Asia Newsletter

Summer 2003

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

Australia

We would like to thank the tax lawyers of Finlaysons in Adelaide for their

contribution to the Australian section of this newsletter.

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 31 July 2003.

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Proposed international tax reforms

• In the May 2003 Federal Budget, the Treasurer announced reforms

to Australia’s international taxation arrangements to improve the

competitiveness of Australian companies with offshore operations.

Controlled foreign company (CFC) rules

• The CFC rules will be simplified for Australian companies operating

in countries where tax arrangements are comparable to those in

Australia. The changes will also ease the rules for certain services

provided in international markets.

• In particular, the scope of the “tainted services income” provisions

will be reduced to exclude from attribution, to a large extent,

the income of CFCs earned from providing services to non-

resident associates.

• This will allow Australian multinationals and regional headquarters,

that provide services to other group companies and joint ventures

through non-resident associates, to compete better in inter-

national markets.

Capital gains tax (CGT)

• Australian companies (and their CFCs) will be exempted from CGT

on the sale of certain non-portfolio interests in foreign companies

with an underlying active business.

• In addition, under the new “foreign income account” rules, which

will replace the current “foreign dividend account”, conduit taxation

relief will be extended to include branch profits, tax-exempt gains

on the sale of offshore subsidiaries with active businesses, and other

foreign income sheltered from Australian tax by foreign tax credits.

• The Government will also examine the feasibility of a CGT exemption

for gains on disposals by non-residents of non-portfolio interests

in Australian companies, to the extent the gain has an underlying

foreign source.

Foreign investment fund (FIF) rules

The Government proposes better targeting the FIF rules to reduce

compliance costs for Australian managed funds and superannuation

(pension) entities investing offshore by:

• increasing the “balanced portfolio exemption” (which exempts

interests in FIFs from the FIF rules where their aggregate value

is less than a prescribed percentage) from 5% to 10% for all

taxpayers; and

• exempting Australian complying superannuation entities from

the FIF rules.

Taxation of trusts

Certain aspects of the cross-border taxation of resident trusts will be

reviewed to improve the international competitiveness of Australian

managed funds. In particular:

• non-residents will be exempted from CGT when selling non-

portfolio interests in certain Australian managed funds; and

• non-resident beneficiaries will be exempted from tax on non-

Australian gains of Australian unit or other fixed trusts.

Foreign banks

• The “separate entity” treatment given to foreign bank permanent

establishments will be extended to branches of other financial

entities.

• Unfranked dividends received by foreign-owned branches will generally

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be taxed on assessment, instead of being subject to non-resident

withholding tax.

Tax treatment of foreign expatriates

The Government will:

• address the double taxation of employee share options for

individuals moving between countries;

• not proceed with a previously-announced measure requiring

security from departing residents for deferred CGT liabilities;

and

• establish a specialist section of the Australian Taxation Office to

deal with foreign expatriate issues.

Double tax treaties

• The Government will move towards a more residence-based treaty

policy, compared with the current source-based model.

• In addition, the “most favoured nation” clauses in a number of

Australia’s existing tax treaties will require Australia to enter into

negotiations with a view to providing to the other treaty partner

similar withholding tax outcomes (ie reductions) to those agreed

in the recent US Protocol.

Date of effect

The majority of reforms arising from the review will take effect on

or after 1 July 2004, subject to parliamentary approval and following

public consultation.

Foreign Hybrid Trusts Update

• Amendments have recently been introduced to Parliament to

give special tax treatment to certain foreign hybrids, including

UK and US limited partnerships and limited liability partnerships,

US limited liability companies and other companies to be listed

in regulations.

• The changes, which were reported in the Asia Newsletter (Spring

2003), will apply from the start of the 2003/2004 income year.

Taxpayers will have an option to apply the amendments from the

start of the 2002/2003 income year.

Infrastructure Financing

The Assistant Treasurer has released for comment a draft Bill that

would replace the existing infrastructure financing provisions on

leveraged leases and non-leveraged finance leases.

The main aim of the proposed Bill is to:

• ensure that only taxpayers that have a sufficient level of risk in

respect of assets under an arrangement with a tax-preferred entity

will be entitled to capital allowances deductions;

• restrict access to tax benefits to non-resident end users; and

• improve the “notional loan” tax treatment of arrangements

between taxpayers and non-taxable entities so that taxpayers

will have greater certainty and neutrality as to the tax treatment

of such arrangements.

Rio Tinto disputes ATO assessments

• The 2002 Annual Report and Financial Statements of Rio Tinto

state that the ATO has issued assessments of $500m against

the Rio Tinto Group. Those assessments, which include penalties

and interest, relate to transactions undertaken in 1997 to acquire

franking credits.

• It is understood that Rio Tinto acquired the franking credits

to overcome a short-term franking deficiency, allowing it to pay a

fully franked interim dividend in 1997.

• In the mid to late-1990s, it was not uncommon for non-resident

shareholders, that did not pay tax in Australia and had no use for

the credits attaching to franked dividends, to trade those credits

with Australian taxpayers who could utilize them.

• Rio Tinto argues it purchased the franking credits based on its

considered view of the law prevailing at the time (which was

subsequently amended to prevent such trading taking place).

The progress of the case will be followed with interest.

ChinaMOFTEC replaced by Ministry of Commerce

• The former Ministry of Foreign Trade and Economic Cooperation

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(referred to as MOFTEC) has been converted into a new ministry,

the Ministry of Commerce of the PRC with effect from 25 March

2003. The new Ministry of Commerce consists of all of the old

MOFTEC and certain departments of the ministries dealing with

domestic trade.

Rep office tax reporting method reform

• On 12 March 2003, the State Administration of Taxation issued a

notice (Guo Shui [2003] no.28) reiterating the tax filing methods for

foreign representative offices. All representative offices of foreign

enterprises should register with the tax authorities and report their

business operations on a regular basis. The notice took effect from

1 July 2003.

• The scenarios covered by the above-mentioned notice include:

• Foreign representative offices engaged in providing consulting

services, such as regulatory, legal, taxation, accounting and audit

services, should keep complete accounting records, calculate

service revenue and taxable income accurately, and pay the taxes

on the Actual Income basis.

• Foreign representative offices, which conduct activities in

connection with trading, advertising and tour agency business,

can (continue to) report for income tax and business tax purposes

on the cost-plus basis.

• The representative offices of foreign governments, international

organisations, non-profit organisations, civil organisations and

those representative offices who qualify as principal supplier for

manufacturing operations of their overseas head office can apply

to the local tax authorities for tax exemptions. However, the final

approval should be issued by the State Administration of Taxation.

For tax exemption purposes, a certificate issued by the head

office’s tax or government authority to certify the nature of the

organisation should be provided. Those representative offices

which are approved to be exempt from taxes should file an annual

report in respect of their business operations with the tax

authorities within one month after the end of the year.

Increased personal income tax enforcement measures

• By notice issued during the weekend of 19 July, the PRC State

Tax Administration has urged tax authorities to intensify personal

income tax collection and management, with particular emphasis

on high-income earners.

Circular on customs duty treatment of royalty payments

• It was announced on 31 July 2003 that the PRC’s General

Administration of Customs has published a new circular to clarify

the customs duty treatment of royalty payments, an issue of

considerable concern to foreign companies with operations in China.

The new circular, which came into effect on 1 July, represents one

of the most sweeping changes to PRC customs legislation since

China’s accession to the World Trade Organization.

• The circular, which supersedes the Customs Interim Provisions of

Tax Levy and Exemption of Software Charges of Import Goods (1993

No. 15), defines royalties and the conditions under which royalties

or like payments will be subject to or exempt from customs duty.

• Although the new circular is welcome in that it provides greater

clarity on how royalty payments should be treated by the PRC customs

authorities nationally, there is concern as to how the new rules will

be implemented by local customs offices and how some of the

circular’s provisions will be interpreted.

Free Trade Agreement with Hong Kong

• On 29 June, the PRC signed a landmark Free Trade Agreement with

Hong Kong, which is set to provide important advantages to

Hong Kong firms in comparison with other foreign investors, in

respect of investments into the PRC (meaning: the Mainland part

of the PRC, as opposed to the territory of Hong Kong). China will

apply a zero tariff rate on some 273 categories of goods, and many

items will be eliminated in 2006 subject to further details which are

still being discussed. Further, the FTA provides relaxations to Hong

Kong firms in the areas of banking, insurance, construction, real

property, securities, management consulting, accounting, legal

services, conventions, logistics and tourism. The changes are

scheduled to take effect on 1 January 2004.

• As well as scrapping tariffs on Hong Kong’s exports to the mainland,

the agreement will provide greater access to the mainland’s service

industries for Hong Kong businesses, and will generally help to

increase the flow of cross border trade. It is expected that the

territory will derive much benefit from the pact as multinational

companies hoping to exploit the vast Chinese market will very

likely set up their Chinese headquarters in Hong Kong. In addition,

Chinese firms are expected to establish offices in the city to take

advantage of investment opportunities.

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Non business expenses

• In a notice jointly issued by the State Administration of Taxation

and the Ministry of Finance on 16 July, the PRC set forth new

provisions designed to close an existing loophole in the tax system

that allows business owners and investors to avoid personal income

tax by passing off personal expenditures as company expenditures.

• With immediate effect, individuals who use their company money

for non-business purchases will be subject to personal income tax

on those purchases. Likewise, individual investors who borrow

company funds for personal use and do not repay the debt within

one year will be liable to personal income tax thereon.

Domestic enterprises becoming FIEs

• The State Administration of Taxation issued a notice on 28 May

2003 (Guo Shui Fa [2003] No. 60) regarding the taxation of domestic

enterprises transformed into foreign investment enterprises (FIEs)

as a result of the acquisition of the domestic enterprises’ shares by

foreign investors. The notice applies retroactively from 1 January

2003 and its contents are summarised below. The background for

this notice is that from 12 April 2003, foreign investors have been

allowed to acquire shares in domestic enterprises, thereby, in certain

circumstances, transforming these enterprises into FIEs.

• Foreign investors acquiring shares in a domestic enterprise or

purchasing shares issued by a domestic enterprise results in an

enterprise which is liable to income tax as an enterprise with foreign

investment or an FIE, i.e. to “foreign income tax”, if the foreign

shareholding, following the acquisition or purchase, exceeds 25%

of the total registered capital of the domestic enterprise.

• If foreign investors meet the requirements under the Foreign

Enterprise Income Tax Law and its detailed rules, they qualify for

the tax incentives available under the tax laws and regulations. The

commencement of operations is defined to be the date shown on

the new business licence issued by the State Administration of

Commerce and the operational period runs from that issuing date

to the date of termination shown on the licence. Losses incurred

before the acquisition or purchase of the shares in a domestic

enterprise remain deductible for an FIE (Foreign Investment

Enterprise) within the period provided for by Art. 11 of the Foreign

Enterprise Income Tax Law.

• The first profit-making year is defined as that in which the enterprise

realises a profit after the deduction of losses incurred before the

acquisition or purchase. If the duration of the first profit-making

period is less than 6 months, the enterprise may choose between

the current year and the next year as the year in which the first-profit

making year commences.

Tax rulings

• The PRC is expected to issue guidelines on advance pricing

arrangements (APAs) in the near future. It lacks regulations governing

the content of APAs and the application procedures for obtaining

them. It was not until autumn 2002 that article 53 of the

Implementation Rules of Tax Collection and Administration Law,

issued by the Chinese State Council, incorporated the APA concept

into law. APAs were first mentioned in the State Administration of

Taxation’s 1998 Circular 59.

Renewable tax holidays

• It was reported on 28 May that despite the many reports indicating

that the PRC is scheduled to phase out its tax incentives for foreign

investment, the PRC government has recently released a new incentive

that gives FIEs the ability to restart their tax holidays, provided that

their activities are classified as “encouraged” under the Catalog

Guiding Foreign Investment in Industry.

• Previously, encouraged FIEs could, for a second time, be exempt

from enterprise income tax for two years followed by a 50 percent

reduction in its nominal enterprise income tax rate for the next three

years. The catch was that the FIE would have to increase its registered

capital by at least US $15 million and that the second holiday would

apply only to the taxable income properly allocated to the new project

relating to the increase. Now, however, an FIE is able to aggregate

a series of smaller registered capital increases and still qualify for

that second-time exemption from enterprise income tax followed

by the 50 percent reduction for the following three years.

Mergers and acquisitions and venture capital

• It was reported on 24 June that the PRC’s State Administration of

Taxation recently released new tax guidance to clarify the enterprise

income tax treatment of certain M&A and venture capital transactions.

The clarification was provided in two notices: Issues Relating to

the Taxation of Foreign Investors’ Acquisitions of Equity Interests

in Domestic Enterprises (the M&A Notice) and Certain Questions

Regarding Payment of Income Tax by Foreign-invested Venture

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Capital Companies (the VC Notice) issued on 28 May and

4 June respectively.

Hong Kong

Advance tax rulings on Profits Tax

• The Hong Kong Inland Revenue Department (IRD) on 23 July

published two new advance ruling cases that concern section 14 of

the Inland Revenue Ordinance (IRO), which essentially defines what

falls into the charge to Hong Kong profits tax.

• One of the new advance rulings was in the taxpayer’s favor, the other

not. At high level, the favorable ruling shows that the IRD considers

it is still possible to have trading profits booked in Hong Kong that

are not taxable there, on the basis they do not arise in or derive from

Hong Kong. The unfavorable ruling is a reminder that this is perhaps

not always straightforward to achieve.

International Tax Developments

• China - Mainland: Free Trade Agreement - see the PRC section above.

• Germany. Germany and Hong Kong signed on 13 January 2003 an

agreement for the avoidance of double taxation in respect of

the taxes on income and on capital of shipping enterprises. The

agreement was concluded in the German and English languages,

each text having equal authenticity. Once in force, the agreement

will generally apply retroactively in Germany from 1 January 1998

and in Hong Kong from 1 April 1998. The new agreement follows

Arts. 8, 13 and 22 of the OECD Model Convention. The profits of

an enterprise of a state from the operation of ships in international

traffic are taxable only in that state. Equally, capital taxation and

capital gains taxation take place only in that state. The profit taxation

rule applies if the profits are derived from the participation in a pool,

a joint business or an international operating agency. The agreement

also contains a definition of profits from the operation of ships in

international traffic, including the profits from the use or rental of

containers. Finally, if an enterprise is an enterprise of both states,

its status is determined by mutual agreement.

• The Netherlands. The Dutch Ministry of Finance in May announced

that it intends to start negotiations with Hong Kong to conclude a

double tax treaty. The negotiations are scheduled to commence in

March 2004. This is the second attempt to arrive at a possible

tax treaty between the two jurisdictions. The previous attempt

was in 1999 but was discontinued because of lack of interest

from the Dutch side. A tax treaty with Hong Kong would likely

reduce the Dutch dividend withholding tax rate but would on

the other hand require assurances by Hong Kong to exchange

information if requested for by the Dutch tax authorities.

• India. It was reported on 14 July 2003 that Hong Kong and

India will soon sign a limited double taxation treaty which will exempt

shipping companies and airlines from having to pay income tax in

both countries.

India

VAT

• The imposition of Value Added Tax (VAT) in India has been postponed

yet again, as the country missed the 1 June deadline. Consequently,

a committee of state finance ministers and representatives from

political parties are now attempting to formulate a new “roadmap”

for implementation of the tax. The VAT issue has been contentious.

It has been postponed more than three times in the last two years.

The government’s plan to press ahead with the tax has sparked

bitter protest from traders and shopkeepers with many staging a

series of strikes in protest.

• The main stumbling block for the central government has been the

apparent inertia of the state legislatures. 11 states have drafted the

legislation necessary to introduce the new tax, but it has been found

that some of the bills drawn up by the state governments contained

“considerable” differences from the recommendations made by the

committee responsible for overseeing the new tax.

• A new deadline for the introduction of the tax has yet to be put in

place, although Finance Minister Jaswant Singh has let it be known

that VAT cannot be introduced piecemeal on a state by state basis,

as anything other than a complete consensus is likely to cause

economic chaos.

Deductibility of foreign head office costs to Indianbranches

• The Mumbai High Court gave its ruling on 30 April 2003 in the case

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of Commissioner of Income Tax v. Emirates Commercial Bank

Ltd. in which it dealt with the issue of the tax deductibility of, and

the restriction (if any) on, the head office expenses incurred by a

non-resident in respect of its branch in India. A foreign bank

had a branch office in Mumbai, India, whilst its head office was in

Abu Dhabi, United Arab Emirates. In the relevant year, certain

travel expenses were incurred for visits by head office staff members

to the Indian branch. These expenses were initially incurred by

the head office but later recovered from the Indian branch. Sec. 44C

of the Income Tax Act (ITA) states that, for non-residents, certain

head office expenses incurred outsid India are deductible in

computing the business income only to the extent of the lower of

(i) 5% of the taxable income or (ii) the head office expenditure

attributable to a taxpayer’s business in India.

• The issue before the High Court was whether or not all of the travel

expenditure was tax deductible as expenditure of the Indian

branch or, alternatively, if the expenditure was subject to restriction

under Sec. 44C of the ITA.

• The High Court held that Sec. 44C of the ITA applies only to

non-residents who carry on a business in India through branches.

The section is intended to avoid difficulties in scrutinizing claims

in respect of general administrative expenses incurred by a foreign

head office insofar as the expenses relate to their businesses in

India, having regard to the fact that foreign companies operating

through branches in India sometimes try to reduce their Indian

tax liability by inflating claims for the head office expenses.

Sec. 44C of the ITA seeks to impose a restriction on the deductibility

of head office expenses, but also contemplates the allocation

of expenses amongst various entities.

• The Court held that in the case in question, the travel expenditure

was exclusively incurred for the Indian branch. The head office

staff came from the head office in Abu Dhabi to Mumbai to attend

to the work of the Mumbai branch and the expenses were incurred

in connection with that work. Though the expenses were initially

incurred by the head office and later recovered from the Indian

branch, they were effectively incurred for the Indian branch.

As a result, the restriction on the deductibility of the expenses in

Sec. 44C of the ITA did not apply. Accordingly, the Court held that

all of the expenditure was eligible for deduction in computing the

business income of the Indian branch.

E-commerce

• The Ministry of Finance has set up an eight-member task force

on emerging issues headed by the Director General of Income

Tax (International Taxation). The other members of the task force

are senior revenue officers and tax professionals from the profession

and industry. The task force has been established to study and

analyse issues relating to electronic (or e-commerce taxation and

the taxation of non-residents and to make recommendations to

the government regarding the appropriate laws to be enacted.

• The task force’s terms of reference are:

• to make recommendations on e-commerce characterization;

• to consider withholding tax obligations in India if both the

payer and payee are non-residents;

• to look at the taxation of the partnerships and consortia of

non-residents and pass through certificates;

• to consider the economic evaluation of the presumptive basis

of taxation and withholding tax rates; and

• to look at transfer pricing issues.

Software development costs deductible as researchexpenditure

• The Income Tax Appellate Tribunal (ITAT) gave its ruling on 31 March

2003 in the case of CIL Bellsouth Ltd. v. Deputy Commissioner of

Income Tax - Delhi Tribunal, in which it held that expenditure

incurred on the development of computer software is eligible for a

deduction under Sec. 35 of the Income Tax Act (ITA) as scientific

research expenditure.

• The taxpayer was engaged in the business of the development and

sale of software and the export of software services. In the relevant

assessment year, the assessee incurred expenses on the development

of computer software which were capitalised in the accounts under

the heading “miscellaneous expenditure” as part of the capitalised

software costs and written off as “deferred revenue expenses” in

the accounts. These expenses were claimed as revenue expenses

in computing the business income in the relevant tax return filed

under Sec. 37 of the ITA. In the course of the assessment procedure,

the taxpayer made an alternative claim for a deduction under Sec.

35 of the ITA.

• The ITAT agreed with the taxpayer’s contentions that complex

and highly technical aspects were involved in the process of the

development of the software and that the R&D involved had to be

viewed in the context of the ever and rapidly changing high technology

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involved in the information technology industry. In addition, the

research activity was original and a planned investigation undertaken

in the hope of gaining new scientific or technical knowledge

and understanding, whereas development was the translation

of research findings or other knowledge into a plan or design for

the production of new or substantially improved devices, materials,

processes, products, services or systems. It was outside the

ability of ordinary businesses to develop such highly sophisticated

and intellectually inclined computer software. Specifically, the

development of the software involved highly skilled labour,

know-how and expertise and other related factors with a high

technical content. Accordingly, the ITAT held that the expenditure

on the development of computer software was eligible for a

deduction as scientific research expenditure under Sec. 35 of

the ITA.

Tax Breaks For Foreign IT Manufacturers

• It was reported on 13 June that the Indian government is preparing

a package of tax breaks aimed at developing an export-orientated

computer hardware and technology sector, which will help transform

the country into a key hi-tech manufacturing location.

• Among the more significant proposals contained in the government

sponsored National Electronics/IT Hardware Manufacturing

Policy is a ten year tax holiday for exporters of IT hardware and

other electronic goods. Other measures contained in the proposals

include the elimination of customs duty on all raw materials and

components used in the manufacture of IT equipment, as well

as the freezing of the forthcoming VAT (Value Added Tax) at 4%

on electronic and IT products. Special additional duty on imports

will also be scrapped.

• The policy document proposes the use of cash subsidies and further

tax incentives to attract large multinational firms. In addition, it

recommends increasing annual depreciation levels on computer

equipment to 100% from the present level of 60%.

Indonesia

Free Trade Zones and Batam

• It was reported on 8 July that the Indonesian government is currently

mulling a proposal to either turn the Riau island Batam into a full

Free Trade Zone (FTZ) or to designate specific areas on the island

as FTZs. Goods imported into an FTZ are not subject to import

duty or VAT (known as PPn in Indonesia) until they are released

from the FTZ. Currently, companies operating in industrial estates

on Batam are eligible for FTZ tax facilities. At this moment,

because of its proximity to Singapore, Batam is benefiting from

the potential offered by the recently signed Free Trade Agreement

between the USA and Singapore, which allows parts of the

manufacturing process to be done outside Singapore without losing

any privileges under the FTA.

Indonesian panel drafting new income tax law

• Mr Anggito Abimanyu, the chief of the Indonesian Department of

Finance’s Fiscal Analysis Board, who also heads the Amendment

of Income Tax Law Committee, on 16 July explained several important

provisions in the draft of Indonesia’s new income tax law. He

announced that in response to input from the IMF, the Indonesian

government is considering the simplification of current income tax

rates. The Minister of Finance subsequently stated that the new

rates will be ‘very competitive’ compared to other tax regimes in

Southeast Asia, and will attract foreign investors without reducing

state tax revenues.

• Mr Abimanyu said he expects to complete the draft and submit

it to the House of Representatives at the end of September 2003.

International Tax Developments

• Bangladesh and Indonesia signed an income tax treaty on 19

June in Dhaka. Bangladeshi Finance Minister M. Salifur Rahman

and Indonesian Minister for Trade and Industry Rini Soewandi

signed the treaty. Details have not yet been released.

• Indonesia signed a customs treaty with the Netherlands on

24 June 2003. This treaty will enable both countries to work

together closely in order to better enforce and monitor the customs

legislation of their respective countries. The treaty still has to

pass through the parliaments of both countries before it can take

effect. The treaty is expected to go into effect either late 2003

or early 2004.

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

between Russia and Singapore, signed on 9 September 2002, have

become available. The treaty generally follows the OECD Model

Convention. The maximum rates of withholding tax are:

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• 10% on dividends in general and 5% if the beneficial owner of the

dividends is (i) the government (as defined) of the other state

or (ii) a company which holds directly at least 15% of the capital

of the company paying the dividends and has invested at least

USD 100,000 (or its equivalent);

• 7.5% on interest. Interest paid to the government (as defined)

of the other state is exempt from tax in the source state; and

• 7.5% on royalties. The definition of royalties includes payments

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

scientific equipment.

Japan

Japanese fifth biggest bank has received public funds

• In Japan, losses can be carried forward for five years. Resona bank,

Japanese fifth biggest bank, requested for an injection of public

funds of JPY 1,960 billion (approx. USD 16.5 billion) on 30 May

2003 since its adequacy ratio fell short. Generally, Japanese banks

have booked deferred tax assets derived from the writing off of

bad debt. In the Resona case, the auditor refused to take into

account more than three years of deferred tax assets. As a result,

it turned out that Resona bank is under capitalised. Resona has

been nationalised since 30 June 2003.

New authority regarding exchange of information withtreaty partners

• The 2003 tax reform provides the tax officials of the National

Tax Agency, regional taxation Bureaus and Tax offices with the

authority to ask questions and inspect books, records and other

documentation to the specified person’s business based on a

request from the tax treaty partner based on the applicable treaty

provision. Before the introduction of the new provision, the

authority to collect the information in connection with exchange

of the information was limited to the “domestic tax interest”.

No information will be gathered on the basis of this authority

if the tax official concerned finds that the tax treaty partner can

not provide the same information to Japan, that the exchange

of information would damage the national interests of Japan,

that the tax treaty partner can obtain the information by itself, and

if it regards criminal matters.

Initial new income tax treaty between Japan andUnited States

• On 10 June, it was announced that an agreement has been

reached in principle regarding the text of a new income tax treaty

between Japan and United States. The proposed new treaty

would substantially reduce the withholding taxes imposed on

dividends, interest and royalties paid between the two countries.

Particularly it would eliminate the withholding taxes on royalties,

certain inter-company dividends and certain interest. Further

details are expected to be published soon. The treaty is expected

to enter into force in 2005.

Tax reform 2004

• The Japanese Finance Ministry is considering abolishing tax on

yields from government bonds for individual investors. Currently,

a 20% tax is levied on the yield of government bonds. The

government thinks that eliminating the tax will promote the sale

of the government bonds. The proposal will be discussed by the

ruling parties in December as part of tax reforms for the year 2004.

Korea

Tax incentives

• The Korean government announced plans to amend the Free

Economic Zone Act providing tax breaks for foreign investors.

Amongst others this includes the establishment of another economic

free zone nearby Seoul. Foreign investor companies could benefit

from free rent of state owned land, state subsidies for construction

projects and corporate income tax facilities (exemptions up to

100% during the first three year period and up to 50% during the

two following years). Tax benefits for qualifying foreign employees

working in the free economic zones are planned as well by increasing

the tax deductions to up to 40% of annual income.

• In July the Korean Ministry of Finance decided to grant tax

exemptions with immediate effect to foreign companies that invest

in media related businesses such as computer games and movies.

The exemptions cover both local taxes and national corporate

taxes for as long as seven years, followed by 50% exemptions

for another three years. The facility applies to investments

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exceeding Won 50 million or a foreign holding of at least 10% of

the voting shares.

• Early May, the Korean Prime Minister of Finance announced that

plans to cut corporate income tax rates cannot be executed before

2005 or 2006. An earlier tax cut seemed not possible given the

status of Korea’s current budget. The current corporate income tax

rate consists of a first bracket (15% on the first Won 100 million)

and a second bracket (27% on the excess). Most of Korea’s

competitive and surrounding countries like Singapore, Taiwan and

Hong Kong have lower tax rates.

• VAT exemptions applicable for tourist hotels have been extended

for half a year in order to support the tourist industry that was

severely hit by the SARS outbreak.

Accounting principles adopted in tax regulations

• The Korean tax authorities will implement various amendments

of its tax legislation in order to minimise differences between

accounting principles and tax law. Accordingly, tax regulations

regarding amongst others development costs, amortizations,

refinancing acquisition costs, restructuring of (bad) debts and

dividend income will be changed. The changes generally apply

to tax returns filed as from 10 May 2003.

Tax evasion

• In an increased effort to decrease tax evasion, the Korean National

Tax Service announced that it has formed special investigation

teams that will focus their attention on high income earners such

attorneys and medical specialists.

Foreign credit card service companies

• The Ministry of Finance and Economy has ruled that (member) fees

paid to a non profit US credit card service company in exchange for

the services provided (such as transaction related services, fund

clearing, administration and global customer assistance) do not

qualify as royalty payment and are therefore not subject to withholding

tax, therewith overruling an announcement made earlier by the

National Tax Service.

International tax developments

• As mentioned in our Autumn 2002 edition, Korea and the Slovak

Republic signed a new tax treaty in August 2001. On 8 July, the

treaty was ratified by both states. The agreement has herewith

entered into force and the agreed withholding tax rates (5%-10%

maximum on dividend distributions, 10% maximum on interest

and royalty payments) apply from that date. As provided in article

28 of the treaty, its other provisions will apply to taxation years

starting on or after 1 January 2003.

• The Netherlands and Korea have concluded an investment protection

agreement on 12 July 2003. This agreement will substitute the

version applicable since 1974. Further information on this agreement

to follow.

Malaysia

Economic stimulus package

• On 21 May 2003, the Malaysian government released its widely

anticipated economic stimulus package. Key aspects of the package

are as follows:

• Real Property Gains Tax Exemption, the package exempts the

transfer of real estate for one year provided the transfer is done

prior to 1 June 2004.

• Liberalising the FIC Guidelines, Foreign equity restrictions with

respect to the acquisition of Malaysian assets are relaxed whereby

the acquisition is only subject to a 30% Bumiputera shareholding.

The previous FIC Guidelines will be streamlined into 2 main sets

of Guidelines ie. one for real property and the other for other

assets including shares. Effectively, foreign investors can now

hold up to 70% of the shareholding in Malaysian companies. At

present, Ministries governing non-manufacturing sectors such

as retail and wholesale, construction, telecommunications, logistics

etc, have specific guidelines for Bumiputera participation which

may differ with the equity policy under the FIC guidelines.

• The manufacturing sector continues to enjoy the existing liberalised

equity policy. In early June, the Ministry announced further

liberalisation to foreign equity for the manufacturing sector. Under

the liberalised rules, new investments in the manufacturing sector

will not be subject to any foreign equity or export condition ie.

new investments can be 100% foreign owned even if they sells

100% to the domestic market. Although this has already

been the temporary liberalisation as announced in 1998 to

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be effective until 31 Dec 2003, the announcement by the Minister

made this a permanent liberalisation.

• Liberalisation of Bumiputera equity conditions and foreign equity

restriction in companies listed on the Kuala Lumpur Stock Exchange

(KLSE) The 30% Bumiputera equity condition is required only

upon listing on the KLSE.

• Incentives for small companies: the package proposes that the

scope of the existing incentives for small companies is widened

by relaxing some of the qualifying conditions.

• Pioneer incentive, the income tax incentive available for companies

with Pioneer Status is increased from 70% to 100%. Increasing

statutory income that can be offset by Investment Tax Allowance

from 70% to 100%. The maximum period for Pioneer Status of

100% tax exemption be extended from 10 years to 15 years,

commencing with the first year the company registers profit.

The period of Investment Tax Allowance of 100% to be extended

from 5 years to 10 years.

• Incentive for export of locally produced goods, (i) the income

tax exemption for Malaysian International trading Companies

will be increased from 10% to 20% of their increased export

value, (ii) the package proposes an income tax exemption of

20% of the increased export value for Hypermarkets and Direct

Selling Companies.

• Group Relief, this is currently only available to companies in the

food production business and the stimulus package proposes

to extend the group relief to forest plantations, including rubber

plantations and manufacturers of selected products in the areas

of biotechnology, nanotechnology, optics and photonics.

• Research and Development Activities, the package proposes

that the Double Deduction for approved R&D expenditure incurred

during the pioneer period can be accumulated and brought

forward. The proposal indicates that the deduction can be offset

against income earned in the post pioneer period.

• Second Round Pioneer Status or Investment Tax Allowance for

R&D Companies The package proposes that R&D companies

will be eligible for a second round of Pioneer Status with 100%

income tax exemption for 5 years or Investment Tax Allowance

of 100% on capital expenditure incurred within 10 years.

• Operational Headquarters (OHQs), existing OHQs approved

prior to the 2003 Budget are eligible for 100% income tax exemption

for the remaining exemption period.

• International Procurement Centres (IPCs) and Regional Distribution

Centres (RDCs), IPCs that fulfil the approval criteria are eligible

for 100% income tax exemption for 10 years.

• Service Tax, a service tax exemption will be granted to hotels and

restaurants for the period from 1 June 2003 until 31 December 2003.

Liberalisation of exchange control rules

• Malaysia’s Central Bank, Bank Negara Malaysia, has liberalised

some of the exchange control rules with effect from 1 April 2003.

The most important changes are (1) an increased limit of RM50

million (Euro 11.64 million) for ringgit credit facilities now also

applies to Non Resident Controlled Companies (“NRCCs”); (2)

NRCC’s can now obtain more than 50% of their ringgit credit facilities

from foreign-owned banks, and (3) the limit on overnight balances

that can be retained by exporters in foreign currency accounts is to

be increased to a maximum of RM50 million (depending on the

level of exports).

Transfer pricing guidelines issued

• The Inland Revenue Board issued transfer pricing guidelines on

2 July 2003, which generally follow the OECD Transfer Pricing

Guidelines. The purpose of the guidelines is to provide multinational

enterprises with information on existing domestic legislation,

acceptable methodologies for determining arm’s length prices and

administrative regulations including the types of records and

documentation expected. The guidelines apply to transactions

between associated enterprises when one enterprise is subject to

tax in Malaysia and the other is located overseas.

• Legal basis. The general anti-avoidance provision under Sec. 140

of the Income Tax Act empowers the Director General to disregard

certain transactions which he believes have the direct or indirect

effect of altering the incidence of tax, including non-arm’s length

transactions. To counteract the effects of such transactions, Sec.

140 also empowers the Director General to make adjustments as

he considers appropriate. This provision is applied in the adjustment

of transfer prices. In addition, the guidelines set out the concept

of comparability in the application of the pricing methodologies and

the factors which may determine or affect comparability.

• Acceptable methodologies. The acceptable methods for determining

arm’s length prices are:

(1) the comparable uncontrolled price method: this method, which

is ideal only if comparable products are available, involves

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a direct price comparison with transactions of a similar product

between independent parties;

(2) the resale price method: this method is generally most appropriate

when the final transaction is with an independent distributor;

(3) the cost-plus method: this method is often useful when semi-

finished goods are sold between the associated parties, the

parties have concluded joint facility arrangements, the manu-

facturer is a contract manufacturer or the controlled transaction

involves the provision of services; and

(4) other methods: these methods should only be considered

when the methods referred to in (1) to (3) are not applicable.

Similar to the OECD Transfer Pricing Guidelines, the guidelines

list two types of transactional profit methods which may be

used: the profit split method and the transactional net margin

method. The tax authorities will not accept methods based

on global formulary apportionment, i.e. methods which involve

the allocation of global profits among associated enterprises

in different countries.

• Documentation. The following documents should be maintained:

(1) Documentation on company details, including the ownership

structure showing linkages between all associated enterprises,

the organization chart and operational aspects of the business;

(2) Transaction details, including a summary of transactions with

associated enterprises, similar transactions with independent

parties, economic conditions at the time of the transactions,

the terms of transactions, the pricing policy for a 7-year period,

a breakdown of product manufacturing costs and a product

price list; and

(3) Documentation relating to the pricing methodology adopted

and the justification for using that method.

• Currently, there are no provisions or facilities for advance pricing

agreements with the tax authorities.

International Tax Developments

• Lebanon and Malaysia concluded their first-time income tax treaty

and protocol on 20 January 2003. The treaty generally follows the

OECD Model Convention. The maximum rates of withholding tax

are 5% on dividends, 10% on interest, and 8% on royalties. The

tax treaty has the usual definition of royalties. Under the treaty,

projects can be carried out in the other country without constituting

a taxable presence there, provided it does not exceed a duration of

9 months, and furthermore, certain services can be carried out in

the other state without creating a taxable presence there provided

they do not exceed 3 or 6 months in any 12-month period (the

threshold depends on the prescribed type of service) Both

states also grant a tax sparing credit in respect of tax reduced or

exempted in accordance with the provisions of the treaty and special

incentives under their domestic laws for the promotion of economic

development or investment, as defined. The treaty makes no specific

reference to special tax regimes in either Lebanon or Malaysia and

it is assumed that the treaty applies to entities qualifying for any

such regimes including Labuan.

New Zealand

We would like to thank Buddle Findlay, Lawyers, Auckland, Wellington and

Christchurch in New Zealand, for preparing the materials for the New Zealand

section of this newsletter.

GST and financial services

• In New Zealand, goods and services tax (New Zealand’s consumption

tax, broadly equivalent to VAT) is not charged on supplies of financial

services, and financial service providers are unable to claim a credit

or “input tax” deduction for GST paid on purchases acquired in

the course of making supplies of financial services. This leads to

inefficiencies as financial service providers are effectively over-

taxed and may be required to pass this GST cost to consumers of

their services.

• The New Zealand government has recently introduced draft legislation

which aims to enable financial service providers to increase their

recovery of GST input tax, by proposing to “zero-rate” business to

business supplies of financial services. “Business-to-business”

supplies means those where the recipient of the financial services

is GST registered and at least 75% of their total supplies in a given

twelve-month period are taxable supplies. Zero-rating means that

instead of being exempt or “outside the GST net”, these “business-

to-business” supplies of financial services will be charged with GST

at the rate of 0%. This will enable financial service providers to

claim GST input tax credits for goods and services acquired in the

course of making these zero-rated supplies of financial services.

GST and the reverse charge

• Recent draft legislation also contains amendments to introduce a

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“reverse charge” to impose GST on certain imports of services into

New Zealand. Under the proposal, GST-registered recipients of

imported services will be required to account for GST where:

• the supply, if had been made in New Zealand by a registered

person, would be a taxable supply (i.e. subject to GST); and

• the supply is acquired for purposes other than the purpose of

making taxable supplies (i.e. is a supply in relation to which the

recipient would not generally have received an input tax deduction)

• The amendment aims to minimise the current disparity between

imported services (no GST) and domestically supplied services

(which are subject to GST). This will also align New Zealand’s

treatment of imported services with that of imported goods (currently

subject to GST), and will bring New Zealand’s GST treatment of

imported services in line with that of most other countries’ GST or

VAT systems.

GST and zero-rating of warranty services

• Recent changes now ensure that non-registered offshore warrantors

are relieved of a GST impost on payments made under a warranty

agreement that has been included in the purchase price of an

imported good. This is achieved by zero-rating the supply of services

to a non-registered offshore warrantor, in relation to goods sold in

New Zealand.

• Previously a double impost of New Zealand GST could occur when

GST was paid by the final consumer, and an irrecoverable GST

impost was also paid by the non-registered warrantor on the actual

cost of the warranted repairs.

• To overcome this potential double taxation, supplies of goods and

services made under a warranty agreement are zero-rated where:

• the warranty agreement is included in the purchase price of goods

which attract GST on importation into New Zealand; and

• consideration for the supply is paid by a non-registered warrantor.

GST and telecommunication services

• The GST treatment of cross-border supplies of telecommunications

services has been recently clarified by providing specific place of

supply, registration and zero-rating rules.

• The changes ensure that unless the supplier and recipient agree

otherwise, supplies of telecommunications services from a non-

resident to a registered person in New Zealand, for the purposes

of carrying on the registered person’s taxable activity, are to be

treated as not being supplied in New Zealand.

• The specific place of supply rules also require an offshore

telecommunications supplier to register for GST if it makes

more than NZD 40,000 per annum of supplies to persons in

New Zealand.

• Telecommunications services will be zero-rated if provided by

New Zealand telecommunications suppliers to non-resident tele-

communications suppliers when a telecommunications service is

initiated outside New Zealand and if the services are provided to

any other overseas persons when a telecommunication service is

initiated outside New Zealand.

• Non-resident cell phone companies whose only activity in New

Zealand is the supply of services to non-resident “roaming” customers

will not be caught.

Trans-tasman triangular taxation

• As discussed in the Australian update in the Spring 2003

newsletter, early in 2003 the Australian and New Zealand

governments announced proposals to relieve the “triangular

taxation” problem that results in double taxation of certain invest-

ments in Australian and New Zealand companies that operate in

both countries.

• On 23 June 2003, the New Zealand government introduced draft

legislation to bring the proposals into effect. Under the proposed

amendments, shareholders of trans-Tasman companies can be

allocated on a pro-rata basis (based on the proportion of their

ownership in the company) imputation credits representing New

Zealand tax paid and franking payments representing Australian

tax paid. The amendments also allow a new form of imputation

grouping that will enable any Australian or New Zealand company

within a wholly-owned group to pay an imputed dividend if

another Australian or New Zealand company in the group has

imputation credits.

• It is proposed that the amendments to enable Australian companies

to maintain New Zealand imputation credit accounts and the new

imputation grouping rules will apply retrospectively from 1 April

2003. The amendments allowing Australian companies to pay

imputed dividends will apply from 1 October 2003.

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Proposed film grant incentive

• Last month the New Zealand Government announced a film and

television grants scheme in the hope of attracting big budget

productions to New Zealand.

• Generally, the scheme provides that:

• film or television productions which spend more than NZD 50

million in New Zealand will qualify for a 12.5% tax exempt

“production expenditure grant”;

• film or television productions which spend between NZD 15

million and NZD 50 million, are also eligible where the spending

equates to at least 70% of the total production expenditure.

• The New Zealand Government has indicated that up to NZD

40 million is available in a grant pool for the first year of

the scheme. The system is similar to that in Australia and will be

reviewed after 3 years. Exact details of the scheme are still

being developed.

• While the changes are welcomed, potential investors need to be

aware of effects from proposals to combat mass market tax

schemes in New Zealand. Of greatest significance is the proposal

to defer tax deductions for net losses until matching income

is earned, to the extent that tax deductions claimed exceed the

amount the investor actually has at risk in the scheme.

Philippines

Clarification of Value Added Taxation of banktransactions

• The Finance Department has approved amendments to the VAT

Reform Act of 1997. The amendments clarify taxability for VAT

purposes of bank transactions. Application of the VAT to bank

transactions was deferred repeatedly and finally went into effect on

1 January 2003. VAT is now chargeable on all interest, commissions,

fees, and other charges of banks.

Philippines considers to introduce new taxes

• The Philippines Government announced that it may introduce new

taxes for those sectors of the economy which have demonstrated

to be successful. The introduction would form part of an effort to

generate more tax revenue and to avoid a debt crisis. The sectors

which were mentioned in this regard are the telecom services,

tobacco, alcohol, and petroleum sectors.

Court states which facts must be demonstrated forrefund of excess withholding taxes

• Proof of the following is required for a refund claim for excess

creditable withholding taxes: (i) the claim for refund was filed within

the required two year period, (ii) the withholding of tax is supported

by a copy of a statement issued by the payer / withholder of tax to

the recipient, stating the amount paid and the amount of tax withheld;

and (iii) the income from which the taxes were withheld was included

in the income tax return of the recipient.

Singapore

One tier corporate income tax system, foreign, non-remitted income

• In 2002, Singapore’s imputation system of taxation was abolished

and replaced by the one tier income tax system. Under the one tier

system, foreign income will only be taxed in Singapore in so far the

income is remitted, or is deemed remitted in to Singapore. The

Singapore income tax Act contains a number of provisions on the

basis of which income will be deemed to have been remitted into

Singapore. For instance, repayment of debt out of income kept

offshore triggers a deeming provision resulting in the foreign income

becoming taxable in Singapore. The initial conclusion was that the

declaration of an interim dividend should not trigger mentioned

deeming provision as the payment of an interim dividend could not

be regarded as a repayment of debt.

• The Inland Revenue Authority of Singapore (IRAS) has published

a Supplementary Circular on the one-tier corporate tax system. This

Circular confirms that foreign sourced income kept offshore out of

which dividends are distributed, will not be considered to have been

remitted into Singapore. Final dividends too can therefore be

distributed out of such income.

• On the basis of this clarification, Singapore has become a very

interesting location for distributing foreign income to foreign

shareholders. It is important to note, however, that if the Singapore

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company would wish to claim the treaty benefits in respect of such

foreign income, Singapore tax treaties generally include a provision

which stipulates that treaty benefits can only be claimed in respect

of remitted foreign income. With respect to remitted foreign

income, Singapore taxpayers should claim the foreign sourced

income exemption (see next item).

Tax exemption for foreign sourced, remitted income

• On 21 May 2003 the IRAS released a Circular which contained

further details on the “Tax exemption for foreign-sourced dividends,

foreign branch profits and foreign-sourced service income.”, as

proposed in the Budget 2003 (see the previous edition of

this newsletter).

• The tax exemption applies to the specified foreign sourced income

received in Singapore on or after 1 June 2003; the income does

not need be earned on or after mentioned date. The exemption is,

where applicable, available to Singapore based corporates and

individuals resident in Singapore. The conditions for qualifying are

as follows. In the year the income is received in Singapore, the

headline tax rate of the foreign jurisdiction from which the income

is received is at least 15%. Furthermore, the income has been

subjected to tax in the foreign jurisdiction from which these

were received.

• In the previous edition of our newsletter we noted that the Budget

2003 left a number of questions unanswered. More particularly,

how to interpret the ‘subject to tax condition’. In a letter to the

IRAS, we sought further clarification on this issue. In their reply, it

was stated that the IRAS envisaged a ‘tracking’ system; the

Singapore recipient should determine whether it had received

dividends distributed out of exempted income (for instance, dividends

from exempt participations) or whether it had received dividends

which have been taxed. This seems confusing, as one of the

considerations for introducing the exemption system was to reduce

the administrative burden for Singapore taxpayers. We do not believe

that a tracking system would achieve this goal.

• In the meantime, the Ministry of Finance released the draft

amendments to the income tax Act. The amendments do not refer

to the tracking method as expressed by the IRAS. Interestingly, for

the first time in Singapore legislative history, the Ministry of Finance

initiated a public consultation procedure whereby the public could

submit comments to the draft. Together with tax professions of

a number of law firms in Singapore, we submitted a letter to the

Ministry in which we provided our views on the proposals with

suggestions for improvement. The letter concentrates on the

differences which would arise in Singapore tax treatment with respect

to income received from shareholdings in companies in different

countries. More in particular, the letter discusses the ‘subject to

tax’ requirement.

• The Ministry has indicated that it will publish by 30 August 2003

a summary of the main comments it received together with their

responses. The summary will not separately address or acknowledge

every comment received. However, since we understand that the

comments submitted by other parties (such as the International

Fiscal Association and big accountant firm) also seek clarification

/ offer suggestions on this particular issue, we expect that it will

be addressed by the Ministry of Finance in mentioned summary.

Singapore’s inland revenue authority clarifies changesto withholding tax regime

• The IRAS has released the details of the administrative amendments

to the withholding tax regime in two circulars. The changes take

effect from 1 April 2003. Payments of withholding tax are now due

by the 15th (previously by the 10th) day of the month that follows

the date of payment of income to a non-resident. The new deadline

also affects the timing of penalties. The amounts for the penalties

have not been amended. Under the new circulars, non-residents

may choose to be taxed at the current income tax rate of 22 % of

net income rather than at 15 percent of gross income.

Singapore unveils major reform of tax incentives forfinancial services

• The Monetary Authority of Singapore recently announced details

of a major reform of Singapore’s tax incentives for financial services.

Seven existing tax incentive schemes for financial services will be

merged into a single streamlined scheme, the Financial Sector

Incentive Scheme. The reform will be implemented in 2004.

Expansion of approved third party logistics scheme

• Previously, a qualifying third party logistics company that manages

an inventory hub for its overseas principals and supplies goods to

overseas manufacturer’s customers may apply for a waiver of GST.

As such, GST on goods imported and stored in the bonded warehouse

will be suspended, and GST will be waived on local delivery to the

manufacturers who have approved Major Exporter Scheme (MES)

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status. After consultation with the industry, the Government has

decided that the existing scheme will be extended. The new scheme

allows qualifying logistics companies to import goods belonging to

them, or to their overseas principals without paying GST; and to

move the goods to customers approved under the Major Exporter

Scheme (MES); or other logistics companies which are also approved

under this scheme without charging GST on the goods removed.

Under this new scheme, there is no longer a requirement to operate

a bonded warehouse.

• To qualify as an approved third party logistics company, the aggregate

of the company’s exports, supplies to MES customers and to other

approved logistics companies must exceed 50% of its total supplies.

The logistics company should furthermore be engaged in the business

of logistics; provide value-added activities for overseas principals;

be registered as a taxable person; have good tax compliance records;

maintain good internal controls and use a computerised Warehouse

Management System.

Withholding tax exemption on interest

• By letter dated 19 February 2003, the MAS (Monetary Authority

of Singapore) has extended until 27 February 2008 the withholding

tax exemption applicable to bonds, notes, commercial paper and

certificates of deposits which are arranged mainly through Approved

Bond Intermediaries (ABI) in Singapore. This measure enables

investors to provide loans to parties in Singapore without any

withholding tax on the interest on these loans provided the loans

are given through ABI’s.

New corporate income tax incentive for R&D activities

• In July 2003 Singapore has released further details of its new corporate

tax incentive scheme announced in the 2003 budget, which aims to

boost research and development activity in the country. A company

approved under the scheme will be granted tax exemption for a

period of five financial years for foreign-source royalties or foreign-

source interest (relevant foreign income) remitted to Singapore,

subject to qualifying conditions.

International Tax Developments

• Belgium. The Belgian Ministry of Finance announced the details

of the application of the supplementary protocol to the treaty between

Belgium and Singapore. The protocol has not yet entered into force.

The details provide for extending the deadline for raising assess-

ments, even if this would no longer be possible under Belgian

domestic law.

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

between Russia and Singapore, signed on 9 September 2002, have

become available. The treaty generally follows the OECD Model

Convention. The maximum rates of withholding tax on dividends

is 10% in general and 5% if the beneficial owner of the dividends is

(i) the government (as defined) of the other state or (ii) a company

which holds directly at least 15% of the capital of the company paying

the dividends and has invested at least USD 100,000 (or its

equivalent). The maximum rate of withholding tax on interest is

7.5%. Interest paid to the government (as defined) of the other

state is exempt from tax in the source state. The maximum rate of

withholding tax on royalties is also 7.5%. The definition of royalties

includes payments for the use of, or the right to use, industrial,

commercial or scientific equipment. The treaty contains the limitation

of benefits provision by requiring the income to be remitted to

Singapore in order to enjoy the treaty benefits, in accordance with

Singapore’s tax treaty policy. Finally, a tax sparing provision applies

under which tax paid in Russia includes tax which would otherwise

have been paid but for special incentive measures to promote

economic development and foreign investments. This provision

will apply for the first 5 years for which the treaty is effective, but the

competent authorities of the states may consult to determine if

the period should be extended.

• Kuwait. The income tax treaty between Kuwait and Singapore has

entered into force on 2 July 2003. The provisions of this treaty shall

have effect on income derived on or after 1 January 2004. The

maximum withholding tax rates are 7% in respect of interest and

10% in respect of royalties received by a beneficial owner - resident

of the other state.

• USA. The United States and Singapore signed a free trade

agreement (FTA) on 6 May in Washington. It is the United States’

first free trade agreement with an Asian country. The FTA has

meanwhile been approved by the U.S. Congress and will gradually

eliminate customs duties on all goods imported from Singapore.

The main benefit to the United States would be greater access

to Singapore’s banking, insurance, legal, and other service sectors,

as Singapore already imposes few import duties. Under the

FTA, Singapore would immediately eliminate customs duties on

all U.S. goods. For Singapore goods entering the United States,

U.S. customs duties would be phased out at different stages; the

least sensitive products would enter duty-free once the FTA enters

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into force, while tariffs on the most sensitive goods would be phased

out over 10 years.

Thailand

Reduction of administrative Customs procedures

• Thailand’s Customs Department has announced that it will simplify

administrative procedures concerning imports and exports. Export

orientated industries already benefited from such simplification

in special export zones which cater for lower tariffs and duties.

However, for import-orientated firms there is no such arrangement

and these firms are often confronted with elaborate and time

consuming administrative procedures. Custom import clearance

is required from a number of agencies. The new measures will allow

firms in the new import zones to import some 10,000 products

without prior approval from these agencies.

Transfer pricing regulations, justifiable reasons

• The Revenue Department has released two Departmental Instructions

clarifying circumstances under which it will not challenge non-arm’s

length prices to which taxpayers may have agreed. Under the Transfer

Pricing regulations, the Revenue Department can adjust prices which

are not in conformity with market prices, unless the tax payer can

demonstrate justifiable reasons for not adopting at arm’s length

prices. The Revenue Department has now clarified what may

constitute justifiable reasons. The Instructions specify that if a debt

restructuring of debts is allowed by the creditor or if assets are

transferred by a debtor without consideration to a creditor for the

purpose of repayment of debt, justifiable grounds may exist In order

to qualify under these Instructions, the debt restructuring plan

should be carried out before the end of 2003; the debt restructuring

policy as set out by the Bank of Thailand should be observed, and,

if the creditor is not a financial institution, it should enter into the

debt restructuring agreement with a financial institution creditor.

The Instructions furthermore specify that, if a service is provided

without consideration or for a consideration at lower than the market

price, justifiable grounds may exits exist if the service is provided

to a government agency, an administrative office, a non-legal mutual

fund and the service benefits government policy.

Foreign exchange losses on loans taken up to financethe construction of a plant

• The Supreme Court recently held that the foreign exchange losses

incurred by a Thai company that relate to borrowings, used to fund

the construction of a plant, should be “capitalised” as part of the

cost of that plant. The Thai company in the case borrowed substantial

sums in foreign currency to fund the construction of its plant, and

for working capital. The company suffered large foreign exchange

losses in respect of the borrowing as a result of the devaluation of

the baht during the 1997 Asian Financial Crisis. It amortised all

those losses for tax purposes over a period of five years, as was

apparently permitted by the tax provisions concerning the tax

treatment of foreign exchange losses that had been introduced at

that time.

International Tax Developments

• Bulgaria. The first-time income tax treaty between Bulgaria and

Thailand, signed on 16 June 2000, entered into force on 13 February

2001. The treaty generally applies from 1 January 2002.

• France. An agreement clarifies the scope of Art. 11 (Interest) of the

France-Thailand income tax treaty of 27 December 1974. The

agreement specifies a list of the entities qualifying for the 3% reduced

interest withholding tax rate under Art. 11(2)(a) of the treaty. These

entities are (i) in respect of France, the COFACE or the Natexis

Banque and (ii) in respect of Thailand, the Export-Import Bank of

Thailand, the Government Savings Bank, the Government Housing

Bank, the Bank for Agriculture and Agricultural Cooperatives, the

Krung Thai Bank, the Radanasian Bank, the Industrial Finance

Corporation of Thailand and any establishments wholly owned by

the government of Thailand and certified by the relevant authorities

of the states. The agreement furthermore contains a list of the

entities qualifying for the exemption from withholding tax as a “public

authority” under Art. 11(3) of the treaty, i.e.: (i) in respect of France,

the Banque de France, any local authorities and any establishments

certified by the relevant authorities of the states and (ii) in respect

of Thailand, the Bank of Thailand, the Export-Import Bank of Thailand,

any local authorities and any establishments certified by the relevant

authorities of the states.

Vietnam

VAT and corporate income tax amendments approved

• Vietnam’s National Assembly has approved amendments to the

country’s Value Added Tax Law, agreeing to reduce the top VAT rate

from 20% to 10%. The VAT will now provide for two rates, i.e. 5%

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 – S U M M E R 2 0 0 31 7

domestic tax laws. Following changes made by the Vietnamese

government to its domestic laws in 1996 and 2000, the tax sparing

relief provisions under the Australia-Vietnam treaty ceased to be

effective. Through an exchange of letters, which entered into force

on 11 February 2003, the Australian government has ensured that

Australian companies investing in specified projects in Vietnam will

continue to benefit from the tax sparing relief provisions in the

treaty. The concessional treatment will apply from the date of the

changes to the Vietnamese domestic laws up to 30 June 2003. From

1 July 2003, the tax sparing provisions under the treaty will

permanently expire.

• UK. The agreement for the promotion and protection of investment

between the United Kingdom and Vietnam (signed on 1 August

2002) entered into force on 1 August 2002.

• USA. The Vietnamese Government has made public its views

on the first year of implementation of the agreement. The review

included the following.

(i) Abolition of restraints on import-export, the prime minister’s

decision of 4 April 2001 of the Prime Minister significantly

reduced the number of commodities imported into Vietnam

subject to import licensing.

(ii) Foreign direct investment in respect of import and local

distribution services, under the pledged schedule, US foreign

invested enterprises (“FIEs”) will be allowed to conduct import

business in Vietnam (at the earliest) three years after the VN-

US BTA comes into effect.

(iii) Taxation, in line with the agreement’s commitments, from

1 January 2003, Vietnam abolished import duty incentives

based on the local content ratio with regard to two-wheel

motorcycles and engines for two-wheel motorcycles. The

Government furthermore stipulated that the dutiable prices of

imported commodities should be in line with the General

Agreement on Tariff and Trade. The Government furthermore

announced that it shall continue to eliminate the discrimination

between FIEs and local enterprises.

• Iceland. The first-time income tax treaty and protocol between

Iceland and Vietnam, signed on 3 April 2002, entered into force

on 27 December 2002. The treaty generally applies from 1

January 2003.

and 10%. The amendments provide for stricter administrative

procedures for VAT refunds. Vietnam has had a number of cases of

VAT refund fraud. The amendments will become effective on

1 January 2004.

• A day after the VAT amendments were approved, Vietnam’s National

Assembly also approved the amendments to the Corporate Income

Tax Law, harmonizing the rates for domestic firms and foreign-

invested enterprises at 28 percent, effective from 2004. For domestic

companies, the rate is decreased from 32 percent. For foreign firms,

on the other hand, the change represents an increase from 25

percent. The new rate reportedly will not apply to foreign companies

already in operation.

ASEAN Free Trade Area, implementation

• Vietnam has been implementing the Common Effective Preferential

Tariff (“CEPT”) since 1 January 1996. In 2003, Vietnam will transfer

about 755 items from the Temporary Exclusion List to the Inclusion

List. Vietnam is expected to reduce the import duty tariffs for

most import items to 0-5% by 1 January 2005 (one year earlier

then required and thus ahead of schedule); and eliminate all tariff

and non-tariff barriers for goods imported from ASEAN countries

by the year 2015.

• It is expected that from 1 July 2003, the ASEAN Harmonised Tariff

Nomenclature (“AHTN”) shall be applied for the calculation of

import and export duties in lieu of the current import and export

tariff. Under the AHTN, the number of import duty lines shall

increase to 10,800 from the current 6,500.

Relocation allowance

The General Department of Taxation in January issued an official letter

providing guidance on relocation allowances applicable to expatriates

working in Vietnam. Accordingly, if an overseas company grants an

expatriate a one-time relocation allowance, such allowance is exempt

from Personal Income Tax on the condition that sufficient supporting

documents are submitted to the tax authority.

International Tax Developments

• Australia. Australia’s Minister for Revenue and Assistant Treasurer

has announced that the Australia-Vietnam income tax treaty of

13 April 1992 has been updated to reflect changes in the Vietnamese

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