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EY Tax Alert – Vol. 21 Issue no. 16 | 31 July 2018 1
Malaysian developments
Updated Real Property Gains Tax (RPGT) Guidelines
The Inland Revenue Board (IRB) has recently published on its
website the RPGT Guidelines dated 13 June 2018 (2018
Guidelines) in Bahasa Malaysia, titled “Garis Panduan Cukai
Keuntungan Harta Tanah”. This new 61-page 2018 Guidelines
replaces the earlier Guidelines dated 18 June 2013 (see Tax Alert
No. 15/2013). The 2018 Guidelines contain the following 25
sections and set out 15 examples:
1. Introduction
2. Objective
3. Scope of imposition
4. Rate of tax
5. Date of disposal and acquisition
6. Disposal price and acquisition price
7. Excluded expenditure
8. Chargeable gains or allowable losses
9. Deduction of allowable losses
10. Exemptions
11. Transfer of assets by way of gift
12. Transfer of assets by way of inheritance
13. Joint venture with developers
EY Tax Alert Vol. 21 - Issue no. 16
31 July 2018
Malaysian developments
• Updated Real Property Gains Tax
(RPGT) Guidelines
• Extension of Common Reporting
Standard (CRS) submission deadline
• Indirect tax matters
Overseas developments
• Hong Kong passes tax and transfer
pricing legislation to counter BEPS
• India: Tribunal rules that allowances
received outside India through a travel
currency card are not taxable in India
EY Tax Alert – Vol. 21 Issue no. 16 | 31 July 2018
2 2
14. Transfer of assets to controlled companies
15. Transfer of assets into stocks
16. Shares in real property companies
17. Application of Paragraph 34A and Paragraph
34 of Schedule 2 of the Real Property Gains
Tax Act 1976 (RPGT Act) are exclusive
18. Procedures for filing a RPGT return
19. Disposer’s responsibilities
20. Acquirer’s responsibilities
21. Acceptance of RPGT returns
22. Methods of filing RPGT returns
23. Cancellation of disposal / sales transaction
24. RPGT payments
25. Procedures for a RPGT refund
Appendix
The 2018 Guidelines introduce several new
Sections that explain and restate various key
provisions from the RPGT Act. The 2018 Guidelines
also incorporate the changes introduced to the
RPGT Act since the previous 2013 Guidelines.
For example, Section 10 of the 2018 Guidelines
provides guidance on the changes to Paragraph 2 of
Schedule 4 of the RPGT Act, which were proposed
during Budget 2016 and which took effect from 31
December 2015 (see Tax Alert No. 22/2015). The
formula to compute the amount of exemption
allowed for a partial disposal (by an individual) was
amended such that the exempted amount is to be
the higher of 10% of the chargeable gain, or the
amount is to be ascertained based on the formula
below:
A/B x C Where A is part of the area of the chargeable asset disposed, B is the total area of the chargeable asset and C is RM10,000.
Another example of an update is in Section 24.1 of
the Guidelines, which has now incorporated the
following changes on the withholding obligations of
the acquirer of the chargeable assets:
• Pursuant to the Finance (No. 2) Act 2014, with
effect from 1 January 2015 Section 21B(1) of
the RPGT Act was amended to provide that an
acquirer is required to withhold either the whole
amount of money received or 3% (previously 2%)
of the total value of the consideration,
whichever is lower. The sum withheld must be
remitted to the IRB within 60 days from the date
of disposal (see Tax Alert No. 21/2014).
• Pursuant to Finance (No. 2) Act 2017, a new
Section 21B(1A) was introduced, which
stipulates that where a disposer is not a
Malaysian citizen or a permanent resident, the
acquirer shall retain the whole amount of money
received or 7% (previously 3%) of the total value
of the consideration, whichever is lower. The
amount withheld is to be remitted to the IRB
within 60 days from the date of disposal (see
Special Tax Alert: Highlights of 2018 Budget –
Part II). This was effective from 1 January 2018.
Notwithstanding the above, Section 5 of the 2018
Guidelines, which provides guidance on the dates of
disposal and acquisition, does not elaborate on
conditional contracts or explain the change in law
with effect from 1 January 2018. Further to this
change, approval required from an “authority or
committee appointed by the Government” would no
longer impact the RPGT disposal date (unlike, for
example, State Government approvals) (see Special
Tax Alert: Highlights of 2018 Budget – Part II).
The procedure to obtain a RPGT refund has also
been updated. Where the refund is to be remitted to
the acquirer, an “agreement letter” as provided in
the Appendix to the Guidelines will need to be
completed and submitted accordingly.
Extension of Common Reporting Standard (CRS) submission deadline
Following the enactment of the relevant rules for
the Automatic Exchange of Information by the
Malaysian Government (see Tax Alerts No. 2/2017,
No. 1/2018, No. 4/2018 and No. 6/2018) under
the Common Reporting Standard (CRS), Malaysian
Financial Institutions (MYFIs) are required to collect
and report to the Inland Revenue Board (IRB) the
EY Tax Alert – Vol. 21 Issue no. 16 | 31 July 2018
3
financial account information of non-residents. The
IRB will exchange this information with the
participating foreign tax authorities of those non-
residents from 2018.
The IRB has recently announced on its website that
the due date of the first CRS report filing, which was
originally due by 31 July 2018, has been extended
to 15 August 2018.
Indirect tax matters
RMCD publishes FAQs and proposed
implementation models for SST
In preparation for the introduction of the Sales Tax
and Service Tax (SST) on 1 September 2018, the
Royal Malaysian Customs Department (RMCD) has
released a list of frequently asked questions (FAQs)
and details pertaining to the proposed
implementation models for SST.
The table below summarizes the key points of the
proposed SST implementation models:
Framework Sales Tax Service Tax
Scope Levied on:
► Taxable goods
manufactured
in Malaysia by
a taxable
person and
sold, used or
disposed by
him; and
► Taxable goods
imported into
Malaysia
Certain goods will
be exempted from
sales tax
Charged on
any provision
of taxable
services made
in the course
or furtherance
of any
business by a
taxable
person in
Malaysia
Framework Sales Tax Service Tax
Registration
and
threshold
Person who
manufactures
taxable goods and
the annual
turnover exceeds
MYR500,000
Service
provider who
provides
taxable
services and
the value of
the taxable
services
provided for a
period of 12
months
exceeds
MYR500,000
Rate(s) 5%, 10% or a
specific rate
Fixed rate of
6%, and a
specific rate
of MYR25 for
the provision
of credit card
or charge card
services
Accounting
basis
Sales Tax is
required to be
accounted for at
the time when the
goods are sold,
disposed of or
first used (accrual
basis)
Service Tax is
generally
required to be
accounted for
at the time
when the
payment is
received
(payment
basis)
Filing of
returns
Submission on a
bi-monthly basis
via electronic
filing or by post
Submission on
a bi-monthly
basis via
electronic
filing / by post
The scope of the Service Tax has been expanded to
include provision of IT services, electricity and
domestic flights, excluding Rural Air Services.
Below is the list of services which will be subject to
Service Tax.
EY Tax Alert – Vol. 21 Issue no. 16 | 31 July 2018
4 4
• Hotel
• Insurance and
takaful
• Food and beverage
preparation
• Club
• Gaming
• Telecommunications
• Pay-TV
• Forwarding agents
• Legal
• Accounting
• Surveying
• Architectural
• Valuation
• Engineering
• Employment agency
• Security
• Management
services
• Parking
• Motor vehicle
service or repair
• Courier
• Hire and drive car
• Advertising
• Domestic flight
except Rural Air
Services
• IT services
• Credit / charge card
• Electricity
• Consultancy
Along with the expansion in scope, it is anticipated
that certain exemptions from the previous SST
legislation will be removed or restricted under the
new Acts, such as the exemption for the provision
of services to companies within the same group and
certain other exemption facilities.
RMCD has also clarified that it will continue with
Goods and Services Tax (GST) audits for closure
purposes, after the SST comes into effect.
To access the list of FAQs, the proposed
implementation models for SST and the list of
proposed goods exempted from Sales Tax, use the
links below:
• Sales Tax FAQ (English) or Sales Tax FAQ
(Bahasa Malaysia)
• Service Tax FAQ (English) or Service Tax FAQ
(Bahasa Malaysia)
• Proposed Sales Tax Implementation Model
• Proposed Service Tax Implementation Model
• Proposed Goods Exempted from Sales Tax
Between June and September 2018, businesses will
have to consider two sets of indirect taxes – the
GST, that was reduced from 6% to 0%, and the
planning for the transition from GST to the SST.
During this period, businesses need to focus on the
technical and operational aspects of transitioning
between the two indirect tax regimes.
In parallel to managing the transition, businesses
also need to consider, among others, the Price
Control and Anti-Profiteering Act 2014 (PCAP Act)
and other regulatory requirements.
In ensuring a smooth transition to SST
implementation, businesses need to consider the
following:
• People, processes and systems, to comply with
the new indirect tax laws and regulations
• Relevant regulations that may have an impact
post-SST implementation, e.g. the PCAP Act
• Stakeholder engagement on potential
commercial implications
Overseas developments
Hong Kong passes tax and transfer pricing legislation to counter BEPS
On 4 July 2018, the third and final reading of the
(Amendment) (No. 6) Bill 2017 (the Amendment
Bill) passed in Hong Kong’s Legislative Council.
The Amendment Bill was gazetted and formally
became law on 13 July 2018.
The Amendment Bill codifies certain transfer pricing
(TP) principles, introduces mandatory TP
documentation requirements into the Inland
Revenue Ordinance (Cap. 112) (IRO), and
implements the minimum standards outlined in the
Consultation Report on Measures to Counter Base
Erosion and Profit Shifting (BEPS) (the Consultation
Report), dated 31 July 2017.
EY Tax Alert – Vol. 21 Issue no. 16 | 31 July 2018
5
The Amendment Bill amends the IRO to:
• Codify TP rules
• Require income or loss from provisions between
associated persons to be computed on an arm’s-
length basis for tax purposes
• Provide for an advance pricing arrangement
(APA) regime
• Require documentation for related party
transactions (intra-group transactions and intra-
entity dealings)
• Introduce a statutory dispute resolution
mechanism for cross-border tax treaty-related
disputes
• Enhance the current tax credit system
• Amend certain profits tax concessions to
introduce revised eligibility criteria (including
eligibility for the half-rate concession for
corporate treasury centre activities)
Different effective dates apply for different
purposes, for example:
• Accounting periods beginning on or after 1
January 2018 for Country-by-Country Reporting
• Accounting periods beginning on or after 1 April
2018 for master file/local file and APAs
• Years of assessment beginning on or after 1
April 2018 for profits taxes under the IRO
• Years of assessment beginning on or after 1
April 2019 for deeming provision on intellectual
property and Authorized OECD Approach for
permanent establishments
This Alert highlights the key provisions in the
Amendment Bill as clarified in a report by the Bills
Committee (the Bills Committee Report).
Detailed discussion
Background
BEPS refers to the exploitation (or perceived
exploitation) of the gaps and mismatches in
international tax rules by multinational enterprises,
to artificially shift profits to low or no-tax locations
where there may be little or no economic activity.
The Organisation for Economic Co-operation and
Development (OECD) released a package of 15
action plans in October 2015 to counter BEPS.
In June 2016, Hong Kong indicated its commitment
to implementing the BEPS package. In October
2016, the Financial Services and the Treasury
Bureau (FSTB) launched a public consultation
process on proposed measures to counter BEPS
strategies. In July 2017, the Government released
the Consultation Report, indicating that the
Government received broad support during the
consultation process for its implementation
strategy with regard to the BEPS package.
On 29 December 2017, the Government published
the Amendment Bill for further reading at the
Legislative Council (LegCo). The Amendment Bill
codifies recommendations released in the
Consultation Paper.
From 10 January 2018 to 4 July 2018, the
Amendment Bill received a total of three readings at
the LegCo. A Bills Committee was also formed to
study the Bill at nine Bills Committee meetings,
which moved a series of Bills Committee Stage
Amendments (CSAs) before the Bill was tabled for
final reading.
The following sections summarize the main issues
covered in the Amendment Bill, as amended by the
relevant CSAs:
1. TP regulatory regime
2. TP documentation
3. Other related matters
TP regulatory regime
Codifies the OECD’s TP rules into the IRO
The Amendment Bill codifies the arm’s-length
principle into the IRO through the proposed
fundamental TP rule (Fundamental Rule). The
Fundamental Rule allows Inland Revenue to adjust
the profits or losses of an enterprise where the
actual compensation made or imposed between two
associated persons departs from the compensation
which would have been made between independent
persons (and that departure has created a tax
advantage).
EY Tax Alert – Vol. 21 Issue no. 16 | 31 July 2018
6 6
The scope of the Fundamental Rule covers persons
who are associated and applies to transactions
involving the sale/transfer/use of assets and
provision of services. Financial and business
arrangements between different parts of an
enterprise, such as dealings between a head office
and a permanent establishment, are also covered.
Associated parties are defined based on tests of
participation in the management, control and
capital of another, or of common participation by a
third party.
The OECD’s TP guidelines are relied on to provide
guidance on how the TP principles should be
interpreted, and a legal basis for its application is
provided in the IRO. In particular, the Amendment
Bill provides that the Fundamental Rule
interpretation is to be consistent with the OECD’s
TP guidelines.
The Fundamental Rule applies to years of
assessment beginning on or after 1 April 2018.
The implementation of the Authorized OECD
Approach as reflected in the Amendment Bill on
attributing income or loss to permanent
establishments has been deferred by 12 months,
i.e. it will apply to years of assessment beginning on
or after 1 April 2019.
In respect of fees for an APA application, the
service charge will be capped at HK$500,000. This
excludes direct costs of engaging external advisors
as well as travelling costs, which will be fully
reimbursed by the APA applicant.
Coverage and risk-based approach
The Bills Committee Report clarifies that the
Fundamental Rule applies to both cross-border and
domestic transactions. In practice, in applying the
TP rules the Inland Revenue Department (IRD) will
consider the overall Hong Kong tax position of the
transactions involved.
Specifically, insofar as domestic transactions
between associated persons do not give rise to
actual tax difference, or domestic transactions
involving non-arm’s length loans (e.g. interest-free
loans) are not carried out in the ordinary course of
money lending or intra-group financing business,
and provided that such transactions do not have a
tax avoidance purpose, then the relevant persons
will not be obliged to compute the income or loss
arising from these transactions on the basis of the
arm’s-length provision when preparing their tax
returns and no corresponding assessment on that
basis will be made by IRD.
The IRD will provide further guidance in a
Departmental Interpretation and Practice Note
(DIPN) at a future date.
In addition, the Fundamental Rule applies to all
types of tax, including profits tax, property tax and
salaries tax. This is because Hong Kong adopts a
scheduler income tax system which is different from
the comprehensive income tax regimes of many
overseas tax jurisdictions whereby all sources of
income are aggregated for assessment purposes.
Deeming provision on intellectual property
The Amendment Bill also incorporates the OECD
guidance in the development, enhancement,
maintenance, protection or exploitation (DEMPE)
functions related to the creation of intangibles.
Specifically, a new provision will be added to the
IRO to target situations where a person in Hong
Kong has contributed to the DEMPE functions in
respect of certain intellectual property rights (IPRs),
but income from such IPRs accrues to a non-
resident outside Hong Kong.
In such a case, the Hong Kong person will be taxed
under the deeming provision. The tax will be
imposed on an amount accruing in respect of the
exhibition or use of the relevant IPRs as is
attributable to the person’s contribution in Hong
Kong, even if the sum accrues to an associate of the
person outside Hong Kong.
EY Tax Alert – Vol. 21 Issue no. 16 | 31 July 2018
7
The Bills Committee Report clarifies that in applying
the deeming provision, the IRD will make sure that a
person will not be subject to double taxation in
respect of the same income from intellectual
property. The non-resident associate will also not be
subject to the profits tax in respect of the relevant
sum to the extent that the new deeming provision
applies.
To allow more lead time for taxpayers to prepare,
the commencement of the deeming provision on
IPRs will be postponed by 12 months. Hence, the
deeming provision will be applicable to the years of
assessment beginning on or after 1 April 2019.
Penalties
The Amendment Bill introduces administrative
penalties relating to transfer pricing; however,
given that transfer pricing is not an exact science,
the penalties have been set at a level lower than the
existing penalties for other non-compliance under
section 82A of the IRO. Specifically, penalties will
be imposed where a tax return is made with
incorrect information on transfer pricing without a
reasonable rationale or with the intent to evade tax.
Taxpayers will be liable for an administrative
penalty calculated as an additional tax not
exceeding the amount of tax undercharged (instead
of an amount trebling the tax undercharged, as is
currently imposed for incorrect returns and other
offences under section 82A of the IRO).
That said, the IRD has not ruled out the possibility
of imposing more stringent penalties or initiating
criminal prosecutions on blatant cases, in
accordance with the relevant provisions of the IRO.
The availability of TP documentation alone will not
qualify for an automatic exemption from penalties,
but will be considered in determining whether
individual taxpayers have a “reasonable excuse” to
be exempt from the penalties.
In assessing whether the taxpayer is able to
substantiate his/her reported/claimed amount, the
Bills Committee Report clarifies that:
a) A taxpayer will be accepted as having
substantiated his/her reported/claimed amount
if such amount is within the arm’s-length range.
b) The proposed section 50AAF will not apply
where the existing section 15C (valuation of
trading stock on cessation of business) is
applicable.
TP documentation
The Amendment Bill adopts the OECD’s
recommended three-tiered documentation
structure, comprising a master file, local file and
Country-by-Country Reporting.
Master file and local file
For fiscal years starting on or after 1 April 2018,
Hong Kong taxpayers are required to prepare
master file and local file documentation.
Exemptions based on business size and/or related-
party transaction volume have been adopted. A
waiver on the requirement to prepare master file
and local file documentation for domestic
transactions has also been applied.
Specifically, enterprises engaging in transactions
with associated enterprises will not be required to
prepare master file and local file documentation if
they can meet either one of the following
exemption criteria:
• Exemption based on size of business: Taxpayers
meeting any two of the following three
conditions are not required to prepare the
master file and local files:
Total amount of revenue not more than
HK$400 million;
Total value of assets not more than HK$300
million; and
Average number of employees not more than
100
• Exemption based on related party transactions: If
the amount of a category of related party
transactions (excluding domestic transactions)
for the relevant accounting period is below the
prescribed threshold, an enterprise will not be
required to prepare a local file for that particular
category of transactions:
EY Tax Alert – Vol. 21 Issue no. 16 | 31 July 2018
8 8
Transfer of properties (other than financial
assets and intangibles): HK$220 million;
Transactions in respect of financial assets:
HK$110 million;
Transfers of intangibles: HK$110 million; and
• Any other transaction (e.g., service income and
royalty income): HK$44 million
• Exemption in respect of domestic transactions:
Master and local files need not be prepared for
domestic transactions between associated
persons.
If an enterprise is fully exempted from preparing a
local file (i.e. its related-party transactions of all
categories are below the prescribed thresholds), it
will not be required to prepare a master file either.
The information to be included in the master file
and local file is specified in the Amendment Bill and
is broadly consistent with the OECD requirements.
The master file and local file must be prepared
within nine months after the end of the enterprise’s
accounting period. The master file and local file can
be prepared in English or Chinese. Taxpayers must
retain documentation for at least seven years.
In-scope taxpayers who fail to prepare master file
and local file documentation without reasonable
excuse are liable to a Level 5 fine (HK$50,000), and
may be ordered by the court to prepare such
documentation within a specified time. Failure to
comply with that order carries a Level 6 fine
(HK$100,000) on conviction.
Country-by-Country (CbC) Reporting (CbCR)
The CbCR filing threshold is set in accordance with
the OECD recommendation, i.e. €750 million, which
is approximately HK$6.8 billion.
The primary obligation of filing a CbC report falls on
the ultimate parent entities (UPEs) of multinational
groups that are resident in Hong Kong. But the
Amendment Bill continues to also embrace the
OECD’s mandate in relation to the implementation
of ”secondary” and ”surrogate” filing mechanisms.
The information to be included in the CbCR is in line
with the OECD’s requirements.
A CbC report has to be prepared for each
accounting period beginning on or after 1 January
2018. The Amendment Bill announced a transitional
arrangement for accepting voluntary filing of CbC
reports for taxpayers with a UPE located in Hong
Kong. These voluntary filings will cover accounting
periods commencing between 1 January 2016 and
31 December 2017.
A Hong Kong enterprise which is a constituent
entity will be required to file a notification to the
IRD within three months after the end of the
enterprise’s accounting period.
Penalty and offense provisions have been
introduced to cover matters such as failing to file
reports or notifications; providing misleading, false
or inaccurate information; or omitting information
in the CbC report furnished by the Reporting entity.
Penalties which may be applied include:
a) On summary conviction – a fine at Level 3 and
imprisonment for six months
b) On conviction on indictment – a fine at Level 5
and imprisonment for three years
Penalty and offense provisions will also apply to the
service providers engaged by the reporting entity.
Other tax matters
Double taxation relief
As previously announced, the Amendment Bill
enhances the current tax credit system by
extending the period for claiming a foreign tax
credit from two years to six years. The stated
objective of this measure is to counterbalance the
increased number of claims for double tax relief
that the IRD expects to receive as a result of the
implementation of statutory TP rules and the
continued expansion of Hong Kong’s
Comprehensive Double Taxation Agreement (CDTA)
network.
EY Tax Alert – Vol. 21 Issue no. 16 | 31 July 2018
9
However, the above change is accompanied by
several new conditions for claiming a foreign tax
credit, including:
i) A requirement to make full use of all other
available reliefs under CDTAs and the local
legislation of foreign jurisdictions before
claiming a foreign tax credit, which will only be
satisfied if all reasonable steps are taken to
minimize the amount of foreign tax payable
before resorting to a foreign tax credit
ii) A requirement to notify the IRD of any
adjustment to foreign tax payments that could
result in the foreign tax credit granted being
excessive
In addition, the Amendment Bill removes the option
for a taxpayer to obtain relief from double taxation
by way of either a foreign tax credit under section
50 of the IRO, or an income exclusion or deduction
under section 8(1A)(c) or 16(1)(c) of the IRO where
the claim involves a CDTA territory; in such case,
only a foreign tax credit can now be claimed.
According to the IRD, this change is consistent with
the view that CDTAs provide comprehensive
solutions for all tax matters within their scope and
the expectation of Hong Kong’s CDTA partners is
that double taxation will be relieved by way of tax
credit as agreed under the CDTAs. Commencing
from the year of assessment 2018/19, the income
exclusion or deduction approach under section
8(1A)(c) or 16(1)(c) of the IRO will be limited to
cases involving non-CDTA territories.
As a result of the above changes, the IRD is
expected to place greater scrutiny on foreign tax
credit claims and require additional supporting
documentation from taxpayers. The modifications
are also likely to result in an increase of mutual
agreement procedure (MAP) applications by
taxpayers, in an effort to minimize foreign taxes
where the foreign jurisdiction overly imposes taxes.
Dispute resolution mechanism
The Amendment Bill introduces a statutory dispute
resolution mechanism to facilitate the handling of
cross-border treaty-related disputes. This new
mechanism replaces the current reliance on
administrative guidance for defining the rules
surrounding MAP applications.
The new statutory dispute resolution mechanism
specifies that a taxpayer may present a case for
MAP and/or arbitration under the relevant Hong
Kong CDTA. A key feature of the statutory
mechanism is that it requires the IRD Commissioner
to give effect to any solution, agreement or decision
resulting from the application of MAP or arbitration
under any of Hong Kong’s CDTAs by making an
appropriate adjustment. The form of an adjustment
is left to the discretion of the Commissioner, but the
Amendment Bill specifies that it may include a
discharge or repayment of tax, the allowance of
credit against tax payable, or the making of an
assessment.
In the course of the deliberations with the Bills
Committee on the Amendment Bill, the IRD has
advised that it would allow a taxpayer to apply for
the holding-over of the tax in dispute under the IRO
in a case where an application for MAP has been
presented or an issue has been referred for
arbitration under a CDTA.
In light of the upcoming OECD peer review process
on dispute resolution, which is scheduled to begin in
December of this year with respect to Hong Kong,
the administrative framework associated with the
new statutory mechanism is expected to be
formulated in accordance with the OECD’s Model
Tax Convention, BEPS Action 14 and the relevant
peer review documents.
Countering harmful tax practices
To counter the artificial shifting of profits derived
from internationally mobile activities (such as
financial and other service activities) to low- or no-
tax jurisdictions, BEPS Action 5 (countering harmful
tax practices) includes a minimum standard
requiring that preferential tax regimes present in a
jurisdiction satisfy certain criteria in order to avoid
being designated as “harmful.”
EY Tax Alert – Vol. 21 Issue no. 16 | 31 July 2018
10 10
These criteria stipulate, among others, that
preferential regimes must not be ring-fenced from
the domestic economy, and require the eligibility for
preferential regimes be subject to a minimum level
of substance in the jurisdiction (the so-called
“substantial activities requirement”). On 5
December 2017, the European Union (EU) also
released a list of “non-cooperative” tax
jurisdictions, where fair taxation is one of the
criteria in assessing a preferential tax regime.
To satisfy commitments made by Hong Kong to the
OECD and the EU in the area of preferential tax
regimes, the Amendment Bill modifies the profits
tax concessions for corporate treasury centres
(CTC), and reinsurance and captive insurance
activities, to remove their ring-fencing feature.
With these amendments, the half-rate concessions
under these three regimes are extended to profits
derived from domestic transactions. These
modifications essentially replicate the change made
last year to the aircraft leasing regime, which made
the benefits under the regime available in respect of
onshore qualifying activities (in addition to the
already covered offshore qualifying activities).
Recently, legislation was also similarly passed to
extend the profits tax exemption for privately-
offered open-ended fund companies, to Hong Kong
incorporated private companies.
To prevent tax arbitrage where the payer concerned
is associated with the recipient benefiting from a
tax concessionary rate, the Amendment Bill
however restricts the amount of deduction that can
be claimed by the payer under all three
concessionary regimes.
The above changes to the CTC, reinsurance and
captive insurance regimes are effective from the
year of assessment 2018-2019 onwards.
As regards the substantial activities requirement,
the Amendment Bill empowers the IRD
Commissioner to prescribe substance threshold
requirements in terms of minimum number of full-
time qualified employees and amount of operating
expenditure in the tax regimes for CTCs,
professional reinsurers, captive insurers, ship
operators, aircraft lessors and aircraft leasing
managers. A separate gazette will be published to
specify the detailed full-time qualified employee and
operating expense thresholds, after consultation
with stakeholders. These changes are also expected
to be effective from the year of assessment 2018-
2019 onwards, subject to adequate legislation
being timely put in place.
As a result of the announcement made last year by
the Hong Kong Government that the five above-
mentioned preferential tax regimes would be
amended to satisfy the BEPS Action 5 minimum
standard, none of the regimes were found to be
harmful in a progress report on BEPS Action 5
published in October 2017 by the OECD, and more
recently in an OECD update on preferential tax
regimes issued on 2 May 2018. This announcement
also contributed to avoiding the inclusion of Hong
Kong in the EU blacklist of uncooperative tax
jurisdictions.
Advance ruling application fees
The Amendment Bill also increases the fees in
respect of an application for advance ruling from
HK$30,000 to HK$45,000, together with certain
other related fees.
India: Tribunal rules that allowances received outside India through a travel currency card are not taxable in India
An Indian tax tribunal has ruled that allowances
received through a travel currency card for services
performed overseas, are not taxable under
domestic law even though they are paid by an
Indian employer.
In light of this development, employers should
evaluate the ruling and the means by which they
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pay such allowances, to determine if their current
approach to taxing these allowances remains valid.
Background
Many employers second employees overseas, while
keeping them on an Indian payroll and paying their
salaries into an Indian bank account. In addition to
salary, employers also provide allowances to the
employees to cover cost of living in the host
country. These allowances are usually provided
either through a travel currency card or payments
to a bank account.
In the case in question, the individuals were non-
residents in India and were on a short-term
assignment overseas. Their salaries were paid into
an Indian bank account and allowances were
provided through a travel currency card issued by
an Indian bank. The Indian employer paid the
salaries and allowances after deducting normal
withholding taxes.
The individuals filed their tax returns in India,
claiming the allowances received through the travel
currency card were exempt under domestic law as
they were received overseas and were for services
performed overseas and therefore not taxable
under domestic law.
The exemption was denied by the tax authorities at
lower levels on the grounds that there was an
employer-employee relationship in India and the
credit/receipt of the allowances was in India. The
first appellate authority overruled the decision of
the lower authority and provided an exemption to
the taxpayers.
The tax authorities disagreed with the order of the
first appellate authority and appealed to the tax
tribunal.
Ruling of the tribunal
The tax tribunal held that the allowances received
by the taxpayers through a travel currency card
were accrued and received overseas. Therefore the
allowances are outside the scope of tax under
domestic law. The conclusion of the tax tribunal was
based on the following observations:
• The taxpayers performed the duties overseas
and the allowances were received by them for
these services.
• Though the instructions to pay the allowances
were received from an Indian employer, the
credit of the allowances happened outside India
in the travel currency card through an overseas
account maintained by the bank.
• The funds for making the payment of the
allowances by the bank were made available by
the Indian employer from an Exchange Earners
Foreign Currency Account.
• The allowances were credited in the travel
currency card for the first time outside India and
the taxpayers were able to get control over the
funds for the first time only in the host country
and not in India.
• In the subsequent years, the tax authorities have
allowed the exemption for allowances received
overseas after a detailed examination.
Next steps
The ruling confirms that if the services are provided
outside India and the income is received overseas,
then the income is not taxable in India, even though
it is paid by an Indian employer. The ruling also
provides clarity on whether allowances are
considered as received in India or overseas, when
paid through a travel currency card issued by an
Indian bank.
In light of this, employers should evaluate the ruling
and the means by which they pay such allowances.
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Contact details
Principal Tax contacts Yeo Eng Ping [email protected] +603 7495 8288 Amarjeet Singh [email protected] +603 7495 8383
Global Compliance and Reporting Simon Yeoh [email protected] +603 7495 8247 Julian Wong [email protected] +603 7495 8347 Datuk Goh Chee San (based in Sabah) [email protected] +6088 235 733 Janice Wong [email protected] +603 7495 8223 Julie Thong [email protected] +603 7495 8415 Lee Li Ming (based in Johor) [email protected] +607 334 1746 Liew Ai Leng [email protected] +603 7495 8308 Koh Leh Kien [email protected] +603 7495 8221 Mark Liow (based in Penang) [email protected] +604 263 6260
People Advisory Services Tan Lay Keng [email protected]
+603 7495 8283 Irene Ang [email protected] +603 7495 8306
Christopher Lim [email protected] +603 7495 8378 Business Tax Services Amarjeet Singh [email protected] +603 7495 8383 Farah Rosley [email protected] +603 7495 8254 Robert Yoon [email protected] +603 7495 8332 Wong Chow Yang [email protected] +603 7495 8349
Transaction Tax Services Yeo Eng Ping [email protected] +603 7495 8288 Sharon Yong [email protected] +603 7495 8478
International Tax Services
Anil Kumar Puri [email protected] +603 7495 8413
Asaithamby Perumal [email protected] +603 7495 8248
Transfer Pricing Sockalingam Murugesan [email protected] +603 7495 8224 Vinay Nichani [email protected] +603 7495 8433 Hisham Halim [email protected] +603 7495 8536
Indirect Tax Yeoh Cheng Guan [email protected] +603 7495 8408
Aaron Bromley [email protected] +603 7495 8314
Financial Services Bernard Yap [email protected] +603 7495 8291
EY Tax Alert – Vol. 21 Issue no. 16 | 31 July 2018
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advice.
Important dates
31 July 2018 6th month revision of tax estimates for companies with January year-end
31 July 2018 9th month revision of tax estimates for companies with October year-end
31 July 2018 Statutory deadline for filing of 2017 tax returns for companies with December year-end
15 August 2018 Due date for monthly instalments
31 August 2018 6th month revision of tax estimates for companies with February year-end
31 August 2018 9th month revision of tax estimates for companies with November year-end
31 August 2018 Statutory deadline for filing of 2018 tax returns for companies with January year-end
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