Asia Tax Bulletin - Mayer Brown · of our firm’s Asia Tax Bulletin. Dear Reader, The pandemic has had its effect on business and this edition of the Bulletin is ... Stamp duty rate

Winter 2020/21

Asia Tax Bulletin

MAYER BROWN | 3

In This EditionWe are pleased to present the Winter 2020/21 edition of our firm’s Asia Tax Bulletin.

Dear Reader,

The pandemic has had its effect on business and this edition of the Bulletin is predominantly about tax incentives China, Indonesia, Japan, Malaysia, the Philippines and Vietnam have all introduced to stimulate their economies. We have also seen countries take measures to ensure related-party transactions comply with the arm’s-length principle, either by regulating documentation requirements (Hong Kong, Philippines) or by adjusting the range within which a transaction is considered to be at arm’s length (Vietnam). Singapore has announced tougher measures against GST and income tax avoidance by introducing a 50% surcharge on transfer-pricing adjustments.

Indonesia’s tax reform (the Omnibus Law) took effect in November and introduced tax exemptions for qualifying offshore salary income and certain investment income provided it is reinvested in the country. Finally, Vietnam’s tax department issued a circular prescribing interest to be imputed on certain interest-free loans.

Happy new year and please stay safe.

Pieter de Ridder

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

2 | Asia Tax Bulletin

EUROPE

CHARLOTTE

RIO DE JANEIRO*VITÓRIA*

SÃO PAULO*

BRASÍLIA*

BRUSSELS

ORKGTON DC

PARISLONDON

FRANKFURT

DUBAI

SHANGHAI

HO CHI MINH CITY

HANOI

BEIJING

SINGAPORE

DÜSSELDORF

*TAUIL & CHEQUER OFFICE

TOKYO

HONG KONG

Contents

6 Value-added tax treatment on transfer of shares for no consideration

6 Hainan free trade haven

7 Deed tax

7 COVID-19: exported goods returned due to force majeure

8 Tax incentives for software and integrated circuits businesses

9 Deduction of advertisement and promotion expenses

9 Internal tax developments

10 Ramping up transfer pricing

11 Stamp duty on non-residential property transactions

11 International tax developments

China

Hong Kong

12 Important victory against retroactive tax legislation

13 Tolerance range for arm’s length price variance

13 Equalisation levy

13 Lower threshold for mandatory electronic invoicing

India

Japan

Indonesia

14 Tax reform

15 Tax holiday incentive for pioneer industries

16 Tax incentive for R&D activities

17 Tax incentives for import of COVID-19 vaccine

17 Stamp duty rate increase

18 Vat collectors for foreign digital goods and services


19 2021 tax incentives


Korea


Malaysia

22 Budget 2021

24 Tax incentives for angel investors

24 Reinvestment allowances

25 Tax treatment of trusts

25 Tax changes and incentives

26 Changes to the tax appeals process

27 Renovation and refurbishment expenses

28 Related party and transfer pricing documentation requirements

29 Tax incentives for donations of computers and similar equipment

30 Tax exemptions for import of certain essential equipment and goods

Philippines

31 Tougher anti-avoidance measures in the goods and services tax

32 Tougher anti-avoidance measures for income tax

32 Income tax treatment of leases

33 COVID-19 permanent establishment

33 Guidelines on GST treatment of transfer pricing adjustments

34 Anti-avoidance case

34 Tax treatment of foreign digital taxes

35 Deemed remittance on transfer

of unremitted foreign-sourced interest income

36 Participation in international compliance assurance programme

36 Income tax treatment of security tokens


Singapore

38 Valuation of collateral for tax liabilities


Taiwan

40 Interest imputation on interest-free loans

41 Reduction of corporate income tax for 2020

41 Higherfinesfortax administration violations

42 Electronic invoices

42 Transfer pricing

43 COVID-19 pandemic: incentive for donations by companies

Vietnam

MAYER BROWN | 5

MAYER BROWN | 7

China (PRC)

Value-added tax treatment on transfer of shares for no consideration

China has clarified the value-added tax (VAT) treatment regarding the transfer of shares for no consideration, VAT exemption on interest on loans to small enterprises or sole traders and the VAT treatment of compensation paid for land reclaimed by landowners. The Ministry of Finance and the State Taxation Administration has issued Circular [2020] No. 40 on 29 September 2020.

Effective 29 September 2020, where shares are transferred for no consideration, the transferor of shares must deem the purchase price as the sale price in computing VAT liability. Where the transferee, in its turn, transfers the shares, the deemed sale price of the previous transfer will be deemed as the purchase price for the transferee for VAT purposes. The transfer is subject to VAT at the rate of 6%, i.e. the rate applicable to transfers of financial assets.

Where a landowner reclaims its land from the user of the land and pays compensation for the loss of the land, tangibles and real property attached to the land, it must be regarded as the return of the land-use right to the owner as provided under item 37 of Art. 1 of Circular [2016] No. 36 and is subject to VAT accordingly.

Hainan free trade haven

Effective 1 December 2020, China will exempt the import of raw materials and accessories (for aviation or vessel repair services) used in the processing industry in the Hainan Free Trade Haven from import duties, value-added tax at the import stage and consumption tax. The duty-free policy applies until the island becomes a closed bonded zone which is expected to occur in 2025.

JURISDICTION:

The above exemptions are only applicable if the materials are imported by incorporated entities (companies with legal personality) that are registered in the Hainan Free Trade Haven for self-use in the so-called “two-ends outside China” production process (the end of import of materials and that of export of products are both abroad).

In this regard, the tax and customs authorities use a “positive list” of 169 products that are eligible for the exemption. With the publication of the list, the duty-free policy will be implemented. It is also mentioned that the list will be adjusted from time to time as needed and depending on administrative conditions.

The exemption and the positive list of exempt products are announced in Circular [2020] No. 42 that is jointly issued by the Ministry of Finance, State Taxation Administration and General Customs Service on 11 November 2020.

Deed tax

Courtesy of Lee Tsai & Partners, it was reported that on August 11, 2020, the Standing Committee of the National People’s Congress promulgated the Deed Tax Law of the People’s Republic of China (the “Deed Law”). The Deed Law elevates deed tax regulations from an administrative regulation level to national law, while amending and upgrading the Interim Regulations of the People’s Republic of China on Deed Taxes promulgated by the State Council on July 7, 1997, and also, takes into account new problems in the deed tax collection process. The Law will come into force on September 1, 2021, and the Interim Regulations of the People’s Republic of China on Deed Taxes will be repealed at the same time.

With regard to the scope of taxable acts, the Deed Law makes it clear that ownership transfer of lands and housing units for investment (share acquisition), repayment of debts, transfer, reward, etc., shall be subject to deed tax. This provision aims to provide a basis for taxation of new forms of transactions observed in recent years.

For the deed tax rate, Article 3 of the Law specifically sets the rate at 3% to 5%, but it should be noted that the applicable tax rate shall be determined by the people’s governments at the provincial, autonomous region and municipal level directly under the jurisdiction of the State Council, while different tax rates can be determined in accordance with specific procedures for ownership transfer for different entities, different regions and different types of housing.

Regarding what may be exempted from the deed tax, the Law adds three new types of tax-exempt ownership transfer of lands and housing units, including between husband and wife during marriage; the inheritance of lands and housing units by legal heirs; and assuming ownership of lands and housing units by foreign embassies, consulates and representative offices of international organisations in China, all of whom are tax-exempt pursuant to law.

In addition, the Law specifically provided for confidentiality of the personal information of deed taxpayers, this requires tax authorities and their staff to keep confidential the personal information of taxpayers in the process of tax collection and administration and not disclose or illegally provide such information to others.

COVID-19: exported goods returned due to force majeure

The Ministry of Finance (MoF) will provide an exemption from import duty, value-added tax (VAT) and consumption tax on import for goods exported between 1 January and 31 December 2020 but returned (re-imported) to China in their original state due to the force majeure of COVID-19 within 1 year from the date of export. Furthermore, the MoF will refund any export duties paid at the time of export.

CHINA (PRC)

8 | Asia Tax Bulletin CHINA (PRC)

Correspondingly, the taxpayer must repay refunds of VAT and consumption tax on the export of these goods (or provide a certificate to prove that no taxes for the export of these goods have been refunded) before applying for the exemption for the re-importation of goods. If the return of these goods has already been subject to VAT, consumption tax on the re-importation and import duties in the period between 1 January 2020 and 2 November 2020, the paid taxes must be refunded to taxpayers. Taxpayers must submit their refund applications to the Customs Service before 30 June 2021.

The above tax regulation is laid down in Public Notice [2020] No. 41 jointly issued by the MoF, the State Taxation Administration and the General Customs Service on 2 November 2020.

Tax incentives for software and integrated circuits businesses

The State Taxation Administration has updated the enterprise income tax (EIT) incentives for enterprises and projects engaged in software and

integrated circuits (ICs) business. The following incentives came into effect retroactively from 1 January 2020:

*Enterprises encouraged by the state that are engaged in manufacturing ICs with a line width of not more than 130 nanometres may carry forward losses incurred in the period of five years before they are listed as enterprises eligible for incentives. The losses can be carried forward for up to ten years.

The incentives are in alignment with Notice of State Council [2020] No.8, announced in Circular [2020] No. 45 jointly issued by the Ministry of Finance, the State Taxation Administration, the Development and Reform Committee and the Ministry of Industry and Information. These government departments are also responsible for drawing up a list of enterprises or projects that are eligible for the incentives.

Type of enterprise or project

Enterprises or projects encouraged by the state that are engaged in manufacturing ICs with a line width of not more than 28 nanometres.

Enterprises or projects encouraged by the state that are engaged in manufacturing ICs with a line width of not more than 65 nanometres.

Enterprises or projects encouraged by the state that are engaged in manufacturing ICs with a line width of not more than 130 nanometres*.

Enterprises engaged in the design, assembly, materials, packing and testing of ICs, and software enterprises that are encouraged by the state.

Key encouraged enterprises engaged in the design of ICs and software enterprises.

Exemption from EIT

First 10 years.

First 5 years.

First 2 years.

First 2 years.

First 5 years.

Post-exemption reduced tax rate

None (normal rate of 25%).

12.5% for 5 years.

12.5% for 3 years.

12.5% for 3 years.

10%.

Minimum period of manufacturing operations

15 years.

15 years.

10 years.

None.

None.

MAYER BROWN | 9CHINA (PRC)

Deduction of advertisement and promotion expenses

From 1 January 2021 to 31 December 2025, enterprises in the cosmetic, pharmacy and (non-alcoholic) beverage industries will be able to claim deductions on advertisement and promotion expenses, limited to 30% of current year sales. Excess expenses may be carried forward to future tax years for subsequent deduction.

Where associated enterprises have entered into a cost-sharing agreement on advertisement and promotion expenses, one of the parties to the agreement may choose to deduct such expenses or to allocate part or all of the expenses to another party to the agreement for deduction, provided that the deductible amount does not exceed the 30% limitation. The other party may, in computing its own deduction limitation, exclude the part of the expenses allocated to it.

Advertisement and promotion expenses incurred by tobacco industries are not deductible for enterprise income tax purposes.

The new rule is laid down in Circular [2020] No. 43 jointly issued by the Ministry of Finance and the State Taxation Administration on 27 November 2020 and will supersede the Circular [2017] No. 41 (which will be abolished effective 1 January 2021) on the same subject.

International tax developments

ASEAN, JAPAN, KOREA.

On 15 November 2020, the Association of Southeast Asian Nations (ASEAN) member states (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam) and ASEAN's free trade agreement partners (Australia, China, Japan, New Zealand and Korea (Rep.)) signed a Regional Comprehensive Economic Partnership Agreement (RCEP), during the virtually held 4th RCEP Summit. In November 2019, India (an ASEAN's free trade agreement partner as well) indicated it had several issues preventing it from joining RCEP and has since indicated it is not in a position to sign the agreement.

MAYER BROWN | 11HONG KONG

Hong KongJURISDICTION:

Ramping up transfer pricing 1

The Inland Revenue Department (IRD) recently developed Form IR1475 and commenced transfer pricing compliance reviews, signalling their intention to ramp up transfer pricing enforcement in Hong Kong. The form will serve as a tool for the IRD to identify high-risk taxpayers for further scrutiny based on factors including the nature and size of the transactions, transacting with jurisdictions with lower tax rates than Hong Kong or claiming ‘offshore’ status for income where such claims may not be consistent with the transfer pricing profile of the Hong Kong taxpayer.

Form IR1475 has been sent to several taxpayers who indicated on their tax returns that they have a requirement to prepare transfer pricing documentation. The form is a summary of the contents of the local file and master file, although it also includes elements related to:

• Details of controlled transactions of a capital nature;

• Whether certain controlled transactions are ‘offshore’ for profits tax purposes; and

• Details of controlled transactions that either were not subject to tax or were subject to tax at a statutory tax rate lower than that of Hong Kong.

At this stage, the focus is on taxpayers with a 31 March year end. However, it is expected to be rolled out further in coming months.

Stamp duty on non-residential property transactions

The Chief Executive of the Hong Kong Special Administrative Region announced in her Policy Address the abolition of double ad valorem stamp duty (DSD) on non-residential property transactions. In this regard, the ad valorem stamp duty rates chargeable on non-residential property transactions will revert to the Scale 2 rates effective 26 November 2020. The abolition of DSD is intended to facilitate the selling of non-residential property by businesses that are encountering financial difficulties or liquidity needs because of the economic downturn, and mitigate the impact of the COVID-19 pandemic on Hong Kong’s economy and business activities.


GEORGIA

According to press releases of 5 October 2020, published by both the Inland Revenue Department of Hong Kong and the Georgian Ministry of Finance, Georgia and Hong Kong signed the Georgia–Hong Kong Income Tax Agreement on 5 October 2020.

USA

On 20 October 2020, the US Internal Revenue Service (IRS) issued announcement 2020-40, communicating that the United States provided a written notification dated 18 August 2020 to the government of the Hong Kong Special Administrative Region on the termination of the Hong Kong–United States Shipping Tax Agreement. The termination of the agreement took effect on 1 January 2021 and has effect for taxable years beginning on or after that date. Under the Hong Kong–United States Shipping Tax Agreement income was exempt from tax in one contracting state for income derived from the international operation of ships by residents of the other contracting state. Shipping companies are presently considering whether they can invoke the domestic tax provisions in both the US and Hong Kong dealing with tax exemption of qualifying shipping profits if their respective domestic taxation regimes of shipping profits is sufficiently comparable and exempts shipping profits earned by companies resident in the other jurisdiction.

1 Courtesy Duff & Phelps (Hong Kong)

India

Important victory against retroactive tax legislation

The Indian revenue authorities had initiated high-profile litigation against Vodafone on the basis that Vodafone had failed to withhold Indian taxes on payments made to the selling Hutch entity. The Supreme Court of India held in favour of Vodafone that no Indian tax was required to be withheld on a transfer of offshore assets between two non-residents.

Shortly thereafter, the Finance Act, 2012 introduced a number of amendments to undo the impact of the Supreme Court ruling. These included a validation clause 1 which could enable the Revenue Authorities to deprive the Supreme Court Ruling of its finality, substantive amendments to the definitions of “capital asset” and “transfer”, as well as an addition of Explanation 5 to section 9(1)(i) of the Income Tax Act, 1961 (“ITA”), “clarifying” that an offshore capital asset would be considered to have a situs in India if it substantially derived its value (directly or indirectly) from assets situated in India. All of these amendments were enacted to take effect retroactively from 1962. Amendments were also introduced, with retroactive effect, to procedural provisions relating to withholding tax (Explanation 2 to s.195 of the ITA).

Thereafter, Vodafone invoked arbitration under the India–Netherlands BIT. On September 25, 2020, the international arbitral tribunal constituted in the case of Vodafone International Holdings BV v. The Republic of India (Vodafone case) held that India had violated the ‘fair and equitable treatment’ (Vodafone award) guaranteed to VIHBV under the 1995 Bilateral Investment Promotion and Protection Agreement (BIPA) between the Republic of India and the Kingdom of Netherlands (India–Netherlands BIT).

JURISDICTION:

Tolerance range for arm’s length price variance

The tax authorities will continue to deem the price at which an international transaction or specified domestic transaction has actually been undertaken (“actual price”) to be the arm’s length price for assessment year (AY) 2020-2021 if the variance between the arm’s length price determined under the Income Tax Act (ITA) and the actual price:

• does not exceed 1% of the actual price in respect of wholesale trading; and

• does not exceed 3% of the actual price in all other cases.

Equalisation levy

The Central Board of Direct Taxes (CBDT) has issued guidelines implementing a 2% equalisation levy (EL) chargeable on certain non-resident e-commerce supply or services under the Finance Act, 2020, with the existing rules and forms on the advertisement equalisation levy being amended to extend their application to e-commerce supply or services.

In this regard, the CBDT issued the Equalisation Levy (Amendment) Rules, 2020 to amend the Equalisation Levy Rules, 2016. The amended EL rules remain largely the same, except for:

• the substitution of the phrases “specified services or e-commerce supply or services” and “assessee or e-commerce operator” in provisions that mention “specified services” and “assessee”, respectively; and

• the revised Statement of Specified Services or E-commerce Supply or Services (Form No. 1) and Appeal to the Commissioner of Income Tax (Form No. 3), namely:

>> in Form No. 1, an e-commerce operator (i.e. the payer) is only required to provide information on the EL remitted to the government for each calendar quarter, unlike the requirement for specified services where the payer is required to provide information for each service provider and transaction;

>> in the case of a corporate payer, Form No. 1 may be verified by a person authorised to verify the income tax return under section 140 of the Income Tax Act or the principal officer (previously, the managing director or director or principal officer); and

>> in Forms No. 1 and 3, a payer for specified services or e-commerce supply or services may provide the Aadhar number instead of the Permanent Account Number (PAN) (previously, only the PAN is accepted).

The Finance Act, 2020 extends the application of the equalisation levy to e-commerce supply or services, in addition to specified services (i.e. online advertisement or any provision of digital advertisement space), effective from 1 April 2020. The obligation to withhold and remit the EL falls in the hands of the payer.

Lower threshold for mandatory electronic invoicing

The Central Board of Indirect Taxes and Customs (CBIC) will lower the aggregate turnover threshold that applies to mandatory electronic invoicing from INR 5 billion to INR 1 billion effective 1 January 2021. The CBIC previously increased the threshold requirement in view of the difficulties faced by taxpayers due to the COVID-19 pandemic.

MAYER BROWN | 13INDIA


Indonesia

Tax reform

On 5 October 2020, the House of Representatives passed the Omnibus Bill on Job Creation into law. The Bill also includes the proposed tax changes mentioned in the previous edition of this bulletin. The list below summarises the tax changes. Some of the items below still require an implementing regulation in order to take effect. On 2 November 2020, the President enacted the Omnibus Bill on Job Creation into law.

CHANGES IN THE INCOME TAX LAW

• Provision on the tax treatment for individual taxpayers, i.e.:

>> An Indonesian taxpayer who resides outside Indonesia for more than 183 days will be treated as a non-resident taxpayer with several conditions.

>> Individual non-resident taxpayers with certain special skills will be granted an exemption from the worldwide income rule for four years from when they arrive in Indonesia. During that period the income that is subject to tax in Indonesia will be limited to the income that originates in Indonesia.

>> Tax exemption for dividends received by resident taxpayer that originate from both domestic and foreign sources that are re-invested in Indonesia.

• Possibility (with the issuance of a government regulation) to reduce the withholding tax rate on interest paid to non-resident taxpayers (currently 20%).

CHANGES IN THE VAT LAW

• Exclusion of delivery on consignment from the definition of “deliveries” that are subject to VAT.

• Exclusion of delivery of coal from the definition of delivery of natural resources that is not subject to VAT.

JURISDICTION:

• Exclusion of delivery of goods for the purpose of capital injection, as long as the party who deliver the goods and the recipient of the goods are a taxable entrepreneur.

• Relaxation in claiming input tax credit, i.e.,:

>> Entrepreneurs that have not started their commercial operation will be allowed to claim their input tax credit (previously they could only claim input tax credit related to capital goods). However, similar to the current provision, if a taxpayer fails to commence its commercial operation within three years after the input VAT is claimed, the taxpayer must return the amount of VAT claimed to the government. For certain industries, the timeline to start the commercial operation may be extended by Minister of Finance regulation.

• Entrepreneurs will be allowed to claim input tax credit before they are registered as taxable entrepreneurs (a maximum 80% of the relevant output VAT).

• If input tax credit that has not been reported in a tax return is found during a tax audit, entrepreneurs will be allowed to claim that input tax credit.

• Entrepreneurs will be allowed to claim input tax credit that is collected through a tax assessment letter, as long as the amount in the tax assessment letter has been paid and the entrepreneur has not filed an objection or any other legal proceeding against the tax assessment letter.

• Inclusion of some provisions on the issuance of tax invoices that were previously stated in an implementing regulation.

Tax holiday incentive for pioneer industries

The Ministry of Finance (MoF) has updated the eligibility criteria and administrative requirements for the tax holiday incentive for new investments made in specific pioneer industries. In this regard, the MoF issued MoF Regulation No. 130/PMK.010/2020 (PMK-130) whose salient features

are set out below. The eligibility criteria for the tax holiday remain largely the same as those provided under the previous regulation (MoF Regulation No. 150/PMK.010/2018). However, PMK-130 includes the following additional criteria:

• A company must have a capital investment plan that has not been granted the following:

>> a tax holiday incentive, including capital investment plans that have been denied the tax holiday;

>> an income tax incentive for investments made in certain business fields and/or certain areas;

>> reduction in net income for new investment or business expansion in certain labour-intensive industries;

>> an income tax incentive in special economic zones; and

>> a company must implement the investment plan not later than one year after obtaining the tax holiday approval.

• The application for a tax holiday may only be submitted up to four years after the effective date of PMK-130.

• PMK-130 also provides clarification regarding the procedure for obtaining the tax holiday incentive for companies that are not listed as approved pioneer industries.

• The Directorate General of Taxes will carry out tax audits to ensure that taxpayers that have been granted a tax holiday are compliant with the requirements set out under PMK-130.

• Taxpayers are required to submit annual investment and production realisation reports once the tax holiday incentive is granted.

• Transitional provisions are provided in PMK-130 for taxpayers that were granted the tax holiday under previous regulations.

MAYER BROWN | 15INDONESIA

16 | Asia Tax Bulletin INDONESIA MAYER BROWN | 17INDONESIA

Tax incentives for import of COVID-19 vaccine

Indonesia will exempt the importation and distribution of COVID-19 vaccines from import duty, excise duty, value-added tax (VAT) and income tax. The Ministry of Finance (MOF) has issued MOF Regulation No. 188/ PMK.04/2020 (PMK-188). PMK-188 came into effect on 26 November 2020.

The importation of COVID-19 vaccines, including raw materials and equipment needed in vaccine production and the implementation of vaccines, through bonded logistic centres will be exempted from:

• import duty and/or excise duty;

• VAT or sales tax on luxury goods; and

• income tax on importation under article 22 of Income Tax Law.

Customs duty and/or excise duty exemption and tax exemptions will also be granted for the distribution of vaccines in the customs area from:

• bonded areas or bonded warehouses;

• free zones or special economic zones; and/or

• companies with import facilities for export purposes.

The above incentives are applicable to the import of COVID-19 vaccines by the central and regional government, and companies appointed by the Ministry of Health. To obtain the above incentives, the relevant entities are required to submit an application to the MOF via the Head of Customs and Excise office through which the goods are imported or distributed. Designated customs and excise officials can carry out inspections to ensure compliance by qualifying persons.

In the case where a taxpayer is granted the above incentives but does not use the vaccine for the intended purpose, the taxpayer will then be obliged to pay the unpaid taxes and penalty ranging from 100% to 500% of the import duty payable, and also be subject to administrative sanctions.

Stamp duty rate increase

The government will impose a higher stamp duty under the new Stamp Duty Law, which will come into effect from 1 January 2021. Under Law No. 10 of 2020 on Stamp Duty (Law No. 10), stamp duty will be levied at a fixed rate of IDR 10,000 on commercial documents, including those in electronic form. Currently, certain documents are subject to stamp duty of IDR 3,000 or IDR 6,000.

Under Law No. 10, stamp duty will be imposed on two types of documents:

• documents of a civil nature, such as:

>> letters of agreement, certificates, statement letters or other similar documents and copies thereof;

>> notarial deeds along with the grosse, copy and quotation thereof;

>> deeds of land conveyancers and copies thereof;

>> securities in any name or form;

>> documents evidencing the transfer of securities, including the transfer of futures contracts;

>> auction documents;

>> documents with a nominal value exceeding IDR 5 million acknowledging the receipt of money or the payment or calculation of debt; and

>> other documents defined by Law No. 10; and

• documents used as evidence in court.

• PMK-130 also includes provisions relating to investors assigned by the government to accelerate the implementation of national strategic projects. PMK-130 replaces MoF Regulation No. 150/PMK.010/2018. PMK-130 was promulgated on 24 September 2020 and came into operation 15 days after the date of promulgation.

Tax incentive for R&D activities

The Ministry of Finance (MoF) has provided further guidance on the tax incentive for qualifying research and development (R&D) activities in Indonesia under Government Regulation No. 45 of 2019 (GR-45). In this regard, the MoF issued Regulation No. 153/PMK.010/2020 (PMK-153) as one of the implementing regulations for GR-45. PMK-153 came into effect on 9 October 2020.

Under GR-45, a domestic corporate taxpayer carrying on certain R&D activities in Indonesia may deduct up to 300% of the actual costs incurred for the R&D activities over a certain period of time. PMK-153 provides the breakdown of the 300% deduction as follows:

• 100% deduction of the actual R&D costs incurred in the relevant year; and

• additional deductions of up to 200% of the actual R&D costs that can be claimed at the following stages:

>> 50% when certain intellectual property rights (IPR) relating to the R&D activities are registered with the Indonesian IPR office;

>> 25% when the locally registered IPR are also registered overseas;

>> 100% upon commercialisation of the R&D activities; and

>> 25% when the qualifying R&D activities stated above are carried on in cooperation with the government’s R&D institution or a higher education institution in Indonesia.

R&D activities that qualify for the additional deductions are activities that meet certain criteria under PMK-153 and are carried on by corporate taxpayers (excluding taxpayers under production sharing contracts, work contracts or mining contracts whose taxable income is calculated based on the contract provisions) from 26 June 2019 onwards. The R&D activity must be in accordance with the focus and theme of priority R&D activities as listed in the attachment of PMK-153.

R&D costs that qualify for the additional deductions include:

• assets other than land and buildings;

• goods or materials;

• payments made to employees, researchers and engineers;

• fees to register the IPR; and

• payments made to R&D institutions or higher education institutions in Indonesia to undertake the R&D activities.

The breakdown stipulated under the additional deduction of 200% deduction is applied to qualifying costs incurred within the past five years from the earlier of:

• registration of the IPR; and

• start of the commercialisation stage.

The additional deductions can be deducted against a maximum of 40% of the taxable income for the relevant fiscal year. Any unutilised additional deduction can be carried forward to the subsequent fiscal years.

The application procedure for availing of the additional deductions is prescribed in PMK-153. Once the application is approved, the taxpayer will be required to submit, annually, the R&D cost report and a report on the utilisation of the additional deductions for R&D activities. Taxpayers that have carried on qualifying R&D activities before PMK-153 came into effect may still benefit from the incentive, subject to conditions.

18 | Asia Tax Bulletin INDONESIA

Stamp duty will not be levied on instruments relating to the transport of passengers or goods, certificates of studies or diplomas, receipt of salary, pension or any similar payment relating to employment, receipt of all taxes and other documents as provided under Law No.10.

The government will allow the use of existing stamps in a combination of IDR 3,000 and IDR 6,000 stamps (for a total of IDR 9,000) to be affixed onto the aforementioned documents from 1 January 2021 to 31 December 2021. The President enacted Law No. 10 (in Indonesian only) on 26 October 2020. Law No. 10 will come into force on 1 January 2021 and replace Law No. 13 of 1985 on Stamp Duty.

VAT collectors for foreign digital goods and services

The Directorate General of Taxation (DGT) has appointed the following companies as value-added tax (VAT) collectors for digital products and services from abroad that are sold to consumers in Indonesia, effective 1 December 2020. For domestic online marketplace operators appointed as VAT collectors, VAT is collected only on the sale of digital goods and services by foreign sellers who sell through the online marketplace.

• Cleverbridge AG Corporation;

• Hewlett-Packard Enterprise USA;

• Softlayer Dutch Holdings B.V. (IBM);

• PT Bukalapak.com;

• PT Ecart Webportal Indonesia (Lazada);

• PT Fashion Eservices Indonesia (Zalora);

• PT Tokopedia;

• PT Global Digital Niaga (Blibli.com);

• Valve Corporation (Steam); and

• beIN Sports Asia Pte Limited.


CAMBODIA

The Cambodia–Indonesia Income Tax Treaty (2017) entered into force on 28 July 2020. The treaty generally applies 1 January 2021.

JapanJURISDICTION:

2021 tax incentives

The government’s ruling coalition has proposed to introduce tax incentives for investments in carbon reduction efforts and digital transformation, extend tax incentives for new home and car buyers and provide inheritance tax exemption to long-term foreign residents, among other measures, in the 2021 tax reform outline announced recently. The related tax reform bills are expected to be submitted to the parliament in January 2021.

Companies that invest in carbon reduction efforts will be eligible for income tax payment deduction of up to 10% of their investments. Companies that invest in digital transformation will be eligible for a special depreciation rate or a tax credit. Businesses may also be eligible for the following incentives:

• higher tax credits for qualified research and development expenditures;

• tax credits for compensation paid to newly hired employees, subject to conditions; and

• higher net operating loss (NOL) carry-over limit for eligible NOL.

Unlisted firms, including investment funds, will be allowed to deduct as business expenses directors’ remuneration (generally non-deductible), subject to conditions. New home buyers that avail of housing loans by 2022 will be eligible to a 13-year tax reduction, instead of the usual ten-year period. Previously, the extended period was allowed to new home buyers that avail of housing loans by 31 December 2020. The existing tax reduction for owners of electric vehicles will be extended by 2 years from the incentive’s end date in May 2021, in order to boost demand and promote electric vehicles. Assets acquired abroad by foreign nationals who have been living in Japan for more than ten years may be exempt from inheritance tax or gift tax.

KoreaJURISDICTION:


UZBEKISTAN

On 18 October 2020, the amending protocol, signed on 19 July 2019, to the Korea - Uzbekistan Income and Capital Tax Treaty entered into force. The protocol generally applies from 1 January 2021.

SWITZERLAND

On 28 October 2020, the amending protocol, signed on 17 May 2019, to Korea’s tax treaty with Switzerland, as amended by the 2010 protocol, entered into force. The protocol generally applies from 1 January 2021 for withholding and other taxes. The provision concerning article 24 (Mutual agreement procedure) of the amended convention will have effect with respect to cases that are presented to the competent authority of a contracting state from 28 October 2020.

20 | Asia Tax Bulletin JAPAN


UK

On 23 October 2020, Japan and the United Kingdom signed a free trade agreement in Tokyo, agreed already in principle on 11 September 2020. The agreement is known as the UK-Japan Comprehensive Economic Partnership Agreement (CEPA). More information can be found on the website of the UK government.

MAYER BROWN | 23MALAYSIA

• pharmaceutical companies involved in vaccine production with investments made in Malaysia will be entitled to a reduced tax rate between 0% and 10% for ten years;

• income tax exemptions for private healthcare service providers on exported services will be extended to 2022;

• existing tax incentives for the Iskandar Development Region, Eastern Corridor Economic Region and Sabah Development Corridor will be extended to 2022;

• existing tax incentives for companies producing components for industrialised building systems will be extended for another five years, subject to conditions; and

• additional tax deductions for employers employing senior citizens and other selected individuals (subject to conditions) will be applicable up to year of assessment 2025.

INDIVIDUAL TAXATION

In terms of individual taxation, the reduced income tax of 1% for resident individuals with chargeable income between MYR 50,000 and MYR 70,000 was part of the initiatives announced with the aim of easing the burden for Malaysian individuals amid the COVID-19 pandemic.

Various increases in personal tax reliefs for resident individuals were also announced, as follows, which will take effect from year of assessment 2021 (unless stated otherwise):

• personal tax relief of up to MYR 1,000 will be granted for vaccination expenses incurred by individuals, their spouses and/or children due to COVID-19, pneumococcal and influenza diseases;

• an increased personal tax relief of up to MYR 8,000 (from MYR 6,000) for incurring medical expenses due to serious diseases will be granted to individuals, their spouses and/or children. In addition, personal tax relief for full health screening will be increased to MYR 1,000 (from MYR 500);

• an increased personal tax relief of up to MYR 8,000 (from MYR 5,000) will be granted for expenses of an individual’s parent’s medical treatment, special needs and parental care;

• the personal income tax relief for individuals with disabled spouses will be increased to MYR 5,000 (from MYR 3,500);

• an employee’s contribution to the Employee Provident Fund will be reduced to 9% (from 11%) from January 2021 to December 2021;

• the personal tax relief of up to MYR 3,000 for contribution to private retirement scheme will be extended to year of assessment 2025 (from year of assessment 2021);

• the limitation of income tax exemption for compensation given on loss of employment will be increased to MYR 20,000 (from MYR 10,000) for every year of service completed for years of assessment 2020 and 2021;

• personal tax relief for lifestyle expenses will be increased to MYR 3,000 (from MYR 2,500), where an additional MYR 500 is specifically allowed for sport-related expenses. The scope of lifestyle relief is also expanded to include purchase of electronic newspaper;

• a personal tax relief of MYR 8,000 for resident individuals on deposits made into the National Education Savings Scheme (Skim Simpanan Pendidikan Nasional) for their children will be extended to year of assessment 2022 (from year of assessment 2020); and

• a concessionary tax rate of 15% will be extended for another five years for foreign citizens who hold important positions in strategic investment at companies that relocate their operation to Malaysia.

INDIRECT TAXATION

• A stamp duty exemption will be granted on sales and purchase agreements (SPAs) and loan agreements for first-time homeowners for the purchase of property valued at MYR 500,000 or below. The exemption is available for SPAs completed between 1 January 2021 and 31 December 2025.

• The stamp duty exemption will be extended for five years on relevant instruments to property developers and purchasers of abandoned projects. The exemption is available for SPAs completed between 1 January 2021 and 31 December 2025 relating to certified abandoned projects.

Budget 2021

The Minister of Finance has proposed several changes, including reducing individual tax rates, increasing personal tax reliefs for individuals and extending the tax incentives period for companies, in the Budget 2021. On 31 December 2020, the government gazetted the Finance Act 2020 (the Act).

CORPORATE TAXATION

In order to boost business continuity in the country, the government announced various tax incentives for corporates, as follows:

• the compliance requirement for principal hub incentives will be made less stringent until 31 December 2022;

• global trading centres will be granted a concessionary tax rate of 10% for a period of five years (with the option to extend for another five years);

• application deadlines for tax incentives for companies relocating their operations to Malaysia will be extended to 31 December 2022 (from 31 December 2021). The scope of the tax incentives will be expanded to include companies in certain service industries where the tax incentives will be in the form of a reduced income tax rate between 0% and 10% for ten years;

• existing tax incentives which will be expiring this year, including those for industry in the maintenance, repair and overhaul activities for aerospace, building and repair of ships, BioNexus status and economic corridor developments will be extended for another year;

• the tax incentives on research and development activities will be granted with a 100% tax exemption for ten years based on commercialisation of research and development activities by private tertiary education research institutes, subject to conditions;

MalaysiaJURISDICTION:

24 | Asia Tax Bulletin MALAYSIA

• A sales tax exemption for the domestic purchase of buses by bus operators will be extended to 31 December 2022 (from 31 December 2020).

• A Human Resources Development Fund levy will be exempt from stamp duty from 1 January 2021 to 30 June 2021.

• Effective 1 January 2021, excise duties will be introduced on electronic cigarettes and its relevant ingredients.

Tax incentives for angel investors

The Inland Revenue Board (IRB) has issued an updated public ruling (PR) on tax incentives for angel investors that takes into consideration recent changes in tax legislation. In this regard, the IRB issued PR No. 12/2020 of 17 November 2020. The main updates are set out below:

• An angel investor who intends to qualify for the tax exemption must make an application with the Ministry of Finance from 1 January 2013 until 31 December 2023 (previously, until 31 December 2017); and

• A company must be incorporated under the Companies Act 2016 (previously, the Companies Act 1965) to qualify as an investee company.

PR No. 12/2020 replaces PR No. 11/2015. A qualifying angel investor is entitled to a tax exemption in the second year of assessment following the year of assessment the investment is made, provided that the investment is not disposed of in part or in full within two years from the investment date. The tax exemption is capped at the amount of investment or MYR 500,000, whichever is lower.

Reinvestment allowances

The Inland Revenue Board (IRB) has issued two updated public rulings (PRs) to clarify the application of reinvestment allowances (RAs) for manufacturing, agricultural and integrated activities undertaken in Malaysia. The IRB issued PR No. 10/2020 of 6 November 2020 and PR No. 11/2020

of 10 November 2020. The PRs take into consideration the latest changes in tax legislation with regard to RAs. The main updates are set out below.

PR NO. 10/2020 – RA ON MANUFACTURING ACTIVITIES

• A new diagram (Diagram 2) is added to illustrate that where the floor area used as storage space exceeds 10% of the total floor area of the extension of a building used for a qualifying project, an RA will not be allowed on the capital expenditure for the total extended floor area.

• A company is not eligible to claim an RA on expenses incurred in replacing tools or machinery parts, unless it is able to show that such capital expenditure results in expanding, modernising, automating or diversifying the existing business.

• Effective from year of assessment (YA) 2019, any unabsorbed RA can only be carried forward to be absorbed for a maximum period of seven consecutive YAs immediately upon expiry of the qualifying period of such RA. After this period, any unabsorbed balance will be disregarded accordingly. Businesses with unabsorbed RA in YA 2018, even though the qualifying period (i.e. 15 years) for such RA has lapsed, can carry forward the unabsorbed RA until YA 2025.

• Written approval from the IRB is not required for claiming RA, but taxpayers must record the claims in the RA claim form accordingly.

PR NO. 11/2020 – RA ON AGRICULTURAL AND INTEGRATED ACTIVITIES

The following amendments made in PR No. 10/2020 are applicable in PR No. 11/2020:

• restriction on the carry-forward period for unabsorbed RA balances; and

• clarification on the RA claim form. PR No. 10/2020 replaces PR No. 9/2017, while PR No. 11/2020 replaces PR No. 10/2017.

A reinvestment allowance (RA) is an incentive granted to resident companies equal to 60% of the qualifying capital expenditures in an assessment year. Generally, an eligible company can claim an RA against a maximum of 70% of the statutory

income. However, for manufacturing projects that achieve the level of productivity prescribed by the Minister of Finance, RA may be deducted from 100% of the statutory income. A company is entitled to claim RA for 15 consecutive years of assessment.

Tax treatment of trusts

The Inland Revenue Board (IRB) has published consolidated guidance on the taxation of trusts, including the ascertainment of a trust beneficiary’s statutory income from the trust. The IRB issued Public Ruling (PR) No. 9/2020 of 6 November 2020. PR No. 9/2020 does not amend the existing tax treatment of trusts. It merely provides an explanation of and guidance for the determination of the statutory income of a trust beneficiary, such as in the case of discretionary and mixed trusts.

TAX TREATMENT OF A TRUST BODY

• Under the Income Tax Act (ITA), a trust body, consisting of a trustee or trustees, is the chargeable person in a trust. The trust body is a tax resident of Malaysia for the basis period of a year of assessment if any trustee member of the trust body is resident in Malaysia for that basis year.

• Where the trust body is a tax resident in Malaysia, the trust body may:

>> deduct the beneficiary’s share of the total income of the trust body from its total income;

>> deduct any annuity payable to a beneficiary; and

>> deem any annuity paid by the trust to its beneficiaries to be derived from Malaysia regardless of whether the trust body has any income in the relevant year of assessment.

• Where a share of the total income of the resident trust body for a year of assessment is deemed to be the statutory income of a beneficiary (i.e. distributed from the trust to the beneficiary), the said share may be deducted from the trust body’s total income in

ascertaining the trust body’s chargeable income for that year of assessment. Thus, income is taxed only once.

TAX TREATMENT OF A BENEFICIARY

• The beneficiary is taxed on the income distributed from the trust at the individual level. Where the beneficiary’s share of the total income from the trust body has been taxed at the trust body level, a set-off under subsection 110(8) of the ITA is allowed to the beneficiary.

• However, where the trust body has deducted the income distributed to the beneficiary in arriving at its chargeable income at the trust body level, the set-off is not allowed to the beneficiary.

Tax changes and incentives

The Ministry of Finance has proposed additional tax amendments, including the introduction of approved incentive schemes, re-introduction of reinvestment allowances (RAs) and introduction of tax avoidance measures, in the Finance Bill 2020.

The Bill, which was recently presented to Parliament for the first reading, amends certain provisions of the Income Tax Act 1967, Real Property Gains Tax Act 1976, Labuan Business Activity Tax Act 1990, Stamp Act 1949 and other relevant legislation.

CORPORATE TAXATION

• A qualifying person undertaking a qualifying activity (i.e. any high-technology activity in the manufacturing and services sector or any other activity which would benefit the economy of Malaysia) approved by the Ministry of Finance will be entitled to a concessionary income tax rate of not more than 20%.

• Special RAs will be made available for manufacturing and certain agricultural projects (where the 15-year RA period has already expired) from years of assessment (YAs) 2020 to 2022 to encourage reinvestments.


• The restriction on deductible expenses for payments made to Labuan entities will be extended to Labuan entities that do not meet the substantial activity requirements under section 2b(1)(a) of the Labuan Business Activity Tax Act 1990.

• Effective from the date of operation of the Finance Act 2020, additional conditions must be met for claiming special deductions/double deductions for research and development expenditure.

• Effective YA 2021, a “plant” for capital allowance purposes will be defined as “an apparatus used by a person for carrying on his business but does not include a building, an intangible asset, or any asset used and that functions as a place within which a business is carried on”.

• For transfer pricing purposes, the Director General will be given the power to disregard any structure adopted by a person in entering into a transaction if (i) the economic substance of that transaction differs from its form; or (ii) the form and substance of that transaction are the same but the arrangement made in relation to the transaction, viewed in totality, differs from those which would have been adopted by independent persons behaving in a commercially rational manner.

• A 5% surcharge on the increase in income or reduction of deduction or loss, as the case may be, will be introduced for transfer pricing adjustments made by the Inland Revenue Board. In addition, taxpayers that fail to provide contemporaneous transfer pricing documentation will be fined between MYR 20,000 and MYR 100,000 or imprisoned for up to six months, if prosecuted.

INDIVIDUAL TAXATION

• Individuals who purchased mobile phones, tablets or notebooks between 1 June 2020 and 31 December 2020 will be entitled to a special personal relief of up to MYR 2,500 for YA 2020.

• Individuals may avail of a special personal relief of up to MYR 1,000 for domestic travels undertaken between 1 March 2020 and 31 December 2021 for YAs 2020 and 2021.

REAL PROPERTY GAINS TAX (RPGT) ACT 1976

• Taxpayers may authorise a tax agent, advocate or solicitor to file their RPGT returns electronically.

• The RPGT rate for companies will apply to societies registered under the Societies Act 1966.

LABUAN BUSINESS ACTIVITY TAX ACT 1990

• Effective YA 2020, “chargeable profits” of Labuan entities are clarified as “the net profits reflected in the audited accounts in respect of such Labuan business activity of the Labuan entity for the basis period for that YA”.

• Labuan entities carrying on Labuan non-trading activities will be required to comply with the control and management requirement (in addition to the substantial activity requirement) in order to avail preferential tax treatments.

STAMP ACT 1949

• A digital stamp on a duplicate and counterpart of an instrument will be deemed a valid stamp showing that the full and proper duty has been paid on the original instrument.

Changes to the tax appeals process

The Inland Revenue Board (IRB) has updated the procedures for lodging appeals against tax assessments and making applications for relief under the Income Tax Act 1967 (ITA). In connection with this, the IRB issued Public Ruling (PR) No. 7/2020 of 7 October 2020. The highlights of the updated procedures include:

• a new seven-year limit on the application for extension of appeals effective from the year of assessment (YA) 2020;

• a procedure for lodging an appeal against best judgment assessments under subsection 90(3) of the ITA effective from YA 2019; and

• a procedure for lodging an appeal involving an application for resolution under a mutual agreement procedure (MAP).

26 | Asia Tax Bulletin MALAYSIA

Effective YA 2020, a taxpayer who was unable to lodge an appeal within the prescribed period may submit the application for extension (Form N) to the IRB within seven years from 30 days after the notice of assessment is served to the taxpayer (previously, no limit applied). To illustrate, an appellant who was served a notice of assessment on 1 August 2020 has until 30 August 2027 to submit an application for extension. Where the application is rejected by the IRB and subsequently rejected by the Special Commissioners of Income Tax (SCIT), no further appeal is allowed.

For best judgment assessments under subsection 90(3) of the ITA made against a company, limited liability partnership, trust body or co-operative society for YA 2019 onwards, the taxpayer must submit Form Q with the income tax return form (ITRF) for the relevant YA not later than 30 days after the notice of assessment has been served to the taxpayer.

For taxpayers other than those referred to above, the ITRF must be submitted if so requested by the IRB.

Effective 24 January 2014, the submission of Form Q to the SCIT may be postponed if the appellant has applied for a resolution under a MAP with a competent authority. If the appellant agrees with the decision made under the MAP, the appellant must apply to cancel the Form Q within 30 days from the date of receipt of the decision. However, if the appellant disagrees with the decision, the appellant must submit a request to the IRB to forward the Form Q to the SCIT within 30 days from the date of the notification letter of the decision. PR No. 7/2020 replaces PR No. 12/2017 of 29 December 2017.

Renovation and refurbishment expenses

The Ministry of Finance (MOF) has gazetted the rules governing the special deduction of up to MYR 300,000 for costs incurred between 1 March 2020 and 31 December 2021 on the renovation and refurbishment of business premises. The MOF has issued the Income Tax (Cost of Renovation and Refurbishment of Business Premise) Rules 2020 (the Rules), which came into effect from year of assessment 2020 onwards.

Qualifying costs, as provided under Schedule 1 of the Rules, include lighting, gas systems, water systems and similar expenses. Meanwhile, “designer fees, professional fees and the purchase of antiques” are excluded accordingly. The Rules also state that the special deduction will not be applicable for a person who has claimed the said deduction as:

• any allowable expense under section 33(1) of the Income Tax Act 1967 (ITA); or

• any capital allowance under Schedule 2 or 3 of the ITA.


Philippines

Related party and transfer pricing documentation requirements

The Bureau of Internal Revenue has clarified the submission requirements for related party transactions (RPT) and transfer pricing documentation (TP documentation) by providing safe harbours and materiality thresholds in Revenue Regulations (RR) No. 34-2020.

The following taxpayers are required to submit the RPT Form with their annual income tax return:

• large taxpayers;

• taxpayers enjoying tax incentives i.e. enterprises registered with the Board of Investments and those in economic zones;

• taxpayers reporting net operating losses for the current taxable year and the immediately preceding two years; and

• a related party conducting transactions with the above taxpayers. As such, key management personnel (KMP) are no longer required to file the RPT Form. Moreover, the KMP and the reporting entity/parent company of the KMP are not required to report transactions between them in the RPT Form.

The aforementioned taxpayers are also required to prepare and submit the TP documentation and supporting documents if any of the following thresholds are met:

• the annual gross sales/revenue for the taxable period exceeds PHP 150 million and the total value of the RPT with foreign and domestic related parties exceeds PHP 90 million, including:

JURISDICTION:

>> amounts received and/or receivable from related parties or paid and/or payable to related parties but excluding compensation paid to KMP, dividends and branch profit remittances; and

>> outstanding loans and non-trade amounts due from/to all related parties;

• RPT covered by an Advance Pricing Agreement are included in the threshold computation but need not be disclosed in the RPT Form; or

• the aggregate value of RPT exceeds the following thresholds within the taxable year:

>> for sale of tangible goods, PHP 60 million; or

>> for service transactions, interest payments, use of intangible goods or other RPT, PHP 15 million.

The TP documentation is required to be prepared and submitted if the taxpayer was required to prepare the TP documentation during the immediately preceding taxable year for exceeding either of the above-mentioned thresholds.

The TP documentation and supporting documents will no longer be attached to the RPT Form but must be submitted within 30 calendar days upon receipt of request from the tax authorities pursuant to a duly issued Letter of Authority covering all internal revenue taxes. The submission deadline may be extended once by 30 calendar days on meritorious grounds.

Taxpayers with RPT that are not required to submit the RPT Form are required to disclose such information in the Notes to the Financial Statements. A simplified version of the RPT Form replaces the old form. RR No. 34-2020 of 18 December 2020 amends RR No. 19-2020 and came into effect immediately upon its publication on 22 December 2020.

Tax incentives for donations of computers and similar equipment

The Bureau of Internal Revenue (BIR) has issued the regulation to implement the tax incentives for donations of computers, laptops, tablets or similar equipment, for use in public schools from 15 September 2020 until 19 December 2020. the regulation was introduced under the Bayanihan to Recover as One Act.

All donors of computers, laptops, tablets or similar equipment, including mobile phones and printers, for use in teaching and learning in public schools are eligible for the following incentives:

• exemption from donor’s tax;

• the donations are deductible from the donor’s income, subject to the limitations under section 34 (H) of the Tax Code and the following conditions:

>> the donor must indicate in the Deed of Donation, the details of the item donated, and the quantity and amount of the donation;

>> the deduction is applicable in the taxable year that the expenses have been paid or incurred; and

>> sufficient documentary evidence is available for the amount of expenses claimed as deductions and the acknowledgement of receipt of the donated items by the recipient public school;

• in the case of foreign donation, the importation of the items by certain government agencies is exempt from value added tax (VAT); and

• for local donation, items originally intended for sale will not be deemed as sales subject to VAT and any input tax attributable on the purchase of the donated articles not previously claimed as input tax may be credited against any output tax.

MAYER BROWN | 29PHILIPPINES

The above incentives will also apply to donations by special economic zones locators to certain government agencies. The value of the donations will be based on the actual acquisition cost of goods donated. If the goods donated are used goods, the depreciated value will be taken into consideration in determining the value of donation.

Tax exemptions for import of certain essential equipment and goods

The Bureau of Internal Revenue (BIR) has issued the regulation to implement the tax incentives for the importation and manufacture of certain equipment, supplies or goods needed to contain and mitigate COVID-19. The importation of the following items identified as critical products, essential goods, equipment or supplies, needed to contain and mitigate COVID-19, is exempt from value-added tax (VAT), excise tax and other fees from 25 June 2020 to 19 December 2020:

• goods including personal protective equipment, surgical equipment and supplies, laboratory equipment and its reagents, medical supplies, tools and consumables, testing kits and such other supplies or equipment as determined by the Department of Health (DOH) and Department of Trade and Industry (DTI);

• waste management equipment such as waste segregation, storage, collection and others as approved by the relevant regulatory agencies; and

• inputs, raw materials and equipment for the manufacture of essential goods for the containment and mitigation of COVID-19.

To qualify for the above tax exemptions, the taxpayer must present a certificate from the DTI that the imported equipment and supplies are not locally available or of insufficient quality. The donation of these imported articles to or for the use of the national government or any non-profit entity created by any of its agencies or to any political subdivision of the government is exempt from donor’s tax and subject to ordinary rules of deductibility.

Any VAT paid for the importation of qualified essential goods from 25 June 2020 to 14 September 2020 may be refunded, subject to conditions. Locally sourced or imported input, raw materials and equipment for the manufacture of medical-grade essential goods related to containment and mitigation of COVID-19 are exempt from VAT, provided that the supplier provides:

• a certified true copy of ‘license to operate’ issued to the manufacturer-buyer by the Food and Drug Administration- DOH; and

• a ‘sworn declaration’ from the manufacturer-buyer.

The sale of finished medical-grade essential goods related to the containment and mitigation of COVID-19, whether locally manufactured or imported is subject to VAT. Likewise, the sale of locally sourced or imported input, raw materials and equipment for the manufacture of medical-grade essential goods to a non-holder of ‘license to operate’ is subject to VAT.

30 | Asia Tax Bulletin PHILIPPINES PHILIPPINES

SingaporeJURISDICTION:

Tougher anti-avoidance measures in the goods and services tax

The Ministry of Finance (MOF) has proposed measures to deter “missing trader fraud” and impose a 50% surcharge on adjustments made for tax avoidance arrangements, among other proposals, in the Goods and Services (GST) (Amendment) Bill 2020. The Bill proposes to disallow a taxable person from claiming an input tax credit on a supply made to another taxable person if that taxable person knew or should have known that the supply was part of any arrangement that results in loss of public revenue (“missing trader fraud”). The arrangement refers to any arrangement comprising two or more supplies, whether or not the supplies are in the same supply chain, where one or more persons evade or avoid paying GST or are able to obtain any tax credit or refund which the person or persons would not otherwise be able to obtain. Examples of scenarios where the missing trader fraud occurs are provided in the ninth schedule of the Bill.

In addition to the disallowance of the input tax credit, a 10% surcharge on the input tax will be imposed on the taxable person. The surcharge must be paid within one month after the date a written notice of the surcharge is served.

The Bill proposes a time limit of five years after the end of a prescribed accounting period in respect of which the Comptroller may make an adjustment for tax avoidance arrangements under section 47(1A) of the GST Act.

The Bill also proposes to impose a 50% surcharge on any additional GST levied resulting from adjustments made by the Comptroller under section 47 of the GST Act for tax avoidance arrangements in respect of an accounting period starting from 1 January 2021 (section 47 of the GST Act allows the Comptroller to disregard or vary arrangements that are carried out with tax avoidance as one of the main purposes

SINGAPORE32 | Asia Tax Bulletin

and make adjustments as he considers appropriate to counteract any tax advantage obtained or obtainable by the taxable person from the said arrangement). The surcharge must be paid within one month after the date a written notice of the surcharge is served.

Tougher anti-avoidance measures for income tax

The MOF has proposed to impose a 50% surcharge on adjustments made for tax avoidance arrangements and clarified the tax treatment of COVID-19 support measures from the government, among other proposals, in the Income Tax (Amendment) Bill 2020.

The Bill proposes to impose a 50% surcharge on any income tax or additional income tax resulting from any tax adjustments made by the Comptroller under section 33 of the ITA for tax avoidance arrangements from the year of assessment 2023 onwards. The surcharge must be paid within one month after the date a written notice of the surcharge is served, whether or not an objection or appeal has been lodged against the adjustment.

The Bill also proposes to impose a 50% surcharge on any stamp duty or additional stamp duty resulting from adjustments made by the Comptroller under section 33A of the SDA. The surcharge will apply to any instrument, or anything treated as an instrument, executed on or after the effective date of section 63 of the ITA (Amendment) Act of 2020 for tax avoidance purposes. The surcharge must be paid within one month after the date a written notice of the surcharge is served, whether or not an objection or appeal has been lodged against the adjustment.

In addition, the Bill proposes a penalty of up to four times of the outstanding amount for taxpayers that fail to pay the stamp duty and surcharge on time.

Income tax treatment of leases

The Inland Revenue Authority of Singapore (IRAS) has clarified the irrevocability of adopting the effective rent method (ERM) on operating lease income and the tax treatment of a sublease reclassified as a finance lease for entities adopting Financial Reporting Standard 116 or Singapore Financial Reporting Standard (International) 16 (FRS 116/SFRS(I) 16).

The election previously available to a lessor under FRS 17 (i.e. to be taxed on the ERM basis) continues to be available to the lessor under FRS 116/SFRS(I) 16. If the lease is regarded as an operating lease, the lessor can make an irrevocable election in writing to be taxed on the operating lease income using the ERM under FRS 116/SFRS(I) 16, subject to conditions. In addition, lease expenses that are not deductible are to be disallowed upfront.

In a situation where a sublease is classified as a finance lease under FRS 116/SFRS (I) 16 but the same is treated as an operating lease for tax purposes, no transitional tax adjustment is required if, before and after the adoption of FRS 116/SFRS(I) 16, the lessor of the sublease is taxed based on when the lease income becomes due and payable under the lease agreement (i.e. contractual rent method or “CRM”).

However, if the lessor of the sublease was taxed on an ERM basis when the sublease was accounted for under FRS 17, the lessor of the sublease will not be able to continue to apply the ERM on the sublease when it is reclassified as a finance lease under FRS 116/SFRS(I) 16. The lessor of the sublease will need to adopt the CRM and make a transitional tax adjustment in the first year it adopts the CRM for tax purposes.

Examples are provided to illustrate the above. Full details are available in the revised IRAS e-tax guide issued on 27 October 2020.

COVID-19 permanent establishment

The Inland Revenue Authority of Singapore (IRAS) has further extended the period of unplanned presence of employees of a foreign company in Singapore to 31 December 2020 by updating its guidance on permanent establishment (PE) determination in view of the COVID-19 pandemic.

In this regard, IRAS has amended the third condition previously set out in order that the unplanned presence of an employee of a foreign company in Singapore will not result in the creation of a PE for the foreign company, as follows:

“the unplanned presence of the employees in Singapore is due to travel restrictions relating to COVID-19 in 2020 and their physical presence in Singapore up to 31 December 2020 is temporary.”

Previously, the guidance provided that physical presence will be considered as temporary if it does not exceed 183 days in 2020 from the date of the employees first arrival in Singapore. The IRAS will continue to review the given date as the COVID-19 situation evolves.

Guidelines on GST treatment of transfer pricing adjustments

The Inland Revenue Authority of Singapore (IRAS) has issued the guidelines on the goods and services tax (GST) treatment of transfer pricing (TP) adjustments.

A taxpayer that is required to make TP adjustments for income tax purposes may also be required to make GST adjustments, subject to conditions. For local purchases, the GST adjustment of the purchaser generally follows the GST adjustment of the supplier.

The required GST adjustments depend on the nature of the supply (i.e. standard-rated, zero-rated or out-of-scope) or imported goods or services (i.e. subject to GST on reverse charge).

Nature of supply or import

Past standard-rated supply.

Past zero-rated or exempt supply.

Imported goods or services.

Increase in the price of the supply or import of goods or services

The taxpayer will need to increase the value of the supply and account for the additional output tax.

The taxpayer will need to increase the value of the supply.

Goods subject to GST:

• the taxpayer must pay the additional GST

• if the taxpayer is GST-registered, he may increase the value of the purchase and claim the additional input tax

Services subject to reverse charge:

• the taxpayer will need to increase the value of the services and standard-rated supplies and account for the additional output tax

• the taxpayer may increase the value of the taxable purchase and claim the additional input tax

Decrease in the price of the supply or import of goods or services

The taxpayer will need to issue a credit note to the related party before a reduction in the value of the supply is made.

N/A.

Goods subject to GST:

• if the taxpayer is GST-registered and has claimed in full the import GST in the GST return, no refund will be made

• if the taxpayer is not entitled to and has not claimed the GST in full, he may claim the overpaid GST in the GST return

• if the taxpayer is not GST-registered, he may apply for a refund with the Singapore Customs

Services subject to reverse charge:

• the taxpayer may reduce the value of the imported services, standard-rated supplies and output tax

• the taxpayer may also reduce the value of the taxable purchase and input tax

MAYER BROWN | 33SINGAPORE

No GST adjustment is required if the supply of goods or services is out-of-scope, the import of goods is exempt, or the import of services is not subject to reverse charge. No GST adjustment is also required if the taxpayer will forgo the additional input tax arising from the increased value of zero-rated supplies.

Full details, including the timing of making adjustments, proxies, documentation requirements and waiver of penalties, are available in the IRAS e-tax guide issued on 9 November 2020.

Anti-avoidance case

The High Court has upheld the decision of the Income Tax Board of Review (ITBR) stating that a company interposed for the purpose of reducing a taxpayer’s income tax liability is not exempt from the general anti-avoidance rule (GAAR) under section 33 of the Income Tax Act (ITA). The decision was handed down in Wee Teng Yau v. Comptroller of Income Tax and another appeal [2020] SGHC 236 of 4 November 2020.

The taxpayer is a dentist, who was previously employed by a dental clinic. In 2012, the taxpayer incorporated a private limited company (the PLC) of which the taxpayer was the sole director and shareholder. The taxpayer left the employ of the dental clinic but continued to provide dental services solely to clients of the dental clinic from 2012 to 2016. The dental clinic paid the PLC instead of the taxpayer for these services. In turn, the PLC paid the taxpayer:

• director’s remuneration that was significantly lower than the amount earned by the taxpayer directly from the dental clinic in 2011; and

• tax-exempt dividends.

The arrangement resulted in lower income tax for the taxpayer, since the corporate tax rate in Singapore is generally lower than the individual tax rate. The ITBR agreed with the Comptroller of Income Tax that the fees received by the PLC from the dental clinic were the taxpayer’s income and should be taxed at the individual level accordingly.

The issue was whether the taxpayer’s arrangement with the dental clinic is exempt from the GAAR under section 33(1) by virtue of section 33(3)(b) of the ITA. The High Court upheld the ITBR’s decision

that the arrangement was not exempt from the GAAR under section 33(1) by virtue of section 33(3)(b) of the ITA. Although the taxpayer argued that the PLC was established for the bona fide commercial reason of operating a dental clinic, the High Court referred to the second condition for the exemption from the GAAR under section 33(3)(b) of the ITA, namely: “… and had not as one of its main purposes the avoidance or reduction of tax”. Based on the facts, the High Court was convinced that one of the main purposes of the arrangement was to reduce the tax liability of the taxpayer.

The High Court’s decision necessitates that section 33 of the ITA is read as a whole. The taxpayer may appeal against the decision to the Court of Appeal.

Section 33 of the ITA sets out provisions where the Comptroller may disregard or vary any arrangement created for tax avoidance purposes. Both the taxpayer and Comptroller cited the interpretation and application of section 33 of the ITA in Comptroller of Income Tax v. AQQ and another appeal [2014] 2 SLR 847. However, the High Court noted that the present case required a simple and straightforward interpretation of section 33 of the ITA as opposed to the AQQ case.

Tax treatment of foreign digital taxes

The Inland Revenue Authority of Singapore (IRAS) has clarified the tax treatment of the following taxes imposed by foreign jurisdictions on digital transactions for persons subject to tax in Singapore:

• taxes imposed as income tax are not deductible under section 15(1)(g) of the Income Tax Act (ITA); and

• taxes imposed as turnover tax, such as India’s equalisation levy and the United Kingdom’s digital services tax, are generally deductible under section 14(1) of the ITA.

Deemed remittance on transfer of unremitted foreign-sourced interest income

The Inland Revenue Authority of Singapore (IRAS) has ruled, in an advance ruling, that the transfer of unremitted foreign-sourced interest income from a taxpayer’s offshore bank account to the parent company’s offshore bank account in order to exercise a proposed capital reduction does not constitute a deemed remittance under section 10(25) of the Income Tax Act (ITA).

The taxpayer is a resident company in Singapore. It is wholly owned by a company incorporated and having its tax residence abroad (the parent company). The taxpayer carries on trade in Singapore, but is not in the business of borrowing and lending. To meet the funding needs of the parent company’s group, the taxpayer extended loans to its related parties abroad, subject to the following terms:

• the agreements were negotiated and executed outside Singapore;

• the interest expense on the loan is not deductible against income chargeable to Singapore income tax;

• the loans extended by taxpayer to the related parties were wholly used outside Singapore by the taxpayer’s related parties and were not brought into or used in Singapore;

• the taxpayer maintained separate offshore bank accounts to facilitate the servicing of the loans and the receipt of the principal loan and interest payments; and

• the interest income received from one of its related parties was not repatriated to Singapore at any time.

The taxpayer contemplated exercising capital reduction under the Companies Act in order to return excess capital to its parent company using the principal loan repayment and/or interest income from its related parties.

The issue was whether the unremitted foreign-sourced interest income transferred from the taxpayer’s offshore bank account to the parent company’s offshore bank account in order to exercise capital reduction was a deemed remittance under section 10(25) of the ITA.

The IRAS ruled in the negative on the basis that the funds (principal loan repayment and/or interest income) were transferred directly from the taxpayer’s offshore bank account to the parent company’s offshore bank account, which does not fall within the scope of section 10(25) of the ITA.

The validity of the advanced ruling is also subject to the following conditions:

• the foreign-sourced interest income constitutes the taxpayer’s foreign-sourced income for Singapore tax purposes;

• the remittance of funds from the taxpayer’s offshore bank account to the parent company’s offshore bank account, without involving any physical fund remittance or transmission by the taxpayer into Singapore, is indeed for the purpose of exercising capital reduction; and

• the foreign-sourced interest income is not used to settle any debts of a business carried on in Singapore, or used to purchase any property which is brought into Singapore, or does not constitute foreign-sourced income of the taxpayer which had already been remitted to, transmitted or brought into Singapore from the time the foreign-sourced income was accrued to the taxpayer to the time it was transmitted to the parent company’s offshore bank account.

The ruling is binding only in respect of the taxpayer and the specified transaction as represented above. The ruling was delivered via Advance Ruling Summary No. 11/2020, which was published on 2 November 2020. Advance rulings are final under the ITA. A taxpayer may not appeal against the decision in the advance ruling, but may opt not to rely on the decision. In such case, the taxpayer must declare in the income tax return that it has obtained, but has opted not to rely on, the advanced ruling.

SINGAPORE34 | Asia Tax Bulletin MAYER BROWN | 35SINGAPORE

Participation in international compliance assurance programme

The Inland Revenue Authority of Singapore (IRAS) has announced that it will participate in the International Compliance Assurance Programme (ICAP) from 2021 in view of its commitment to provide tax certainty to multinational enterprises (MNEs) operating in Singapore and reduce the number of cases that result in disputes.

The ICAP is a voluntary risk assessment and assurance programme developed by the OECD to facilitate co-operative multilateral engagements between MNEs and tax administrations, which aim to provide participating MNEs with increased tax certainty in certain activities and transactions.

Unlike advance pricing agreements (APAs), the outcome of the ICAP does not provide legal certainty (i.e. it is not legally binding). However, participating MNEs could obtain comfort and assurance, through an outcome letter, from each participating tax administration with regard to the transaction or risk area covered by the risk assessment. For a transaction or risk area that is considered low risk, the outcome letter will include an assurance that the tax administration does not anticipate to subject the covered transaction or risk area to further review for a defined period.

An MNE may signify its interest in participating in the ICAP through its ultimate parent entity (UPE)’s tax administration. The MNE may also be approached by the UPE’s tax administration to discuss its possible participation in the ICAP.

ICAP serves to complement IRAS’ Enhanced Taxpayer Relationship Programme, APAs and advance tax rulings (ATRs) in providing tax certainty to MNEs.

Income tax treatment of security tokens

The Inland Revenue Authority of Singapore (IRAS) has clarified that a security token can be in the form of any security or investment asset or instrument. Hence, the nature of returns derived from a security token could be interests, dividends or other distributions, and will be taxed accordingly. Further details are available in the updated guidelines on the income tax treatment of digital tokens dated 9 October 2020.


USA

According to an update of 14 October 2020, published by the US Internal Revenue Service (IRS), the Singapore–United States Competent Authority Arrangement on the Exchange of Country-By-Country (CbC) Reports was signed and entered into force on 6 October 2020. The arrangement generally applies from 6 October 2020.

KAZAKHSTAN

The amendments made by the MLI to Singapore’s double tax treaty with Kazakhstan took effect on 1 October 2020. Due to these changes, additional anti-tax treaty abuse conditions have taken effect and are now part of the double tax treaty provisions.

OMAN

On 29 October 2020, the government of Singapore published a document, containing details of the amendments made to the Oman–Singapore Income Tax Treaty (2003), by the MLI. Singapore and Oman deposited their instruments of ratification of the MLI on, respectively, 21 December 2018 and 7 July 2020. The MLI therefore entered into force for Singapore on 1 April 2019 and for Oman on 1 November 2020.

ASEAN, JAPAN, KOREA

On 15 November 2020, the Association of Southeast Asian Nations (ASEAN) member states (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam) and ASEAN’s free trade agreement partners (Australia, China, Japan, New Zealand and Korea (Rep.)) signed a Regional Comprehensive Economic Partnership Agreement (RCEP), during the virtually held 4th RCEP Summit. In November 2019, India (an ASEAN’s free trade agreement partner as well) indicated it had several issues preventing it from joining RCEP and has since indicated it is not in a position to sign the agreement.

SINGAPORE36 | Asia Tax Bulletin MAYER BROWN | 37SINGAPORE

MAYER BROWN | 39TAIWAN

Taiwan

Valuation of collateral for tax liabilities

On 10 November 2020, the Ministry of Finance provided a clearer scope of collateral and valuation methods with respect to the collateral provided by taxpayers for tax liabilities purposes through the Amendments on Rules for Collateral Valuation of Gold and Securities. In accordance with article 11-1 of the Tax Collection Act, taxpayers may offer gold, securities or property as collateral for tax authorities if they do not have sufficient cash to settle their tax liabilities.

• When providing gold as collateral, the value will be changed from the purchase price to the sale price by referring to the market transaction prices of gold by local banks.

• When providing publicly traded securities such as listed stocks or beneficiary certificates as collateral, the value will be 80% of the previous day’s closing price in the securities markets. For corporate bonds, the value will be 80% of the par value of the bonds.

• When providing land or buildings as collateral, the value will be the present value assessed by the tax authorities plus 20% of the said value of the land or buildings. The land or buildings must meet a number of requirements: they must be easily realisable, there must be no disputes over property rights, and the building can be paid off in full. However, if taxpayers can prove the market value of the collateral, the tax authorities may recognise the market value after carrying out investigation and verification.

The amendments came into effect immediately from the date of announcement. The Ministry of Finance explains that such amendments will allow the tax authorities to take an objective view to assessing the value of collateral, improving the administration procedure and protecting the rights of taxpayers.

JURISDICTION:


SAUDI ARABIA

On 2 December 2020, Taiwan and Saudi Arabia signed an income tax agreement in Riyadh.

MAYER BROWN | 41VIETNAM

Interest imputation on interest-free loans

On 10 August 2020, the General Department of Taxation (“GDT”) issued Official Letter No. 3231/TCT-CS (“Official Letter 3231”) to the Tax Department of Nam Dinh province in relation to the tax obligations of Smart Shirts Garments Manufacturing Bao Minh Company Limited (“Smart Shirts Bao Minh”). Specifically, Official Letter 3231 clarifies the tax consequences of interest-free lending between two companies in Vietnam if these companies are related.

Accordingly, the interest-free loan that Smart Shirts Bao Minh granted to another company between 2017 and 2018 shall be taxable at a rate determined by the tax authorities. The rationale for such conclusion by the GDT is that since the interest-free loan did not reflect the market common transaction values, it is a breach of tax regulations and must thus be taxed in accordance with Article 37.1(e) of the Law on Tax Administration 2006. The GDT applied the Law on Tax Administration 2016 in preparing Official Letter 3231 although the legislation had expired on 1 July 2020 as this was the law applicable to the loan granted by Smart Shirts Bao Minh between 2017 and 2018.

However, it should be highlighted that the GDT’s view remains applicable under the current laws since the new Law on Tax Administration 2019 contains similar provisions on the tax authority’s right to levy taxes under similar circumstances. Specifically, Article 50.1(dd) of the Law on Tax Administration 2019 mirrors Article 37.1(e) of the Law on Tax Administration 2006, granting tax authority the right to impose taxes on transactions where the value of goods and services does not reflect the market’s common values. Consequently, the GDT’s view expressed in Official Letter 3231 that interest-free loans are lending activities not in accordance with market values remains applicable, and the extent of tax exposure remains unchanged.

As a consequence of Official Letter 3231, the lender of an interest-free loan would be retroactively liable for any unfulfilled tax obligations, such as CIT, arising out of the loan. Pursuant to Articles 49.2 and 50.2 of the Law on Tax Administration 2019, the tax authority can either fix the payable tax amount or the relevant factors to calculate the same on the basis of the following:

• Database of the tax authority and commercial database;

• The tax amount payable by a comparable entity (in terms of products, industry and scale) in the same locality; otherwise the tax amount payable by a comparable entity in another locality;

• Effective inspection results; and

• The applicable industry tax rate under tax laws.

Reduction of corporate income tax for 2020

The government has issued the implementing decree detailing the application of the 30% reduction in the corporate income tax (CIT) payable for qualified enterprises, cooperatives, agencies and other organisations established under Vietnam laws with the total revenue of not more than VND 200 billion for the year 2020.

In addition to the condition previously approved by the National Assembly, the implementing decree (Decree No. 114/2020/NĐ-CP) clarifies the determination of an enterprise’s total revenue and CIT payable in 2020, as follows:

• total revenue includes all sales proceeds, processing fees, service charges, including surcharges, subsidies and other amounts that the enterprise is entitled to receive;

• enterprises established in 2020, or enterprises that have undergone change in form or ownership, consolidation, merger, division, dissolution or bankruptcy in 2020, where the enterprise did not operate for a full 12 months, shall compute the total revenue by multiplying the average monthly revenue by 12 months;

• for quarterly declarations, qualified enterprises shall pay 70% of the quarterly CIT where its total revenue in 2020 is expected to be not more than VND 200 billion; and

• enterprises enjoying incentives are entitled to the reduction.

Decree No. 114/2020/NĐ-CP dated 25 September 2020 implements Resolution No. 116/2020/QH14, which took effect on 3 August 2020.

Higher fines for tax administration violations

The Vietnamese government will impose higher fines for violations of tax administration rules, effective from 5 December 2020, under Decree 125/2020/ND-CP, to improve taxpayer compliance with existing laws.

The Decree sets out the levels of fines for the following violations, among other transgressions:

• violations involving a tax registration deadline, notice of business operation suspension or notice of resuming business ahead of time will be fined between VND 1 million and VND 10 million;

• violations involving late notification of changes in tax registration information will be fined between VND 500,000 and VND 7 million;

• false or incomplete declarations that do not result in under-declaration of tax payable or do not lead to tax evasion will be fined between VND 500,000 and VND 8 million;

• delays in filing a tax return will be fined between VND 2 million and VND 25 million;

• “large-scale” administrative violations will include:

>> violations involving tax amounts of VND 100 million or more, or goods valued at VND 500 million or more; and

>> violations involving 10 or more invoice numbers.

The fine for a tax violation will increase under aggravating circumstances or decrease under extenuating circumstances, respectively, by 10% of the average fine level;

VietnamJURISDICTION:

MAYER BROWN | 43VIETNAM

• violations involving the issuance of, tampering with and/or destruction of paper and electronic invoices and use of illegal invoices and other relevant violations will be fined, based on the nature of the violation, from VND 500,000 to VND 50 million; and

• violations involving tax evasion will be fined up to 300% of the tax evasion amount.

The relevant statutes of limitation for the above violations are also provided in the Decree accordingly. The fines are streamlined to be consistent with the rules prescribed under the Law on Handling Administrative Violations of 2012 and the Law on Tax Administration of 2019.

Electronic invoices

On 19 October 2020, the government issued Decree No. 123/2020/ND-CP (“Decree 123”) regarding invoices and tax documents such as personal income tax withholding documents, tax receipts and fee payment receipts. Most notably, the phase-in of e-invoicing is now postponed until 1 July 2022.

Decree 123 will take effect on 1 July 2022, to supersede a number of invoicing regulations, including Decree No. 51/2010/ND-CP as amended by Decree 04/2014/ND-CP (collectively referred to as “Decree 51”) and Decree No. 119/2018/ND-CP (“Decree 119”).

Previously, pursuant to Decree 119, the use of e-invoices would be mandatory on 1 November 2020. This is not in line with Article 151.2 of the Law on Tax Administration No. 38/2019/QH14, which provides that regulations on electronic documents and invoices only take effect on 1 July 2022. The new Decree 123 now resolves this inconsistency.

Until 30 June 2022, companies can continue to use their current invoice system, including paper invoice system under Decree 51. Transition into e-invoice system is encouraged. However, those who are unable to meet information technology infrastructure requirements and continue to use paper invoices must submit a prescribed form as stipulated under Decree 123 together with the submission of VAT returns. This also applies to companies established during the transition period.

Once Decree 123 takes effect, only e-invoices (VAT invoices or sales invoices) and invoices printed by tax authorities will be in use. Invoices printed by tax authorities will be used only by small and medium companies under specific conditions or during black-out periods when the information technology infrastructure system of the tax authority is down.

Timing for invoice issuance for different business lines that have been regulated under Circular No. 39/2014/TT-BTC is set forth in more detail under Decree 123, including for telecommunication services, construction and installation activities, real estate, air transport services, commercial retail, etc.

Transfer pricing

The government has updated the transfer pricing rules with regard to acceptable databases and arm’s length range, deductible interest expense and country-by-country reporting (CbCR) effective from the tax year 2020. In this regard, the government issued Decree No. 132/2020/ND-CP (Decree 132).

• The following changes under the draft transfer pricing decree were approved:

>> taxpayers and tax authorities may use commercial databases in their transfer pricing analyses;

>> the lower limit of the acceptable arm’s length range has been raised from the 25th percentile to the 35th percentile. Thus, the standard arm’s length range is from the 35th to the 75th percentile, with the median value set at the 50th percentile; and

>> the cap on deductible interest arising from related party loans has been increased from 20% to 30% of earnings before interest, tax, depreciation and amortisation from the tax year 2019.

• a Vietnamese ultimate parent entity (UPE) with worldwide consolidated revenue in a fiscal year of at least VND 18 trillion must file a CbCR to the tax authorities within 12 months (previously, 90 days) from the UPE’s financial year end;

• a foreign-owned subsidiary operating in Vietnam is not required to file the CbCR provided that its UPE which is a resident of another country had filed the CbCR overseas and the CbCR will be made available to the Vietnamese tax authorities through an automatic exchange of information (AEOI) procedure; and

• the use of the tax authorities’ internal database in making and assessing transfer pricing adjustments in tax audits will be limited under Decree 132. However, tax authorities will retain the right to use their database to assess taxpayers’ compliance with transfer pricing rules and/or impose adjustments when deemed necessary.

Decree 132 comes into effect on 20 December 2020 and replaces Transfer Pricing Decree 20. A taxpayer with a foreign UPE is required to submit the CbCR locally under Decree 132 under the following scenarios:

• the UPE’s country of residence has a tax treaty in force with Vietnam but has not yet signed the Multiple Competent Authority Agreement (MCAA) on the AEOI with Vietnam;

• the UPE’s country of residence has signed the MCAA but has suspended the AEOI or the CbCR has not been provided automatically to Vietnam; or

• in the case of a multinational enterprise having more than one Vietnamese subsidiary, the UPE must appoint a subsidiary to file the CbCR locally and notify the tax authorities of the appointment in writing.

COVID-19 pandemic: incentive for donations by companies

The government will allow donations made by companies to support activities that prevent and control the COVID-19 pandemic as deductible expenses in determining the taxable income.

The government announced the above incentive in Resolution 128/2020/QH14 of 12 November 2020. Resolution 128/2020/QH14 also outlined the government’s focus in combating tax loss, tackling transfer pricing and tax evasion issues, issuance of electronic invoices, reforming the tax agencies and other prevalent issues, which form part of the measures in administering the State budget for 2021.

VIETNAM42 | Asia Tax Bulletin


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.

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

Pieter de Ridder is a Partner of Mayer Brown LLP and is a member of the Global Tax Transactions and Consulting Group. Pieter has over two decades of experience in Asia advising multinational companies and institutions with interests in one or more Asian jurisdictions on theirinbound and outbound work.

Prior to arriving in Singapore in 1996, he was based in Jakarta and Hong Kong. His practice focuses on advising tax matters such as direct investment, restructurings, financing arrangements, private equity and holding company structures into or from locations such as mainland China, Hong Kong, Singapore, India, Indonesia and the other ASEAN countries.

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