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Asia Newsletter

January 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 5 February 2004.

L O Y E N S & L O E F F – A S I A N E W S L E T T E R – J A N U A R Y 2 0 0 41

Asean

Japan to negotiate bilateral Free Trade Agreementswith Malaysia, Philippines and Thailand

• At the Japan-ASEAN summit in Tokyo, it was announced that

negotiations for bilateral free trade agree-ments between Japan and

Malaysia, the Philippines and Thailand would commence in early

2004. ASEAN member States have been very active over the past

year in respect of bi- and multi-lateral free trade agreements (Japan,

China). A recent Mc Kinsey report indicated that the South East

Asian economies should integrate in order to maintain their

competitive edge. A number of plants manufacturing goods for the

ASEAN market has already been established within ASEAN borders,

in view of the customs duty benefits which can be so achieved.

Thailand, for instance, has been very successful in luring the major

automotive manufacturers to set up production facilities in Thailand.

Common Effective Preferential Tariff (CEPT) – updated

• ASEAN recently revised the so called ‘CEPT Rules of Origin and

Operational Certification Procedures’ The revised Rules of Origin

now clearly define the method of calculating local content (required

for claiming the reduced tariffs) and provide principles and guidelines

for determining the cost for ASEAN Rules of Origin purposes.

Australia

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

to the Australian section of this newsletter.

Enactment of rules for foreign exchange gains and losses

• Complex new measures dealing with the taxation of foreign exchange

gains and losses were enacted on 17 December 2003 with

retrospective effect from 1 July 2003. Generally, the new measures

treat foreign exchange gains and losses as being assessable or

deductible upon the occurrence of a “realisation event” and apply

to foreign currency transactions entered into by taxpayers (excluding,

in general, banks and other deposit-taking institutions) on or after

1 July 2003.

Foreign hybrid legislation introduced

• New rules dealing with the tax treatment of foreign hybrid entities

have been introduced into Parliament but not yet enacted. Broadly,

these rules will apply, once enacted, to treat limited partnerships

established under a foreign law and entities such as US limited

liability companies, as partnerships (and, therefore, as “look-through”

vehicles) rather than companies (as is currently the case) for

Australian tax purposes.

Amendments to tax consolidation regime announced

• Further amendments to the tax consolidation regime for Australian

corporate groups were announced on 4 December 2003. The effect

of these amendments will be backdated to 1 July 2002. Whilst many

of the amending measures are for finetuning and clarification

purposes, the most significant is the introduction of legislation

which will allow taxpayers to revoke certain elections (apart from

the election to form a consolidated group) up to 31 December 2004.

Interest deductions denied

• A recent decision of the Full Federal Court (Spassked Pty Ltd v

Commissioner of Taxation [2003] FCAFC 282) affirmed the Court’s

decision at first instance, denying a tax deduction for interest

payments on borrowings used to fund the acquisition of shares

where there was no reasonable expectation of dividend income.

The taxpayer has lodged an application seeking special leave to

appeal to the High Court.

2L O Y E N S & L O E F F – A S I A N E W S L E T T E R – J A N U A R Y 2 0 0 4

International Tax Developments

• The first tranche of the changes foreshadowed in the Government’s

2003 Budget in response to the Review of International Tax

Arrangements to increase the attractiveness of Australia as a place

for business has been introduced into Parliament. The amendments

relate to widening certain exemptions from the foreign investment

fund (“FIF”) rules (in particular in the attributable income calculation

for complying superannuation entities and related wholesale trusts)

and an exemption from interest withholding tax for unit trusts that

is similar to the exemption available to companies in respect of

widely offered debentures. The amendments also alter the basis

for calculating attributable income from controlled foreign companies

(“CFCs”) that are resident of broadly comparable tax jurisdictions.

It will no longer be necessary to include third country sourced income

derived by the CFC unless specifically identified by regulation. The

final item in this package of bills removes the potential for double

taxation of tax on royalty payments where there has been a transfer

pricing adjustment (that is, by both the denial of a deduction and

imposition of withholding tax). The Commissioner will now be able

to reduce the withholding tax to the extent the transfer pricing

rules operate to deny a deduction for royalty payments.

• UK and Russia. New tax treaties between Australia and the UK

and Australia and Russia entered into force on 17 December 2003.

The new treaties will generally have effect for Australian income

and withholding taxes from 1 July 2004.

China (PRC)

Tax registrations

• With effect from 1 February 2004, each taxpayer will have only one

tax registration certificate which will be issued and stamped by both

the competent State Tax Bureau and the local tax bureau in charge

of the taxpayer.

Income Tax reform

• In recent weeks, at various occasions, the State Tax Bureau and

government officials in Beijing have announced that they are

actively pursuing new tax legislation to replace the current income

tax laws applicable to foreign and domestic investors respectively.

• The proposed new income tax will integrate both the foreign enterprise

income tax law (FEIT) and the domestic enterprise income tax, and

present a harmonized tax law for both foreign and domestic investors.

Reports are that the new income tax rate will be 25%, which is 8%

points lower than the current standard income tax rate in China.

Further, tax holidays currently applicable to foreign investors will be

abolished and replaced by a uniform system for everyone, which is

proposed to be a 1 year full (100%) income tax holiday followed by

another year for which a 50% income tax holiday applies. This is

good news for domestic investors but unwelcome news to foreign

investors who are currently enjoying far more generous tax facilities.

It is understood that existing FIE investment applications will be

grandfathered provided they are approved before the new tax

legislation takes effect. The plans are for the new income tax law

to take effect on 1 January 2005. Where appropriate, foreign investors

should seek legal and tax advice to consider maximising the income

tax facilities applicable to their investment in China.

VAT reform

• With effect from 1 January 2004, on a trial basis, a consumption,

rather than the generally applicable production oriented VAT system,

applies in China's three Northeastern provinces. The immediate

effect hereof is that VAT charged on fixed assets by local suppliers

can be credited by the buyer against its output-VAT, whereas under

the present general VAT system applicable in the other parts of

China, VAT on purchases of fixed assets can not be credited against

output VAT, and thus is a cost of business.

Export VAT

• There have been several developments in this field late 2003.

Based on an export VAT Circular (Cai Shui (2003) 222 in October)

the State Tax Bureau and the MOF have jointly issued two

implementing circulars. Exports of goods purchased from small

scale taxpayers will be eligible to VAT credits capped at 6% whereas

exports of software products is exempt from VAT as of 1 January

2004, so that no VAT refunds or credits will be given to the exporter

in the latter case.

Trading activities

• China has relaxed the conditions for trading activities by allowing

joint venture companies or wholly-owned enterprises to establish

Chinese 'procurement' companies provided that registered capital

3 L O Y E N S & L O E F F – A S I A N E W S L E T T E R – J A N U A R Y 2 0 0 4

is at least RMB 30m, the foreign investor has an overseas distribution

network and the local Chinese partner in a joint venture situation

has a sound creditworthiness and financial position.


• Macao. China signed a Tax Arrangement with Macao on 27

December 2003. The Arrangement is similar to a full fledged double

tax treaty and unlike China's Arrangement with Hong Kong, this

one also covers passive income such as e.g. dividends, interest

and royalties, but it does not cover business tax on airline and

shipping profits, which the Arrangement with Hong Kong does

cover. The withholding tax rates are in most cases 10% which

is not spectacular, given China's statutory withholding tax rate

of 10% currently. China also has a CEPA arrangement (see below)

with Macao, as it has with Hong Kong.

• China's new tax treaty with Cuba entered into force on 17 October 2003.

Hong Kong

Shipping agreement with Singapore

• A shipping agreement was signed between Hong Kong and

Singapore on 28 November 2003. The agreement is awaiting

ratification before it can enter into force. It provides that shipping

and airline activities will be taxable only in the country where the

business has its management and control.

Investment facilities because of the CEPA

• According to reports in the regional media, multinational

companies are rushing to take advantage of the Closer Economic

Partnership Arrangement (CEPA) between Hong Kong and the

Chinese mainland.

• In the last week of December 2003, the Hong Kong government

announced that the trade and Industry Department, in parallel

with five government approved certification organisations, have

begun accepting applications for Certificates of Hong Kong

Origin (which are required in order to benefit from the tariff

exemption between the mainland and Hong Kong on certain

goods) from today.

• The five approved certification organisations are the Hong Kong

General Chamber of Commerce, the Federation of Hong Kong

Industries, the Chinese Manufacturers' Association of Hong Kong,

the Indian Chamber of Commerce and the Chinese General Chamber

of Commerce.

Tax exemption for offshore funds

• The Hong Kong government on 14 January said it will have a

month long consultation on proposed amendments that would

exempt fund entities and nonfund entities that reside outside

of Hong Kong from profits taxes for income arising from

transactions in Hong Kong. The changes would bring Hong Kong

in line with other major financial centers, which do not tax the

profits generated through the involvement of a fund manager in

their jurisdiction.

• The proposed amendments to the tax law seek to exempt fund

entities and non-fund entities resident outside Hong Kong from

profits tax in respect of any income derived from transactions

undertaken in Hong Kong through a broker or an approved

investment adviser. To prevent round-tripping by local funds, anti

avoidance measures are also proposed. The Hong Kong government

stated that if the results of the consultation are positive, the

government plans to seek an early introduction of legislation.

Tax treaty with Belgium

• Hong Kong and Belgium on 10 December 2003 entered into

Hong Kong's first comprehensive income tax treaty and protocol.

Hong Kong has an existing Memorandum of Understanding on

the Arrangement for Avoidance of Double Taxation with China,

but the arrangement does not address the treatment of dividend,

interest, and royalty income. The treaty has to be ratified by both

jurisdictions before it can enter into force. The treaty will serve to

protect investors from one of the jurisdictions against income

tax in the other jurisdiction, if these investors make occasional

trips to the other jurisdiction to meet with customers or to carry

out projects, provided these visitis do not exceed a prescribed time

threshold. Furthermore, the treaty provides for reduced withholding

tax rates in Belgium on dividends (5% or 15%), interest and qualifying

royalty payments. The treaty, we believe, will provide an interesting

platform for Hong Kong investors who wish to invest into Europe.

Through Belgium, these investors can tap into the European Union

tax exemptions.

L O Y E N S & L O E F F – A S I A N E W S L E T T E R – J A N U A R Y 2 0 0 4 4

India

Taxation of outsourced businesses

• In recent years, India has seen a steady growth of outsourcing

of business processes by nonresidents or foreign companies to

information-technology-enabled entities in India. Such entities are

either branches or associated concerns of the foreign enterprises,

or independent Indian enterprises. Their activities range from

procuring orders for the sale of goods to providing services such

as software maintenance, debt collection, software evelopment,

and credit card and mobile telephone-related services. In some

cases, a business process outsourcing (BPO) unit in India performs

all revenue-generating activity of the nonresident enterprise, or a

significant portion thereof.

• It was reported on 7 January 2004 that the Central Board of Direct

Taxes issued a circular clarifying the tax treatment of nonresidents

outsourcing to BPO units in India. The government notes in the

circular that the manner and extent of the attribution of profits

resulting from BPO units will ultimately depend on the facts of

each case and the nature of the services provided by the BPO unit,

as determined in accordance with the provisions of the relevant

treaty and applicable domestic law.

• Essentially, however, profits attributable to the provision of incidental

services are exempted from income tax in India, whereas profits

attributable to core activities are not. The CBDT defined the terms

‘incidental’ and ‘core’.

Budget 2004/2005

• On 3 February 2004, the Indian government issued its budget for

the period from 1 April 2004 through 31 March 2005. It is an interim

budget because general elections are up shortly and therefore the

current government will not seek to implement new legislation to

adopt the budget proposals. If re-elected, the current government

commits to adopt the interim budget statements. The tax aspects

are highlighted below:

• In India, stamp duty is levied either by the Central Government

or the State Government. It is proposed to reduce the stamp

duty by 50% on all instruments on which stamp duty is imposed

by the Central Government.

• The income tax rates for corporates and individuals would not

be changed.

• The income tax exemption provided for in section 80IA of

the Income Tax Act relating to new undertakings in the power

sector starting transmission or distribution at any time till 31

March 2006. This date is proposed to be extended till 31

March 2012.

• Currently long term capital gains on certain listed securities

purchased between 1 March 2003 and 1 March 2004 are tax

exempt. It is proposed to extend this exemption in respect of

securities purchased till 28 February 2007.

• A tonnage tax scheme, with notional income at a fixed rate on

the basis of net registered tonnage is proposed to be considered

for Indian shipping business.

Increased focus on Liaison Offices

• It was reported on 15 January 2004 that India's tax authorities are

looking at foreign companies that have set up "liaison offices" to

determine whether those offices actually carry on business in India,

which could subject them to tax, local media have reported. Under

the foreign exchange regulations, foreign companies are permitted

to set up liaison offices in India, but those offices are not allowed

to undertake any business or commercial activity in India or to earn

any income in India.

• India's tax authorities believe that, in some cases, liaison offices

employed large numbers of people and carried on business-

generating activities in India. If the liaison offices are actually

carrying on business in India, the authorities say, the income

attributable to those business activities would be subject to tax

in India.

Computer software purchase a royalty?

• It was reported on 21 November 2003 that in the case of Lucent

Technologies Hindustan Ltd. v. I.T.O., an Indian Income Tax

Appellate Tribunal has clarified that a payment for the importation

of computer software is not necessarily a royalty subject to

withholding tax.

• The tribunal appreciated the taxpayer's arguments distinguishing

between a payment for a copyrighted article -- an item with an

imbedded copyright -- and a payment for a copyright. The tribunal


concluded in Lucent Technologies Hindustan that the taxpayer's

payment to a U.S. company had been for the acquisition of a

copyrighted article, but that the taxpayer had acquired no rights

in that article. The payment, therefore, was not a royalty subject to

tax withholding.

Service Tax and Export of Services

• It was reported on 19 December 2003 that responding to requests

from service providers for clarification of the meaning of "export of

services," India's Ministry of Finance recently released a discussion

draft setting forth the criteria to be used for determining when a

service is deemed to have been exported and is thus exempt from

service tax in India.


• Mauritius/India tax treaty. We refer to the previous edition of our

newsletter, in which we reported on the Supreme Court decision on

tax treaty protection under the tax treaty between India and Mauritius.

Reportedly, on 24 November 2003, a Review Petition was filed with

the Supreme Court of India, which will come up for admission in

next few weeks.

• As a result of the recent case with Mauritius, where the Indian tax

authorities had to concede defeat as the Supreme Court (inter alia)

ruled that tax treaty residence certificates issued by overseas tax

authorities override domestic tests applied in India, the Indian

government has reportedly decided that it will seek to include a

Limitation of Benefit clause in its first time or renewed tax treaties.

This would mean that certain prescribed minimum substance

conditions would have to be met in order to benefit from the tax

treaty reduced tax rates.

Indonesia

Tax reform

• The Indonesian tax authorities have announced plans to make major

changes to the income tax legislation. Based on oral statements

made by the Director General of Taxation on 24 October 2003,

Indonesia is considering to reduce the income tax rates to 12% for

the first IDR 75 million of taxable income, and 28% on the balance

(presently the maximum rate is 30% for corporates and 35%

for individuals). The authorities are also contemplating a possible

amendment to the VAT legislation. Finally, changes are expected

in the General Tax Law. The government plans to no longer make

tax refund requests automatically subject to a tax audit. They have

announced that they expect to issue draft legislation in the first

two months of 2004.

VAT and Luxury Sales Tax also due in Batam

• With effect from 1 January 2004, businesses operating on Batam

island have to pay and charge VAT and Luxury Sales Tax on domestic

sales, both in and outside Batam itself. An exception applies if

the sale is an export sale, i.e. to a foreign country, which will continue

to be free of VAT and Luxury Sales Tax provided the business in

Batam is operating in one of the Free Trade Zones on the island.

This is an important development for many businesses which

have been established in Batam because of its close proximity to

Singapore and because of the combination of (1) low labour

costs for production and (2) the Free Trade Agreement between

Singapore and the USA, which allows Singapore companies to

use Batam based manufacturers and still enjoy the import duty

privileges provided the Singapore company has a local content

of 40%.


• Netherlands. The new Dutch/Indonesia tax treaty which was

signed on 29 January 2002, was ratified by both countries in

December 2003 and has, according to a statement made by the

Dutch embassy in Jakarta taken effect on 1 January 2004. The

treaty contains a number of very interesting features, particularly

with respect to financing Indonesian borrowers. Under the treaty,

provided this is properly implemented, loans made out for more

than 2 years are exempt from interest withholding tax in Indonesia.

This presents a unique opportunity to avoid withholding tax on

funding costs by using a Dutch company to provide or arrange

the funding for an Indonesian borrower. The treaty also contains

an interesting provision with respect to dividend withholding tax,

and provides for a 10% withholding tax rate on dividends regardless

of the relative size of the interest in the company that pays the

dividend. In most of Indonesia's tax treaties a threshold interest

of at least 25% applies, in order to enjoy the reduced dividend

withholding tax rate under a treaty. Hence, not so in the new

Dutch/Indonesia tax treaty. Finally, the treaty contains a specific

exemption of withholding tax on technical service fees and a

10% withholding tax rate on royalties.


• North Korea. More than one year after signing an income tax

treaty with the Democratic People's Republic of Korea, Indonesia

has ratified the treaty by issuing Presidential Decree 96, dated

14 November 2003. However, under article 28(1) of the treaty,

it will not enter into force until it is ratified by both contracting

countries. The treaty was signed 11 July 2002 in Jakarta.

• Thailand. Indonesia has reportedly ratified the new tax treaty

with Thailand and the wait is now on Thailand to ratify the treaty

before it can enter into force. The tax treaty does not contain

spectacular withholding tax reductions, as most rates will be reduced

to 15% withholding tax under the new treaty.

Japan

Tax reform 2004

• On 19 December 2003, the Ministry of Finance in Japan (“MOF”)

announced a tax reform package for the fiscal year 2004. The tax

reform still needs to be approved by the Diet. Various topics in the

package are highlighted below:

• The period for losses to be carried forward is extended from

5 years to 7 years. This will be applicable retroactively to losses

from business years beginning on or after 1 April 2001. The 5

year period for statutory limitations and book keeping obligations

will be extended to 7 years correspondingly;

• The 2% additional tax applicable to the corporations using

consolidated taxation will be abolished as per 1 April 2004;

• The income tax rate on capital gains from unlisted stocks will

be reduced from 26% (currently) to 20%. This will apply to

capital gains realised as from 1 January 2004;

• The scope of qualified “venture” for the purpose of reduced

taxation of income tax will be expanded;

• The amount of certain stocks of family owned small and medium

size companies that are eligible for a special reduced calculation

of inherited assets for the purpose of inheritance tax will be

increased to JPY 1,000 million (currently 300 million);

• Gains on the sale of inherited unlisted stocks to the issuing

company for the purpose of the payment of the inheritance tax

will be taxed as capital gains, rather than deemed dividends. For

income tax purposes, a deemed dividend is taxed at progressive

rates (maximum 50%, including the local tax) while capital

gains are taxed at a flat rate (reduced from 26% to 20% as part

of the 2004 tax reform);

• The tax rate on capital gains of unlisted stocks will be reduced

to 20% (see taxation of small and medium size company);

• Capital gains on open stock investment funds (stock-type

investment trusts) will be taxed at the same reduced rate of

10% as capital gains of stocks. Capital losses incurred from the

sale of open stock investment funds may be carried forward for

3 years;

• The tax rate of income tax for long term capital gains on the sale

of land and buildings will be reduced from 26% to 20%;

• The special deduction in the amount of JPY 1 million for capital

gains on land for creation of high quality residential land will be

abolished. On the other hand, the special tax rate of income tax

for the capital gains will be reduced to 14% for the first bracket

of capital gains in the amount of Yen 20 million;

• The tax rate of income tax for short-term capital gains from

the sale of land and housing will be reduced to 39%; and

• The compensation of capital gains and losses from the sale of

land and housing with other income will be abolished. These

measures will be applied to sales on or after 1 January 2004.

Court case regarding profits realised stock option

• The Yokohama Direct Court ruled on 21 January 2004 in favour of

the national tax authorities with regard to taxation of profits

gained from stock options. The profits were treated as salary income

upon which the higher income tax rate is levied (compared to the

lower rate for occasional income). On 30 January 2004, the Tokyo

District Court also decided that profits from stock options should

be treated as salary income. These decisions run counter to other

Tokyo District Court decisions taken in 2002 and 2003.

Korea

Corporate Tax rates reduced

• On 9 December 2003 the Korean authorities have formally

agreed that as from 1 January 2005, Korean corporate income tax

rates will be lowered to 25% (currently 27%) for taxable income


to the extent exceeding KRW 100 million; below that amount

the rate will be lowered from 15% to 13%.

• In addition to the above the Korean Parliament agreed on various

other bills. These regard, amongst others, inheritance and gift tax

and income tax.

Tax incentives: Foreign Investment Promotion Law

• At the end of 2003, the government of Korea announced again

further tax incentives for foreign investors. The plans consist of

more tax cuts for investments in specific sectors (a.o. medical

sector, welfare sector and infrastructure related sectors) and industries,

as part of its overall tax reform plans.

• As of 9 January 2004 the amended Foreign Investment Promotion

Law applies, in order to increase foreign investment into Korea.

Amongst others, the amendments regard easier access for

foreign investors to many kind of investment related (tax) incentives,

for example by lowering required minimum invested amounts

required for such incentives.

Transfer Pricing

• At a public meeting held in Seoul last December, an official of the

Korean National Tax Service gave some insight in the policy of

the Korean tax authorities (NTS) with respect to tax audits of

Korean companies owned by foreign shareholders in relation to

transfer pricing issues. He said that such companies will only

be targeted in a situation whereby a clear manipulation indication

exists. In order to prevent too much reluctance at the foreign

investor’s level to invest in Korea, a foreign owned Korean company

will benefit from this favourable attitude.

Shipping: tonnage tax regime

• Korean authorities announced plans for the introduction of a

tonnage tax system applicable as from 2005 for qualifying shipping

industries. Accordingly, the weight of the vessels used will be the

basis for the calculation of the amount of taxable income, rather

than the operational profits. As a result of this change of system

the overall tax burden for shippers can decrease substantially.

Deductibility corporate expenses

• As of the beginning of 2004, the tax deductibility of entertainment

expenses has been restricted. The tax authorities will check the

legitimacy of costs in excess of KRW 500,000 more strictly on the

basis of required documentation.

Stock options• Early January 2004, a Korean court ruled that gains on stock options

granted by a foreign parent company to employees based in Korea

are in principle subject to Korean income tax.

Malaysia

Tax incentives to acquire foreign-owned companies

• The Malaysian government is providing tax incentives to

Malaysian companies that venture abroad in search of profitable

businesses and are able to acquire new technology or find new

markets for local produce. Examples of Malaysian local produce

currently being exported are palm oil, cocoa, rubber, wood-based

products and tin ore. In August the government released a specific

tax ruling -- Income Tax (Deduction for Cost on Acquisition of a

Foreign Owned Company) Rules 2003 -- that entitles companies

to a deduction based on the acquisition of a foreign-owned company.

To qualify for the deduction a locally owned company must be

incorporated under the Company's Act 1965, have at least 60 percent

Malaysian equity ownership, and be involved in manufacturing,

trading, or marketing activities. According to the ruling, an amount

equal to one-fifth of the cost of acquisition for the year of assessment

and for each of the following four years of assessment will be

allowed as tax deductions. The ruling is effective retrospectively

from 21 September 2002.

Labuan Offshore Companies – Malaysian marketingoffices permitted

• Labuan Offshore Companies (“LOC”) were recently permitted to

establish marketing offices in Kuala Lumpur and/or Johor Bahru.

An annual fee of M$5,000 is payable in respect of each office that

is established. Operating restrictions apply in respect of such offices.

In particular, those offices may be used only for meetings with

existing or potential clients of the LOC. LOCs are prohibited from

carrying on trading activities through those offices, or keep their

accounting records there. It however does provide offshore

companies with the opportunity to set up a base in peninsular

Malaysia, something which should make the day-to-day business


operations for an offshore company much more efficient.

Time apportionment for expatriates working inOHQ / Regional offices

• The 2003 budget proposed that expatriates working in operational

headquarters and regional offices (a status which grants a number

of tax incentives) be taxed only on that portion of their income

attributable to the number of days they are in Malaysia in the course

of their duties. Recently, the proposed law was finally gazetted,

effective from the Year of Assessment 2003. With these measures,

Malaysia aims to bring its legislation in line with Singapore’s NOR

scheme, Thailand’s OHQ incentive and Hong Kong’s rules in

respect of employees with regional responsibilities.


• Germany. A new tax treaty between Germany and Malaysia was

initialled on 8 July 2003. Once in force, the initialled treaty will

replace the Germany-Malaysia income tax treaty of 8 April 1977.

No further details are yet available. The current tax treaty between

Malaysia and Germany has the interesting feature that the

Malaysian withholding tax on technical service fees for services

carried out in Malaysia is reduced to nil.

• Denmark. A protocol to the Denmark-Malaysia income tax treaty

of 4 December 1970 was signed on 3 December 2003. The

provisions of this treaty are not spectacular. The more interesting

ones are as follows:

• A permanent establishment also includes a gas well and a warehouse.

Supervisory activities in connection with a construction or assembly

project constitute a permanent establishment if they continue for

more than 6 months in any 12-month period;

• Denmark applies a tax sparing provision in respect of specified

income which has been subject to tax in Malaysia and lower

(effective) rate under one of Malaysia’s incentive schemes. Denmark

also exempts dividends which have been taxed at a reduced rate

or exempted in Malaysia because of special incentive measures.

The tax sparing provisions will apply for the first 10 years for which

the protocol is effective but this period may be extended by the

competent authorities;

• A limitation of relief article is inserted, under which relief from

taxation under the treaty is only given on income subject to tax to

the extent that the income is remitted to or received in a state.

• India. Details of the new income tax treaty and protocol between

Malaysia and India, signed on 14 May 2001, have become available.

On entry into force, the new treaty will replace the current

Malaysia-India income tax treaty of 25 October 1976. The new treaty

generally follows the OECD Model Convention. The treaty and

Protocol at a glance:

• The treaty provides for a withholding tax rate of 10% on dividends,

interest, royalties and technical fees (as regards the latter this is

a departure from the exemption under the previous tax treaty).

• A permanent establishment includes (i) a farm or plantation,

(ii) a sales outlet, (iii) a warehouse and (iv) a building site, or a

construction, installation or assembly project if it lasts for more

than 9 months;

• There is a tax sparing credit applicable in both states. The new

treaty makes no specific reference to special tax regimes in either

Malaysia or India and it is assumed that the new treaty applies

to entities qualifying for any such regimes.

• Australia. The second protocol of 28 July 2002 to the Australia-

Malaysia income tax treaty of 20 August 1980 entered into force

on 23 July 2003. With regard to the tax sparing provisions, the

protocol applies retroactively, in Australia, in respect of tax on

income for any year of income beginning on or after 1 July 1992 and,

in Malaysia, in respect of tax for any year of assessment beginning

on or after 1 January In any other case, the protocol will apply, in

Australia, in relation to income for any year of income beginning

on or after 1 July 2004 and, in Malaysia, in respect of tax for any

year of assessment beginning on or after 1 January 2004. The more

interesting points to note are as follows.

• Art. 10 (Dividends) is replaced with a new article, which provides

that, in Australia, no tax is charged on dividends to the extent that

they have been "franked" if the recipient is a company which holds

directly at least 10% of the voting power in the paying company.

In all other cases, the rate of withholding tax is 15% - and, in Malaysia,

no withholding tax is levied on dividends paid by a company resident

in Malaysia;

• Art. 12 (Royalties) is amended so that the exemption for approved


industrial royalties derived from Malaysia and for royalties subject

to cinematograph film-hire duty in Malaysia, is removed. The

definition of royalties now includes payments for the use in connection

with television, radio or other broadcasting, or the right to use in

connection with such broadcasting, visual images or sounds, or

both, transmitted by satellite or cable, optic fibre or similar technology,

and for the use of, or the right to use, some or all of the part of the

radiofrequency spectrum specified in a relevant licence; and

• Art. 21 (Income of dual resident) is replaced by an Other income

article, which is similar to that of the OECD Model, except that

the article also provides that other income derived by a resident of

one state from the other state may also be taxed in the other state.

New Zealand

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

Wellington and Christchurch, New Zealand

New tax legislation

• The Taxation (Annual Rates, GST, Trans-Tasman Imputation and

Miscellaneous Provisions) Bill 2003 received royal assent in

November 2003. The changes introduced by this Bill are as follows:

• Certain business-to-business supplies of financial services

previously classified as exempt supplies for GST purposes are

now “zero-rated” supplies with the effect that tax credits will be

available to the financial service providers in respect of GST they

pay on business supplies;

• A reverse charge mechanism is introduced to impose GST

on certain imports of services, which will include supplies

between intra-group companies such as management fees and

internal charges;

• New Zealand’s imputation laws have been reformed to reduce

double taxation of trans-Tasman investments, as part of an

agreement with Australia (similar legislation was enacted in

Australia in June 2003). Companies can elect to use this regime

from 1 April 2003 and are able to pay dividends pursuant to the

new rules from 1 October 2003;

• A deferred deduction rule is introduced to combat aggressive

tax arrangements, such as those arrangements which result in

investors receiving more in tax deductions than the money they

invest in the arrangements;

• Amendments have been made to the controlled foreign company

regime to allow a New Zealand resident’s attributed foreign

income/loss or foreign investment fund income/loss to be nil

if there is a lack of information available in respect of the controlled

foreign company as a result of stock exchange rules or the

laws of the particular country preventing disclosure of the

required information; and

• The new legislation will come have effect from the first day of

a financial quarter (1 January, 1 April, 1 July or 1 October) some

time in the next twelve months.

New Zealand Supreme Court announced

• The appointment of judges to the new Supreme Court, which will

replace the Privy Council as New Zealand’s highest court, was

announced in November 2003. As previously announced, the

Supreme Court has come into being on 1 January 2004 and hearings

will commence on 1 July 2004.

International recruitment

• Proposals to reduce the tax barriers to international recruitment

are set out in a government discussion document released by

the Inland Revenue Department in November 2003. The proposals

include a temporary exemption from some of New Zealand's

international tax rules for people recruited to work here (as employees)

who have been non-resident in New Zealand for tax purposes for

the previous ten years.

Proposals to lift barriers impeding international venturecapital access to New Zealand

• The Government has detailed two new tax proposals which are

intended to lift the barriers impeding access by international venture

capital to New Zealand.

• Under the first proposal, certain non-residents (including most

of New Zealand’s tax treaty countries) will be eligible for an

exemption on any tax which they may incur on profits from the

realisation of shares in small, unlisted New Zealand companies.

The exemption will apply to persons who, because they are exempt

from tax in their own jurisdiction, cannot claim any relief from

New Zealand tax.

• Tax changes for special partnerships intended to make it easier

for non-residents to invest with New Zealand-resident persons

in a special partnership structure.

L O Y E N S & L O E F F – A S I A N E W S L E T T E R – J A N U A R Y 2 0 0 4 1 0

• These tax proposals will be included in the first taxation Bill

for 2004 and are scheduled to take effect on 1 April 2004.


• Chile. New Zealand signed a double tax agreement (DTA) with Chile

in December 2003. It will come into force once both countries

legislate for it. Details are not yet available.

Philippines

Suppliers of certified exporters are also entitled tozero-rating

• A VAT-registered supplier of goods of a certified exporter is

treated as “indirect exporter” of goods. It is entitled to zero-rating,

subject to the following conditions: (i) the supplier is a duly

accredited indirect exporter under R.A. No. 7844; (ii) a Permit

for VAT zero-rating pursuant to Section 4.107-1(d) of Revenue

Regulations No. 7-95 has been issued to the supplier; (iii) the

exporter has furnished the supplier with a copy of its “Certificate

of Accreditation as Eligible Exporter”; (iv) the supplier issued the

exporter a VAT-registered invoice for zero-rated sales duly registered

with the BIR with the words “zero rated” imprinted on the invoice.

A VAT-registered supplier of service of a certified exporter is also

entitled to the benefit of zero-rating for as long as (i) the services

it provides to the exporter involve processing, converting or

manufacturing goods used in the exporter’s business, (ii) the

export sales exceed 70% of the total annual production, (iii)

the VAT-registered supplier of service is either accredited by the

Board of Investments or by the Export Development Council,

(iv) the supplier has been first issued with a BIR Permit for

VAT zero-rating, and (v) the supplier issues to the exporter a

duly-registered VAT invoice for VAT zero-rated sales.

Philippines plans another tax amnesty

• President Gloria Macapagal Arroyo wants to offer another tax

amnesty before the 2004 presidential election and is urging

Congress to expedite the passage of a bill that would allow

taxpayers to settle tax debts free of penalties or prosecution.

It is expected that the Bill will pass somewhere in the course

of February.


• The investment protection agreement between the Belgian-

Luxembourg Economic Union and the Philippines, signed on

14 January 1998, will enter into force on 19 December 2003.

Confirmation of the entry into force of the agreement was published

in the Belgian Official Gazette of 27 November 2003.

• Sweden. The new income tax treaty between Sweden and the

Philippines, signed on 24 June 1998, entered into force on

1 November 2003. The new treaty will generally apply from 1 January

2004. The treaty generally follows the OECD Model Convention.

It provides for reduced withholding tax rates of 15% (25% under

the former treaty) on dividends generally and 10% (15% under

the former treaty) if paid to a company that holds directly at least

25% of the capital of the company paying the dividends, 10% on

interest, and 15% on royalties. To avoid double taxation, both states

generally grant an ordinary tax credit. In respect of dividends, the

Philippines will also allow credit for the underlying corporate tax

payable in Sweden if the Philippine company owns directly or

indirectly more than 50% of the voting power in the Swedish

company paying the dividends. Sweden will no longer grant any tax

sparing credits. A limitation on benefits provision renders the

treaty benefits inapplicable to income of, and dividends from,

companies that are residents of a contracting state and derive their

income primarily from listed activities from third states if such

income is taxed significantly more leniently than income from

similar activities carried out in that contracting state.

Singapore

GST relief for trust and logistics companies

• Amendments to Singapore's Goods and Services Tax Act, together

with a related Circular, extend the zero-rating provision for trustee

services to cover qualifying services provided by a Singapore trust

company to a foreign trust of which that company is not the trustee,

effective 1 July 2003.

• The amendments open the possibility for the Minister of Finance

to issue regulations implementing the Approved Third Party

Logistics Company Scheme, under which qualifying companies will

be able to import certain goods without paying GST and to move

1 1 L O Y E N S & L O E F F – A S I A N E W S L E T T E R – J A N U A R Y 2 0 0 4

them to certain parties without charging GST, effective 1 January

2004. Singapore has increasingly shown a focus on luring logistics

companies in order to strengthen its profile as a hub for the region.

IRAS issues circular on tax audits

• The Inland Revenue Authority of Singapore has a systematic method

of selecting candidates for tax audits and in December 2003 issued

a circular explaining Singapore's taxpayer audit process. The Circular

focuses on common errors made, the way in which these may be

avoided, and reiterates categories of non-deductible expenses.

IRAS issues additional circular on Not OrdinarilyResident scheme

• The IRAS has issued a new circular on the NOR scheme. Under

the clarifications contained in the additional circular, the IRAS

aims to mitigate some of the practical problems which arose in

respect of the NOR scheme.

GST circular on hire purchase and other financinginstruments

• The IRAS Circular of 18 November 2003 provides clarifications

regarding the GST treatment of hire purchase and other financing

instruments. Under a hire purchase agreement, the transfer of the

possession of goods to a hirer gives rise to a taxable supply for

goods subject to GST, even if legal ownership is not transferred.

Instalment credit finance is, however, an exempt supply if a separate

charge of interest is made on the hirer. If the hirer defaults on

payments and the financier repossesses and subsequently sells

the goods to satisfy the debt, the financier must charge GST on

the sale.

• Other financing or leasing instruments are treated as hire purchase

agreements if (i) the lease provides an option or right for the

lessee to purchase the goods prior to or at the end of the lease

period and (ii) the goods are not recognized as the lessor's assets

in his accounts.

• The gross margin scheme, under which GST is charged on the

excess of the sale price over the purchase price of the goods sold,

applies to used goods if they are supplied under a hire purchase

agreement and to new goods if they are supplied under a hire

purchase agreement by pure financiers, such as banks and finance

or leasing companies, which have obtained prior approval.

GST guidelines on e-commerce

• The GST guidelines of November 2003, 4th edition on e-commerce

clarify that the supply of goods or services in Singapore via the

Internet or any other electronic media is subject to GST similar

to traditional commerce. Physical goods purchased over the Internet

are subject to GST if the supplier is a GST-registered person and

the supply is made in Singapore. Physical goods delivered to an

overseas destination are zero-rated as exports. Physical goods

imported into Singapore are subject to GST if the value of the

goods exceeds SGD 400. Services or digitized goods supplied

over the Internet are subject to GST, unless they are zero-rated,

e.g. services performed for a person who does not "belong in

Singapore". Services or digitized goods from overseas suppliers

imported into, or downloaded in, Singapore are not subject to GST,

regardless of value.

Circular on income tax treatment of foreign exchangegains or losses

• The Inland Revenue Authority of Singapore issued a circular on

28 November 2003 regarding the income tax treatment of foreign

exchange gains or losses for businesses.

• As a concession, with effect from the year of assessment 2004,

the accounting treatment for recognizing foreign exchange gains or

losses will be accepted for tax purposes, provided that the same

treatment is applied to both gains and losses and the gains and

losses are revenue in nature.

• Unrealized gains or losses in prior years will be deemed to be

realized in the year of assessment 2004. The concession will be

granted automatically and taxpayers who do not wish to avail

themselves of the concession will have to make an irrevocable

election not to do so. In this case, the normal tax treatment will

apply, under which foreign exchange gains or losses will not be

taxable or allowable for tax purposes until there is a physical

conversion of the foreign currency into the functional currency of

the business.

• Capital gains and losses will remain not taxable or allowable.

Gains or losses arising from the translation of financial statements

in the businesses' non-Singapore dollar functional currencies into

Singapore dollars merely for presentational purposes (recognized

on the balance sheet) will also not be taxable or allowable. In

addition, any gain or loss arising from the translation of the year-

1 2L O Y E N S & L O E F F – A S I A N E W S L E T T E R – J A N U A R Y 2 0 0 4

end balance of a designated foreign currency bank account will be

taxable or allowable for tax purposes if the account is maintained

solely for the purposes of receiving payments from sales on revenue

accounts or trade debtors and making payments for such accounts.

Tax cuts for oil traders to compete with Thailand

• Singapore is considering to cut corporate income tax rates for

approved oil traders from 10 percent to 5 percent as a countermeasure

to the recently announced reduction by Thailand for oil traders

operating in Thailand.


• India. Singapore’s Deputy Prime Minister Lee Hsien Loong has

recently expressed interest in concluding a tax treaty with India

which would have similar features to the treaty currently in place

between Mauritius and India. Mauritius has been very successful

in capitalising on the tax treaty and is currently the single biggest

country investor into India. The most interesting feature of the

tax treaty between Mauritius and India is the exemption from

Indian tax for capital gains realised upon the alienation of qualifying

interests in Indian companies. As Mauritius, on the basis of domestic

legislation, does not tax such capital gains either, equity investments

made via Mauritius allow for a tax efficient exit. Singapore also

does not tax capital gains, so if the Singapore government would

be able to negotiate an exemption from Indian capital gains tax,

such would directly rival the Indian Mauritius tax treaty. Both

governments are aiming to complete the process by April of this

year, although impending Indian general elections may delay

any agreement.

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

between Singapore and Egypt, signed on 22 May 1996, have become

available. The treaty generally follows the OECD Model Convention.

The treaty provides for a 15% withholding tax rate on dividends,

interest and royalty payments. In Singapore, a tax sparing provision

also applies for 10 years from the date the treaty has effect, under

which taxes paid in Egypt include tax which would otherwise

have been payable but for special incentive measures to promote

economic development. Under this provision, the deemed credit

for Egyptian taxes paid on dividends, interest and royalties cannot

exceed 10%.

• Hong Kong. Singapore signed a shipping and air transport treaty

with Hong Kong on 28 November 2003. It provides for an exemption

on income derived from the operation of ships or aircraft in

international traffic by an enterprise of one state from income tax

in the other state. The exemption also applies to gains from the

alienation of ships or aircraft, and related movable property, and

to income or gains from the participation in a pool, joint business

or international operating agency. Remuneration from employment

exercised aboard a ship or aircraft is taxable only in the state of

the operating enterprise, unless it is derived by a resident of the

other state.

• Oman has ratified its tax treaty with Singapore. Treaty between

Singapore and Oman signed Singapore and Oman signed a first-

time income tax treaty and protocol on 6 October 2003. Once

in force, the treaty will replace the Singapore-Oman air transport

treaty of 29 June 1998, except for the protocol to the air transport

treaty. The tax treaty generally follows the OECD Model Convention.

It provides for a withholding tax of 5% on dividends, 7% on interest

and 8% on royalties. There are anti-abuse provisions under

which the dividends, interest and royalties articles do not apply

if tax avoidance is the main reason why parties use the treaty.

A permanent establishment includes a building site, a construction,

assembly or installation project or connected supervisory activities

if they last for more than 9 months. A tax sparing provision applies

under which taxes paid include tax which would otherwise have

been payable but for tax incentives which are designed to promote

economic development. The tax sparing provision applies for 10

years from the date the treaty has effect, but the competent

authorities of the states may consult each other to determine if this

period will be extended.

Taiwan

Technology contribution as means of paying up shares

• It was reported on 24 November 2003 that technology contributions

in exchange for shares of a Taiwanese company will become

immediately taxable as a gain on properties transaction based on

the difference of the total par value of shares issued and the cost

of acquiring or developing the technology.

• With that announcement, the MOF reversed its previous policy,

under which capital gains tax is due when sales were subsequently

sold. By explanation letter issued in the mid-1980s, the Ministry of

Finance said that special techniques invested in a corporation for

1 3 L O Y E N S & L O E F F – A S I A N E W S L E T T E R – J A N U A R Y 2 0 0 4

the purpose of obtaining stock amounted to bartering one property

for another. There were no tax consequences arising from the

transaction until the subsequent disposition of the stocks.

• Under this system, income tax on property transaction income

stemming from special techniques can be escaped without difficulty

because the sale of the stocks may not occur until long after they

are acquired. To close this tax loophole, the MOF has now changed

its policy to require that property tax on individuals of special

techniques be taxed immediately when the stocks are obtained.

Advance Pricing Agreement guidelines

• It was reported on 5 January 2004 that in conjunction with a

newly proposed transfer pricing regime, Taiwan's MOF has unveiled

its proposed rules on advance pricing agreements (APA's). In

their present form, the APA rules are limited to international

transactions and cross-border investments. The new rules apply

to inbound and outbound investors as well as entities involved in

cross-border transactions.

Dividends paid to foreign branches

• The government on 24 December 2003 approved a bill revising

the income tax law to bring the tax treatment of dividends paid

to foreign branches in line with that of dividends paid to foreign

subsidiaries by imposing a separate 20 percent tax on dividends

paid to foreign branches.

• Currently, Taiwan's income tax law provides an exemption from

withholding tax on intercorporate dividends received by enterprises

who are subject to corporate income tax in Taiwan. As a result,

dividends received by foreign subsidiaries and foreign branches

from other Taiwanese corporations are not subject to withholding

tax. However, because foreign subsidiaries are required to withhold

tax at 20 percent on dividends distributed to their parent corporations

while foreign branches can remit their profits to their headoffices

without withholding any such tax, a discrepancy exists between the

tax treatment of the two.

• When the bill becomes law, dividend income received from Taiwanese

corporations by foreign subsidiaries and foreign branches both will

ultimately be taxed at 20 percent. For the subsidiaries this takes

the form of withholding tax, and for the branches, it will take the

form of the separate tax that these revisions introduce.

Transfer pricing

• On 2 January 2004, Taiwan added a new article 114-1 to the Guidelines

for the "Assessment of Profit-Seeking Enterprise Income Tax," which

provides a mechanism to adjust intercompany transfer pricing.

• The addition of new article 114-1 of the guidelines on 2 January

marks the first time the Ministry of Finance has established a

mechanism for the adjustment of intercompany transfer pricing.

The new article provides a preferential order for adjusting

intercompany transfer pricing when article 43-1 of the Income Tax

Law is applied as follows: comparable price method; resale price

method; cost plus method; and other methods as established by

the ministry.

Thailand

Tax cuts rate for oil traders and refiners approved

• On 27 January, the Thai cabinet approved measures to reduce the

corporate income tax rate for oil traders and refiners from 30 percent

to 10 percent. Singapore is considering to reduce the corporate

income tax rate for approved oil traders from 10% to 5%.

Valuation of imported goods

• The cabinet approved a new draft Ministerial Regulation on 25

November 2003 regarding the valuation of imported goods for

customs duties purposes. The new Ministerial Regulation was

necessary to comply with the 1994 General Agreement on Tariffs

and Trade and to align Thai customs valuation methods with

international standards. When finalized, the Ministerial Regulation

will have retroactive effect from 1 October 2003.

Tax incentives for skills, technology and innovationprojects announced

• The Board of Investment (BOI) announced in a press release of

19 November 2003, that extensive tax incentives will be granted

to skills, technology and innovation projects. The incentives are

specifically aimed at the automobile industry, the fashion industry

and the information and communication sector. The incentives

package will include a 1-year extension of the normal tax holiday

L O Y E N S & L O E F F – A S I A N E W S L E T T E R – J A N U A R Y 2 0 0 4 1 4

(but not exceeding a maximum of 8 years) with no restriction on

benefits, as well as exemption from import duties on machinery for

the project, regardless of location. The conditions to qualify for the

incentives include: (i) a minimum of 1% to 2% of the annual sales

must be spent on research and development (R&D) activities

in the first 3 years; (ii) a minimum of 1% to 4% of the employees

must be graduates with bachelor or higher degrees in areas relating

to science, engineering or R&D regarding technology or design; and

(iii) a minimum of 1% of the expenditure in the first 3 years must

be spent on providing education to Thai employees or improving

their manufacturing skills. The incentives will also be available

to projects which are directly related to improving science and

technology, i.e. scientific, pharmaceutical or medical equipment

manufacturing, scientific experiments, electronic designing,

calibration, R&D, human resources development facilities and

science parks which are required to have facilities as specified by

the BOI.

Other tax incentives

• The Board of Investment (BOI) issued several notifications and

announcements on 16 October 2003 regarding tax incentives for

various sectors. The specific industries include the Designing,

Jewellery and accessory manufacturing, Agriculture and food-related

activities and Small / Medium sized enterprises recognised under

the One Tambol One Product Program (OTOP).

Revenue department reissues request for transferpricing documentation

• Thailand's Revenue Department recently reissued letters requesting

taxpayers' transfer pricing documentation. Thailand recently adopted

transfer pricing guidelines and the Thai Revenue hope to identify

possible areas for further scrutiny. In addition, since the tax authorities

are relatively inexperienced in this area, the request is aimed at

expanding the Revenue’s transfer pricing database.

End to tax breaks for property sector

• Tax breaks for Thailand's property sector have expired as planned

at the end of 2003 and will not be renewed The tax breaks, introduced

after the 1997 financial crisis, were designed to invigorate the property

sector. The government believes the sector has sufficiently bounced

back and extending the breaks would be unfair to other sectors.

Transitional measures are planned to ease the impact that the expiry

of the tax breaks will have.


• Seychelles. Details of the first-time income tax treaty between

Thailand and Seychelles, signed on 26 April 2001, have become

available. The treaty generally follows the OECD Model Convention.

The treaty provides for a withholding tax rate of 10% on dividends,

15% on interest in general and 10% on interest received by any

financial institution including an insurance company, and 15% on

royalties. It also permits the states to impose a branch profits tax.

(Thailand has a branch profits tax of 10%). A tax sparing provision

applies under which taxes paid include tax which would otherwise

have been payable but for special incentive laws designed to promote

economic development in the other state.

• Taiwan. Details of the first-time income tax agreement with

Taiwan, signed on 9 July 1999, have become available. The agreement

generally follows the OECD Model Convention. It provides for a

withholding tax of 10% on dividends in general and 5% if the

beneficial owner holds directly at least 25% of the capital of the

company paying the dividends; 15% withholding tax on interest

in general and 10% on interest received by financial institutions

including insurance companies. A withholding tax of 10% applies

to royalties. The definition of royalties includes payments for the

use of, or the right to use, industrial, commercial or scientific

equipment. The agreement permits a territory to impose income

tax up to a maximum rate of 5% on the disposal of profits realized

by a permanent establishment in accordance with its laws. A tax

sparing provision applies for 5 years (extendable by mutual

agreement) from the date on which the agreement enters into force

under which taxes paid include tax which would otherwise have

been payable but for special incentive measures.

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

between Thailand and Turkey, signed on 11 April 2002, have

become available. The treaty generally follows the UN Model

Convention. It provides for 10 or 15% withholding tax on dividends

and interest payments, and 15% on royalties. A permanent

establishment includes a building site or a construction project if

it lasts for more than 12 months, which is a generous time shelter

to help avoid that projects carried out in the other state becoming

taxable. The treaty includes a tax sparing provision operating

in Turkey for 3 years from the applicable date for the treaty, under

which taxes paid in Thailand include tax which would otherwise


Vietnam

Tax exemption for foreign investors considered

• In an effort to level the playing field for all investors and attract

more foreign direct investment into Vietnam, the government

plans to exempt foreign investors from paying taxes on profits

transferred abroad, officials from the Ministry of Planning and

Investment announced on 8 January. New laws are expected to

be submitted to the National Assembly for approval by late 2004.

New Tax laws entered into force

• Substantial amendments to Vietnam's Enterprise Income Tax Law,

Value Added Tax Law, and Special Consumption Tax Law became

effective 1 January 2004. At the end of 2003, the Ministry of Finance

issued implementing regulations.

• The General Department of Taxation (“GDT”) is currently

drafting a new circular on FCWT to replace the existing Circular

as a result of the recent changes in VAT and EIT laws. The draft

circular seeks to impose higher tax rates and deemed taxable

income on a number of activities of foreign contractors. These

include the increase of the deemed percentage of taxable

income for VAT in respect of “supply of goods” from 20% the

current 10%, and 40% for construction with supply of equipment

from current 30%. We understand that if the draft circular is

signed off and released as it currently stands, the tax costs for

foreign contractors (and the Vietnamese contracting party) will

likely increase significantly.

Personal income tax reform

• Among the substantial overhaul of the main tax laws, the

amendments to the Personal income tax laws were not approved

by the National Assembly. The National Assembly indicated that

amending the Personal income tax laws was not (yet) opportune.

Vietnam's taxes on employees are among the highest in the Asia

Pacific region. Foreign staff are taxed at a rate of up to 50 percent

on their worldwide income. For local staff, payroll costs are further

inflated by a 30 percent surtax on income in excess of about US

$1,000 per month, a 17 percent social insurance cost, and a 5 percent

health insurance cost.

have been payable but for special incentive measures designed to

promote economic development.

• Norway. The new income tax treaty and protocol between

Thailand and Norway, signed on 31 July 2003, entered into force

on 29 December 2003. The new treaty applies from 1 January

2004. The new treaty generally follows the OECD Model

Convention. The withholding tax rates are similar to those in the

treaty with Turkey mentioned above, except that a 5% withholding

tax rate applies to royalties for the use of, or the right to use, any

copyright of literary, artistic or scientific work and 10% on royalties

for consideration for the use of, or the right to use, industrial,

commercial or scientific equipment. Instead of a 12 months time

shelter, this treaty provides for a 6 months time shelter for projects

carried out in the other country. A limitation of benefits clause

applies, under which relief from taxation is granted only on amounts

of income subject to tax in the other state to the extent that

the income is remitted to, or received in, that other state. The

protocol includes a most-favoured nation clause, under which,

if a treaty is subsequently concluded by one of the states with a

third state under which interest is taxed at a lower rate than under

this treaty, the lower tax rate will apply. A tax sparing provision

applies for 10 years (extendable by mutual agreement), under

which, on approval by the Norwegian competent authority,

taxes paid in Thailand include tax which would otherwise have

been payable but for special incentive measures. Thailand provides

for the credit method to avoid double taxation.

• Myanmar (Burma). Details of the first-time income tax treaty

between Thailand and Myanmar, signed on 7 February 2002, have

become available. The treaty generally follows the OECD Model

Convention. It provides for a 10% withholding tax rate on dividends

and interest generally, and 15% on royalties. A 5% rate applies to

royalties for the use of, or the right to use, any copyrights of literary,

artistic or scientific work and 10% on royalties for consideration in

respect of any services of a managerial or consultancy nature or

information concerning industrial, commercial or scientific experience.

The treaty permits a state to impose a branch profits tax in accordance

with its laws. A limitation of relief article applies under which treaty

relief is granted only on amounts of income subject to tax in the

other state to the extent that the income is remitted to or received

in that other state.

• Bahrain and Thailand signed an income tax treaty on 27 December

in Manama. Details are not yet available.

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New YorkTom Claassens /Mark van Casteren712 Fifth AvenueNew York, NY 10019USAt +1 212 489 06 20f +1 212 489 07 10

ParisAttorneys at LawAlfred Hoogveld1, Avenue Franklin D.Roosevelt75008 ParisFrancet +33 1 49 53 91 25f +33 1 42 89 14 60

Tax AdvisersEgbert Jan Jonker1, Avenue Franklin D.Roosevelt75008 ParisFrancet +33 1 49 53 91 25f +33 1 49 53 94 29

RotterdamHans de GrootWeena 6903012 CN RotterdamThe Netherlandst +31 10 224 62 24f +31 10 412 58 39

SingaporePieter de Ridder80 Raflles Place14-06 UOB Plaza 1Singapore 048624t +65 6532 30 70f +65 6532 30 71

TokyoAttorneys at LawJohn VersantvoortNishimoto Kosan KandaNishikicho Building, 12F3-23 Kanda NishikichoChiyoda-kuTokyo 101-0054Japant +81 3 52 81 55 87f +81 3 52 81 55 89

Tax AdvisersLoyens & Volkmaars BV,Tokyo branchPieter StalmanNishimoto Kosan KandaNishikicho Building, 12F3-23 Kanda NishikichoChiyoda-kuTokyo 101-0054Japant +81 3 52 81 55 82f +81 3 52 81 55 83

asia newsletter - loyens & loeffcdn.loyensloeff.com/media/4292/january-2004.pdfinformation below...

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