulations, justifiable reasons
• The Revenue Department has released two Departmental Instructions
clarifying circumstances under which it will not challenge non-arm’s
length prices to which taxpayers may have agreed. Under the Transfer
Pricing regulations, the Revenue Department can adjust prices which
are not in conformity with market prices, unless the tax payer can
demonstrate justifiable reasons for not adopting at arm’s length
prices. The Revenue Department has now clarified what may
constitute justifiable reasons. The Instructions specify that if a debt
restructuring of debts is allowed by the creditor or if assets are
transferred by a debtor without consideration to a creditor for the
purpose of repayment of debt, justifiable grounds may exist In order
to qualify under these Instructions, the debt restructuring plan
should be carried out before the end of 2003; the debt restructuring
policy as set out by the Bank of Thailand should be observed, and,
if the creditor is not a financial institution, it should enter into the
debt restructuring agreement with a financial institution creditor.
The Instructions furthermore specify that, if a service is provided
without consideration or for a consideration at lower than the market
price, justifiable grounds may exits exist if the service is provided
to a government agency, an administrative office, a non-legal mutual
fund and the service benefits government policy.
Foreign exchange losses on loans taken up to financethe construction of a plant
• The Supreme Court recently held that the foreign exchange losses
incurred by a Thai company that relate to borrowings, used to fund
the construction of a plant, should be “capitalised” as part of the
cost of that plant. The Thai company in the case borrowed substantial
sums in foreign currency to fund the construction of its plant, and
for working capital. The company suffered large foreign exchange
losses in respect of the borrowing as a result of the devaluation of
the baht during the 1997 Asian Financial Crisis. It amortised all
those losses for tax purposes over a period of five years, as was
apparently permitted by the tax provisions concerning the tax
treatment of foreign exchange losses that had been introduced at
that time.
International Tax Developments
• Bulgaria. The first-time income tax treaty between Bulgaria and
Thailand, signed on 16 June 2000, entered into force on 13 February
2001. The treaty generally applies from 1 January 2002.
• France. An agreement clarifies the scope of Art. 11 (Interest) of the
France-Thailand income tax treaty of 27 December 1974. The
agreement specifies a list of the entities qualifying for the 3% reduced
interest withholding tax rate under Art. 11(2)(a) of the treaty. These
entities are (i) in respect of France, the COFACE or the Natexis
Banque and (ii) in respect of Thailand, the Export-Import Bank of
Thailand, the Government Savings Bank, the Government Housing
Bank, the Bank for Agriculture and Agricultural Cooperatives, the
Krung Thai Bank, the Radanasian Bank, the Industrial Finance
Corporation of Thailand and any establishments wholly owned by
the government of Thailand and certified by the relevant authorities
of the states. The agreement furthermore contains a list of the
entities qualifying for the exemption from withholding tax as a “public
authority” under Art. 11(3) of the treaty, i.e.: (i) in respect of France,
the Banque de France, any local authorities and any establishments
certified by the relevant authorities of the states and (ii) in respect
of Thailand, the Bank of Thailand, the Export-Import Bank of Thailand,
any local authorities and any establishments certified by the relevant
authorities of the states.
Vietnam
VAT and corporate income tax amendments approved
• Vietnam’s National Assembly has approved amendments to the
country’s Value Added Tax Law, agreeing to reduce the top VAT rate
from 20% to 10%. The VAT will now provide for two rates, i.e. 5%
L O Y E N S & L O E F F – A S I A N E W S L E T T E R – S U M M E R 2 0 0 31 7
domestic tax laws. Following changes made by the Vietnamese
government to its domestic laws in 1996 and 2000, the tax sparing
relief provisions under the Australia-Vietnam treaty ceased to be
effective. Through an exchange of letters, which entered into force
on 11 February 2003, the Australian government has ensured that
Australian companies investing in specified projects in Vietnam will
continue to benefit from the tax sparing relief provisions in the
treaty. The concessional treatment will apply from the date of the
changes to the Vietnamese domestic laws up to 30 June 2003. From
1 July 2003, the tax sparing provisions under the treaty will
permanently expire.
• UK. The agreement for the promotion and protection of investment
between the United Kingdom and Vietnam (signed on 1 August
2002) entered into force on 1 August 2002.
• USA. The Vietnamese Government has made public its views
on the first year of implementation of the agreement. The review
included the following.
(i) Abolition of restraints on import-export, the prime minister’s
decision of 4 April 2001 of the Prime Minister significantly
reduced the number of commodities imported into Vietnam
subject to import licensing.
(ii) Foreign direct investment in respect of import and local
distribution services, under the pledged schedule, US foreign
invested enterprises (“FIEs”) will be allowed to conduct import
business in Vietnam (at the earliest) three years after the VN-
US BTA comes into effect.
(iii) Taxation, in line with the agreement’s commitments, from
1 January 2003, Vietnam abolished import duty incentives
based on the local content ratio with regard to two-wheel
motorcycles and engines for two-wheel motorcycles. The
Government furthermore stipulated that the dutiable prices of
imported commodities should be in line with the General
Agreement on Tariff and Trade. The Government furthermore
announced that it shall continue to eliminate the discrimination
between FIEs and local enterprises.
• Iceland. The first-time income tax treaty and protocol between
Iceland and Vietnam, signed on 3 April 2002, entered into force
on 27 December 2002. The treaty generally applies from 1
January 2003.
and 10%. The amendments provide for stricter administrative
procedures for VAT refunds. Vietnam has had a number of cases of
VAT refund fraud. The amendments will become effective on
1 January 2004.
• A day after the VAT amendments were approved, Vietnam’s National
Assembly also approved the amendments to the Corporate Income
Tax Law, harmonizing the rates for domestic firms and foreign-
invested enterprises at 28 percent, effective from 2004. For domestic
companies, the rate is decreased from 32 percent. For foreign firms,
on the other hand, the change represents an increase from 25
percent. The new rate reportedly will not apply to foreign companies
already in operation.
ASEAN Free Trade Area, implementation
• Vietnam has been implementing the Common Effective Preferential
Tariff (“CEPT”) since 1 January 1996. In 2003, Vietnam will transfer
about 755 items from the Temporary Exclusion List to the Inclusion
List. Vietnam is expected to reduce the import duty tariffs for
most import items to 0-5% by 1 January 2005 (one year earlier
then required and thus ahead of schedule); and eliminate all tariff
and non-tariff barriers for goods imported from ASEAN countries
by the year 2015.
• It is expected that from 1 July 2003, the ASEAN Harmonised Tariff
Nomenclature (“AHTN”) shall be applied for the calculation of
import and export duties in lieu of the current import and export
tariff. Under the AHTN, the number of import duty lines shall
increase to 10,800 from the current 6,500.
Relocation allowance
The General Department of Taxation in January issued an official letter
providing guidance on relocation allowances applicable to expatriates
working in Vietnam. Accordingly, if an overseas company grants an
expatriate a one-time relocation allowance, such allowance is exempt
from Personal Income Tax on the condition that sufficient supporting
documents are submitted to the tax authority.
International Tax Developments
• Australia. Australia’s Minister for Revenue and Assistant Treasurer
has announced that the Australia-Vietnam income tax treaty of
13 April 1992 has been updated to reflect changes in the Vietnamese
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