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Asia Newsletter
Summer 2012
The information below is produced by Loyens & Loeff in Singapore and Hong Kong. It is designed to alert those (interested in) doing
business in the Asian region to recent developments in the region. Such developments are discussed in brief terms and are based on
generally available information. The materials contained in this publication should not be regarded as a substitute for appropriate detailed
professional advice. The information below was assembled based on information available as at 30 June 2012.
1LOYENS & LOEFF Asia Newsletter – Summer 2012
ChinaBiggest tax collection on indirect share transferby non-resident
• Shanxi Provincial Office of the State Administration of Taxation
(“SAT”) released on 21 March 2012 the news that capital gains
tax of RMB 403 million had been collected by the Jincheng Tax
Bureau on the indirect transfer of Chinese shares by a non-
resident enterprise. In this case, a BVI company held 100% of
the shares in a Hong Kong company which in turn owned 56%
shares in a Chinese coal company in Jincheng city located in
Shanxi province. In March of 2012, the BVI company transferred
its shares in the Hong Kong company to another Hong Kong
holding company. Based on Circular 698, the Jincheng Tax
Bureau assessed the acquiring Hong Kong company for the
10% capital gain tax.
Tax incentives for enterprises inwestern regions of China
• On 6 April 2012 the SAT issued a notice regarding the preferential
tax treatment of qualified enterprises located in the western
regions of China (Gong Gao [2012] No.12). Upon application,
the western-region enterprises are subject to enterprise income
tax (“EIT”) at a reduced rate of 15% rather than 25%, provided
that their main business is within the scope of the Encouraged
Industries Catalogue for Western Regions (EICWR) and at least
70% of their gross income is derived from that main business.
This reduced rate applies for the period 1 January 2011 to 31
December 2020.
Enterprise Income Tax: some issues clarified
• On 24 April 2012 the SAT issued Gong Gao [2012] No.15,
clarifying some issues with regard to the determination of taxable
income for the purposes of EIT. This Gong Gao applies retro-
actively as of the tax year 2011. Some important points are:
• Financing expenses incurred on issuing corporate bonds,
obtaining loans and other financing instruments, can be fully
deducted from taxable income on the condition that the
financing instrument is not of an equity nature;
• Operational costs (including fees and commissions) of
enterprises engaged in the agency business (such as securities,
futures and insurance) are fully deductible;
• During the start-up period of an enterprise, 60% of the incurred
entertainment expenses are deductible. The deduction
however cannot exceed 0.5% of the sales revenue for the
current year; advertisement expenses are fully deductible in
the start-up period;
• Actually incurred and deductible expenses which were not
deducted or not fully deducted in preceding tax years can be
deducted from the taxable income of the year in which the
expenses were incurred, upon filing a statement by the
enterprise within 5 years after the relevant year.
Transfer pricing adjustment made torelated resident enterprise
• It has been reported on 16 May 2012 that the Suzhou Tax
bureau of Jiangsu Province made a transfer pricing adjustment
to the price paid with regard to a domestic transfer of shares
and assessed RMB 21.14 million income tax. In the transaction,
a Chinese enterprise located in Suzhou transferred its 4.65%
shares in a Chinese listed company to its individual shareholder.
The tax bureau held that the sales price calculated at 50%
of the listed company’s average stock price during the most
recent five trading days was much lower than the fair market
value (“FMV”) of the shares. After a ten month negotiation, the
tax bureau adjusted the tax due by increasing the capital gain
derived from the transfer of shares by applying the comparable
uncontrolled price method, but allowed a discount rate to take
into account the fact that the shares were not publicly tradable
at the time of the transfer.
Tax treatment of stock options clarified
• On 23 May 2012 the SAT issued a notice regarding the EIT
treatment of stock option plans (Gong Gao [2012] No.18) which
2LOYENS & LOEFF Asia Newsletter – Summer 2012
applies to Chinese listed companies (also Chinese companies
listed abroad and Chinese private companies if certain
conditions are met) effective as of 1 July 2012. Listed companies
can deduct the difference between the FMV of the exercised
options and the purchase price paid by directors, supervisory
members, senior managers and other employees as salary
expenses from the companies’ taxable income. The FMV of
the exercised stock is determined by the stock closing price
on the date of exercise.
VAT reform extended to Beijing
• It has been reported that the pilot program of Beijing with
regard to the partial integration of business tax and VAT has
been approved. The covered service items and applicable tax
rates are consistent with the pilot program launched in Shanghai
as of 1 January 2012. Furthermore, Tianjin, Chongqing, Xiamen,
Shenzhen, Jiangsu, Hunan, Hainan, Anhui and Fujian also
submitted their application for the VAT pilot program.
International Tax Developments
• Botswana. According to the government of Botswana, Botswana
and China signed a tax treaty on 11 April 2012.
• Denmark. On 16 June 2012, a new China - Denmark tax treaty
was signed in Copenhagen which will replace the old tax treaty
concluded in 1986 once in force.
• Ecuador. The first round of negotiations for the tax treaty
between the China and Ecuador was held in Beijing from 7 to
11 May 2012.
• Ethiopia. On 21 June 2012 Ethiopia ratified the Ethiopia -
China tax treaty which was concluded in 2009.
• India. It has been reported that India announced its intention
to update the current tax treaty between China and India which
was concluded in 1994.
• Latvia. The amending protocol to the tax treaty between China
and Latvia entered into force on 19 May 2012. It applies as of
1 January 2013. Among others, the exemption of interest
withholding tax is extended; royalty withholding tax is reduced
from 10% to 7%; and the shareholding requirement for Chinese
indirect tax credit is increased from 10% to 20%.
Hong Kong
Islamic bonds
• The Hong Kong government launched a two-month consultation
exercise on proposed amendments to the Inland Revenue
Ordinance (Cap.112) and the Stamp Duty Ordinance (Cap.117)
on 29 March 2012. The proposed amendments aim to make
Hong Kong more competitive in terms of profits tax, property
tax and stamp duty liabilities in order to promote the development
of the Islamic bond market.
Business registration fees waived for one year
• The Revenue (Reduction of Business Registration Fees) Order
2012 came into effect on 1 April 2012. This Order reduces the
fees payable in respect of business registration certificates
by a sum of $2,000 and branch registration certificates by a
sum of $73 which commence on or after 1 April 2012 but
before 1 April 2013. Also the fees payable in respect of local
companies registered under the “One-stop company incorporation
and business registration regime” will be reduced by a sum of
$2,000 if the related incorporation applications are made
during this period.
Capital duty abolished
• On 13 May 2012 the Companies Registry of Hong Kong
announced that the capital duty levied on Hong Kong based
companies has been abolished as of 1 June 2012 under the
Companies Ordinance Order 2012. The scope of the abolition
includes capital duty levied on nominal share capital for
registration of a company, nominal share capital increase after
incorporation and the premium on the issuance of shares.
Tax exemptions for eligible investmentschemes clarified
• Under section 26A(1A) of the IRO, tax exemptions are given
to sums derived by mutual funds, unit trusts and similar type
investment schemes. The application of these exemptions was
clarified in a revised guidance note (DIPN No.20) in June 2012.
• To qualify as “similar investment scheme”, the investors
concerned, among others, should have no control over the
management of the funds invested in the scheme.
3LOYENS & LOEFF Asia Newsletter – Summer 2012
• Mexico. On June 18 2012, Mexico and Hong Kong signed a
double tax agreement and protocol. The treaty eliminates
Mexican dividend withholding tax, (i.e. Mexico cannot withhold
tax on the dividend payments to Hong Kong residents) and
reduces Mexican interest withholding tax to 4.9%/10% and
royalty withholding tax to 10%. Capital gains derived from
transfer of shares in Mexican companies may be taxed by
Mexico. Please note that anti-avoidance provisions are included
in the treaty and the protocol. The treaty will enter into force
after both parties’ ratification.
• Portugal. By Presidential Decree No. 80/2012, Portugal ratified
the Hong Kong-Portugal tax treaty on 5 April 2012. The tax
treaty entered into force on 3 June 2012 which generally applies
as of 1 January 2013 for Portugal and from 1 April 2013 for
Hong Kong. Please note that an anti-avoidance clause is
introduced in the protocol.
India
General Anti-Avoidance Rule
• There have been a number of important developments with
respect to the GAAR. The key amendments proposed by the
Finance Minister to the Finance Bill, 2012 have been approved
on 8 May 2012 by Indian parliament. Draft GAAR guidelines
have been issued for consultation. The Prime Minister’s
Office has assumed the Finance Ministry portfolio and it is
being said that the PM will seek to find ways of softening the
GAAR impact on foreign investments in India. Highlights are
as follows:
• GAAR provisions have been deferred by a year. Hence it
shall be applicable from 1 April 2013;
• The onus to prove applicability of GAAR would be on the
tax department (unlike the investor as was proposed in
the Budget);
• The GAAR provisions will be re-looked into by a Committee
to be set-up under the Chairmanship of the Director General
of Income Tax (International Taxation), which will also consider
the recommendations received. The Committee is to submit
its recommendations by 31 May 2012.
Stamp duty
• The Hong Kong Stamp Office launched a new Online Platform
on 23 April 2012 for (i) registering stock borrowing and
lending agreements / repurchase agreements for the purpose
of obtaining Hong Kong stamp duty relief on stock borrowing
and lending transactions under the Stamp Duty Ordinance,
Cap. 117 and (ii) submitting Notification of Execution of Stock
Borrowing and Lending Agreement by Lender. Under this
new Online Platform, relevant documents can be uploaded
to the Stamp Office’s system for processing without the need
to submit physical documents. The Outline Platform will
only be made available to borrowers, lenders and their agents
who have an E-stamp account within the Stamp Office. The
existing registration / notification process requiring submission
of physical documents will remain unchanged.
International Tax Developments
• Guernsey. The negotiations for a tax agreement between
Guernsey and Hong Kong were concluded, according to the
information published by the Guernsey government on 3
April 2012.
• Indonesia. The Hong Kong-Indonesia tax treaty entered
into force on 28 March 2012, which applies as of 1 January
2013 for Indonesia and as of 1 April 2013 for Hong Kong.
• Jersey. Jersey ratified its tax agreement with Hong Kong in
May 2012.
• Macau. On 12 June 2012, representatives from Hong Kong
and Macau discussed resuming negotiations regarding an
agreement on avoidance of double taxation and exchange
of information.
• Malaysia. On 25 April 2012, the tax treaty between Hong Kong
and Malaysia was signed. The treaty reduces the dividend
withholding tax rate to 5%/10%, the interest withholding tax to
10%, the royalty withholding tax to 8% and withholding tax
on fees for technical services to 5%. Capital gains derived
from transfer of shares are protected from being taxed in
Malaysia. Neither Malaysia nor Hong Kong presently levies tax
on dividends or capital gains.
4LOYENS & LOEFF Asia Newsletter – Summer 2012
• Tax payer (resident or non-resident) will be able to approach
the Advance Ruling Authority (AAR) to obtain a ruling on
whether the arrangement is a permissible one or otherwise;
• An independent member would be appointed in the GAAR
approving panel to ensure objectivity and transparency. One
member of the panel now would be an officer of the level of
Joint Secretary or above from the Ministry of Law;
• There is widespread disappointment that the Indian govern-
ment has not seen fit to propose amendments to address
the uncertainty caused by retrospective tax legislation. The
Ministry of Finance has reassured taxpayers that the
retrospective amendments would not be used to reopen
finalized cases and that they would not override provisions
of India’s bilateral double tax agreements;
• India’s Finance Ministry has announced several amendments
to its proposed 2012 Finance Bill -- including plans to defer
implementation of the controversial general anti-avoidance
rule -- after weeks of protests from the international business
community, which has argued that the GAAR would further
dampen investor confidence in the country; and
• Since the vaguely worded GAAR was introduced in Mukherjee’s
16 March budget speech, investor anxiety has climbed
as speculation swirls about the GAAR’s implications for
business in India. Investors fear that the GAAR would give
tax officials more power to scrutinize any transaction if
they suspect it was conducted to avoid taxes, and that the
GAAR would allow Indian tax authorities to override tax
treaties with other countries. The unrest reached a fever pitch
in April, when international investor holdings in the Indian
market fell by $9 billion and the value of the Rupee dropped
4% against the U.S. dollar. Foreign institutional investment
also sagged significantly.
• In addition to the delayed GAAR implementation, Mukherjee
said an independent member would be appointed to the
GAAR panel to promote objectivity and that taxpayers would
be allowed to approach the Authority for Advance Rulings
to determine whether a planned transaction would be permitted
under the GAAR provisions.
• In order to codify the doctrine of substance over form, the
Finance Act, 2012 had incorporated anti-avoidance provisions
in the form of General Anti-Avoidance Rules (“GAAR”) under
Chapter X-A of the Income-tax Act, 1961 (“the Act”). The
Chairman, Central Board of Direct Taxes (“CBDT”) had
constituted a committee (“Committee”) for formulating guidelines
for the implementation of GAAR and to provide clarity on the
provisions to safeguard taxpayers against the indiscriminate
use of the provisions.
• The draft guidelines and recommendations of the Committee
have now been released for public consultation and
recommendations. They discuss several aspects pertaining to
the GAAR provisions and also provide illustrations of the
applicability of the GAAR provisions.
• The Committee has reiterated that the GAAR regime would
apply only to income accruing or arising on or after 1 April 2013.
However, the guidelines do not grandfather existing investments/
structures set up in the pre GAAR regime. The guidelines
provide that the GAAR provisions would be invoked only above
a monetary threshold, which is yet to be defined.
• The Committee has recommended the prescription of certain
statutory forms for GAAR related proceedings with a view to
ensuring consistency of approach and transparency.
• Under the GAAR provisions, one of the key concerns has been
that if the main purpose of a step or part of the arrangement
is to obtain a tax benefit, the whole arrangement would be
treated as an impermissible avoidance arrangement. Addressing
such concerns, the draft guidelines recommend that if a part
of the arrangement is regarded as impermissible, the tax
consequences will be limited to only that part of the arrangement.
The guidelines also reiterate that the burden of proof for
invoking GAAR is with the Revenue Authorities (“RA”).
• The guidelines recognize the distinction between tax evasion,
tax avoidance and tax mitigation and provide that the GAAR
provisions are not intended to cover cases of tax evasion
and tax mitigation.
• GAAR provisions would not be invoked in cases where FIIs
do not obtain any benefit under a Tax Treaty and instead subject
themselves to tax under the provisions of the Act. The guidelines
state that the GAAR provisions may be involved where the
FIIs choose to seek relief under a Tax Treaty, but clarify that
5LOYENS & LOEFF Asia Newsletter – Summer 2012
in any case such provisions would not be invoked in case of
non-resident investors of the FII.
• The clarification provided through the illustration as to
what constitutes substance (ie, local board managing the
business with adequate manpower, infrastructure and capital
of its own) in the case of a holding company operating out
of a low tax jurisdiction, does not provide any substantial
clarity as to substance in the case of the typical fact patterns
involving FIIs.
• The provisions of the Act contain Specific Anti-avoidance
Rules (“SAAR”). The draft guidelines provide that the GAAR
provisions would not be invoked on transactions which fall
within the purview of SAAR. However, as per the guidelines,
the RA would be in a position to invoke GAAR in exceptional
cases of abusive tax behaviour on the part of a taxpayer that
might defeat a SAAR.
• The draft guidelines provide examples to illustrate scenarios
which fall within the purview of SAAR where the provisions of
GAAR would not be invoked and also an example where
GAAR would be invoked despite a SAAR.
• The draft guidelines cover several illustrations of structures
involving holding companies set up in jurisdictions which offer
tax advantages under India’s tax treaties. The guidelines provide
some clarity on what may or may not constitute “misuse or
abuse”, “bonafide purpose” and “lack of commercial substance”.
The guidelines clarify that GAAR would not be invoked in a
situation where a foreign investor invests through a holding
company which is “doing business in the country of its
incorporation”. The said term appears to cover a situation of
a company which has a board of directors that meet in that
country and which carries out its business with adequate
manpower, capital and infrastructure.
• GAAR would apply in a case where a company is located in
a low tax jurisdiction which acquires shares of an Indian
company through funding from its holding company and where
such a company does not have any other transactions. The
guidelines interpret such a case as a situation where the
beneficial owner of the shares is actually the holding company
acting through a connected party (ie, the holding company in
the low tax jurisdiction).
• The guidelines also throw some light on the thinking of the
RA on the interpretation of the Limitation of Benefit clause
under the India-Singapore Tax Treaty. As per the interpretation
provided, only expenses incurred in the country of residence
can be claimed towards the satisfaction of the expenditure
test for claiming the tax treaty benefits and expenses such as
interest paid to the overseas holding company are excluded for
this purpose.
• The guidelines clarify that a merger of a loss making company
into a profit making company would not be covered by the
GAAR provisions in light of the applicable SAAR provisions
related to carry forward of losses in a business restructuring.
• GAAR would apply to a case involving repatriation of profits
by way of a selective buyback of shares (as opposed to dividend
declaration) of an Indian company held by non-resident
shareholders (operating from low tax jurisdictions).
• The guidelines clarify that the setting up of holding companies
by Indian taxpayers to hold investment in other subsidiaries
outside India and use of such holding companies as a dividend
deferral mechanism is not intended to be covered by GAAR.
The Committee notes that such cases could get covered by
the Controlled Foreign Company (CFC) provisions in the
proposed Direct Taxes Code.
• A company raising funds from an unconnected party through
borrowings instead of the equity route has been clarified to be
excluded from the purview of GAAR. The guidelines state that
GAAR could be invoked in case of transactions with connected
parties depending on various facts including the source of funds,
location of the connected parties in low tax jurisdictions, etc.
• Finally, the guidelines clarify that a genuine transaction of
lease of assets (versus purchase) would not disentitle the
lessee from claiming a tax break on the lease rentals, but that
GAAR provisions would apply in case of circular leasing.
Tax rate for non-residents
• The long term capital gains tax rate for non-residents
(including private equity funds) on transfer of unlisted securities
is reduced from 20% to 10% (excluding surcharge and cess),
similar to FIIs.
6LOYENS & LOEFF Asia Newsletter – Summer 2012
• A tax exemption applies to long term capital gains arising on
transfer of unlisted securities in an initial public offer (i.e. through
offer for sale).
• Securities Transaction Tax at the rate of 0.2% will apply to a
transfer of unlisted securities in an IPO.
Retrospective amendment totax indirect transfer
• It is clarified that the retrospective amendment to tax indirect
transfers will not override treaty benefits. Consequently, if the
transferor is a tax resident of a country which has a beneficial
tax treaty with India, then the benefit of the treaty provisions
should apply.
• The cases where assessment orders have been finalised will
not be reopened on account of the retrospective amendment.
The CBDT is directed to issue a policy circular on this after
passage of Finance Bill.
Tax withholding rate on foreign borrowings
• A 5% withholding tax rate applies to External Commercial
Borrowings raised by all sectors (and not only infrastructure
sector) and long term infrastructure bonds.
Withholding tax exemption onresident software purchases
• In a welcome and much required move, the Central Board of
Direct Taxes (“CBDT”) has clarified that with effect from 1 July
2012 no tax withholding is required to be made on “royalty”
payments - on purchases of software from a Resident Seller
(“RS”) subject to the following 3 conditions being met:
• The RS should not have carried out any modifications to the
software;
• Taxes should have been withheld on “any” previous leg of
the transaction, either under section 194J of the Act where
purchases have been made from a Resident or under section
195 of the Act if made from a non-resident; and
• The buyer obtains a declaration to the effect that the withholding
tax as indicated above has been made and is required to
obtain the Permanent Account Number of the RS.
Share buyback not eligible fortax treaty benefits
• India’s Authority for Advance Rulings (AAR) on 22 March
denied elevator company, Otis Mauritius, the benefit of a capital
gains tax exemption provided under the India-Mauritius
income tax treaty and assessed CGT on Otis Elevator Co.
(India) Ltd. (“Otis India”), saying a recent transaction between
the two was designed solely to avoid tax in India.
• The AAR supported the Indian Income Tax Department’s
argument that Otis India stopped distributing dividends in
2003, when a new provision in the Income Tax Act, 1961, made
distributed dividends taxable, and then transferred the
accumulated reserves to Otis Mauritius through a buyback
arrangement.
• The ruling follows the principle of substance over form,
under which a transaction -- even if it is well within the legal
framework -- should not be taken into account if the sole purpose
of the transaction was to avoid paying tax. That principle is
central to the general anti-avoidance rule proposed in India’s
Finance Act 2012-2013.
• The AAR noted that neither Otis U.S. nor Otis Singapore had
accepted the offer of a share buyback because under India’s
tax treaties with those two countries, a buyback would have
triggered Indian tax liability for the non-resident subsidiaries.
Furthermore, Otis India could not provide a reasonable
explanation for not distributing dividends since 2003, despite
making profits. It therefore treated the transaction between
Otis India and Otis Mauritius as a dividend distribution, which
is taxable in India (in the hands of Otis India) under article 10,
paragraph 2 of the India-Mauritius tax treaty.
Compulsory convertible bondscharacterised as a loan
• India’s Authority for Advance Rulings (AAR) observed the
substance over form principle in a recent ruling that a Mauritius
company’s sale of compulsorily convertible bonds (CCBs)
issued by the buyer’s Indian subsidiary was in substance a
loan to the subsidiary. Accordingly, the proceeds from the sale
were taxable in India as interest income.
7LOYENS & LOEFF Asia Newsletter – Summer 2012
• Reportedly, the assessee, a Mauritius company identified herein
as Maurco, invested in an unrelated Indian company (Indco)
by purchasing equity shares in Indco and CCBs issued by Indco.
At the time, Indco was a wholly owned subsidiary of another
Indian company (Indco2). Indco used the proceeds from
Maurco’s purchases of the equity shares and CCBs to partially
finance the acquisition of land development rights from Indco2
and to develop the property. The sales of the equity shares
and CCBs were made in accordance with the terms of a joint
agreement between Maurco, Indco and Indco2. Under the
terms of the agreement, the CCBs had to be converted into
equity shares in Indco after a period of 72 months from the date
of the investment. Maurco had a put option (to sell) and Indco2
had a call option (to buy) the CCBs prior to their conversion.
Maurco sold the CCBs to Indco2 within a period of three years
under the put and call option agreement. Maurco sought a
ruling on whether the gains (or any portion thereof) on the
sale to Indco2 were taxable in India in view of article 13 of the
tax treaty.
• The AAR disregarded the legal form of the transaction and
found that in substance, the gains made by Maurco was in the
nature of loan interest and were thus taxable as such under
the ITA and article 11 of the tax treaty. The AAR rejected
Maurco’s argument that the gains arising on the sale of the
CCBs were in the nature of (tax-free) capital gains and that no
part of the gains could be characterized as (taxable) interest.
• The AAR also rejected Maurco’s argument that the purchase
of the CCBs was similar to an investment in equity and therefore,
no real borrowing took place between Indco and Maurco. Indco
was not independent of Indco2 even though they were separate
legal entities, the AAR said. Indco2 was in fact managing and
controlling the business of Indco, and thus Indco and Indco2
should be considered as one and the same entity for tax
purposes. The AAR also rejected Maurco’s argument that the
CCBs were sold to an independent legal entity (Indco2) that
had not borrowed any money from Maurco, and that it was a
simple case of the sale of CCBs from one investor to another.
The AAR ruled that part of the consideration paid by Indco2
to Maurco on the purchase of the CCBs was taxable interest
(that is, the return on money borrowed by Indco from Maurco).
The AAR also rejected the argument that because Maurco
was related to neither Indco nor Indco2, the proceeds from the
sale of the CCBs should be treated as non-taxable capital gains,
and not as taxable interest.
Dredging work not taxable
• An Indian company was not required to withhold tax on
payments it made to a Singapore subcontractor for dredging
work carried out by the subcontractor in India, according to the
Hyderabad Income Tax Appellate Tribunal.
• The 15 February ruling in DDIT v. Dharti Dredging and Infra-
structure Ltd., was based on the India-Singapore income tax
treaty and concerns assessment years 2005-2006 and 2006-
2007. The assessee (Dharti), an Indian dredging and construction
company, was contracted to provide construction and dredging
activities at a port in India. Dharti entered into a contract with
a Singapore company (EMPL) to procure dredging services
as specified by Dharti at that port. Dharti agreed to pay EMPL
a per-day fee for as long as the dredging equipment was in
India. The dredging equipment was operated by employees
of EMPL, who performed the work for Dharti. The assessee
had no control over the dredger, nor was it handed over to the
assessee. In each of the years at issue, EMPL did not spend
more than 183 days in India. Dharti paid the fees due to EMPL
but withheld no tax on the payments, arguing that EMPL was
not subject to tax in India.
• The tribunal overturned the tax assessment, noting that the
Revenue Department had not disputed the claim that EMPL
did not spend more than 183 days in India during either of the
fiscal years at issue. Therefore, EMPL had no PE in India under
article 5 of the tax treaty.
• Further, the dredging equipment was not under Dharti’s control,
Dharti had no right to use it, and the individuals operating it
were neither controlled nor supervised by Dharti, the tribunal
said. It found that because the dredger remained in the
possession and control of EMPL, EMPL provided dredging
services and not the equipment itself to Dharti for its use. That
the fees were determined and paid based on the time the
dredging equipment was in India was irrelevant.
• The tribunal ruled that the fees Dharti paid to EMPL were not
in the nature of royalties as defined in article 12 of the tax treaty,
but in the nature of business profits of EMPL. Because EMPL
had no PE in India under treaty article 5, the fees it received
were not taxable in India. Accordingly, Dharti was under no
obligation to withhold tax from the payments.
8LOYENS & LOEFF Asia Newsletter – Summer 2012
Offshore supplies taxable if part of acomposite contract
• The Authority for Advance Rulings (AAR) in India issued a
ruling dated 7 June 2012 in the case of Alstom Transport SA,
France (AAR 958/2010) dealing with the issue of taxability of
“offshore supply contracts”.
• The Bangalore Metro Rail Corporation (BMRC), an Indian
entity, floated a tender for the “design, manufacture, supply,
installation, testing and commissioning of signalling / train control
and communication systems”. A Consortium of four different
companies - Alstom Transport SA, France (Taxpayer), Alstom
Projects India Limited (APIL), Thales Security Solutions &
Services SA Portugal (Thales) and Sumitomo Corporation,
Japan (Sumitomo) was formed following a Consortium Agreement
entered into between the companies. The Consortium intended
to carry out the terms of the tender floated by BMRC and each
company was to be jointly and severally bound by the tender
as well as jointly and severally liable to BMRC. The contract
was entered into between the Consortium and BMRC. Alstom
Transport SA, France was the leader of the Consortium. The
Consortium undertook to carry out the specifications of the
BMRC tender. A portion of the payments were to be paid by
the BMRC in INR and the remaining in EUR.
• The AAR ruled that income from the offshore supply contract
would be taxable in India and the Consortium was liable to be
assessed in India as an Association of Persons as the tender
floated by BMRC was a “composite tender”. The main purpose
of the contract was the installation and commissioning of a
signalling and communication system. A contract has to be
read as a whole in the context of the purpose for which it is
entered into. A contract for the installation and commissioning
of a project like the one between the Consortium and BMRC
could not be split up into separate parts as consisting of
independent supply or sale of goods on one hand; and for
installation and commissioning, etc. on the other hand. Composite
contracts were to be read as a whole in the context of what was
to be achieved, and not in different parts for tax purposes. The
AAR followed the Supreme Court in its recent ruling in the
Vodafone International Holdings BV Case (Vodafone) where
the Supreme Court of India had applied the “look at” test, i.e.
a composite contract has to be looked at as a whole, in the
context of the object and purpose sought to be achieved.
• The contract between BMRC and the Consortium was not one
of supply of offshore equipment independent of installation and
commission. Thus, the taxpayer could not claim tax exemption
for income earned from offshore supply contracts. Accordingly,
the AAR concluded that income from offshore supply contracts
would be taxable in India as part of the composite contract given
to the Consortium.
• The following comments were made by the AAR in relation to
the taxability of the Consortium as an AoP:
• The companies had formed the Consortium in pursuance of
an intention to promote their respective businesses and they
shared a common object, i.e. performance of contract and
earning income. Hence, they formed an AoP and were liable
to be taxed in that status;
• It was logical step to consider the AoP question after the
contract itself was discussed; as the nature of their activity
could be discerned only after a thorough examination of
the contract;
• The contract with BMRC was the basis of the coming together
of the various parties as a Consortium. Hence, anything done
after acceptance of the tender, e.g. subsequent division of
responsibilities amongst them, would not affect their joint liability;
• The Consortium, being a commercial arrangement of parties,
would not affect the common object of the companies in it.
Accordingly, the Consortium was liable to be taxed asan AoP;
and
• In conclusion, the AAR held that composite contracts could
not be separated into different portions for taxation purposes
so as to claim exemption for income from offshore supply of
equipment, as the contract was to be looked at as a whole;
and that the income received by the Consortium under the
contract was taxable in India.
International Tax Developments
• UAE. On 16 April 2012, India and the United Arab Emirates
signed an amending protocol to their double tax treaty.
• Switzerland. The competent authorities of Switzerland and
India have entered into a Mutual Agreement regarding the
interpretation of subparagraph b) of the new paragraph 10 of
the Protocol (hereinafter “Protocol”) to their double tax treaty
9LOYENS & LOEFF Asia Newsletter – Summer 2012
(hereinafter “the Agreement”). Sub-paragraph b) of the new
paragraph 10 of the Protocol sets forth the information that
the competent authority of the requesting State shall provide to
the competent authority of the requested State when making
a request for information under Article 26 of the Agreement.
According to this provision it is required that the requesting
State provides among other information (i) the name of the
person(s) under examination or investigation and, if available,
other particulars facilitating that persons identification, such
as address, date of birth, marital status, tax identification
number as well as (v) the name and, if available, address of
any person believed to be in possession of the requested
information. Sub-paragraph d) clarifies that whilst these are
important procedural requirements that are intended to ensure
that, fishing expeditions do not occur, these requirements
nevertheless need to be interpreted with a view not to frustrate
effective exchange of information.
• Malaysia. On 9 May 2012, India and Malaysia signed a new
income tax treaty. Once in force and effective, the new treaty
will replace the India - Malaysia Income Tax Treaty (2001).
Indonesia
Increase in export levy on coal and base metals
• In a move that has taken the international mining sector by
surprise, Indonesia revealed on 3 and 4 April 2012 plans to
impose a steep 25% export tax on coal and base metals later
this year and boost the levy to 50% in 2013. The government
hopes to prevent an outpouring of mineral and metal exports
before the country implements an export ban on certain metal
ores in 2014. It has not been confirmed yet when the levy
might take effect. The export ban was included in a slew of
new government mining regulations issued in February in an
effort to stimulate domestic investment and capture a larger
portion of mining profits. Indonesia is the largest exporter of
thermal coal in the world. Since the government introduced a
mining law in 2009 meant to promote investment, companies
have been ramping up production, exploiting resources, and
exporting materials at a fast pace. In addition to choking off
the flow of exports, the government hopes to spur downstream
investment and compel foreign companies with mining interests
in the country to funnel money into domestic projects, such as
new smelters and sheet metal manufacturing plants.
• The news of the tax came as a surprise to many in the
international mining sector, leaving buyers and importers of
Indonesian coal nervous. Mining analysts have questioned the
effectiveness of such a high levy and noted that the tax could
force customers and importers to look elsewhere, such as
Australia and Africa, for supplies. The tax could also shake up
foreign mining companies’ Indonesian operations, especially
since such companies have already decided to invest huge
amounts of money in exploration and development based on
several financial factors, including taxation.
International Tax Developments
• Hong Kong. The Hong Kong-Indonesia income tax treaty,
signed in Jakarta on 23 March 2010, entered into force on 28
March. Its provisions will apply in Hong Kong from 1 April 2013,
and in Indonesia from 1 January 2013, the Hong Kong Inland
Revenue Department announced on 16 April. Under the treaty,
dividends are taxed at a maximum rate of 5% if the beneficial
owner of the dividends is a company (other than a partnership)
that directly holds at least 25% of the dividend payer’s capital.
In other cases, dividends are taxed at a maximum rate of 10%.
Interest is taxed at a maximum rate of 10%, and royalties are
subject to a maximum rate of 5%. The treaty makes a carve
out for domestic anti avoidance provisions in the contracting
states, so investors using Hong Kong need to address the
Indonesian anti treaty shopping provisions when structuring
their investment into Indonesia.
• Morocco. The Indonesia-Morocco income tax treaty entered
into force on 10 April and will apply from 1 January 2013. Based
on the treaty, dividends, interest, and royalties are taxable at
a maximum rate of 10%. Interest paid on credit sales of industrial
or scientific equipment is taxable only in the state of residence
of the recipient.
Japan
Comprehensive Social Security and Tax ReformBill passed by Lower House
• On 26 June 2012, the Lower House passed the Comprehensive
Social Security and Tax Reform Bill that had been proposed
by the Cabinet on 30 March 2012 and which was mentioned in
10LOYENS & LOEFF Asia Newsletter – Summer 2012
the previous edition of this newsletter. The Bill that would double
the current 5% consumption tax rate was sent to the Upper
House on the same day. In the course of the negotiation with
opposition parties, the ruling Democratic Party compromised
to modify the Bill by including the higher Consumption Tax rate
but excluding the proposed increase in the highest marginal
individual income tax rate as well as the proposal to broaden
the taxable base of the Inheritance Tax.
Korea
Withholding tax regulations
• The National Tax Service (NTS) published a Q&A for the
new tax regulations (featured in the previous edition of this
newsletter) and also provided the official application form in
English, which is acceptable by the NTS. The NTS also classifies
certain corporate-type fund as Overseas Investment Vehicles
(OIVs) under pre-conditions. The official application form in
English is now available and accepted for non-resident investors’
use in applying for the reduced Double Tax Treaty (DTT) rates.
In addition, it is important to note that even a corporate-type
fund is deemed as OIVs if it falls under the definition of OIVs.
Tax treaty benefits denied by Supreme Court
• In a recent case involving a foreign fund, the Supreme Court
denied the application of the Korea-Belgium tax treaty based
upon the fact that the intermediate Belgian holding company
was not engaged in any ordinary business activities in Belgium
and was interposed solely for tax avoidance purposes in
connection with the investment activities in Korea. A US resident
is regarded to be the beneficial owner of shares in the Korean
company under the substance over form principle and therefore
the Korea-US tax treaty applied according to the Supreme
Court. Furthermore, the Supreme Court ruled that a foreign
limited partnership is to be treated as a foreign corporation with
legal personality for the purpose of Korean income tax purposes.
International Tax Developments
• Bahrain. On 1 May 2012 Bahrain and Korea signed a tax treaty,
which will enter into force after the exchange of ratification
documents. Under this treaty, the dividend withholding tax is
reduced to 5%/10%, interest withholding tax to 5% and royalty
withholding tax to 10%. A capital gains tax exemption is provided
for gains realized upon the transfer of shares.
• Italy. On 3 April 2012 Italy and Korea signed a protocol regarding
the exchange of information.
• Luxembourg. On 29 May 2012, a protocol was signed to amend
the Korea-Luxembourg tax treaty(1984).
• Panama. On 1 April 2012 the tax treaty between Korea and
Panama entered into force. The treaty generally applies as of
1 January 2011 for the exchange of information and from 1
January 2013 for withholding and other taxes.
• Peru. On 10 May 2012, Korea and Peru signed a tax treaty.
Details were not yet available.
• Uruguay. On 27 March 2012, the Uruguay government approved
the Korea-Uruguay tax treaty. The treaty will enter into force
15 days after the exchange of the ratification instruments. The
exchange of information agreement between Uruguay and
Korea also was approved by Uruguay on 27 March 2012.
• Negotiations for exchange of information agreements between
Andorra and Korea and Guernsey and Korea were initiated.
Malaysia
Goods and Services Tax (GST) soon?
• Malaysia’s Finance ministry published a ‘readiness survey’ to
assess the readiness of Malaysian businesses to implement
GST, implying that GST may be implemented soon. Minister
Jala wants political parties to cooperate in passing this tax,
in order to reduce reliance on income from oil and gas (i.e.
Petronas’ revenues). He aims at diversifying Malaysia’s revenue
sources and broadening the tax base. As a result, corporate
and income tax could be reduced. Currently Malaysia levies
service tax at a rate of 6% and sales tax at a rate of 5% or 10%,
which would be replaced by the GST.
Landmark case on source of income
• Malaysia has a territorial tax system. Only income derived in
Malaysia or derived outside Malaysia and received in Malaysia
11LOYENS & LOEFF Asia Newsletter – Summer 2012
is taxable in Malaysia. However, Malaysian tax law exempts
foreign-source income received in Malaysia from tax.
• After 5 years of litigation and two victories in lower courts,
Malaysia’s Court of Appeal ruled that interest income derived
by a taxpayer from loans given to a Dutch group company
is foreign-sourced and therefore not subject to Malaysian
income tax.
• The tax inspector continued arguing that the interest income
was sourced in Malaysia as the funds lent were generated
from the business activities of the taxpayer in Malaysia
and transmitted from the taxpayer’s bank account in
Malaysia.
• At each level, the Malaysian courts and the Special Com-
missioners affirmed Commonwealth case law and even though
not identical, the courts applied the principles arising from the
case law as the present case revolved around the question of
what the taxpayer had done to earn the interest income.
• The Court of Appeal ruled that the source of the interest income
is located “where money was lent”, and it followed that what
had been done to earn the income was the placement of the
funds in the Netherlands. As a result, the interest income
received from its Dutch group company was exempt from tax
in Malaysia.
• This is the first Malaysian case on source of income and
therefore significant as a precedent for the future. The ruling
is consistent with case law on the same subject ruled in Hong
Kong. In may affect the tax treatment of interest earned by all
taxpayers including individuals depositing their savings abroad
in foreign bank accounts.
New transfer pricing and APA Rules
• On 11 May 2012 the Malaysian government issued the
Income Tax (Transfer Pricing) Rules 2012 (TP Rules 2012) and
the Income Tax (Advance Pricing Arrangement) Rules 2012
(APA Rules 2012). They both retrospectively apply as of 1
January 2009.
• The TP Rules 2012:
• Define contemporaneous transfer pricing documentation;
• Prescribe five transfer pricing methodologies, of which
preference is given to traditional transactional methods over
transactional profit methods;
• Promote using a year-by-year comparison when determining
the arm’s length price unless it is not feasible, in which case
a multiple year analysis may be permitted;
• Provide that in determining the arm’s length price for intra-
group services, the taxpayer must show that a service has
been provided, a benefit has been derived from that service
which is commensurate with the consideration paid;
• Recognize cost contribution arrangements; and
• Provide guidance on establishing the arm’s length price for:
• financing arrangements; and
• the sale or licensing of intangible property.
• The APA Rules 2012:
• Cover unilateral, bilateral and multilateral arrangements;
• Set out the APA process and timeline.
• Set out the circumstances in which an APA request may be
declined, including hypothetical situations;
• Cover a period of between 3 to 5 years of assessment;
• Permit a rollback in certain circumstances; and
• Safeguard the confidentiality of the information obtained.
Tax treaty relief for foreign nationalsworking in Malaysia
• On 3 May 2012 the Inland Revenue Board (IRB) of Malaysia
has issued a Public Ruling (PR No. 2/2012) about the application
of tax treaty relief for non-resident individuals working in
Malaysia. The PR provides clarification for foreign nationals
who are seconded to Malaysia for a limited period of time by
employers resident in jurisdictions with which Malaysia has
concluded tax treaties. The ‘dependent personal services’
article in the tax treaties generally sets three conditions that
must be fulfilled in order to claim tax treaty relief. These
conditions are clarified in the PR. If the conditions are not
fulfilled, the employee is subject to tax in Malaysia. The PR
furthermore clarifies the procedure to claim tax treaty relief.
12LOYENS & LOEFF Asia Newsletter – Summer 2012
customs procedures and technical barriers to trade), (ii) legal
issues; (iii) trade remedies; and (iv) co-operation. It outlines
commitments from both countries on liberalisation of trade in
goods. Malaysia and Chile will progressively reduce or eliminate
tariffs on their respective industrial and agricultural products.
Negotiations on services and investments will commence
within two years after the implementation of the Trade in Goods
Agreement. The FTA offers opportunities to strengthen trade
and investment linkages by enhancing Malaysia’s market
share in Chile, facilitating two-way investment flows in areas
of common interest, and creating potential for Malaysian
traders and investors to expand to other Latin American markets.
This is Malaysia’s fifth bilateral and the first FTA with a Latin
American country. Malaysia and Australia concluded an FTA
on 22 May 2012. It covers (i) trade in goods (market access,
rules of origin, sanitary and phyto-sanitary measures, customs
cooperation, technical barriers to trade, and trade remedies),
(ii) trade in services (market access, movement of natural
persons, mutual recognition arrangement, telecommunication,
and financial services), (iii) investment, (iv) economic and
technical cooperation, (v) intellectual property rights, (vi) e-
commerce, (vii) competition policy, and (viii) legal and institutional
provisions. The FTA will open up new market opportunities for
both countries and enhance trade and economic relations
between the two countries. It is expected to enter into force on
1 January 2013, after both countries have completed their
necessary domestic procedures.
• Hong Kong. On 25 April 2012 Malaysia and Hong Kong signed
an income tax treaty. Reference is made to the Hong Kong
section of this newsletter for more details about the treaty.
• Bermuda and Malaysia signed an exchange of information
agreement on 23 April 2012, which relates to tax matters.
• India and Malaysia signed a new tax treaty on 9 May 2012.
Reference is made to the India section of this newsletter for
more details.
Philippines
Tax breaks for international airlines approved
• In late May 2012, Bill 6022 was approved aiming to rationalize
the taxation of international air carriers. According to the bill,
Clarification of tax treatment of cash losses
• On 1 June 2012 the IRB issued PR 4/2012, which outlines the
conditions for cash losses (in the course of business) to be tax
deductible, and clarifies the tax treatment of amounts recovered
that were deducted in an earlier year. The ruling replaces PR
5/2005. A loss of cash resulting from theft, misappropriation,
or embezzlement may be tax deductible, provided that the loss
is incidental to the business and that specific conditions are
fulfilled. Various factors should be considered to determine
whether the loss of cash is deductible, such as the action taken
against the person involved (that is, the filing of a police report,
termination of service or recovery of loss), the situation in which
the loss occurs, meaning that the loss must be a recognized
incident involving the taxpayer's business and must occur in
the ordinary course of carrying on the business, and the amount
of loss, which should not be out of proportion to the reasonably
expected risks of the business.
Treasury management centres
• Income Tax (Exemption) (No. 3) Order 2012 - PU (A) 184/2012.
The Order exempts a non-citizen individual from the payment
of income tax in respect of income derived from an employment
with a qualifying treasury management centre. The amount
of exempt income is determined as specified by a formula
in the Order. The Order is effective from the year of assess-
ment 2012.
• Stamp Duty (Exemption) (No. 2) Order 2012 - PU (A) 185/2012.
The Order exempts all instruments of loan agreements and
service agreements executed by a qualifying treasury manage-
ment centre from stamp duty which would otherwise be
chargeable under the Stamp Act. The exemption shall apply
to agreements for the provision of qualifying financial and fund
management services in Malaysia that are executed within the
period of operation of the Order. The Order is deemed to have
come into operation on 8 October 2011 and shall continue to
be in operation until 31 December 2016.
International Tax Developments
• Free Trade Agreements (FTA) with Chile and Australia. The
FTA between Malaysia and Chile of 13 November 2010, entered
into force on 18 April 2012. The FTA covers (i) trade in goods
(tariffs, rules of origin, sanitary and phyto-sanitary measures,
13LOYENS & LOEFF Asia Newsletter – Summer 2012
international air carriers performing business activities in the
Philippines will be exempt from paying the 2.5% tax levied on
their gross Philippines billings under the reciprocal principle.
Binding effect of tax rulings prior to1998 clarified
• The Bureau of Internal Revenue (BIR) clarified that rulings
issued prior to the Tax Code of 1997 (entering into effect on
1 January 1998) have binding effect. However the pre-1998
tax rulings apply only to the taxpayers to whom the rulings
were issued and only with regard to specific transactions covered
in the rulings, and cannot be used as precedent by other tax-
payers to secure tax treatment for current business transactions
or to support their position against any tax assessments.
Certain joint ventures exempt from tax
• On 1 June 2012, the Bureau of Internal Revenue issued
Revenue Regulations 10-2012 on the tax exemption of joint
ventures or consortiums involved in construction projects or
engaging in petroleum, coal, geothermal and other energy
operations pursuant to an operating or consortium agreement
under a service contract with the Government. In order to be
treated as non-taxable corporations, certain conditions must
be met.
Singapore
Simplified tax form for small businesses
• Currently, all companies have to report their estimated chargeable
income (ECI) within 3 months of the end of their financial year
end - even companies without any taxable profit and no ECI.
To reduce compliance requirements for small companies with
turnover not exceeding SGD 1 million and with no ECI, said
companies will no longer need to file the ECI. The waiver will
take effect from Year of Assessment (YA) 2013 for companies
with accounting years ending October 2012 or later.
• In addition, as of YA 2012 small companies with an annual
turnover not exceeding SGD 1 million, a new simplified income
tax return for small companies, Form C-S, for much faster and
easier tax filing. Companies electronically filing Form C-S will
also enjoy a later e-Filing due date of 15 December, instead
of 30 November for paper filing.
Consultation paper on new tax treatmentof royalties
• On 16 April 2012 the IRAS issued a consultation paper
(consultation period expired on 14 May 2012) on the adoption
of a ‘rights-based approach to characterise software payments
and payments for the use of or the right to use information and
digitised goods’.
• Currently, all payments for the use of software are classified
as royalty for tax purposes, which are subject to 10% withholding
tax if paid to a non-resident. This also applies to payments
for the provision of information (i.e. scientific, technical, industrial
or commercial knowledge) and digitized goods such as down-
loadable books and movies. Withholding tax exemptions are
available for transactions by end-users of (i) certain types of
software payments such as shrink-wrap software and software
bundled with hardware, and (ii) information and digitized goods,
for a period of 10 years beginning 28 February 2003.
• Under the proposed rights-based approach, the characterization
of a payment is determined based on the nature of the rights
transferred in consideration for the payment. In particular, it
examines if the payer acquires the use of a “copyright right” or
a “copyrighted article” (as defined in the consultation paper).
In brief, payments made in consideration for the complete
alienation of the transferor’s copyright right in the software,
information or digitized goods, is a sale of the copyright right.
Therefore, the payment would be either business income or
capital gains in the hands of the transferor. Without a complete
alienation of such copyright right, such a payment is treated as
royalty, which is subject to 10% withholding tax if paid to a non-
resident. On the other hand, payments made for the transfer
of a copyrighted article is treated as business income in the
hands of the transferor. Such payments to non-residents will
therefore not be taxable in Singapore unless the payments
constitute income derived from a trade or business carried on
by the non-resident person in Singapore, or income effectively
connected with any permanent establishment of that person
in Singapore.
• The proposal constitutes a change in the policy of the IRAS
vis-à-vis the taxation of payments for IP, as the types of payments
14LOYENS & LOEFF Asia Newsletter – Summer 2012
subject to withholding tax is reduced: if the user does not have
the right to copy or change the IP or the information for commercial
purposes, the payment would no longer qualify as a royalty.
Equity investment gains tax exempt
• The details of the ‘safe harbour’ rule for the qualification of
gains from the disposal of equity investments, reported on in
our Spring edition, have been published in IRAS circular of
30 May 2012. Gains from a disposal of ordinary shares in an
company derived during the period 1 June 2012 to 31 May 2017
(both dates inclusive) are tax exempt if immediately prior to the
date of share disposal, the divesting company has held at least
20% of the ordinary shares in the investee company for a
continuous period of at least 24 months.
• This rule applies to listed and unlisted investee companies
incorporated in Singapore or abroad. The rule does not apply
to the following scenarios:
• disposals that do not meet the conditions above;
• a divesting company whose gains or profits from the disposal
of shares are included as part of its income based on normal
income tax rules;
• an investee company that is in the business of trading or
holding Singapore immoveable properties (other than the
business of property development);
• where a divesting company had held at least 20% of the
ordinary shares in an investee company for a continuous
period of at least 24 months and incurs losses from the
disposal of ordinary shares in the investee company; and
• where a divesting company makes gains or losses from the
disposal of non-ordinary shares in an investee company.
• Whether gains or losses derived in the scenarios above are
income or capital in nature, will continue to be determined
based on the facts and circumstances of each case.
Tax deduction for renovation andrefurbishment works
• The IRAS has published details on the increase of the
expenditure cap under the renovation and refurbishment
scheme to SGD 300,000 as announced in the Budget 2012.
• It comprises a deduction which will apply to a period of 3
consecutive years, on a straight-line basis, starting from the YA
for which the expenses are incurred. There must be a trade,
business or profession for which the costs were incurred during
the basis period for the tax deduction to apply. Unabsorbed
deductions (if any) will be subject to the normal tax treatment
for tax losses.
• Qualifying expenses, if they do not affect the structure of the
business premises, are the cost of: general electrical installation
and wiring to supply electricity; general lighting; hot/cold
water system (pipes, water tanks, etc.); gas system; kitchen
fittings (sinks, pipes, etc.); sanitary fittings (toilet bowls, urinals,
plumbing, toilet cubicles, vanity tops, wash basins, etc.); doors,
gates and roller shutters (manual or automated); fixed partitions
(glass or otherwise); wall coverings (such as paint, wall-paper,
etc.); floorings (marble, tiles, laminated wood, parquet, etc.);
false ceilings and cornices; ornamental features or decorations
that are not fine art (mirrors, drawings, pictures, decorative
columns, etc.); canopies or awnings (retractable or non-
retractable); windows (including the grilles etc); and fitting rooms
in retail outlets.
• Disallowed deductibles are expenses for any designer services
or professional services; any antique; and any type of fine art
including painting, drawing, print, calligraphy, mosaic, sculpture,
pottery or art installation.
Property tax treatment of common property
• On 9 May 2012 the IRAS published a tax circular clarifying the
property tax treatment of common property, which includes
car parks, retail kiosks and areas occupied by automated
teller machines, common areas and facilities, atrium space,
and the maintenance office in both residential and non-
residential buildings.
• Generally, “common property” is taxable under the Property
Tax Act. However, by way of administrative concession, the
IRAS would only ascribe a taxable value (Annual Value) to
these areas where they are let or licensed out, instead of being
held for the enjoyment in common of all occupants. Where
parts of the common property are used and enjoyed by all
occupants, such as swimming pools and tennis courts, the
IRAS may choose not to ascribe separate Annual Values to
these parts. The concession does not apply to any part of the
15LOYENS & LOEFF Asia Newsletter – Summer 2012
common property that is not held for the common enjoyment
by all owners or occupants, for example the management office
used exclusively by the developer or building owner.
Mergers and acquisitions scheme
• The M&A scheme was introduced in Budget 2010 and
enhanced in Budget 2012. The IRAS updated its circular on
the M&A scheme to include guidance on the enhancement.
The M&A scheme is relevant to a company incorporated
and tax resident in Singapore that acquires a controlling
(i.e. 50% or 75%) ordinary share stake in another company.
It is not intended to apply to (i) internal restructurings or
reorganisations of companies undertaken within a corporate
group except where such a restructuring or reorganization
also results in the corporate group acquiring a higher proportion
of ordinary share ownership in a target company after the
event; (ii) the setting up of new (subsidiary) companies within
a corporate group to carry on business activities; (iii) the
acquisition of ordinary shares which form part of the acquiring
company’s trading stocks. A corporate group refers to one
comprising 2 or more companies, each of which is either a
holding company or subsidiary of another entity within the group.
• Subject to conditions, a company (“acquiring company”) that
acquires the ordinary shares of another company (“target
company”) during the period 1 April 2010 to 31 March 2015
(both dates inclusive) is granted an M&A allowance, equal to
5% of the value of the acquisition. An acquiring company may
acquire the ordinary shares of a target company either directly
or through a wholly owned subsidiary that is incorporated for
the primary purpose of acquiring and holding shares in other
companies (“acquiring subsidiary”). In either situation, the M&A
allowance will be granted only to the acquiring company. The
maximum amount of M&A allowance granted to an acquiring
company is $5 million for each year of assessment (“YA”) for
all qualifying share acquisitions executed in the basis period
for that YA (i.e. 5% of the purchase consideration of qualifying
share acquisitions aggregating up to $100 million). The M&A
allowance on the purchase consideration (including any
contingent consideration, i.e. that part of the purchase
consideration for the share acquisition that is payable only
when conditions pre-agreed between the acquiring company
and target company are met) incurred for any qualifying share
acquisition is allowed over 5 years on a straight-line basis
(“5-year write-down period”) and cannot be deferred. Where
any contingent consideration is incurred in a basis period
subsequent to the basis period in which the qualifying share
acquisition took place, the M&A allowance on that contingent
consideration is allowed on a straight line basis over the
remaining years of the 5-year write-down period. However,
if any contingent consideration is incurred in the last basis
period of the 5-year write-down period or later, the M&A
allowance on that contingent consideration is allowed fully
in the YA relating to the basis period in which the consideration
was incurred.
• Under the scheme, subject to conditions, stamp duty relief is
granted on any contract or agreement for sale of equitable
interest in ordinary shares or on any transfer documents for the
acquisition of the ordinary shares under an M&A deal. The
instrument must be executed during the period 1 April 2010 to
31 March 2015 (both dates inclusive) to be eligible for the relief.
The acquiring company may acquire the ordinary shares of the
target company directly or through an acquiring subsidiary.
The amount of stamp duty relief which is granted to the acquiring
company only is capped at $200,000 for each financial year
(“FY”). Where both stamp duty relief and M&A allowance are
claimed on the same qualifying share transaction, the FY or
elected 12-month period for the purpose of stamp duty relief
must be identical to the basis period or elected 12-month period
for the purpose of claiming M&A allowance.
• The qualifying conditions have been set out in detail in the new
circular, which has been published on 28 June 2012.
International Tax Developments
• Colombia. On 7 May 2012, Singapore and Colombia signed
an air services tax agreement, which establishes a legal
framework to eliminate the double taxation of income derived
by Singaporean and Colombian airlines from the use and sale
of aircraft that operate internationally, and of the capital and
assets of those airlines. It will enter into force after the exchange
of ratification instruments.
• United Kingdom (UK). Singapore and the UK signed the second
amending protocol to the income tax treaty of 12 February 1997
on 15 February 2012. It includes:
• A dividend withholding tax exemption, and a 15% withholding
tax on dividends from REITs;
16LOYENS & LOEFF Asia Newsletter – Summer 2012
• A reduction of interest and royalty withholding tax to 5%
and 8% respectively;
• Clarification of when a trustee is considered as beneficial
owner; tax treatment of income paid by a trustee or personal
representative resident in the UK to a Singapore resident;
• Definitions of ‘person’ (no longer excluding partnerships) and
‘fiscal year’ (the CIT year of assessment);
• During the first five years as of the effective date of this
protocol, consultancy services continuing for more than 183
days in a calendar year will constitute a permanent establish-
ment; and
• The limitation of relief provision has been deleted.
• Vietnam. From April - June 2012, (i) Singapore concluded
negotiations with Vietnam for an amending protocol to the tax
treaty of 2 March 1994.
• Portugal. Singapore and Portugal signed an amending protocol
to the tax treaty of 6 September 1999.
• Bahrain. Bahrain has ratified the amending protocol to the
Singapore/Bahrain income tax treaty of 18 February 2004.
Taiwan
No deduction for transfer pricing adjustments
• The Taiwan Supreme Administrative Court recently delivered
a ruling in the case Cadence Taiwan regarding the deductibility
of a transfer pricing adjustment. This is the first Taiwanese
court case on transfer pricing issues after transfer pricing
regulations were introduced in Taiwan in 2004.
• In this case Cadence Taiwan provided R&D services to its
parent company Cadence US. Based on a transfer pricing
study, the service fees paid by Cadence US to Cadence Taiwan
in 2002 were too high. Therefore in 2003 and 2004, Cadence
US instructed Cadence Taiwan to book a significant amount
of sales allowance and sent a debit note to Cadence Taiwan.
Cadence Taiwan thus claimed a tax deduction for the sales
allowance it booked for 2003 and 2004.
• The court denied the deductibility of the transfer pricing adjust-
ment, i.e. sales allowances based on the following reasons:
• The inter-company service agreement between the two related
companies did not contain any provision for a subsequent
retroactive adjustment to the service fees;
• The debit note was not counter-signed by Cadence Taiwan
to confirm its agreement to the adjustment; and
• The sales allowances booked by Cadence Taiwan were purely
for profit allocation purpose, without any economic substance.
A new version of a capital gainstax plan devised
• As from 1 January 2013, individual investors with annual net
gains of NT $4 million or more from trading shares, initial public
offerings and beneficiary certificates of private equity funds
will be subject to capital gains tax at a rate of 15% to 20%.
Offshore investors without a business operation in Taiwan will
continue to be tax exempt.
International Tax Developments
• Czech Republic. The second round of negotiations on the
Czech Republic - Taiwan tax arrangement is scheduled to take
place from 10 to 13 July 2012.
• United Kingdom. On 4 June 2012 the Ministry of Finance of
Taiwan clarified that the open-ended investment companies
of the U.K. can benefit from the 10% dividend withholding
tax rate and interest withholding tax rate in Taiwan under the
Taiwan-U.K. tax agreement, if certain conditions are met.
Thailand
Regional operating headquarters scheme
• In March 2012, a Royal Decree (No. 535) was issued, which
announced some changes to the claw back provisions under
the Regional Operating Headquarters (ROHQ) scheme. The
new ROHQ scheme of 2012 grants tax benefits to certain
businesses and includes a claw back provision withdrawing
such benefits with effect from the first year if certain conditions
17LOYENS & LOEFF Asia Newsletter – Summer 2012
have not been met in any year during the period the scheme
applies. The benefits to which the claw back provisions
apply are:
• a reduced 10% corporate income tax (CIT) rate on service
income from Thai affiliated entities. The 10% rate applies
also to interest and royalty income from affiliated entities and
foreign branches;
• exemption from CIT on service income from foreign affiliated
and foreign branches; and
• an exemption from CIT on dividends from Thai and foreign
affiliates.
• The Royal Decree provides that if certain conditions are not
met in a year, the tax benefit should only be withdrawn for
that year, instead of with retroactive effect from the first year.
Furthermore, the ten-year period within which the dissolution
of a business would cause the tax benefits to be withdrawn
with effect from the first year, has been reduced to a five
year period.
Personal income tax changes
• Draft legislation on the personal income tax exemption for
Thai residents receiving dividends from shares of a foreign
company listed on the Stock Exchange of Thailand (SET) has
recently been approved. The draft law also proposed an
exemption from income tax to be granted on the sale of
stock listed on ASEAN stock exchanges through the SET’s
trading system.
• A ministerial regulation was recently approved by the Cabinet
granting personal income tax exemption to non-resident public
entertainers who receive income from acting in foreign films
made in Thailand by foreign companies during the period from
1 January 2011 to 31 December 2015.
Participation exemption forforeign dividends
• We understand that a tax proposal to introduce a tax exemption
for inter-corporate foreign dividends is expected to be approved
shortly, which would enable Thai companies to enjoy tax
exemptions on foreign dividends provided the pertinent
conditions are satisfied.
International Tax Developments
• Thailand’s tax treaty negotiations with Ireland have been
concluded successfully, and negotiations with Estonia and
Cambodia have been announced.
Vietnam
Confirmation on fulfilment of tax liabilities
• On 21 March 2012, the General Department of Taxation issued
Official Letter No. 1015/TCT-CS. Under this letter, taxpayers
are entitled to request the relevant tax authority to confirm
whether they have fulfilled their tax liabilities regarding a
certain tax or regarding all taxes they are liable for. However,
taxes and duties levied on export/import activities are not included
within the scope of this facility.
2012 transfer pricing inspection planrevealed
• On 5 April 2012, the General Department of Taxation (“GDT”)
announced that in its 2012 TP inspection plan, 7,800
companies involved in related transactions, especially foreign
invested companies, are being targeted. TP audits can be
triggered if these companies have significant number of
related transactions, or are in a loss-making situation, or are
entitlement to tax incentives, or have not been audited or
inspected before, or have been under suspicion of TP
manipulation, or significant amount of tax is due. Also a
specialized transfer pricing team was established at the level
of GDT in order to administer the taxpayers’ TP compliance
with regard to related transactions.
New circular on foreign contractors’tax released
• The Ministry of Finance released Circular No.60/2012/TT-BTC
(Circular 60) providing guidance on the foreign contractors
tax (“FCT”). The FCT is applicable to foreign contractors doing
business in Vietnam or deriving income from Vietnam. This
new circular will replace Circular 134 and its amendments on
FCT after 45 days from the signing date 12 April 2012.
18LOYENS & LOEFF Asia Newsletter – Summer 2012
Although great care has been taken when compiling this newsletter, Loyens & Loeff N.V. does not accept any responsibility whatsoever
for any consequences arising from the information in this publication being used without its consent. The information provided in the
publication is intended for general information purposes and cannot be considered as advice.
• The deemed corporate income tax rate for some business
lines changed under this Circular. For example, interest payment
to offshore non-credit lenders were exempt but now are
taxed at a deemed CIT rate of 5%. For drilling activities, foreign
contractors are subject to 7% VAT rate and 5% CIT rate on their
taxable turnover.
Tax breaks for businesses granted
• On 10 May 2012 the Vietnamese government published
Resolution 13/NQ-CP providing new tax breaks to help
companies combating financial difficulties experienced in
2012. Qualifying companies may be eligible for the following
tax breaks:
• Six-month VAT payment deferral for VAT liabilities of April,
May and June 2012;
• Nine-month deferral for unpaid 2011 corporate income tax;
and
• 30% reduction of 2012 corporate income tax.
International Tax Developments
• Estonia. According to the information published on 27 April
2012 by the Estonian Ministry of Foreign Affairs, Estonia intends
to sign a tax treaty with Vietnam.
• Morocco. On 15 June 2012, an investment protection agreement
was signed by Morocco and Vietnam.
• Singapore. It has been reported that negotiations for an amending
protocol to the Singapore-Vietnam tax treaty (1994) took place
from 18 to 20 April 2012.
• United Kingdom. On April 24 2012, the Prime Minister of Vietnam
signed Decision 480/QD-TTg, ratifying the pending air services
tax agreement with the U.K.
• Saudi Arabia. The tax treaty with Saudi Arabia has entered
into force with effect from 1 February 2011. The treaty generally
applies from 1 January 2012. Further details of the treaty will
be reported subsequently.
w w w . l o y e n s l o e f f . c o m
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