asia newsletter - microsoftloyensloeffwebsite.blob.core.windows.net/...2012.pdf · royalty...

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


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.


• 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.


• 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.


• 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


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.


• 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.


• 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.


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.


• 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


(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.


• 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


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.


• 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


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.


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.


• 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,


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


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


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.


• 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;


• 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.


• 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


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.


• 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.


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.


• 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

Offices

BENELUX

AMSTERDAM

Fred. Roeskestraat 100

1076 ED Amsterdam

Netherlands

Telephone +31 20 578 57 85

Fax +31 20 578 58 00

ARNHEM

(OOSTERBEEK)

Utrechtseweg 165

6862 AJ Oosterbeek

Netherlands

Telephone +31 26 334 72 72

Fax +31 26 333 73 42

INTERNATIONAL

ARUBA

ARFA Building (Suite 201)

J.E. Irausquin Boulevard 22

Oranjestad, Aruba

Telephone +297 582 48 37

Fax +297 583 52 14

CURACAO

Landhuis Arrarat

Presidente Romulo Betancourt

Boulevard 2

Berg Altena, Curaçao

Telephone +599 9 465 15 00

Fax +599 9 465 15 18

DUBAI

Dubai International Financial Centre

(DIFC)

Gate Village, Building 10, Level 2

Dubai, U.A.E.

Telephone +971 4 4372 700

Fax +971 4 4255 673

BRUSSELS

Woluwe Atrium

Neerveldstraat 101-103

B-1200 Brussels

Belgium

Telephone +32 2 743 43 43

Fax +32 2 743 43 10

EINDHOVEN

Parklaan 54a

5613 BH Eindhoven

Netherlands

Telephone +31 40 239 44 44

Fax +31 40 239 44 40

FRANKFURT

Barckhausstrasse 10

60325 Frankfurt am Main

Germany

Telephone +49 69 971 570

Fax +49 69 971 571 00

GENEVA

Rue du Rhone 59 (1st floor)

CH-1204 Geneva

Switzerland

Telephone +41 22 818 80 00

Fax +41 22 312 02 03

HONG KONG

28th floor, 8 Wyndham Street

Central, Hong Kong

Telephone +852 3763 9300

Fax +852 3763 9301

LUXEMBOURG

K-Point Building

18-20, rue Edward Steichen

2540 Luxembourg

Luxembourg

Telephone +352 46 62 30

Fax +352 46 62 34

ROTTERDAM

Blaak 31

3011 GA ROTTERDAM

The Netherlands

Telephone +31 (0) 10 224 62 24

Fax +31 (0) 10 412 58 39

LONDON

26 Throgmorton Street

London EC2N 2AN

United Kingdom

Telephone +44 20 7826 3070

Fax +44 20 7826 3080

NEW YORK

555 Madison Avenue

27th Floor

New York, NY 10022

USA

Telephone +1 212 489 06 20

Fax +1 212 489 07 10

PARIS

1, Avenue Franklin D. Roosevelt

75008 Paris

France

Telephone +33 1 49 53 91 25

Fax +33 1 42 89 14 60 (legal)

Fax +33 1 49 53 94 29 (tax)

SINGAPORE

80 Raffles Place

# 14-06 UOB Plaza 1

Singapore 048624

Telephone +65 6532 3070

Fax +65 6532 3071

TOKYO

15F, Tokyo Bankers Club Building

1-3-1 Marunouchi, Chiyoda-ku

TOKYO 100-0005

Japan

Telephone +81 3 3216 7324

ZURICH

Dreikönigstrasse 55

CH-8002 Zurich

Switzerland

Telephone +41 43 266 55 55

Fax +41 43 266 55 59

asia newsletter - microsoftloyensloeffwebsite.blob.core.windows.net/...2012.pdf · royalty...

Documents