Asia Newsletter€¦ · First thin capitalisation case Ê • In China’s first thin capitalization case, a tax bureau of the State Administration of Taxation (SAT) in Shanxi Province

Asia Newsletter

January 2012

The information below is produced by Loyens & Loeff in Singapore. 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 December 2011.

1LOYENS & LOEFF Asia Newsletter – January 2012

Loyens & Loeff will open in Hong Kong!

• We are proud to announce that Loyens & Loeff has opened a

new office in Hong Kong as of 15 January 2012. The Hong

Kong office advises international corporations on international

tax (re)structurings, investment funds, investment management,

M&A, financing and wealth management. Loyens & Loeff has

focused on China for many years, particularly on Chinese

outbound investments and transactions. Asian investors can

benefit from the attractive Benelux tax climate, while being

protected by an excellent network of bilateral investment treaties.

Being present in the middle of the dynamic Asian market, we

can act on developments proactively and promptly.

• The office is located on 8 Wyndham Street and will be led by

two senior partners, Carola van den Bruinhorst, tax adviser

and Thierry Lohest, attorney who in the course of 2012 will

join Carola in Hong Kong. The full address details are shown

on the back cover of this newsletter.

200 Customs administrations to classify international trade. It

marks an important step towards the realisation of the ASEAN

Economic Community by 2015.

• The harmonised tariff nomenclature can be likened to a “trade

dictionary” used by traders and ASEAN Customs administrations

to classify traded goods. All goods are identified by a unique

eight-digit code, with the tariff rates tagged to them, by individual

ASEAN member countries. With the adoption of a common

tariff nomenclature in ASEAN, traders benefit from a unified and

consistent way of classifying goods.

• From the tariff classification codes, traders will also be able to

determine whether the goods are eligible for preferential tariffs

under the different free trade agreements (FTAs). At the national

and regional levels, the AHTN serves as the basis for negotiations

on FTAs and customs treaties, as well as the collection of trade

statistics. It is also used by customs administrations to monitor

the movement of goods, for purposes such as food security,

public health, environmental protection and counter-terrorism.

ChinaFirst thin capitalisation case

• In China’s first thin capitalization case, a tax bureau of the State

Administration of Taxation (SAT) in Shanxi Province made an

adjustment of more than CNY 30 million (about $4.72 million)

in enterprise income tax on a Chinese subsidiary of an

anonymous Japanese multinational company, according to a

5 December China Taxation News report.

• The tax bureau received a net EIT payment of more than CNY

11 million (about $1.73 million) on November 25. (The EIT was

reduced under various preferential tax treatments.) During

analyses of taxpayers’ tax data and information in 2011, the

tax bureau reportedly noticed that the Chinese subsidiary

maintained abnormally high debt-to-asset ratios, reaching

91.26% in 2007, 87.32% in 2008, and 93.86% in 2009. The

Chinese taxpayer reportedly accrued and paid considerable

interest expenses and guarantee fees abroad, claiming

deductions totalling more than CNY 22 million (about $3.46

million) for interest expenses during those three years.

ASEANHarmonised tariff codes

• It was reported on 30 November 2011 that the customs

administrations of ASEAN member countries will implement

a new set of tariff codes for the classification of all goods

traded within and outside the region from 2012. The ASEAN

Harmonised Tariff Nomenclature (AHTN) 2012 is a common

tariff classification system of ASEAN. The AHTN is also an

initiative by ASEAN member countries to provide a transparent

and uniform goods classification system to facilitate trade in

ASEAN. It is based on the latest version of the Harmonised

Commodity Description and Coding System (HS) developed by

the World Customs Organisation (WCO).

• To incorporate the requirements of the ASEAN member states,

the AHTN 2012 saw an increase in the number of tariff lines

from 8,300 to 9,558. Most increases came from products related

to fishery, machinery and vehicles. The AHTN 2012 was

endorsed by the ASEAN Directors-General of Customs at their

20th annual meeting held in June this year in Myanmar.

According to the statement, the WCO HS is used by more than

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• While continuing to report net operating losses since its inception

in 2003, the Chinese company received capital increases

(originally denominated in U.S. dollars) of $1 million in 2007

and $13.77 million in 2010 from the Japanese parent company,

which had a total investment of $54.7 million in the Chinese

company. The Chinese company also obtained $55 million

from a foreign bank loan secured by the Japanese company.

The tax bureau filed an anti-avoidance request with the SAT to

start a thin capitalization investigation. After several months

and more than 10 meetings with the taxpayer, the tax bureau

concluded that the Chinese company had avoided EIT by taking

significant cross-border loans with large interest expenses and

other related costs. As a result, the taxpayer was subject to a

tax adjustment under China’s thin capitalization rules.

• China introduced the thin cap regime in 2008. In general, an

enterprise (other than a financial institution) is permitted to

deduct arm’s-length interest expenses paid to related parties

to the extent that its debts to the related parties do not exceed

200% of the equity investment. Interest expenses in excess of

the debt-to-equity limitation are generally non-deductible.

• The thin cap rules define debt broadly to include any

compensated debt financing that is obtained, directly or indirectly,

from a related party. For example, a loan provided by a related

party in the name of an unrelated third party falls under the

thin cap rules, as does a loan offered by an unrelated third

party but secured by a related party with joint liability. Guarantee

fees, mortgage expenses, and any other costs that have the

nature of interest are deemed interest expenses for thin

cap purposes.

• There is, however, a favourable exception for taxpayers. It

states that an enterprise is allowed to deduct (arm’s-length)

interest expenses actually paid to domestic related parties if it

can, in accordance with China’s transfer pricing rules, provide

contemporaneous transfer pricing documentation certifying

that the transactions at issue were in compliance with the

arm’s-length principle, or if its effective EIT rate is not greater

than that of the domestic related parties. Notably, the 2008

exceptional rule does not cover interest expenses paid to foreign

related parties.

• The thin cap rules are still in early development in China and

have not addressed some common issues. For example, it

may be unclear whether account payables arising from a trade

or business (for example, purchases of goods) with related

parties constitute a debt for thin cap purposes. That may be

determined on a case-by-case basis, looking at the specific

facts and circumstances of each case.

New Foreign Investment Catalogue

• The Chinese government issued the new Foreign Investment

Industrial Guidance Catalogue (2011 Amendment) in an effort

to further liberalize the market entry for foreign investors and

improve foreign investment structure and development in certain

sectors and regions.

• China’s National Development and Reform Commission (NDRC)

and Ministry of Commerce (MOFCOM) jointly promulgated the

new Foreign Investment Industrial Guidance Catalogue (2011

Amendment) (the New Catalogue) on 24 December 2011. The

New Catalogue, approved by the State Council, will come into

effect 30 January 2012, and the existing catalogue - as amended

in 2007 (the 2007 Catalogue) - will simultaneously expire and

become void.

• Initially issued in 1995, and subsequently revised several times

by the NDRC and MOFCOM, the New Catalogue is consistent

with the Chinese government’s strategy to open up China’s

market to foreign investors, and serves as a basic guide for

foreign investors by categorizing industries into “encouraged”,

“restricted” or “prohibited” categories. Any industry not so

classified is deemed “permitted”.

• The two prevailing themes in the New Catalogue are: expanding

access to foreign investors and relaxing restrictions on foreign

investment, and improving foreign investment structure and

promoting development in certain sectors and regions.

Pilot program to subject certain servicesto VAT

• The Ministry of Finance and the State Administration of Taxation

(SAT) jointly issued a notice on 16 November 2011 (Cai Shui

[2011] No. 110) releasing the pilot program with regard to the

partial integration of business tax and VAT previously announced

by the State Council. The program is implemented from 1

January 2012. The main points are as follows.

VAT rates for taxable services

Services Rate of VAT

Leasing of tangible assets 17%

Transportation and construction services 11%

Insurance, service of household nature 6%and modern services (except leasing)

Other modern services to be determined 0%


• Under the VAT regulation the difference is made between the

general calculation method and simple calculation method

(the simple calculation method refers to the method which

adopts the low rate, but may not deduct input tax). The general

calculation method of VAT applies to transportation, construction,

telecommunication, modern services, cultural and sport activities,

sale of real properties and disposal of intangibles whereas

the calculation of VAT on financial and insurance services, and

services related to domestic household must take place on the

basis of the simple calculation method.

• In general the tax base is the total amount of the transaction.

Exceptions are transactions in which a lot of advances (payments

on behalf of others) are involved. Import of taxable services is

subject to VAT whereas export of taxable services is zero-rated

or exempt from VAT.

• Business tax incentives granted to the services under the

business tax regime may be continued after inclusion in the

VAT scope. However, in cases where the double taxation

(charged to both business tax and VAT) is removed due to this

integration, the incentives granted under the business tax regime

will be discontinued.

• Taxpayer is liable to VAT on the services in the place where

his business establishment is situated. The amount of business

tax paid in other region (outside the pilot zone) may be deducted

from the VAT payable. The taxpayers who are situated outside

the pilot zone, but carry on business inside remain to be liable

to business tax on the services being taxable under the business

tax regime.

International Tax Developments

• Denial of tax arrangement between China and Hong Kong.

• It was reported by IBFD that the local tax bureau of Shenzhen

had refused to apply the tax arrangement between for the

gains on the transfer of shares derived by a non-resident.

The decision of the tax bureau resulted in a tax bill of CNY

12 million which has been paid by the taxpayer, according to

the report.

• A company incorporated in Hong Kong, owned by a company

in the Cayman Islands, disposed of part of its shares in

an enterprise located in Shenzhen China and derived a

considerable amount of gains from the transaction. The Hong

Kong company claimed the application of the tax arrangement

between China and Hong Kong which provides for either

no taxation of such gains in China (if the recipient of the gains

had a participation of less than 25%) or a withholding tax of

10%. However, the local tax bureau of Shenzhen refused

the application of the tax arrangement between China and

Hong Kong.

• The tax authority’s decision is based on the following facts:

• the Hong Kong company and the enterprise in Shenzhen

were established at almost the same time, indicating that the

main purpose of the incorporation of the Hong Kong company

was to make investments in China;

• the paid-up capital of the Hong Kong company is only HKD

100 and therefore disproportionate to the gains derived from

the investment;

• given the fact that the staff of the Hong Kong company consists

of a director, a secretary and an accountant, no investment

specialist being employed, the function of the Hong Kong

company is not commensurate with the gains derived;

• the capital of the Hong Kong company is minor. The primary

capital invested in the Shenzhen enterprise comes from the

parent holding company in the Cayman Islands;

• apart from the investment in the Shenzhen enterprise, the

Hong Kong company does not carry on any substantial

business or operations, nor does it derive any income from

them; and

• although the Hong Kong company is an investment company,

the decisions on investment, financing and reduction of

shareholding are taken outside the company.

• The tax authority concluded that the Hong Kong company

was interposed for the investment in China because the China

does not have a tax treaty with the Cayman Islands, an

international tax haven. The Hong Kong company should be

deemed to be a “conduit company” by reference to its paid-up

capital, business scope, personnel and decision making

procedure. The tax authority of Shenzhen refused the application

of the tax arrangement on the basis of the substance-over-

form principle.

Hong KongInvestment in IPRs

• Through Inland Revenue (Amendment) (No. 3) Ordinance 2011

issued on 16 December 2011, Hong Kong provides tax deductible

amortization allowances over a 5 year period to patent rights,

any know how rights, copyrights, registered designs and


registered trademarks. The buyer must have economic and

legal ownership to the IPRs. Certain anti-avoidance provisions

apply, such as e.g. the denial of tax deductions for IPRs

purchased from affiliated parties. Also sale and licensing back

situations are not eligible for tax deductions.

Advance rulings

• As per 18 November 2011, Departmental Interpretation and

Practice Notes No. 31 (“Advance Rulings”) has been revised to

provide more information to enable taxpayers to better understand

the advance ruling service provided by the Department. New

paragraphs have been added to cover issues like discretion,

extent of disclosure, quality and completeness of information,

class rulings and incorrect information or false answer. In

addition, issues like ruling shall not apply, processing of ruling

requests and publication of rulings are elaborated in greater

detail in the present update.


• Malta. On 8 November, Hong Kong signed a double tax treaty

with Malta. The treaty contains a 3% withholding tax rate on

royalties and no withholding tax on dividends and interest. It

must still be ratified by both jurisdictions.

• The Netherlands. The new double taxation treaty between

Hong Kong SAR and the Netherlands signed in 2010 will take

effect in the Netherlands from 1 January 2012 and in Hong

Kong from 1 April 2012. The treaty provides for a 0% dividend

withholding tax rate on dividends paid by a Dutch company to

a Hong Kong corporate shareholder provided that the latter is

a headquarter company or a company approved by the Dutch

tax authorities. The combination of this treaty with the Dutch

participation exemption regime and extensive tax treaty network

makes the Netherlands a tax-efficient gateway into Europe

and, indeed, the rest of the World for companies and individuals

from Hong Kong and Mainland China.

• Switzerland. On 4 October 2011, a new Hong Kong - Switzerland

Income Tax Agreement (2011), was signed by an exchange of

letters (NB: the Hong Kong - Switzerland Income Tax Agreement

(2010), signed on 6 December 2010, is superseded by the new

treaty and will therefore never enter into force).

• France. The France - Hong Kong Income and Capital Tax

Agreement (2010) entered into force on 1 December 2011.

The agreement generally applies from 1 January 2012 in France

and 1 April 2012 in Hong Kong.

IndiaEmployment Visas to foreign nationals

• In relation to employment visas for expatriate assignees, the

Ministry of Home Affairs (“MHA”) had earlier clarified that a

foreign national should draw a salary of at least USD 25,000

per annum for grant of an employment visa. The term “salary”

includes salary and all other allowances paid in cash. The

perquisites received in kind such as housing, telephone, transport,

etc. are not to be included in the said term. The MHA has

recently widened the scope of term “Salary” clarifying that the

taxable perquisites will also be considered while working out

the threshold salary limit of USD 25,000 per annum for

employment visa purposes.

Shrink wrap software payment subject towithholding tax

• The Karnataka High Court in the recent case of CIT vs. Samsung

Electronics & Co has held that payment made for supply of

shrink wrap software is royalty under the provisions of the Double

Taxation Avoidance Agreement and hence liable to tax in

India, thereby requiring the remitter to withhold tax under section

195 of the Act. This decision is likely to have a deep impact

on the principles for characterizing a ‘royalty’ and a substantial

economical impact on the software industry.

Mauritius tax treaty protection

• The Authority for Advance Rulings (“AAR”) has delivered an

important ruling in the case of Ardex Investments Mauritius Ltd

on the chargeability of gains arising from transfer of shares of

an Indian company held by a Mauritian Company. The AAR

has ruled that such gains would not be chargeable to tax in

India as per the provisions of the Double Taxation Avoidance

Agreement (“Tax Treaty”) between India and Mauritius.

• Ardex Investments Mauritius Ltd (“the applicant”) was a tax

resident of Mauritius holding a valid Tax Residency Certificate

(“TRC”). The only asset held by the applicant was the equity

shares of Ardex Endura (India) Pvt Ltd [“Ardex India”], a limited

company incorporated in India. The applicant proposed to sell

its holding in Ardex India to a German entity of the applicant’s

group. The sale was proposed to be carried out at the prevailing

market value of the shares, which resulted in capital gains for

the applicant. The applicant applied to the AAR seeking a

ruling on taxability in India on the proposed transfer of shares

of Ardex India.


IndonesiaTransfer pricing

• In December, the Director General of Taxes has updated the

Transfer Pricing Regulation through PER-32/PJ/2011. There

are two significant changes. Firstly, related parties transactions

which should be documented and tested by Transfer Pricing

Documentation (TP Doc) changed from both domestic and cross

border related parties transaction to only cross border transactions

(except for 3 special domestic transactions). Secondly, related

party transactions subject to the transfer pricing analysis will

only apply to transactions of at least IDR 10 billion (approximately

USD 1,000,000). The circular stipulates that the TP method is

now based on the most appropriate method, and no longer on

the hierarchy of TP methods.


• ASEAN-Australia-New Zealand. On 21 November 2011, the

Minister of Trade announced that Indonesia had completed its

internal ratification procedures to enable the ASEAN-Australia-

New Zealand Free Trade Agreement (FTA) to enter into force

for Indonesia. The FTA is already in force for New Zealand,

Australia and the other nine members of ASEAN.

• Malaysia. On 20 October 2011, Indonesia and Malaysia signed

an amending protocol to the income tax treaty of 12 September

1991, as amended by the 2006 protocol. Further details will be

reported subsequently.

JapanIslamic bonds introduced

• New requirements for Islamic bonds (quasi-bond beneficial

interests (QBIs)) have been added in the Asset Liquidation Act

and preferential tax measures for QBIs have been introduced

by the Special Taxation Measures Law as follows:

• When providing for QBIs in an SPT contract, the following

conditions must be included:

- the principal should be redeemed at a predetermined point

of time; and

- beneficiary certificate holders of the QBIs have no voting

rights for resolutions at a beneficiary certificate holders’

meeting except for important matters.

• The AAR ruled the following:

• Since the initial shares were acquired by the applicant 10

years back, it substantiates that the proposed transaction

does not arise out of a short term arrangement;

• Even if the company was incorporated in order to take

advantage of the Tax Treaty, it cannot be viewed as

objectionable treaty-shopping, as the Supreme Court ruled

in the case of Azadi Bachao Andolan that treaty-shopping

itself is not taboo;

• When the shares are held for a considerable period of time

before they are sought to be sold under a regular commercial

arrangement, it is not possible to enquire into aspects such

as the source of the original investment;

• The proposed transaction was not a case of a gift of the

shares or a transfer of the shares without consideration and

furthermore the sale was proposed at market rate; and

• As per the Indo-Mauritius Tax Treaty, a gain arising to the

company from the sale of the shares is not chargeable to tax

in India and consequently, there would not be any obligation

to withhold tax in India. However, since the gain was chargeable

to tax under the provisions of the Act, the company is obliged

to file an income tax return in India.

• This is a reaffirmation of the position under the India-Mauritius

Tax Treaty that capital gains arising to a resident of Mauritius

from a transfer of shares of an Indian company should not be

chargeable to income tax in India. The AAR has also noted

that the principles laid down by the Supreme Court that treaty

shopping is not a taboo and taking advantage of a Tax Treaty

by itself cannot be objected to. Since the ruling is binding only

on the Mauritius company, the outcome of this ruling could

encourage other Mauritius holding companies to secure a ruling

in their cases as well.

• With the proposed introduction of General Anti Avoidance

Rules (“GAAR”) under the Direct Taxes Code (“DTC”), which

seeks to apply rigorous business purpose tests, it will be

interesting to see whether the ratio of the Supreme Court’s

ruling in Azadi Bachao Andolan will apply under the DTC as

well, and similarly, whether this and other rulings issued by the

AAR would continue to be binding on the Revenue.


• The Netherlands. The Social security agreement between

India and the Netherlands came into force on 1 December 2011.


• Preferential tax measures for QBIs

- A special rule applies for Japanese corporate bonds

(issued by 31 March 2013) managed under the Book-

Entry System, whereby interest and gains on corporate

bonds received by non-resident individuals or foreign

companies are exempt from withholding tax provided

that the relevant application forms are submitted and

certain conditions are met. This rule has been expanded

to QBIs issued by 31 March 2013;

- Capital gains from a sale of the following shares by non-

resident individuals or foreign companies are treated as

Japanese-source income and subject to Japanese tax;

- shares in a Japanese company if the non-resident

individuals or foreign companies owned 25% or more

of the outstanding shares at any time during the past

3 years, including the year of sale, and sold 5% or

more of the outstanding shares of the company; or

- shares in a company with more than 50% of its total

property consisting of real estate located in Japan on

a fair market value basis.

• The amendments explicitly exclude QBIs from the application

of this rule, thus capital gains arising from a disposal of QBIs

by non-resident individuals or foreign companies are tax exempt

in Japan.

Tax reform proposals 2011

• The proposed Tax Reform Bill was not passed in its original

form. The main changes approved are summarized below:

• The corporate tax rate will be reduced from 30% to 25.5%

for fiscal years beginning from 1 April 2012;

• The corporate tax rate for SMEs for the taxable income not

exceeding JPY 8,000,000 will be reduced from 18% to 15%

for fiscal years beginning between 1 April 2012 and 31

March 2015;

• As the tax bill to fund reconstruction of Great East Japan

Earthquake was passed, the corporate tax rates for fiscal

years beginning between 1 April 2012 and 31 March 2015

will be 28.05% (25.5%*110%) for ordinary companies and

16.5% (15%*110%) for SMEs;

• The tax loss carry-forward period will be extended from 7

years to 9 years for tax losses accrued from 1 April 2008;

• For companies other than SMEs, deductible tax losses

carried forward will be limited to 80% of the taxable income

for fiscal years beginning from 1 April 2012;

• Provision for bad debts will not be allowable for companies

other than SMEs, banks, insurance companies and similar

companies for fiscal years beginning from 1 April 2012.

• A transitional measure will be applicable as follows to gradually

phase out the deduction for the non-eligible companies:

- Fiscal years beginning from 1 April 2012 to 31 March 2013:

Allowable limit before the amendments * 3/4.






• The Netherlands. On 17 November 2011, the Netherlands

ratified the income tax treaty and protocol between the

Netherlands and Japan, signed on 25 August 2010. The new

tax treaty provides a number of benefits for Japanese companies

investing in or through the Netherlands. The new treaty will

come into force as of 1 January 2012. The most important

reduction considers a full dividend withholding tax exemption

for beneficial owners of shareholdings representing at least

50% of the voting rights in a subsidiary (subject to other specific

requirements such as a 6 month holding period and the limitation

of benefits requirements). Under the current treaty a minimum

5% dividend withholding tax rate applies. In order to qualify for

the benefits of the treaty certain strict criteria need to be met.

Current structures should be reviewed in order to determine

whether the new lower withholding tax rates apply and whether

the limitation of benefits requirements is met. Due to the

introduction of the participation regime in the Japanese tax

regime, the current 5% dividend withholding tax cannot be

credited against Japanese taxable income and therefore results

in a significant tax cost upon repatriation of profits. The new

treaty will eliminate this cost (provided that the requirements for

the 0% rate are met). The introduction of the 95% participation

exemption regime in Japan and the elimination of dividend

withholding tax under the new treaty will make it more attractive

for Japanese companies to repatriate dividends to Japan. The

difference between the Dutch corporate tax rate (25%) and the

corporate tax rate in Japan (approx. 40%) may however make

it more attractive to retain cash in the Netherlands instead of

repatriating it to Japan. The withholding tax on royalties will

also be reduced to 0% (from 10%). This is only relevant for

royalty payments by Japanese companies to a Dutch company

as the Netherlands does not levy royalty withholding tax. The

interest withholding tax rate will also be reduced to 0% for

qualifying financial institutions such as banks (note that the


Netherlands does not levy withholding tax on interest). The

new treaty and especially the proposed new withholding tax

rates will strengthen the position of the Netherlands as a good

investment route for Japanese companies.

Korea

• USA. On 22 November 2011, the National Assembly of Korea

(Rep.) ratified the free trade agreement (FTA) between Korea

(Rep.) and United States signed in Washington, D.C. on 30

June 2007. As a result of this, one of the US major law firms

announced its plan to open an office in South Korea in 2012.

MalaysiaBudget 2012

• On 7 October 2011 the Malaysian Prime Minister presented the

Budget for 2012. On the corporate tax side, it inter alia proposes:

• Corporate tax incentives to encourage the establishment of

treasury management centres (TMCs). Centres that establish

themselves in Malaysia would be granted (i) a five-year 70%

income tax exemption; (ii) withholding tax exemption for

interest payments on loans; (iii) stamp duty exemption for

loan and service agreements; and (iv) an expatriates regime

which taxes expatriates working in TMCs only on the portion

of their chargeable income attributable to the number of

days they are in Malaysia. This TMC incentive would

have to be applied for with the Malaysian Investment

Development Authority (MIDA) between 8 October 2011 and

31 December 2016.

• Corporate tax incentives to accelerate development of the

Kuala Lumpur International Financial District (KLIFD): (i) a

ten-year total income tax exemption; (ii) stamp duty exemption

on loan and service agreements for KLIFD status companies;

(iii) industrial building allowance and accelerated capital

allowance for KLIFD marquee status companies; and (iv) a

five-year 70% income tax exemption for property developers

in KLIFD. These incentives would take effect as of the year

of assessment 2012 (tax year 2011).

• Corporate tax incentive to promote creativity and modern

technology. Industrial design services would be given pioneer

status with a five-year 70% income tax exemption if applied

for with MIDA between 8 October 2011 and 31 December

2013.

• Corporate tax incentive to encourage investment in hotels.

Hotel operators in Peninsular Malaysia investing in new four-

and five-star hotels would be given pioneer status with a five-

year 70% income tax exemption or a five-year investment tax

allowance of 60% if applied for with MIDA between 8 October

2011 and 31 December 2013.

• Islamic Finance. Expenses incurred on the issuance of Islamic

securities (Wakalah) would be tax deductable until year of

assessment 2016. The issuance of such sukuk must be

approved by the Securities Commission of the Labuan Financial

Services Authority. Similar deductions exist for Mudharabah

and Bai’ Bithaman Ajil (based on tawarruq) Islamic securities.

The existing tax exemption on issuance and trading of non-

ringgit sukuk (i.e. fees from undertaking activities and profits

originating from Malaysia) has been extended until year of

assessment 2014.

• The 100% income tax exemption for shipping companies

would be reduced to 70%.

• Real Property Gains Tax (RPGT). RPGT will be raised to 10%

for residential and commercial properties disposed of within

2 years of their purchase. The 5% rate will continue to apply

to disposals within 3-5 years of purchase. Properties disposed

of after 5 years of purchase will remain exempt from RPGT.

This applies to resident and non-resident corporate and

individual owners.

• Real Estate Investment Trusts (REIT). The 10% final withholding

tax on dividends received from REITs listed on Bursa Malaysia

which is set to expire this year is proposed to be extended until

31 December 2016.

• Stamp duty. Micro enterprises and SMEs, as well as professional

firms setting up in rural areas, would be grated a full stamp duty

exemption on loan agreements up to MYR 50,000. Full stamp

duty exemption on loan agreements used for the purchase of

certain residential property up to MYR 300,000 between 1

January 2012 and 31 December 2016.

• As of year of assessment 2013 (tax year 2012) the time bar

for tax audits would be reduced from 6 to 5 years from the

assessment date. As of that date, delays in tax refunds are

proposed to be compensated 2% per day if the due date is

exceeded by 90 days (if e-filed tax returns) or if exceeded by

120 days (for manually filed returns).

Public ruling on expat taxation in Malaysia

• On 16 November 2011 the Malaysian Inland Revenue Board

(IRB) has issued Public Ruling (PR No. 8/2011) on the tax


treatment of foreign nationals working in Malaysia, effective as

of year of assessment 2011. The PR provides guidance on

when a foreign national working in Malaysia is subject to tax on

the employment income derived in Malaysia.

• As a general rule, employment income is taxed in the country

where the work is actually performed, irrespective of the place

where the employment contract is entered into or where

remuneration is paid. In other words, an expat working in

Malaysia is subject to tax on his employment income derived

in Malaysia under Malaysian domestic law.

• The tax rates applicable to foreign nationals depend on their

residence status in Malaysia. Generally, an individual is a tax

resident if his physical presence in Malaysia is 183 days or

more in a tax year. Tax residents can generally claim personal

tax relief and are taxed at progressive rates. Non-residents

however, are not entitled to any personal tax relief. Non-residents

are subject to 27% (year of assessment 2009) and 26% (year

of assessment 2010) income tax rates.

• The PR also provides guidance and examples on when a foreign

national would qualify for the tax exemption where the

employment is exercised in Malaysia for less than 60 days, and

on how to calculate unilateral and bilateral foreign tax credits

in the case of double taxation.

Public ruling on co-operative society

• On 16 November 2011 the IRB has issued Public Ruling (PR

No. 9/2011) on the tax treatment of Co-operative Societies in

Malaysia, effective as of year of assessment 2011.

• For income tax purposes, a Co-operative Society (Coop) is

a society registered as such in Malaysia and includes

Farmers’ and Fishermen’s Associations. Foreign registered

Coops are not recognized and will be taxed as non-resident

companies.

• Income from both mutual and non-mutual activities will be

subject to tax, and will be computed as prescribed by Sec. 5 of

the Income Tax Act 1967 (ITA). Allowed deductions include

sums paid/transferred to: a statutory reserve fund; any educational

institution and/or co-operative organization established for the

furtherance of the co-op; or a co-op education trust fund, as

prescribed by Sec. 65A (a) of the ITA. Pursuant to Sec. 65A

(b), a Coop may also deduct a (8%) percentage of its members’

funds (defined in Schedule 6 of the ITA).

Public ruling on gratuity

• On 5 December 2011 the IRB has issued Public Ruling (PR No.

10/2011) on the tax treatment of gratuity, effective as of year

of assessment 2011.

• In general, gratuity payments refer to lump-sum payments by

an employer to an employee which are attributable to the past

services of the employee, such as those paid upon retirement.

Other payments such as for the loss of employment are

considered to be compensation, not gratuity.

• Gratuity is normally taxed at the level of the employee, however,

an employee receiving a gratuity upon retirement can qualify

for full tax exemption, when one of the following conditions

is fulfilled:

• The retirement was due to ill-health;

• The retirement takes place upon or after reaching the age of

55, or on reaching the compulsory age of retirement from

employment as specified under any written law, and in either

case that employment lasted for at least 10 years with the

same employer or with companies in the same group; or

• The retirement takes place upon reaching the compulsory

age of retirement pursuant to a contract of employment or

collective agreement at the age of 50 but before 55 and that

employment lasted for at least 10 years with the same employer

or with companies in the same group.

Discussion papers on Islamic financetransactions

• On 19 December 2011, the Malaysian Accounting Standards

Board (MASB) published the following three discussion papers

exploring the accounting treatment of a number of Islamic

financial transactions.

• DP i-1 Takaful. In many material respects, takaful can be

likened to conventional insurance, but has a number of distinct

features and the paper notes “little has been written about

accounting for takaful under International Financial Reporting

Standards (IFRS)”. The paper explores issues such as:

• whether takaful meets the definition of an insurance contract

in IFRS 4 Insurance Contracts;

• whether a takaful operator should prepare consolidated

financial statements;

• accounting for any qard, an interest-free loan extended to a

participant’s fund that is in deficit; and


• retakaful, participating contracts, revenue recognition, and

additional disclosures.

• DP i-2 Sukuk. Sukuk is commonplace in the Malaysian capital

market and can be compared to a conventional bond. Issues

discussed include the classification of sukuk by the issuer

and investor in the statement of financial position, fair value

measurement, impairment, derivatives, guarantees and related

party disclosures.

• DP i-3 Shariah Compliant Profit-sharing Contracts. These

contracts are similar to conventional profit-sharing or partnership

contracts but raise questions of the classification of items in

the statement of financial position, accounting implications of

smoothing techniques to stabilise returns on capital, and

consolidation, joint ventures and investments in associates.

• The discussion papers do not seek to provide prescriptions for

the accounting questions raised but instead put forward the

MASB’s understanding of the issues and alternate solutions to

solicit public views on preferred solutions.

• The MASB has requested comments on the discussion papers

by 16 March 2012.


• Indonesia. An amending protocol to the income tax treaty

between Malaysia and Indonesia of 12 September 1991 was

signed on 20 October 2011.

• Bahrain. South Africa. The amending protocols to the income

tax treaties concluded by Malaysia with Bahrain (1999) and

South Africa (2005) have both been ratified by Malaysia’s

counterparties early December 2011.

• Senegal. The income tax treaty and protocol between Malaysia

and Senegal of 17 February 2010 has been ratified by Senegal.

PhilippinesInterest imputation

• On 19 July 2011 it was ruled in the Commissioner of Internal

Revenue v. Filinvest Dev’t Corp. (G.R. No. 167689), that the

Commissioner of Internal Revenue’s (CIR) power of distribution,

apportionment or allocation of gross income and deductions

under the tax code does not include the power to impute

‘theoretical interest’ to the taxpayer’s transactions.

• The Court held that there must be proof of the actual or probable

receipt or realization by the taxpayer of the gross income item

sought to be distributed, apportioned or allocated by the CIR.

An examination of the records did not reveal any actual or

possible evidence that the taxpayer’s advances extended to its

affiliates had resulted in the interests subsequently assessed

by the CIR. While the CIR asserted that the taxpayer had

sought credit from commercial banks, it could not prove that

said funds were, indeed, the source of the advances the former

provided its affiliates. Moreover, there is no factual basis for

the imputation of theoretical interests as, pursuant to Article

1956 of the Philippines Civil Code, no interest shall be due

unless it has been expressly stipulated in writing.

Philippines defers capital gains tax on non-compliant listed companies

• On 1 November 2011 the Philippine BIR announced a deferral

of imposing a higher capital gains tax (CGT) on stock transactions

connected to companies that fail to meet the 10% minimum

public ownership requirement. The 5% to 10% CGT was

originally planned to be imposed as of 30 November 2011. The

government now aims to implement the CGT as of 1 January

2012. The announcement comes as a compromise to settle a

dispute between the BIR and the Philippine Stock Exchange

(PSE) regarding listed companies that have less than 10%

public ownership.

• The BIR had argued that those non-compliant companies

should be delisted, which would trigger a 6% CGT on sales of

their shares, instead of the 0.5% stock transaction tax granted

to listed companies. According to the PSE’s internal rules, firms

must meet the minimum public-float requirement by 30 November

2011, followed by a three-year “curing” period, during which it

would charge higher listing fees to non-compliant companies.

Only then would such firms be delisted.

• The PSE President pointed out that the move would possibly

penalize shareholders and investors, instead of the companies

responsible for meeting the public-float requirement, according

to media reports. He said furthermore argued the tax would

alarm local and foreign investors who may already be on edge

over the recent controversy over the PEACe bonds, which were

supposedly exempt from a withholding tax upon maturation in

mid-October (see above coverage). The BIR however levied

a 20% tax on the bonds anyway, citing previous rulings that

overturned the exemption.

VAT exemption thresholds for real property

• On 27 October 2011 the BIR issued Revenue Regulations No.

16-2011 on the amended thresholds for value added tax (VAT)


exemptions on real property transactions, taking into account

consumer price index adjustments. The new thresholds, effective

as of 1 January 2012, are as follows: (i) when gross annual

receipts on the sale or lease of goods or properties or

performance of services does not exceed PHP 1,919,500 shall

be subject to 3% percentage tax instead of the 12% VAT; (ii)

the sale of a residential lot valued or sold at maximum PHP

1,919,500, or house and lot and other residential dwellings

valued or sold at maximum PHP 3,199,200 is exempt from VAT;

and (iii) the lease of residential units with a maximum rental of

PHP 12,800 per month per unit is exempt from VAT, irrespective

of the annual gross receipts of the lessor.

Philippines consider environmental designationto increase mining tax revenue

• The Philippine government is considering reclassifying mines

as “mineral reservations” as an attempt to increase tax revenue

from the mining sector. Such designation would trigger a 5%

royalty tax in addition to the 2% excise tax that mining companies

are liable to.

• The president of the Philippine Chamber of Mines said that

would only stop large mining companies from investing in the

country. He noted that currently many small mine operators

escape taxation by simply ignoring the law and failing to submit

tax returns.


• India. On 17 October 2011 negotiations have been announced

for a revision of the income tax treaty and protocol between the

Philippines and India of 12 February 1990 and signing of this

revised treaty is expected in January 2012.

SingaporeIncome Tax Bill Amendments

• On 13 October 2011 the Ministry of Finance (MOF) has

accepted 23 out of the 55 suggestions on the draft Income Tax

(Amendment) Bill 2011 received during the public consultation

exercise from 11 July 2011 to 1 August 2011. The suggestions

will be incorporated into the revised Income Tax (Amendment)

Bill 2011 and include an improvement to the productivity and

innovation credit (PIC) scheme, an umbrella incentive for the

maritime sector, implementation of foreign tax credit pooling,

deduction of pre-commencement expenses for start-up

companies, an enhanced tax deduction for equity-based

remuneration (EEBR) schemes, a one-off corporate income tax

rebate of 20% up to SGD 10,000 and an amendment of the

personal income tax rate structure.

• On 22 November 2011 the Finance Minister addressed these

legislative changes and announced that the on-going periodic

review of the income tax system also triggered some legislative

changes, most of which from a technical nature of to improve

the tax administration. Worth mentioning are:

• Implementation of greater clarity and certainty in the timely

resolution of income tax disputes, providing for an extention

of the time to file an appeal from 14 days to 30 days and

enabling taxpayers to approach the Income Tax Board of

Review even if their case is non-taxable for that year;

• An amendment of the exchange of information provisions

in the Income Tax Act (ITA), which currently allow for the

exchange of information under double tax arrangements, but

are amended to also provide for the exchange of information

under separate Exchange of Information agreements.

Tax deductibility of losses causedby fraud

• On 17 October 2011 the High Court ruled in AQP vs. Comptroller

of Income Tax [2011] SGHC 229 in an appeal for the tax

deduction of losses caused to a company by a fraudulent director

under section 14(1) of the ITA.

• The appellant is a Singapore resident company listed on

the Singapore stock exchange. The former managing director

(former MD) was appointed in 1995. In 1999 he was dismissed

for misuse of the company’s funds; inter alia, he made out false

purchase orders and claimed reimbursements from the company

for supposedly advancing the payment of the orders from his

personal bank account. The stolen money was used to repay

his gambling debts. He was charged and tried in the District

Court and sentenced to nine years in prison.

• After this fraud came to light, the appellant made provisions

for doubtful debts in the year of assessment (YA) 2000, but

no claim for deduction for the loss was made in that YA. In

2003, the appellant took legal action against the former MD

to recover the stolen money but it proved irrecoverable. In

2005, the appellant lodged an “error or mistake” claim for the

loss under section 93A of the ITA. The claim was denied as

the Comptroller of Income Tax (CIT) was of the opinion that

“there is no error or mistake within the meaning of section

93A of the Act”. Appellant’s subsequent appeal was with the

Board of Review (Board).


• The Board referred to a 1925 UK case (Curtis (HM Inspector

of Taxes) v J & G Oldfield, Limited (1925) 9 TC 319) on the

deductibility of losses arising from an employee’s fraud and

applied “the Curtis test” to appellant’s case. In Curtis it was

ruled that losses resulting from subordinate empoyees’

fraud are normally deductible, but that money misused by

a controlling individual was not considered an expense in

earning profits (but rather an application of profits). Hence,

there must be a nexus between the expense and the income

produced. The Board concluded that the loss of the appellant

was not deductible under section 14(1) of the ITA and decided

in favour of the CIT. The subsequent appeal to the High Court

was dismissed.

• Although not required due to the dismissal, the High Court’s

Tay Yong Kwang J explained that in his view an error or mistake

under s. 93A ITA constitutes a “genuine mistake of law.”

Although technically such comments are no binding precedent,

it will have persuasive powers in future cases.

Additional buyer’s stamp duty on purchase ofresidential properties

• On 7 December 2011 the government announced an additional

buyer’s stamp duty (ABSD) to be imposed on certain categories

of residential property purchases.

• The objective is to create a sustainable residential property

market where prices move in line with economic fundamentals.

Prices of private residential properties have continued to rise

as demand remains strong, even during the current economic

uncertainties. To protect the Singapore private residential

property market, the government now imposes ABSD, with a

higher rate for foreign buyers in particular.

• The ABSD is levied on top of the current buyer’s stamp duty

(i.e. 1% on first SGD 180,000, 2% on the next SGD 180,000

and 3% for the remainder) as of 8 December 2011 and applies

to the purchase price or market value of the property (whichever

is higher) for the following purchases:

• Foreigners and non-individuals buying any residential property

are subject to a 10% ABSD;

• Permanent Residents (PRs) owning one and buying the

second and subsequent residential property are subject to

a 3% ABSD; and

• Singapore citizens (Singaporeans) owning two and buying

the third and subsequent residential property are subject to

a 3% ABSD.

• For joint purchases by two or more parties of different categories,

the higher applicable ABSD rate is imposed.

• Singaporean first time buyers and buyers of HDB flats

are not affected by the new measure. Certain reliefs are

provided so that the measure does not impact home occupation

demand by residents. For example, relief is provided for

Singaporean-foreigner/PR married couples buying their homes.

Reliefs will also be provided for qualifying developers and for

purchases falling within the scope of Singapore’s international

trade agreements.

Goods and Services Tax Bill amendments

• On 22 November 2011 the Finance Minister addressed the

legislative changes in the Goods and Services Tax (Amendment)

Bill 2011. Worth mentioning are:

• Implementation of the new GST scheme for approved marine

customers; they will enjoy zero-rated purchase or rental of

goods as long as they are used or installed on commercial

ships for international travel. Marine repair businesses may

zero-rate their invoices if they deliver ship parts to Singapore

shipyards or to approved marine customers.

• Extension of the existing approved contract manufacturer

and trader scheme (ACMT), allowing local contract

manufacturers to disregard (for GST purposes) services

rendered to overseas clients even if the processed goods are

delivered in Singapore, to qualifying biomedical contract

manufacturers. The ACMT scheme has furthermore been

enhanced by allowing contract manufacturers to disregard

services rendered on failed and excess production and

to recover GST on locally purchased goods used in the

contract manufacturing process.

• Implementation of zero-rating the supply of certain goods to

overseas persons from qualifying approved warehouses,

aiming to encourage overseas persons to store their high

value goods in Singapore warehouses. The zero-rating

extends to the storage renting.

• Expansion of the scope of GST recovery for local agents on

goods imported on behalf of overseas persons. Currently,

local agents are not able to claim input GST on the goods

imported for the overseas persons if the goods have undergone

a treatment or process that changes the nature or form of

the goods, before being supplied in Singapore. The GST Act

will be amended to enable local agents to recover GST on

such goods. In addition, local agents who are approved

under GST suspension or deferment scheme may use the


• Canada. An amending protocol to the income tax treaty between

Singapore and Canada of 6 March 1976 has been signed on

29 November 2011.

• Mexico. The amending protocol to the income tax treaty between

Singapore and Mexico of 9 November 1994, signed on 29

September 2009, will enter into force on and generally apply as

of 1 January 2012.

• Qatar. The amending protocol to the income tax treaty between

Singapore and Qatar of 28 November 2006, signed on 22

September 2009, will enter into force on and generally apply as

of 1 January 2012.

• Estonia. The amending protocol to the income tax treaty

between Singapore and Estonia of 18 September 2006, signed

on 3 February 2011, has been ratified by Estonia on 23

November 2011.

• Panama. The income tax treaty and protocol between

Singapore and Panama of 18 October 2010 have entered into

force on 19 December 2011 and will generally apply as of

1 January 2012.

Taiwan (R.O.C)

Limitation of royalty withholdingtax exemption

• Under Taiwanese income tax law, royalties paid to a foreign

enterprise for the use of its patent rights, trademarks, and/or

various kinds of special licensed rights in order to introduce

new production technology or products, improvement of product

quality, or reduce production cost under the approval of the

competent authority as a special case (i.e. to improve Taiwan’s

economic development), are exempt from Taiwanese withholding

tax. The Supreme Administrative court however has recently

dismissed a claim from a foreign company that had signed a

patent license agreement with a domestic company and

applied for tax exemption. The court argued that the domestic

company had transferred the licensed patent to its subsidiary

in China for manufacturing. Following this decision, the Taipei

National Tax Administration (TNTA) has announced that the

scope of the income tax exemption on royalties paid to foreign

companies is now limited to domestic use of the licensed right

as the tax exemption is meant for the promotion of Taiwan’s

economic development.

scheme to suspend or defer payment of import GST on goods

imported for overseas persons for subsequent re-export.

Stamp Duty Bill amendments

• On 22 November 2011 the Finance Minister addressed the

legislative changes in the Stamp Duties (Amendment) Bill 2011.

These are:

• In a speech before Parliament, Josephine Teo, the Minister

of State for finance and transport, addressed changes in

Stamp Duties (Amendment) Bill 2011 to include limited liability

partnership duty relief and remove most fixed and nominal

stamp duties of SGD 2 and SGD 10.

• Stamp duty relief will be made available for a company

converting into a Limited Liability Partnership (LLP), subject

to conditions. This relief provides more flexibility for companies

restructuring to LLPs.

• Most fixed and nominal stamp duties of $2 and $10 on

documents executed on or after 19 February 2011 will be

removed. This streamlines the stamp duty regime and reduces

taxpayers’ compliance cost.

• The conditions for stamp duty relief for qualifying mergers

and acquisitions (M&As) announced in the Budget 2010,

such as the qualifying period, will be changed to align more

closely to the conditions in the income tax allowance for

qualifying M&As. This will provide for greater consistency

and ease compliance.


• Uzbekistan. The amending protocol to the income tax treaty

between Singapore and Uzbekistan of 24 July 2008, signed on

14 June 2011, has entered into force and generally applies as

of 1 November 2011.

• Czech Republic. End October 2011, negotiations for an

amending protocol to the income tax treaty between Singapore

and Czech Republic of 21 November 1997 took place in Prague.

• Mexico. The amending protocol to the income tax treaty

between Singapore and Mexico of 9 November 1994, signed

on 29 September 2009, has been approved by Mexico on

29 September 2011.

• Spain. The income tax treaty and protocol between Singapore

and Spain of 13 April 2011 will enter into force on 1 February

2012 and will generally apply from 1 January 2013.



• Switzerland. The income tax agreement between the Trade

Office of Swiss Industries in Taipei and the Taipei Cultural and

Economic Delegation in Switzerland of 8 October 2007 has

been recognised by the Swiss Federal Council on 9 December

2011. It contains provisions which are typical of agreements

between two states on the avoidance of double taxation in the

area of taxes on income. It follows standard Swiss practice for

agreements in the area of double taxation and is based on the

OECD Model Convention. It contains provisions on the exchange

of information in line with the internationally applicable standard.

The double taxation agreement serves the economic interests

of Switzerland in relation to Chinese Taipei. The date of entry

into force has not yet been announced.

ThailandApproved corporate tax cuts

• The corporate income tax cut proposal – as reported in the

previous edition of this newsletter – has been approved by the

cabinet through Royal Decree 530. The corporate income tax

rate has been reduced from 30% to 23% for 2012 and will be

reduced to 20% in 2013.

Tax incentives for infrastructure fund

• On 15 November 2011, the Thai cabinet approved the draft

legislation, consisting of the following tax incentives, to promote

the Infrastructure Funds (“IFF”):

• An exemption from VAT, specific business tax and stamp duties

for the transfer of the assets from the originator to the IFF,

provided the assets will eventually be returned to the originator

or transferred to the government authorities or state enterprises.

• A reduction of registration fees charged by the Land

Department (i) on the transfer of immovable property from

the originator to IFF (from the normal rate of 2% to 0.01% of

the properties’ value), and (ii) for the mortgage and lease of

immovable property (from 1% to 0.01% - not to exceed THB

100,000 for the mortgage registration).

• A ten-year exemption of personal income tax on the profits

distributed from IFF to the individual unit holders, starting

from the day IFF is established. After such ten-year period,

the investors will be subject to the normal tax rate that is

currently applicable to a mutual fund, i.e. 10% flat tax (instead

of progressive tax rates). It has not been confirmed whether

foreign resident individuals will be entitled to this tax exemption.

• The draft legislation does not exempt the transaction from

corporate income tax. Foreign corporate unit holders are

normally not taxed for the profits distributed from the mutual

funds established under the securities exchange laws

(including IFF). Thai corporate unit holders are normally

exempted from income tax on 50% of the profits distributed

from IFF where the recipient is a non-listed company, and

fully exempted for listed companies, provided that the

investment units are held for at least 3 months before the

distribution and remain un-transferred for 3 months after

the distribution.

Tax incentives for vessel replacement

• Pursuant to a 1996 Royal Decree ((Vol. 299) B.E. 2539 (1996)),

a Thai limited company or a Thai registered partnership in the

business of international sea transportation of goods, is exempt

from income tax on the gains from the sale of its vessels, provided

that all the proceeds are spent on a replacement vessel.

• On 6 December 2011 the Thai cabinet approved changes to

relax the tax incentives rules for the replacement of vessels.

The conditions for applying such tax incentive are to be

changed as follows:

• The proceeds from the sale of the old vessel can be used -

in addition to purchasing a new vessel - to build a new vessel;

• The replacement vessel can now also be purchased prior

to the sale of the old vessel, if the old vessel is sold within 1

year from the purchase of the replacement vessel;

• The replacement vessel must be registered as a Thai ship

within 2 years from the sale of the old vessel;

• Where a replacement vessel is purchased, and it is second-

hand vessel, that vessel cannot be older than the vessel it is

replacing. Additionally, the replacement vessel must not be

smaller than the old vessel; and

• The Revenue Department must be notified of the above.

VietnamOne-year enterprise income tax deferral forselected industries

• On 11 October 2011 the Vietnamese Prime Minister issued

Decision 54/2011/QD-TTg allowing eligible taxpayers to defer

payment of enterprise income tax for one year. Eligible taxpayers

include enterprises or cooperatives with 300 or more employees

with a minimum three-month employment engaging them in


manufacturing, processing agricultural products, forestry products,

aquaculture products, textiles/garments, footwear, electronic

components; and construction and installation of certain

infrastructure projects. EIT amounts already paid for the first

three quarters of 2011 can be offset against the EIT payable

for other income not eligible for tax deferral or the EIT payable

in subsequent periods.

Representative offices of tradepromotion agencies

• The Government issued Decree No. 100/2011/ND-CP dated

28 October 2011 regarding the establishment and operation

of representative offices by foreign trade promotion organisations

in Vietnam. The decree will take effect on 15 December 2011.

• Accordingly, the foreign trade promotion organization is entitled

to set up not more than one representative office in one province

or centrally-run city. A foreign trade promotion agency will be

licensed if it meets two conditions: it is a legally established

organisation under foreign law and it has a charter and operating

principles that comply with Vietnamese law.

• Also under the Decree, the representative office, as a subordinate

unit of the foreign trade promotion organization, is not permitted

to set up a representative office under it. A representative office

can function as a contact agency and promote the activities of

a foreign company, including assisting the foreign enterprise in

exploring the domestic market, performing market research and

providing economic, trade and market information to foreign

companies and organisations. However, a representative office

cannot directly conduct profit-making operations in Vietnam.

Vietnam clarifies VAT regime

• Vietnam’s General Department of Taxation has recently issued

official letters (2524/TCT-C, and 2524/TCT-CS), clarifying the

following in relation to input VAT credits:

• Foreign contractors with VAT-registered project operation

offices who wish to claim input VAT credits must make

payments directly from their own bank accounts opened in

Vietnam if the value of the purchased goods or services

exceeds VND 20 million (approximately $956).

• Vietnamese project operation offices can claim an input VAT

credit even if their overseas headquarters make payments

directly to Vietnamese suppliers on behalf of the project

operation office. The input VAT claim must in that case

include (i) confirmation of the payments by the relevant foreign

bank; (ii) documents supporting the actual transactions;

(iii) documents showing that the Vietnamese suppliers

claimed output VAT based on the relevant invoices issued;

(iv) documents showing that the goods or services providers

in Vietnam received the full amount transferred from the

overseas headquarters in accordance with the relevant

sales contracts and invoices; and (v) authorization from the

project operation office for its headquarters to make payments

directly from overseas bank accounts, clearly stated in the

sales contracts with the Vietnamese suppliers.

• The Ministry of Finance issued official letter 15514/BTC-TCT,

which sets out the conditions for Vietnamese traders to apply

to 0% VAT rate to goods exported on spot:

• The export contract with the foreign trader should clearly

provide that the goods shall be delivered to a recipient in

Vietnam;

• Customs Office certification that the goods have already

been delivered to the on-spot importer as instructed by the

foreign party;

• The foreign buyer shall pay the Vietnamese seller in a freely-

converted currency, the bank payment of which should be

documented as evidence. FX regulations apply when the

foreign trader authorizes the on-spot importer to make the

payment; and

• The export or VAT invoices clearly state the names of the

foreign buyer, the on-spot importer (the recipient of the goods)

and the place of delivery.


• Netherlands. An amending protocol to the air transport agreement

between Vietnam and the Netherlands of 1 October 1993 has

been signed on 29 September 2011 and - awaiting its ratification

- provisionally applies as of 28 September 2011.

• Kazakhstan. A double tax treaty between Vietnam and

Kazakhstan has been signed on 31 October 2011.

• Peru. An agreement on the mutual assistance in customs matters

has been signed between Vietnam and Peru on 11 November

2011. It deals with technical and professional contents and

exchange of information relating to taxes and customs fees.

• Chile. A free trade agreement (FTA) between Vietnam and

Chile has been signed on 12 November 2011.

• Qatar. The income tax treaty between Vietnam and Qatar of

8 March 2009 has entered into force and generally applies as

of 1 January 2012.

w w w . l o y e n s l o e f f . c o m

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Asia Newsletter€¦ · First thin capitalisation case Ê • In China’s first thin capitalization case, a tax bureau of the State Administration of Taxation (SAT) in Shanxi Province