Industry update on tax landscape in India and indirect tax ... · landscape in India and indirect...

Industry update on tax landscape in India and indirect tax developments in Southeast Asia and ChinaCommitted to the success of your businessSeptember 2019 Tax

India indirect tax updateCommitted to the success of your businessSeptember 2019 Tax

© 2019 Deloitte & Touche LLP 3

1. India GST—story so far

2. Concept of ‘Intermediary’

3. Incentives and discount schemes

4. Issues emerging under GST

5. New return filing system

6. Proposed e-invoicing mechanism

7. Dispute resolution scheme

8. Customs interplay with GST

9. Key opportunity areas and way forward

Contents


India

India GST—story so far


Nation-wide impact


India

Overall shift in responsibilities for tax policies

Over 120 indirect tax legislations repealed

Over 8 million taxpayers impacted

Average revenue collection of INR1 trillion per month

Over 0.5 million Central and State Tax Officers trained

INR22 billion invested by CBEC for IT enablement

New constitutional body established

India went live with GST on 1 July 2017


Council meetings – 36

Rate changes - 16

Notifications – 300+

Circulars and orders – 100+

Committees for specific issues –

more than 12

Equivalent notifications and

circulars in each state

Advance Rulings – 660+

applications filed

Advance Rulings – 320+

disposed. Majority pro-revenue

Advance Rulings – 30+ appeals

filed

Advance Rulings – 25+ appeals

disposed . Majority pro-revenue

Anti-profiteering – 45 + orders

passed

Writ petitions filed against

various issues – rulings awaited

* Source : GST Council Secretariat’s News-Letter May 2019


India


Success Challenges Go forward

• Uniform tax laws

• Common compliance portal

• Transparent digital processes

• Increase in credit base

• Transition issues

• Multiple registration requirements

• Frequent amendments with short time frame to implement

• Free hand to Central & State authority to investigate any assesse

• Tax authorities, from States, are still getting proficient with service industry taxation

• Initiation of GST audits

• Adjudication and investigation by tax authorities and other regulatory authorities

• Phased rollout of new simplified return

• Electronic Invoicing – To dispense with e-way bill requirement

• Single refund disbursement


India


Concept of ‘Intermediary’



India

‘Intermediary services’ under GST

Definition of intermediary:

“intermediary" means a broker, an agent or any other person, by whatever name called, who arranges or facilitates the supply of goods or services or both, or securities, between two or more persons, but does not include a person who supplies such goods or services or both or securities on his own account

Key considerations for

qualification as

‘intermediary’

Presence of element of agency

Facilitation and arrangement of main supply

Whether supply provided on own account

Linkage between remuneration and main sale

Prevailing judicial precedents and advance rulings

Whether marketing services and services under revenue sharing arrangement qualify as ‘intermediary

services’ under GST



India

Intermediary vs Zero Rated Supplies

Key determinants for intermediary services

• Direct linkage between performance of service and final supply by the main supplier

• Consideration based on achievement of target linked to the final supply

• Responsibility for activities like order processing, negotiation, collection of consideration etc. from customers on behalf of the supplier

• It may be noted that various GST advance rulings have been issued on the characterisation of marketing and allied support services as ‘intermediary’

• Accordingly, it is essential to review the scope of ‘marketing activities’ in light of the concept of intermediary and advance rulings

While provision of marketing and other allied support services would qualify as zero rated supply (ie export from India), in certain cases concept of intermediary becomes relevant. In such an event, these support services would not qualify as export as per GST Laws

Recent circular issued under GST which clarifies scope of ‘intermediary’ in case of IT/ITeS services



India

Recent advance rulings

Zero Rated supply

• Applicant entered into agreement with overseas companies for providing administrative and support services which will include accounting and payroll assistance services

• Held that such services do not constitute intermediary services due to:

Scope of services does not constitute a principal-agent relationship

Applicant is not a person who arranges or facilitates supply of services between 2 people

[Order by Maharashtra AAR in the case of NES Global Specialist Engineering Services Private Limited]

Intermediary services

Whether marketing services and services under revenue sharing arrangement qualify as ‘intermediary

services’ under GST

• Applicant entered into agreement with its group companies to provide business support and marketing services

• Held that such services provided to Holding Company constitute intermediary services due to:

Scope involving liaising with potential customers, connecting with customers for obtaining orders, maintaining close commercial relationships

Principal agent relationship between the companies

[Order by Maharashtra AAAR in the case of Asahi Kasei India Private Limited]


India

Incentive schemes and discounts under GST


Discount before the supply or

at the time of supply • Discount shall be duly recorded in the invoice issued in respect of the supply

• To claim deduction of post sale discount for payment of GST, it must be

• established by an agreement entered before or at the time of supply

• Credit pertaining to such discount is reversed by the recipient

• Discount is linked to relevant invoices

Post supply discount

• Discount shall be allowed as deduction irrespective whether pre-supply, post-supply or at the time of supply

• Discount shall be in relation to a particular supply transaction

• Benefit passed by way of discount on subsequent transaction shall not be allowed as deduction

Principles applicable during erstwhile

laws

Key features


India


Typically, types of discounts include cash, trade and volume discount. Each of these would be required to be evaluated

separately to analyse the tax treatment in light of the nature (discount/supply/subsidy)

Each of the above would have GST implications in respect of adjustment of tax liability, reversal of credits, reporting

requirements etc.

• Schemes having an overall objective of brand promotion such as coupons, free of cost supplies etc.

Marketing spends

• Trade discount—on-invoice discount allowed upfront on bulk purchases

• Cash discount—on-invoice discount/post supply discount allowed for inducing prompt payments

Cash and trade discount

• Allowed by way of issuance of credit notes on achievement of specified target sales volumes

Volume discount


India

Types of discount and impact


In case the dealer is required to perform some activities such as advertisement campaign, exhibition, etc., then such post-supply discount will be treated as separate supply and would be chargeable to GST

Dealer not required to reverse ITC attributable to the post sale discount received from the supplier through issuance of financial/commercial credit notes by the supplier where tax remains paid on such transaction

Post-sale discounts without any additional obligation from dealer’s to be excluded from the taxable value provided conditions of Section 15(3) of the CGST Act are satisfied (i.e., it is known upfront and corresponding credit is reversed by the recipient)

If additional discount is given to dealer to offer a special reduced price to the customer to augment the sales volume, then such additional discount would represent consideration flowing from supplier to dealer for the supply made by dealer to the customer

*Circular no. 105/24/2019-GST, dated 28 June 2019, in continuation to Circular no. 92/11/2019-GST, dated 7 March 2019

Clarifications emerging from Circulars*


India



India

Clarifications emerging from Circular dated 28 June 2019

Supply of goods to distributor

Supplier Distributor Customer

• Sale of goods to customer

• Performance of advertisement activities‘Post supply discount’ for performing advertisement

activities to be treated as separate supply under GST

Where dealer/distributor is required to perform additional activities to avail post-sale incentive

Supply of goods to distributor

Supplier Distributor Customer

• Sale of goods at special reduced price

Additional discount/subsidy by supplier to distributor to be included in consideration payable by end-customer

Where goods are sold by dealer/distributor at a reduced price to the end customer in view of additional discount/subsidy offered by the supplier


Whether post sale discount/incentive

results in variation of sales price of the

dealer to the customer

Whether post sale discount/incentive

results in variation of purchase price of the

dealer

Whether post sale discount/incentive is

given towards performance of an

activity by the dealer

Whether post sale discount/incentive is

given as ex-gratia payment

Key aspects to be analysed


India


India

Issues emerging under GST


Other audits and investigations

Issues emerging under GST (cont.)

India

Scrutiny of transition credit claimed through

GST TRAN-1

Transaction level matching of input tax credit in GSTR 3B and

GSTR 2A

Investigations initiated against taxpayers in

response to anti-profiteering complaints

Examination of deviations in tax liability,

credit availment basis past trends


India

New return filing system


New return filing system

India

Transition plan to new compliance system

New return filing process to be implemented in a phased manner

January to June 2019

July to September 2019

October 2019 onwards

• Present mechanism of filing GSTR 1 and GSTR 3B New return

• New formats introduced in May 2019

• Trial phase for new return system rolled-out; Offline utility introduced

• Present system to continue for discharging GST liability

• Mandatory filing under new system for large taxpayers1 (for small taxpayers, January 2020 to be implementation date)

• Current return filing system to be gradually phased-out (Cut off date January 2020)

1Large taxpayers means taxpayers whose aggregate turnover in the previous year exceeds INR5 Crores/S$ 1 million. All other taxpayers to qualify as ‘small taxpayers’ for this purpose


Structure of new GST return

Form GST RET-1/2/3(monthly/quarterly)

ProfileForm GST ANX-1

(monthly/quarterly)Form GST ANX-2

Form GST ANX-1A

Amendment of Form GST ANX-1

Form GST RET-1A/2A/3A

Amendment of Form GST RET 1/2/3

Form GST PMT-08

Monthly payment of self assessed tax

Contains details of ANX-1 & 2 and other details like advance, TDS, TCS,

interest, late fee and payment of taxes

Intimation of option for return periodicity and

type of quarterly return

Consists of details of outward supplies,

imports and inward supplies attracting

reverse charge

Auto population of inward supplies, on the basis of return filed by

suppliers


India

Proposed e-invoicing mechanism



India


Proposed system requires uploading of full invoice on the GSTN portal for generation of a unique IRN (Invoice Reference Number). The invoice would be valid only after generation of such IRN

Every transaction would be recorded on the GST network on a real time basis

Currently, similar provisions present in the e-waybill system. Further, e-waybill will be linked to e-invoice and will be pre-filed basis such information

Uploading of full invoice data on the GSTN portal would do away with the requirement of filing GSTR-1 returns

Proposed system would result in substantial reduction in input credit verification and elimination of fake invoices

Electronic invoicing system in respect of B2B transactions proposed to be introduced from January 2020 onwards in a phased manner


India

Dispute Resolution Scheme


Dispute Resolution Scheme

India

Key highlights of the scheme

• Amnesty scheme for central taxes/duties/levies for resolution and settlement of legacy disputes

• All persons covered except the specified category

• Relief in the form of:

– Payment of part tax dues (30% to 60%)

– No interest and penalty

– Immunity from prosecution w.r.t. the matter and period covered

• Coverage of the scheme:

– Show cause notices, appeals as on 30.06.2019 pending final hearing

– Quantified demand under any pending audit/investigation/enquiry up to 30.06.2019

– Amount voluntarily disclosed

– Tax arrears


Dispute Resolution Scheme (cont.)

India

Benefits for declarant

Not liable to pay any further tax/duty or interest or penalty

Discharge certificate issued with respect to the amount of tax dues to be conclusive for the matter and period mentioned in the declaration

Not to be prosecuted under the indirect tax law with respect to the matter covered in the statement

The matter and period covered in the statement not to be reopened in any other proceeding


Dispute Resolution Scheme (cont.)

India

Conditions for availing benefits

Restriction on input tax credit availmentTax dues paid cannot be availed as input tax credit

Refund ineligibilityTax dues once paid are not eligible for refund under any circumstances

E-payment of tax duesTax dues shall be paid through internet banking and without utilising input tax credit

Adjustment of pre-depositPre-deposit will be adjusted from tax payable. However, no refund where pre-deposit exceeds amount payable


India

Customs interplay with GST


Customs, TP and GST interplay

India

There is a strong interplay between GST and Customs Laws in the context of international trade. We have highlighted some key aspects which lead to this interplay:

Appropriate integration/hand-off critical for effective management

• IGST on import of goods under Customs

• Impact of exemptions under GST

• Special transactions—high seas sale, bond to bond sales

• Import without consideration from related party taxable under GST—attribution of notional value for GST may lead to Customs implications

• Applicability of concepts of composite/mixed supply under Customs

Tax positions

• 8-digit classification under Customs vis-à-vis 4-digit under GST

• Reconciliation between Shipping Bill and export invoices

• Need for BoE to claim tax credits

• Tax invoices required to claim export incentives

• Requirement to report BoE/Shipping Bills in the GST returns

Compliance

• Import of goods from related parties governed by the Customs Law

• Import of services from related parties covered under GST Law

• Separate valuation rules prescribed for imports from related and unrelated parties

• Requirement to substantiate arms length price

Valuation


Customs, TP and GST interplay (cont.)

India

Transfer Pricing and Custom Interplay

Objective of customs valuation and Transfer Pricing (TP) methodologies is to establish that price of a cross border transaction is not influenced by the relationship between the parties entering into the transaction

MARKETING INTANGIBLES

• Excessive Advertising, Marketing andPromotion (‘AMP’) expenditure creates anissue from customs as well fromTP perspective

SUBVENTION PAYMENTS

• Likely issues under Customs as wellas GST laws

ROYALTY

• Customs authorities usually seek to include royalty in assessable values considered for computation of customs duty

• GST implications may also arise

CREDIT NOTES/DEBIT NOTES

• Year end pricing adjustments often result in customs and TP implications

• Practice of issuing credit/debit notes directly impacts transaction value, therefore valuation issues may arise


India

Key opportunity areas


Key opportunity areas

India

What’s expected next?

Expansion of GST

to include power,

real estate,

petroleum

Jurisprudence to

evolve (writ

petitions,

appellate

proceedings)

New Customs law,

FTP may be

introduced

Compliance

framework to

evolve and

stabilise


Key opportunity areas (cont.)

India

Way forward

ERP alignment with GST IT ecosystem

GST law(s) would continue to evolve over next 3-5 years

Exploring areas for Advance

Rulings/Advocacy

Document positions and data

Track legislative developments

Revisit tax considerations

SEA indirect tax updateCommitted to the success of your businessSeptember 2019 Tax


1. Singapore

• Customer accounting for prescribed goods

• Reverse Charge (RC)

• Overseas vendor registration

2. Malaysia

• Sales and Service Tax (SST)

• Digital tax

Contents


Singapore

Customer accounting for prescribed goods


Customer accounting for prescribed goods

Singapore

• Customer accounting applies on the local sale of prescribed goods to a Goods and Services Tax (GST) registered customer for his business purpose if the GST exclusive value of the sale exceeds $10,000 in a single invoice

• Customer will account output tax on behalf of seller in the customer’s GST return

• Who will be impacted:

− GST registered business selling prescribed goods

− GST registered business purchasing prescribed goods

• Prescribed goods:

− Mobile phones

− Memory cards

− Off-the-shelf software


Singapore

RC


RC

Singapore

What is the reverse charge mechanism?

• The recipient of a imported service to account for GST on the value of the services acquired from outside Singapore

• Recipient treated as making the supply and account for output tax

• Input tax claim is allowed subject to the normal input tax recovery rules

Scope of imported services

• Applicable on all imported services other than:

− Exempt supplies

− Zero-rated supplies

− Certain government services

− Services acquired that are directly attributable to taxable supplies


RC (cont.)

Singapore

Who will be affected?

• GST-registered persons who:

− Are not entitled to full input tax credit; or

− Belong to a GST group that is not entitled to full input tax credit

• Non-GST registered persons who:

− Import services from overseas suppliers which are within the scope of reverse charge where the value exceed S$ 1 million in a 12-month period; and

− Are not entitled to full input tax credit if GST registered

When to account for imported services?

• Earlier of the following:

− When invoice in respect of the supply is issued (posting date can also be used); and

− When payment in respect of the supply is made

• RC Business may elect to apply reverse charge at the end of the longer period


RC (cont.)

Singapore

Value for imported services

• Value of supply will be the amount equal to consideration paid for the services, without any deduction of withholding tax (if any)

• GST will be computed on the consideration paid

• If no payment is made to the overseas supplier, the value will be its open market value

• For services procured from a connected person or an overseas branch/head office, the following rules apply:

− If consideration paid < OMV, value of imported service=OMV

− If there is a cost allocation, value of imported service can be reduced by any salaries, wages and interest cost components including any mark-up


RC (cont.)

Singapore

Transitional rules

Payment made in full before 1

January 2020

Services completed before 1

January 2020

Supplier’s invoice issued

before I January 2020

Not subject to RC

Not subject to RC

Apply standard RC rules

Yes

Yes

No

No

No

Yes

To apply transitional rules

• Value of supply to be subject to

RC: invoice amount less the

higher of payment made and

services performed before 1

January 2020

• Account in GST return for the

period in which 1 January

2020/later effective date of GST

registration falls in

(note: transitional rules apply even

if registration date is after 1

January 2020)


Singapore

Overseas vendor registration


Overseas Vendor Registration (OVR) regime

• It is a pay only scheme where overseas vendors providing digital services to non-GST registered customers in Singapore to charge and account for GST on such services.

• It aims to achieve equality in the GST treatment for all services consumed in Singapore regardless where the service is procured from.

Scope of digital services under OVR

• Digital services are defined as services which are supplied over the Internet or an electronic network and the nature of which renders their supply essentially automated with minimal or no human intervention, and impossible without the use of information technology.

• Include the supplies of the following:

− Downloadable digital content

− Subscription-based media

− Software programs

− Electronic data management

− Support services performed via electronic means, to arrange or facilitate a transaction which may not be digital in nature (e.g., commission, listing fees and services charges)

Singapore

Overseas vendor registration


OVR registration threshold

Overseas suppliers are required to register under OVR regime if:

• Annual global turnover exceeds S$1 million and make Business-to-Consumers (B2C) supplies of digital services to customers in Singapore exceeding S$100,000 in a calendar year; or

• Annual global turnover expected to exceed S$1 million and B2C supplies of digital services to customers in Singapore is expected to exceed S$100,000 in the next 12 months period.

Businesses liable for GST registration under OVR are required to apply within 30 days from date when the liability arise.

Unlike the normal GST registration, under the OVR regime, overseas suppliers are not required to appoint a Section 33(1) local agent or provide security deposit (unless registered under voluntary basis).

May apply for de-registration if supplies made by overseas suppliers will not exceed the OVR threshold in the next 12 months.

Who will be affected by OVR?

• Overseas suppliers of B2C supplies of digital services;

• Overseas Electronic Marketplace Operators who provide B2C supplies of digital services; and

• Local Electronic Marketplace Operators who provide B2C supplies of digital services.

Overseas vendor registration (cont.)

Singapore


Determine customer belonging status

• Existing belonging status guidelines apply—BE and FE rules and usual place of residence

• IRAS admin concession—Maintain 2 pieces of non-conflicting evidence based on the following:

− Payment proxy (credit card info or bank account details)

− Residence proxy (billing or home address)

− Access proxy (IP address, mobile country code of SIM card)

• 2 evidence pieces should comprise payment proxy and either a residence or access proxy

Customer’s GST registration status

• Customers responsible to provide GST registration number to overseas suppliers

• Customers to seek refund if incorrectly charged GST for purchase from overseas suppliers


Singapore


Electronic Marketplace

• Electronic marketplace operators regard as the supplier of digital services if any of these conditions are met:

− Authorise charge to customers

− Authorise the delivery of supply to the customers (delivers item itself or sends approval to commerce delivery)

− Sets terms and conditions under which the supply is made (provides customer support or owns customers data, influences pricing, specific payments or delivery method)

− Documentation issued to customer identifies the supply as made by the marketplaces

Overseas electronic marketplace regards as supplies of digital service

• in addition to its own supplies of B2C digital services, the supplies of B2C digital services made by overseas suppliers through the marketplace to non-GST registered customers in Singapore will be taken in consideration when determining its GST registration liability in Singapore under OVR regime.

• Where GST-registered, it is required to charge and account GST on the supplies of B2C digital services made to non-GST registered customers in Singapore by overseas suppliers through the marketplace.


Singapore


Local electronic marketplace regards as supplies of digital service

• in addition to its taxable supplies, the supplies of B2C digital services made by overseas suppliers through the marketplace to non-GST registered customers in Singapore will be taken in consideration when determining its GST registration liability in Singapore (i.e., S$1 million threshold).

• Where GST-registered, it is required to charge and account GST on the supplies of B2C digital services made to non-GST registered customers in Singapore by overseas suppliers through the marketplace.

Supplies of digital services accounted by the electronic marketplace as suppliers would be disregarded for the assessing of whether the overseas suppliers’ registration liability


Singapore


Time of supply

• Earlier of - payment is received or invoice is issued

• Any equivalent document that serves as bill for payment can be considered as invoice

Value of supply

• Supply is for a consideration wholly in money → Value of Supply + GST = Monetary Consideration

• Supply not for a consideration or for a consideration not wholly consisting of money → Value of Supply = Open Market Value

• Must convert foreign currency-denominated supplies using acceptable exchange rate and account GST on the S$ equivalent

• May adopt to use prevailing exchange rate at

− Time of supply;

− End of the taxable period; or

− Time of filing of GST return

*Must consistently apply on all supplies of digital services for at least one year


Singapore


Transactions straddling 1 Jan 2020 (Discrete supplies)

• Where full payment is received before 1 Jan 2020, transaction is considered outside the scope of GST

• Where services are fully performed before 1 Jan 2020, transaction is considered outside the scope of GST

• Where part of the payment is received or part of services is performed before 1 Jan 2020 and the remaining payment or services performed on and after 1 Jan 2020, GST should be accounted for on the lower of the value of the remaining payment or services performed on or after 1 Jan 2020.

• Value of services—determine on appropriate methods such as valuation of measurable work or the business normal costing of pricing system


Singapore

Implementation of OVR

50% payment received from

customer

Service performed

Dec 2019 Jan 20201 January 2020

GST accounted based on the lower of:

• Value of remaining payment = $50• Value of service performed = $100


Transactions straddling 1 Jan 2020 (Continuous supplies)

• Continuous supplies of digital services subject to transitional rules when:

− Invoice is issued or payment received before 1 Jan 2020;

− Services or part services performed from 1 Jan 2020; and

− Services are not performed pursuant to an agreement made before 19 Feb 2019.

• GST accounted based on the portion of services performed after 1 Jan 2020

• Portion of the service which GST is applicable should be filed in the overseas supplier’s first GST return


Singapore

Oct 2019 Sep 2020Jan 2020 Apr 2020 Jul 2020

One year online media streaming subscription of $100

Full payment received from

customer Implementation of OVR

GST account on portion of services performed after 1 Jan 202

=> $100 x 9 mths/12 mths


GST filing

• A simplified GST return is to be filed on a quarterly basis with payment due one month from end of the quarter. Only Box 1, Box 1b, Box 6 and Box 11 need to be completed.

• GST incurred on expenses are not recoverable.

• No filing of GST F7 for disclosure of errors—any correction of errors to be made in the next return.

Record keeping

• Suppliers to maintain business and accounting records for 5 years—must be able to provide upon request by IRAS to support the GST collected from all supplies made in Singapore.

• No invoicing and pricing display requirement to be imposed on the suppliers.


Singapore


Malaysia

SST


SST

Malaysia

Initial implementation

Service tax imposed on prescribed taxable services provided by service providers located in Malaysia.

Now

Stage 1: Business to Business (B2B) transactions—1 January 2019

Malaysian businesses (both registered and unregistered SST) acquiring taxable services to self-account for 6% service tax

Taxable services may include consultancy, engineering, management, IT, accounting and employment services

To ‘level the playing field’ for local service providers

Stage 2: Business to Consumer (B2C) transactions i.e., Digital Tax– 1 January 2020

Foreign service providers to register with RMCD, charge and remit service tax at 6%


SST (cont.)

Malaysia

Scope of tax

• Tax imposed on any taxable services (i.e., if not a taxable service, no tax to be imposed);• Taxable services made in carrying on his business;• Services are made by a taxable person; and• Taxable services were provided in Malaysia (i.e., no tax imposed on imported and exported services).• Tax imposed on imported taxable services (taxable services acquired by any person in Malaysia from a person outside Malaysia) (w.e.f. 1

January 2019)

Rate of tax• 6%• RM25.00 upon issuance of principal or supplementary card and every subsequent year or part thereof

Out of scope service

Scope of Service Example

Service acquired and consumed by person outside Malaysia Accommodation service outside Malaysia paid by business entity in Malaysia

Service acquired by person in Malaysia in relation to goods, land or matters outside Malaysia

Consultation service in relation to property located outside Malaysia to prospective Malaysia customer

Service acquired by person outside Malaysia in relation to goods, land or matters in Malaysia

Consultation service in relation to business investment in Malaysia by prospective foreign investor

Service acquired by person not carrying on business in Malaysia Online software training acquired by user in Malaysia


List of taxable persons and services as per the Service Tax Regulations 2018

•Accommodation

*Group A

•Food and Beverage

Group B

•Night-Clubs, Dance Halls, Cabarets, Health and Wellness Centres, Massage Parlours, Public Houses And Beer Houses

Group C

•Private Club

Group D

•Golf Club and Golf Driving Range

Group E

•Betting and Gaming

Group F

•Professionals

*Group G

•Credit Card and Charge Card

Group H

•Other Service Providers

Group I

Professionals:1.Advocate/solicitor2.Syarie lawyer3.Public accountant4.Surveyor5.Professional engineer6.Architect7.Consultancy services provider, training or coaching

services provider8.IT services provider9.Certain management services provider10.Employment services provider11.Private agency

Other Service Providers:1.Insurance/takaful operator2.Telecommunication/content application services

provider3.Customs agent4.Parking operator5.Motor vehicle repair centre6.Courier services7.Vehicle charter8.Advertising9.Electricity10.Local air transport11.Amusement park12.Brokerage and underwriting13.Cleaning services

Malaysia


First schedule of the Service Tax Regulations 2018

Group A: Accommodation

Total value of taxable service—RM500,000

(1) Person (2) Taxable Service

Any person operating accommodation premises including hotel,inns, lodging house, service apartment, homestay and other similar establishment, excluding accommodation premises:

(a) Provided by: (i) The Federal Government;(ii) Any statutory body or local authority; or(iii) Any private higher education institutions registered under

the Private Higher Educational Institutions Act 1996 [Act 555],

As a facility to any person for educational, training or welfare purposes;

(b) Provided by an employer as a facility to his employees;(c) Provided by any religious or welfare body registered with the Registrar of Societies Malaysia or under any written law governing such body, for the purpose of religious or welfare activities and not for commercial purpose.

(a) Provision of accommodation premises.(b) Provision of any other taxable service specified in other Groups in

this Schedule.(c) Provision in other services within the accommodation premises.(d) Provision or sale of tobacco products and alcoholic and non-

alcoholic beverages.


First schedule of the Service Tax Regulations 2018 (cont.)

Group G : Professionals


Person Taxable Service

7. Any person who provides consultancy, training or coaching services, excluding:

a) approved companies with status or definitions as research and development companies and contract research and development companies under Section 2 of the Promotion of Investments Act 1986 [Act 327] and approved research institute under Section 34B of the Income Tax Act 1967 [Act 53]; or

b) the Federal or State Government, local authorities or statutory bodies.

g) Provision of consultancy services including professional consultancy services other than specifically mentioned in this Schedule, or training or coaching services with or without the issuance of certificate for which the fees are imposed, excluding:

i. Provision of consultancy services relating to healthcare services and veterinary services;

ii. Provision of consultancy, training or coaching services in connection with:

A. goods or land situated outside Malaysia; or

B. Other than matters relating matters specified in (A) outside Malaysia.



Group G : Professionals (cont.)



8. Any person who provides information technology services. g) Provision of all types of information technology services, excluding

i. provision or sale of goods in connection with the provision of the information technology services;

ii. provision of information technology in relation to –

A. goods or land situated outside Malaysia; or

B. Matters outside Malaysia other than matters specified in (A).

Based on the Guide on IT services as at 13 December 2018, the following are IT services that are subject to service tax:

• Development or provision of software

• Development or provision of computer system (excluding hardware)

• Installation of system (excluding hardware) or software

• Software maintenance of IT equipment

• Creation and maintenance of webpage, websites, web portal and online platforms

• Updating to new version, upgrading or modification of data, system or software

• Provision of cloud services

• Manage services in data centre services excluding rental of rack space and hardware

• Subscription of data (for example media streaming services)

• Security of data, system or software

• Administrative fee for data, system or software

• Advisory or consultation for data, system or software (it is considered as consultancy services)

• Advisory or consultation for system development (it is considered as consultancy services)

• Management on IT (it is considered as management services)






9. Any person who provides management services, excluding -

(a) The management and maintenance services in connection with land or building solely for residential use provided by any developer, joint management body, management corporation or residential association;

(b) the management services provided by any person who is licensed or registered with the Securities Commission Malaysia for carrying out the regulated activity of fund management under the Capital Markets and Services Act 2007 [Act 671]; or

(c) the management services provided by any person, Government agency, local authority or statutory body for the purposes of religious, welfare, bereavement, burial, cemeteries, cremation, sewerage, water supply, health or transport services.

i) Provision of any of following management services:

i. Project management services, full or part of the project

ii. Tourism management services

iii. Logistic management services

iv. Maintenance management services

v. Warehousing management services

vi. Collection and debt management services

vii. Car park management services

viii. Sports facilities management services

ix. Secretarial management services

x. Any management services other than specified in i) to ix) made on behalf of another person

excluding provision of such services in connection with:

xi. goods or land situated outside Malaysia; or

xii. matters outside Malaysia other than matters specified in (xi).






10.Any person who provides employment services.

11.Any person who is a private agency licensed under the Private Agencies Act 1971 [Act 27]

j) Provision of all types of employment services, excluding –

i. Provision of employment services in the form of secondment of employees; or

ii. Provision of employment services for employment outside Malaysia.

k) Provision of guards or protection for the personal safety or security of another person or for the safety or security of the property or business of such other person, excluding provision of such services to guard or protect a person, or a property or business situated, outside Malaysia.


Treatment in Designated Area (DA) and Special Area (SA)

Special rules

Services provided

PCA DA/SA

Service Tax

SA SA

SA DA

DA DA

No Service Tax

Service Tax

Designated Area (DA)(deemed outside of Malaysia)

Labuan, Langkawi,Tioman and Pangkor

Services provided between and within DA

Not subject to service tax except prescribed by Minister

Special Area (SA)(deemed outside of Malaysia)

Free Zone, Licensed Warehouse, LicensedManufacturing Warehouse and Joint Development Area

Services provided between and within SA

Not subject to Service Tax except prescribed by Minister

Note: Location of company in DA/SA is determined by “principle place of business”

Acquisition of imported taxable services: No exclusion for businesses located in DA or SA.


B2B service tax exemption

• Service tax exemption for business-to-business (B2B) transactions for same services provided between two companies registered for service tax.

• The purpose of the B2B exemption is to eliminate tax cascading effect.

• Applies to the following services under Group G:

• The service provided by the service provider, must be under the “same item” (a) to (i) above under Group G as that provided by the service recipient.

• No application/certificate required.

(a) Legal services (f) Architectural services

(b) Legal services on Islamic matters (g) Consultancy services

(c) Accounting/bookkeeping (h) IT services

(d) Surveying services (i) Management services

(e) Engineering consultancy services

Service Provider

(Management service registered)

Service Recipient

(Management service registered)

Final service recipient

B2B exemptionNo service tax charged

Charge service tax 6% on management service


Prescribed conditions:

i. Companies are treated to be in a group of companies if one company controls each of the other companies:-

1. Direct or indirect shareholding of more than 50%; or

2. Direct or indirect shareholding of 20% to 50%—to have power to appoint/remove majority of directors; and

ii. The same service must not be provided to any company outside the group i.e., third party that does not meet the Group test.

Services rendered within group of companies

Intra-group relief

Any taxable service mentioned in item a, b, c, d, e, f, g, h, or i of Group G to any company within the same group of companies in Malaysia are not treated as a taxable service:

Intra-group Ministerial Exemption

Minister’s exemption granted under subsection 34(3) of the Service Tax Act 2018 for imported taxable services acquired from foreign companies within the same group.

Group G—Professionals

(a)

Legal Services

(b)

Legal services on Islamic matters

(c)

Accounting/bookkeeping

(d)

Surveying services

(e)

Engineering consultancy

services

(f)

Architectural services

(g)

Consultancy,training or

coaching services

(h)

Information technology

services

(i)

Management services

No application/certificate required.


Goods (e.g., restaurants, hotel)/services

1. Non-connected persons — actual price (goods)/value (services)

2. Connected persons — price “would have been sold” to non-connected person (e.g., free taxable goods and services —Service tax payable at market value

Imported taxable services

1. Exchange rate to MYR—selling rate of Bank Negara

2. The value of an imported taxable service:

• Insurance/takaful policy—actual premium/contribution paid

• Other services—actual value of services

• Connected persons—Open Market Value

Note: RMCD have indicated in the seminars the followings:

a. Value of service is based on invoice value (tax exclusive)

b. Service tax is inclusive of amount retained by recipient for withholding tax purposes

Connected Persons

For the purpose of Section 9 of the Act, the person shall be deemed to be connected with taxable person if—

(a) They are officers or directors of one another’s business;

(b) They are legally recognised partners in business;

(c) Any one person directly or indirectly owns, controls, or holds five per cent or more of the outstanding voting stock or shares of both of them;

(d) One of them directly or indirectly controls the other;

(e) Both of them are directly or indirectly controlled by a third person;

(f) together they directly or indirectly control a third person;

(g) They are members of the same family; or

(h) He is a trustee in a settlement.

Value for service tax


When is it due?

Taxable period• Bimonthly (every 2 months); or

• Specific basis (subject to approval).

Accounting basis

• For taxable services provided: Earlier of when payment is received or 12 months from the date the taxable service was provided.

• Section 21: The registered person must issue an invoice and service tax shall be collected from the customer in addition to the value and any other amount due and payable by the customer.

• For imported taxable services acquired: Earlier of when payment is made or date of receipt of invoice.

•Note: RMCD has indicated in the Imported Service Guide dated 9 January 2019 to allow businesses to refer the date of receipt of invoice to be at the point when the invoice is recorded in the company’s account

Service tax return submission and payment

• To be submitted and paid no later than the last day of the following month after the end of the taxable period.

• To be submitted electronically or by post. Payment to be made electronically or by cheque, bank draft (to be posted to SST Processing Centre).

• To be submitted regardless whether there tax is to be paid or not (nil).

Record keeping requirements

• Documents are to be kept for 7 years.

• Records can be kept in both Bahasa Malaysia or English.


Post-implementation issues

• Wide and subjective definitions of scope

• Changes in the guides—Two recurring examples:

• Management services—Additional scope in regulations with effect from 1 January 2019

• Information technology services—Guide includes all IT enabled services

Scope of prescribed services—interpreting the law

• Practical issue—ensuring both companies registered for and provide “same service” under specific item in Group G

B2B “same service” exemption

• Services provided to non-eligible related parties will taint all group services

• Interpretation of “same services”—question of fact

Intra-group relief

• Determining if imported services are taxable—affect all Malaysian businesses whether or not service tax registered

• Ministerial exemption for intra-group exemption—determining if service provider meets eligibility requirements

• Services provided to non-eligible related parties will taint all group services

• Interpretation of “same services”—question of fact

Imported services

• Previous GST concept of reimbursement/disbursements adopted

• For service tax valuation, reimbursements subject to service tax, disbursements not taxable

Reimbursements/disbursements


Malaysia

Digital tax


Digital tax

Malaysia

• B2C: Service tax on digital services provided by foreign companies—Effective 1 January 2020

• Service tax is proposed to be levied at 6% on digital services provided by a foreign service provider to consumers residing in Malaysia

• Definitions:

• Registration

− Threshold for registration is determined via assessment of turnover on a historical or prospective basis (on a rolling 12 months’ basis)

− If the threshold is breached, then an application for registration is to be made to RMCD 3 months before the commencement of the tax on1 January 2020 (i.e., on 1 October 2019 onwards)

− The registrant is thereafter required to file a quarterly (3-month period) return and to issue invoices to consumers for any taxable digitalservices

Dig

ital

servic

e Services delivered or subscribed over the internet or other network which cannot be obtained without the use of information technology; and

Where delivery of the service is essentially automated.

Fo

reig

n s

ervic

e

pro

vid

er Person who is outside Malaysia

providing digital service to a consumer;

Includes any person who is outside Malaysia operating an online platform for buying and selling goods or providing services (whether or not such person provides any digital services); and

Makes transactions for the provision of digital services on behalf of any person.

Co

nsu

mer Any person who fulfils any 2 of the

following:-

•makes payment for digital services using credit or debit facility provided by any financial institution or company in Malaysia; or

•acquires digital services using an internet protocol address registered in Malaysia or an international mobile phone country code assigned to Malaysia; or

•resides in Malaysia

China VAT and customs updateCommitted to the success of your businessSeptember 2019 Tax


1. China VAT update

2. China customs update

Contents


China

VAT update


VAT update

China

The series of VAT reduction policies

On 20 March 2019, the Ministry of Finance (MOF), the State Taxation Administration (STA) and General Administration of Customs (GAC) jointly issued the Bulletin on Policies for Deepening the VAT Reform (Bulletin No. 39). The series of VAT reduction policies, including VAT rate reduction and expansion of input VAT credit took effect on 1 April 2019.

VAT rate reduction Expansion of input VAT credit Excess input VAT refund

Applicable VAT rateTaxable activities

Old VAT rate New VAT rate

16% 13%Sales and importation of general goods; provision of processing, repair and replacement services; and provision of leasing services of tangible and moveable assets

10% 9%Sales and importation of specified goods; provision of transportation, postal, basic telecom services, construction services and leasing services of immoveable property and sales of land use rights or immoveable property

6% 6%Provision of value-added telecom services, financial services, modern services and lifestyle services; and sales of intangible assets other than land use rights


10

Passenger transportation services

Immoveable assets 10% super deduction

Applicable type of invoices

Other qualifiedvouchers

Note: it only applies to the company’s own employees

Previously—60%/40% credit

Now, one-off credit

Production service sector and lifestyle service sector

Postal service, telecom service, modern service and lifestyle service > 50%

1 April 2019 to 31 December 2021

VAT update (cont.)

China

Expansion of input VAT credit

Besides rate reduction, the policies of expanded input VAT credit are expected to further reduce the VAT burden of enterprises.


VAT update (cont.)

China

Excess input VAT refund

5

4

3

2

1The newly increased unutilised input VAT is more than

the ending balance as of March 2019 for six consecutive months

The amount of newly increased unutilised input VAT

at the end of the sixth month is RMB500,000 or more

Taxpayer’s credit rating is A or B

Bulletin 39

Refundable amount = newly incurred excess input VAT

× input VAT ratio×60%

Impact on export VAT refund

Bulletin 84

6 No records of tax fraud or noncompliance in relation to issuance of VAT special invoices, export VAT refund, etc. and not subject to 2 or more penalties by the tax authorities due to tax evasion for the 36-month period before the input VAT refund application

Qualified taxpayers* can start to apply for the excessive input VAT

refund starting from the VAT filing period of July 2019 earlier than the September filing period

There is no threshold of the incremental input VAT as compared to the

end balance as of March 2019

Refundable amount = newly incurred excess input VAT × input VAT ratio

5

4

3

2

1

6

Same as Bulletin 39

Same as Bulletin 39

Same as Bulletin 39

*The qualified taxpayers are advanced manufacturing taxpayers, which are defined as manufacturers whose revenue generated from the manufacturing and sales of non-metallic mineral products, general equipment, special equipment and computer, communications and other electronic equipment, by referring to the National Economic Industry Classification, accounts for more than 50% of its total revenue in a 12 months' basis before the application.

New rule for advanced manufacturing

taxpayers issued on Aug 31, 2019


VAT update (cont.)

China

Imminent developments of China VAT

• It is the direction to reduce the VAT rates from three bands (i.e., 13%, 9%, and 6%) to two

bands

Reduce bandsof VAT rates

• SAT/MOF are working on VAT treatments on financial services (such as the input VAT

creditability of interest), possibly followed by construction and real estate sectors

• No significant changes are expected for lifestyle sector

Further refineVAT rules

• The tax authorities are more and more relying on technology and data mining to identify the

potential risk areas and audit targets

• The E-invoicing for Special VAT Invoices are expected in future

Further develop technology in tax management

• Expected in 2020? VAT legislation


VAT update (cont.)

China

VAT incentives for Shanghai Free Trade Zone

Waigaoqiao

LinGang（New）

Zhang jiang

Jinqiao

Lujiazui

Layout of SH FTZ

Domestic goods entering into the comprehensive bonded zone or bonded logistics part of the FTZ are eligible for export VAT refund

Goods from overseas entering the FTZ can be imported under the bonded status (i.e., free of import duty and VAT)

Goods transaction within the FTZ can be VAT exempt

Facilities for domestic sales by an FTZ company


Digital EVR SystemA SMART automated tool to enhance efficiency and accelerate cash tax refund

Export VAT refund is very unique and highly regulated in China. Improper management of export refund claims can result into tax costs and tax losses. The manual work can be tedious if the export volume is significant. The EVR tool is developed to help export companies enhance efficiency, control tax risks and accelerate cash tax refund, which is crucial in the current economic environment.

Respond to tax inspection and risk management

The risk indicator functions of Deloitte EVR assists companies to remain nimble in an increasingly regulated environment where there is an enhanced leverage of big

data analysis (such as Golden Tax III).

Integrated Solution of Tax Declaration and Control

The one-stop-shop of an integrated export VAT refund declaration and control system enhances the data

analysis capabilities at the group level especially for companies with a big export volume and a high

compliance standard.

Our Value Proposition

Reduce tax compliance cost and expedite cash tax refund

Reduce tax losses due to delays, misstatements and improper tax treatment which will reduce tax compliance costs. Simultaneously accelerating cash receipts through timely and correct tax reporting.

Establish a common information platform across multiple departments

Establish a common platform across Customs, Finance, and Tax departments for real-time information sharing. Achieving data unification and alignment for companies to manage the export refund reporting in a more efficient and accurate manner.

VAT update (cont.)

China

The unique features of zEVR


China

Customs update


Customs update

China

Strategies for managing tariff expenses

Exclusion of additional tariffs imposed by China and the US

Application deadline

Commodity value

(Billion US$)US China

List 1（34）

By 9 October 2018

From 3 June to 5

July 2019

List 2（16）

By 18 December 2018

List 3（200/60）

From 30 June to30 September 2019

From 2 September to 18 October 2019

Results of the first batch of applications (US$ 34 Billion)

Batch DateApproved quantity

HS codes involved

List 1 29 December 2018 98421 ten-digit US HS

codes

List 2 25 March 2019 8729 ten-digit US HS

codes

List 3 15 April 2019 34815 ten-digit US HS

codes

List 4 14 May 2019 51521 ten-digit US HS

codes

List 5 30 May 2019 46444 ten-digit US HS

codes


Customs update (cont.)

China

•Collect relevant information on the goods to be excluded from extra tariff, including but not limited to the name, tax codes, import quantity, cost, form, function, usage, etc.

Collections

•Review the information provided by client on exclusion application, and request additional information from client when necessary.

Review

•Brainstorm, analyse and discuss with relevant client team about the reasons for supporting the exclusion application based on current facts and data.

Discussion

•Analyse the corresponding exclusion application strategies based on the business impact of the client, such as the tax code and the amount of the goods under the tax code to be excluded.

Analysis

•Assist in optimising the data set of exclusion application based on the above analysis results.

Optimisation

•Arrange on-site talks or teleconferences with customers, revise and improve the complete data set of the exclusion application according to the review comments from the management team, and form the final version of data set.Discussion

•Assist in filling out and submitting the exclusion application online through the official website of the Tariff Policy Research Center of the Ministry of Finance.

Application

Strategies for managing tariff expenses

China’ s exclusion process


A private communications equipment manufacturing company

The Personal Communications Division and the Global Telecommunications Program Division paid US$34 million and US$3 million in royalties, respectively;

Customs identified:underpaid tax of tens of million yuan of was levied for the missing declaration in royalty of this company

A foreign-funded automobile manufacturing company

Continuous external payment of large amount of technology royalties;

Customs identified: Over RMB100 million yuan of external payment of royalty is dutiable, and underpaid customs duties, consumption tax and VAT shall be paid in accordance with the regulations

An foreign-funded sports goods trading company

Continuous external payment of large amount of trademark royalties;

Customs identified:Trademark royalties are entirely related to imported goods, requesting underpaid tax of more than RMB10 million yuan annually

• Improve the way of declaration of dutiable royalties

• Improve the business environment of cross-border trade

• Fully accomplish self-declaration and self-payment of enterprises


China

China’s new requirement for royalty reporting Background

As a result of tax reform and technology export control in various countries, royalties are an important tool of transnational transactions in business and tax planning.

China Customs authorities has enhanced their monitoring and supervision on royalties under non-trade payments in recent years.


• Note: Bulletin No. 58 of 2019 was officially implemented on 1 May 2019


China

China’s new requirement for royalty reporting

• Changes in confirmation standards of royalties:

Confirmation judgment

Current Requirements for Filling in Customs Declaration Forms Requirements for Filling in after the Implementation of Bulletin No.58

Confirmation of payment of royalties?

According to Articles 11 and 13 of the Measures of Valuation, files and confirmswhether the buyer has paid royalties relevant to the imported goods to the seller or the relevant parties, which are not included in the actual and payable price of the imported goods.

When filing a declaration form, the taxpayer shall confirm the existence of dutiable royalties which refer to royalties that should be included in the dutiable value of imported goods in accordance with Articles 11, 13, and 14 of the Measures of Valuation.

Yes • The buyer has to pay the royalties directly or indirectly to the seller or the relevant party, which are not included in the actually paid and payable price of the imported goods, and meet the criteria of being related to imported goods under Article 13 of the Measures of Valuation; or

• The buyer has to pay the royalty directly or indirectly to the seller or the relevant party, which are not included in the actually paid and payable price of the imported goods, but the taxpayer can not confirm whether it meet the criteria under Article 13 of the Measures of Valuation

For the existence of dutiable royalties related to the imported goods that need to be paid directly or indirectly to the seller or the relevant parties, no matter whether they are included in the actual payment or the price payable of the imported goods.

No If the buyer has to pay the royalties directly or indirectly to the seller or the related parties, which are not included in the actually paid and payable price of the imported goods, the taxpayer can confirm that the royalties are not relatedto the imported goods according to Article 13 of the Measures for Valuation.

There is no direct or indirect payment of dutiable royalties related to imported goods to the seller or the relevant parties.



China

China’s new requirement for royalty reporting

• Two types of declaration methods:

Dutiable royalties are paid before a Customs declaration is made for the imported goods

Taxpayers shall input the amount of dutiable royalties paid to the "miscellaneous fees" column of the declaration form.

1. Assess the dutiability of the royalties

2. Pay the royalties before import

3. State “Yes” in the “Confirmation of royalty payment” column in Customs declaration

4. State the value of the royalties in the “miscellaneous fees” column

Dutiable royalties are not paid before declaring for the imported goods

Within 30 days after each payment, the taxpayer shall declare and pay taxes to the Customs with the "9500" supervision code, and fill in the Declaration Form of Dutiable Royalties.

1. Assess the dutiability of the royalties

2. State “Yes” in the “Confirmation of royalty payment” column in Customs declaration

3. Pay royalties after import

4. Declare the dutiable royalties through separate filing within 30 days of the payment

• Note: For those who have paid taxable royalties when goods are declared for import, the Customs shall levy taxes on royalties according to the applicable tax rate and exchange rate on the date of accepting the declaration for import of goods



China

China’s new requirement for royalty

Recommendations:

• Assessing the dutiability of the royalties

– Participation of various departments of the company

– Comprehensive consideration of various influencing factors

– Proof is the key consideration

– How to allocate is a difficult issue

Non-trade payment

Royalty contract

Technical process

Imported goods

Procurement process

Sort out the past year's situation: Focus on royalties

Key Technology Contents Proprietary technology carriers:

• Drawing• List of patents • Design process

The nature of Royalty: content and scope of authorisation

How to calculate: Is the deduction reasonable?

Type of goods:

• Raw material • Production

equipment • Finished product

Overseas mode of production:

• Customisedproducts

• Common products

Supplier:

• Related party• Non-related party

Finance department Legal department Technical department Production/logistics department

Procurement department

India TP pricingCommitted to the success of your businessSeptember 2019 Tax


1. Key Developments

2. Tax Challenges in Digital Economy

3. Key TP Controversy

4. Update on APA & MAP

Contents


Glossary

Abbreviations Full name Abbreviations Full name

ALP Arm’s Length Price GST Goods and Services Tax

AO Assessing Officer HC High Court

AY Assessment Year IRA Indian Revenue Authorities

APA Advance Pricing Agreement ITAT Income Tax Appellate Tribunal

AMP Advertisement, Marketing and Promotion MAM Most Appropriate Method

AE Associated Enterprise MAP Mutual Agreement Procedure

BEPS Base Erosion Profit Shifting MNE Multinational Enterprise

CBDT Central Board of Direct Taxes OECD Organisation for Economic Cooperation and Development

CA Competent Authority PE Permanent Establishment

CUP Comparable Uncontrolled Price Method PCD Public Consultation Document

CIT(A) Commissioner of Income-Tax (Appeals) PSM Profit Split Method

DRP Dispute Resolution Panel SBRT Single Brand Retail Trading

ECB External Commercial Borrowings SEP Significant Economic Presence

FAR Function, Asset and Risk TP Transfer Pricing

FARM Function, Asset, Risk and Market TPO Transfer Pricing Officer

FDI Foreign Direct Investment TNMM Transaction Net Margin Method

FY Financial Year VAT Value added Tax


India

Key Developments


• In an initiative undertaken by the government, a task force was appointed to re-write the existing Income Tax Act, which was framed in year 1956

• The new law is expected to be easier to understand and implement, reduce litigations, facilitate voluntary compliance, increase tax base, improve efficiency and be equitable and fair

• 100% FDI is now permitted under automatic route

• It was clarified that contract manufacturing activities may be conducted under a legally tenable contract, whether on Principal to Principal or Principal to Agent basis

Key Developments

India

Key Regulatory Developments

Relaxation under FDI (Contract Manufacturing)

Direct Tax Code 2.0

FDI Relaxation (SBRT)

• All procurements (for local sales or export sales) made from India by the SBRT entity shall be counted towards local sourcing

• Relaxation of the current deadline of 5 years for considering exports

• Sourcing of goods from India for global operations can now be undertaken directly by the SBRT entity or group entities (resident or non-resident) or indirectly through third parties (under a legally tenable agreement)

• Entire value of local sourcing from India for global operations shall be considered towards local sourcing (and not just incremental value)

• Online trading can commence 2 years before opening of brick and mortar store

• Full Angel tax concession on investments up to INR25 Crores

• Tax incentives in terms of carry-forwarding losses and exemption of capital gains on sale of residential property for investment purpose

• Start-up cell has been constituted to redress the grievances and resolve pending tax issues of start ups

• Income tax demand, if any computed, shall be pressed only upon confirmation by the Hon’ble ITAT

• The assessing officer, in order to initiate assessment proceedings needs to have approvals from the supervisory authority

Relief for Start ups


CBDT paper on attribution of profits to PE in India

CBDT has recently issued a public consultation documentinviting comments from stakeholders upon the formulaebased on fractional apportionment method to determineprofits of Indian PE, which takes both demand and supplyfactors of value chain in consideration.

The intent is to bring certainty and uniformity in themanner of computing the profits attributable to PEs in India.

Direct Tax Code Proposal—TP Assessment De-linking:

The Task Force is learnt to have pushed for de-linking of TPassessments from regular assessments.

It is proposed that TP assessments be carried out by aseparate functional unit and for a block of 4 years, as isprevalent in some other countries.

Measures for lesser but quality TP audits are expected

Source: Press Reports

Secondary Adjustments

As a consequence of primary adjustment (> INR10 Mn) to the TP, if the adjustment amount is not repatriated to India by foreign AE within prescribed period—such adjustment to be deemed as 'advance' to AE by taxpayer and interest to be imputed on the same

Under the recent amendments proposed in Budget 2019, the tax payer with effect from September 1, 2019, has an option to pay one time additional tax of 18% on the excess money or part thereof, in case cash is not repatriated in India within the prescribed time limit.

OECD paper on digital economy

On February 13, 2019, OECD released a PCD addressing the tax challenges of digitalisation of the economy. The document sets out two types of proposal:

• Revision of existing profit allocation and nexus rules

• A global anti-base erosion proposal

A number of the proposals would extend to the taxation of all themultinational businesses—not just those that are highly digitalised

Key Developments (cont.)

India


India

Tax Challenges in Digital Economy


Tax Challenges in Digital Economy

India

Digital Economy—what has transformed

Reliance on intangible

assets

Scale without

mass

Data and user

participation

Highly digitalised businesses often are highly involved in the economy of a jurisdiction without any significant physical presence

Higher level of value than currently assessed comes from users’ participation in the digital activities that some platforms enable

Digital business models tend to have a heavy reliance on intellectual property assets, and are therefore more mobile

Tax Challenges in the digital economy include but not limited to:

• the ability of a company to have a significant digital presence in the economy of another country without being liable to taxation due to the lack of nexus under current international rules

• the attribution of value created from the generation of marketable location relevant data through the use of digital products and services

• the characterisation of income derived from new business models

• the application of related source rules, and how to ensure the effective collection of VAT/GST with respect to the cross-border supply of digital goods and services


Tax Challenges in Digital Economy (cont.)

India

Favored China

Proposals of the PCD

• The Task Force on Digital Economy, through the Inclusive Framework of the OECD delivered an interim report- “Challenges Arising fromDigitalisation” in March, 2018 reflecting on the BEPS issue and broader tax challenges arising in a digitalised economy.

• In continuation, the Inclusive Framework members released a policy note followed by a public consultation document in February 2019, toform a consensus among nation members for the tax proposals formulated by the OECD.

• OECD in its consultation document has come out with Three alternative proposals to expand the taxing rights of user/market jurisdictionsby revising existing profit allocation and nexus rules

Focuses on highly digitalised businesses, wherein users contribute to:

Creation of brand; Generation of valuable data; and Market power through development of a critical

mass.

• Target Business model: Social media platforms Search engines Online market place

• Profit allocation based on actual physical presence in the user jurisdiction

MARKETING INTANGIBLE

Applies to all businesses

• Establishes intrinsic link between market intangibles and market jurisdiction

• Target Business model: all international business particularly with valuable market based intangibles (operating with no or limited local presence)

• Profit allocation rules to attribute all or part of the non –routine or residual profit which is attributable to marketing intangibles and allocate it to market jurisdiction

02

Applies to all businesses

• Purposeful and sustained interaction with the country through digital intervention and negligible physical presence

• Target business model: Non resident entities having a significant economic presence in a market jurisdiction (User base/customers/buyers)

• Profit allocation may be based on fractional apportionment method

03

SIGNIFICANT ECONOMIC PRESENCEUSER PARTICIPATION

01

Following this, OECD has developed a workforce for creating an outline of a long-term solution around the issue. The said document is required to be submitted by January 2020 and the consensus agreement on new international tax rules is likely to be delivered by the end of 2020.


• Developing countries like China or India have been advocating expanding the scope of profit attribution in source jurisdiction

• Profit attribution based on not just FAR analysis but also considering the 'market' analysis, referred to as FARM analysis

• OECD/G20 also focused on re- allocating more taxing rights to the market jurisdictions.

• Increasing need of maintaining complete data transparency, evaluation and analysis and value chains, operating models and global transfer pricing structures.

• Need to evaluate current remuneration structures in view of the value chain analysis of digitalised business models.

• To identify different ways and means to apportion profit between the different entities in order to allocate profits to market jurisdictions wherein maximum sales are generated (if need be).


India

A move away from Functions, Risk and Asset (FAR)

Functions Asset Risk MARKET


• IRA in agreement with global tax debate on digital companies:

o Market countries play an important role in creating value for MNEs

o Thus, profit attributable to such value creation activities should be allocated to market countries

• Digital MNEs operating in India are witnessing spate of scrutiny, since IRAs are challenging India business model of digital MNEs:

o IRAs contend that MNEs earning revenue from large user base in India, without paying any taxes in India

o In light of limited guidance on mechanism of attribution of profit, IRAs are resorting to arbitrary application of traditional transactional methods (such as PSM), resulting in asymmetry, adhoc profit allocation and sometimes double tax burden

Market country

Overseas entity

Local entity

Remunerates for support functions

Booking Commission, Usage

fee, etc. if any directly to overseas

entity

Users

Intangibles

Data

Value drivers

Entire revenue generated from market country directly transferred to low tax jurisdictions

Return for value drivers?

Only routine returns under the garb of low end support service providers

Online Platform

Home country

Digital Economy


India


India Developments on Taxing Digital Economy

• Equalisation Levy was introduced in India in Finance Act 2016

• The intent was to tax the digital transactions at 6% of gross consideration on the income accruing to foreign e-commerce companies from India

• Primarily covers online advertisement services and any provision for digital advertising space for the purpose of online advertisement

• Equalisation levy not to be charged if:

• Non-resident has a PE in India; or

• The aggregate amount of consideration for specified services does not exceed INR1 lac in the previous year; or

• The payment for the specified service is not for purpose of

carrying out business or profession

• Concept of SEP introduced to provide that a non-resident‘s SEP in India shall constitute “business connection” of the non-resident in India

• The aim is to bring the income earned by way of such SEP by non-resident, under the tax net in India

• The threshold limits for qualifying as “SEP” are yet to be notified by the government. The said provisions come into force from 1st April 2019

• However, the practical application of the “significant economic presence” concept largely depends upon cooperation from India’s tax treaty partners since under the section 90(2) of the Act, the taxpayer is eligible to apply the treaty provisions over the Act wherever more beneficial

• Thus, until such amendments are made in the treaties, this concept would remain domestic law. Therefore, this is not expected to have any immediate impact on the digital economy

Equalisation levy Significant Economic Presence


India

India scenario


India

Key TP Controversy


Overview

• India, in past few years, has focused on reducing disputes by investing heavily in alternate dispute resolution routes such as APA, MAP, Safe Harbour.

• At the same time, India has also introduced a host of administrative and legislative changes with a view to reduce litigation, align with global best practices and streamline the assessment procedures.

• Key developments include—risk based scrutiny selection, stricter rules for AO to not carry transfer pricing assessments, introduction of multiple year data and range concept, etc.

• However, the dispute on certain key aspects continue without any judicial certainty:

Key TP Controversy

India


Key TP Controversy (cont.)

India

• Marketing Intangibles

Legal ownership of the brand vests with the AE

Indian Company incurs excessive AMP spend vis a vis comparable companies

Excessive AMP spends create “Marketing Intangible” in India

Presumption of “arrangement” i.e., separate international transaction

Tax authorities seeks arm’s length consideration for provision of “brand promotion” services to AE

• Close to 100 companies in India are already in TP litigation

(including all key market players in Consumer Industry in

India) on the said issue.

• HC (second highest appellate authority in India) have mixed

views to these TP adjustments.

• Revenue Authorities have appealed before the SC (The Apex

Court of India) against the orders of the HC and similarly,

taxpayers have appealed against IRS.

• Pending outcome before Supreme Court, lower authorities

continue to make adjustments using arbitrary approaches

such as residual profit split, cost plus method and TNMM with

AMP intensity adjusted margins.

• A number of taxpayers have resorted to APA/MAP to attain

tax certainty

What revenue authorities allege?


Payment of Royalty

• Royalty payout has been under detailed transfer pricing scrutiny. Close to 80% cases have been subjected to transfer pricing adjustment

• But, majority of these cases get relief at the higher appellate level

• A sample of 572 transfer pricing cases show that about 11% of cases were settled in favour of revenue. 35% of cases were settled in favour of the taxpayer and another 18% were partly favourable to the taxpayers. 36% of cases were remanded back for further scrutiny

• Major TP adjustments relating to Royalty payments revolve around the following: (i) Choice of MAM—TNMM v. CUP; (ii) Benefit Test; (iii) Use of Regulatory guidelines to justify Royalty rate; and (iv) Ad-hoc adjustments, i.e., restricting it to a specific threshold/ratio etc.


India

In favor of

Tax

authority

In favor of

Taxpayer

18%

Partly in favorof Taxpayer and Taxauthority

36%

Issue

remanded

back for fresh

adjudication35% 11%

Summary of decisions of various ITATs over adjustments on royalty payments


Intra Group services

• Receipt of intra group services, or commonly referred to as management cross charges, is one of the most vexed litigated issue in India

• Revenue authorities normally perceives this transaction as means of lowering tax base in India

• Revenue authorities have consistently challenged the payout on account of such charges by determining the ALP as ‘Nil’ and alleging, i)services are not received by Indian company; ii) no party under uncontrolled circumstances would be willing to pay for such services; iii)inadequate documentation to support the cross charges; or iv) services received are duplicative in nature or are shareholder services


India

ITAT (final fact finding authority)—Maximum number of jurisprudence entails remand of issue back to lower

authorities for examination of evidence

CIT(A)/DRP (quasi judicial authority)—Mostly upholds the action of lower authorities

AO/TPO—Arbitrary basis to determine ALP as ‘Nil’



India

Profit attribution to Permanent Establishment

Indian jurisprudence on attribution of profits

Profit Attribution

• Morgan Stanley and Co. Inc. [Supreme Court]

• Hyundai Rotem Company [Delhi Tribunal]

• Arrow Electronics India Ltd. [Bangalore Tribunal]

• Anglo French Textile Company [Supreme Court]

• Hukum Chand Mills Limited [Supreme Court]

• Galileo International Inc. [Delhi Tribunal]

• Rolls Royce Singapore P. Ltd. [Delhi High Court]

• GE Energy Parts Inc. Vs. ADIT [Delhi High Court]

Based on FAR analysis

Presumptive /ad-hoc

attribution of profits

Proportionate/formulary

apportionment

• eFunds Corporation [Delhi Tribunal]

• Convergys Customer Management Group Inc. [Delhi Tribunal]

Rule 10 upheld primarily in cases where the taxpayer did not produce any analysis/TP study did not reflect all functions performed by the PE


India

Update on APA & MAP


Total Applications Filed*

Bilateral applications filed country-wise*

• Close to 1000 applications filed in six APA cycles.

• Close to 85% of the applications filed are unilateral.

• Maximum bilateral APA applications are with US, UK and Japan.

• Over the period, 35 unilateral applications have been converted to bilateral

• Only one bilateral has been converted to unilateral.

117

206192

113

78

115125

29 2614 19 23

5335

146

232206

132

101

168

160

0

50

100

150

200

250

2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19

No. of APAs filed

Financial Years

Total APA filings

Unilateral Bilateral Total

7545 25 13 7 6 5 5 4 4 3 3 1 1

0

100

USA UK Japan Switzerland Netherlands Sweden Finland South Korea Denmark Australia Singapore Canada Germany New Zealand

No.

of BAPA

applications filed

Countries

No. of BAPA applications filed-country wise

No. of BAPA applications filed• Source : Annual Report on the APA programme in India FY 2017-18• **As per market intelligence

Total 1145**: 946 Unilateral and 199 Bilateral APA applications filed so far

Update on APA & MAP (cont.)

India

Advance Pricing Agreement—Filings


Total 297: 265 Unilateral and 32 Bilateral APA concluded so far

• Source : Annual Report on the APA programme in India FY 2017-18 and press releases issues by the CBDT

• Significant momentum gained in 3rd year with 55 APAs signed in FY 2015–16 and 88 in the 4th year i.e., in FY 2016-17 and 67 APAs in FY 2017-18 i.e., the last financial year

• First bilateral APA was signed in December 2014 with Japan in less than 2 years

• Proportion of bilateral conclusions increased over the period

• Service sector is the largest contributor to India’s gross domestic product and is also at the forefront of India’s international trade. Maximum number of APAs concluded for international transactions in service sector


India

Advance Pricing Agreement—Conclusions

5 3

53

80

58

41

25

0 1 2

8 9 11

1

5

4

55

88

67

52

26

0

10

20

30

40

50

60

70

80

90

100

2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20

No. of APAs c

onclu

ded

Financial Years

APA Conclusions in India

Unilateral Bilateral Total


*Source : *Annual Report published by the Ministry of Finance FY 2017-18- up to December 31,2017^ OECD—India’s MAP statistics up to December 31,2017, the MAP cases started before January 01,2016 and closed in 2017 are not shown in these graphs

117

3719

10 10 6 6 5

0

20

40

60

80

100

120

140

USA UK Japan Sweden Treaty

partners

China Denmark Australia

Bifurcation of transfer pricing MAP cases-country wise^

Countries

9

8

7

0

2

4

6

8

10

USA Treaty partners UK

Bifurcation of other MAP cases resolved-country wise^

Countries

Mutual Agreement Procedure: Indian update

• From 1 April 2014 to 31 December 2017, India has successfully resolved over 500 tax disputes with USA, UK, Japan, China, Netherlands, etc.

• India has resolved more than 100 tax disputes with the USA involving transactions such as:

- Software Development Services

- IT enabled Services (both BPO and KPO services)

- Payment of Royalty

- Payment of Management Fees

- Cost Contribution Arrangements

- Engineering Design Services

- Contract R&D Services, etc.


India


India

Key APA Conclusions in India


Key APA Conclusions in India

India

Issues

• Mix of manufacturing and distribution operations—Tax authorities advocate segmental benchmarking

• Feasibility of undertaking economic adjustments

- Adjustment on comparables or tested party?

- Rationale for undertaking adjustment

Approach and outcome

• Manufacturing and distribution operations were combined for determination of ALP• ALP was further justified through choice of comparables and statistical analysis• Economic adjustments were allowed to be undertaken on the taxpayer such as

capacity utilisation, etc.• Tax authorities evaluate the following:

- Global price list of imported components and finished goods- Correspondences demonstrating price negotiations with AEs- Trend analysis to verify shift towards third party local sourcing vis-à-vis imports

from AEs- Robust documentation and commercial rationale for undertaking economic

adjustment

Intra-group services

Issues

• Historically, royalty payout has been around 1%-2% for Brand Trademark and 5%-8% for Brand Trademark & Technology together

• Yearly benefits derived from license of IPs being challenged

• Reason for multiple payments for intangibles—royalty and technical fees for services being charged separately

• Royalty is generally not allowed in case of losses in tax assessments

Imports of goods and economic adjustments


• APA authorities evaluate the following:

- Need, benefit and rendition test

- Computation methodology—basis for allocation

- Consistency with group policy

- Documentation to support the benefit test

• Unilateral APAs are concluded with a upper cap on intra-group services of 2%-3% on sales and Bilateral APAs are concluded with a upper cap of 4%-5% on sales

• Global cross charge report, agreements, back-up invoices are some of the documents that are required to be maintained as part of post APA compliance process


Key Indian APA conclusions

India

Issues

• Alleged PE due to lack of documentation

• Arbitrary attribution of profits to enterprise (alleged PE)

• TP analysis does not adequately reflect the functions performed and risks assumed by enterprise (alleged PE)


• Redressed PE issue despite the unfavourable judgement from ITAT:

- Detailed FAR analysis of the international transaction subject to PE through site visits and the personal interviews of people who trigger PE

- Documentation trail to substantiate the role of Indian entity and foreign entity examined

- The APA does not conclude if it’s a PE or not

- Provides an outcome of the arm’s length return for the transaction subject to PE with detailed FAR of Indian Company and associated enterprise

- The APA outcome is much favourable then profit attribution suggested by the ITAT

Royalty for intellectual

property

Issues

• Historically, royalty payout has been around 1%-2% for Brand Trademark and 5%-8% for Brand Trademark & Technology together

• Yearly benefits derived from license of IPs being challenged

• Reason for multiple payments for intangibles—royalty and technical fees for services being charged separately

• Royalty is generally not allowed in case of losses in tax assessments

Permanent establishment


• APA authorities evaluate the following:- Need and benefit through factory site visit, detailed discussion with key personnel

and supporting documentation of benefit test- Comparison of royalty rates paid by Indian entity vis-à-vis other Group entities

• Royalty agreed : - As a fixed percentage; or - On residual profit split method

• Royalty payments allowed in loss years with commercial justification that losses attributable to external factors such as under utilisation of capacity, etc.

• Increase in royalty rates allowed with increase in profitability with an upper cap


Key Indian APA conclusions (cont.)

India

Issues

• Functional re-characterisation (routine services vs. high value added services)

• Level of mark-up

• Application of Profit Split Method vs. Cost Plus Method


• APA authorities evaluate the following:- Detailed site visits on functions performed - Documentation supporting supervision and control of AE on Indian Co. - Any intangibles being created by the R&D services carried out in India

• APAs are concluded at Cost Plus Methodology• APA authorities align the functions and risks with the circular issued by the CBDT on contract

R&D services (stipulates conditions to be fulfilled to qualify as contract R&D services provider with insignificant risks).

Explanation for losses in

manufacturing set-up

Issues

• Onus on taxpayer to prove reasons owing to losses in initial year losses are beyond its control

• Denial of economic adjustments—Non-appreciation of business commercials by tax authorities

• Grant of economic adjustment by Higher authorities is subject to availability of comparability data in the public domain and most cases being remanded without detailed guidance

Contract R&D services


• Substantiating the case for under utilisation of capacity and justified the losses through capacity utilisation adjustment—APA authorities understand the nuances surrounding the new business

• APA authorities evaluate the following:- Trend analysis to verify the choice of fixed expense heads that could be considered for

adjustment - Contemporaneous documents to justify installed capacity and factory site visits- On the basis of determining capacity utilisation of the company

• Profit margins of the applicant were adjusted (unlike in the normal course where adjustment is done on comparable companies)- Various fixed expense heads had different percentages of allowance for capacity adjustment - A cut off was also negotiated whereby capacity adjustment would be provided below an

“x”% of company’s utilisation- The difference in company’s utilisation and comparable’ s capacity was applied to such fixed

expenses allowed for adjustment and considered as non-operating expenses


Key Indian APA conclusions (cont.)

India

Issues

• The tax authorities view the AMP activity as service provided by Indian entity to its foreign AE for building its brand in India.

• Tax authorities do not accept the spends on AMP is towards Indian business and the benefits enjoyed by the Indian entity from the use of brand as an economic owner.

• Multiple approach adopted by the tax office for determining ALP such as Bright Line Test, PSM and Cost Plus.

• Matter is currently sub-judice in the SC.


• AMP accepted as an international transaction on without prejudice basis and with a critical assumption that outside APA years (i.e., pending in SC/HC/ITAT) will not be bound by the APA outcome.

• In some cases, the APA team has insisted to include AMP, if relevant.

• APAs are concluded with different approaches:

- Allowance of AMP linked to profits; i.e., X% of sales would be allowed as AMP if operating margin (‘OPM’) achieved at Y% (reflecting as ALP) and if the OPM is more than Y% then X% + additional AMP would be allowed

- % of AMP allowed on gross sales based on turnover threshold

- Alternate options of intensity based adjustment is also appreciated but no results as yet

Marketing intangibles


India

Key Learnings


Key Learnings

India

An open minded approach of APA authorities without any influence of past audit history

Insightful characterisationof the taxpayer’s business in line with the actual functional profile

Site visit provides a deeper understandings of the taxpayer’s business

Reasonable and rational negotiations

Mixed transparency during negotiations

APA outcomes have an element of premium embedded—cost of certainty

Reduced documentation and compliance burden post APA

MAP conclusions normally have no bearing on the negotiations

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited (“DTTL”), its global network of member firms, and their related entities. DTTL (also referred to as “Deloitte Global”) and each of its member firms and their affiliated entities are legally separate and independent entities. DTTL does not provide services to clients. Please see www.deloitte.com/about to learn more.

Deloitte is a leading global provider of audit and assurance, consulting, financial advisory, risk advisory, tax and related services. Our network of member firms in more than 150 countries and territories serves four out of five Fortune Global 500® companies. Learn how Deloitte’s approximately 286,000 people make an impact that matters at www.deloitte.com.

Deloitte Asia Pacific Limited is a company limited by guarantee and a member firm of DTTL. Members of Deloitte Asia Pacific Limited and their related entities provide services in Australia, Brunei Darussalam, Cambodia, East Timor, Federated States of Micronesia, Guam, Indonesia, Japan, Laos, Malaysia, Mongolia, Myanmar, New Zealand, Palau, Papua New Guinea, Singapore, Thailand, The Marshall Islands, The Northern Mariana Islands, The People’s Republic of China (incl. Hong Kong SAR and Macau SAR), The Philippines and Vietnam. In each of these, operations are conducted by separate and independent legal entities.

About Deloitte SingaporeIn Singapore, services are provided by Deloitte & Touche LLP and its subsidiaries and affiliates.

Deloitte & Touche LLP (Unique entity number: T08LL0721A) is an accounting limited liability partnership registered in Singapore under the Limited Liability Partnerships Act (Chapter 163A).

This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the “Deloitte Network”) is, by means of this communication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this communication.

© 2019 Deloitte & Touche LLP

Industry update on tax landscape in India and indirect tax ... · landscape in India and indirect...

Documents

Transcript of Industry update on tax landscape in India and indirect tax ... · landscape in India and indirect...