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GLOBAL TAX SERVICES

The impact of tax treaty trends in the Asia-Pacific funds sector

TAX

Contents

Introduction 2

Australia 4

The People’s Republic of China 7

Hong Kong 11

India 12

Indonesia 14

Japan 16

Macau 19

Malaysia 21

New Zealand 23

Pakistan 25

Philippines 27

Singapore 30

Sri Lanka 33

South Korea 36

Taiwan 39

Thailand 42

Vietnam 44

Abbreviations 47

Introduction

The trend towards substance The use of intermediate investment holding structures to take advantage of reduced withholding and other taxes imposed under the domestic law is a staple feature of investment structuring for investment funds in the Asia-Pacific region. Many countries in the region impose some form of tax on the remittance of dividends and also on gains made on the sale of investments, especially non-portfolio investments. In many cases it is possible to substantially reduce or eliminate the imposition of tax on dividends and gains under double tax agreements (DTAs).

Although there are only four members of the Organisation of Economic Co-operation and Development (OECD) in the region (Australia, Japan, Korea and New Zealand) many of the tax treaties in the Asia-Pacific region are broadly based on the OECD model convention on income and capital. The OECD plays an active role in the Asia-Pacific region through its outreach program to emerging markets, which makes it influential within the region. The OECD Model Convention even sets out the positions of 6 nonmembers in the Asia-Pacific region (China, India, Malaysia, Philippines, Thailand and Vietnam).

To claim the benefit of a tax treaty in relation to reducing the tax imposed on dividends there are two basic requirements the recipient needs to satisfy under the OECD Model Convention. These are:

• Therecipientmustberesidentinthe contracting state; and

• Therecipientmustbethebeneficial owner of the income received from the payer in the other contracting state.

Typically these requirements look to whether an entity claiming the benefit of a tax treaty is established and operating in a particular country and is the true owner of the income in question.

To determine the residence of a taxable person you have to begin with the local tax law for each relevant state and then consider the treaty definitions of residence and application of any tie-breaker clauses in applicable treaties where a taxable person might qualify as resident in more than one jurisdiction. The OECD Model Convention provides that ‘Resident of a Contracting State’ means any person who is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature. A resident does not include any person who is liable to tax in that State in respect only of income from sources in that State. It is interesting to note that the OECD generally discourages the use of a 'subject to tax' condition, in relation to a specific item of income, in order for treaty benefits to apply.1 However the OECD envisages that such a condition may be included to deal with the use of conduit companies.2

The concept of beneficial ownership originates from English law and encompasses the following concepts:

• 'trueownership'; • notasnomineeortrustee; • entitledtodisposeofasdesired.

On 12 January 2009 the OECD released a report for discussion on the claiming of tax treaty benefits by a Collective Investment Vehicle (CIV)3. The report considers the issues of whether a CIV is a person, resident of a contracting state and the beneficial owner of income under existing treaties. It was noted that there are divergent views on the issues and in relation to beneficial ownership cites the dual tests set out by Klaus Vogel in his book on double tax treaties4 of (1) the entity’s right to decide whether or not a yield should be realised and (2) whether the entity has the right to dispose of that yield, as reference pillars in determining whether a CIV has beneficial ownership. The report also recommends certain amendments to the model convention and favours ensuring CIVs are treated as resident of contracting states and the beneficial owner of income.

1 Paragraph 15, Commentary on Article 1, page 51 OCED Model Tax Convention (Condensed Version) 2008

2 Ibid 3 Report of the Informal Consultative Group on the

Taxation of Collective Investment Vehicles and Procedures for Tax Relief for Cross Border Investors on The Granting of Treaty Benefits with respect to the Income of Collective Investment Vehicles.

4 Vogel, Klaus Vogel on Double Tax Conventions, 3rd

edition (1997), Kluwer Law

2 l The impact of tax treaty trends in the Asia-Pacific funds sector

Inclusion of the concept of beneficial ownership in tax treaties dates from the 1960’s and appears to have been originally designed to prevent the owner of the income from nominating a treaty-protected third party as the legal owner, in order to reduce source country taxation. The concept is used in articles 10 (dividends), 11 (interest) and 12 (royalties).

The concept is not used in article 13 (capital gains) or 21 (other income). The significance of this has not been explored in tax cases or the OECD Model Convention. The OECD Model Convention provides relief for a company resident in a Contracting State from capital gains tax in the other Contracting State in some situations. However, if the capital gains arise on moveable property (such as shares) that is part of the business property of a permanent establishment in the other Contracting State, they will be taxable in that State. If not, the moveable property will be taxable in the Contracting State in which the company is resident. Individual tax treaties may provide relief from tax on gains made by non-residents on sales of non-portfolio investments.

The OECD commentary on the Model Convention states that the requirement of beneficial ownership:

“makes plain that the State of source is not obliged to give up taxing rights merely because that income was immediately received by a resident of a State with which the State of source had concluded a convention..”5

It goes on to note that:

“where an item of income is received by a resident of a Contracting State acting in the capacity of agent or nominee it would be inconsistent with

the object and purpose of the Convention for the State of source to grant relief or exemption merely on account of the status of the immediate recipient of the income as a resident of the other Contracting State . . .

For these reasons…a conduit company cannot normally be regarded as the beneficial owner if…it has…very narrow powers which render it…a mere fiduciary or administrator acting on account of the interested parties.”6

The wide range in the level of sophistication and development of countries in the region is reflected in the divergent approaches taken to policing the use of tax treaties. Some countries are happy to accept evidence of incorporation in a particular location as sufficient evidence of residence and do no seek to look beyond that. Initially the concept of beneficial ownership has, despite its roots in English law, been applied to look at legal ownership only. However, increasingly countries are looking to economic as well as legal ownership as the correct test. Examples of countries looking to apply a strict beneficial ownership test include India which has unsuccessfully sought through the Courts to challenge the commonly used Mauritius Indian investment structure (although the recent Vodaphone Holdings BV decision raises considerable uncertainty in this area). Similarly, in relation to Indonesia, the Indofoods and PT Indah Kiah Pulp & Paper cases demonstrate how the concept can apply even in relation to civil law jurisdictions. A substance over form approach is also applied in some countries for example, Japan and Korea, and will look at factors such as whether the particular company is in the same location as the true decision makers.

There is also a trend to include more radical solutions to the use of conduit companies as countries seek to tighten the criteria under which they allow tax treaty benefits. These include:

• limitationofbenefitsclausesin treaties7;

• provisionsallowingtheapplication of domestic general anti-avoidance rules8; and • informationsharingpowersbetween

different jurisdictions.

In light of recent developments in domestic law, the new reports from the OECD and the OECD commentary, it can be expected that the use of treaties could be challenged by local authorities more regularly. While many jurisdictions in the Asia-Pacific region are not yet taking the approach adopted in the more developed OECD member states, the expectation is that the developing economies are taking note of the approach being taken in other jurisdictions and are likely to move to a more substance based approach. As a result, the use of intermediate holding company investment structures could be subject to increasing scrutiny. Therefore, funds should seek to place legal entities where directors of substance can participate in decision making and to the extent possible real economic functions and substance reside. These increased requirements present a very real commercial challenge to centrally located deal and portfolio management teams who are often responsible for the entire Asia-Pacific region.

5 See Paragraph 12, Commentary on Article 10, page 151 OCED Model Tax Convention (Condensed Version) 2008

6 Ibid Paragraph 12.1 7 See for example the India / Singapore protocol June

2005 8 These are common in Japanese tax treaties and

increasingly appear in newer tax treaties agreed between other countries

The impact of tax treaty trends in the Asia-Pacific funds sector l 3

Australia

Introduction The previous 30 percent non-final withholding tax (WHT) regime applying to distributions from Australian managed investment trusts to certain foreign residents has been replaced with a new final WHT regime.

Under new rules, the rate of WHT will be substantially reduced to a final rate of 7.5 percent from 1 July 2010 for non-resident investors in exchange of information countries. Varying concessional rates will apply in the interim period between 1 July 2008 and 1 July 2010.

Contact

Tony Mulveney Tax Partner KPMG in Australia Tel: +61 2 9335 7121 [email protected]

Key messages

WHTs will apply in relation to payments of dividends, interest and fund payments, such as from Australian managed investment trusts.

Australia has domestic general anti-avoidance provisions. Further targeted anti-avoidance clauses are being introduced as international tax treaties are updated.

General taxation

Tax rate An Australian resident is generally subject to income tax on worldwide income.

A non-resident of Australia is generally subject to income tax in Australia on their Australian-sourced income, and capital gains derived from events, such as disposals, in relation to certain assets that are taxable Australian property.

The current tax rate for corporations is 30 percent for the year 2008/09.

The use of DTAs to reduce the WHT rates

omestic WHT rate on payments of WHT applies to payments of unfranked dividends (i.e. dividends paid from profits dividends and interest to the fund which have not borne corporate tax in Australia) and interest where the payment is

made by a resident to a non-resident. Under domestic law, the current rate of WHT is 30 percent for unfranked dividends and 10 percent for interest.

WHT does not apply to payments of franked dividends and certain unfranked dividends declared to be conduit foreign income.

WHT on payment of dividends The domestic rate of WHT may be reduced by an applicable DTA, typically 15 and interest to the fund under percent for unfranked dividends, but this can be as low as 0 percent, and 10

commonly used DTAs percent for interest. Payments of interest to certain lenders are exempt from WHT under recent DTAs, for example with the US or UK.

D


Treatment of gains arising on the Capital gains

sale of investments under domestic An Australian resident company would be subject to tax on capital gains arising on law most types of assets at the prevailing corporate tax rate for the relevant period.

A non-resident will only be subject to capital gains tax from chargeable events in relation to assets that are taxable Australian property. These are limited to:

• Real property (e.g. land and buildings) situated in Australia

• Direct or indirect interests in entities (whether resident in Australia or not) which hold significant Australian real property

• Assets used in carrying on a business through a permanent establishment (PE) in Australia.

An interest in an entity will only constitute taxable Australian property if the fund (and its associates) holds shares or interests of at least 10 percent in the entity, and more than 50 percent of the value of the entity’s underlying assets consist of Australian real property. There is a look back period in relation to the 10 percent interest test to counter staggered sell-downs.

Revenue gains

Australian sourced revenue gains from the sale of investments will generally be taxed.

WHT on capital gains arising on sale WHT is not applicable on capital gains derived directly by a non-resident. of shares under the relevant DTAs However, the gross capital gain derived indirectly by a non-resident may be subject

to WHT in Australia where the shares constitute taxable Australian property and the gross capital gain on the shares is paid to the non-resident as part of a fund payment.

The applicable rate of WHT on the fund payments is 30 percent (final). However, from 2010/11, this rate of withholding will be reduced to 7.5 percent (final) for nonresidents in an information exchange country with varying concessional rates to apply during the interim period to 2010/11.

Australia’s more recent DTAs contain a sweep-up provision which explicitly covers the taxation of capital gains.

For completeness, it is noted that an argument exists that Australia’s jurisdiction to tax the capital gains of non-residents is limited in the context of certain pre-CGT DTAs. This view is not accepted by the Australian Tax Office.

Requirements for the investee to avail themself of the reduced WHT

rates under the relevant DTAs

1. Domestic law Australian law includes general anti-avoidance provisions which apply to schemes where the sole or dominant purpose of the scheme is to obtain a tax benefit (including schemes undertaken for the purpose of obtaining treaty benefits).

Where these provisions apply, the Commissioner may cancel any tax benefits that arise as a result of the scheme and impose additional penalties.

Australia’s DTAs permit the application of the domestic general anti-avoidance provisions.


2. DTAs Treaty benefits for interest and dividends are limited to cases where income is beneficially owned by the resident of the other Contracting State.

The Australian Government is seeking to tighten Australia’s anti-treaty shopping provisions.

Only a small number of Australia’s DTAs contain explicit anti-avoidance provisions designed to prevent treaty shopping, such as the DTAs with the US, UK, China and Norway, and limitation of benefits provisions which require certain conditions to be satisfied for a taxpayer to claim treaty benefits such as those with the US, Russia and a new treaty with Japan which is not yet in force.

The anti-treaty shopping provisions seek to deny treaty benefits where taxpayers have entered into arrangements to alter the tax residence of an entity or operate through interposed entities in order to obtain treaty benefits.

3. Experience/practice Australia is increasingly moving towards exchange of information as a means of administering and enforcing tax laws.

Many of Australia’s DTAs contain an article on the exchange of information between the contracting countries. Australia also has Tax Information Exchange Agreements with some non-DTA countries which allow for the full exchange of information in relation to tax matters (including information regarding the residence of non-resident investors).

The explicit anti-treaty shopping and limitation of benefits provisions are only found in Australia’s more recent DTAs. There is limited experience or guidance in relation to the Australian Tax Office’s approach to their use.

In contrast, there is extensive experience and guidance in relation to the ATO’s approach to the general anti-avoidance rules in Australia’s domestic tax rules.

In relation to the Australian Tax Office’s attitude to tax avoidance, it is noted that there have been certain high profile international tax investigations such as Project Wickenby.

4. Mutual agreement procedures Each of Australia’s DTAs contains a MAP article that provides for the resolution of (MAP) issues which may arise in relation to international double taxation.

The MAP is limited in two ways:

• Itdoesnotcompelanagreementtobereachedbetweenthetaxationauthorities.

• Itwillonlyprovidereliefwheretaxationarisesinamannerinconsistentwiththe provisions of a DTA. For example, Australia’s DTA with Germany, Switzerland and Italy do not have provisions to deal with economic double taxation.

Level of proof required to be Australia’s taxation framework is based on a system of self-assessment. The submitted to the tax authorities for a obligation to lodge Australian income tax returns and assess tax is the taxpayer’s in

claim for reduced WHT rate the first instance.

Generally, the non-resident investor will be required to provide their overseas address to an Australian payer to ensure that tax is withheld at the reduced WHT rate, otherwise tax is withheld at the highest marginal tax rate.


The People’s Republic of China

Introduction The People’s Republic of China (PRC) has become an increasingly favored location for fund investment in recent years due to deregulation, a strong currency, relatively good economic performance and growing consumer markets. The PRC imposes WHT on PRC-sourced income derived by a non-PRC resident enterprise (including funds) without a taxable establishment in the PRC, unless a specific exemption applies. Where a fund invests via a jurisdiction that has entered into a DTA with the PRC, it is possible for the fund to obtain reduced withholding rates on the payment of dividends and interest from the PRC, or realized gains arising on the disposal of PRC equity investments.

Contact

John Gu Tax Principal KPMG in China Tel: +852 2978 8983 [email protected]

Key messages

There are domestic tax exemptions available for domestic authorized securities investment funds. However, these exemptions do not apply to foreign funds.

Foreign direct investment (FDI) in PRC renminbi denominated listed securities is restricted. Foreign funds can only invest in such securities via the Qualified Foreign Institutional Investor (QFII) regime or through the foreign strategic investor route.

Foreign funds can invest directly in unlisted companies through the FDI route subject to satisfying certain conditions.

General taxation

Tax rate Corporate Income Tax (CIT)

The National People's Congress approved the Corporate Income Tax Law of the People's Republic of China (CIT Law) on 16 March 2007, and the CIT Law (together with the Detailed Implementation Rules (DIR) for the CIT Law) took effect on 1 January 2008.

The generally applicable CIT rate is 25 percent. There are reduced rates available for certain qualifying small-scale/small-profit enterprises and hi-tech enterprises.

Non-resident enterprises without an establishment or place of business in the PRC are subject to WHT at the rate of 20 percent on various types of passive income (e.g. dividends, interest, rent, royalties and other income) derived from the PRC. This WHT rate is reduced to 10 percent pursuant to Article 91 of the DIR to the CIT Law.


The use of DTAs to reduce the WHT rate

Domestic WHT rate on payments of To the extent that the fund or its intermediate investment holding company is dividends and interest to the fund considered a non-PRC tax resident without a taxable establishment in the PRC,

the 10 percent WHT rate would apply to dividends, interest paid by PRC investee companies and capital gains on sale of the PRC investee companies. This 10 percent WHT rate may be reduced under an applicable tax treaty where the beneficial owner of the relevant income is resident in a jurisdiction that has entered into the applicable tax treaty with the PRC, and other conditions prescribed in the treaty are satisfied.

Where certain conditions are satisfied, dividends received by a PRC tax resident enterprise (which could include an overseas fund) from anther PRC tax resident enterprise are specifically exempt from CIT.

WHT on payment of dividends Fund investors have generally sought to adopt intermediate holding companies and interest to the fund under incorporated in Hong Kong or other favorable jurisdictions to hold PRC investments.

commonly used DTAs Under the PRC-Hong Kong DTA, the WHT applicable to dividends paid to a Hong Kong resident company is reduced from the general rate of 10 percent to 5 percent (provided that the Hong Kong resident company’s shareholding in the PRC company is at least 25 percent). The WHT applicable on interest paid to Hong Kong resident company is reduced to 7 percent from 10 percent.

Treatment of gains arising on the Under the CIT Law, capital gains derived by a non-resident enterprise without sale of investments under domestic establishment in the PRC on the sale of PRC equity investments are subject to

law PRC WHT at the rate of 10 percent.

Under the CIT law, capital gains are taxed as ordinary income and there is no specific provision providing for favorable tax treatment for capital gains.

WHT on capital gains arising on sale Under the PRC-Hong Kong DTA, capital gains derived by a Hong Kong resident of shares under the relevant DTAs company on the sale of equity investment in a PRC company are exempt from PRC

WHT where the Hong Kong resident company holds less than 25 percent interest in the PRC company and the PRC company is not land rich for at least three years from the date of disposal. An investee company is considered to be land rich where 50 percent or more of its assets comprise directly or indirectly of immovable property in the PRC.



1. Domestic law The CIT law (effective from 1 January 2008) contains a general anti-tax avoidance provision which gives the PRC tax authorities the power to make reasonable adjustments to an enterprise’s taxable profits or revenue in circumstances where the enterprise has entered into transactions for the primary purpose of obtaining a reduction, deferral or avoidance of taxable profits or revenue. Prior to the introduction of the CIT law, the PRC tax laws did not contain a general anti-tax avoidance provision.

This general anti-avoidance provision should be considered to have application to treaty shopping arrangements. Specifically, under the Draft Administrative Regulations on Special Tax Adjustments (which were not yet effective at the time of writing), abusive use of DTAs by enterprises is specifically listed as a heads of tax avoidance against which the general tax avoidance provision could be used.



Domestic WHT rate on payments of dividends and interest to the fund

To the extent that the fund or its intermediate investment holding company is considered a non-PRC tax resident without a taxable establishment in the PRC,the 10 percent WHT rate would apply to dividends, interest paid by PRC investeecompanies and capital gains on sale of the PRC investee companies. This 10percent WHT rate may be reduced under an applicable tax treaty where the beneficial owner of the relevant income is resident in a jurisdiction that has enteredinto the applicable tax treaty with the PRC, and other conditions prescribed in thetreaty are satisfied.

Where certain conditions are satisfied, dividends received by a PRC tax residententerprise (which could include an overseas fund) from anther PRC tax residententerprise are specifically exempt from CIT.

WHT on payment of dividends and interest to the fund under

commonly used DTAs

Fund investors have generally sought to adopt intermediate holding companies incorporated in Hong Kong or other favorable jurisdictions to hold PRC investments.

Under the PRC-Hong Kong DTA, the WHT applicable to dividends paid to a Hong Kong resident company is reduced from the general rate of 10 percent to 5 percent (provided that the Hong Kong resident company’s shareholding in the PRC company is at least 25 percent). The WHT applicable on interest paid to Hong Kongresident company is reduced to 7 percent from 10 percent.

Treatment of gains arising on the sale of investments under domestic

law

Under the CIT Law, capital gains derived by a non-resident enterprise withoutestablishment in the PRC on the sale of PRC equity investments are subject to PRC WHT at the rate of 10 percent.

Under the CIT law, capital gains are taxed as ordinary income and there is nospecific provision providing for favorable tax treatment for capital gains.

WHT on capital gains arising on sale of shares under the relevant DTAs

Under the PRC-Hong Kong DTA, capital gains derived by a Hong Kong residentcompany on the sale of equity investment in a PRC company are exempt from PRC WHT where the Hong Kong resident company holds less than 25 percent interestin the PRC company and the PRC company is not land rich for at least three yearsfrom the date of disposal. An investee company is considered to be land richwhere 50 percent or more of its assets comprise directly or indirectly of immovableproperty in the PRC.



1. Domestic law The CIT law (effective from 1 January 2008) contains a general anti-tax avoidance provision which gives the PRC tax authorities the power to make reasonable adjustments to an enterprise’s taxable profits or revenue in circumstances where the enterprise has entered into transactions for the primary purpose of obtaining a reduction, deferral or avoidance of taxable profits or revenue. Prior to theintroduction of the CIT law, the PRC tax laws did not contain a general anti-taxavoidance provision.

This general anti-avoidance provision should be considered to have application to treaty shopping arrangements. Specifically, under the Draft Administrative Regulations on Special Tax Adjustments (which were not yet effective at the time ofwriting), abusive use of DTAs by enterprises is specifically listed as a heads of tax avoidance against which the general tax avoidance provision could be used.

The draft regulation provides that in assessing whether enterprises have undertaken tax avoidance arrangements, the PRC tax authorities should consider various factors from the perspective of the overall arrangement, including: the form and substance of the arrangement; the means by which the arrangement is concluded; the tax outcomes; and change in financial result or position of the parties involved in the arrangement. Where enterprises are considered to have implemented a tax avoidance arrangement, the PRC tax authorities are empowered to make adjustments based on reasonable methods to nullify its effects. The draft regulation specifically empowers the PRC tax authorities to adjust the tax result based on their economic substance, and counteract tax benefits arising from the arrangement through reclassification or reassessment of profits, losses, quantum of tax exemption or reduction of each party involved in the arrangement.

In view of the ability which PRC tax authorities have to tackle tax motivated treaty shopping arrangements on general tax avoidance grounds, it would be prudent for a fund to establish an investment holding company in a tax treaty jurisdiction based on commercial and operational reasons rather than for the primary purpose of accessing tax benefits offered under a particular DTA. The fund should be able to demonstrate that there is sufficient commercial substance and non-tax motivated reasons to establish any intermediate holding company holding the PRC investment in a particular tax treaty jurisdiction. Such evidence may include documentation to demonstrate that the intermediate holding company is properly constituted under the laws of the overseas jurisdiction; evidence of commercial presence in that jurisdiction, including the exercise of effective management and control therein; the presence of resident directors, employees and office premises in that jurisdiction and so on. In the absence of such evidence to support commercial substance, it is possible that the PRC tax authorities could seek to apply the general anti-tax avoidance provisions to deny treaty benefits.

2. DTAs Notwithstanding the general legal position that DTAs prevail over the CIT law in the case of conflict, in the context of the application of the general anti-tax avoidance provisions with respect to treaty shopping practices, the PRC has sought to retain the ability to apply the general anti-avoidance provision under the treaties. In fact, under recent DTAs concluded by the PRC with Hong Kong and Singapore, this issue is resolved as there is a specific article which allows the respective jurisdiction to apply its domestic general anti-tax avoidance laws to counteract tax-motivated transactions (including treaty shopping in the PRC context).

Under many of the tax treaties entered into by the PRC, in order for the overseas investor to be entitled to tax treaty benefits, it needs to be considered the beneficial owner of relevant income such as dividends, interest and royalties derived from the PRC. The term beneficial owner is not specifically defined under the relevant DTAs or the PRC domestic laws, but the PRC tax authorities usually make reference to the Commentaries to the OECD Model Convention for guidance on internationally accepted practice. In this respect, based on the OECD Model Convention principles, where the recipient entity simply acts as an agent, nominee or otherwise as a conduit of the relevant income, the PRC tax authorities could seek to deny tax treaty benefits on the basis that the recipient entity cannot be considered to be the beneficial owner of such income. Investors should ensure that they are entitled derive the benefits and bear the risk of ownership with respect to the relevant income and thus can be considered to be the beneficial owner for DTA purposes.


Since the general anti-avoidance provision was only introduced from the start of 2008 there is little practical experience of how the PRC tax authorities will seek to enforce this provision in the context of fund structures. There have been relatively few cases where the PRC tax authorities have sought to challenge overseas investment holding companies on the grounds that they lack commercial substance in the jurisdiction of incorporation and that the primary purpose of establishing the holding company is to access DTA benefits. However, such challenges may now become more common.

3. Experience/practice Currently, to grant tax treaty relief, the PRC tax authorities require evidence of the tax residence of the payee being in the relevant tax treaty jurisdiction. The payee should provide a tax residency certificate from that jurisdiction. In practice, the PRC tax authorities have not sought additional evidence from investors, such as where the company exercises its effective management; the location of its board of directors meetings; or whether the company has employees or offices maintained in the jurisdiction of establishment to prove commercial substance in the investment holding company’s jurisdiction of establishment. Nevertheless, as discussed above, the scope of the general anti-tax avoidance provisions under CIT law are sufficiently broad to allow for enforcement against treaty shopping practices and investors should be mindful that PRC tax authorities could apply a more stringent policy with respect to such practices in future.

4. MAP Under many of the DTAs entered into between the PRC and overseas jurisdictions, MAP offer taxpayers a means by which they can seek assistance from a competent tax authority in resolving taxation disputes under a DTA. Specifically, where a PRC tax resident enterprise considers that a tax measure adopted by an overseas tax treaty country results in, or will lead to, tax consequences inconsistent with the tax treaty with the PRC, that enterprise may lodge an application for assistance with the State Administration of Taxation (SAT) as the competent tax authority in the PRC. The SAT will then communicate with its counterpart tax authority of the relevant treaty country and try to resolve the issue. An overseas investor may similarly invoke the MAP and request the competent tax authority in its jurisdiction of residence to assist it in dealing with any disputes with the SAT, for example a potential challenge by SAT with regard to whether or not the investor qualifies for treaty benefits.

Level of proof required to be Based on current PRC tax law practice, in order to claim the reduced WHT rate and submitted to the tax authorities for a to satisfy PRC foreign exchange requirements, the applicant is required to submit

claim for reduced WHT rate the following documents to the PRC regulatory authorities and foreign exchange remittance bank prior to remittance of the income:

• CompletedApplicationforTreatmentunderAvoidanceofDTA

• Proofoftheapplicant’sresidenceintherelevantDTAjurisdiction(suchas Certificate of Hong Kong Resident Status from the IRD under PRC-Hong Kong DTA)

• Copyofcontractsoragreementssuchasloanagreementsforinterestpayment

• Otherdocumentsrequiredbythein-chargetaxauthoritiesincludingaudited reports, board of director resolutions and tax completion certificates in the case of dividend payments and foreign exchange bank.

The PRC regulatory authority may impose additional requirements on a case by case basis.


Hong Kong

Introduction Hong Kong is a preferred investee location for fund investments and as an intermediate location for investments into China due to the favorable tax regime and the absence of WHTs on the payment of dividends, interest or with the correct structuring gains arising on the disposal of investments.

Contact

John Timpany Tax Partner KPMG in Hong Kong Tel: +852 2143 8790 [email protected]

Key messages

No WHT on the payment of dividends, interest and capital gains on the sale of shares.

General taxation

Tax rate A person who engages in business in Hong Kong and in receipt of Hong Kong sourced income from that business, is liable to Hong Kong profits tax. The current tax rate for corporations is 16.5 percent for the year of assessment 2008/09.

The use of DTAs to reduce WHT

Domestic WHT rate on payments of There is no WHT on payments of dividends or interest from a Hong Kong investee dividends and interest to the fund to a non-resident, including the fund, or on the realization of capital gains. See

below regarding the treatment of gains arising on the sale of investments under domestic law.

For completeness, where the fund invests directly in real estate located in Hong Kong and derives rental income, the fund will be regarded as carrying on business in Hong Kong. The rental income will be treated as Hong Kong sourced, and subject to Hong Kong profits tax. This tax will not be reduced by any treaty.

Treatment of gains arising on the Generally, gains on the sale of investments are not subject to Hong Kong profits sale of investments under domestic tax if the gains are regarded as capital gains (i.e. gains which are not of a revenue

law nature). In addition, where the gains arising on the disposal of investments are structured such that they arise offshore (non-Hong Kong sourced), the gains should not be subject to Hong Kong profits tax.


India

Introduction India’s growth in the recent past and the potential of significant return on investments has led to increasing FDI flows from funds. If investment into India is made through a tax-friendly jurisdiction, a foreign investor can manage their tax exposure on their return on investments in Indian companies.

Contact

Naresh Makhijani Executive Director KPMG in India Tel: +91 22 3983 5703 [email protected]

Key messages

No WHT on the payment of dividends. No capital gains tax on long-term capital gains on sale of shares listed on an Indian stock exchange.

General taxation

Tax rate The tax rate differs depending on whether the foreign entity investing into India is a company or a non-corporate entity and whether the investments in the Indian investee companies are held as stock-in-trade or portfolio investments. The maximum marginal income-tax rate for income earned during the financial year 2008-09 (1 April 2008 to 31 March 2009) is 42.23 percent for foreign companies and 31.6725 percent for a foreign non-corporate. The effective tax burden may however be greater due to Dividend Distribution Tax (DDT) of 16.995 percent payable by the investee company. For details please refer to the next paragraph.


Domestic WHT rate on payments of Dividends received by a shareholder (resident or otherwise) from an Indian dividends and interest to the Fund company are exempt from income-tax in the hands of that shareholder. However,

the Indian investee company that distributes the dividend has to pay DDT of 16.995 percent of the amount distributed in addition to the corporate tax that it pays on the profit it earns.

Interest paid by the Government of India or an Indian concern to a non-resident (irrespective of whether the non-resident is a company or not) on monies borrowed or debt incurred in foreign currency, is subject to WHT at 21.115 percent.

WHT on payment of interest to the Under most DTAs the WHT rate on interest can be reduced to 10 percent on Fund under commonly used DTAs the gross amount thereof. In the case of interest paid to a company that is a

tax resident of Mauritius and which carries on a bona fide banking business in Mauritius, there is the possibility of a nil rate of Indian WHT on the interest.


Treatment of gains arising on the Long-term capital gains on transfer of listed shares are exempt from income-tax sale of investments under domestic provided the transaction of sale is liable to Securities Transaction Tax (STT), currently

law 0.125 percent.

Short-term capital gains on transfer of listed securities are also subject to a concessional tax rate of 16.995 percent subject to the STT being paid on the transaction of sale.

Long-term capital gains on transfer of non-listed shares, debentures and real estate assets are taxed at 22.66 percent for resident companies and 21.115 percent for non-resident companies or 10.55 percent for foreign institutional investors (FII).

Short-term gains on the transfer of assets other than listed securities are generally taxed at the standard corporate rates which are 42.23 percent for foreign companies and 33.99 percent for Indian companies. Short term capital gains on the disposal of securities by a FII are taxed at 31.6725 percent.

WHT on capital gains arising on sale If the investment into India is made by an intermediate vehicle located in a tax-of shares under the relevant DTAs friendly jurisdiction, the tax on capital gains can be reduced to nil, except for gains

on the disposal of shares of companies whose assets are comprised principally of immovable property in India.


rates under any relevant DTA

1. Domestic law There are no specifically targeted anti-treaty shopping provisions within Indian domestic tax law.

2. DTAs The Indian tax authorities will typically consider the substance of the entity seeking to claim treaty benefits and would deny these to an entity that does not have sufficient substance. Awareness of structures that seek to take advantage of relative differences between tax treaties is increasing in India.

Tax treaties that India has entered into with some countries do include specific anti-avoidance provisions, such as a beneficial ownership requirement for certain categories of income or even a limitation of benefits article, for example India’s tax treaties with Singapore and the UAE.

3. Experience/practice Tax authorities in India do look at potential treaty abuse and seek to clamp down on it by invoking either the substance test or the beneficial ownership test. Limitation of benefits articles in India’s tax treaties are a fairly recent phenomenon and so have not yet been subject to judicial scrutiny.

4. MAP India has an Advance Ruling Mechanism in place but not an Advance Pricing Arrangement Mechanism. The MAP has been invoked in a number of cases and treaty issues have been resolved through this procedure but can take a long time to reach resolution.

Level of proof required to be As a minimum requirement, tax authorities in India would require sight of a tax submitted to the tax authorities for a residence certificate from the tax authorities of the country of residence of the

claim for reduced WHT rate entity seeking to claim treaty benefits.

Dependent upon the level of satisfaction with the validity of the claim, further evidence may be requested. This evidence could include audited financial statements; bank account statements; minutes of board/investment committee meetings and so on.


Indonesia

Introduction Indonesia has negotiated DTAs with over 50 countries. These generally follow the OECD Model. Under the DTAs, WHT on income from foreign fund investments may be reduced or exempted.

Contact

Graham Garven Tax Partner KPMG in Indonesia Tel: +62 (0) 21 570 4888 [email protected]

Key messages

The standard rate of final WHT of 20 percent on income from investments by foreign funds such as dividends, interest or gains arising on the disposal of investments, may be reduced to 0 percent, 10 percent or 15 percent depending upon the treaty and form of income.

General taxation

Tax rate A person who carries on business in Indonesia and is in receipt of Indonesian sourced income from that business is liable to Indonesian tax on any profits. The current tax rate for corporations is 30 percent for the fiscal year 2008. This will be reduced to 28 percent for 2009 and 25 percent for 2010.

The use of DTAs to reduce WHT

Domestic WHT rate on payments of WHT is imposed at 20 percent on the payment of dividends or interest from an dividends and interest to the fund Indonesian company to a non-resident. There should be no WHT on return of the

funds invested.

Under current regulations, there are restrictions on funds investing directly in real estate located in Indonesia.

WHT on payment of dividends Under the DTAs, WHT on payments of dividends or interest by an Indonesian and interest to the fund under company to a non-resident can usually be reduced to 10 or 15 percent.

commonly used DTAs

Treatment of gains arising on the The sale of shares held by non residents in an unlisted Indonesian company is sale of investments under domestic subject to 5 percent WHT from the total proceeds. In case the Indonesian company

law is a listed company, the sale of shares is subject to 0.1 percent WHT from the total proceeds.

Where an Indonesian resident company realizes a capital gain, the gain is generally taxable at the applicable corporate tax rate. There are some exceptions for certain types of venture capital companies.


WHT on capital gains arising on sale Most DTAs provide exemption from the 5 percent WHT on transfer of shares of shares under the relevant DTAs though notable exceptions are the DTAs with Singapore and Australia.

Certain treaties indicate that the 5 percent WHT still applies on the sale or transfer of a company the property of which principally consists, directly or indirectly, of immovable property situated in Indonesia.

In case the Indonesian company is listed company, the sale of shares is subject to 0.1 percent WHT from the total proceeds. In practice this still applies for treaty country residents, although theoretically an exemption may be available.



1. Domestic law Where treaty benefits are sought, the investor must supply a certificate of tax residence from the fiscal authorities of the treaty jurisdiction.

There are no general anti-avoidance rules and no specific regulations except for a widely applied ability to re-determine transactions and pricing where special relationships exist.

2. DTAs Most DTAs contain the standard OECD model Article on Associated Enterprises.

Any special purpose vehicle (SPV) or conduit company, which receives dividends or interest from Indonesia, may be subject to a beneficial ownership review conducted by the Indonesian Tax Office (ITO). No clear regulation has been provided with regard to the interpretation of beneficial ownership. However, the ITO has recently revoked a circular which had set out guidelines that specifically excluded SPVs or conduit companies from being considered the beneficial owners. The current regulation suggests that the recipient must be the true owner and stipulates that further regulations will follow.

3. Experience/practice Focus on beneficial ownership is fairly recent. In the past, the production of a valid certificate of residence (COR) was generally sufficient for the recipient to enjoy treaty benefits. The above revocation of the regulation setting out beneficial ownership criteria, in the absence of further regulations, would seem to revert to this approach.

4. MAP There is no track record regarding the resolution of treaty issues through competent authority procedures. Indonesia has unilaterally cancelled one treaty (Mauritius) and renegotiated others in the past 10 years.

Level of proof required to be To qualify for the exemption or reduced tax, the Indonesian company must obtain submitted to the tax authorities for a a COR from the investor to prove residence and eligibility for treaty relief. The COR

claim for reduced WHT rate must be issued by the competent authority, such as the tax authority for the other jurisdiction.

The COR should be submitted to the ITO prior to the date of payment. In practice, the ITO usually accepts that treaty benefits may apply if a valid COR can be produced on demand; however it is recommended to obtain and submit the COR in advance of any payments.


Japan

Introduction Japan is a high tax jurisdiction. It is not uncommon for investment funds to invest in Japan from countries which have a favorable DTA with Japan. However, Japan has anti-treaty shopping provisions in its domestic law, which allows tax authorities to challenge treaty transactions based on different factors including beneficial ownership of the income or investments. The Japanese tax authorities have historically taken a hard line against foreign investors who appeared to be treaty shopping, especially in cases where no Japanese tax was paid on the Japanese source income. In the recently concluded DTAs, extensive limitations of benefits, or anti-treaty shopping provisions, have been included.

Contact

David Lewis Tax Partner KPMG in Japan Tel: +81 (3) 6229 8219 [email protected]

Key messages

For a foreign investor to access the benefits of a treaty with Japan, physical l in its location in its place of residence is a must; but in the absence of being able to also show beneficial ownership, it is unlikely to be sufficient to withstand rigorous challenge by the tax authorities.

General taxation

Tax rate Foreign corporations are subject to tax in Japan on their Japanese source income. The scope of the taxable income and the manner in which the income is taxed varies depending on the types of income that the foreign corporation is deriving. Under the domestic law, a foreign corporation which does not have an agent or physical presence PE in Japan is generally subject to corporation tax at 30 percent or WHT at 20 percent. For foreign corporations with a PE in Japan, the tax rate is approximately 42 percent, comprising of 30 percent national corporation tax and approximately 12 percent local tax.


Domestic WHT rate on payments of Under domestic law, dividends and interest paid to non-residents is usually subject dividends and interest to the fund to WHT of 20 percent. Reduced WHT rates however apply to the following income:

• Dividendsfromlistedshares,whicharesubjecttoareducedWHTof7percent until 31 March 2009 and 15 percent thereafter if the non-resident shareholder owns not more than 5 percent of the outstanding stock

• Interestfromgovernmentbonds,bondsissuedbyJapanesecorporationsand quasi-financial products, which are subject to a reduced WHT of 15 percent.


WHT on payment of dividends Under the commonly used DTAs, dividend WHT can typically be reduced to a range and interest to the fund under of 0 percent to 15 percent subject to certain ownership requirements and holding

commonly used DTAs period. Interest WHT on the other hand can typically be reduced to 10 percent, but sometimes to 0 percent for banks and similar financial institutions.

Treatment of gains arising on the For a Japanese company, gains from sale of investments are generally treated as sale of investments under domestic part of its ordinary taxable income and are subject to corporation tax at an effective

law tax rate of approximately 42 percent.

If a Japanese company realizes a gain from its land or other similar property located in Japan, such a gain is also subject to a five percent surtax. However, if the land has been held for a short term (a continuous period of five years or less), the surtax is 10 percent. This surtax has been suspended until December 31, 2008. In fact, it has been suspended since 1998 on an annual basis as a tax incentive. Given the current market condition, it is possible that the surtax will continue to be suspended for 2009.

Under domestic law, a foreign investor is not subject to tax on the gains arising from sale of shares in Japanese companies unless the conditions under the so-called 25 percent rule or real estate holding company (REHC) rule are satisfied. For a foreign corporation with no PE in Japan, the tax rate would be 30 percent where the conditions below are satisfied.

Twenty-five percent rule

A foreign investor is subject to tax on gains arising from sale of shares in Japanese companies if it:

• Togetherwithspeciallyrelatedshareholders,sells5percentormoreofthe shares in a Japanese company.

• Togetherwithspeciallyrelatedshareholders,ownsorhasowned25percent or more of the shares in the Japanese company at any time during the three 12-month fiscal periods from the last day of the fiscal year of sale.

The definition of specially related shareholder is complex and includes partners in a partnership.

REHC rule

A REHC refers to a company whose assets consist of 50 percent or more of real estate assets in Japan, or shares in such companies.

A foreign investor is subject to tax on gains from sale of shares in a REHC if it, together with specially related shareholders, owned as of the last day of the fiscal year preceding the year of sale, more than 5 percent of the REHC if it is listed or more than 2 percent of the REHC if it is privately owned. The definition of RECH is broad and includes foreign companies.

WHT on capital gains arising on sale Treaty rules governing the taxation of gains on sale of shares vary from treaty to of shares under the relevant DTAs treaty. Some provide the taxing right to the country where the investor is resident

(the resident country), and others to the country where the investee is resident (the source country). DTAs of Japan which adopt the resident country approach include Belgium, Germany, Ireland, Italy, the Netherlands, Spain, Switzerland, the UK and the US. However, the UK and the US have comprehensive limitatibenefits provisions in their treaties.

on of




1. Domestic law The domestic law in Japan has a general anti-avoidance provision (for closely held companies) as well as a substance over form provision (beneficial ownership rules). The substance over form provision states that, “where a person to whom the revenue from assets or a business seems to be legally imputed as merely a nominee, that is, the person does not enjoy the revenue, but a corporation other than the said person is enjoying the revenue, the revenue shall be considered as being reverted to the corporation which enjoys the revenue”. This allows tax authorities to attribute income to the beneficial owner of a conduit company without having to overtly ignore the relevant DTA. However, the law does not define what constitutes a nominee and there is no guidance as to what constitutes a nominee. In the past, this provision has been used by the tax authorities to challenge perceived treaty shopping cases. The tax authorities may challenge a treaty transaction based on various factors including the level of substance, the place of effective management and control and the beneficial ownership of the income or investment.

2. DTAs The requirements for assessing the reduced WHT rates vary from treaty to treaty. There has been a growing tendency for Japan to include more extensive limitation of benefits (anti-treaty shopping) provisions in its DTAs, for example the US in 2003, the UK in 2006 and Australia in 2008. Note that Japan’s DTAs generally permit the application of the domestic general anti-avoidance provisions.

3. Experience/practice There was a recent court case where the tax authorities sought to deny the treaty benefits claimed by a Dutch company. The decision was held in favor of the taxpayer probably because of the legalistic approach adopted by the tax authorities in pursuing the case. In spite of this, it is expected that the Japanese tax authorities will continue to take a hard line against perceived treaty abuse, especially in cases where no Japanese tax is paid on Japanese source income.

4. MAP In practice, for fund investments, it is not common for treaty issues to be resolved through MAP.

Level of proof required to be In claiming the reduced WHT rates or capital gains exemption (for new treaties), an submitted to the tax authorities for a application form duly signed is required to be submitted to the tax authorities by

claim for reduced WHT rate the day before payment or disposition is made. Residency certificates are required for newer treaties that contain limitation of benefits provisions. This is not an approval system but merely a filing.


Macau

Introduction The property market in Macau has seen strong growth in recent years, making Macau a popular place for property investment. A number of funds have been set up to invest in Macau property via offshore intermediate holding companies and are mostly incorporated in the British Virgin Islands or Bermuda.

Contact

Curtis Ng Tax Principal KPMG in Macau Tel: +85 2 2143 8709 [email protected]

Key messages

Generally speaking, there is no WHT on the payment of dividends, interest and capital gains on the sale of shares in Macau. Macau has only a limited tax treaty network where treaties were entered into with the Mainland China and Portugal.

General taxation

Tax rate Income earned by entities carrying out business activities in Macau is subject to Macau Complementary Tax (MCT). The maximum MCT rate is 12 percent.

Rental income from properties located in Macau is subject to Macau Property Tax (MPT). Certain exemptions from MPT are available for new buildings.

Domestic WHT rate on payments of Generally speaking, there is no WHT on payments of dividends; interest from a dividends and interest to the fund Macau investee to a non-resident, including the Fund; or on the realization of capital

gains. See below on treatment of gains arising on the sale of investments under domestic law.

However, if dividends are distributed by the Macau investee to a non-resident, including the fund, from its before-tax profits, or if the dividend will be claimed as a deduction by the Macau investee for MCT purposes, the dividend will be subject to MCT at rates mentioned above in the hands of the fund.


On the other hand, where the fund invests directly in real estate located in Macau, the fund, as an owner of a property located in Macau, is subject to MPT, irrespective of its residency and whether the property is rented out or self-occupied. The current MPT rates are 16 percent of the rental income for rented properties and 10 percent of the rental value determined by the Macau Finance Bureau (the government authority handling tax affairs) for non-rented properties. MPT levies are also subject to 5 percent Macau Stamp Duty surcharge which results in effective tax rates of 16.8 percent and 10.5 percent respectively for rented and non-rented properties.

An owner will be exempted from MPT in the first four years after the issuance of occupancy permit if the residential or commercial building is located in the Macau peninsula. For new buildings located in Taipa and Cotai islands, the exemption period is six years. The exemption also applies to buildings where major extension or renovation work has been undertaken and the costs of such extension or renovation are at least 50 percent of the current market value of the buildings. MPT will not be reduced by any tax treaty.

Treatment of gains arising on the In Macau there is no distinction between revenue and capital gains. Therefore there sale of investments under domestic is no separate regime for capital profits and all such profits are generally taxable as

law income for MCT purposes in the same manner as revenue profits.


Malaysia

Introduction Malaysia is a popular investee location for fund investments due to the favorable tax regime and the absence of WHTs on the payment of dividends or, with the correct structuring, gains arising on the disposal of investments. Malaysia encourages FDI by providing a number of incentives, particularly in export-oriented, high-tech industries and back office service operations.

Contact

Leanne Koh Executive Director KPMG in Malaysia Tel: +603 7721 7126 [email protected]

Key messages

No WHT on the payment of dividends and no capital gains on the sale of shares.

General taxation

Tax rate A non-resident entity, who carries on business in Malaysia and is in receipt of Malaysian sourced income from that business, is liable to Malaysian CIT. The current tax rate for corporations is 26 percent for the year of assessment 2008 and 25 percent for the year of assessment 2009 onwards.

The federal territory of Labuan has its own offshore legislation to govern offshore trading activities carried out with non-resident entities. An offshore company carrying on an offshore trading activity for the basis period for a year of assessment can enjoy a preferential rate of 3 percent of its audited net profits or elect to pay tax of RM 20,000 for a year of assessment.


Domestic WHT rate on payments of There is no WHT on payments of dividends from a Malaysian investee to a nondividends and interest to the fund resident, including the fund, or on the realization of capital gains. See below for

the treatment of gains arising on the sale of investments under domestic law.

A 15 percent WHT rate applies on payment of interest to a non-resident entity under domestic law. Some specific interest payments are exempted from this withholding requirement.

Furthermore, during the budget it was proposed that passive income, including commissions, guarantee fees and introducer’s fees (which do not fall under business income), would be subject to a 10 percent WHT effective from 1 January 2009.


WHT on payment of dividends There is no WHT on payments of dividends by a Malaysian investee to a nonand interest to the fund under resident.

commonly used DTAs For payments of interest to a non-resident person, the WHT rate may be reduced under the terms of certain DTAs. Malaysia’s tax treaties typically provide for reduced treaty rates from 5 percent to 15 percent for interest payments.

There are no specific treaty rate clauses which may reduce the WHT rate on passive income to be introduced from 1 January 2009.

Where WHT may be suffered in Malaysia, investors should consider whether their local tax laws permit credit to be given against any local taxation for taxation suffered overseas on different sources of foreign income.

Treatment of gains arising on the Generally, gains on the sale of investments are not subject to Malaysian income sale of investments under domestic tax if the gains are regarded as capital gains (i.e. gains which are not of a revenue

law nature). In addition, where a gain arising on the disposal of an investment is structured such that it arises offshore (so is non-Malaysian sourced), the gain will not be subject to Malaysian income tax.

WHT on capital gains arising on sale Not applicable of shares under the relevant DTAs



Domestic law Malaysian tax law includes a general anti-avoidance provision which enables the director general of the Inland Revenue to disregard or vary the taxation effect of a transaction where it is deemed that the taxation was motivated by tax avoidance.

DTAs To apply a reduced treaty rate of WHT on interest paid to a non-resident person a tax residence certificate is required to be submitted to the Malaysian Inland Revenue Board confirming the residence of the payee.

Further note Funds should note that Malaysia is expected to introduce thin capitalization rules from 1 January 2009 with further guidance expected to be issued in due course.


WHT on payment of dividends and interest to the fund under

commonly used DTAs

There is no WHT on payments of dividends by a Malaysian investee to a non-resident.

For payments of interest to a non-resident person, the WHT rate may be reducedunder the terms of certain DTAs. Malaysia’s tax treaties typically provide forreduced treaty rates from 5 percent to 15 percent for interest payments.

There are no specific treaty rate clauses which may reduce the WHT rate onpassive income to be introduced from 1 January 2009.

Where WHT may be suffered in Malaysia, investors should consider whethertheir local tax laws permit credit to be given against any local taxation for taxationsuffered overseas on different sources of foreign income.

Treatment of gains arising on the sale of investments under domestic

law

Generally, gains on the sale of investments are not subject to Malaysian incometax if the gains are regarded as capital gains (i.e. gains which are not of a revenuenature). In addition, where a gain arising on the disposal of an investment is structured such that it arises offshore (so is non-Malaysian sourced), the gain will not be subject to Malaysian income tax.

WHT on capital gains arising on sale of shares under the relevant DTAs

Not applicable



Domestic law Malaysian tax law includes a general anti-avoidance provision which enables thedirector general of the Inland Revenue to disregard or vary the taxation effect of a transaction where it is deemed that the taxation was motivated by tax avoidance.

DTAs To apply a reduced treaty rate of WHT on interest paid to a non-resident persona tax residence certificate is required to be submitted to the Malaysian Inland Revenue Board confirming the residence of the payee.

Further note Funds should note that Malaysia is expected to introduce thin capitalization rules from 1 January 2009 with further guidance expected to be issued in due course.

New Zealand

Introduction New Zealand has a growing investment and managed funds industry, which has been bolstered with the recent introduction of KiwiSaver (the Government’s voluntary work-based savings scheme) and new favorable tax rules for domestic savings and investment vehicles.

Dividends and interest sourced in New Zealand are generally taxable to nonresidents under New Zealand’s non-resident withholding tax rules (NRWT), but this WHT is reduced under DTAs. New Zealand is in the process of updating its DTAs (starting with Australia), and NRWT rates on dividends and interest are expected to be reduced significantly. New Zealand effectively relieves WHT on dividends where New Zealand company tax has been paid on repatriated profits. New Zealand interest payers can also elect to pay a 2 percent approved issuer levy (AIL), rather than NRWT on interest.

Contact

Paul Dunne Partner KPMG in New Zealand Tel: +64 9 367 5991 [email protected]

Key messages

Capital gains on the sale of shares are generally not taxed.

WHT on dividends and interest derived by non-residents is taxable at 15 percent and 10 percent respectively, under New Zealand’s DTAs. NRWT on dividends can effectively be refunded in certain situations.

Where interest is paid to a non-related foreign investor, the payer can elect to deduct a 2 percent AIL on repayments rather than WHT.

There are tax planning opportunities with the new PIE and international tax regimes for savings and investment vehicles.

General taxation

Tax rate A person who carries on business in New Zealand (i.e. through a PE), or is in receipt of New Zealand sourced income, is taxable on their profits at the persons’ marginal tax rate. Where the person is a company or a widely held investment vehicle the applicable tax rate is 30 percent from the 2008-09 year of assessment.


Domestic WHT rate on payments of There is WHT on payments of dividends or interest from a New Zealand company dividends and interest to the fund to a non-resident. The WHT arises under New Zealand’s NRWT rules. The WHT

rates are 30 percent on dividends and 15 percent on interest. These WHT rates are substantially reduced under New Zealand’s DTAs.

Where interest is paid to a non-associated foreign investor, the payer can elect to deduct 2 percent AIL on repayments, rather than NRWT.


WHT on payment of dividends WHT on interest and dividends are reduced under New Zealand’s DTAs to 10 and interest to the fund under percent and 15 percent respectively. New Zealand also operates a foreign investor

commonly used DTAs tax credit (FITC) mechanism, which effectively refunds NRWT on dividends if New Zealand company tax has been paid in respect of the repatriated profits.

Treatment of gains arising on the Capital gains arising on the sale of equity investments are generally not taxable sale of investments under domestic under New Zealand’s domestic law unless the person is considered to be in the

law business of trading in the investments or have acquired the investments for the purpose of resale.

New Zealand has a comprehensive regime which taxes New Zealand tax resident entities and fixed establishments of non-residents on all gains and losses from financial arrangements.

Where a non-resident invests directly in real estate located in New Zealand and derives rental income, the rental income will be treated as New Zealand sourced and subject to tax in New Zealand. The tax payable is not normally able to be relieved under New Zealand’s DTAs.

Under recently introduced rules for New Zealand managed funds (called PIEs), share trading income of a PIE is not taxable if the shares are in New Zealand companies or certain resident listed Australian companies. The tax rate on PIE income is capped at 30 percent and distributions made by PIEs are not taxable, and no WHT liability would arise in relation to these amounts.

Under changes to New Zealand’s international tax rules for outbound portfolio share investments, tax is imposed on a maximum deemed income return of 5 percent (notwithstanding that the actual return, including dividends received, may be higher). There is scope for a PIE type entity to be set up to invest offshore, and be taxed on a maximum return of 5 percent.

WHT on capital gains arising on sale There is no WHT on realized capital gains. There are anti-avoidance rules to stop of shares under the relevant DTAs re-characterization of income as capital gains.



1. Domestic law New Zealand’s domestic law contains anti-avoidance provisions aimed at preventing the re-characterization of dividends as capital gains, for example. However, the existence of anti-avoidance rules has generally not acted as a constraint to investment in New Zealand. Recently introduced tax rules for PIEs have also made the investment tax landscape more favorable.

2. DTAs The applicable WHT rate is self-assessed and there are no special requirements for a foreign investor to receive reduced WHT rates on interest and dividends under a DTA, other than the investor being tax resident in the relevant treaty state. New Zealand is presently renegotiating its DTAs with Australia and the United States. A likely outcome will be reductions in WHT rates on dividends and interest. The new treaties may therefore contain treaty shopping and limitation of benefit articles.

3. MAP New Zealand’s DTAs contain MAP to deal with situations where a tax liability arises in both New Zealand and the treaty country and there is no other tie breaker provision operative.

Level of proof required to be Not applicable, but see comments above. submitted to the tax authorities for a

claim for reduced WHT rate


Pakistan

Introduction Under Pakistan’s tax laws, the tax implications for investments made by nonresident companies or foreign funds would generally be the same as for any resident person. However, reduced tax rates and exemptions or concessions may be available under certain tax treaties where the necessary criteria apply.

Contact

Saqib Masood Head of Tax Function KPMG in Pakistan Tel: +92 21 5682290 [email protected]

Key messages

Exemptions from some gains on Pakistan investments until June 13, 2010.

Pakistan’s tax treaties do not offer the benefit of reduced WHT rates for interest or dividend payments.

Residents of certain countries may benefit from a capital gains exemption under their jurisdiction’s DTA with Pakistan.

General taxation

Tax rate Companies with income falling under the normal tax regime would generally be subject to income tax at a rate of 35 percent in Pakistan. Small companies may benefit from reduced rates.

Additionally, there is a final tax regime which applies to various specified sources of income, such as income from real property, with differing rates dependent on the source of income. Rental income from real estate, for example, is taxed at progressive rates ranging from 5 to 10 percent. The applicable amount of tax is required to be withheld at source.


Domestic WHT rate on payments of Dividends paid by a Pakistan resident company are subject to 10 percent taxation dividends and interest to the Fund deducted at source as a final tax. A reduced rate of 7.5 percent may be available

for companies involved in the power industry, subject to conditions.

Interest payments made by a Pakistan resident company to a non-resident having no PE in Pakistan attract 10 percent WHT under the domestic law.

Certain interest payments to non-resident / foreign companies are exempt from tax provided the terms or loan agreement or instrument is approved by Federal Government and on fulfillment of prescribed conditions. Similarly, interest derived from foreign currency accounts held with authorized banks in Pakistan or certificate of investment issued by investment banks in accordance with Foreign Currency Accounts Scheme introduced by State Bank of Pakistan is also exempt from tax.


WHT on payment of dividends In the case of dividends or interest paid to non-residents, the treaty rates are not and interest to the Fund under generally lower than the applicable domestic WHT rates and so do not offer a tax

commonly used DTAs saving benefit.

Treatment of gains arising on the Capital gains are generally taxable at the normal tax regime rates. If the asset is sale of investments under domestic held for more than one year then only 75 percent of the gain is subject to tax.

law. There are exemptions from taxation for gains on sale of certain investments such as shares listed in Pakistan, up to June 13, 2010.



1. Domestic law Pakistan’s domestic tax law includes a general anti-avoidance provision enabling the tax authorities to:

• Re-characterizeatransactionoranelementofatransactionthatwasenteredinto as part of a tax avoidance scheme

• Disregardatransactionthatdoesnothavesubstantialeconomiceffect;or

• Re-characterizeatransactionwheretheformofthetransactiondoesnotreflect the substance.

Pakistan also has transfer pricing and thin capitalization rules.

2. Double tax agreements Double taxation agreements signed by Pakistan to date do not specifically restrict the application of domestic anti-avoidance provisions.

The tax treaties generally allow for the taxation of immovable property in the jurisdiction in which the asset is located.

Some tax treaties provide that capital gains in respect of shares and assets, with certain exclusions, will be taxed in the country where the recipient is resident. Therefore, such double taxation agreements may be used beneficially to prevent the taxation in Pakistan of certain capital gains on the sale of shares. To take advantage of such treaties the gain must arise to a person resident in a relevant treaty country and they must be able to demonstrate that they are the beneficial owner of the income.

3. Experience/practice Generally the tax authorities in Pakistan do not challenge the application of double taxation agreements. Instances of referrals under the mutual agreement procedures are rare. However, a non-resident may seek advance ruling regarding tax implications from the Federal Board of Revenue.

Level of proof required to be In order to obtain a nil / reduced rate WHT certificate, the tax authorities generally submitted to the tax authorities for a require copies of appropriate base documentation / agreements confirming

claim for reduced WHT rate beneficial ownership of the income. They will also require evidence of the tax residence of the recipient from the tax authority of the relevant treaty country.


Philippines

Introduction Companies that want to position themselves in the Asia-Pacific region have a wide range of advantages for choosing the Philippines as an investment site. Foremost among these is the country’s strategic and centrally located position, natural resources and abundant supply of highly trainable and English-speaking labor. It has become an attractive business destination particularly for global businesses seeking to establish offshore service operations.

Contact

Herminigildo G. Murakami Tax Principal KPMG in Philippines Tel: +63 2 885 0117 [email protected]

Key messages

Preferential WHT rates are imposed on the payment of dividends to funds located in jurisdictions that do not impose a tax on dividends. Preferential WHT rates on the payment of dividends and interest are also available under relevant DTAs. A low stock transaction tax, in lieu of capital gains tax, is imposed on the sale of shares listed and traded through the Philippine stock exchange. In addition, the sale of listed and unlisted shares by residents of countries with existing DTAs with the Philippines may be exempt from stock transaction tax and capital gains tax, subject to qualifying conditions.

General taxation

Tax rate The CIT rate for resident companies is 35 percent of the taxable income. Nonresident companies are taxed at 35 percent of the gross income. The tax rate will be reduced to 30 percent from January 1, 2009.

Minimum CIT of 2 percent of gross income is imposed on resident companies when it is greater than the regular CIT.


Domestic WHT rate on payments of In general, the final WHT on payment of dividends from a Philippine investee to a dividends and interest to the fund non-resident, including a non-resident fund, is 35 percent (30 percent beginning

January 1 2009).

The WHT is reduced to 15 percent if the country in which the fund is domiciled, does not subject such dividends to taxation or allows a tax sparing credit equivalent to 20 percent (15 percent beginning January 1 2009). The WHT on dividends may be further reduced to 10 percent under existing DTAs, subject to qualifying conditions.

The final WHT on payments of interest on foreign loans from a Philippine investee to a non-resident, including the fund, is 20 percent. The WHT rates may be further reduced to 10 percent under existing DTAs, subject to qualifying conditions.


WHT on payment of dividends In general, the WHT rate on the payment of dividends under commonly used DTAs and interest to the fund under ranges from 15 percent to 25 percent. The WHT rates are lowered to a range of 10

commonly used DTAs percent to 20 percent, if qualifying conditions apply.

The WHT rate on interest under commonly used DTAs ranges from 10 percent to 15 percent.

Treatment of gains arising on the There is no capital gains tax imposed on the sale of shares listed and traded sale of investments under domestic through the Philippine stock exchange. In lieu of capital gains tax, the sale of

law shares listed and traded through the Philippine stock exchange is subject to a stock transaction tax of 0.5 percent of the gross selling price or gross value of the shares.

Net capital gains realized during the taxable year from the sale of shares of stock in a domestic corporation not sold through the stock exchange are taxed at 5 percent of the net capital gains not exceeding PHP 100,000 and 10 percent for the amount in excess of PHP 100,000.

Gains presumed to have been realized on the sale of land and/or buildings treated as capital assets are subject to a final tax of 6 percent on the higher of the gross selling price or fair market value.

Income from the sale of capital assets other than shares of stocks, land and buildings are treated as an ordinary income and subject to 35 percent CIT. This rate will be reduced to 30 percent from January 1, 2009.

WHT on capital gains arising on sale Capital gains on the sale of unlisted shares are taxed at 5 percent and 10 percent, of shares under the relevant DTAs while listed shares are subject to a stock transaction tax of 0.5 percent. The sale

of listed and unlisted shares by residents of countries with existing DTAs with the Philippines may be exempt from capital gains tax and stock transaction tax, subject to qualifying conditions.



1. Domestic law The Philippines has no specific or general anti-avoidance provisions. However, Section 50 of the Philippine Tax Code gives the Commissioner of Internal Revenue the power to allocate income and expenses between or among related parties in order to prevent the evasion of taxes or to clearly reflect the income among related parties.

2. DTAs The DTAs entered into by the Philippines with other countries generally require a minimum percentage of direct holdings (ranging from 10 percent to 25 percent) by the recipient company in order to qualify for the reduced WHT rates on dividends.

3. Experience/practice The Philippine tax authorities have consistently adhered to the provisions of DTAs and stringently applied the requirements for preferential treaty rates or reduced WHT rates.

4. MAP DTAs entered into by the Philippines contain MAP through which competent authorities consult to resolve disputes regarding the application of treaty provisions.


Level of proof required to be To apply reduced WHT rates under relevant DTAs, an Application for Relief from submitted to the tax authorities for a Double Taxation must be filed with the International Tax Affairs Division (ITAD) of

claim for reduced WHT rate the Philippines’ Bureau of Internal Revenue at least 15 days before the payment of dividends or interest. The application must be accompanied by supporting documents justifying the relief sought, as follows:

• Letterprovidinginformationontransactionscoveredbytreatyprovisionsand requested tax treaty treatment for such transactions, and legal justification

• Originalcopyofproofofresidenceofincomerecipientsuchascertificationby the tax authority of its country or a certified copy of the Articles of Incorporation duly certified by the Securities and Exchange Commission (or its equivalent)/ Philippine Consulate/Embassy of the respective country

• OriginalcopyofcertificationfromPhilippineSecuritiesandExchange Commission that income recipient is/is not registered to engage in business in the Philippines

• OriginalcopyofSpecialPowerofAttorneydulyexecutedbytheincomerecipient authorizing the withholding agent/representative in the Philippines to file claim for tax treaty relief or certification by the withholding agent/representative that he is the duly authorized representative in the Philippines of the income recipient

• OriginalcopyofnotarizedcertificationbytheSecretaryofthePhilippine corporation showing the number and value of the share of the applicant and percentage of latter’s ownership in the Philippine corporation as of the date of record/transaction

• CertifiedcopyofBoardResolutionapprovingthedeclarationofdividend(for dividends only)

• CertifiedcopyofBoardofInvestment(BOI)Registration

• CertifiedcopyofdulynotarizedContractofLoanorLoanAgreement(forinterest only)

• Certifiedcopyofproofofinwardremittancesofforeignloan(forinterestonly)

• Certifiedcopyofproofofloanguaranteeorinsurance,oracertificationof financing (direct or indirect) by the foreign government or any financial institution wholly owned by the foreign government or any financial institution designated in the treaty (for interest only)

• PhotocopyofWHTreturnswhichreflecterroneouspaymentsandtheAnnual WHT Return (to be submitted only when applying for tax credit/refund).

In order to avoid a potential deficiency in WHT assessments, it is ideal that a tax treaty relief ruling is first obtained from the Philippine tax authorities before payments are made to non-residents.

In the case of payments made prior to obtaining approval from the Philippine tax authorities, if relevant, and upon which the regular domestic WHT rates have therefore applied, an application for tax credit/refund may be made after the payment for the difference in WHT rate which would have been payable if the treaty rate had been applied to the payment. The claim must be filed within a two-year prescriptive period.


Singapore

Introduction Singapore is a popular jurisdiction in which to management activities due to the favorable taDTAs and continued efforts taken by the Singenhance the fund management industry.

Contact

Tay Hong Beng Executive Director, Tax KPMG in Singapore Tel: +65 6213 2565 [email protected]

operate and conduct fund x regime, extensive network of apore government to promote and

Key messages

Singapore has an extensive network of DTAs, no WHT on the payment of dividends and no capital gains tax.

Singapore also offers an attractive rate of tax of 10 percent on the fund manager’s qualifying fee income under the Financial Sector Incentive (FSI) (Fund Management) Company Award (FSI-FM).

General taxation

Tax rate Singapore adopts a territorial basis of taxation and income tax is imposed on income accruing in or derived from Singapore. Foreign sourced income would generally not be taxable in Singapore unless it is received or deemed received in the country. However, specified foreign income such as foreign dividend income, foreign branch profits and foreign sourced service income may be exempt from Singapore income tax even if it is received in Singapore, subject to certain conditions.

Where the fund invests directly in real estate located in Singapore and derives rental income, the rental income will be regarded as Singapore sourced income and subject to Singapore income tax at the prevailing corporate tax rate.

At the time of writing the prevailing corporate tax rate is 18 percent.

Singapore also offers tax exemptions to foreign funds. Subject to certain conditions being met, funds managed by fund managers in Singapore can also qualify for income tax exemptions. A tax exemption is granted to specified income earned by a qualifying fund from designated investments. This incentive is applicable to funds constituted as trusts as well as those which are incorporated as companies outside Singapore and not tax resident in Singapore.



Domestic WHT rate on payments of There is currently no WHT on the payment of dividends by a Singapore resident dividends and interest to the fund company.

The domestic WHT rate for payment of interest to a non-resident person is 15 percent and it is levied on the gross amount (18 percent if it is paid to a PE in Singapore of a non-resident person). However, where the lender (i.e. the fund) is a tax resident in a jurisdiction that has concluded a DTA with Singapore, the applicable WHT rate may be reduced to the appropriate treaty rate, in some cases nil.

WHT on payment of dividends No dividend WHT. and interest to the fund under Singapore has DTAs with over 50 countries which may provide for preferential tax

commonly used DTAs rates or tax exemption for interest payments subject to conditions.

Where the fund is located in a low tax jurisdiction (e.g. Cayman Islands, British Virgin Islands or Bermuda) where Singapore does not currently have a DTA with these countries, the domestic WHT of 15 percent would apply for payment of interest to the non resident fund.

Treatment of gains arising on the For Singapore income tax purposes, only profits or gains arising from a trade sale of investments under domestic or business would be subject to tax. Currently, there is no capital gains tax in

law Singapore. However, what constitutes a capital gain is not defined in the tax legislation. The distinction between capital gains versus revenue gains (the latter being taxable gains) must be decided based on the facts and the whole circumstances of the case. Generally, gains on the sale of investments are not subject to Singapore income tax if the gains are regarded as capital gains (i.e. gains which are not of a revenue nature).

WHT on capital gains arising on sale Not applicable of shares under the relevant DTAs




1. Domestic law There are no specific anti-avoidance rules for treaty shopping. However, Singapore has a general anti-avoidance rule which disregards the tax effect of schemes entered into with a primary or dominant purpose of obtaining a tax benefit. In the event where the Inland Revenue Authority of Singapore (IRAS) has reason to believe that the purpose or effect of any arrangement is directly or indirectly to reduce or avoid any tax liability which otherwise would have been imposed, it may invoke anti-avoidance provisions under Section 33 of the Singapore Income Tax Act (SITA) to disregard the arrangement and make any tax adjustments as it deems appropriate so as to counteract any tax advantage obtained under the arrangement. In essence, Section 33 of SITA provides the IRAS with sweeping powers to negate any tax-avoidance schemes that may be established by taxpayers in a wide range of situations.

Under Section 33 of the SITA, IRAS may disregard or vary any arrangement that has the effect of:

• Alteringtheincidenceofanytaxwhichispayablebyorwhichwouldotherwise have been payable by any person

• Relievinganypersonfromanyliabilitytopaytaxortomakeareturnunderthe SITA; or

• Reducingoravoidinganyliabilityimposedorwhichwouldotherwisehavebeen imposed on any person by the SITA.

2. DTAs Tax treaty provisions usually take precedence over domestic law unless the transaction is regarded as an anti-tax avoidance scheme as highlighted above.

3. Experience and practice The IRAS generally endorses the provisions of the DTAs concluded by Singapore where the requirements (beneficial ownership, limitation of benefits, substance) have been satisifed unless the Section 33 anti-tax avoidance provisions apply.

4. MAP This MAP for resolving difficulties arising from the application of the provisions of a DTA is commonly used by the IRAS.

Level of proof required to be For a reduced rate of WHT under a DTA to be applied to a relevant interest submitted to the tax authorities for a payment made to a non-resident recipient, the IRAS would normally require the

claim for reduced WHT rate recipient to submit a COR, duly completed and endorsed by the Tax Authority in the contracting state to the IRAS on an annual basis. This is required to verify that the recipient is indeed a tax-resident of the relevant treaty country.


Sri Lanka

Introduction Foreign investment in equity securities including unit trusts, other than in a few restricted activities, have been fully liberalized, provided investment funds are repatriated in foreign currency via a special account known as a Share Investment External Rupee Account (SIERA) with any commercial bank.

Likewise, investments in Government Debt Securities are also free of control provided investment is made via funds repatriated in foreign currency and via an account known as a Treasury Bond External Rupee Account (TIERA) with any commercial bank. Investments in any other debt securities are subject to regulatory control.

Contact

Premila Perera Head of Tax KPMG in Sri Lanka Tel: + 94 11 2343106 [email protected]

Key messages

Gains derived from the sale of shares listed on the Sri Lanka Stock Exchange, whether held for investment or trading purposes, and also from Government Securities, are free of income tax in Sri Lanka.

The acquisition of real estate by a non-citizen or a Sri Lanka company with a foreign equity holding exceeding 25 percent is subject to a 100 percent transfer tax on the value of the property.

The repatriation of gains from sale of real estate would also be subject to Exchange Controls.

General taxation

Tax rate A person, who carries on business in Sri Lanka and is in receipt of income sourced from Sri Lanka, is chargeable to Sri Lanka income tax. The currently prevailing general corporate rate of tax is 35 percent. However, certain business sectors enjoy a concessionary rate of 15 percent. Unit trusts are chargeable to tax at 10 percent.



Domestic WHT rate on payments of The WHT rate on payment of dividends from Sri Lanka is 10 percent. The WHT tax dividends and interest to the fund so deducted would be a final tax. Distributions made by a unit trust would not be

subject to WHT.

Corporate Debt

Interest is subject to a WHT of 10 percent which would be a final tax if the security is purchased via inward remittances of foreign currency.

Government Debt

Interest on Dollar Denominated Bonds issued by the Government of Sri Lanka are tax exempt. Investments in Sri Lanka Rupee Bonds are subject to a 10 percent withholding of tax on initial issue to primary dealers and this would be a final tax where the TIERA method is used for investments.

Other debt

Interest on debts not falling within the above confines would ordinarily be subject to a withholding of tax at 15 percent except where a reduced rate may be applied under a DTA.

WHT on payment of dividends The deduction of 10 percent tax at source on dividends is a statutory obligation and interest to the fund under on the distributing company. If a DTA provides for tax free dividends or at a lower

commonly used DTAs. rate, the investor would have to obtain a refund of the excess tax deducted at source.

In the case of Corporate Debt Securities, where an applicable DTA provides for a lower rate of tax, a direction would have to be obtained from the Sri Lanka Revenue Authorities for the payor to be permitted to withhold at the reduced rate.

In the case of Government Debt Securities, the withholding of tax being at the original point of issue, a refund claim would have to be submitted to the tax authority if a treaty provides for a lower rate or an exemption from tax.

Where a fund is recognized as a financial institution in the home country, some of Sri Lanka’s DTAs provide for an exemption in Sri Lanka from tax on any interest irrespective of whether on corporate / government debt securities.

Treatment of gains arising on the There is currently no taxation of capital gains in Sri Lanka. sale of investments under domestic Where shares are traded on the Sri Lanka stock exchange a share transaction levy

law. applies of 0.2 percent on both the buy and sell side of the transaction.

Profits from disposals which are of a revenue or trading nature are generally taxable.




1. Domestic law The domestic law contains a general anti-avoidance provision whereby artificial and fictitious transactions or dispositions that result in the reduction of tax can be disregarded by the local Revenue Authorities and the actual income from such transactions may be assessed on the investor.

2. DTAs Ordinarily, the DTAs do not provide a more beneficial rate of tax on dividends compared to the current 10 percent domestic withholding rate. However, where treaties provide for a credit for underlying corporate tax in the home country or for tax sparing relief, beneficial ownership of the dividend income, and in some cases a minimum shareholding requirement, will be prescribed in the DTA.

Interest

A condition precedent to obtaining treaty relief in relation to interest is beneficial ownership of the income.

Where the fund investments into Sri Lanka are indirect or via an intermediate holding company, the Sri Lanka Revenue Authorities may consider the tax residence of the fund and intermediary in the application of treaty relief or enquire as to which party is the beneficial owner of the income.

The treaty with the USA contains limitation of the benefit provisions.

3. Experience/practice It is usual practice of the Sri Lanka Revenue Authorities to request the following prior to granting treaty relief:

• Evidenceoftaxresidency

• Forfinancialinstitutions;alicenseorsuchothermandatefromtheRegulatory Authority of the home country which endorses such status

• Evidenceofbeneficialownershipoftheincome.

4. Mutual agreement procedures Although the DTAs provide for this, it has not been a common practice in Sri Lanka up to the present time to seek competent authority agreements or rulings.


South Korea

Introduction Many foreign funds invest in South Korea today. The Korean government is promoting foreign investment and makes efforts to provide a favorable investment environment. In addition, the Korean government has recently enacted several changes of domestic tax law to reduce the tax burden. These changes are currently awaiting congress approval.

Contact

Jae Won Lee Senior Partner KPMG in South Korea Tel: +82 2 2112 0955 [email protected]

Key messages

Korea imposes high rates of WHT on dividends, interest and gains. In light of the fact that Korea has signed a significant number of DTAs with foreign countries, those eligible are entitled to enjoy reduced WHT rates on dividends, interest, and may be exempt from taxes on capital gains earned from their investment in Korea.

General taxation

Income tax rate A domestic corporation is liable to tax on their worldwide income whereas a foreign corporation is liable to tax in Korea on Korean sourced income. The CIT rates are 14.3 percent (including resident surtax) for the first KRW 100 million of taxable income and 27.5 percent thereafter.

The CIT rate is proposed to be reduced to 11 percent for the first KRW 200 million of taxable income and 22 percent thereafter from 2010 (12.1 percent for the first KRW 200 million of taxable income and 24.2 percent thereafter in 2009). However, the relevant law is currently under review and has not been enacted by Congress at the time of writing.


Domestic WHT rate on payments of If a domestic company pays dividends or interest to a foreign shareholder or dividends and interest to the fund creditor whose country of residence has not signed a tax treaty with Korea, Korean

domestic law imposes 27.5 percent WHT on dividends or interest payments. However, foreign funds may be entitled to reduced WHT rates under applicable DTAs.

Under the proposed revision to the domestic tax law, the domestic WHT rate would be reduced to 22 percent on dividends and interest distributed to foreign residents from 2009.


WHT on payment of dividends WHT rates under Koreas DTAs vary from 0 percent to 16.5 percent depending on and interest to the fund under the applicable tax treaty.

commonly used DTAs

Treatment of gains arising on the Profits on transfer of shares is the lower of (i) 11 percent of the gross amount sale of investments under domestic received, or (ii) 27.5 percent (22 percent under the proposed revision to the

law domestic tax law from 2009) of the net gain on transfer.

There is an exemption from tax on capital gains where such securities are publicly traded on the open market and the foreign seller owns less than 25 percent of the total shares in the Korean entity.

WHT on capital gains arising on sale A number of Korea’s DTAs provide a tax exemption for eligible foreign funds’ gains of shares under the relevant DTAs on sale of shares. However, if the investee is considered to be a real estate rich

company, then the foreign fund may still be subject to domestic tax on the gain.



1. Domestic law In general, if a foreign fund claims reduced WHT rates under a DTA, this will generally be accepted provided the beneficial ownership and residency requirements are satisfied. However, if the fund claims tax exemption under a DTA, then the WHT agent has to submit a tax exemption application with required documents to the tax authorities within a specified due date.

The Ministry of Strategy and Finance has announced a list of jurisdictions for which a special WHT regime is applicable which would require the Korean withholding agent to withhold at the domestic rate in the first instance and subsequently the foreign-investor would have to apply for any reassessment of taxes upon proving his beneficial ownership of the Korean-source income and the applicability of a lower treaty rate. Currently, Labuan (Indonesia) is the only jurisdiction designated on the list.

• residencystatusintherelatedtreatycountryfortaxpurposes

• beneficialownershipoftheincome.

2. DTAs In principle, to be eligible for the treaty benefits (e.g., reduced treaty WHT rate), the following two conditions must be satisfied in accordance with the provisions of the DTA and Korean tax laws.

3. Experience/practice The Korean tax authority has sought to challenge circumstances where they perceive there to be fund structures where there is an intention to take advantage of a reduced treaty rate through the use of conduit entities or treaty shopping.

Where there is a need for a non-resident fund’s investment into Korea to be made indirectly then the fund should ensure that there is sufficient commercial justification and evidence to substantiate which entity is the beneficial owner of any dividend or other income derived from the Korean investment and which supports the tax residence of that entity as being within the relevant treaty jurisdiction.


4. MAP Advance clearance procedures for fund structures are not available. Should there be disagreement in relation to the application of provisions under a DTA then it may be appropriate to apply to the competent authority for an opinion.

Level of proof required to be There is no specific guidance issued by the Korean tax authority in relation to their submitted to the tax authorities for a minimum requirements. Each situation is generally treated on a case by case basis.

claim for reduced WHT rate Where the special WHT regime applies (Ministry of Strategy and Finance list referred to above) or a tax exemption is being sought under a particular treaty then an application should be made to the tax authority to apply the treaty provisions. In the latter situation the foreign company must submit an Application for WHT Exemption together with a residency certificate to the Korean payor company. The Korean payor company in turn will review the submitted application, and then submit it to the relevant tax office by the 9th day of the following month after the first payment is made.

Where a reduced treaty rate can be applied for WHT then in the first instance the rate can be effectively self assessed between the parties. For a Korean investee, it would be recommended that they obtain a COR from the payee and ensure that they satisfy themselves that the beneficial owner of the income is the payee and not a third party prior to applying any reduced treaty rate of WHT.

The payment of WHT should be made to the district tax office no later than the 10th of the following month after each payment. If the withholding agent (i.e. the Korean payor) fails to withhold taxes or the correct amount of taxes, the withholding agent may be subject to penalties (which range from 5 to 10 percent of the under-withheld taxes) in addition to the additional taxation to be paid over.


Taiwan

Introduction Taiwan has generally been considered to have a relatively stable, capitalistic economy, creating an excellent investment environment. The government has promoted investment by establishing a free and open investment system, and by providing a conducive environment for corporate operations. The government is gradually reducing restrictions on foreign investments and trade, is seeking to further encourage the private sector and is continuing to reform of the financial sector.

Economic policy has targeted upgrading manufacturing and encouraging the development of services, especially with the relocation of manufacturing processes to mainland China.

Although the dominant political issue continues to be the relationship between Taiwan and China, there are substantial trade and investment links between the two economies. Despite restrictions on cross-strait links, China remains one of Taiwan's largest export markets and source of imports, as well as a major destination for FDI.

Contact

Stephen Hsu Tax Partner KPMG in Taiwan Tel: +886 2 8101 6666 ext. 01815 [email protected]

Key messages

The payment of dividends or interest will normally be subject to WHT at 20 percent without taking into consideration of the treaty.

General taxation

Tax rate The income tax rate for companies is normally 25 percent.

Generally, non-resident individuals and foreign corporations without a fixed place of business or a business agents within Taiwan are subject to WHT at source with respect to their Taiwan source income.

Upon the outward distribution of dividends or interest to non-residents, normally it will be subject to WHT at 20 percent unless such WHT rate can be reduced under treaty relief.


Treatment of gains arising on the Capital gains arising from the sale of shares and interest-bearing securities are sale of investments under domestic exempt from income tax. However, the transaction itself will be subject to STT at a

law rate of 0.3 percent of the transaction price.


Domestic WHT rate on payments of The domestic WHT rate on payments of dividends to non-residents is 20 percent dividends and interest to the fund provided the investment is an approved foreign investment. A 20 percent WHT rate

similarly applies for interest payments.

WHT on payment of dividends Under the majority of Taiwan’s DTAs, the WHT rate on payment of dividends or and interest to the fund under interest can be reduced to 10 percent.

commonly used DTAs



1. Domestic law Taiwan does not have any general anti-avoidance or anti-treaty shopping rules within its domestic legislation.

2. DTAs The term beneficial owner is not clearly defined under the currently applicable Taiwan tax laws or DTAs. However, under current practice and in accordance with the Taiwan Guidelines for the Application of DTAs, for a non-resident company to avail themself of the reduced WHT rate on dividends or interest, it is required to submit a COR proving its tax residence status and documents identifying it as the beneficial owner of the dividends or interest.

3. Experience/practice For a foreign investor to enjoy the benefit of a reduced WHT under a DTA, they must either submit the required documents to the withholding agent, the Taiwanese payor, before the distribution of dividends/interest (for relief at source), or submit a reclaim for the excess tax withheld after the distribution of dividends/ interest to the Taiwanese tax authority.

Under the relief at source approach, the WHT position is. As such, challenges from the tax authority are less common when that approach is adopted although they can still arise. By contrast, where the foreign investor seeks a tax reclaim from the tax authority following the payment of dividends or interest upon which the higher domestic WHT rate was applied, the tax authority will normally review the reclaim in detail and may request additional documents from the foreign investor or withholding agent to substantiate the claim.


Level of proof required to be Where the investment in Taiwan is made by a non-mutual fund foreign investor, the submitted to the tax authorities for a Taiwan Guidelines for the Application of DTAs stipulate that the foreign investor

claim for reduced WHT rate should provide the following documents to the withholding agent prior to the distribution of the dividends/interest:

• ACORissuedbythetaxauthorityoftherelevanttreatycountry

• Documentsidentifyingtheforeigninvestorasthebeneficialownerofthe income. For dividend income this might include share certificates/beneficiary receipts or dividend distribution calculation statements. For interest, this may include the loan contracts or deposit records, interest statements or other notices.

In a situation where the investment into Taiwan is made by a mutual fund, the tax authority normally views a mutual fund as a pass through entity and so the applicability of reduced treaty rates would generally be determined based on the tax status of the unit holders (their place of tax residence and confirming their beneficial ownership of the income etc.). A COR for each respective unit holder, issued by the relevant competent tax authority(ies) of the treaty country should be submitted to the withholding agent or tax authority as appropriate. The Certificate should indicate that the unit holder is a tax resident from the beginning of a given year to the date of dividend distribution, as well as the proportion of fund units invested.

Where Certificates of residence for the unitholders cannot be provided then the following alternative is generally accepted:

The mutual fund can provide its own COR along with the following supporting documents:

• Adeclarationletterissuedbythemutualfundwhichindicatesthepercentage of profit distribution or proportion of fund units invested/held by the unit holders located in the respective treaty countries. The declaration letter has to be authenticated by the Taiwanese consulate in each treaty country or verified in the treaty’s court of law or government agencies, or authenticated by statutory public notary.

• Alistofunitholdersandinformationregardingtheirnames,taxIDnumbers, addresses, units held or percentage of profit distribution, etc.

• Theprospectusorinvestmentproposalforthemutualfund.


Thailand

Introduction Thailand has a wide network of tax treaties with 52 countries, some of which may provide tax exemption from capital gains.

Contact

Wirat Sirikajornkij Robert Porter Tax Partner Tax Partner KPMG in Thailand KPMG in Thailand Tel: +66 2677 2423 Tel: +66 2677 2424 [email protected] [email protected]

Key messages

Interest and dividends are subject to WHT at 15 percent and 10 percent respectively. Capital gains arising to non-residents can be subject to 15 percent WHT, however this may be reduced to nil under the terms of certain DTAs.

Thailand has a fairly extensive range of different WHTs which are beyond the scope of this document. As with any other investment, if seeking to invest into Thailand it would be recommended that detailed advice is sought in respect of the specific tax issues pertaining to the particular investment.

General taxation

Tax rate Under the Thai Revenue Code (TRC), Thai companies and non-Thai companies carrying on business in Thailand are subject to CIT in Thailand at the normal rate of 30 percent.

Generally, under the TRC, a company incorporated under foreign laws which has an employee, an agent or a go-between to carry on its business and thereby derive income in Thailand, will be deemed to be carrying on a business in Thailand.

Investments in listed and non-listed shares, derivatives, interest bearing securities or deposits in Thailand by a non-Thai company should not constitute carrying on a business in Thailand, nor by themselves create a PE in Thailand.

WHT rate on interest and dividend payments

Domestic WHT rate on payments of Dividends and interest paid from or within Thailand to non-residents are subject to dividends and interest to the fund WHT on a gross basis at the following rates:

• Dividends:10percentWHT(i.e.listedandnon-listedshares)

• Interest:15percentWHT(i.e.interestbearingsecuritiesordeposits)


The definition of interest may include amounts paid under interest rate swaps, cross currency swaps, or cross currency interest rate swaps where a party to the swap is considered to be a borrower. Where there is no borrower under the swap arrangement, the swap payments should not be treated as interest income, and since it would not alternatively be income from the provision of services, it should not be subject to WHT.

There are various other WHT rates applicable in Thailand including WHT for royalties and certain types of services or goods. These are beyond the scope of this document.

WHT on payment of dividends Thailand’s tax treaties do not contain reduced rates for dividend income paid to and interest to the fund under non-residents. As such, dividends paid to a non-Thai company incorporated in a

commonly used DTAs country having a tax treaty with Thailand are subject to WHT at the rate of 10 percent.

The rate of WHT payable on interest paid to non-residents may be reduced under the terms of certain tax treaties in respect of interest payable to banks or financial institutions.

Treatment of gains arising on the Thailand does not impose a separate tax on capital gains. Any gain arising from sale of investments under domestic the disposal of assets, regardless of the purpose for which the assets were

law acquired, is treated as ordinary income for CIT purposes.

Domestic WHT on gains on the Gains derived by a non-resident on the disposal of shares in a Thai company and disposal of assets bonds or bills or debt instruments issued by a Thai company will be subject to 15

percent WHT on the part of the proceeds that exceed the cost of the investment.

The WHT rate for capital gains paid from or within Thailand to non-residents may be reduced to nil under certain DTAs.

Requirements for the investee to There is no official requirement for documents to be submitted to the tax avail themself of the reduced WHT authorities to substantiate a claim for a reduced WHT rate nor for the payer to

rates under the relevant DTAs submit documents prior to, during or after the payment is made. However, in the event of a tax examination, a certificate of incorporation which is notarized by a public notary or certificate of tax residence from the tax authority of the relevant treaty jurisdiction may be requested.


Vietnam

Introduction Vietnam has seen dynamic economic growth in recent times and significant development in its capital markets, making it an attractive place for funds to invest in recent years. Vietnam is keen to encourage more overseas investment and the country has increased integration as an important player in the Asian region with favorable changes in the tax regime providing more benefits to foreign investors. There are elements to the tax regime in Vietnam which may be unfamiliar to some foreign investors and those investors should ensure they consider their entry and exit strategies carefully in order to ensure they derive the intended benefits from the opportunities of investing into Vietnam.

Contact

Warrick Cleine Rolf Winand Managing Partner Tax Director KPMG in Vietnam KPMG in Vietnam Tel: +84 (8) 821 9266 ext. 8200 Tel: +84 (8) 821 9266 ext. 8201 [email protected] [email protected]

Key messages

No WHT on the payment of dividends.

WHT is levied on interest. There is a also Capital Assignment Tax on capital gains from the sale of interests in a Vietnam investee company and Deemed Income Tax from the sale of securities.

Tax treaties, where available, can be applied and an income tax reduction or exemption may be obtained in accordance with the tax treaty provisions and successful application to the local tax authorities.

General taxation

Tax rate Business organizations established and registered under the relevant Vietnamese laws are liable to pay CIT at 28 percent, reduced to 25 percent from 1 January 2009. Lower preferential tax rates and tax holidays may be available but are subject to various conditions.

The CIT regulations have separate provisions regarding income tax on assignment of land use rights and land lease rights, in which income earned on the transfer of land use/lease rights from the developer to the buyer must be separately accounted for and subject to separate income tax at 28 percent with no preferential tax rates applied. After calculation of income tax at the rate of 28 percent, additional income tax shall be calculated on the residual income at the progressive tax rates ranging from 0 percent to 25 percent.

A new law provides that income from real property transfers is not entitled to CIT incentives and must be separately determined. The new law does not have separate provisions on tax implications with respect to income earned from the transfer of land use/lease rights. It is expected that sub-law regulations will be issued soon to provide further guidance on implementation of this law.



Domestic WHT rate on payments of There is no WHT on dividends paid out of after tax profits from a Vietnamese dividends and interest to the fund investee to a non-resident.

Interest payments from a Vietnam resident investee to a non-resident are subject to WHT at the domestic rate of 10 percent.

Interest on bonds is subject to a WHT of 0.1 percent on the interest and bond value.

Treatment of gains arising on the A transfer of ownership of the capital contributed in a company established under sale of investments under domestic the laws of Vietnam to another investor (the capital assignee) is treated as a capital

law assignment and the vendor (the capital assignor) would be subject to Capital Assignment Tax at a rate of 28 percent on any gain derived from the transfer.

Capital Assignment Tax only applies to first tier investment transfers. If the assignment does not involve the change of the direct investor in the Vietnam company (i.e. if a transaction is structured outside of Vietnam at a holding company level or above), Vietnam Capital Assignment Tax shall not apply.

For investments in securities including those in the Vietnamese stock market or over the counter market, CIT is imposed on the gross value of securities sold on each transaction. This is a deemed profits tax, equivalent to 0.1 percent of the value of the transaction; including sales of shares, bonds except tax-free bonds and investment fund certificates.

WHT on capital gains arising on sale Tax treaties, where available, can be applied and a tax reduction or exemption of shares under the relevant DTAs obtained on gains from the sale of interests or securities in a Vietnamese investee

entity. The tax treaty between Vietnam and Singapore provides for the possibility of an income tax exemption on gains from the sale of securities in Vietnam. The majority of Vietnam’s DTAs would not provide the benefit of such an exemption.

Requirements for the investor to avail themself of the reduced WHT


1. Domestic law Generally, Vietnam does not have specific targeted anti-avoidance rules applicable to funds located offshore and/or in a low tax jurisdiction.

2. DTAs DTA provisions on capital gains vary from one DTA to the other. For example, the Vietnam-Thailand DTA provides that nothing in this article shall prevent either contracting state from taxing the gains or income from the sale or transfer of shares or other securities. In contrast the Vietnam-Australia DTA provides income, profits or gains derived by a resident of a contracting state from the alienation of shares or comparable interests in a company, the assets of which consist wholly or principally of real property situated in the other contracting state, may be taxed in that other country.

The majority of Vietnam’s DTA agreements do not offer a reduced rate of WHT for interest compared to the current domestic rate of 10 percent. One exception is the treaty with France (see the following comments).

3. Experience/practice Vietnam is not an OECD member; however, the Vietnamese tax authority appears willing to follow international practice provided in the OECD guidelines.

Recently, the General Department of Taxation issued an official letter to a specific company providing guidance on income tax with respect to loan interest following


the DTA between Vietnam and France. The Official letter provides that the tax exemption in Vietnam on loan interest income shall be applied under the DTA between Vietnam and France only if all of the following conditions are satisfied:

• ThetaxpayerisaFrenchtaxresident.

• TheFrenchtaxresidentisthebeneficialowneroftheincome.

• ThenegotiationandsigningprocessismadebetweentheFrenchtaxresident and the Vietnamese partners directly, which neither forms a PE in Vietnam nor is carried out through any PE in Vietnam.

4. MAP There is currently no MAP conducted in Vietnam however rulings can be applied for specific transactions.

Level of proof required to be Application of reduced DTA rates is not automatic in Vietnam, and formal submitted to the tax authorities for a notification/application procedures have to be complied with.

claim for reduced WHT rate The process for obtaining the benefit of a reduced treaty rate or tax exemption under a DTA is currently subject to a degree of uncertainty. The current process is relatively new and requires some bedding down. The tax authorities have acknowledged weaknesses in the provisions and they have therefore been subject to different interpretations by provincial tax departments and individual tax officers. The requirements to operate the process as it currently stands are as follows:

Under the domestic laws, foreign investors who self-assesses that they are entitled to a tax exemption on their income under the DTA provisions should apply the following:

• Within15dayspriortoimplementationofthecontractwithVietnam organizations (e.g. capital assignment contracts or loan contracts), the foreign investors must forward to their Vietnamese counterparty (e.g. the capital assignee, the Vietnamese borrower, the securities broker or the Vietnamese bank) the dossier (details below) informing them that the foreign investors are subject to a exemption or reduced rate of withholding under the a DTA;

• WhendeclaringWHTonbehalfoftheforeigninvestors,theVietnamese contracting party will indicate that the foreign investors are entitled to an income tax reduction or exemption under the relevant DTA. No tax payment is required at the time of tax declaration. However, certain supporting documents must also be submitted to the local tax authorities;

• Within15dayspriortothecompletionofthecontractornolaterthanthe end of the first quarter after the taxable year-end, the foreign investors must forward their certificate of tax residence for that taxable year to the Vietnamese contracting party. The Vietnamese counterparty will then submit such this certificate to the local tax authorities on behalf of the foreign investors to complete the DTA exemption dossier on the self assessment basis.

The dossier should include the following main documents:

• Anotificationletter(inaformalregulatedformat)

• Acertificateontheforeigninvestors’residenceissuedbytheirhomecountry tax authorities for the year prior to the year of DTA application and in the year applying DTA exemption

• Anotarizedcopyofbusinessregistrationissuedbythecountriesresidinginwith respect to the foreign investors

• AcopyofthecontractsenteredintowithVietnamparties.


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Abbreviations

AIL Approved Issuer levy

BOI Board of Investment (Philippines)

CIT Corporate Income Tax

CIT Law Corporate Income Tax Law of the People's Republic of China

CIV Collective Investment Scheme

COR Certificate of residence

DDT Dividend Distribution Tax

DIR Detailed Implementation Rules

DTA Double tax agreement or double tax treaty

FDI Foreign direct investment

FII Foreign Institutional Investors

FITC Foreign investor tax credit

FSI Financial Sector Incentive

FSI-FM Financial Sector Incentive Fund Management Company Award

IRAS Inland Revenue Authority of Singapore

ITAD International Tax Affairs Division (Philippines)

ITO Indonesian Tax Office

MAP Mutual agreement procedure or competent authority ruling

MCT Macau Complementary Tax

MPT Macau Property Tax

NRWT Non-resident withholding tax

OECD Organisation of Economic Co-operation and Development

PE Permanent establishment

PRC The People s Republic of China

QFII Qualified Foreign Institutional Investor

REHC Real estate holding company

SAT State Administration of Taxation

SIERA Share Investment External Rupee Account (Sri Lanka)

SITA Singapore Income Tax Act

SPV Special purpose vehicle

STT Securities Transaction Tax

TIERA Treasury Bond External Rupee Account (Sri Lanka)

TRC Thai Revenue Code

WHT Withholding tax

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For further information please contact:

Chris Abbiss Principal & Regional Leader, Asia-Pacific Financial Services Tax KPMG in Hong Kong Tel: +852 2826 7226 [email protected]

Richard Ellard Asia-Pacific Regional Tax Partner KPMG In Singapore Tel: +65 6213 3982 [email protected]

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Publication date: February 2009

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