Asset and Wealth Management Tax Highlights – Asia Pacific

January to March 2018 In this edition’s asset and wealth management tax highlights for the Asia Pacific region, we highlight industry and tax developments from Australia, China, Hong Kong, India, Japan, Malaysia and Singapore, which may impact your asset and wealth management business. We hope you find these updates of interest, and will be pleased to discuss these developments and issues with you further.

Australia

Federal Court considers Australia’s right to tax gains of foreign limited partnerships

A recent Federal Court decision in Resource Capital Fund IV LP v Commissioner of Taxation dealt with Australia’s right to tax profits made by a Cayman Island Limited partnership on the sale of shares in an Australian mining company. While the Court held that the United States (US) resident partners were the relevant taxpayers under domestic law, they were within the protection of the Australia-US Double Tax Treaty and not subject to Australian tax on the sale of the Australian shares by the limited partnership (LP).

The case raises several important points for foreign investors (particularly private equity investors) in Australian companies, and Australians investing overseas. These include:

• Investments made by US resident investors through non-US unincorporated LPs should have the benefit of the Australia-US Double Tax Treaty.

• Even though LPs are taxed like companies from an Australian perspective, LPs are not in fact a separate taxable entity. The outcome suggests that each partner in an LP may have to submit tax returns and pay

tax on investments in Australia. Urgent clarification is needed on this point from the Australian Taxation Office (ATO).

• The Court held that the sale of shares in the Australian company had an Australian source, despite the LP and its partners being located overseas. Broadly, this was due to the amount of input provided by individuals in Australia throughout the term of the investment. This is potentially a significant development for inbound investment funds.

• The Court held that the mining shares were not Taxable Australia Property (TAP) i.e. land-rich-noting:

– Mining leases were treated as TAP, however general purpose leases and miscellaneous licences granted under the Mining Act were not TAP.

– Certain items of infrastructure were effectively carved out of the definition of real property.

– For ‘downstream assets’ (i.e. assets used in the mine’s processing and manufacturing functions), the ‘netback method’ was preferred to a ‘top down residual approach’.

The Commissioner of Taxation has appealed this decision to the Full Federal Court.

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Asia Region Funds Passport Bill and tax framework for CCIVs

The Australian Government has released draft legislation and explanatory materials on the new tax framework to give effect to the Corporate Collective Investment Vehicle (CCIV). This follows the earlier release of draft legislation dealing with the regulatory framework proposed to apply to CCIVs. The new Corporate Investment Vehicles (CIVs) are designed to be internationally recognised vehicles to attract foreign investors, including under the Asia Region Funds Passport.

Broadly, the proposed tax treatment of CCIVs aligns with the current tax arrangements for Attribution Managed Investment Trusts (AMITs) which provides flow-through taxation treatment, but there are some important differences to be noted.

The Government has also released on 28 March 2018, a bill introducing the Asia Region Funds Passport rules, following an earlier release of draft legislation.

In addition, the Asia Region Funds Passport Joint Committee has called for expressions of interest to participate in a Pilot Program for the Passport. The Pilot Program will test the Passport framework and regulator processes across participating economies to identify any remaining barriers to trade or areas for future improvement.

ATO issues guidance on foreign trusts and capital gains

The ATO has finalised the following taxation determinations (previously issued in draft) dealing with foreign trusts and the interaction with the capital gains tax (CGT) rules:

• Taxation Determination TD 2017/23, which sets out the ATO’s view that a foreign trust does not recognise capital gains or capital losses from CGT events arising in respect of assets that are not Taxable Australian Property (TAP) in working out the trust’s net income. Any amount attributable to such a gain that is paid or applied for the benefit of a resident beneficiary may be included in their assessable income.

• Taxation Determination TD 2017/24, which sets out the ATO’s view that amounts assessable to an Australian resident beneficiary of a foreign trust (under section 99B of the Tax Act) that are attributable to gains from a non-TAP asset of the trust are not treated as a capital gain for the purposes of applying a capital loss offset or CGT discount when working out the beneficiary’s taxable income.

Australia’s hybrid mismatch rules updated draft law released

On 7 March 2018, the Australian Government released for comment a revised version of exposure draft legislation and explanatory materials to implement the Organisation for Economic Cooperation and Development (OECD) recommended hybrid mismatch rules.

Hybrid mismatches are differences in the tax treatment of an entity or instrument under the laws of two or more tax jurisdictions. If a mismatch arises, it is neutralised by disallowing a deduction or including an amount in assessable income.

This latest exposure draft updates the incomplete draft legislation previously released for comment on 24 November 2017, and also incorporates rules to address branch mismatch arrangements and to introduce a unilateral ‘integrity rule’ designed to discourage foreign interposed zero or low tax rate entities lending to Australia.

The commencement date of the proposed rules is subject to the legislative process. However, with comments on the current exposure draft law not due until 4 April 2018, based on Parliamentary timetables, it would appear that any law cannot be introduced until the Winter session of Parliament which commences on 8 May 2018.

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Proposed reduction in the corporate tax rate

The Bill which proposes to give effect to the remaining elements of the Government’s plan to progressively lower the corporate tax rate to 25 per cent for all corporate tax entities by the 2026-27 income year was being debated in the Senate at the time of this publication. If the Government is unsuccessful in negotiating with the independent Senators, the Government may try again in May for the Federal Budget.

Tax treatment of stapled structures

The Government is seeking to protect the integrity of the corporate tax system by tightening rules related to the use of stapled securities. A stapled structure typically involves the stapling of units in an asset owning trust to shares in a trading company, such that investors trade both units and shares together. Under current arrangements, foreign investors may be taxed at a concessional rate of 15% on passive income from the trust and effectively taxed on trading income in the company at 30%.However, the Government is concerned with structures that convert trading income to passive income (such that income is concessionally taxed) through the use of cross staple rental and other payments from the company to the trust.

To address these integrity concerns, the Government proposes the following measures:

• Applying a final withholding tax at the corporate tax rate to distributions derived from trading income converted to passive income using a Managed Investment Trust (MIT) (subject to limited exemptions provided by the Government for certain infrastructure projects).

• Amending the thin capitalisation rules to prevent foreign investors using multiple flow-through vehicles such as trusts or partnerships to convert trading income to favourably taxed interest income.

• Limiting foreign pension fund withholding tax exemption for interest and dividends to portfolio investments only.

• Creating a legislative framework for the existing tax exemption for foreign governments (including sovereign wealth funds) and limiting the exemption to portfolio investments.

• Excluding agricultural land from being “eligible investment business” for a MIT.

These measures (except for the thin capitalisation measures) are proposed to take effect from 1 July 2019. The thin capitalisation measures are proposed to take effect from 1 July 2018.

Transitional measures are also proposed for ordinary business staples and infrastructure assets.

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China

China is again offering opportunities for asset managers by re-launching the Shanghai QDLP Programme

Shanghai has recently re-launched its Qualified Domestic Limited Partners (QDLP) programme allowing qualified domestic private RMB funds (Qualified RMB Funds) to be established in Shanghai to invest into offshore markets after a two-year hiatus. This time, more than a dozen asset managers received approvals to participate in the QDLP Programme.Each approved asset manager may have an individual foreign exchange quota up to US$50 million to exchange the RMB funds raised from Chinese investors to foreign currency, to be further invested into overseas markets. This reflects China’s long-term commitment to opening the capital account and internationalising the RMB, as well as Shanghai’s ambition of becoming an international financial center by 2020.

The resumed QDLP Programme continuously provides a channel for international asset managers to access Chinese domestic capital. In order to maximise investment returns, various China tax issues need to be properly reviewed when considering what structure to put in place. For instance:

• Management fees and performance fees may be collected by the offshore fund manager of the master fund under the “master-feeder” structure. Asset managers will need to put in place an appropriate fee structure for compensating the Onshore Fund Management Company (Onshore FMC) from the Chinese tax and transfer pricing perspectives.

• China indirect tax implications, especially those uncertain practical issues in calculating the taxable income, which needs further attention and clarification from actual policy implementation circulars.

• Selecting the best location for registering the Onshore FMC and QDLP fund is also a key concern for asset managers. This is particularly true as many districts in Shanghai are actively promoting the asset management industry by providing favourable policies.

Other tax issues should also be properly managed, such as the unclear tax treatment on partnership and contractual arrangement under the current Chinese tax regime, permanent establishment exposure to the offshore FMC and the offshore master fund through the activities of senior management in China, etc.

Positive signals to foreign investors: China unveils withholding tax deferral treatment for foreign direct re-investment

On 21 December 2017, the Ministry of Finance (MOF), State Administration of Taxation (SAT), National Development and Reform Commission and Ministry of Commerce jointly unveiled this long-awaited year-end gift, i.e. the Notice Regarding the Provisional Deferral Treatment for WHT on Direct Re-investment by Foreign Investors Using Profits Distributed from TREs in China (Caishui [2017] No.88, or the Notice), which clarifies the criteria to enjoy tax deferral treatment, application procedures and responsibilities, and

post-administration by the tax authorities. According to the Notice, such treatment would be effective retrospectively from 1 January 2017, and tax payments already settled on eligible re-investment can be refunded. Subsequently, the above four ministries jointly released a list of Q&As through the MOF’s official website on 28 December 2017, providing their interpretation of the background of certain provisions in the Notice and relevant implementation requirements.

The tax deferral treatment is a very favourable policy to attract foreign capital flow into China. Foreign investors that have generated profits from their investment activities in China are suggested to proactively assess their existing group investment strategy and adjust accordingly to fully leverage on such treatment. Meanwhile, they should also pay close attention to the local-level implementation of this tax deferral treatment and prepare as necessary.

For more details, please refer to the following URL:

https://www.pwccn.com/en/services/tax/publications/chinatax-news-dec2017-38.html

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China issues tax policy to support the opening of the commodity futures market

The MOF, the SAT and the China Securities Regulatory Commission jointly issued the Circular on Tax Policy for the Support of Opening the Crude Oil Futures and Other Commodity Futures Market (Caishui [2018] No.21, the Circular) on 13 March 2018, clarifying the favorable income tax treatment for overseas investors’ trading of crude oil futures opened to overseas investors. According to the Circular,

• For the overseas institutional investors (including overseas brokers) that:

– do not have any establishment or place in China; or

– have establishment or place in China but their income derived is not effectively connected to such establishment or place;

their investment income derived from trading of crude oil futures within China (excluding physical delivery) are temporarily not subject to China corporate income tax (CIT).

• For overseas brokers, the commission fees from provision of brokerage service relating to China crude oil futures trading to overseas investors outside of China are categorised as non-China sourced service income and are not subject to CIT.

• For overseas individual investors, income derived from trading of China’s crude oil futures are temporarily exempted from China individual income tax for three years starting from the date when overseas investors are allowed to trade China’s crude oil futures.

• For other commodity future trading activities that have been approved by State Council to allow foreign investors’ participation, the tax treatments set out in this Circular may also be applicable.

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Hong Kong

Non-renminbi sovereign bonds will be exempted from profits tax

The Exemption from Profits Tax (Non-Renminbi Sovereign Bonds) Order was gazetted on 12 January 2018. The Order provides profit tax exemption under section 87 of the IRO for the following income derived from non-Renminbi sovereign bonds issued in Hong Kong by the Chinese Government:

• Interest income derived from the bonds; and

• Profits from (a) sale or other disposal of the bonds, or (b) on redemption, on maturity or presentment of the bonds.

The Order will come into operation on 30 March 2018 and will apply to year of assessment commencing on 1 April 2017 and all subsequent years of assessment.

Hong Kong signed bilateral arran gement for exchange of Country-by-Country reports with France

The HKSAR Government announced on 15 January 2018 that Hong Kong has signed a bilateral arrangements for exchange of Country-by-Country (CbC) reports with France, bringing the total number of bilateral arrangements signed to 4. In addition to Ireland, South Africa and the UK, Hong Kong will exchange CbC reports for 2016 with France.

Implementation of the Multilateral Convention in Hong Kong

The Inland Revenue (Amendment) (No. 5) Bill 2017 was passed by the

Legislative Council on 24 January 2018 and was gazetted as Inland Revenue (Amendment) Ordinance 2018 on 2 February 2018.

The Ordinance:

• empowers the Chief Executive to give effect to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (Multilateral Convention) and other tax agreements that apply to Hong Kong; and

• amends certain Inland Revenue Ordinance provisions on automatic exchange of financial account information so that they align with the international standard stipulated by the OECD.

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The 2018/19 Hong Kong Budget

Hong Kong’s 2018/19 Budget was presented by the financial secretary, Mr Paul Chan on 28 February 2018.

There is no change to the profits tax rate but there are various profits tax proposals in the Budget (please see below for details). Same as last year, various one-off relief measures are also proposed in the Budget. Some key points include:

1. Profits tax rates for companies (16.5%) and unincorporated businesses (15%) remain unchanged.

2. Extend the profits tax exemption for qualifying debt instruments to cover instruments with maturity of any duration and Hong Kong listed debt securities.

3. Review the existing tax concessions applicable to the fund industry with regard to international requirements on tax co-operation while providing a more facilitating tax environment for the fund industry in Hong Kong.

4. Provide full tax deduction for capital expenditure on eligible energy-efficient building installations and renewable energy devices in the first year instead of over a period of five years.

5. Examine the feasibility of introducing a limited partnership regime for private equity funds and the related tax arrangements

6. Explore ways of enhancing Hong Kong’s competitiveness as an insurance hub, including tax arrangements.

7. Waive 75% of profits tax for 2017/18, subject to a ceiling of HK$30,000.

Launch of the CbC Reporting Portal

The IRD has announced that the CbC Reporting Portal was launched on 5 March 2018. Hong Kong Ultimate Parent Entities of Reportable Groups (HK UPEs) can now file CbC Returns to the Inland Revenue Department for accounting periods beginning between 1 January 2016 and 31 December 2017 via the Portal voluntarily. HK UPEs intending to make such filings have to register on the Portal.

Signing of the Hong Kong / India CDTA

Hong Kong and India signed a CDTA on 19 March 2018. It represents the 39th CDTA signed by Hong Kong. With the signing of a tax treaty with India, Hong Kong has now signed tax treaty with 18 out of 65 countries along the Belt and Road

1.

The CDTA seeks to improve transparency in tax matters and help curb tax evasion / avoidance. The key highlights of the India / Hong Kong CDTA are as follows:

• Capital gains arising on sale of shares of an Indian company to be chargeable to tax in India.

• Capital gains arising on sale of Indian securities (other than shares eg. derivatives, debt securities, etc.) to be chargeable to tax in India.

• Interest income to be taxed at the rate of 10% subject to satisfying beneficial ownership test.

• Fees for technical services payable to a resident of Hong Kong to be taxed at the rate of 10% subject to satisfying beneficial ownership test.

• Article on permanent establishment (PE) includes amongst others service PE clause with a threshold of 183 days within a 12 month period.

• Other income arising in India will be chargeable to tax in India.

• Articles of the tax treaty are aligned to the provisions of Multilateral Instrument to implement tax treaty related measures to prevent Base Erosion and Profit Shifting.

For more details, please refer to the following URL:

https://www.pwccn.com/en/services/tax/publications/hongkongtax-news-mar2018-4.html

1 The 18 countries are: Belarus (to be

effective from 2018/19), Brunei, China, Czech Republic, Hungary, India (not yet effective), Indonesia, Kuwait, Latvia (to be effective from 2018/19), Malaysia, Pakistan (to be effective from 2018/19), Qatar, Romania, Russia, Saudi Arabia (not yet effective), Thailand, United Arab Emirates and Vietnam.

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India

Relaxation of Minimum Alternative Tax (MAT) - Companies under the Insolvency and Bankruptcy Code (IBC), 2016

On 6 January 2018, the Central Board of Direct Taxes (CBDT) issued a press release clarifying that a company admitted under the IBC shall be allowed to be reduce the amount of total loss brought forward (including unabsorbed depreciation) from the book profit for the purpose of MAT calculation with effect from year of assessment 2018-19.

Union Budget 2018

On 1 February 2018, the Finance Minister presented the Budget 2018 proposals. On 14 March 2018, the Finance Bill, 2018 (2018 Bill) was passed by the Lok Sabha with 18 amendments in respect of Direct Tax provisions and couple of amendments in other provisions of the 2018 Bill.

Some of the key proposals relating to Financial Services sector in the Union Budget are as follows:

• Introduction of tax on long term capital gains on listed equity shares, units of equity oriented mutual funds and units of business trust. For listed equity shares, however, tax is to be calculated subject to cost rebasing of equity shares purchased prior to 1 February 2018

• Capital gains on transfer of derivatives, rupee denominated bonds and global depository receipts on recognized stock exchange in International Financial Services Centre exempt from tax by a non-residents

• Any income distributed by an equity oriented mutual fund to be subject to tax at 10%

• Extension of tax incentive for startups extended to eligible startups incorporated before 1 April 2021

• Widening the ambit of ‘business connection’ from person who habitually concludes contract to person who plays a principal role leading to conclusion of contracts on behalf of non-residents

• Reduction in corporate tax rate applicable to large set of companies

• Increase in cess levied on income-tax and surcharge to 4%

• New scheme for conducting assessment proceedings through electronic mode to be notified

• Non filing of tax returns to entail prosecution implications without monetary threshold of tax payable

FAQs regarding taxation of LTCG proposed in the 2018 Bill

On 4 February 2018, the CBDT issued FAQs clarifying, among other points, that LTCG on listed equity shares arising upto 31 January 2018 has been grandfathered for resident and non resident assesses, including foreign portfolio investments.

Applicability of Section 56 (2) (viib) in case of start-ups

On 6 February 2018, the CBDT issued an instruction stating that, in cases of Start Up Companies (as per the Department of Industrial Policy and Promotion definition), no coercive measure would be taken by the Assessing Officer to recover the outstanding demand for additions made under section 56(2)(viib) of the Income-tax Act, 1961 and also requires expeditious disposal of pending appeals by Commissioner (Appeals).

Foreign companies to establish facts to claim treaty benefit

The Authority for Advance Rulings (AAR) has recently pronounced two rulings in respect of taxability of capital gains arising in the hands of Mauritius companies on transfer of shares of an Indian company. The AAR held that the beneficial provisions of India / Mauritius tax treaty shall be available where Mauritius company can demonstrate that the investment was genuine with flow of funds through proper banking channels, and not mere accounting entries.

Asset and Wealth Management Tax Highlights – Asia Pacific 9

2018 Japan Tax Reform proposals

At the end of March 2018, the 2018 Japan Tax Reform proposals were passed into law. The rules discussed below are selected BEPS-inspired reforms that would impact the asset and wealth management industry.

A. Agent PE and Independent Agent

Current Law - Agent PE

The Japanese domestic tax law definition of a PE will be modified to align with the OCED’s BEPS Action 7 (Preventing the Artificial Avoidance of Permanent Establishment Status) and related discussion papers.

Under current law, broadly, an Agent PE is analysed based on the following criteria:

• a person (other than an agent of independent status);

• acting on behalf of the foreign taxpayer; and

• has, and habitually exercises, an authority to conclude contracts in the name of the foreign taxpayer.

Updated Law - Broadening of Agent PE Activity

Under the 2018 Japan Tax Reform, the scope of activity that gives rise to an Agent PE will also include the activities of a person in Japan who habitually acts in the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the foreign taxpayer, where such contracts result in the transfer of ownership of assets owned by that foreign taxpayer.

Current Law - Independent Agent

As noted above, a person considered an independent agent under Japanese domestic law will not be deemed to create an Agent PE for the related foreign taxpayer. Currently, the following conditions must be satisfied to qualify as an independent agent:

• a broker, commission agent, or other agent of independent status; and

• acting in the ordinary course of their business.

Updated Law - Narrowing of Independent Agent Activity

Under the 2018 Japan Tax Reform, notwithstanding the existing criteria, a person will be not be considered an independent agent if that person acts exclusively or almost exclusively for one or more foreign taxpayer(s) to which it is closely related.

Timing

The two amendments to the Agent PE and Independent Agent qualifications described above are expected to be applicable on or after 1 January 2019 for individual income tax and for the fiscal years beginning on or after 1 January 2019 for corporation tax.

FSA Guidance

Japan’s Financial Services Agency (FSA) has previously issued guidance for fund managers looking to meet the independent agent exception for the management of offshore funds. This form of guidance, sometimes referred to as a trading safe harbor or Japan’s equivalent of an investment management exemption, has been of special interest to Japanese licensed fund managers acting as discretionary investment managers for offshore funds. The FSA has not yet released new or updated guidance with respect to the independent agent exception following the announcements of the 2018 Tax Reform though the expectation is that a revised guidance will be issued over the course of 2018.

Key Takeaway

The new changes broaden the meaning of Agent PE while narrowing the scope of the independent agent exception for foreign companies with personnel in Japan in line with OECD / BEPS trends.

B. Real Estate Holding Company

Current Law - Real Estate Holding Company

Capital gains derived by a non-resident, without a PE in Japan, from the transfer of shares in either a listed

or unlisted corporation (including certain defined trusts) are subject to tax in Japan where the corporation predominantly holds real estate in Japan (see below), and the non-resident (including by aggregation with any special related persons) owns more than 5% of the shares if the corporation is listed or more than 2% if a private corporation at the prior fiscal year-end in which the shares are sold unless relief applies under a double tax treaty. The taxation is applicable by filing Japanese tax returns.

Under current law, a corporation is treated as predominantly holding real estate if 50% or more of its assets, based on their fair market value at the time of the transfer, consist of real estate in Japan (inclusive of land, buildings, shares in other corporations or specified trusts that predominantly hold real estate in Japan, etc.).

Updated Law - Real Estate Holding Company

The 2018 Japan Tax Reform expands the scope of when a company is considered a real estate holding company from the date of transfer to any day preceding one year from the date of transfer. This 365 day look-back assessment is also consistent with the OECD’s BEPS Action 15; specifically, the terms of article 9 of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) signed by Japan on 7 June 2017.

Timing

This amendment to the real estate holding company rule will be applicable on or after 1 January 2019 for individual income tax and for the fiscal years beginning on or after 1 April 2018 for corporation tax.

Key Takeaway

A taxpayer looking to sell shares in a Japanese company should determine on the date of the sale as well as the one year leading up to the date of sale whether it meets the revised definition of a real estate holding company.

Japan

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Malaysia

Tax Exemption on Management Fee for Sustainable and Responsible Investment (SRI) Funds

Currently, companies providing management services of Shariah-compliant funds approved by Securities Commission Malaysia (SC) are exempted from tax on the following:

• Statutory income (SI) from fund management services provided to foreign investors in Malaysia;

• SI from fund management services provided to local investors in Malaysia; and

• SI from fund management services provided to business trusts or real estate investment trusts in Malaysia.

During Budget 2018 announcements, to further promote fund management activities, it was proposed that tax exemption is also extended to management fee income from management of conventional and Shariah-compliant SRI funds approved by the SC.

This shall be effective from year of assessment 2018 to 2020.

The SC has issued Guidelines on Sustainable and Responsible Investment Funds on 19 December 2017.

Expansion of Venture Capital Incentives

The Government of Malaysian in the Budget 2018 has allocated RM 1 billion to be provided by major institutional investors for investments in venture capital in main selected sectors, coordinated by SC to accelerate the growth of the venture capital (VC) industry.

In the Budget 2018, various expansion of tax incentives have been proposed in addition to the existing incentives to sustain entrepreneurship and VC industry. The following is a summary of these announcements relating to the VC industry:

A. Incentives for Venture Capital Management Corporation (VCMC)

Presently, there was income tax exemption on SI derived from share of profits received on investment made by VCC.

During Budget 2018, it was proposed that income which is exempted from tax be expanded to include income received from management fees and performance fees in managing Venture Capital Company (VCC) funds.

B. Incentives for Venture Capital Company

At present, there was income tax exemption given for 10 years or according to the life of the fund established for investment in the VC, whichever is shorter. The VCC must invest at least 70% of seed, start-up and early stage funds in VC or at least 50% in the form of seed capital.

It was proposed that investment limit in VC at seed, start-up and early stage be reduced from 70% to 50% and the 50% balance be allowed for other investments.

C. Incentives for Investment in a Venture Capital

Currently, companies or individuals with business income that make an investment in a VC are given a tax deduction on the amount of investment made in the VC at adjusted income level.

It was proposed during the Budget 2018 that companies or individuals with business income investing into the VCC funds created by VCMC be given a tax deduction on the amount of investment made, restricted to a maximum of RM20 million per year for each company.

The tax exemption for the above VC incentives will be given for 5 year from year of assessment 2018 to 2022.

Extension of Period for Tax Incentives for Angel Investors

Previously, the application period for angel investors’ incentive was from 1 January 2013 until 31 December 2017. The incentive is income tax exemption equivalent to the amount of investment made by an angel investor who invests in investee companies in the form of ordinary shares. The application has to be submitted to the MOF and is subject to certain qualifying criteria.

To attract prospective angel investors to contribute capital injection in investee companies, it is proposed that the application period for tax inventive for the angel investor be extended for another 3 years.

This shall be effective for applications submitted to MOF from 1 January 2018 until 31 December 2020.

Asset and Wealth Management Tax Highlights – Asia Pacific 11

Singapore Variable Capital Company (S-VACC)

Last year, the Monetary Authority of Singapore (MAS) issued a consultation paper on the S-VACC framework, which created a buzz in the industry. Tax considerations were, however, not discussed in the paper. Many industry players have since given feedback on their ‘wish lists’ for the tax features of S-VACC. The long awaited good news on the tax treatment for S-VACCs are finally released in the Singapore Budget 2018 (delivered on 19 February 2018).

It has been announced that the tax exemption schemes under sections 13R and 13X (13R/13X Schemes) of the Income Tax Act and the Goods and Services Tax (GST) remission for funds approved under these schemes will be extended to S-VACCs. Under these schemes, S-VACCs can achieve tax neutrality provided that they derive only “specified income” derived from “designated investments”. Fund managers approved under the Financial Sector Incentive – Fund Management (FSI-FM) Scheme will also enjoy 10% concessionary tax rate on income derived from managing S-VACCs approved under the 13R/13X Schemes. S-VACCs will therefore be positioned on a level playing field vis-à-vis the current investment funds approved under 13R/13X Schemes.

One of the key features of S-VACCs is that it can be set up as a standalone fund or as an umbrella structure with multiple sub-funds and share-classes. It has been clarified that S-VACCs will be treated as a company and as a single entity. Further, from a tax administration standpoint, only one set of tax return needs to be filed with the IRAS by each S-VACC whether it is standalone or an umbrella structure. This is a simple and positive approach and should help reduce costs and administrative burden on fund managers using S-VACCs.

The conditions under the existing schemes continue to apply to S-VACCs. Two of the conditions under the 13X Scheme are that the applicant fund needs to have a minimum fund size of SGD50 million at the point of application and an annual local business spend of at least SGD200,000. Since the Budget clarified that a S-VACC will be treated as a company and a single entity for tax purposes, it should follow that the SGD50 million condition and the SGD200,000 local business spend condition applies at S-VACC level regardless of the number of sub-funds within the S-VACC. Similarly, the shareholding test and the $200,000 annual business spending requirement under Section 13R should apply at the S-VACC level rather than at the level of each sub-fund. Whether this interpretation is appropriate will be confirmed once the final details are made available in October 2018.

The current 13R/13X Schemes also provide for withholding tax exemption on interest-related payments made by approved 13R/13X funds, subject to conditions. The Budget was silent on whether this withholding tax exemption would similarly be extended to S-VACCs. We hope this would be clarified when further details are made available in October 2018. This could otherwise limit the use of S-VACCs by funds whose strategy involves leverage.

The tax changes will take effect on or after the effective date of the S-VACC regulatory framework. The S-VACC regulatory framework is currently going through the legislative process and is estimated that the tax changes will only take effect in 2019.

Enhancement to 13X Scheme

The 13R Scheme applies only to funds set up in the form of companies, while the 13X Scheme (which is the enhanced scheme) applies to funds that are set up as companies, trusts

and limited partnerships (certain exceptions apply). Many funds today are still set up offshore due to investors’ familiarity and preference. These funds may be set up in structures/legal forms according to the foreign law which are not restricted to companies, trusts and limited partnerships. Common foreign structures used for funds include Luxembourg fonds commun de placement.

It has been announced that the 13X Scheme will be available to all fund vehicles constituted in all forms, provided the 13X qualifying conditions are met. This applies to new awards approved on or after 20 February 2018. This enhancement should provide more flexibility to Singapore-based fund managers in choosing the suitable legal form for the investment funds they manage. Further details of the change will be released by May 2018.

Transfer pricing requirement

The Income Tax (Amendment) Act 2017 was passed into law in October 2017 to introduce key transfer pricing (TP) amendments including:

• Requirement to prepare contemporaneous TP documentation (TPD) from the year of assessment (YA) 2019 (i.e. financial year 2018) for Singapore taxpayers with annual revenues more than SGD 10 million

• Increase in the penalties for not preparing contemporaneous TPD to SGD 10,000

• A 5% surcharge on the amount of TP adjustments which is automatically applicable unless waived by the IRAS

• Codification of the substance over form approach, where the IRAS is empowered to re-characterise transactions in certain cases

Singapore

This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

© 2018 PricewaterhouseCoopers Limited. All rights reserved. PwC refers to the Hong Kong member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. HK-20180406-4-C1

Singapore issued subsidiary legislation under the Income Tax Act (2018 TP Rules) and an updated Transfer Pricing Guidelines on 23 February 2018. This is the first time Singapore has rewritten its TP provisions since it first legislated the arm’s length principle under section 34D of the Income Tax Act; and it marks a new era for TP enforcement and administration. This clearly signals the seriousness of the government in enforcing the arm’s length principle in Singapore. One of the most significant updates is the legislation of TPD requirements and the tenfold increase in penalties.

GST reverse charge

The reverse charge is a common feature of GST/VAT regimes, but when GST was introduced in 1994, the Government decided not to effect the reverse charge provision as it was determined that operational and compliance costs may outweigh the tax benefits. The Government has since announced that Singapore will be implementing the reverse charge for business to business services with effect from 1 January 2020.

The majority of the businesses that will be affected by the introduction of the reverse charge would be those in the financial services and real estate sectors, where most if not all of such businesses are not able to fully recover their input GST. Operationally, affected businesses would need to identify and track payments to overseas service providers (including related parties) and assess the GST treatment and impact. System changes would be required to capture the additional reporting requirements and payment of GST to the IRAS.

Signing of the Singapore / Tunisia tax treaty

Singapore and Tunisia signed a comprehensive double taxation agreement on 27 February 2018. If the tax treaty is ratified and enters into force within 2018, it will become effective from 1 January 2019 for both Singapore and Tunisia.

Below is a general comparison of the domestic tax rates in Tunisia and the reduced rates under the treaty for capital gains, interest and dividends. The rates may differ for specific sector / recipient such as financial institutions.

Capital gains

Domestic DTA

Tunisia 25% Exempt for non-land rich companies

Dividends

Domestic DTA

Tunisia 5% 5% / 0%*

Interest

Domestic DTA

Tunisia 20% 10% / 5%^ / 0%*

Contact list

Country Partner Telephone Email address

Australia Ken Woo +61 (2) 8266 2948 ken.woo@au.pwc.com

China Matthew Wong +86 (21) 2323 3052 matthew.mf.wong@cn.pwc.com

Hong Kong Florence Yip +852 2289 1833 florence.kf.yip@hk.pwc.com

India Bhavin Shah +91 (22) 6689 1122 bhavin.shah@in.pwc.com

Indonesia Margie Margaret +62 (21) 5289 0862 margie.margaret@id.pwc.com

Japan Akemi Kitou Stuart Porter

+813 5251 2461 +813 5251 2944

akemi.kitou@jp.pwc.com stuart.porter@jp.pwc.com

Korea In-Hee YunHoon Jung

+82 02 709 0542 +82 (0) 2709 3383

ihyun@samil.com hoonjung@samil.com

Malaysia Jennifer Chang +60 (3) 2173 1828 jennifer.chang@my.pwc.com

New Zealand Darry Eady +64 (9) 355 8215 darryl.b.eady@nz.pwc.com

Philippines Malou P. Lim +63 (2) 845 2728 malou.p.lim@ph.pwc.com

Singapore Anuj Kagalwala +65 6236 3822 anuj.kagalwala@sg.pwc.com

Taiwan Richard Watanabe +886 (0) 2 27296666 26704 richard.watanabe@tw.pwc.com

Thailand Orawan Fongasira +66 (2) 344 1302 orawan.fongasira@th.pwc.com

Vietnam Van Dinh Thi Quynh +84 (4) 3946 2231 dinh.quynh.van@vn.pwc.com

* when paid to Government of Singapore and specified entities

^ when interest is received by banks or financial institutions