Asia Tax Bulletin - Mayer Brown...Advertising Services 49 International Tax Developments Vietnam VAT on Foreign E-commerce Operators 44 VAT Rate 44 Tax Exemption on Interest Income

Autumn 2019

Asia Tax Bulletin

MAYER BROWN | 32 | Asia Tax Bulletin

AMERICAS

CHARLOTTE

RIO DE JANEIRO*

SÃO PAULO*

BRASÍLIA*

PALO ALTO SAN FRANCISCO

LOS ANGELES HOUSTON

CHICAGO

BANGKOK

NEW YORKWASHINGTON DC

DUBAI

SHANGHAI

HONG KONG

HO CHI MINH CITY

HANOI

BEIJING

SINGAPORE

*TAUIL & CHEQUER OFFICE

MEXICO CITY

TOKYO

In This EditionWe are pleased to present the Autumn 2019 edition of our firm’s Asia Tax Bulletin.Dear reader,

I’m happy to present this edition of our quarterly Asia Tax Bulletin, reporting on significant tax related developments in Southeast Asia, Greater China, Japan, Korea and India. Included in this edition is the inter alia the trade war between the PRC and the USA, transfer pricing circulars issued by the IRD in Hong Kong, India’s tax changes proposed in the recent government Budget for 2019/2020 as well as the proposed tax reform, CFC changes and tax incentives in Indonesia, Korea’s Budget proposals, service tax developments in Malaysia and tax reform measures in the Philippines.

Singapore is one step closer to implementing the long awaited Variable Capital Company legislation, which will effectively put it on a par with the company law of the British Virgin Islands. Thailand introduced a VAT on foreign ecommerce operators and is encouraging foreign talent to relocate to Thailand by offering attractive tax benefits.

We hope you will enjoy reading about these and other developments and as always appreciate any suggestions for improvement. Please do not hesitate to contact us if you have any questions about taxation in Asia.

With kind regards,

Pieter de Ridder

Pieter de RidderPartner, Mayer Brown LLP+65 6327 0250 [email protected]

MAYER BROWN | 5

Contents06 Retaliation Increase of Tariffs

06 Tax Incentive in Hengqin New Area Extended to Tourism Industry

07 US Trade War Subsidy

07 Farmland Use Tax Implementation Rules Issued

07 Resource Tax Law published

09 Tax incentives for Lingang New Area in Shanghai Free Trade Zone

09 International Tax Developments

10 Foreign Taxes Deduction for Profits Tax Purposes

10 Tax Penalties

11 Transfer Pricing Guidelines

12 Package of Measures to Support Enterprises and Resident

12 Charitable Institutions


China

Hong Kong

16 Management Services are not Subject to Withholding Tax

17 Finance Ministry’s Economic Stimulus

17 Consolidated Circular for Assessment of Start-ups

18 Farm-in Expenditure Incurred by Oil Exploration and Production Companies

19 New Direct Tax Law

20 Taxation Laws (Amendment) Ordinance 2019

20 Capital Gains Tax Liability on Conversion into an LLP

21 Notification on Arm’s Length Tolerance Range for 2019-20 Assessment Year


India (cont’d.)

Japan

Indonesia22 VAT Exemption on Transportation

Equipment

22 Changes to the CFC Rules

23 Tax Incentives

24 Reduction of Tax on Bond Interest Payments

24 Tax Incentives for Upstream Oil and Gas Sector



Korea27 Budget - Proposed Tax Changes


Malaysia30 Restriction on Deductability of interest

32 Wholly and Partly Irrecoverable Debts and Debt Recoverie

33 Service Tax

33 Service Tax Amendments Gazetted

34 Withholding Tax Exemption Withdrawn for Income from MSC


35 Proposed Passive Income and Financial Intermediary Tax Act

36 Tax Reform


Philippines

42 Futures Transaction Tax in Case of Merger

42 Abolishment of Stamp Duty Act

43 Law on Repatriation of Offshore Funds

Taiwan

46 Taxation of Foreign Workers

46 Business Trip Allowances Paid to Experts

47 Transfer of Shares

47 Tax Treatment of Liquidation of Assets by Foreign Representative Office

47 Guidance on Provisions

48 Tax Incentives for Investments in Expansion of Projects

48 Clarification on VAT Treatment for Certain Services Provided for Foreign Enterprises

49 Social and Health Insurance Contributions Increased

49 Withholding Policy Applicable to Online Advertising Services


Vietnam

44 VAT on Foreign E-commerce Operators

44 VAT Rate

44 Tax Exemption on Interest Income

45 New Relocation Package Incentive

Thailand

India15 Budget 2019/2020 Presented

15 Sabka Vishwas (Legacy Dispute Resolution) Scheme

15 Tax Deduction at Source on Cash Withdrawals

37 FATCA

37 Variable Capital Company (VCC)

38 Public Consultation on GST on Digital Payment Tokens

39 Responses to Public Consultation on Draft Income Tax (Amendment) Bill 2019

39 MOF Invites Feedback on Proposed Changes to GST Act

40 Proposed Tax Framework for VCCs

Singapore


Singapore (cont’d.)


China (PRC)

Retaliation increase of tarriffs

As a response to the US government’s announcements to impose additional 10% tariffs on USD 300 billion worth of Chinese goods, the Customs Tariff Commission of the State Council has issued a public notice (Shui Wei Hui Public Notice [2019] No. 4) imposing import tariffs on US products.

• From 1 September 2019, 916 goods and products will be subject to 10% additional tariffs, and 801 goods and products will be subject to 5% additional tariffs.

• From 15 December 2019, another 912 goods and products will be subject to 10% additional tariffs, and 2,449 goods and products will be subject to 5% additional tariffs.

• All goods and products subject to additional tariffs are listed in four attachments to the Public Notice with specifications of the appropriate tariffs and dates of implementation. In total, 5,078 US products with a total value of USD 75 billion will be affected.

Tax incentive in Hengqin New Area extended to tourism industry

The Ministry of Finance and State Taxation Administration jointly issued Circular [2019] 63 (the circular) which extends the tax incentives granted in Hengqin New Area to the tourism industry. The circular applies from 1 January 2019 to 31 December 2020. Its contents are as follows:

• the tourism industry is added to the Catalogue of Industries for Enterprise Income Tax Incentives in Hengqin New Area 2019, benefiting from the reduced enterprise income tax rate of 15% (the enterprise income tax statutory rate being 25%); and

JURISDICTION:

• enterprise income tax incentives for other industries that are regarded as encouraged and taxed at a reduced rate of 15% in Hengqin New Area will continue to be implemented in accordance with Circular [2014] No. 26 which stipulates the preferential tax policies in Shenzhen Qianhai, Shenzhen-Hong Kong Modern Service Cooperation Zone, Fujian Pingtan Comprehensive Experimental Area and Hengqin New Area.

US Trade war subsidy

It was announced in September 2019 that the Guangdong-province government authorities issued a policy granting allowances to companies in that province to mitigate the negative impact on those companies as a result of the “trade war” between China and the U.S. As a key requirement, a company’s quarterly gross revenue, quarterly exported amount, or quarterly imported amount must have decreased by more than 15% in two consecutive quarters as compared with the same period of last year for purposes of qualifying for the government subsidy. The subsidy to be granted to a qualified company located in e.g. Zhuhai would be CNY 9,288 (about $1300) multiplied by the number of the average employees of the company who paid mandatory social security expenses last year.

The Congressional Research Service (CRS) of the US Library of Congress has released a report entitled “US-China Relations”. The CRS report indicates an updated date of 29 August 2019 and is designated R45898. The United States has so far imposed Section 301 tariffs of 25% on three tranches of imports from China, valued at an estimated USD 250 billion, to pressure China to address its policy issues related to technology transfer, intellectual property, and innovation. The CRS report states that President Trump tweeted on 23 August 2019 that he would increase the tariff rate for USD 250 billion worth of imports from China from 25% to 30%, effective from 1 October 2019, and that he would increase the proposed tariff rate for the remaining imports from China from 10% to 15%, to go into effect for some products on 1 September 2019, and for other products on 15 December 2019. The CRS report further states that trade negotiators from the two countries are scheduled to meet for a

13th round of negotiations in Washington, DC, in September 2019. The CRS is an agency within the US Library of Congress and serves the US Congress throughout the legislative process by providing legislative research and analysis for an informed national legislature.

Farmland use tax implementation rules issued

On 30 August 2019, the Ministry of Finance, together with other ministries, published the Farmland Use Tax Implementation Rules (the rules). The rules contain 33 articles and will be effective from 1 September 2019. The rules define and specify certain concepts and terms used in farmland use tax, such as users of farmland. They also define in more detail the institutions and constructions that are exempt from such tax. Moreover, the rules provide that the farmland use tax return must be filed by the taxpayer, and the tax collected by the tax bureau, in the place where the farmland is located. The information concerning size, type of farmland, etc., provided by the (local) government department in charge of natural resources will be used for the tax assessment.

Resource Tax Law published

On 26 August 2019, the Resource Tax Law (the law) was adopted at the 12th meeting of the 13th Standing Committee of the National People’s Congress. The law will be implemented from 1 September 2020; on that same date, the Resource Tax Interim Regulations of 1993 will be repealed. Entities and individuals exploiting taxable products in China and in the waters under its jurisdiction are subject to resource tax. Depending on the resource, tax is imposed on the basis of ad valorem or per unit. The applicable rates will be determined by local governments within the ranges provided by the law. The rates for the major resources are as follows:

Taxable product

Crude oil

Natural gas

Rate (% of

value/price)

6%

6%

CHINA (PRC)

MAYER BROWN | 98 | Asia Tax Bulletin CHINA (PRC) CHINA (PRC)

Taxable product

Coal

Rare earths

Tungsten

Molybdenum

Iron ore

Gold

Copper

Bauxite ore

Lead-zinc, nickel, tin ore

Other ferrous metals

Graphite

Diatomite, kaolin, fluorite, limestone, pyrite

Phosphate rock ore, potassium chloride

Potassium sulphate

Well salt, lake salt

Sea salt

Extraction of underground salt brine salt

Coal seam (into) gas

Clay, gravel ore

Other non-ferrous products not listed

Mineral water

Rate (% of

value/price)

2% - 10%

7% - 20%

6.5%

8%

1% - 9%

2%- 6%

2% - 10%

2% - 9%

2% - 6%

2% - 10%

3% - 12%

1% - 12%

3% - 8%

6% - 12%

1% - 6%

2% - 5%

3% - 15%

1% - 2%

CNY 1 - 5 per tonne or CNY 0.1 - 5 per cubic metre

20% or > CNY 30 per tonne or cubic metre

1%-20% or CNY 1 – 30 per cubic metre

A taxpayer that exploits or produces taxable products that fall under different taxable categories must calculate sales separately. Higher tax rates will apply if the taxpayer fails to calculate them separately or is unable to accurately provide the sales revenue or sales volume per taxable item. Exploitation of taxable products for the taxpayer’s own use is equally subject to resource tax except where its use is for the continuity of the production of taxable products. The following are exempt:

• crude oil and natural gas used for heating in the process of crude oil extraction and transportation within the oil field; and

• coal-formed gas (CBM) extracted by coal mining enterprises for safety reasons.

Resource tax is reduced in the following circumstances:

• tax on crude oil and natural gas extracted from low-abundance oil and gas fields will be reduced by 20%;

• tax on high-sulphur natural gas, tertiary oil recovery and crude oil and natural gas extracted from deep-water oil and gas fields will be reduced by 30%;

• tax on heavy oil and high pour point oil will be reduced by 40%; and

• tax on mining products from depleted mines will be reduced by 30%.

Furthermore, local governments at provincial, municipal or autonomous region level are empowered to exempt or reduce resource tax in the case of accidents, natural disasters or exploitation of low-grade (abundant) mines. Resource tax liability arises on the date when payment or a collecting document is received. In the case of own use, the liability arises on the date of the transfer of products.

A taxpayer must file resource tax returns on a quarterly basis. Where resource tax cannot be calculated and paid based on a fixed term, the relevant taxpayer may file returns on a pay-per-use basis.

With effect from the effective date of this law, Chinese enterprises and foreign enterprises that exploit crude oil or natural gas on the basis of Sino-foreign cooperative joint ventures and pay fees for using mining areas will pay resource tax in accordance with this law, and will no longer pay the fees for using mining areas.

Tax incentives for Lingang New Area in Shanghai Free Trade Zone

On 30 August 2019, the Shanghai Municipal Government released the announcement”Several Opinions on Promoting the Implementation of Special Support Policies for the Quality Development of the Lingang New Area of the China (Shanghai) Free Trade Zone” which introduced 50 measures with regard to the administration of the zone, professional talents, finance and taxation, land planning, industrial development, housing supply and infrastructure. The measures apply from 1 September 2019 to 31 August 2023. The tax incentives contained in the announcement are as follows:

• for qualified enterprises engaging in research and development in key industries, such as integrated circuit (IC), artificial intelligence, biomedicine and civil aviation within the zone, the enterprise income tax rate will be reduced from 25% to 15% for 5 years, starting from the date of establishment of the enterprise;

• qualified IC production and design enterprises and software enterprises may be exempt from enterprise income tax in the first 2 years and may enjoy an enterprise income tax reduction of 50% in the subsequent 3 years; and

• a subsidiary tax may be granted to high-end workers and talents working in the new zone to reduce individual income tax.

Furthermore, a special tax policy relating to goods entering the zone plus transactions of goods and services between enterprises within the zone is being developed, as is the VAT policy on export of services.

International Tax Developments

INDIA

On 5 June 2019, the amending protocol, signed on 26 November 2018, to the China - India Income Tax Treaty, as amended by the 1995 exchange of notes, entered into force. The protocol generally applies from 1 January 2020 for China and from 1 April 2020 for India.

HONG KONG

On 19 July 2019, China and Hong Kong signed an amending protocol in Beijing to update the China - Hong Kong Income Tax Agreement, as amended by the 2008, 2010 and 2015 protocols. The signed protocol adds a new article on teachers and researchers and incorporates measures to prevent tax treaty abuse, which are part of the Base Erosion and Profit Shifting project (BEPS).


Hong KongJURISDICTION:

Foreign taxes deduction for profits tax purposes

Foreign taxes deduction for profits tax purposes

On 19 July 2019, Hong Kong’s Inland Revenue Department issued an updated Departmental Interpretation and Practice Notes (DIPN) 28 to set out the Department’s interpretation and practice on the provisions relating to foreign tax deduction after the enactment of the Inland Revenue (Amendment) (No. 6) Ordinance 2018.

All outgoings and expenses that are not capital in nature, to the extent that they are incurred in the production of taxable profits, are deductible for profits tax purposes.

If a foreign tax is paid in a territory outside Hong Kong that has a treaty in force with Hong Kong, and the relevant treaty pro-vides relief from double taxation by way of a tax credit, a Hong Kong resident person can only apply for a tax credit under section 50 of the Inland Revenue Ordinance (IRO). A non-Hong Kong resident person not covered under the relevant treaty may seek unilateral relief from its residence jurisdic-tion or bilateral relief under the treaty between its residence jurisdiction and the treaty territory (if any).

Tax penalties

On 5 September 2019 the IRD announced that the webpage on penalty policy has been updated to include the major penalty provisions in relation to relief from double taxation, exchange of information, transfer pricing requirements, advance pricing arrangement, mutual agreement procedure and arbitration, etc., as well as the Department’s penalty policy on transfer pricing cases.

Transfer Pricing guidelines

On 19 July 2019, the Hong Kong Inland Revenue Department issued three Departmental Interpretation and Practice Notes (DIPN) to set out the Department’s interpretation and practices on the relevant rules and requirements, and the latest international standards relating to transfer pricing. DIPN 58 was issued to further supplement the implementation of the previously gazetted Ordinance to implement BEPS minimum standards and codifying the transfer pricing principles:

• A Hong Kong entity should explain its transfer pricing treatment by documenting all material facts and circumstances making it clear how the Hong Kong entity understands the law that applies to those facts and circumstances, and why and on what basis adjustments are made for any material differences.

• The master file and local file must be prepared within 9 months after the end of each accounting period of the Hong Kong entity.

• A Hong Kong entity of a group is exempt from preparing both a master file and a local file if they meet any of the two following exemption thresholds:

>> the total amount of annual revenue for the accounting period does not exceed HKD 400 million;

>> the total value of assets at the end of the accounting period does not exceed HKD 300 million; and

>> the average number of the entity’s employees during the accounting period does not exceed 100.

• A Hong Kong entity is exempt from preparing a local file for a particular type of controlled transaction if the amount of that type of controlled transaction does not exceed the following threshold:

>> transfers of properties (movable or immovable, but excluding financial assets and intangibles) do not exceed HKD 220 million;

>> transactions in respect of financial assets do not exceed HKD 110 million;

>> transfers of intangibles do not exceed HKD 110 million; and

• DIPN 58 also sets out the obligations for filing CbC returns, contents of the CbC report and its notification requirements.

DIPN 59 discusses the arm’s length principle for transactions between associated persons to be computed on an arm’s length basis. The concepts and terminologies relevant to transfer pricing are defined under DIPN 59, including provision, affected persons, transaction and a series of transactions, participation, control, beneficial interest, indirect beneficial interest through interposed person, and potential advantage in relation to Hong Kong tax.

• DIPN 59 sets out the following exempted domestic transactions that are not subject to the operation of Rule 1, including actual provisions that do not give rise to any potential advantage, domestic nature condition, no actual tax differences, non-business loan condition, as well as non-tax avoidance condition.

• DIPN 59 examines the key aspects in a comparability analysis, the functional analysis, economically relevant characteristics of comparability factors and contractual terms of the transaction, as well as characteristics of property transferred or services provided in determining the arm’s length price.

• DIPN 59 explains the various transfer pricing methods, which comprise the traditional transaction methods and the transactional profit methods. As for the most appropriate method, DIPN 59 sets out that although both the traditional transaction method and the transactional profit method can be applied in an equally reliable manner, the traditional transaction method is preferred to the transactional profit method. However, the Commissioner of the Inland Revenue Department agrees that MNE groups should retain the freedom to apply methods not described above to establish that those prices satisfy the arm’s length principle. In cases where other methods are used, their selection should be supported by documentation including an explanation of why

HONG KONG


OECD-recognized methods were regarded as non-appropriate or non-workable in the circumstances of the case and of the reason why the selected other method was regarded as providing a better solution.

• DIPN 60 discusses mainly the attribution of profits to a Permanent Establishment (PE) in Hong Kong. Rule 2 in section 50AAK of the Inland Revenue Ordinance requires the income or loss of a non-Hong Kong resident person attributable to the person’s PE in Hong Kong to be determined as if the PE were a distinct and separate enterprise, taking into account the functions performed, assets used and risks assumed by the non-Hong Kong resident person through the PE. DIPN 60 also examines the strategies that seek to avoid having a PE in Hong Kong, including fragmentation of activities between closely related parties, complementary functions, commissionaire arrangement and similar strategies.

• The rule for attribution of profits is the separate enterprises principle. Profits are attributed to the PE in the amount that it would have made if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions dealing wholly independently with the non-Hong Kong resident person. This includes the assumption that the PE would have such equity and loan capital attributed to it, as it would reasonably be expected to have if it were a separate entity.

• Expenses are only attributable to the PE in Hong Kong where they are incurred for the purposes of producing chargeable profits of the PE. Meanwhile, expenses incurred for other purposes apart from those of the PE in Hong Kong alone will be subject to an apportionment method to calculate the amount that is attributable to the PE of the non-Hong Kong resident person.

• The attribution of “free capital” (i.e. funding that does not give rise to a tax-deductible interest expense) should be carried out in accordance with the arm’s length principle to ensure that a fair and appropriate amount of profits is allocated to the PE.

•

On 28 August, a webpage was set up by the IRD to explain the requirements in relation to master file and local file, and the Department’s approach to ensure compliance with the requirements.

Package of measures to support enterprises and residents On 15 August 2019, the Financial Secretary of Hong Kong announced a package of measures to counter the challenging external and local economic environments. The proposed measures aim to support enterprises, in particular small and medium-sized enterprises (SMEs), in safeguarding jobs and relieving people’s financial burdens. The tax-related measures are summarized below.

• Twenty-seven (27) groups of government fees and charges will be waived for a period of 12 months, which will benefit a wide range of sectors, including maritime, logistics, retail, catering, tourism, construction, agriculture and fisheries.

• Further to the Budget for 2019/2020 (see the previous edition of this Bulletin), a one-off reduction of salaries tax, tax under personal assessment and profits tax will be increased from 75% to 100% for the year of assessment 2018/2019, subject to a maximum of HKD 20,000 per case.

• An additional 1-month allowance is provided to social security recipients based on the standard rates of comprehensive social security assistance (CSSA) payments, old age allowances, old age living allowances and disability allowances, respectively.

The above proposals will be submitted to the Legislative Council for approval.

Charitable institutions

On 9 September, the IRD issued a Tax Guide for Charitable Institutions and Trusts of a Public Character, which has been updated to set out the Department’s interpretation and practice in relation to the taxation of charitable institutions or trusts of a public character and other related matters.


AUSTRIA

On 9 April 2019, the Austria - Hong Kong Competent Authority Arrangement on the Exchange of Country-by-Country (CbC) Reports, which was signed on the same date, entered into force. In accordance with Section 8, paragraph 1, the agreement became effective on the date of the last signature.

CHINA

On 19 July 2019, China and Hong Kong signed an amending protocol in Beijing to update the China - Hong Kong Income Tax Agreement, as amended by the 2008, 2010 and 2015 protocols. The signed protocol adds a new article on teachers and researchers incorporating measures to prevent tax treaty abuse, which are part of the Base Erosion and Profit Shifting project (BEPS).

SWITZERLAND

According to a press release of 2 August 2019, published by the Swiss Tax Authorities, the Hong Kong - Switzerland Competent Authority Agreement on Automatic Exchange of Information (CRS) entered into force on 1 July 2019. The arrangement specifies the details of what information will be exchanged and when, as set out in the OECD Automatic Exchange of Information Agreement.

PORTUGAL

On 27 August 2019, a competent authority arrangement on the exchange of country-by-country (CbC) reports between Hong Kong and Portugal has been signed.

HONG KONGHONG KONG


IndiaJURISDICTION:

The scope of income is defined under sections 4 and 5 of the Income Tax Act, 1961 (ITA). Since the payment of commission does not fall within the threshold of business connection or, in the context of a tax treaty, within the threshold of permanent establishment, the taxpayer is not obliged to deduct taxes at source and, hence, the disallowance by the tax authorities is bad in law.

Budget 2019/2020 presented

The Indian Finance Minister (FM) presented the 1st Budget of the newly formed NDA 2.0 government for financial year (FY) 2019-20. While there were many expectations before the Budget to revive animal spirits in the economy, the Budget has presented a mixed bag. Key changes include:

• Relaxation in investment norms in aviation, media, insurance, insurance intermediaries and single brand retail sectors;

• Start up taxation – rationalisation measures;

• Incentives to Foreign Portfolio Investors;

• Rationalisation of Non Banking Finance Companies norms;

• Thrust to the International Financial Services Centre (IFSC);

• Changes to Alternative Investment Funds - pass through taxation; and

• Buy-back tax on listed securities.

On 1 August 2019, the Finance (No. 2) Act 2019 (the Act) was enacted after it had received the assent of the President. The Act gives effect to the financial proposals of the central government for the financial year 2019/2020. The amendments are in line with the draft bill presented to Parliament on 5 July 2019.

Sabka Vishwas (Legacy Dispute Resolution) Scheme

On 21 August 2019, the Central Board of Indirect Taxes and Customs (CBIC) announced that the Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019 (the Scheme) will enter into force on 1 September 2019 and will remain in force until 31

December 2019. The Scheme was introduced in the Union Budget 2019/20 to provide relief in dispute resolution and amnesty to taxpayers for closing their pending tax disputes relating to legacy Service Tax and Central Excise cases that are now subsumed under Goods and Services Tax (GST). The Scheme provides substantial relief in the tax dues for all categories of cases as well as full waiver of interest, fines and penalties, and complete amnesty from prosecution. In addition:

• for all cases pending in adjudication or appeal in any forum, the Scheme offers a relief of 70% from the duty demand if it is INR 5 million or less, and 50% if it is more than INR 5 million;

• for cases under investigation and audit where the duty involved is quantified and communicated to the party or admitted by him in a statement on or before 30 June 2019, the Scheme offers a relief of 70% from the duty demand if it is INR 5 million or less, and 50% if it is more than INR 5 million;

• for cases of confirmed duty demand, where there is no appeal pending, the relief offered is 60% of the confirmed duty amount if it is INR 5 million or less, and 40% if it is more than INR 5 million; and

• for cases of voluntary disclosure, the person availing of the Scheme will be required to pay the full amount of disclosed duty.

Further details and conditions to avail of the Scheme are contained in sections 120 to 125 of Finance (No.2) Act, 2019. The CBIC also notified the Sabka Vishwas (Legacy Dispute Resolution) Scheme Rules, 2019 (the Rules) vide Notification No. 5/2019 Central Excise-NT dated 21 August 2019, which provides the procedural aspects of the Scheme.

Tax deduction at source on cash withdrawals

On 30 August 2019, the Central Board of Direct Taxes issued a press release to clarify the applicability of tax deduction at source (TDS) on cash withdrawals. The Finance (No. 2) Act, 2019 has inserted a new section 194N in the Income-tax Act, 1961 (the Act) to provide for the levy of TDS at 2% on cash payments in excess of INR 10 million in

INDIA

In regards to Commission payments to non-resident not subject to withholding tax. On 14 May 2019, the Income Tax Appellate Tribunal (ITAT) of Jaipur gave its decision in the case of Satyam Polyplast v. DCIT (ITA 158/2019). According to the ITAT, commission paid to a sales agent for procuring sales orders outside India is not taxable in India. The taxpayer (Satyam Polyplast) was a partnership firm registered in India and engaged in the business of manufacturing of polypropylene (PP) bags. The taxpayer paid commissions to various non-resident entities without deducting tax deducted at source (TDS).

The taxpayer argued that it was engaged in the export of its end products and, for that purpose, it had tied up with non-resident persons for procuring sales orders on its behalf. After exporting the goods and receiving the payment in foreign currency, the taxpayer paid commission to such non-resident persons for services rendered outside India. The taxpayer contended that the payments made by it to the non-residents were not liable to tax in India and, therefore, the taxpayer was under no obligation to deduct TDS.

The tax authorities disagreed and proceeded to hold that the payment in question was a fee for technical services (FTS), since the taxpayer had made this payment for managerial or consultancy services rendered by the non-resident persons. Accordingly, the tax authorities disallowed a deduction for the commission paid on the basis that there was non-deduction of taxes at source. The aggrieved taxpayer appealed before the ITAT.

The issue was whether the commission paid to various non-residents would be equal to the payment for routine services or FTS. The ITAT held in favour of the taxpayer stating that the payment of commission is not FTS but a regular payment to the non-residents made in the ordinary course of business. The tax authorities also could not substantiate its contention that the commission paid was of the nature of FTS.


aggregate made during the year by a banking company or cooperative bank or post office to any recipient holding one or more accounts with the above-mentioned organizations. This section came into effect from 1 September 2019.

In this regard, it is clarified that any cash withdrawal prior to 1 September 2019 will not be subject to the TDS under section 194N of the Act. However, as the threshold of INR 10 million is with respect to the perevious year, the calculation of the amount of cash withdrawal for triggering TDS under section 194N of the Act shall be counted from 1 April 2019 onwards.

As such, if a person has already withdrawn INR 10 million or more in cash up to 31 August 2019 from one or more accounts held with a banking company or a cooperative bank or a post office, the 2% TDS shall apply on all subsequent cash withdrawals.

Management services are not subject to withholding tax

On 30 April 2019, the Income Tax Appellate Tribunal (ITAT) gave its decision in the case of DCIT v. Hyva Holding B.V. (ITA 3816/2017), stating that the payment for management services does not fall within the definition of “fees for technical services” (FTS) under the India - Netherlands Income and Capital Tax Treaty (as amended through 2012) (the treaty) where the taxpayer has not made available technical knowledge to its Indian subsidiary for its independent use.

The taxpayer (Hyva Holding B.V.) was a company incorporated in the Netherlands. It entered into an agreement with its Indian subsidiary to render certain services. The Indian tax authority took the view that the services provided by the taxpayer included managerial, technical and consultancy services, and, while rendering such services, the taxpayer had made available technical knowledge and skills which would fall under the definition of FTS under article 12(5) of the treaty. On first appeal, the Tax Commissioner (Appeals) concluded in favour of the taxpayer, stating that the services rendered by the taxpayer were of a managerial services nature which could not be treated as FTS

under the treaty since the treaty definition covered only technical and consultancy services. In addition, it was stated that, by providing core expertise, supporting its group company in growing, expanding and achieving business independence, the taxpayer was not making available any technical knowledge, experience, know-how, skills, etc., as the services rendered had not enabled its Indian subsidiary in its own right to apply them for all its future needs. Therefore, ultimately, it was held that the payment received by the taxpayer from its Indian subsidiary was not of an FTS nature, and, hence, not taxable in India. Accordingly, the tax assessed by the tax authority was reversed. The tax authority then appealed before the ITAT.

The issue was whether the payment for management services supporting the taxpayer’s Indian subsidiary or ensuring capacity building of the Indian subsidiary would be regarded as making technical knowledge or skills available.

The ITAT ruled in favour of the taxpayer, stating that article 12(5) of the treaty does not include managerial services in the definition of FTS. Therefore, although some services rendered by the taxpayer may have the trappings of technical or consultancy services, the core activity of the taxpayer under the agreement is providing managerial services. Accordingly, the payment received by the taxpayer from its Indian subsidiary cannot be treated as FTS under article 12(5) of the treaty.

Moreover, the expression “make available” not only means that the recipient of the service is in a position to derive an enduring benefit out of the utilization of the knowledge or know-how independently in future, without the aid of the service provider, but such technical knowledge, experience, know-how, skills, etc. must remain with the recipient even after expiry of the agreement. It was also held that the technology will be considered to have been made available when the person acquiring the service is able to apply the technology independently. Hence, to come within the purview of FTS under article 12(5) of the treaty, the rendering of services and making available of technical knowledge, experience, know-how, skills, etc. must take place simultaneously. In the present case, the tax authority failed to demonstrate that, while rendering services to its Indian subsidiary, the taxpayer had made available technical knowledge,

experience, know-how, skills, etc. enabling its Indian subsidiary to apply such technology independently.

Finance Ministry’s economic stimulus

On 23 August 2019, the Finance Minister announced several measures in order to encourage some sectors to boost the Indian economy.

The enhanced surcharge levied, in accordance with the Finance (No. 2) Act 2019, on long- and short-term capital gains arising from the transfer of equity shares and/or units by FPIs has been withdrawn. The pre-budget position is restored.

However, the above withdrawal has not been extended to other securities such as debt securities, etc.

• Relief for start-ups

>> To mitigate genuine difficulties faced by start-ups and their investors, angel tax paid by the start-ups on the funding received from investors in excess of its fair market value, will be withdrawn for start-ups registered with the Department for Promotion of Industry and Internal Trade.

• Measures to accelerate the automotive market

>> An additional 15% depreciation allowance is claimable on vehicles acquired from 23 August 2019 until March 2020, increasing the total depreciation claimable to 30%.

• Faceless assessment

>> On or after 1 October 2019, all tax notices, summons, orders, etc. will be issued from a centralized system with a computer-generated unique document identification number.

>> All old tax notices will be decided by 1 October 2019 or will be uploaded again through the centralized system.

>> From 1 October 2019, all tax notices will be disposed of within 3 months from the date of reply.

• Goods and services tax (GST) refunds

>> All pending GST refunds due to micro, small and medium-sized enterprises (MSMEs) will be paid within 30 days.

>> In the future, GST refunds on new applications will be paid within 60 days from the date of application.

Consolidated circular for assessment of start-ups

According to a press release on 2 September 2019, the Central Board of Direct Taxes (CBDT) issued Circular No. 22/2019 (the circular) on 30 August 2019 to consolidate all the circulars/clarifications issued previously in relation to tax compliance matters of start-up entities (start-ups) following several announcements made by the Ministry of Finance.

• It is mentioned that under Circular No. 16/2019 dated 7 August 2019, the process of assessment of the start-ups recognized by the Department for Promotion of Industry and Internal Trade was simplified. Circular No. 16/2019 covered cases under “limited scrutiny”, such as cases where multiple issues including the issue of section 56(2) (viib) of the Income Tax Act, 1961 (ITA) were involved, and cases where Form No.2 was not filed by the start-up. The detailed process of obtaining mandatory approval of the supervisory authorities for conducting an enquiry was also laid down by Circular No. 16/2019.

• The time limit for completion of pending assessments of start-ups was also specified whereby all cases involving “limited scrutiny” are to be completed preferably by 30 September 2019. Other cases of start-ups are to be disposed of on a priority basis and preferably by 31 October 2019.

• It is mentioned that under the clarification issued on 9 August 2019, the provisions of section 56(2)(viib) of the Act would also not be applicable in respect of assessment made before 19 February 2019 if a recognized start-up had filed a declaration in Form No. 2. The timelines for disposal of appeals before the

INDIAINDIA


Commissioners of Income-tax (Appeal) was also specified. Further, the addition made under section 56(2)(viib) of the Act would also not be pressed in further appeal.

• It is provided that the outstanding income-tax demand relating to additions made under section 56(2)(viib) of the Act would not be pursued and no communication in respect of outstanding demand would be made with the start-up. Other income-tax demands on the start-up would not be pursued unless the demands were confirmed by the Income Tax Appellate Tribunal (ITAT).

• In order to redress grievances and to address various tax related issues in the case of start-ups, a Startup Cell has been constituted by CBDT. Grievances can also be filed online at [email protected].

Farm-in expenditure incurred by oil exploration and production companies

The Indian income tax law provides for a special deduction for assessees engaged in the business of prospecting for or extraction or production of mineral oils. It specifically provides that, in the event of a farm-out (selling) of participating interests in the production sharing agreement by oil exploration and production companies, the unamortized expenditure is allowed as a deduction and the surplus is taxed in the hands of the seller. However, in the hands of the buyer, no specific provision is provided under the Income Tax Act, 1961 (the Act).

Thus, while taxability of a farm out is clearly laid out, no specific provision had been made regarding the treatment of farm-in (buying) payments, which resulted in a conflict between oil exploration and production entities and the tax department.

Therefore, the Central Board of Direct Taxes (CBDT) recently issued Circular No. 20/2019 dated 19 August 2019 (the circular) clarifying that amounts paid by oil exploration and production companies for acquiring participating interests in the production sharing agreement entered into with the central government, being in the nature of

rights (business or commercial right akin to a licence), will be treated as an intangible asset, with amortization of the same being claimable under the provisions of the Act.

• The government offers exploration and development rights through global bidding, with the successful oil and gas blocks being granted licence to explore, develop and carry on production operations.

• Oil exploration and production companies generally buy (farm-in) and sell (farm-out) their participating interests in the production sharing agreement entered into with the central government.

• Farm-in expenditure is incurred when an entity in this line of business acquires a participating interest from other entities in oil/gas blocks and becomes part of the production sharing agreement.

Former practice

• Such farm-in purchase price is accounted for as an asset as per the prescribed accounting standards.

• International accounting rules for oil and gas followed in Australia, Indonesia, the United Kingdom, among other countries, also require that such acquisition cost be capitalised and depreciated.

• Some of the case law on this issue also supports the treatment of acquisition rights in a production sharing agreement as an intangible asset.

Recent update

• In the circular, the CBDT clarifies that the amount paid for acquiring the participating interest will not be treated as the cost of acquiring the share in a partnership or investment for the acquisition of a member’s interest in an association of persons or body of individuals.

• The amount paid for acquiring the participating interest will initially be treated as an amount paid towards acquiring the underlying asset.

• The amount paid for acquiring the participating interest (after deduction of the component cost attributable to tangible assets) will be treated

as an intangible asset (being a business or commercial right akin to a licence) eligible for claiming of amortization under provisions of the Act.

New direct tax law

In November 2017, the government appointed a task force to review and redraft the Income-tax Act, 1961 (ITA), taking into account the direct tax systems prevalent in various countries, international best practices and the economic needs of the country. The task force recently submitted a report to the Finance Minister recommending certain changes to be made to the ITA. The government is expected to release the report of the eight-member panel in the public domain for consultations after examining all the recommendations, with the same being likely to be presented to Parliament as part of the Union Budget 2020/21 in February 2020.

Although the report and the recommendations therein have not been made public yet, some of the major announcements likely to be made under the new law for income tax are as follows:

Relief for individual taxpayers

• Currently, the personal income tax structure includes three categories: people below the age of 60; people above the age of 60 but below 80; and people aged 80 years and above.

• The first category contains four brackets: zero tax on income up to INR 250,000; 5% tax on income between INR 250,000 and INR 500,000; 20% on income between INR 500,000 and INR 1 million; and 30% on income above INR 1 million.

• The second category also contains four tax brackets but with the first bracket of zero tax on income up to INR 300,000. The third category contains three brackets with the first bracket of zero tax on income up to INR 500,000.

• The task force has suggested a modification on the current brackets and an introduction of a new rate between 5% and 20%.

Common corporate tax rate for foreign companies and domestic companies

• Currently, domestic companies with turnover of up to INR 4 billion pay income tax at a lower rate of 25%, while larger companies, which account for the lion’s share of the government’s tax revenue, pay income tax at a rate of 30%. In addition, unlike domestic firms, foreign companies pay a higher corporate tax rate of 40%, but do not have to pay dividend distribution tax that is applicable to domestic companies.

• The task force has recommended a common corporate tax rate of 25% for both domestic and foreign companies.

Abolishment of dividend distribution tax

• Currently, dividend distribution tax is imposed on domestic companies at a gross rate of 15% plus applicable surcharge and cess. In addition, in the case of dividends exceeding INR 1 million paid by a domestic company, shareholders receiving the dividends are required to pay tax at a rate of 10% on those dividends. This results in taxation of the same income at various stages.

• The task force has suggested that dividend distribution tax be abolished, and that dividends be taxed in the hands of the shareholders.

Repatriation tax

• In the case of foreign companies, a “branch profits tax” is recommended to be levied on the amount repatriated to their foreign headquarters. (As a result, the rates of taxation of domestic and foreign companies may still be different to some extent.)

Change in tax assessment procedure

• The task force has recommended that the concept of “assessing officer” be replaced by “assessment unit”; also, scrutiny cases are expected to be allotted centrally by the IT system on a random basis (“faceless assessment scheme”).

• The task force also recommended that transfer pricing assessments be carried out by a separate functional unit which will be set up for a period of 4 years.

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MAYER BROWN | 2120 | Asia Tax Bulletin INDIAINDIA

Litigation management unit

The task force has recommended a separate litigation management unit to be set up to manage the entire litigation process, i.e. from deciding which cases the appeals ought to be filed to devising the strategy for defending a case. Further, the officer raising the tax demand will be unable to file for litigation in the same case.

Highlights of other recommendations

• Introduction of the concept of mediation and settlement of litigation through negotiation.

• Individuals earning up to INR 5.5 million may obtain major tax relief.

• Various incentives for start-ups are recommended.

• The proposed direct tax code will have fewer sections than the current ITA.

Taxation Laws (Amendment) Ordinance 2019

During a press conference on 20 September 2019, the Finance Minister announced that the Taxation Laws (Amendment) Ordinance 2019 (the ordinance) has been brought in to make certain amendments in the Income-tax Act, 1961 (the Act) and the Finance (No. 2) Act 2019 (the Finance Act).

• With effect from fiscal year (FY) 2019-20, domestic companies are provided with an option to pay income tax at 22% provided that they will not avail any exemption/incentive. The effective tax rate is 25.17% inclusive of surcharge and cess. Further, such companies are not required to pay the minimum alternate tax (MAT).

• With effect from FY 2019-20, a new domestic manufacturing company which is incorporated on or after 1 October 2019 is provided with an option to pay income tax at 15%. This benefit is available to companies that do not avail any exemption/incentive and commence their production on or before 31 March 2023. The

1 Courtesy Khaitan & Co in Mumbai.

effective tax rate is 17.01% inclusive of the surcharge and cess. Further, such companies are not required to pay MAT.

• A company which does not opt for the concessional tax regime and avails the tax exemption/incentive will continue to pay tax at the pre-amended rate. However, they can opt for the concessional tax regime after the expiry of their tax holiday/exemption period. After the exercise of the option they will be liable to pay tax at 22% and the option once exercised cannot be subsequently withdrawn. Further, the rate of MAT has been reduced from the existing 18.5% to 15%.

• The enhanced surcharge introduced by the Finance Act will not apply on capital gains arising on the sale of equity share in a company or a unit of an equity-oriented fund or a unit of a business trust liable for securities transaction tax, in the hands of an individual, Hindu Undivided Family (HUF), Association of Persons (AOP), Body of Individuals (BOI) and Artificial Juridical Person (AJP). The enhanced surcharge will also not apply to capital gains arising on the sale of any security including derivatives, in the hands of Foreign Portfolio Investors (FPIs).

• Listed companies which have already made a public announcement of buy-back before 5 July 2019 will not be subject to the tax on the buy-back of shares.

Capital gains tax liability on conversion into an LLP1

In the recent case of Domino Printing Science Plc., In Re (AAR 1290 of 2012 decided on 23 August 2019), the Authority for Advance Rulings (AAR), ruled that shareholders of a company are liable to capital gains tax upon the conversion of a company to a Limited Liability Partnership (LLP) as the conditions of a tax neutral transfer are not fulfilled. Under the Income Tax Act, 1961 (IT Act) any transfer of a capital asset by a company to an LLP or shares held by the shareholder in the company, as a result of conversion of a company into an LLP, would be

tax neutral, subject to conditions. This ruling assumes importance as it is the first decision which deals with taxability in the hands of the shareholders on the breach of conditions of a tax neutral transfer.

Notification on arm’s length tolerance range for 2019-20 assessment year

On 13 September 2019, the Central Board of Direct Taxes (CBDT) issued Notification No. 64/2019 (the notification) to provide the accepted tolerance range for transactions to be considered as at arm’s length for the 2019-20 assessment year.

The notification provides that where the variation between the arm’s length price determined under section 92C of the Income-tax Act, 1961 (the Act) and the price at which the international transaction or specified domestic transaction has actually been undertaken does not exceed 1% of the latter (i.e. the actual transaction price) in respect of wholesale trading and 3% of the latter (i.e. the actual transaction price) in all other cases, the price at which the international transaction or specified domestic transaction has actually been undertaken will be deemed to be the arm’s length price for assessment year 2019-2020.

The term “wholesale trading” is further defined under the notification as an international transaction or specified domestic transaction of trading in goods, which fulfils the following conditions:

• The purchase cost of finished goods is 80% or more of the total cost pertaining to such trading activities.

• The average monthly closing inventory of such goods is 10% or less of sales pertaining to such trading activities.


CHINA

On 5 June 2019, the amending protocol, signed on 26 November 2018, to the China - India Income Tax Treaty, as amended by the 1995 exchange of notes, entered into force. The protocol generally applies from 1 January 2020 for China and from 1 April 2020 for India.

SPAIN

According to an update of 27 August 2019, published by the Indian Ministry of Finance, the amending protocol, signed on 26 October 2012, to the India - Spain Income and Capital Tax Treaty entered into force on 29 December 2014. The protocol generally applies In India from 1 April 2015 for other taxes and in Spain from 1 January 2015. Special conditions apply for article 28 (Exchange of Information) and article 28A (Assistance in the collection of taxes) of the amended convention.


Indonesia

VAT exemption on transportation equipment

On 8 July 2019, Indonesia passed Government Regulation (PP) No. 50 / 2019 (the Regulation) which exempts the impor-tation and supply of certain transportation equipment from VAT. The items exempted from VAT under articles 1 and 2 of the Regulation include:

• water transportation equipment;

• underwater transportation equipment;

• air transportation equipment;

• trains and spare parts;

• shipping safety equipment, aviation safety equipment, human safety equipment and spare parts;

• certain water transport vessels; and

• aircraft, aviation and human safety equipment, repairs and maintenance equipment and spare parts.

The exemption will be withdrawn and the unpaid VAT must be repaid if, within 4 years from the time of importation and/or acquisi-tion, the items mentioned in articles 1 and 2 of the Regulation are not used in accor-dance with the original purpose or are transferred to another party by the entity. The Regulation will enter into force on 6 September 2019.

Changes to the CFC rules21

With the issuance of MoF Regulation 93/PMK/03/2019 (“MoF-93”), the Minister of Finance has amended certain provisions of MoF Regulation 107/PMK/03/2017 (“MoF-107”) regarding controlled foreign corporations (“CFC”). MoF-107 expanded

2 Courtesy Harsono Strategic Consulting in Jakarta.

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the scope of a CFC to cover indirectly owned CFCs. One of the most important changes in MoF-93 is that the definition of deemed dividend now excludes business profits. The intention is to provide greater certainty and fairness when taxing investments in CFCs. Below is a summary of the general CFC rules, highlighting the new changes under MoF-93. MoF-93 is retroactively applicable from tax year 2019.

CFCs consist of (i) directly owned CFC: A non-listed foreign corporation in which an Indonesian taxpayer, individually or collectively with other Indonesian taxpayers, owns 50% or more of the foreign corporation’s paid-up shares or (ii) indirectly owned CFC: A non-listed foreign corporation which is controlled indirectly by an Indonesian taxpayer through:

• A directly controlled foreign corporation; or

• A directly controlled foreign corporation and an indirectly controlled foreign corporation in the preceding level of investment which owns at least 50% of the paid-up shares at every level of investment.

An indirectly controlled foreign corporation also includes a foreign corporation in which at least 50% of the paid-up shares are jointly owned by:

• Indonesian taxpayers and a directly or indirectly controlled foreign corporation;

• Indonesian taxpayer and another Indonesian taxpayer through a directly or indirectly controlled foreign corporation; or

• A directly and/or indirectly controlled foreign corporation.

The 50% ownership threshold is determined as of the end of the Indonesian taxpayer’s fiscal year. For an indirectly owned CFC, the 50% threshold is determined based on the ownership of the indi-rectly owned CFC. Note, however, that if less than 50% of the CFC is held by another CFC in which the Indonesian taxpayer has a direct interest, the shareholdings of other Indonesian taxpayers are combined to determine whether the threshold is met.

3 Courtesy Harsono Strategic Consulting in Jakarta.

The Indonesian taxpayer will be taxed on dividends deemed distributed from the CFC. Under MoF-93 a deemed dividend is defined as originating from the following “certain income” (i) dividends, except for dividends received from the CFC, (ii) interest, unless received by a CFC which is owned by an Indonesian taxpayer which has a banking license (this exception does not apply if the interest is received from an Indonesian resident taxpayer which is a related party to the CFC), (iii) rental income from (i) land and/or building, or (ii) other rental income from a related party, (iv) royalties and (v) capital gains.

The calculation of deemed dividend is as follows:

• For a directly owned CFC, the deemed dividend is determined based on the shareholding percentage multiplied by the net income after tax on certain income.

• For an indirectly owned CFC, the deemed dividend is determined based on the percentage of ownership in the respective indirectly owned CFC multiplied by the net income after tax on certain income.

• Net income after tax on certain income is the gross amount of the certain income after deducting costs to obtain, collect and maintain the certain income; and any taxes due, paid, or withheld on the certain income.

As before, the deemed dividend from the CFC is recognized by the Indonesian taxpayer at the end of the fourth month after the CFC submits its local corporate income tax (“CIT”) return or, if no return is required, at the end of the seventh month after the end of the CFC’s fiscal year.

Tax incentives3 2

Government Regulation No. 45/2019 (“GR-45”) was issued on 25 June 2019 and amends GR No. 94/2010. GR-45 provides additional tax incentives for certain pioneer industries in the form of reduc-tions to net or gross income.

INDONESIA


MEXICO

On 29 April 2019, Indonesia ratified the amending protocol, signed on 6 October 2013, to the Indonesia - Mexico Income Tax Treaty, by way of Presidential Decree No. 23 of 26 April 2019, as published in Official Gazette No. 79 of 2019.

On 18 September 2019, the amending protocol, signed on 6 October 2013, to the Indonesia Mexico Income Tax Treaty (2002), entered into force. The protocol generally applies from 18 September 2019

UAE

On 24 July 2019, Indonesia and the United Arab Emirates signed an amending protocol to update the Indonesia - United Arab Emirates Income Tax Treaty (1995) in Jakarta. On the same day, both countries signed an investment protection agreement as well.

SAN MARINO

On 30 August 2019, the Indonesia - San Marino Exchange of Information Agreement entered into force. The agreement generally applies from 30 August 2019 for criminal tax matters and from 1 January 2020 for other tax matters.

The tax incentives offered in GR-45 are set out below:

Eligible Taxpayer

Provides new investment or business expansion in labor intensive industries

Provides professional placements, apprenticeship, human resource development

Provides certain R&D activities in Indonesia

Incentive

A reduction in net income at 60% of the investment amount in fixed assets, including land that is used for the core business, which is expensed for a certain period of time

A reduction in gross income up to a maximum of 200% from the total cost disbursed for such activities

A reduction in gross income up to a maximum of 300% from the total cost disbursed for certain R&D activities which is expensed for a certain period of time.

It is hoped that these incentives will improve labor quality efficiency and encourage innovations in technology. Further details are expected in a future MoF regulation.

Reduction of tax on bond interest payments

On 12 August 2019, Government Regulation (PP) No. 55/2019 (the regulation), which reduces the income tax rate on bond interest payments, was issued by the government. The regulation is the second amendment to PP No. 16/2009 concerning income tax on interest from bonds. The regulation entered into force on 12 August 2019.

• Bonds are defined as debt securities, state debentures and regional bonds with a maturity of more than 12 months. Bond interest is received or obtained in the form of interest/discount by the holder of the bond.

• The interest/discount on bonds received or obtained by qualified taxpayers as provided under the regulation is reduced to:

>> 5% up to and including 2020; and

>> 10% from 2021 onwards.

Tax incentives for upstream oil and gas sector

On 27 August 2019, the government issued Regulation of the Ministry of Finance (PMK) No. 122/PMK.03/2019 (the regulation) which provides exemptions for oil and gas operators (relating to upstream oil and gas business activities) from value added tax (VAT) or VAT and sales tax on luxury goods, land and building tax, and from the tax treatment of charging of joint facility operating costs and head office indirect cost allocation expenditure. The regulation will be in force 30 days from its promulgation on 27 August 2019 and notes:

• VAT or VAT and sales tax on luxury goods will not be collected for the acquisition of certain taxable goods or services that are used or utilized in the context of petroleum operations.

• A reduction of 100% will be introduced for outstanding land and building tax related to oil and gas projects as stated in the tax notification letter.

• Incentives are granted to contractors in certain work areas that do not achieve a certain internal rate of return.

• The provision of taxable services in the upstream oil and gas sectors will be exempt from VAT if certain criteria are met.

• The expenditure of indirect head office cost allocations from contractors that fulfil certain conditions is exempt from VAT.


BAHAMAS

On 9 May 2019, Indonesia ratified the Bahamas - Indonesia Exchange of Information Agreement which was concluded in 2015, by way of Presidential Decree No. 29 of 8 May 2019, as published in Official Gazette No. 96 of 2019.

INDONESIAINDONESIA


Japan


USA

On 17 July 2019, the United States Senate approved the amending protocol, signed on 24 January 2013, to the Japan - United States Income Tax Treaty (signed in 2003). On 30 August 2019, the protocol entered into force. It generally applies from 1 November 2019 for withholding taxes and from 1 January 2020 for other taxes for both Japan and the United States. The provisions for article 26 (Exchange of Information) and article 27 (Assistance in the collection of taxes) of the amended convention apply from 30 August 2019. The provisions concerning arbitration will have effect with respect to cases that are under consideration by the tax authorities as of 30 August 2019 and to cases that come under consideration after 30 August 2019.

CROATIA

On 5 September 2019, the Croatia - Japan Income Tax Treaty will enter into force. The treaty generally applies from 5 September 2019 for the provisions of article 25 (Exchange of Information) and article 26 (Assistance in the Collection of Taxes) and from 1 January 2020 for other taxes.

URUGUAY

Uruguay According to a press release of 13 September 2019, published by the government of Uruguay, Japan and Uruguay have signed an income tax treaty in Uruguay.

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KoreaJURISDICTION:

Budget - proposed tax changes

On 25 July 2019, the Ministry of Economy and Finance released its proposed tax amendments for 2019 (the proposed amendments). Once finalised and passed by the legislature, the amended law will be effective from 1 January 2020.

Corporate tax

• Where an in-kind contribution is made to establish a holding company, any corporate income tax/capital gains tax that may arise from such transaction will be paid in instalments over a period of 3 years starting from the fifth fiscal year after the in-kind contribution is made (applicable to in-kind contributions/transfers of shares occurring on or after 1 January 2022).

• The Promotion of Investment‧Mutual Cooperation Tax will not be applicable to special-purpose companies (applicable to fiscal years commending on or after 1 January 2020).

• Taxpayers are entitled to a deduction of up to KRW 15 million (previously, KRW 10 million) for car expenses incurred for business purposes without any records (applicable to fiscal years commending on or after 1 January 2020).

• De minimis safe harbour: taxpayers will be allowed to immediately deduct expenditures made for certain purposes up to KRW 6 million (previously, KRW 3 million) per item.

• It is clarified that regardless of whether the accounting treatment for existing leases is changed, the current tax treatment for leases must continue to be applied.

• It is clarified that where a penalty is imposed for fraudulent or incorrect VAT invoice, etc., issued in connection with goods and services supplied, the amount that must be subject to the 2% penalty is limited to the amount that is deductible for tax purposes.


Individual income tax

• An administrative fine for failure to report foreign accounts will be waived to the extent that a taxpayer is subject to a criminal fine or administrative fine under a “notice disposition” (applicable to notice dispositions issued on or after 1 January 2020).

• The range of the penalty reduction ratio will be increased from 10%–70% to 30%–90% with respect to late or amended reporting of foreign financial accounts (applicable to late or amended reporting filed on or after the effective date of the relevant provisions).

• While a taxpayer is entitled to a deduction from his or her earned income, the allowed deduction will be limited to KRW 20 million (applicable to income received on or after 1 January 2020).

• The amount of severance pay that officers are entitled to on or after 1 January 2012 will be calculated based on a less favourable formula with downward adjustment of the applicable statutory number (applicable to severance pay received on or after 1 January 2020).

Indirect tax

• The VAT Law (VATL) allows small and medium-sized enterprises (SMEs) that are in the manufacturing business to defer VAT payments on their purchases of imported goods if certain requirements are met.

• Whereas a VAT credit is granted to taxpayers with accounts receivable or other receivables that are ascertained as bad debt within 5 years of the supply date, the proposed amendments allow such VAT credit to be granted to taxpayers with accounts receivable or other receivables that are ascertained as bad debt within 10 years from the supply date.

• Under the current rules, taxpayers with more than one registered place of business for VAT purposes are subject to a penalty at a rate of 2% of the supply value where the taxpayer fails to issue a VAT invoice from the proper place of business (from which the goods or services were supplied), but, instead, issues the VAT invoice from another place of business (the law

treats such error as non-issuance and applies a 2% penalty). Under the proposed amendments, such erroneous issuance of VAT invoice will only be subject to a 1% penalty of the supply value.

• Where a penalty is imposed for erroneously stating a supply value that is in excess of the actual supply value (a penalty at a rate of 2% of the supply value), the law is ambiguous as to whether the penalty for failure to correctly indicate the “necessary information” in the VAT invoice must also be imposed (penalty of 1% of the supply value) (the supply value is part of the “necessary information” that is subject to the 1% penalty). It is clarified that the 1% penalty for erroneous indication of “necessary information” must not be imposed in addition to the 2% penalty imposed for indicating a supply value in excess of the actual value.

• It is clarified that where a taxpayer is denied a VAT credit for failing to correctly indicate the correct supply value, the amount of VAT credit that will be denied is the amount that corresponds to the difference between the erroneous supply value and the proper supply value rather than the amount corresponding to the entire supply value.

Other taxes

• Securities Transaction Tax (STT) applicable to the transfer of shares (both listed and non-listed shares) outside the stock exchange is reduced from 0.5% to 0.45%.

• While taxpayers are currently not allowed to file amended tax returns on past tax returns that were filed after the statutory due date, the proposed amendments now allow for such amended returns (i.e. refund requests and request for correction of taxes) to be filed even if the taxpayer had submitted its initial tax return past its statutory due date.

• When valuing the shares owned by the largest shareholder, the largest shareholder will be supplied with a 20% premium in determining the value of its shares, unless the shareholder is an SME, in which case no premium will be applied.

KOREA

• Customs duties may be exempted where exported goods are re-imported due to defects in the goods within 1 year after the date of export declaration, or where tools attached to exports for quality maintenance/status check during transportation or equipment used temporarily for instalment/assembly/unloading are re-imported within 2 years from the date of export declaration (applicable to import declarations filed on or after 1 January 2020).

• An ex post facto application for preferential tariff under a Free Trade Agreement (FTA) will be allowed for 45 days from the date of payment notice of customs duties when imported goods are reclassified under the Harmonized System (HS) code which is different from the HS code declared by the importer (applicable to ex post facto applications for preferential tariff filed on or after 1 April 2020).

International tax

• Where a backdoor transaction results in a reduction in domestic tax burden by the amount stipulated under the Presidential Decree (PD) (e.g. 50%), the burden of proving that there was no intent of tax avoidance will be placed on the taxpayer (applicable to fiscal years commencing on 1 January 2020).

• The proposed amendments leave the CITL and IITL as the unified rules concerning the refund claim right of a non-resident individual or foreign corporation while placing the burden of proof on the taxpayer (applicable to relevant income arising on or after 1 January 2020).

• Non-submission of information/data requested by the tax authorities will be subject to a penalty of up to KRW 300 million every 30 days until satisfactory submission thereof (applicable to fiscal years commencing on or after 1 January 2020).

• Provisions are introduced allowing the tax authorities to impose a transfer pricing assessment based on the arm’s length price presumed through the data collected from comparable companies within the same industry if the taxpayer does not submit the requested information/data (applicable to fiscal years commencing on or after 1 January 2020).

• A corporation subject to Master File/Local File submission will be exempt from the submission requirement of the schedule of international transactions and reporting of the transfer pricing method applied (applicable to fiscal years commencing on or after 1 January 2020).

• “Real estate securities” is based on the definition of “real estate” under the Korea (Rep.) - United States Income Tax Treaty (1976) (the treaty).

• Any manufacturing know-how, technical information, etc., included in a patent not registered in Korea used for domestic manufacturing, production, etc., will be deemed “remuneration for other similar property, rights” under the treaty and classified as royalty income. Further, indemnity for infringement of patents registered overseas (but not registered in Korea) will be classified as other income (subject to a 16.5% tax rate, including the local income tax) (applicable to income paid on or after 1 January 2020).

• Results of a concluded Mutual Agreement Procedure (MAP) will prevail over conflicting court rulings (applicable to MAPs commenced on or after 1 January 2020).


UK

On 22 August 2019, Korea and the United Kingdom signed a trade continuity agreement in London. The agreement replicates the existing trade agreements between the European Union (EU) and Korea as far as possible and will not enter into force while the EU-Korea free trade agreement continues to apply to the UK.

KOREA


day of the basis period for the YA following the year in which such amount was ascertained were substantially the same.

The determination of tax-EBITDA is in accordance with the formula A+B+C, where:

• A is the amount of adjusted income of the person from its business sources;

• B is the total amount of qualifying deductions allowed in ascertaining the amount of the adjusted income under A. “Qualifying deductions” is defined as the special deductions given under specific rules or provisions (i.e. deduction equivalent to 200% of the amount incurred and deduction under rules made under section 154(1)(b) of ITA in ascertaining adjusted income); and

• C is the total amount of interest expense incurred in relation to the gross income of the person for any financial assistance in a controlled transaction from its business sources.

The restriction does not apply to:

• an individual;

• a licensed bank, licensed investment bank, licensed insurer or professional reinsurer as defined under the Financial Services Act 2013;

• a licensed Islamic bank, licensed takaful operator or professional retakaful operator as defined under the Islamic Financial Services Act 2013;

• a Labuan bank or Labuan investment bank licensed under Part VI of the Labuan Financial Services and Securities Act 2010;

• a Labuan Islamic bank or Labuan Islamic investment bank licensed under Part VI of the Labuan Islamic Financial Services and Securities Act 2010;

• a Labuan insurer or reinsurer, including a Labuan captive insurance business licensed under Part VII of the Labuan Financial Services and Securities Act 2010;

• a Labuan takaful operator or retakaful operator, including a Labuan captive takaful business licensed under Part VII of the Labuan Islamic Financial Services and Securities Act 2010;

• a development financial institution which is prescribed under the Development Financial Institutions Act 2002;

• a construction contractor as defined under the Income Tax (Construction Contracts) Regulations 2007;

• a property developer as defined under the Income Tax (Property Developer) Regulations 2007; or

• a person having been granted an exemption under paragraph 127(3)(b) or subsection 127(3A) of the ITA in respect of the adjusted income of the person.

On 5 July 2019, the Restriction on Deductibility of Interest Guidelines (the Guidelines) were issued by the Inland Revenue Board (IRB) following the issuance of the Income Tax (Restriction on Deductibility of Interest) Rules 2019 (the Rules). The objective of the Guidelines is to explain the restriction on the amount of interest deductible in relation to:

• business interest expenses; and

• other payments which are economically equivalent to interest for the basis periods beginning on or after 1 July 2019.

The key points are the following:

• They provide the scenarios where “control” under subsection 140A(5A) can be applied as a “controlled transaction”.

• “Interest expense”, “Payment economically equivalent to interest” and “Specific third party interest” are explained in more detail.

• The Guidelines clarify that the legislation and rules are applicable to:

>> a person within the charge to tax under the Income Tax Act, 1967 (ITA) (except where the non-application clause applies); and

>> a person having interest expense from financial assistance which is deducted in ascertaining the adjusted income before any restriction under section 140C from each of the business sources that are paid or payable to:

– its associated person outside Malaysia;

MALAYSIA

Malaysia

Restriction on deductibility of interest

On 28 June 2019, the Income Tax (Restriction on Deductibility of Interest) Rules 2019 (the rules) were gazetted. The prescribed rules were gazetted for the implementation of the earnings stripping rules (ESR) under Section 140C of the Income Tax Act 1967 (ITA). Section 140C was enacted into the ITA via the Finance Act 2018 after it had been first announced during the presentation of the Budget for 2018 to the parliament.

The key points are the following:

• the restriction came into operation on 1 July 2019;

• the deductibility restrictions applies:

>> to persons having been granted any financial assistance in a controlled transaction, with the total amount of any interest expense for all such financial assistance exceeding MYR 500,000 in the basis period for a year of assessment (YA); and

>> in respect of the basis period beginning on or after 1 July 2019 and subsequent basis periods;

• the total amount of interest expense for such financial assistance is deemed to accrue evenly over that period or periods for a YA;

• the maximum amount of interest referred to in section 140C of the ITA is an amount equal to 20% of the amount of tax–EBITDA of that person from each business source for the basis period for a YA; and

• the excess interest expense over the amount ascertained will be carried forward and deducted against the adjusted income of the company for the subsequent YAs until the whole amount of that excess has been fully utilized, provided that the shareholders of that company on the first day and the last

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– its associated person outside Malaysia which operates through a permanent establishment in Malaysia; or

– a third party outside Malaysia where the financial assistance is guaranteed by its holding company or any other enterprises under the same MNE Group.

With regard to the de minimis threshold: where a person has multiple business sources, the threshold of RM 500,000 should be accumulated from all business sources while the calculation of interest restriction should be made separately on each of the business sources.

The Guidelines provide sample calculations of Tax-EBITDA and interest restriction, and numerical examples of the maximum amount of interest expense allowable and the carry forward of interest expense.

For the non-application list, the Guidelines specifically add a special purpose vehicle established solely for the issuance of sukuk under subsection 60I(1) of the ITA in the list. However, the Guidelines did not include a person granted an exemption under Paragraph 127(3)(b) or Subsection 127(3A) of the ITA in the list.

The Guidelines further clarify that if construction contractors and property developers have other business income which is not specified under Income Tax (Construction Contracts) Regulation 2007 and Income Tax (Property Developers) Regulations 2007 [i.e. P.U. (A) 276/2007 and P.U. (A) 277/2007], that business income will be subjected to section 140C of the ITA and the Rules.

The restriction on deductibility of interest will only be applicable to a business source where the basis period of a person starts on or after 1 July 2019.

Wholly and partly irrecoverable debts and debt recoveries

On 24 September 2019, the Inland Revenue Board (IRB) issued Public Ruling No. 4/2019 (the PR) to explain the tax treatment of wholly and partly

irrecoverable debts as a deduction against gross income from a business, and recoveries of wholly and partly irrecoverable debts where a deduction has been made in ascertaining the adjusted income for an earlier year of assessment (YA).

• Definitions of the terms used are provided such as bad debts, gross income, adjusted income, person, basis period, relative, related company and business or commercial considerations.

• A trade debt could be written off as a bad debt and allowed as a deduction only when the debt has been included in the gross income of a person for the basis period for a YA prior to the relevant YA and the debt is a debt which is irrecoverable.

• Sound considerations should be taken by the person carrying the business before a trade debt can be written off.

• The amount of bad debt written off which was previously allowed as a deduction and subsequently recovered must be included in the gross income for the basis period the amount is received and subject to tax accordingly.

• Specific provision of doubtful debts is allowed as a tax deduction after ascertaining the likelihood of recovery of each debt.

• General provision for doubtful debts is not allowed as a deduction since the provision is made based on general information, even if there is a legal requirement or an accounting convention for the particular trade or industry to make such a provision.

• A decision to forgive or to waive payment of a trade debt (either wholly or in part) should not be regarded as a valid business or commercial consideration for tax purposes and no tax deduction should be allowed.

• Non-trade debts that are written off as bad debts or provisions made in respect of non-trade debts that are doubtful (either specific or general) are not tax deductible.

• Stringent examination should be made in relation to the debts due from related or connected persons.

MALAYSIA

• For the settlement of trade debts with assets, the net proceeds from the sale of the asset or the market value of the asset given in exchange is the value to be taken as settlement for the debt. Any balance of the debt still outstanding can be claimed as a deduction for bad debt.

• Several examples are provided to explain the above.

• The PR replaces PR No. 1/2002 dated 2 April 2002.

Service Tax

On 9 July 2019, the Service Tax (Amendment) Act 2019 (the Act) was enacted after it had been passed by the parliament on 9 April 2019. The Act will come into operation on a date to be set by the Minister by notification in the Gazette. The Act is in line with the draft bill presented to the parliament on 4 April 2019. Importantly, with effect from 1 January 2020, a 6% service tax will be imposed on digital services provided by foreign service providers.

SERVICE TAX ON DIGITAL SERVICES

On 20 August 2019, the Service Tax Guide on Digital Services (the guide) was issued by the Royal Malaysian Customs Department. The guide has been prepared to assist taxpayers in understanding the imposition of service tax on digital services provided by a foreign service provider (FSP).

• “Digital services” are services provided through an information technology (IT) medium with minimal or no human intervention from the service provider. The services include the supplies of the following items (the list is not exhaustive):

>> software, applications and video games (e.g. online licensing and mobile apps);

>> music, e-books and film (e.g. live streaming services and subscription-based media and/or memberships);

>> advertisements and online platforms (e.g. online advertising space on an intangible media platform);

>> search engines and social networks;

>> databases and hosting (e.g. website hosting and online data warehousing);

>> internet-based telecommunication;

>> online training (e.g. e-learning, webinars and online courses);

>> other (e.g. a subscription to online resources).

• The provision of the above is not considered a digital service if the service can be obtained without the use of IT and the transmission of the service is via e-mail which requires human intervention.

• An online platform that carries out transactions on behalf of an overseas service provider and issues invoices or any other document under its name will be regarded as an FSP.

• The provisions of digital services are applicable to both business-to-business (B2B) and business-to-consumer (B2C) transactions.

• Businesses that have been charged service tax on digital services provided by a foreign registered person (FRP) are exempted from service tax in Malaysia on these imported taxable services.

• “Consumers” include businesses and individuals in both designated and special areas.

• Relevant administrative details (registration, accounting, transitional rules, compliance and enforcement, and other related information) regarding the service tax are provided.

Service Tax amendments gazetted

On 30 August 2019, the Service Tax (Amendment) Regulations 2019 (the regulations) providing certain amendments to the Service Tax Regulations 2018 (the principal regulations) were gazetted. The regulations entered into force on 1 September 2019.

MALAYSIA


The main amendments to the regulations are set out below.

• A definition of “courier service” has been included.

• A formula has been provided to determine the value of taxable services where payment for taxable services is made to any machine or a device operated by coins, etc.

• The following additional particulars are required in the invoices issued by a registered person for the provision of any taxable service to a customer exempted from payment of service tax under section 34 of the Service Tax Act 2018:

• name and address of the customer;

• the customer’s service tax registration number; and

• the customer’s total amount of service tax that is exempted.

• Only one application for registration is required if a taxable person in any prescribed group of taxable persons and services provides two or more taxable services specified in different prescribed groups, and the value of each taxable service exceeds the total prescribed threshold in the First Schedule of the principal regulations.

• Where a company in a group of companies acquires any taxable services specified in items (a), (b), (c), (d), (f), (g), (h) or (i) of Group G (Professionals) in the First Schedule of the principal regulations from any company within the same group of companies outside Malaysia, such services will not be considered imported taxable services.

• Certain amendments have been made to the list of taxable services provided in the First Schedule of the principal regulations.

• New forms are provided replacing the previous Form SST-01, Form SST-02 and Form SST-02A of the principal regulations.

Withholding tax exemption withdrawn for income from MSC status companies

The Malaysia Digital Economy Corporation Sdn Bhd (MDEC) has announced on its website that the withholding tax exemption granted under the Income Tax (Exemption) (No. 13) Order 2005 (P.U.(A)102/2005) (the Order) on the following types of income received by a non-resident company from an approved multimedia super corridor (MSC) status company will be withdrawn:

• fee for technical advice or technical services;

• licensing fee in relation to technology development; and

• interest on loans for technology development.

The exemption will only be effective until 31 December 2019 and necessary steps will be taken to revoke the Order with effect from 1 January 2020.


CAMBODIA

On 3 September 2019, Cambodia and Malaysia signed an income tax treaty in Cambodia.

MALAYSIA MALAYSIA

PhilippinesJURISDICTION:

Proposed Passive Income and Financial Intermediary Tax Act

On 27 August 2019, the House Committee On Ways and Means approved House Bill No. 304 (the bill), also known as the proposed Passive Income and Financial Intermediary Tax Act (PIFITA). The bill is the fourth package of the government’s comprehensive tax reform program (CTRP). The bill will be submitted to the House plenary for approval. Key aspects are the following:

• Revamped withholding tax rates for certain passive income on domestic and foreign taxpayers, as follows:

>> interest: 15% on gross interest payments or any other monetary benefit realized from any debt instrument;

>> capital gains on unlisted securities: 15% on the net capital gains realized during the taxable year from the disposal of unlisted shares/debts instruments;

>> capital gains on listed securities: 0.6% (to be reduced by 0.1% every year until 2024) on the gross selling price from the disposal of listed shares/debts securities; and

>> tax on initial public offerings will be removed.

• Cash/property dividends received by a non-resident foreign corporation are proposed to be subject to a final withholding tax of 15% (or lower treaty rates).

• Improperly accumulated earnings tax will be changed to 15% on improperly accumulated taxable income (exceptions available for certain institutions).

• Expenses incurred relating to exempt income/income not subject to tax will be disallowed.


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FATCA

To streamline the FATCA Reporting pro-cess, the Inland Revenue Authority of Singapore (“IRAS”) has released amend-ments to the FATCA reporting requirements on 10 July 2019. The current practice of submitting paper based NIL FATCA return and reporting packages via the International Data Exchange System (“IDES”) will no longer be possible from 1 April 2020. Reporting Singaporean Financial Institutions (“SGFIs”) will be required to file all FATCA returns electronically via IRAS’ myTaxPortal using the ‘Submit CRS or FATCA return’ e-service. This initiative aligns FATCA reporting with the current Common Reporting Standard (“CRS”) and as a result should lead to efficiencies for both the IRAS and Reporting SGFIs.

The above changes which are effective from 1 April 2020 applies to all submissions of new, NIL, amended or void FATCA returns, including returns relating to Reporting Years 2018 and earlier. Further information on the FATCA reporting requirements via the ‘Submit CRS or FATCA Return’ e-Service are expected to be released by end-September 2019.

Variable capital company (VCC)

The Second Minister for Finance, Ms Indranee Rajah, today moved the Variable Capital Companies (Miscellaneous Amendments) Bill 2019 (“the Bill”) for First Reading in Parliament. The Bill amends the (a) Variable Capital Companies Act 2018 (Act 44 of 2018) (“VCC Act”), (b) Income Tax Act (Cap. 134) (“ITA”), (c) Goods and Services Tax Act (Cap. 117A) (“GSTA”); and (d) Stamp Duties Act (Cap. 312) (“SDA”).

The VCC Act provides for the incorporation and operation of a new corporate structure, the Variable Capital Company (“VCC”), to cater to the needs of investment funds. The introduction of the VCC structure will encourage fund managers in Singapore to

• Deductibility of interest expense will be restricted to 50% of the interest income earned by taxpayers which is subject to withholding tax.

• Banks and non-banking financial intermediaries performing quasi-banking functions will be subject to gross receipts tax (GRT) of 5% on the type of income listed in the PIFITA. Further, GRT of 2% will be imposed on entities carrying on life insurance business.

• Documentary stamp tax (DST) will be abolished for certain instruments. The DST rates will be changed for certain documents (such as property insurance and annuity policies). DST on the sale of shares in domestic corporations will be removed.

On 4 September 2019, the House of Representatives approved House Bill No. 304 (the bill), also known as the proposed Passive Income and Financial Intermediary Tax Act (PIFITA), on second reading after it was approved by the House Committee On Ways and Means on 27 August 2019. The bill will have to undergo a third reading before it is transmitted to the Senate for approval.

Tax Reform

In a press release dated 18 August 2019, the Department of Finance announced that the House Committee on Ways and Means approved House Bill No. 4157 (the bill), also known as the proposed Corporate Income Tax and Incentive Rationalization Act (CITIRA) bill. The bill represents the second package of the government’s comprehensive tax reform program. The bill has been submitted for approval to the House of Representatives.

• the current corporate income tax rate (for resident and non-resident corporations) of 30% will be reduced by 2% every 2 years starting in the year 2021 until it reaches the rate of 20% in the year 2029;

• preferential tax rates of certain taxpayers will be removed and the prevailing corporate tax rate will be applicable;

• the fiscal incentives regime provided will be revised and amended accordingly. Incentives

for approved activities will be given for a specific period which is renewable; and

• existing taxpayers who are currently enjoying incentives will be given a sunset provision. A new application for incentives should be made after the expiry of the sunset provision if the taxpayers meet the qualification criteria.


LUXEMBOURG

On 1 January 2020, the Luxembourg - Philippines Social Security Agreement (2015) and its administrative arrangement, signed on 19 January 2018, will enter into force. The agreement and arrangement generally apply from 1 January 2020. The entry into force date was announced by way of publication in the Journal Officiel du Grand-Duché de Luxembourg No. A639 and A640 of 27 September 2019.

PHILIPPINES


domicile their investment funds in Singapore and help strengthen Singapore’s position as a full-ser-vice international fund management centre. It is expected that the VCC framework will be opera-tional in 4Q 2019.

The proposed tax treatment, formulated in consul-tation with the industry, recognises the unique characteristics of VCCs, which combine the advan-tage of a single legal entity at the umbrella VCC fund level, with limited liability and segregation of assets and liabilities at the sub-fund level.

Corporate Income Tax (“CIT”). To ease compliance burdens, an umbrella VCC only needs to file a single CIT return with the Inland Revenue Authority of Singapore, regardless of the number of sub-funds that the umbrella VCC may have. Tax incentives under sections 13R and 13X of the ITA will be extended to VCCs. In the case of an umbrella VCC, these tax incentives will be granted at the umbrella level. Deductions and allowances for umbrella VCCs will be applied at the sub-fund level for determination of the sub-fund’s chargeable or exempt income. Where applicable, an umbrella VCC will enjoy start-up or partial tax exemption which will be applied once at the umbrella level, regardless of the number of sub-funds the umbrella VCC may have.

Goods and Services Tax (“GST”). GST will apply at the sub-fund level, as each sub-fund makes inde-pendent sale and purchase decisions based on its respective investment mandate.

Stamp Duty (“SD”). SD treatment will be applied at the sub-fund level. This is because each sub-fund can, through its umbrella VCC, enter into transac-tions relating to immovable property and shares.

Public consultation on GST on digital payment tokens

In addition to the feedback requested by the Ministry of Finance on the legislative amendments for Goods and Services Tax (GST) treatment of digital payment tokens, the Inland Revenue Authority of Singapore (IRAS) is conducting a public consultation on the draft GST guide on digital payment tokens (the draft guide) issued on 5 July 2019.

The draft guide sets out the GST treatment for transactions involving virtual currencies or crypto-currencies that function or are intended to function as a medium of exchange (referred to as digital payment tokens) which will take effect from 1 January 2020.

IRAS is seeking feedback on this change of GST treatment from businesses dealing in digital pay-ment tokens, including businesses:

• buying and selling digital payment tokens;

• using digital payment tokens as payment and/or consideration;

• charging a fee or commission to facilitate the transfer, purchase or sale of digital payment tokens; or

• issuing digital payment tokens, such as through an initial coin offering (ICO).

The draft guide also provides a table comparing the GST treatment of digital payment token trans-actions before 1 January 2020 and that applicable from 1 January 2020.

The objective of the change is that digital payment tokens, such as Bitcoin, will no longer attract goods and services tax starting January 1, 2020. The consultation document outlines proposed changes to the draft GST (Amendment) Bill 2019 that would allow a GST exemption for the exchange of digital payment tokens for other digital payment tokens and would eliminate GST when digital payment tokens are used to pay for goods and services. Under current rules, the sale and transfer of digital payment tokens are treated as supplies of services subject to GST until January 1, 2020.

The consultation draft sets out the characteristics of a digital payment token, which must meet five requirements. It must be expressed as a unit; must be fungible; must lack currency denomination and must not be linked to any currency by its issuer; must be able to be electronically transferred, stored, or traded; and must be intended as a publicly acceptable medium of exchange without any substantial restrictions on its use as consider-ation. Businesses trading in digital payment tokens will no longer be required to register for GST purposes, even if their annual turnover exceeds $1 million.

SINGAPORE

The proposed changes would bring Singapore’s treatment of digital payment tokens on par with Australia, Japan and the EU.

Responses to public consultation on draft Income Tax (Amendment) Bill 2019

In a press release of 15 August 2019, the Ministry of Finance (MOF) issued a summary of responses to the public consultation on the draft Income Tax (Amendment) Bill 2019 (the draft Bill). The MOF invited the public to provide feedback on the draft Bill from 19 June to 10 July 2019. The draft Bill proposes legislative amendments to effect tax changes announced in Budget 2019 and changes arising from the periodic review of the income tax system, including the following key changes:

• the tax incentive schemes for funds managed by Singapore-based fund managers will be extended and refined;

• a personal income tax rebate of 50% of income tax payable capped at SGD 200 will be granted to all tax resident individuals for the year of assessment (YA) 2019;

• the not ordinarily resident (NOR) scheme will lapse after YA 2020, which means that the last NOR status will be granted in YA 2020 and will expire in YA 2024; and

• a prescribed deemed expense ratio, set at 25% of gross commission income, for tax resident individuals who are self-employed commission agents (i.e. general commission agents, insur-ance agents, real estate agents and remisiers) earning gross annual commission income of up to SGD 50,000 in respect of which there are deductible outgoings or expenses, will be introduced.

The key feedback received pertained to the follow-ing tax changes:

• increasing the prescribed deemed expense ratio, and increasing or removing the revenue threshold, for self-employed commission agents;

• clarifying the revocation of tax incentive awards when the conditions of a tax incentive are not met by an incentive recipient;

• clarifying that the amendment of the definition of qualifying debt securities under Section 13(16) of the Income Tax Act will allow alterna-tive set of qualifying conditions for insurance-linked securities; and

• clarifying the amendment relating to the lapsing of the Approved Unit Trust scheme.

The MOF received 46 suggestions, 28 of which were accepted and led to revisions being made to the draft Bill. The proposed legislative changes would be incorporated into the Income Tax (Amendment) Bill 2019 to be presented to Parliament in the last quarter of 2019.

MOF invites feedback on proposed changes to GST Act

In a press release issued on 5 July 2019, the Ministry of Finance (MOF) invited interested parties to provide feedback on the draft Goods and Services Tax (Amendment) Bill 2019 until 26 July 2019. The proposed amendments are as follows:

There are two proposed amendments relating to the planned introduction of GST on imported services from 1 January 2020 as announced by the Minister of Finance in Budget 2018:

• clarifying or improving GST administration on imported services, such as by clarifying the scope of the reverse charge mechanism, and allowing GST group registration for overseas business under the overseas vendor registra-tion (OVR) regime; and

• introducing an offence for misrepresentation of information in order for the Inland Revenue Authority of Singapore (IRAS) to enforce GST on imported services effectively if a customer were to provide false information and that information may be used by an overseas supplier to determine whether GST is chargeable.

SINGAPORE


Currently, the sale and transfer of digital payment tokens are regarded as supplies of services and are subject to GST. The proposed amendment seeks to:

• exempt from GST the exchange of digital payment tokens for fiat currency or other digital payment tokens as financial services; and

• not subject to GST the use of digital payment tokens as a means of payment for goods and services.

The proposed amendment more accurately reflects the characteristics of digital payment tokens, and is an update of GST rules to ensure that they remain relevant in the digital economy. To align with the principle of open justice and in keeping with international trends, tax proceedings in the High Court and the Court of Appeal (the Courts) will no longer be heard in private by default. The redaction of taxpayers’ names in published decisions of such judicial proceedings will also be discontinued.

The proposed definitions are consistent with those in the Income Tax Act for the purposes of appeals heard before the Income Tax Board of Review. These new definitions are to safeguard the interests of taxpayers lodging appeals to the GST Board of Review by ensuring that the representatives han-dling their appeals meet certain professional qualifications.

Proposed tax framework for VCCs

In a press release of 5 August 2019, the Ministry of Finance (MOF) issued a summary of responses to public consultations on the proposed bill introduc-ing a tax framework for variable capital companies (VCCs). The Variable Capital Companies Act 2018 (VCC Act) was passed by Parliament on 1 October 2018. The VCC Act provides for the incorporation and operation of a new corporate structure for investment funds. In February and March 2019, for the purpose of introducing the tax framework for VCC, the MOF invited the public to provide feed-back on the proposed changes to the Goods and Services Tax Act (GSTA), Income Tax Act (ITA) and Stamp Duties Act (SDA). The proposed legislative changes will be incorporated into the Variable

Capital Companies (Miscellaneous Amendments) Bill 2019 (the Bill). The MOF received 39 sugges-tions, 13 of which were accepted and led to revisions being made to the draft bill.

The proposed tax treatment was formulated in consultation with the industry and recognizes the unique characteristics of a VCC, which combines the advantages of a single legal entity at the umbrella VCC fund level with the segregation of assets and liabilities at the sub-fund level. Salient aspects of the proposed tax treatment are as follows:

• Corporate income tax:

>> An umbrella VCC only needs to file a single corporate income tax return, regardless of the number of its sub-funds.

>> Selected tax incentives under the ITA will be extended to the VCC at the umbrella level.

>> Where applicable, a VCC will enjoy a start-up or partial tax exemption once at the umbrella level for its first 3 years of assess-ment (determined with reference to the date of incorporation of the VCC), regard-less of the number of sub-funds.

>> Deductions and allowances for the umbrella VCC will be applied at the sub-fund level for the determination of the sub-fund’s charge-able or exempt income.

• Goods and services tax: GST will be applied at the sub-fund level because each sub-fund makes independent sale and purchase deci-sions based on its respective investment mandate. Therefore, if liable, each sub-fund is required to separately register, charge, account for and file GST returns.

• Stamp duty: Stamp duty treatment will be applied at the sub-fund level in view of the segregation of assets and liabilities at the sub-fund level.

The bill is expected to come into effect in the last quarter of 2019.

SINGAPORE


ARMENIA

On 8 July 2019, the Armenia - Singapore Income Tax Treaty was signed in Singapore.

LUXEMBOURG

The amendments made by the MLI to Singapore’s tax treaty with Luxembourg took effect on 1 August 2019.

THE NETHERLANDS

The amendments made by the MLI to Singapore’s tax treaty with the Netherlands took effect on 1 July 2019.

SWITZERLAND

According to a press release of 2 August 2019, published by the Swiss Tax Authorities, the Singapore - Switzerland Competent Authority Agreement on Automatic Exchange of Information entered into force on 1 August 2019. The arrange-ment specifies the details of what information will be exchanged and when, as set out in the OECD Automatic Exchange of Information Agreement.

ITALY

The Italian Tax Authorities (ITA) published Ruling Answer No. 302 of 26 August 2019 (the ruling) providing clarifications on the tax treatment of profit distributions made by resident real estate funds to real estate investment trusts (REITs) established in Singapore and operating under the supervision of the local Monetary Authority. Under domestic law, profit distributions to foreign under-takings for collective investment (Organismo di investimento collettivo del risparmio, OICR) are exempt from withholding taxes, provided that the OICR is resident in a jurisdiction included in the Italian “white list”. With regard to foreign REITs, the exemption is generally not applicable. In such a case, the ITA makes reference to the guidelines of the European Public Real Estate Association (EPRA), according to which the essential features of a REIT are inherently different from those of an OICR under several aspects (for example, lack of a pre-determined investment policy; corporate

structure; and “perpetual” business activity which is not limited in time). However, by taking into account the special requirements prescribed by Singapore legislation, the ruling establishes that Singapore REITs are similar in nature to a domestic OICR. Therefore, no withholding tax applies to profit distributions made to a Singapore REIT.

TURKMENISTAN

Singapore signed a double tax treaty with Turkmenistan on 28 August 2019. It is the first double tax treaty between the two countries.

UKRAINE

On 16 August 2019, Singapore and Ukraine signed an amending protocol to update the Singapore - Ukraine Income Tax Treaty, in Kyiv.

SINGAPORE


Taiwan

Futures transaction tax in case of merger

On 7 August 2019, the Ministry of Finance of Taiwan issued a press release to clarify that in the case of a merger, the surviving company (domestic or foreign) or a new company established after a merger is not liable for futures transactions tax on the futures commodities held by the merged company prior to the merger because the futures commodities are not actually traded during a merger. This is consistent with the tax treatment of transferred securities, which are also not subject to securities transaction tax in the case of a merger.

Abolishment of Stamp Duty Act

On 12 September 2019, the Executive Yuan passed a proposal for the abolishment of the Stamp Duty Act as part of government efforts to reform the tax system and pre-vent double taxation. The proposal has been forwarded to the Legislature for deliberation and completion of the legisla-tive procedure for abolishment.

Currently four types of documents are subject to stamp duty, i.e. specified mone-tary receipts, contracts to perform a specific job or task, contracts for sale of moveable property, and contracts for sale, exchange or subdivision of real property. Since commercial deals are usually com-prised of different elements, e.g. a contract for sale of moveable property is also a monetary receipt, disputes may arise when the tax authorities and the taxpayers have different views on the tax liability. Cumbersome procedures for checking the tax liability have burdened taxpayers and brought about high auditing and collection costs for the tax administration. Levying the stamp duty also leads to double taxation in many cases, e.g. VAT may also apply. Elimination of stamp duty will benefit not only businesses and economic activities but the general public as well.

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The abolishment of stamp duty is projected to result in revenue loss of about TWD 12 billion per year for local governments, but the central govern-ment will allocate special funds to cover all revenue shortfalls.

Law on repatriation of offshore funds

Following the legislation of the “Statute for Management and Taxation of Offshore Fund Repatriation”, the Cabinet has announced that the Statute is effective from 15 August 2019, and implemented from that date. Enterprises and individuals who file an application to the competent authority between 15 August 2019 and 14 August 2020 can apply a preferential tax rate of 8% to repatriated funds that are remitted into foreign exchange special bank accounts within the desig-nated period. For those who file an application between 15 August 2020 and 14 August 2021, the applicable preferential tax rate is 10%.

To facilitate taxpayers in transferring offshore funds to domestic bank accounts in a legitimate way, three procedural rules have been published:

• “Rules for Management and Taxation of Offshore Fund Repatriation” under the supervi-sion of the Ministry of Finance;

• “Rules for Financial Investment Management of Offshore Fund Repatriation” under the supervi-sion of the Financial Supervisory Commission; and

• “Rules for Investment Industries of Offshore Fund Repatriation” under the supervision of the Ministry of Economic Affairs.

The following summarise the application, manage-ment, and use of offshore fund repatriation under the three procedural rules:

• applications by enterprises and individuals are filed with the tax authorities for a review of their qualification and taxation of income;

• the source of funds will be investigated by authorized banks for anti-money laundering and financing of terrorism;

• once approvals are granted, enterprises and individuals must open foreign exchange special bank accounts for transferring funds from foreign accounts to domestic accounts;

• the authorized banks will withhold 8% or 10% from the special bank accounts owned by the taxpayers and pay the withholding tax to the tax authorities;

• at least 70% of the funds after tax must be invested in certain industries, venture capital funds or private equity funds with advance approval from the Ministry of Economic Affairs;

• if the investment is completed within 2 years (extendable for another 2 years) and the holding period is more than 4 years, tax author-ities will grant a tax refund of 4% or 5% to the special bank accounts owned by taxpayers based on a certification issued by the Ministry of Economic Affairs;

• no more than 25% of the funds after tax may be used for portfolio financial investment in accordance with the rules of the Financial Supervisory Commission;

• no more than 5% of the funds after tax are free for any use except for the purchase of real property, real estate investment trusts and real estate asset trusts;

• if any investment or the use of funds do not comply with the rules or the funds are not deposited in special bank accounts, they will be subject to the original tax rate of 20%, i.e. the authorized banks will withhold additional tax of 10% or 12% from the special bank accounts; and

• any portion of funds not being used and any funds transferred after investment must be kept in the special bank accounts for 5 years. From the 6th year, one third of the amounts may be withdrawn.

All offshore funds deposited into the special back accounts will become fully available for use in the 8th year after repatriation, thereby meeting the statute of limitation of 7 years under the tax law.

TAIWAN


ThailandJURISDICTION:

VAT on foreign e-commerce operators

It has been reported that the previously drafted bill on value added tax (VAT) on foreign e-commerce operators will be introduced in 2020. The tax bill is expected to be presented to the parliament for approval later this year.

VAT rate

The Finance Minister announced that the Cabinet has agreed to retain the current value added tax (VAT) rate at 7% for another year until September 2020 due to the slowing down of the country’s economic growth.

Tax exemption on interest income

On 26 August 2019, the Director-General of Revenue issued Notification Nos. 351 and 352 providing additional personal income tax compliance requirements relating to interest income derived from bank depos-its. Notification No. 351 provides that the following conditions must be met if a taxpayer wishes to qualify for the tax exemption granted under Royal Decree No. 664 relating to interest income received on tax-free time deposits:

• the taxpayer can only have one tax-free time deposit account;

• the taxpayer must notify the bank of, and present, his/her citizen ID number or taxpayer ID number for verification purposes.

A withholding tax of 15% will be withheld by the bank and remitted to the Revenue department if:

• the taxpayer does not comply with the above conditions;

• the taxpayer does not comply with the rules for tax-free time deposits; or

• the taxpayer withdraws the tax-free time deposit before the due date.

Notification No. 352 provides that the following conditions must be met by a taxpayer aged 55 or above who wishes to qualify for the tax exemption granted under clause 2(69) of Ministerial Regulation No. 126 relating to interest income received from fixed deposits up to THB 30,000 in a tax year. If the taxpayer does not satisfy the conditions, no exemp-tion is granted and a withholding tax of 15% will be withheld by the bank and remitted to the Revenue department. The conditions are:

• the taxpayer must keep the fixed deposit for more than 1 year;

• the taxpayer must notify the bank of, and present, his/her citizen ID number or taxpayer ID number for verification purposes; and

• the taxpayer must complete the information and certification form provided in Notification No. 352 and submit it to the bank for inspec-tion purposes.

New relocation package incentive

According to a press release of 9 September 2019 issued by the Board of Investment (BOI), the Cabinet recently approved a proposed relocation package incentive referred to as “Thailand Plus” with a view to attracting more foreign investment into the country, particularly expediting invest-ments from companies seeking to relocate as a result of the ongoing trade war. The features of the proposed Thailand Plus package are set out below.

• Companies with investment projects amounting to at least THB 1 billion in the identified activi-ties will be entitled to a reduction of 50% of the corporate tax rate for a period of 5 years provided that the application is submitted to BOI by the end of year 2020 and the actual investment is made by December 2021.

• Employers will be entitled to a special deduc-tion for training expenses relating to advanced technology endorsed by the Ministry of Higher Education, Science, Research and Innovation. Expenses incurred in hiring new highly skilled manpower in the fields of science and

technology will also be eligible for special deduction. Moreover, the BOI will also upgrade its incentives scheme with a view to encourag-ing the industry to be actively engaged in science, technology, engineering and mathe-matics (STEM) training.

• Investments in automation systems will be eligible for double deduction.

• An investment steering committee will be set up to coordinate the consideration and facilita-tion of the investment projects, especially those involving large investments.

In addition, the government aims to reduce con-straints faced by foreign investors, especially in the targeted industries. Further facilitation measures will be taken such as the extension of “smart visa” to enhance the pool of foreign talents in Thailand.

THAILAND


VietnamJURISDICTION:

Taxation of foreign workers

On 19 July 2019, the Department of Taxation of Hanoi City issued Official Letter No. 56770/CT-TTHT to clarify the personal income tax (PIT) policy applicable to foreign workers, as follows:

• According to article 6, clause 1, point a of Circular No. 111/2013/TT-BTC, where a foreign worker resides in Vietnam for at least 183 days in any period of 12 consecutive months, he will be considered a resident in Vietnam. In this regard, the foreign worker’s first tax year is not determined according to the calendar year but is calculated based on the 12 consecutive months from the first day of his arrival in Vietnam. From the second tax year onwards, the tax years will be calculated on a calendar-year basis.

• The deadline for submitting a PIT return for the first tax year is the 90th day from the end of the period of 12 consecutive months. The PIT payable will be calculated based on the progressive tax rates.

• If the foreign worker still resides in Vietnam for the full 183 days in the calendar year for the second tax year, the progressive tax rates will continue to be applicable. The PIT payable will be determined according to article 26, clause 2, point e.2 of Circular No. 111/2013/TT-BTC.

Business trip allowances paid to experts

On 9 August 2019, the Department of Taxation of Ha Noi City issued Official Letter No. 63381/CT-TTHT (the letter) clarifying the withholding of personal income tax on business trip allowances paid to domestic and foreign experts.

The letter states that where a company pays business trip allowances to domestic experts who do not have a written employment contract with the company, the company is required to withhold personal income tax (PIT) at 10% from the business trip allowances paid in accordance with article 25, clause 1, point i of Circular No. 111/2013/TT-BTC (the circular).

If allowances are paid to foreign experts who do not reside in Vietnam, the company is required to withhold 20% PIT from the payments made in accordance with article 18, clause 1 of the circular.

Foreign experts who carry out official development assistance (ODA) projects will be exempt from PIT, provided that the Decision No. 119/2009/QD-TTg regulations are met.

Transfer of shares

On 6 August 2019, the General Department of Taxation issued Official Letter No. 3082/TCT-DNNCN (the letter) clarifying the personal income tax (PIT) policy with respect to the transfer of shares by an individual.

The letter states that income from the transfer of shares by an individual must be declared and the resulting PIT paid in accordance with the regulations on securities transfers.

With respect to the transfer of listed shares, the share transferor is required to pay PIT at a rate of 0.1% based on the price of the share transfer in accordance with article 16 of Circular No. 92/2015/TT-BTC (the circular).

With respect to the transfer of unlisted shares, the applicable price of the share transfer for the purpose of PIT calculation in accordance with article 16 of the circular is:

• the price shown in the share transfer contract;

• the actual price of the share transfer; or

• the price shown in the accounting records.

Tax treatment of liquidation of assets by foreign representative office

On 13 August 2019, the Department of Taxation of Ha Noi City issued Official Letter No. 64070/CT-TTHT (the letter) providing clarification on the tax treatment of the liquidation of assets by a foreign representative office. The letter states that, according to clause 3, article 5 of Circular No. 219/2013/TT-BTC and clause 1, article 2 of Circular No. 78/2014/TT-BTC, non-business organizations will be exempt from value added tax (VAT) and enterprise income tax (EIT) on the liquidation of assets.

Accordingly, a foreign representative office without any business activities in Vietnam will be exempt from declaring and paying VAT and EIT on the liquidation of assets.

As such, the foreign representative office will not be required to buy separate invoices issued by the tax authorities to be provided to the acquirer of the assets under clause 1, article 13 of Circular No. 39/2014/TT-BTC.

Guidance on provisions

On 8 August 2019, the Ministry of Finance issued Circular No. 48/2019 (the circular) providing guidance on several types of provisions. The circular will enter into force on 10 October 2019 and apply from fiscal year 2019 onwards. It replaces Circular 228/2009/TT-BTC and its amendments.

• The guidance on provisions is the basis for determining deductible expenses when determining income subject to corporate income tax according to the regulations. The provisions for purposes of preparing financial statements are made in accordance with accounting regulations.

• The circular applies to enterprises that are established, conducting production and business activities, under the provisions of Vietnamese law (including foreign credit institutions and bank branches established in Vietnam, with the exception of provisions for credit risks).

VIETNAM


• The subject of provisioning and the formula for the level of provisioning for the following items:

>> provision for devaluation of inventories (including raw materials, materials, tools, devices, goods and goods purchased on transit, goods sent for sale, goods of tax-guarantee warehouses and finished products);

>> provision for loss of investments (including listed and traded on domestic stock markets and unlisted domestic securities);

>> provisions for bad debts (amounts receivable including the debts lent by the enterprises and the bonds owned by the enterprises which is not registered for trading on the securities market yet). Separate provisioning levels are provided for enterprises engaged in telecommunications services and retailing; and

>> provision for warranty of products, goods, services and construction works.

• Enterprises are not allowed to make provisions for foreign investments. Provisions carried forward will be reversed and recorded as a decrease in expenses at the time of preparing the financial statements 2019.

• Other specialized industries, such as insurance, securities, capital investment, debt trading or retail are also covered in the circular, but may also be subject to separate guidance issued by the Ministry of Finance.

Tax incentives for investments in expansion of projects

On 3 July 2019, the Department of Taxation of Ha Noi City issued Official Letter No. 52637/CT-TTHT (the letter) providing clarification on the enterprise income tax (EIT) incentives granted for investments made in expansion of projects.

The letter states that where a company increases its capital to invest in the development and expansion of the production scale of an investment project in

an industrial zone (the area where tax incentives are made available), the company may choose to:

• enjoy the incentives in accordance with the initial project; or

• apply for a tax exemption or tax reduction for a period applicable to new investment projects in the same industrial zone, provided that

• a project meets any of the three criteria on expansion investment as regulated under clause 4, article 10 of Circular No. 96/2015/TT-BTC.

If the company opts for a tax exemption or tax reduction, the additional income from the expansion investment will be exempt from tax for 2 years, after which a 50% reduction of tax payable for 4 subsequent years will apply pursuant to article 6 of Circular No. 151/2014/TT-BTC.

The duration of the tax exemption or reduction will be calculated from the year in which the expansion project is completed and its operation commences with taxable income being generated. If no taxable income is earned within the first 3 years from the first year in which the expansion project generates revenue, the duration of the exemption or reduction will be calculated from the fourth year in which revenue is generated by the project pursuant to clause 4, article 10 of Circular No. 96/2015/TT-BTC.

Clarification on VAT treatment for certain services provided for foreign enterprises

On 25 July 2019, the Department of Taxation of Hanoi issued official letter 58604/CT-TTHT clarifying that where a company provides package forwarding services for a foreign enterprise from an overseas port to Vietnam and vice versa, the following services shall be entitled to a VAT rate of 0% if the conditions regulated in Point d, Clause 2 Article 9 of Circular No. 219/2013/TT-BTC (the Circular) are met:

• forwarding;

• checking and counting;

• handling and lifting; and

• loading and unloading performed at port areas.

Further, related expenses such as expenses of documents, surrendered bill of lading, sealing charges and demurrage and/or detention charges are exempted from VAT declaration and payment according to Point d, Clause 7 Article 5 of the Circular if the expenses are collected and/or paid on behalf of the foreign party.

However, if the provision of such related services is the source of revenue of the company, they shall be entitled to apply VAT at a rate of 0% if the conditions regulated in Article 9 of Circular No. 219/2013/TT-BTC are met. Otherwise, the provision of such related services shall be subject to VAT at a rate of 10%.

Social and health insurance contributions increased

According to Decree No.38/2019/ND-CP issued on 9 May 2019, the basic monthly salary is increased to VND 1.49 million effective 1 July 2019. As such, the Ho Chi Minh city social insurance agency issued Announcement No. 1222/TB-BNXH dated 5 June 2019 which provides that the payment of social insurance (SI) contributions and health insurance (HI) premiums based on the basic monthly salary is increased accordingly effective 1 July 2019. The details of the adjustments are as follows:

• in respect of cadres, public officials, public employees and employees whose salary scales are determined by the state, their monthly salary level on which SI contributions are based is the total wage coefficient multiplied by the new basic wage level of VND 1.49 million per month;

• the maximum salary on which compulsory SI contributions are based is VND 29.8 million (i.e. 20 times higher than the basic salary level);

• the maximum monthly income on which optional SI contributions are based is VND 29.8 million (i.e. 20 times higher than the basic salary level);

• the salary on which HI premiums are based of health insurance participants whose HI

premiums are paid by the State budget is VND 1.49 million per month; and

• the salary on which HI premiums are based of health insurance participants whose part of HI premiums is paid by the State budget (students, near-poor households) and household HI participants is VND 1.49 million per month.

Withholding policy applicable to online advertising services

On 21 June 2019, the General Department of Taxation issued Official Letter No. 2501/TCT-CS (the letter) providing clarification on the withholding tax policy applicable to online advertising services provided by foreign entities. The letter clarifies that, pursuant to Circular No. 103/2014/TT-BTC (the circular), where foreign entities (such as Facebook, Google and YouTube) provide advertising services to a local company, the company is required to withhold and pay withholding tax on behalf of the foreign entities even though the foreign entities do not have any head office situated in Vietnam.

In addition, the foreign entities are also liable to value added tax (VAT) and enterprise income tax in Vietnam. The tax calculation will be determined in accordance with articles 12 and 13 of the circular.

The company may use the documents showing the payment of VAT on behalf of the foreign parties to declare the input VAT deduction as provided under clause 1 of article 15 of Circular No. 219/2013/TT-BTC.


CROATIA

On 23 May 2019, the Croatia - Vietnam Income Tax Treaty entered into force. The treaty generally applies from 1 January 2020.

VIETNAM VIETNAM


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Mayer Brown is a distinctively global law firm, uniquely positioned to advise the world’s leading companies and financial institutions on their most complex deals and disputes. With extensive reach across four continents, we are the only integrated law firm in the world with approximately 200 lawyers in each of the world’s three largest financial centers—New York, London and Hong Kong—the backbone of the global economy. We have deep experience in high-stakes litigation and complex transactions across industry sectors, including our signature strength, the global financial services industry. Our diverse teams of lawyers are recognized by our clients as strategic partners with deep commercial instincts and a commitment to creatively anticipating their needs and delivering excellence in everything we do. Our “one-firm” culture—seamless and integrated across all practices and regions—ensures that our clients receive the best of our knowledge and experience.

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