Asia Newsletter

Spring 2004

AT T O R N E Y S TA X L AW Y E R S C I V I L L AW N O TA R I E S

The information below is produced by Loyens & Loeff in Singapore and Tokyo. It is designed to alert those (interested in) doing business in

the Asian region to recent developments in the region. Such developments are discussed in brief terms and are based on generally available

information. The materials contained in this publication should not be regarded as a substitute for appropriate detailed professional advice. The

information below was assembled based on information available as at 30 April 2004.

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Asean

Philippines calling for end to tariffson electronic goods

• The Philippines is pushing for the removal of tariffs on electronic

and semiconductor products traded within the ASEAN region

(Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines,

Singapore, Thailand and Vietnam, linked by Free Trade Agreement

to China). In addition to electronics, the ASEAN members are

currently finalising plans to eliminate tariffs in the rubber and

textiles industry, agriculture and fishing, healthcare, tourism

and airlines.

Australia

We would like to thank Greenwood and Freehills in Sydney for their contribution

to the Australian section of this newsletter

Proposed changes for corporate loss rules

• On 7 April 2004, the Assistant Federal Treasurer released the

Government’s discussion paper, Loss Recoupment Rules for

Companies for public comment. Under current rules, companies

which have suffered a major change in ownership or control are

able to utilise losses carried forward from previous income years

if they are able to satisfy the same business test. Due to the

difficulties companies face in attempting to comply with the

rules which require them to identify and track the ultimate owners

of the company before their losses can be claimed, companies

often rely on the alternative “same business test” to support

their use of the revenue and capital losses.

• The proposals in the paper, if enacted, will substantially restrict

the ability of companies to utilise losses after a change of ownership

or control by limiting the range of companies which can rely on the

same business test. In particular, the key proposals involve:

• retaining the same business test without change for companies

and consolidated groups with total income equal to or less than

$100 million in an income year;

• removing the same business test for companies and consolidated

groups with total income above $100 million in an income year;

• relaxing the rules to track the continuity of ownership of certain

companies that are, in effect, widely held; and

• The measures restricting access to the same business test, if

enacted, will commence from 1 July 2004 whilst the rules

enacting the relaxation of the continuity of ownership test will

be backdated to 1 July 2002.

New retirement income measures

• The Federal Treasurer released the Government’s superannuation

and retirement income proposals on 25 February 2004. The policy

drivers for these proposals include:

• increasing access to superannuation to a larger portion of

the population;

• removing structural barriers to ongoing participation in the

workforce for those who are approaching retirement age and

for those who are semi-retired;

• increasing the incentives to take superannuation benefits

as an ongoing income stream;

• simplifying some compliance obligations; and

• limiting some practices perceived by the Government to

be undesirable.

• Some of the proposals announced, if enacted, will have significant

effects on employers, employees and other contributors to super-

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annuation providers, fund managers, the self-employed, retirees

and even non-working individuals. The drafts, consultative

documents and legislative amendments have not been released as

yet. Several measures are intended to commence on 1 July 2004.

Entertainment rules and business seminars

In Amway of Australia v. Commissioner of Taxation (No. 2) [2003] FCA

1533, the Federal Court considered whether certain “entertainment”

expenses incurred by Amway in hosting events for distributors

are allowable deductions. This is the first judicial analysis of the

rules since they were enacted in 1985. The main operative provision

dealing with entertainment expenses denies deductions for

outgoings that are in respect of “the provision of entertainment”.

This is however subject to a plethora of exceptions. The issue

therefore was whether the whole or part of the expenses incurred

by Amway fell into one of the exceptions to the general prohibition.

The decision has several potentially significant effects on the

deductibility of entertainment expenditure, whether for independent

contractors or for employees.

International Tax Developments

• Participation exemption and reform of the controlled foreign

company (“CFC”) rules. The second tranche of the changes

foreshadowed in the Government’s 2003 Budget in response

to the Review of International Tax Arrangements were introduced

into Federal Parliament on 1 April 2004. Certain measures will

commence from 1 April 2004 and others from 1 July 2004.

In general terms, the key measures in the Bill are designed to:

• exempt from Australian tax all dividends received from foreign

companies where the Australian corporate shareholder has

at least 10% of the voting shares in the company;

• exempt from Australian tax certain capital gains made on

transactions with shares in foreign companies where the

Australian corporate shareholder has at least 10% of the

voting shares in the company;

• widen the exemption for Australian companies from Australian

tax of income and capital gains made through foreign branches;

• extend these three exemptions to the CFC regime where a

CFC receives such dividends, capital gains or branch profits;

and

• narrow the situations where a resident shareholder will be

attributed with income derived by a CFC from performing

services for offshore associates.

• Australia/Mexico Tax Treaty. The new tax treaty between

Australia and Mexico entered into force on 31 December 2003.

The agreement will have effect for Australian and Mexican

withholding taxes in relation to dividends, interest and royalties

paid or credited on or after 1 January 2004. The dates of effect

for Australian income tax and other Mexican taxes is 1 July 2004.

China

China plans to increase foreign corporateincome tax

• In February 2004, the Chinese finance ministry has outlined a

new unified corporate tax.

• Law, which aims to treat domestic and foreign corporations

on an equal footing, effectively raising corporate income tax

for foreign-invested enterprises. The Chinese government has

been considering a new corporate income tax law for some time.

China made pledges regarding its tax scheme when it joined

the World Trade Organization in 2001, promising to introduce

a unified corporate tax law within five years.

• The director of the finance ministry’s general office finally hinted

in an interview at the beginning of February that a unified tax

rate of between 24% and 28% would be imposed.

• Further, China has five special economic zones in which

companies benefit from tax incentives designed to attract

foreign direct investment in the country. As part of the changes

the government is considering phasing out the preferential

tax policies in the special economic zones and replacing them

with a system of tax incentives available to both domestic and

foreign companies involved in specific industrial sectors.

• A first draft of the proposals is expected this year and the new

corporate tax law is expected to come into force on 1 January

2006. According to reports in the national media, China’s new

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corporate tax legislation is set to be submitted to the State

Council by June. Following that, it will be reviewed in March

2005 by the National People’s Congress.

Tax inspection strengthened

• It was reported on 19 April that the State Administration of

Taxation (SAT) issued a notice on 16 January 2004 (Guo Shui Fa

[2004] No. 9) regarding the scrutinization of tax incentives

granted in development zones. The notice urges local tax authorities

to scrutinize and remove tax policies which are in conflict with

national laws and regulations.

• The targets of the scrutiny include Economic Technological

Development Zones, Open Coastal Economic Zones, High and

New Technology Zones and other various development zones

approved by state, provincial or lower governments.

• The areas which the local tax authorities are required to

scrutinize are tax incentives granted to enterprises registered

in a development zone while the business is carried on outside

the zone, tax incentives only available to newly established

enterprises that are granted to existing enterprises and tax

incentives (including widening of the scope of tax incentives in

terms of amount, duration etc.) granted without authority or

being in conflict with national laws and regulations. In addition,

the SAT announced five sectors of economic activity on which

tax inspections will focus in 2004. These sectors are transportation,

pharmacy, trade, real estate and the automotive industry.

Tax discrimination action considered againstChina by USA

• It was reported on 17 March 2004 that recent statements by

the United States Trade Representative Robert Zoellick appear to

hint that the US government is on the brink of launching an action

against China at the WTO over the latter country’s discriminatory

tax regime. US industry has long complained that it cannot compete

inside China due to the favourable tax treatment given to domestic

producers, particularly in the semiconductor sector. The Bush

administration has for some time been urging the Chinese to

level the tax playing field, but to no avail. Reportedly, the US

government has finally lost patience with China on trade issues.

His comments come after telling the Senate Finance Committee

last week that the US could become the first nation to seek

redress against China at the WTO if the Chinese failed to make

changes to VAT administration. Chiefly, the US criticizes the

Chinese government’s use of the VAT (Value Added Tax) system.

China provides for rebate of a substantial portion of the 17 percent

VAT paid by domestic manufacturers on their locally produced

ICs (integrated circuits). China, meanwhile, charges the full 17

percent VAT on imported ICs, unless they were designed in China.

Oil and gas contractors

• It was reported on 20 February 2004 that a circular recently

issued by the State Administration of Taxation of the People’s

Republic of China sets forth the taxation obligations applicable

to foreign contractors in the oil and gas fields. The circular

outlines requirements regarding registration with tax authorities,

income reporting, the issuance of official tax invoices, and the

settlement of outstanding tax liabilities before departure from

the P.R.C., among other things.

Allowances for expatriate employeeswho commute to China

• It was reported on 16 March 2004 that residents of Macau and

Hong Kong who commute daily to employment in mainland

China are entitled to exclude from monthly taxable income

various employer-provided allowances, a P.R.C. circular clarifies.

Before issuance of the circular it was unclear whether those

employees were entitled to the exclusions, although Hong Kong

and Macau have been deemed foreign jurisdictions for purposes

of P.R.C. tax law and regulations. Generally, expatriates can exclude

allowances, such as those for housing and education, to soften

the effect of the P.R.C.’s 45 percent maximum individual income

tax rate.

International Tax Developments

• Treaties between China and Indonesia and China and Tunisia

enter into force. The first-time income tax treaty between China

and Indonesia, signed on 7 November 2001, entered into force

on 25 August 2003. The treaty generally applies from 1 January

2004. Further details of the treaty will be reported subsequently.

The first-time income tax treaty between China and Tunisia,

signed on 16 April 2002, entered into force on 23 September 2003.

The treaty generally applies from 1 January 2004.

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Hong Kong

Budget 2004-05

In the budget released on 10 March 2004, Hong Kong Financial

Secretary declared his support for a future sales tax in the territory

but offered up no major tax changes for the current fiscal year, relying

instead on economic growth and moderately decreased spending

to keep the territory’s deficit in line. Hong Kong was widely

expected to announce forward movement on that front, but delayed

making a decision on the sales tax question until the end of the

year. Because implementing the tax would reportedly take another

three years, no sales tax would take effect until at least 2008.

Housing benefit for tax purposes

• It was reported on 22 April that tax experts have pointed out that

Section 9 of the Inland Revenue ordinance stipulates that any

housing paid for by an employer is deemed to be worth 10% of

the employee’s other cash remuneration, regardless of the value

of the property. According to reports in the regional media, this

has led to a discriminatory tax structure, whereby those who

are provided accommodation by their employer pay far less

in taxation than those who are compensated with the equivalent

amount of cash. This ‘loophole’ has been blamed for keeping

rent levels artificially high in certain parts of the territory, and

criticised for being used by many firms as a lure to foreign

executives to take up posts within the city.

India

Exchange control further liberalized

• It was reported on 26 February 2004 that the government, in a

new move towards capital account convertibility, has decided

to relax further the foreign exchange remittance controls in India.

Accordingly, Indian companies no longer require the permission of

the Reserve Bank of India (RBI) to extend short-term credit to

their overseas offices, pay royalties to foreign collaborators and

fees for technical collaboration, and make remittances in respect

of the use of trademarks and the purchase of franchises and

advertising on foreign television channels. Indian individuals

may also purchase health insurance from foreign insurers and

engage foreign real estate agents for the purpose of selling residential

and commercial property in India without the RBI’s permission.

• In addition, the restrictions on the payment of royalties and

lump-sum fees under technical collaboration agreements, not

registered with the RBI, have been abolished. The use of trademarks

is freely allowed, but their purchase requires the approval of

the RBI. In engaging real estate agents abroad, no permission is

required in respect of amounts of up to USD 25,000 or 5% of

the inward remittance per event, whichever is greater.

• The government is also reported to have amended the Foreign

Exchange Management Act 1999 to empower the RBI to impose

penalties in respect of violations of the foreign exchange transaction

requirements.

Clarification of guidelines forExternal Commercial Borrowings

• The Reserve Bank of India (RBI) has issued Circular No. 82 of

1 April 2004, providing clarification on the External Commercial

Borrowing (ECB) guidelines, which were revised by way of a circular

dated 31 January 2004. Circular No. 82 provides the following

key clarifications:

• end-use. Prior to 1 February 2004, eligible borrowers were

permitted to raise ECBs equivalent to USD 50 million per financial

year for general corporate purposes, under the automatic

approval route. However, under the revised ECB guidelines, ECB

end-users are no longer permitted to use such funds for working

capital, general corporate purposes and repayment of existing

Indian rupee (INR) loans;

• amount of ECB under the automatic approval route. It has been

clarified that the maximum amount of ECBs which can be

raised by an eligible borrower under the automatic approval

route is USD 500 million or equivalent during a financial year;

• submission of ECB return. Borrowers utilizing ECBs since

1 February 2004 are required to submit an ECB return that

has been certified by the designated Authorized Dealer (AD),

on a monthly basis within 7 working days from the end of

the month to which it relates. It has been clarified that all

existing borrowers are also required to submit ECB returns on

a monthly basis from January 2004 onwards as mentioned

above; and

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• compliance with ECB guidelines. The primary responsibility

to ensure that ECBs raised and utilized are in conformity with

the RBI instructions is with the borrower and any contravention

of the ECB guidelines will be viewed seriously and may invite

penal action. The designated AD is also required to ensure

that raising and utilization of ECBs is in compliance with ECB

guidelines at the time of certification.

Tax clearance no longer required for contractors

• It was reported on 9 March 2004 that the Central Board of

Direct Taxes (CBDT) stated in Circular No. 2/2004 of 10 February

2004 that contractors are not required to obtain an income

tax clearance certificate from the Income Tax Department and

there is no need to furnish such a certificate when submitting

tenders or obtaining commercial contracts in India. The Circular

also states that the income tax clearance is not required for any

other purposes, such as the registration or the renewal of the

registration of contractors, and the renewal of import/export and

shipping licences in India. All relevant persons must, however,

quote their permanent account number, i.e. tax registration number,

in tender or other relevant documents.

• The CBDT issued the Circular further to its earlier decision, with

effect from January 2003, that an income tax clearance certificate

does not need to be furnished by any person on filing a tender for

the purpose of obtaining commercial contracts in India.

Provision of technical services or execution of work?

• It was reported on 2 March 2004 that the Income Tax Appellate

Tribunal (ITAT) gave its ruling on 5 May 2003 (reported in February

2004) in the case of Gujarat State Electricity Corporation Ltd.

v. Income Tax Officer (82 TTJ 456), which dealt with a dispute

regarding the deduction of tax at source on payments for the

execution of work as opposed to the provision of technical

services. The ITAT held that the payments were for the execution

of operation and maintenance work in respect of the power project

and were not for the provision of purely technical services and

that tax was correctly deducted at a rate of 2% under Sec. 194C

of the ITA.

• Specifically, the ITAT observed that the agreement was not only

for providing skilled and technical services relating to the

operation and maintenance of power plants, but all the business

activities of the operation and maintenance of the power plants

were entrusted to the GEB, which had long-standing experience

in this area. The agreement required the GEB to carry out all or

any of the activities required for the operation and maintenance

of the power plants and was concluded by the parties with the

view to entrusting all the responsibilities of carrying out an

important part of the business activities of the power project,

i.e. carrying on the business activities of the operation and

maintenance of power projects.

• The ITAT also held that the definition of fees for technical services

under Sec. 9(1)(vii) of the ITA excludes any consideration received

in respect of any construction, assembly, mining or similar project

undertaken by the recipient. Such consideration must be excluded

from the definition of fees for technical services on the grounds

that these activities virtually amount to the carrying on of a business

in India for which considerable expenditure must be incurred by

a non-resident. It would, accordingly, be unfair to tax such

consideration in the hands of a foreign company on a gross basis.

The consideration for any construction, assembly, mining or similar

project is, therefore, chargeable to tax on a net basis, i.e. after

deducting the expenses incurred in earning the income.

Indian Supreme Court will not reviewdecision on Mauritius tax treaty

• It was reported on 17 March 2004 that the Indian Supreme

Court has dismissed a review petition filed over its recent decision

to uphold a government circular issued with regard to the Indo-

Mauritian DTA.

Derivative transactions

• It was reported on 26 April 2004 that the Ministry of Finance

is planning to remove the uncertainty regarding the tax treatment

of derivatives transactions. The development appears to have

been prompted by renewed demands from the Securities and

Exchange Board of India (SEBI) to exclude derivatives trading

from the definition of speculative transactions under Indian tax

laws, thereby allowing traders the benefit of the set-off of losses

against speculative gains. The Ministry of Finance is said to be

examining this technical issue and may suggest suitable

amendments to the Income Tax Act 1961 (ITA).

• The existing provisions of the ITA do not cover derivatives

although they do deal with transactions relating to shares and

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securities. Accordingly, in the absence of a clearly defined tax

treatment, derivatives trading may, under the ITA, be included

in the definition of speculative transactions. In addition, under

the existing income tax provisions, losses from speculative business

cannot be set off against profits from non-speculative business,

i.e. speculative losses can only be set off against speculative profits.

The ITA defines a speculative transaction as one in which a contract

for the purchase or sale of any commodity, including stocks and

shares, is settled without taking physical delivery. Futures and

options trading are settled in cash in India with no requirement

for physical delivery and, therefore, may be regarded as speculative

transactions. The ITA also, however, broadly stipulates that

contracts for stock and shares intended to prevent losses in the

market value of shares held as a result of price fluctuations are

not to be construed as speculative transactions.

• The SEBI has supported investors’ demands to treat trading

in derivatives as normal business transactions which are

assessed as business income and that trading by individual

investors should be treated as giving rise to short-term capital gains

and losses.

Indonesia

Tax reform

• In January 2004, the Director General of Taxation submitted to

Parliament for discussion draft amendments to the tax legislation.

He advised that the tax office intends to implement the changes

from 1 January 2005. The proposed amendments are still subject

to changes made by Parliament. Most changes concern the income

tax law. The key changes are the following:

• The definition of permanent establishments would be expanded

by including warehouses which are not merely used to store or

display goods;

• The definition of tax object would be expanded to include

derivative transactions in the stock exchange and interest

obtained from bonds owned by mutual funds;

• Forex losses may be claimed only on an actual realisation basis,

and hence no longer also on an unrealised basis;

• Tax losses must be differentiated by distinguishing between

only against active respectively passive income earned by the

company for a maximum period of 5 years; it is proposed that

losses will be segmented between domestic and foreign losses;

• Stock valuations can also be done on a LIFO basis;

• Minimum calculation norms will be allowed for small and medium

sized businesses with an annual turnover of maximum Rp 1 billion;

• Income tax rates will change: the corporate tax rate would

become a flat 28% income tax rate (same for branches and

permanent establishments), which means a reduction by 2%

points compared with the present maximum income tax rate,

whereas resident individuals would enjoy a higher minimum

annual income threshold before being subject to income tax

(Rp 5.7 mio), and the lowest 5% bracket will disappear;

• The wage tax will be increased by 10% points for employees

who do not have a tax registration number (NPWP), so will

therefore range between 20% and 45%, whereas domestic

withholding taxes will increase by 10% for individuals who do

not have a NPWP number;

• Interest withholding tax is proposed to be based on the time

of payment or maturity;

• Changes to withholding tax exemptions for banks are proposed;

• Grants are proposed to be taxable;

• On the VAT, export services are proposed to no longer be

subject to Indonesian VAT;

• VAT exemptions will be introduced to enable a company to do

an internal restructuring; and

• US dollar bookkeeping is proposed to be abolished.

Tax loss compensation

• The Director General of Taxation issued a circular on 3 March 2004

(SE-03/PJ.31/2004) in which he clarified the treatment of tax

losses. Interestingly, he stipulates that losses arising from offshore

sources of income can only be compensated with income from

offshore sources. Losses relating to income which is taxed according

to the final tax concept cannot be compensated. Tax losses can

be compensated for 5 years.

Batam to be split into free trade enclaves

• It was reported on 19 April that Indonesia is in the final stages

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of preparing a new law to formally create free trade enclaves on

Batam (located 20 minutes away by boat from Singapore) as

opposed to turning the whole island into a free trade zone. This

will be welcomed by the many manufacturing businesses currently

operating on Batam, as it brings a measure of certainty to the

debate which has been going on for at least one year now.

Effective 1 January 2004, businesses in Batam are subject to

VAT and Luxury Tax, which has come as an unpleasant effect for

the existing businesses. Businesses established in the free trade

enclaves can operate without VAT and Luxury Tax provided they

do not sell to the domestic market.

VAT Collector Regulation

• Under an MOF Decree issued on 24 December 2003, PSC

contractors (oil and gas contractors) and Contract of Work (COW)

mining companies, state owned companies, state owned banks,

Pertamina and the Central Bank are no longer appointed as

VAT Collectors with effect from 1 January 2004. This is beneficial

to these entities, as they will now enable suppliers to recover

their own input VAT.

International Tax Developments

• Mauritius tax treaty. Because of its favourable terms, this treaty

has had a significant impact on international finance and holding

structures for investments into Indonesia. Contrary to earlier

reports this year that the government of Indonesia would have

given notice of termination of its tax treaty with Mauritius of

10 December 1996 as a result of which, further to Art. 29 of the

Mauritius-Indonesia treaty, the treaty will generally cease to

apply in Mauritius on 1 July 2005 and in Indonesia on 1 January

2005, it appears that the Indonesian tax authorities did not actually

yet terminate the treaty, but gave notice to renegotiate the

tax treaty with Mauritius. Unless it would be decided that a

renegotiation seems hopeless, and this will concentrate on the

extremely generous 5% dividend withholding tax rate in the

treaty for 25% or greater interests in Indonesian companies,

and the Indonesian authorities give notice to terminate the

treaty before 1 July 2004, it will continue to apply after 31 December

2004. Sentiments however do not appear to be optimistic that

the Indonesians are willing to compromise on their wish to

increase the dividend withholding tax rate under the treaty, and

in forthcoming cases, we encourage our readers to consider

changing their current holding or financing structure into Indonesia.

Because of the beneficial terms in Indonesia’s new tax treaty

with the Netherlands (see previous edition of this newsletter),

one possibility which is receiving considerable attention in

recent months is to either interpose a Dutch BV company as the

intermediary finance and/or holding company for the investor,

or to replace Mauritius companies by Dutch BV companies,

where appropriate. Latest news from our correspondents in

Indonesia is that the Director General of Taxation has stated

that they will give notice before 1 July 2004 to terminate the

treaty. To be continued.

• Treaty between Portugal and Indonesia signed. Portugal and

Indonesia signed a first-time income tax treaty and protocol on

9 July 2003 in Lisbon. The maximum rates of withholding tax

are 10% on dividends, interest and royalties. Capital gains from

the alienation of property are generally taxable only in the alienator’s

state of residence. Both states generally provide for the credit

method to avoid double taxation. Portugal also uses the exemption-

with-progression method.

• Indonesia signed a tax treaty with Surinam on 14 October 2003.

The treaty contains a 15% withholding tax rate on dividends,

interest, branch profits tax and royalty payments. The 15% branch

profits tax rate does not apply to oil and gas exploration projects

(PSCs) in Indonesia, which will therefore be subject to the 20%

rate of branch profits tax. This is significant, as Indonesia has

made it public that it intends to renegotiate its tax treaties on

the branch profits tax rate in respect of oil and gas activities.

Indonesia wants to impose the full (20%) branch profits tax rate.

Further, the treaty contains a six months time threshold for

qualifying projects and a 90 days and less time threshold for

qualifying services before one would constitute a permanent

establishment in the other country. The treaty awaits ratification

before it can take effect.

• Brunei. Details of the first-time income tax treaty and protocol

between Indonesia and Brunei, signed on 27 February 2000, have

become available. The agreement, which was concluded in the

English language, generally follows the OECD Model Convention.

The maximum rate of withholding tax is 15% which applies to

dividends, interest and royalties. The treaty contains a de minimis

time test for specified projects of 3 months and for services

provided by companies of the other country, of 183 days in any

12 months period, within which there will not be a taxable permanent

establishment in the other country.

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Japan

Tax reform 2004

• On 19 December 2003, the Ministry of Finance in Japan announced

a tax reform package for the fiscal year 2004. On 26 March 2004,

the approval of the tax reform was passed by the Japanese Diet.

For further details on the tax reform, reference is made to the 2004

January edition of this newsletter.

Consumption tax

• As from 1 April 2004, vendors must indicate the gross price of

goods and services to the consumer, i.e. including the 5%

consumption tax. Only mentioning the net price is no longer allowed.

International Tax Developments

• New Japan-US tax treaty. Japan signed a new tax treaty with the

USA on 6 November 2003. On 30 March 2004, representatives

of Japan and the United States exchanged instruments of

ratification for the tax treaty, therewith bringing the treaty into

force. The new tax treaty will be applicable to taxes withheld

at source as from 1 July 2004, and for the other elements as from

1 January 2005. For further details on this tax treaty reference

is made to the 2003 Autumn edition.

Korea

Incentives & Corporate Tax developments

• In February the National Tax Service indicated that tax audits

would be deferred for taxpayers that increased hiring last year by

more than 10 per cent. The deferral depends on the location of the

employer and may extend until 2006 for some regions outside

Seoul. The extension until 2006 also applies to start-ups. It

was announced that tax investigations on foreign businesses

will generally be cut back in order to make the tax environment

more attractive.

• The use of tax losses after certain mergers has been further

limited. Where so far the use of losses in such mergers was restricted

only if related entities merged, now such restrictions also apply

to such mergers between non-related entities.

• Due to changes in the Tax Incentives Limitation Law, the number

of years for which tax exemptions are provided have been limited

but the scope of qualifying investments has been expanded.

Qualifying foreign investments in high tech ventures or foreign

investment areas for which tax benefits will be claimed after

2004 will be fully exempt from corporate income taxes for five

years (seven years if claimed before 2005) and then for 50% for

the next two years (three years if claimed before 2005).

• Similarly, in March it was proposed that qualifying start-ups and

corporate demerged companies can obtain a partial (50%) or

even a full exemption from corporate income taxes up to five years.

One of the conditions is that a minimum amount of new employees

(depending on the sector of activity) must be hired.

• As of 1 January, fees paid for services used but not performed in

Korea are under domestic law no longer subject as Korean source

income and thus no longer subject to Korean withholding tax.

Tax treaties sometimes already prohibited the levy of such

withholding tax.

Personal income tax developments

• As of 1 January, foreign employees that reside in Korea can elect

to be taxed either at a flat rate of 18.7% on their gross income, or

at the normal progressive rates on their net income after an

overseas allowance deduction of 30% at maximum. It is also

planned to introduce as from 2005 the possibility for expatriates

to pay their income tax online. Stock options granted on foreign

shares to persons employed in Korea are subject to personal

income tax at the normal progressive rates (and not at the lower

rate for other income components), it was ruled in January by

the Administration Court in Seoul.

Extension of tax breaks for capital spending

• To bolster capital investment in the Republic of Korea the

government plans to extend until the end of the year a temporary

tax measure, under which corporations in most industries can recoup

15 percent of capital spending, officials announced 29 April. The

measure, introduced in 2003, is scheduled to expire in June.

With a six-month extension the measure will terminate just in

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time for a 2-percentage-point drop in corporate tax rates, scheduled

to take effect 1 January 2005.

Malaysia

Asset backed securities

• Although securitization transactions that involve the issuance

of asset-backed securities are exempt for stamp duty and real property

gains tax purposes, there was until recently no comprehensive

tax treatment for those transactions. That changed, however,

with Malaysia’s 2004 budget, which introduced favourable tax

treatment for securitization transactions involving the issuance

of asset-backed securities

International Tax Developments

• A protocol to the Malaysia/Denmark tax treaty was recently

signed. It requires ratification before it enters into force. The

scope of the “permanent establishment” article has been broadened

to also cover, gas wells and warehouses. In addition, it was clarified

that supervisory activities in connection with a construction or

assembly project continuing for more than six months “in any 12-

month period” constitute a permanent establishment. The “royalty”

article has been broadened to cover payments for technical,

managerial or consultancy services or assistance. This is especially

noteworthy because Malaysia imposes a withholding on such

payments for services rendered within Malaysia at the rate of 10%.

The “elimination of double taxation” article has been replaced

with a more comprehensive article. Danish resident companies are

to benefit from the inclusion of tax sparing provisions. Danish

companies that receive dividends from Malaysian companies where

such dividends are paid from income subject to tax incentives

are to be exempt from tax in Denmark on such dividends. Danish

resident companies that receive dividends, that are not otherwise

exempt, from Malaysian companies in which they own 25% or

more of the voting shares, are to be entitled to claim a tax credit

for underlying tax paid by that company.

• Tax treaty between Iran and Malaysia. The treaty generally

follows the OECD Model Convention, but some provisions are based

on the UN Model Convention. The maximum rates of withholding

tax are 25% on dividends; 15% on interest, and 10% on royalties

(including technical fees). A permanent establishment (PE)

arises, among others, if a construction or assembly or installation

projects lasts for more than 6 months or lasts for more than 12

months if the activities undertaken are merely supervisory. The

treaty contains a tax sparing provision.

New Zealand

This summary has been prepared by Buddle Findlay, Lawyers, Auckland,

Wellington and Christchurch, New Zealand

New legislation introduced

• The Taxation (Annual Rates, Venture Capital and Miscellaneous

Provisions) Bill 2004 was introduced on 29 March 2004.

• The Bill introduces significant changes in the tax treatment of

venture capital in respect of non-residents who invest in commercial

activities in New Zealand through unlisted companies or special

partnerships.

• The main change under the new rules proposed in the Bill

will be that non-residents will not be subject to New Zealand

income tax on gains derived from selling shares in certain unlisted

New Zealand companies. To qualify for this exemption the

non-resident must be resident of a country with which New Zealand

has a double tax agreement and would not be eligible for a

credit in their home jurisdiction if the income were taxable in

New Zealand.

• The new rules will also contain an exemption for investments

in New Zealand that are made through a foreign fund which is

resident in a grey-list country (the United Kingdom, the United

States, France, Germany, Japan, Canada or Australia) provided no

individual investor owns more than 10% of the fund.

• The Bill also provides that partners in special partnerships will

be able to offset tax losses incurred in relation to the special

partnership against other income derived from New Zealand.

Previously, partners of special partnerships were only able to

offset special partnership losses against future income derived

from the special partnership.

• Amendments to disallow deductions for taxpayers who

enter into a sale and leaseback of intangibles, by deeming such

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transactions to be finance leases (and, therefore, a sale of the

underlying intangible asset) are included in the Bill.

• The Bill is expected to be reported back to Parliament on 6 October

2004 (after submissions and Select Committee consideration).

Examination of double tax agreements

• New Zealand intends to begin negotiations with Austria, with a

view to concluding a double tax agreement by December 2005.

• New Zealand also expects to conclude a double tax agreement

with the Republic of South Africa shortly.

• Legislation will be passed this year giving legal effect to the

double tax agreements recently signed with the United Arab

Emirates and the Republic of Chile.

Review of tax laws for trading banks

• The Inland Revenue Department and the Treasury Department

are reviewing the tax laws applying to trading banks to ensure

they are robust, with a view to determining whether legislative

change is necessary.

Rewrite of the Income Tax Act 1994

• Legislation rewriting the parts of Income Tax Act was passed

by Parliament on 8 April 2004 and is expected to receive royal

asset by mid May. The legislation is not intended to introduce

any substantive changes to the legislation and is intended to

only simplify the existing provisions by rewriting them in “plain

English”. Legislation to rewrite the remaining sections of the Income

Tax Act 1994 remains on the Government’s work programme.

Philippines

Philippines should increase taxes; IMF

• Despite efforts in the Philippines to curb public debt, the

IMF advised the country on 30 March that it should consider

increasing taxes to reduce the high public deficit. The IMF

urged the Philippine government to consider a tax increase as

part of a broader plan of economic reform designed to stabilize

the politically and economically volatile country. The IMF called

upon the government to increase the country’s VAT rate, as well

as excise taxes on cigarettes, alcohol, and petroleum, and to resist

tax amnesty proposals and limit tax incentives.

International Tax Developments

• Details of the income tax treaty and protocol between the

Philippines and the Czech Republic. The treaty generally follows

the OECD Model Convention. Withholding tax rates are 15% on

dividends (10% for corporate shareholders holding at least a 10%

interest), and 10% for royalties (generally) and interest. The treaty

permits the states to levy a branch profits tax of up to 10%. A

permanent establishment includes (i) a building site, a construction,

assembly or installation project or connected supervisory activities

if they last for more than 6 months and (ii) the furnishing of services,

including consulting or managerial services, by an enterprise of a

state through employees or other personnel engaged by the

enterprise for this purpose if the activities of that nature continue

in the other state for a period or periods aggregating more than

6 months in any 12-month period. The protocol limits treaty benefits

in certain circumstances and permits the states to apply their

domestic laws intended to prevent tax evasion. It is not yet clear

how this last provision will be applied in practice.

Singapore

Budget 2004; Corporate income tax

• Rate reduction; the Budget proposes to reduce the rate from

22% to 20% with effect from 1 January 2004. With this reduction,

Singapore increasingly becomes a tax efficient alternative to

Hong Kong (currently 17.5%), with the added benefit of Singapore’s

tax treaty network.

• Royalties; the rate for withholding tax on royalties will be reduced

from 15% to 10% as of 1 January 2005.

• Regional HQ Incentive; the maximum duration of the existing

regional HQ incentive scheme will be extended from three to

five years with immediate effect. Where under the previous scheme

only newly set up companies could qualify for RHQ, under the

new scheme companies that have already been in Singapore for

more than a year may now also be eligible for this incentive.

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• Pioneer Incentive; the maximum duration for the pioneer incentive

will be extended from 10 to 15 years with immediate effect.

• Incentive for financial services industry; a new incentive will be

introduced to encourage companies to provide higher value-added

processing services supporting financial activities. Approved

companies will enjoy a concessionary tax rate of 5% on qualifying

income from the provision of such services to financial institutions

during the period from 27 February 2004 to 26 February 2009.

Details are expected to be released later this year.

• The Qualifying Debt Securities (QDS) Scheme will be enhanced

to cover non –resident’s short term (1 year tenure) discount income

arising from QDS and a concessionary rate of 10% for residents

earning such income.

• Wealth management services; the tax exemption schemes for

foreign investors and foreign trusts whose funds are managed by

any fund manager or trustee company in Singapore will be enhanced

to cover the additional categories of income.

• Asset securitisation; Special Purpose Vehicles engaged in asset

securitisation on or after 27 February 2004 will be given a

concessionary tax treatment. Details are expected to be released

later this year.

• Commodity derivatives trading; a 5% concessionary tax rate on

qualifying income derived from trading in commodity derivatives

will be introduced with effect from 27 February 2004. Details

are expected to be released later this year.

• Approved International Shipping Enterprise Scheme (AIS);

Currently, only Singapore sourced charter income received from

an Approved International Shipping Enterprise (AIS) is tax exempt

for an AIS company. Where an AIS company received charter

income in respect of a foreign ship from a Singapore resident

without AIS status, such constituted taxable income for the AIS

company. With effect from Year of Assessment 2005, all onshore

charter income received by AIS company will be tax exempt.

Budget 2004; Personal income tax

• Tax exemption of remitted foreign sourced income. Currently foreign

income is taxable in Singapore in so far the income has been

remitted into Singapore.

• Onshore sourced interest income partially exempt. Interest income

derived by an individual from 1 January 2003 to 31 December 2004

from standard savings, current and fixed deposit accounts with

approved banks and finance companies in Singapore is partially

exempted from tax. Interest income derived by individuals on or

after 1 January 2005 from such standard deposits will be fully

exempted from tax.

Not Ordinarily Resident scheme

• The Inland Revenue Authority of Singapore revised the NOR

scheme. The scheme and the country’s three-year administrative

concessions concerning residence have been mutually exclusive.

The NOR scheme was introduced as an incentive measure for

those resident employees who have regional responsibilities

and therefore frequently travel outside Singapore. If a Singapore

resident carries out work outside Singapore under a Singapore

employment contract, the income will be taxable in Singapore.

Before the introduction of the NOR scheme, a salary split was,

under specific circumstances, the only manner in which the income

of such resident employees could be properly allocated to (and

taxed in) the country in which work was carried out. If the

administrative requirements are met, the NOR scheme could

provide for an effective Singapore income tax rate of not lower

than 10%.

Singapore expands tax breaks to accountantsand lawyers

• On 21 March 2004, the Singaporean government has extended

tax breaks which are usually only available for corporations to

partnerships, in an attempt to encourage more accounting, audit,

and law firms to locate their headquarters in the country. Under

the Expansion Incentive for Partnerships scheme, unveiled at

the end of March 2004, firms which are able to prove that they

intend to expand their Singapore-based operations will receive a

50% tax exemption on qualifying overseas income over a certain

amount (determined by the average of the partnership’s profits

for the provision of services in the region over the three years prior

to the application).

IP writing down allowance, further details releasedby IRAS

• In the Budget 2003 it was announced that writing-down allowances

would be granted automatically in respect of the acquisition of

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Intellectual Property between 1 November 2003 and 31 October

2008. Conditions included that the legal and economic ownership

of the IP lies with the Singapore entity. The further clarifications

stipulate that the Singapore entity should submit third-party

independent valuation report on the acquired IP in the following

situations (i) the value of the capital expenditure incurred in

acquiring the IPR is equal to or greater than S$2 million for unrelated

party transactions; or (ii) the value of the capital expenditure incurred

in acquiring the IPR is equal or greater than S$0.5 million for

related party transactions.

Warehouse retail scheme introduced

• A pilot scheme called “The Warehouse Retail Scheme” (WRS)

was recently launched by the Singapore Economic Development

Board (EDB). This scheme would allow businesses operating on

a regional scale to reap significant savings and productivity gains

from the co-location of various operations. For the first time,

retail activities which were previously disallowed within industrial

or warehouse developments can now take place on industrial land

under the WRS. With this scheme, fresh retail concepts such as

warehouse outlets and ‘big box’ retailers that typically occupy

100,000 to 200,000 sq ft can now set up in Singapore. This

headquarters cum flagship store concept will enable companies

to base their regional competencies like distribution networks and

various business systems here, to leverage on Singapore’s strong

business infrastructure to service the region and the world. All

businesses with innovative concepts that satisfy the minimum

criteria listed below by the fifth year of their operations are welcome

to apply:

(a) annual turnover to grow to at least S$100 mil;

(b) total direct employment of at least 250;

(c) annual total business spending of at least S$20 mil or total

investment (excluding land cost) of at least S$50 mil; and

(d) any other conditions as imposed by the recommending

agency. Companies conducting or expanding to significant

regional activities based in Singapore shall be given favourable

consideration.

International Tax Developments

• Tax treaty with India. The governments of Singapore and India

announced that the eighth round of talks to create a comprehensive

economic and free trade agreement has been completed, with

further talks anticipated in May. The major items on the agenda

included a review of the countries’ double taxation avoidance

agreement. Singapore’s Deputy Prime Minister and Finance Minister

indicated that his government was seeking to obtain a bilateral

tax agreement with India along the same lines as the India - Mauritius

tax treaty. It is anticipated that the negotiations would focus on

the capital gains article in the current treaty. The current treaty

between the two countries allows India to tax capital gains. If

the new treaty would indeed disallow India to tax certain

capital gains, Singapore could be on par with (and in certain

situations even surpass) Mauritius (in Singapore; no capital

gains tax, dividend income might be exempt and no dividend

withholding tax on distributions made out of Singapore).

Taiwan

Land Value Incremental Tax

• It was reported on 20 February 2004 that Taiwan’s parliament

had unanimously agreed to extend for one year the reduced rates

of the land value incremental tax (essentially a capital gains tax),

until the end of January 2005.

• The Ministry of Finance had proposed to adjust the rates to

levels lower than the original rates, but higher than the current

temporary rates. The government halved the rates in early 2001

in an effort to spur the decade-long housing market recession

and invigorate the economy. But after more than a year’s debate

on how the LVIT tax rates should be fixed, the MOF failed to

persuade lawmakers to support its proposal.

Relaxation of investment tax credits

• It was reported on 20 February 2004 that in order to reduce

the possibility that investors will permanently lose unused

investment tax credits, Taiwan has relaxed the rules governing the

use of those credits under the Statute for Promoting Industrial

Upgrading (SPIU).

• Under the SPIU, business investors can use qualified investment

tax credits to offset a portion of business income tax, while

individual investors can use the credit to offset individual income

tax. However, with strict limitations in place as to the year in

which an investment tax credit can be used to offset income, some

credits were being lost.

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Also, the amended ordinance eliminates the 30 percent surtax

that was previously applied in addition to the maximum 50 percent

rate. Foreign nationals should see a reduction in the maximum

tax rate under the amended ordinance. Vietnam ranks among the

countries with the highest personal income tax rates in the Asia

Pacific region.

Foreign Contractor Withholding Tax

• Further clarifications with respect to FCWT have been released.

FCWT is a combination of direct and indirect tax, levied from

foreign contractors carrying out work for Vietnamese clients. The

clarifications may be summarised as follows. If the contract

clearly identifies the services which will be rendered outside

Vietnam (and provides for a value attributable to these services)

that part of the contract will not attract FCWT. Only the value of

the work carried out in Vietnam will attract FCWT. The clarifications

further stipulate that the mere sale and purchase of equipment

will also not be subject to FCWT. However, equipment produced

outside Vietnam will be subject to the indirect tax component

of FCWT.

• In February 2003 the SPIU was revised, and on 6 February 2004

the Ministry of Finance issued an explanation letter, granting

greater flexibility for the use of investment tax credits to lower

investors’ tax liability. Investors can take advantage of the relaxed

rules beginning this filing season.

Thailand

Tax measures to boost the stock market

• The Thai Cabinet on 27 April approved tax measures to strengthen

the flagging stock market by encouraging increased institutional

investment. The measures call for tax incentives for investments

in long-term mutual equity funds and allow deductions for

investments into retirement mutual funds. Tax incentives available

for newly listed corporations, originally set to expire in September,

have also been extended for one year.

Reintroduction of inheritance tax?

• Thailand’s Prime Minister Thaksin Shinawatra recently suggested

the preparation of a bill that would reintroduce the inheritance

tax in Thailand. The reintroduction aims at narrowing the gap

between the rich and the poor. The Finance Minister, however,

remains sceptical about the effect of an inheritance tax, noting

this tax might be circumvented. The Finance Minister favoured

an increase in tax rates for the upper brackets and increasing

the tax rates for land and property ownership. Tax breaks for the

property business sector have already ended as per the end of last

year (see our previous newsletter).

Vietnam

Personal income tax changes with effect from 2004

• After initially not approving the reforms, the National Assembly of

Vietnam approved the Amendments to the Ordinance on Personal

Income Tax, marking the first significant attempt at reforming

the personal income tax rules. The amended ordinance will take

effect 1 July. Under the amended ordinance, the highest tax rate

for Vietnamese nationals is 40 percent, reduced from 50 percent.

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