asia tax bulletin · updates on tax incentives for companies 19 international tax developments 20...

Winter 2019/20

Asia Tax Bulletin

MAYER BROWN | 3

AMERICAS

CHARLOTTE

RIO DE JANEIRO*

SÃO PAULO*

BRASÍLIA*

PALO ALTO SAN FRANCISCO

LOS ANGELES HOUSTON

CHICAGO

BANGKOK

NEW YORKWASHINGTON DC

DUBAI

SHANGHAI

HONG KONG

HO CHI MINH CITY

HANOI

BEIJING

SINGAPORE

*TAUIL & CHEQUER OFFICE

MEXICO CITY

TOKYO

In This EditionWe are pleased to present the Winter 2019/20 edition of our firm’s Asia Tax Bulletin.

We wish our readers a happy new year.

This edition of the Asia Tax Bulletin is filled with many tax developments, especially in the ASEAN countries and China. China issued a draft of a new VAT law and a Consumption tax law and issued clarifications on the recently amended individual income tax law.

Indonesia came out with draft proposals for a radical reform of the way individuals are taxed, which will give exciting opportunities to individuals resident in Indonesia. It also came out with tax measures to tax foreign digital companies.

Japan introduced an increase of its consumption tax and Korea launched a task force to monitor taxation of digital companies. Malaysia is also now going to tax foreign digital businesses as of 2020. Malaysia issued its annual government budget in October 2019.

The Philippines Board of Internal Revenue issued transfer pricing audit guidelines and Taiwan proposes a reduction of the retained earnings tax provided that substantial investments are made in Taiwan by the Taiwanese business. Finally, as regards Vietnamese taxation, the Hanoi tax department issued clarifications on a host of matters which are highlighted in this edition.

We hope and trust that you will find the contents of this edition of interest. Please let us know if you have questions or if you wish to share your feedback on this publication.

With kind regards,

Pieter de Ridder

Pieter de RidderPartner, Mayer Brown LLP+65 6327 0250 [email protected]

2 | Asia Tax Bulletin

MAYER BROWN | 54 | Asia Tax Bulletin

Contents

6 Draft Value Added Tax Law Released for Public Consultation

7 Draft Consumption Tax Law

8 Gains on Transfer of Listed Shares and on Hong Kong Securities Investment Funds Trading

8 Changes to Individual Income Tax

9 Annual Individual Income Tax Settlement of Comprehensive Income Clarified

9 Social Insurance for Residents from Hong Kong, Macau and Taiwan Announced

10 Draft Urban Maintenance and Construction Tax Law

10 Export of Retail Products Through Cross-Border E-Commerce Pilot Zone

10 China Postpones Imposition of Tariffs on US Products

10 Adjustments to Tentative Import Tariffs for 2020 Published

11 International Tax Developments

12 Tax Concessions

12 Profits Tax Concessions for Insurance-Related Businesses


China

Hong Kong

14 Liaison Office in India is a Permanent Establishment

14 Reduced Corporate Tax Rate, Carry-Forward of Losses and MAT Credits

15 TDS Exemption on Cash Withdrawal by Authorised Dealer & FFMC

15 TDS Credit under Section 194N

16 CBDT Extends Tax Filing Deadline for Certain Cases

16 Taxation Laws (Amendment) Bill, 2019 – Introduced in Lower House of Parliament


India

Japan

Indonesia17 Tax Reform

18 Super Deduction for Certain Expenses

18 Taxation of Foreign Digital Companies

19 Updates on Tax Incentives for Companies


20 Consumption Tax Rate Increase

21 Highlights of 2020 Tax Reform Proposals


Korea22 Task Force on Digital Tax to be Set Up


Malaysia24 Budget 2020

25 Principal Hub Incentive

26 Digital Services Tax

28 Development Cost for Customised Computer Software

28 Taxation of Foreign Fund Management Company

29 Tax Treatment of Perquisites from Employment

29 Tax Treatment of Expenditure for Repairs and Renewals of Assets

30 Labuan Offshore Companies

31 Transfer Pricing Audit Guidelines Issued


Philippines

33 FATCA Reporting


Singapore

35 Procedure for Withholding Taiwan-Sourced Income of Foreign Companies

36 Incentive for Reducing Retained Earnings Tax by Substantial Investment

37 Safe Harbour Rules for Master File and CbC Report

Taiwan

40 Loan Interest Earned by Representative Office

40 Tax Implications


Vietnam

38 Repeal of Existing Tax Incentive Tax Benefits

39 Tax Implications of Investment Income

39 Withholding Tax Implication on Interest Payment Made to Mutual Fund

Thailand

MAYER BROWN | 7

China (PRC)

Draft Value Added Tax Law Released for Public ConsultationThe Ministry of Finance (MoF) and the State Taxation Administration (SAT) released the draft Value Added Tax (VAT) Law (the draft VAT Law), which is now open to public consultation. Any comments should be submitted to the MoF before 26 December 2019. The draft VAT Law contains nine chapters and 47 articles. The main content is set out below.

TAXPAYERS AND WITHHOLDING AGENTS• Taxpayers are entities or individuals that

are engaged in taxable transactions that do not exceed the tax threshold of CNY 300,000 per quarter. Recipients of imported goods are VAT taxpayers.

• Entities and individuals engaged in taxable transactions that do not exceed the above tax threshold are not considered VAT taxpayers; however, they may opt to register as VAT taxpayers to pay VAT.

• In the case of taxable transactions carried out within the territory of China by foreign entities or individuals, the purchaser will be withholding agent.

VAT TAX RATES AND VAT COLLECTION RATE• The draft VAT Law provides the

following rates:

>> 13% for the supply of goods, processing, repairs and repairs services, leasing services of tangible movable property and imported goods;

>> 9% for the supply of transportation services, postal services, basic telecommunications, construction, leasing services of real estate, granting land use rights, sales or import of agricultural products and other goods;

JURISDICTION:

>> 6% for distribution services, intangible assets and financial goods; and

>> 3% collection rate for small-scale VAT taxpayer rate (i.e. VAT at a low rate and no input tax credit granted).

TAXABLE AMOUNT• The draft VAT Law clarifies that the taxable

amount is the consideration for taxable transactions, including all monetary or non-monetary economic benefits. In the case of “mixed sales”, the applicable tax rate for main business should apply.

VAT EXEMPTIONS• Supplies such as contraceptive pills or classic

books and entities such as hospitals, museums or welfare institutions are exempt from VAT. The State Council may formulate special preferential VAT policies and report them to the Standing Committee of the National People’s Congress in accordance with the needs of national economic and social development, or due to emergencies or any other reasons that have a significant impact on taxpayers’ business activities.

FILING PERIODS• Depending on the circumstances, filing periods

could be 10 or 15 days, a month, a quarter or half year.

TAX ADMINISTRATION• VAT is collected by the tax authorities.

However, VAT on imported goods will be collected by the customs services. To facilitate a smooth transition, the current tax treatment may continue to apply up to five years after the implementation of the new law where it is necessary to do so.

Draft Consumption Tax Law The Ministry of Finance (MoF) and the State Taxation Administration (SAT) have released the draft Consumption Tax Law (the draft law) for public consultation. Any comments should be submitted to the MoF or SAT before 2 January 2020. The draft law contains 23 articles.

TAXPAYERS• Entities and individuals engaged in the

production, commissioned processing or importing of taxable consumption goods in(to) China are subject to consumption tax. The consumption tax is levied on the production, wholesale or retail sale of taxable goods, or on the goods that are not sold but are for the taxpayer’s own use.

TAX RATES• The State Council can adjust the tax rates and

report the adjustments to the Standing Committee of the National People’s Congress. A taxpayer supplying different taxable goods subject to different tax rates has to calculate the sales proceeds and sales amount separately. If no such separate calculation is made, or if different taxable goods subject to different tax rates are sold in one package, the highest rate will apply.

DEDUCTIONS AND EXEMPTIONS• Consumption tax imposed on taxable goods

used for the production of taxable consumption goods can be deducted from the consumption tax payable on goods produced or sold, e.g. consumption tax paid on tobacco products used for the production of cigarettes or cigars, or on petroleum for the production of petrol or diesel oil.

• Export of taxable goods is exempt from consumption tax, unless it is provided otherwise by the State Council.

• The State Council is authorised to stipulate exemptions or reductions of consumption tax and report them to the Standing Committee of the National People’s Congress.

TAX ADMINISTRATION• Consumption tax will be collected by the tax

authorities or, with respect to imported taxable consumer goods, by the customs service on behalf of the tax authorities. The State Council will issue the implementation rules in accordance with the draft law.

CHINA (PRC)

MAYER BROWN | 98 | Asia Tax Bulletin CHINA (PRC) CHINA (PRC)

Gains on Transfer of Listed Shares and on Hong Kong Securities Investment Funds Trading On 4 December 2019, the Ministry of Finance, State Taxation Administration and Securities Regulatory Committee jointly issued Circular [2019] No. 93 (the Circular) continuing the exemption from individual income tax for gains derived by Chinese individual investors from the transfer of shares listed on the Hong Kong Stock Exchange and from trading of Hong Kong securities investment funds through the recognised investment fund mechanism between Hong Kong and Shanghai and the same mechanism between Hong Kong and Shenzhen.

The previous exemptions were laid down in Circular [2017] No. 78 and Circular No. 154, respectively, which provided for an applicable period ending on 4 December 2019. Under the Circular, the exemp-tions have been extended until 31 December 2022.

INPUT VAT REFUND ON PURCHASE OF EQUIPMENT USED BY R&D INSTITUTIONS On 25 November 2019, the Ministry of Finance (MoF), the Ministry of Commerce and the State Taxation Administration (SAT) released a circular (Circular [2019] No. 91) concerning the refund of input VAT on the purchase of equipment used by domestic research and development (R&D) institu-tions or foreign-invested R&D centres. The circular applies from 1 January 2019 to 31 December 2020.

The domestic R&D institutions that are eligible for the full refund of input VAT include the R&D or technology institutions designated and approved by the MoF, Customs Service, the Ministry of Science and Technology and the SAT, universities and designated platforms of small and medium-sized enterprises.

Foreign-invested R&D centres are also eligible for the refund if all the following conditions are satisfied:

• for foreign-invested R&D centres established on or before 30 September 2009:

>> the invested amount is at least USD 5 million where the R&D centre is a separate entity with legal personality or a department of a company or branch and the R&D expenses exceed CNY 10 million on an annual basis;

>> staff engaged in R&D exceeds 90; and

>> the cumulative value of the equipment purchased is more than CNY 10 million; and

• for foreign-invested R&D centres established on or after 1 October 2009:

>> the invested amount is at least USD 8 million where the R&D centre is a separate entity with legal personality or a department of a company or branch and the R&D expenses exceed CNY 10 million on an annual basis;

>> staff engaged in R&D exceeds 150; and

>> the cumulative value of the equipment purchased is more than CNY 20 million.

A foreign-invested R&D centre must be recognised as such by the competent department of com-merce. A guideline for approval of foreign-invested R&D centres and a list of eligible equipment are attached to the circular. The previous circular on the same subject, Circular [2016] No. 121, was abolished on 11 November 2019.

Changes to Individual Income Tax At a meeting of the State Council on 20 November 2019, it was decided that individual taxpayers whose annual comprehensive income is less than CNY 120,000 or whose tax payable after an annual tax settlement is mino, will be exempt from the annual tax settlement in the following two years.

Moreover, from 1 January 2019 to 31 December 2023, only 50% of the employment income derived by crew working on a cross-ocean ship will be included in the tax base for individual income tax purposes if they sail on a ship for more than 183 days in a tax year.

The Ministry of Finance and the State Taxation Administration are expected to publish a circular to implement the decisions in the short term.

Annual Individual Income Tax Settlement of Comprehensive Income ClarifiedOn 7 December 2019, the Ministry of Finance and the State Taxation Administration jointly issued a circular (Circular [2019] No. 94) clarifying several issues regarding the annual individual income tax settlement of comprehensive income. From 1 January 2019 to 31 December 2020, a resident individual is exempt from the annual tax settlement if his annual comprehensive income does not exceed CNY 120,000 or if the amount of tax payable upon tax settlement is less than CNY 400. The exemption does not apply if the withholding agent has not withheld tax on the comprehensive income where such an obligation exists.

Furthermore, the following applies from tax year 2019:

• where a discrepancy exists between the tax calculation and the deduction rules of the withholding agent and those of the tax authority in charge of the annual tax settlement with regard to tax matters of the disabled, widowed and childless elderly or martyrs’ families, the most favourable outcome for the taxpayer will prevail; and

• where information provided by a resident individual in respect of special additional deductions is incorrect and, despite a notification by the tax authority, is not rectified without a legitimate reason, the tax authority may suspend the application of the special additional deductions. After a resident individual has corrected the relevant information or explained the situation in accordance with the regulations, the resident individual may apply the special additional deductions with confirmation by the tax authority and recoup the deductions for previous months.

Social Insurance for Residents from Hong Kong, Macau and Taiwan AnnouncedOn 29 November 2019, the Ministry of Human Resources and the National Medical Security jointly published a circular (Ling [2019] No.41) concerning social insurance for residents from Hong Kong, Macau and Taiwan who are employed, live or study in mainland China. The circular will come into effect on 1 January 2020.

• Residents from Hong Kong, Macau and Taiwan hired and recruited by employers such as enterprises, public institutions, social organisations and individual economic organisations in mainland China must participate in basic pension insurance, basic medical insurance, employment injury insurance, unemployment insurance and maternity insurance.

• Non-employed residents of Hong Kong, Macau and Taiwan who live in mainland China and hold “residence permits for Hong Kong, Macau and Taiwan residents” must participate in basic pension insurance and basic medical insurance in their place of residence.

• University students from Hong Kong, Macau and Taiwan who are studying in mainland China are required to buy the same medical insurance policy as mainland students in the place where their education institutions are located.

• Residents from Hong Kong, Macau and Taiwan who meet the conditions for participating in social insurance in mainland China have to register for social insurance at their place of residence by presenting their residence permits and following the same procedures as for mainland Chinese residents.

• If residents from Hong Kong, Macau and Taiwan leave mainland China before the conditions for receiving pension payments are met, their social insurance personal accounts will be retained. However, an application for termination of social insurance can be made, in which case the deposit amount in the social insurance personal account will be refunded.


Where the insured person subsequently returns to mainland China, the insurance can be resumed and the insured period will be added up to the previous insured terms.

• Residents from Hong Kong, Macau and Taiwan who have participated in social insurance in their home jurisdictions are exempt from the obligations of basic pension insurance and unemployment insurance in mainland China by presenting certificates issued by the relevant authorities.

Draft Urban Maintenance and Construction Tax Law On 20 November 2019, the State Council approved the draft of the Urban Maintenance and Construction Tax Law of the People’s Republic of China. The charge of the draft tax remains the same as the Urban Maintenance and Construction Fee currently imposed by the interim regulation.

Export of Retail Products Through Cross-Border E-Commerce Pilot Zone The State Taxation Administration has published a notice concerning the enterprise income tax treatment of enterprises engaged in export of retail products (SAT Public Notice [2019] No. 36). According to the notice, from 1 January 2020, e-commerce enterprises engaged in cross-border business located within the Cross-Border E-Commerce Pilot Zone will be taxed on a deemed profit basis provided that the enterprises fulfil the following requirements:

• the enterprise is registered in the Pilot Zone and with the Cross-Border E-Commerce Online Service Platform in respect of the date of export, name, quantity unit, quantity, unit price and amount of export;

• exported goods are declared through the local Customs Service; and

• exported goods are exempt from value-added tax and consumption tax even if the enterprises have not yet received the official receipt of purchases.

The deemed taxable profit rate is set at 4% of revenue.

An enterprise eligible for tax incentives granted to small and medium-sized enterprises may continue to enjoy those incentives. Similarly, those that are eligible for tax exemption as prescribed under article 26 of the Enterprise Income Tax Law (interest from treasury bonds, dividends, income of non-profit organisation) will be exempt from tax on such income.

China Postpones Imposition of Tariffs on US ProductsOn 15 December 2019, China’s Customs Tariff Commission issued a Public Notice (CTC Public Notice [2019] No. 7) stating that the government had postponed the imposition of tariffs of 5% and 10% (as prescribed by CTC Public Notice [2019] No. 4) on imports of US products with a total value of USD 75 billion. The government also postpones the imposition of tariffs of 5% and 25% (as prescribed by CIC Public Notice [2018] Nos. 5, 7 and 8) on US-manufactured vehicles and auto parts. Both impositions were scheduled to take effect on 15 December 2019. This is considered to be a mitigation measure in response to the trade agreement that the United States and China recently concluded. Earlier, the United States had cancelled an additional 10% tariff on Chinese goods that was scheduled to take effect on 15 December 2019.

Adjustments to Tentative Import Tariffs for 2020 PublishedOn 23 December 2019, the Customs Tariff Commission of the State Council published a public notice (CTC Public Notice [2019] No. 50) (the notice) adjusting the tentative import tariffs for 2020. The content of the notice is summarised below.

• From 1 January 2020, the import tariffs for 859 commodities will be reduced (the application of tentative import tariffs); and from 1 July 2020, the tentative import tariffs for seven information technology products will be repealed.

• On 1 July 2020, the fifth-step tariff reduction for the information technology products listed in the Schedule of the Amendment to the Tariff Concession Schedule of the People’s Republic of China to Join the World Trade Organization will be implemented. The tariff quotas continue to apply to eight commodities, including wheat, and the quota tariff rate for fertilisers, urea, compound fertiliser, ammonium hydrogen phosphate will remain unchanged at 1%.

• From 1 January 2020, new reduced rates will be implemented under trade agreements or preferential rate arrangements concluded with New Zealand, Peru, Costa Rica, Switzerland (from 1 July 2020), Iceland, Singapore, Australia, South Korea, Chile, Georgia and Pakistan, among other countries.

• Moreover, from 1 January 2020, 107 products or commodities, including ferrochrome, will continue to be subject to export duties; the scope and rates of the taxable items remain unchanged.

International Tax DevelopmentsARMENIA, BELARUS, KAZAKHSTAN, KYRGYZSTAN, RUSSIA On 25 October 2019, the free trade agreement (FTA) between China and the Eurasian Economic Union (Armenia, Belarus, Kazakhstan, Kyrgyzstan, Russia), signed on 17 May 2018, entered into force.

MAURITIUSOn 17 October 2019, China and Mauritius signed a free trade agreement (FTA) in Beijing.

SINGAPOREOn 16 October 2019, the amending protocol, signed on 12 November 2018, to the 2008 free trade agreement (FTA) between China and Singapore entered into force.

MACAUOn 27 November 2019, China and Macau signed an amending protocol to the China-Macau Income Tax Arrangement (2003), as amended by the 2009, 2011 and 2016 protocols, in Macau.

HONG KONGOn 6 December 2019, the amending protocol to the China-Hong Kong Income Tax Agreement, as amended by the 2008, 2010 and 2015 protocols, entered into force. The protocol generally applies from 1 January 2020 for China and from 1 April 2020 for Hong Kong.

NEW ZEALANDOn 27 December 2019, the China-New Zealand Income Tax Treaty entered into force. The treaty generally applies from 1 January 2020. From this date, the new treaty generally replaces the tax treaty of 1986, as amended by the 1997 protocol.

CHINA (PRC) CHINA (PRC)

Hong KongJURISDICTION:

Tax ConcessionsOn 6 November 2019, the Legislative Council passed the Inland Revenue (Amendment) (Tax Concessions) Bill 2019. The new Ordinance gives effect to the concessionary tax measures proposed in the 2019-2020 Budget. These measures include a one-off tax reduction of 75% on profits tax, salaries tax and tax under personal assessment for the year of assessment 2018/19, subject to a maximum of HKD 20,000 per case; and a waiver of business registration fees for 2019/20.

Profits Tax Concessions for Insurance-Related Businesses On 6 December 2019, the government published the Inland Revenue (Amendment) (Profits Tax Concessions for insurance-related Businesses) Bill 2019 in the Official Gazette. The Bill seeks to amend the Inland Revenue Ordinance (Cap. 112) to reduce the profits tax rate by 50% (i.e. 8.25%) for all general reinsurance business of direct insurers, selected general insurance business of direct insurers and selected insurance brokerage business of direct insurers. Administrative provisions, including provisions on anti-avoidance and ascertainment of assessable profits, are also included in the Bill to address enforcement issues arising from the provision of the proposed tax relief.

Currently, there are only tax incentives for captive insurance business and reinsurance business of professional reinsurers in Hong Kong at the profits tax rate of 8.25%. It is necessary for Hong Kong to introduce new measures to keep the business environment conducive to insurance business and to help the insurance industry seize new opportunities, including those arising from the Belt and Road Initiative. The Bill was introduced into the Legislative Council for the first reading on 18 December 2019.

HONG KONG MAYER BROWN | 13

International Tax DevelopmentsESTONIA AND CAMBODIA Hong Kong’s double tax treaties (CDTAs) with Cambodia and Estonia signed in June and September this year respectively came into force on 27 and 18 December 2019, respectively, after the completion of the relevant ratification procedures. The CDTAs will have effect in respect of Hong Kong tax for any taxable periods beginning on or after April 1, 2020, a Government spokesman said today (December 27). Cambodia and Estonia were the 38th and 75th largest trading partners of Hong Kong in 2018 respectively. The CDTAs will bring a greater degree of certainty on tax liabilities for those who engage in cross-border business activities, and help promote bilateral trade and investment activities.

PRCThe Hong Kong Chief Executive in Council issued an Order to implement the amending protocol, signed on 19 July 2019, to the China-Hong Kong Income Tax Agreement, as amended by the 2008, 2010 and 2015 protocols. The Order was published by way of Legal Notice No. 118 in Gazette No. 40, Vol. 23, Legal Supplement No. 2, of 4 October 2019 and will be scheduled at the Legislative Council on 6 December 2019 for negative vetting.

MACAU According to a press release of 25 November 2019, published by the government of Macau, the Hong Kong-Macau Income Tax Agreement was signed by Hong Kong on 22 November 2019 and by Macau on 25 November 2019.


• no timeline exists within which the option under section 115BAA must be exercised. Hence, a domestic company, having carried forward losses on account of additional depreciation, may exercise the option after setting off the losses thereby accumulated.

The Circular also clarifies the situation regarding the carried-forward Minimum Alternate Tax (MAT) credit under section 115JB of the Act as follows:

• the provisions of section 115JB shall not be applicable to the domestic company that exercises the option under section 115BAA. Hence, the MAT credit of the domestic company that exercised the option under section 115BAA shall not be available subsequent to the exercise of such option; and

• no timeline exists within which the option under section 115BAA must be exercised. Hence, a domestic company with MAT credits may exercise the option after utilising the said credit against the regular tax payable under the taxation regime existing prior to promulgation of the Ordinance.

TDS Exemption on Cash Withdrawal by Authorised Dealer & FFMCOn 15 October 2019, the Central Board of Direct Taxes (CBDT) issued Notification No. 80/2019 (the Notification) which exempts cash withdrawal from Tax Deducted at Source (TDS) under section 194N of the Income-tax Act, 1961 (the Act) for a withdrawal made by the following “qualified person”:

• authorised dealer (i.e. a person that is an authorised dealer under the Foreign Exchange Management Act, 1999) and its franchise agent and sub-agent; and

• full-fledged money changer (FFMC) licensed by the Reserve Bank of India and its franchise agent.

To qualify for exemption, the following requirements must be met:

• The withdrawal will be made only for the purposes of:

>> purchase of foreign currency from foreign tourists or non-residents visiting India or from resident Indians on their return to India, in cash as per the directions or guidelines issued by the Reserve Bank of India; or

>> payment of inward remittances to the recipient beneficiaries in India in cash under the Money Transfer Service Scheme (MTSS) of the Reserve Bank of India.

• A certificate must be furnished by the qualified person to the bank mentioning that the withdrawal is only for the purposes specified above and the directions or guidelines issued by the Reserve Bank of India have been followed.

The Notification shall be deemed to have come into force with effect from 1 September 2019 onwards.

TDS Credit under Section 194N On 27 September 2019, the Central Board of Direct Taxes issued the Income-tax (10th Amendment) Rules, 2019 (the amendment) vide Notification 74/2019, which provides a new sub-rule (3A) in rule 37BA of the Income-tax Rules, 1962 (the rules).

Under the new sub-rule (3A), it is provided that for the purposes of section 194N (payment of certain amounts in cash), the credit for tax deducted at source (TDS) shall be given to the person from whose account tax is deducted and paid to the Central Government account for the assessment year relevant to the previous year in which such tax deduction is made.

The amendment shall be deemed to have come into force with effect from 1 September 2019.

India

Liaison Office in India is a Permanent Establishment 1

The Delhi bench of the Income Tax Appellate Tribunal (“Tribunal”) in a set of batch appeals in Hitachi High Technologies v. DCIT1, held that a Liaison Office (“LO”) of Hitachi High Technologies Singapore Pte. Ltd. (“Appellant”) in India constituted a Permanent Establishment (“PE”) of the Appellant on account of the activities undertaken by it, which were not simply preparatory or auxiliary in nature. The Tribunal compared the PE exclusion clause for preparatory and auxiliary activities in Article 5(7)(e) of the India-Singapore tax treaty, against the language in India’s treaties with the USA and Canada; and concluded that the India-Singapore treaty envisaged a narrower exclusion which the Appellant did not qualify.

Reduced Corporate Tax Rate, Carry-Forward of Losses and MAT CreditsOn 2 October 2019, the Central Board of Direct Taxes (CBDT) issued Circular No. 29/2019 (the Circular) which clarifies the option available under section 115BAA of the Income-tax Act, 1961 (the Act) and the secondary legislation, The Taxation Laws (Amendment) Ordinance, 2019 (the Ordinance). The Circular clarifies that:

• a domestic company opting for the benefit of a lower tax rate under section 115BAA of the Act is not allowed to claim any losses carried forward on account of additional depreciation. This applies for the Assessment Year during which the option was exercised and for any subsequent Assessment Years; and

JURISDICTION:

INDIA1 Courtesy Nishith Desai Associates in Mumbai.


CBDT Extends Tax Filing Deadline for Certain Cases Following the Central Board of Direct Taxes (CBDT)’s decision to extend the deadline for the filing of income tax returns (ITRs) from 30 September 2019 to 31 October 2019 for persons whose accounts are required to be audited, the CBDT issued an order under Section 119 of the Income-tax Act, 1961 (the Act) on 27 September 2019. The order provides that this extension is applicable to assessees covered under clause (a) of Explanation 2 to section 139(1) of the Act, which includes companies, partnership firms, proprietorships and working partners of a firm.

However, it is clarified that there shall be no extension of the due date for the purpose of Explanation 1 to section 234A of the Act (interest for defaults in furnishing return) and the assessee shall remain liable for the payment of interest as provided under section 234A of the Act.

Taxation Laws (Amendment) Bill, 2019 – Introduced in Lower House of ParliamentOn 25 November 2019, the Finance Minister introduced the Taxation Laws (Amendment) Bill, 2019 (the bill) in the Lok Sabha (the lower house of Parliament). The bill will replace the Taxation Laws (Amendment) Ordinance 2019 (the ordinance) which was brought in to make certain amendments in the Income-tax Act, 1961 (the Act) and the Finance (No. 2) Act 2019 (the Finance Act). The amendments provided in the bill are generally in line with the amendments provided in the ordinance, with some further amendments made to the Act, as set out below.

• A provison to section 115BAA(1) of the Act will be added to provide that the option for a domestic company to compute its income tax payable at 22% for any previous year relevant to the assessment year beginning on or after 1 April 2020 will be withdrawn if the domestic company fails to satisfy the conditions contained in section 115BAA(2) of the Act.

• Certain additional grounds will be added to section 115BAA(2) of the Act to be complied with by the domestic company in order to apply the reduced corporate tax rate of 22%.

• A new section 115BAB(4) of the Act will be added to provide that if any difficulty arises regarding fulfilment of conditions, the Central Board of Direct Taxes may issue guidelines for the purpose of removing the difficulty and promoting manufacturing or production of an article using a new plant and/or machinery.

• A new section 115JAA(8) of the Act will be added to provide that the provisions of section 115JAA of the Act relating to the tax credit in respect of tax paid on deemed income of certain companies shall not apply to a person who has exercised the option under section 115BAA of the Act.

International Tax DevelopmentsMOROCCO On 15 July 2019, the amending protocol, signed on 8 August 2013, to the India-Morocco Income Tax Treaty (1998) entered into force. The protocol generally applies from 15 July 2019.

INDIA

Indonesia

Tax ReformIndonesia’s Minister of Finance announced on 3 September 2019 the Government’s plan to introduce legislation on a number of tax changes (the New Tax Law). The New Tax Law will impact the Income Tax, Value Added Tax (VAT), and General Tax Provision laws. The legislative process is at a very early stage and many key aspects of the proposals may be subject to change.

The corporate income tax (CIT) rate will be reduced in phases, from 25% to 22% for tax years 2021 and 2022, with a further reduction to 20% for tax years 2023 and thereafter. Newly listed Indonesian companies will receive an additional three percentage point reduction (CIT rate of 19% for tax years 2021 and 2022 and 17% for tax years 2023 and thereafter for a period of five years. After the five years, the rate becomes 20%).

Tax exemptions will be provided for Indonesian resident companies and individuals on dividends received from both domestic and foreign companies, if the dividend is reinvested in Indonesia. Currently, an Indonesian company pays 25% profits tax on all foreign source dividends, and on domestic dividends when the company’s shareholding is less than 25%.

Tax penalties will be reduced to encourage voluntary compliance. The penalty for failure to issue, or for the late issuance of a VAT invoice would be reduced from 2% to 1% of the VAT transaction value. The interest for the underpayment of tax (due to tax return amendments and tax assessment letters) would be reduced from 2% per month to a benchmark interest rate plus 5%, prorated on a monthly basis. A new penalty of 1% of the VAT transaction value will be introduced if a person fails to register for VAT purposes.

The ability to claim input VAT will be broadened to potentially cover pre-production periods and certain other situations.

JURISDICTION:

MAYER BROWN | 1918 | Asia Tax Bulletin INDONESIA

The legal and regulatory frameworks for Indonesia’s various incentives will be consolidated into one part of the law.

A new domestic permanent establishment (PE) definition (without physical presence) will be introduced that may apply the ”significant economic presence” concept. It appears that the PE definition in Indonesia’s Income Tax Law will be updated to reflect this change that allows the Indonesian Government to tax profits without physical presence in Indonesia. The announcement did not address the expected impact of treaty definitions of PE, but the Director General of Taxation has been subsequently quoted as stating that such treaty articles will still apply.

Indonesia may adopt a territorial tax principle of taxation instead of the current worldwide income taxation principle for individuals.

Super Deduction for Certain Expenses On 9 September 2019, the Ministry of Finance (MOF) issued Regulation No. 128/PMK.010/2019 (the Regulation) on the 200% super deduction (the deduction) for apprenticeship, internship and teaching activities conducted by a taxpayer’s employees. The Regulation came into effect on 9 September 2019.

In order to qualify for the deduction, the taxpayer must satisfy the following requirements:

• the taxpayer’s employees have conducted apprenticeship, internship and teaching activities in certain competency sectors as provided under the Regulation;

• the taxpayer has entered into a Perjanjian Kerja Sama (cooperation agreement) with the relevant institution;

• the taxpayer has not incurred a tax loss in the tax year in which the said deduction arises; and

• the taxpayer has submitted Surat Keterangan Fiskal (Fiscal Statements) accordingly for the purpose of the deduction.

The deduction applies to the following costs:

• provision of premises and supporting facilities such as electricity, water, fuel, maintenance fee, and any other related expenses for the purpose of carrying on the activities;

• provision of instructors or educators;

• provision of goods or materials for the purpose of the activities;

• fees or cash incentives paid to the participants; and

• certificates granted to the participants.

The deduction is not available for any incurred expenses that are attributable to participants with special relationships with the taxpayer. The 100% additional deduction element will be capped if the additional deduction results in a loss. The deduction is not available if certain other incentives have already been granted to the taxpayer. The taxpayer is required to submit a notification, the cooperation agreement and a fiscal statement before commencing a training programme. An annual report must be submitted by the taxpayer together with its corporate income tax return for the purpose of claiming the deduction.

The Director General of Tax may deny the deduction if:

• no cooperation agreement was entered into by the taxpayer;

• the activities performed are not in line with the cooperation agreement;

• the notification is not submitted accordingly; and

• the annual report is not submitted in a timely fashion, or inadequate information is provided.

Taxation of Foreign Digital Companies On 4 December 2019, it was reported that the government had issued a new regulation providing that foreign companies with a significant presence in the emerging Internet economy in Indonesia are subject to local taxes in Indonesia.

According to the regulation, foreign companies trading goods and services online in Indonesia will be treated as having a physical presence in Indonesia, and will be required to comply with local taxation rules as a result. Foreign companies are also required to appoint representatives to act on their behalf for tax purposes.

The new regulation will apply to foreign companies that meet certain criteria (with further details still to be provided) such as:

• a certain number of transactions;

• a certain transaction value;

• a certain number of shipping packages; and

• a certain amount of traffic.

Furthermore, the regulation provides that foreign digital companies that were operating in Indonesia before the regulation came into effect will have a grace period of two years from the date of implementation. The regulation came into effect on 25 November 2019.

Updates on Tax Incentives for Companies On 12 November 2019, the government issued Regulation No. 78 Year 2019 (the regulation), which provides amendments to the regulations on the tax incentives provided for companies investing in certain business sectors. The regulation will come into effect on 13 December 2019, and the previous Government Regulation (i.e. GR No. 18 Year 2015 (as amended by GR No. 9 Year 2016)) is revoked.

In order to enjoy the reduction in the net taxable income of up to 30% from the amount invested in fixed asset, the fixed asset invested is required to comply with the following conditions:

• the asset should be new, unless it originates from a complete relocation from another country;

• the asset should be listed in the new business licence as the basis for obtaining the tax incentives; and

• the asset should be owned directly by the taxpayer and utilised for the main business activity.

An extension of the carry-forward of tax losses of more than five years but not more than 10 years is available, provided that the following annual qualifications to extend the tax loss carry-forward period are met:

• the company carries out eligible investment provided under the regulation;

• the company carries out eligible investment in the Industrial Zone or Bonded Zone;

• the company carries out investment in new and renewable energy;

• the company carries out development in economic or social infrastructure in the operational area of at least IDR 10 billion;

• the company uses raw materials and/or components which are at least 70% made in Indonesia;

• the company employs a certain number of Indonesian workers;

• the company carries out research and development in Indonesia for product development or production efficiency of at least 5% of the investment made within five years; or

• exports make up at least 30% of the total sales of the company for the investment conducted outside of a Bonded Zone.

The Online Single Submission (OSS) system is introduced to process the tax incentives applications.

Taxpayers who have enjoyed tax incentive under the regulation are not allowed to enjoy the following tax incentives provided:

• the tax incentive in the Integrated Economic Development Zones;

• the tax holiday provided under GR No. 94 Year 2010 (as amended by GR No. 45 Year 2019); and

• the super deduction incentives on the labour-intensive industries provided under GR No. 94 Year 2010 (as amended by GR No. 45 Year 2019).

The implementing regulations based on the old regulations remain effective, provided that they are consistent with the provisions of the regulation.

INDONESIA

MAYER BROWN | 21

JapanJURISDICTION:

Consumption Tax Rate Increase The consumption tax rate increase from 8% to 10% (7.8% for national consumption tax and 2.2% for local consumption tax) is effective as from 1 October 2019. This is the first time the consumption tax rate has been increased since the increase from 5% to 8% on 1 March 2014.

However, the increase is not across the board as the government has introduced a reduced rate of 8% (6.24% for national consumption tax and 1.76% for local consumption tax) for everyday essentials, food and non-alcoholic beverages purchased for consumption offsite and subscriptions for printed newspapers published at least twice a week.

There are criticisms that confusion will arise as consumers are not accustomed to the dual rate system. For example, when people eat at a restaurant, 10% is applied but the 8% rate is used for to-go purchases, in some cases from the same outlet.

In the interim, the consumption tax returns will have three rates which are the previous 8% (6.3% for national consumption tax and 1.7% for local consumption tax), the new 10% and the reduced rate of 8%.

The additional tax revenue from the increase in the consumption tax rate is planned to be used for free education for young children, to help low-income households and for fiscal reconstruction.

To avoid a business recession like the one that occurred when consumption tax was raised from 5% to 8%, the government is introducing certain economic measures such as the “point back” system. Under this system, when a consumer makes a cashless payment at a registered small and medium-sized shop, 5% is rebated, and when cashless payment is made at a registered convenience store and food service chain, the rebate is 2%. However, there will be no rebates at large supermarkets.

This “point back” system will be effective until the end of June 2020. By introducing this system, the government is also aiming to promote a cashless society in Japan.

The introduction of an invoice system like that of the EU is delayed till October 2023, as further preparations are required.

Highlights of 2020 Tax Reform Proposals On 12 December 2019, the government outlined its 2020 tax reform plan (the Plan). The Plan is currently at the proposal stage and is still subject to change. Highlights of the key reform measures are as follows:

• To encourage the spread of 5G networks, a 15% tax credit is proposed to be given to eligible businesses that invest in 5G infrastructure.

• Eligible companies that invest in innovative start-ups will be able to deduct 25% of their investment from taxable income.

• Single parents who have never been married and with an annual income of less than JPY 5 million will also be given special tax deductions that are currently only available to parents that are divorced or widowed.

• To encourage individuals to invest more and increase their retirement savings, it is planned to extend the Nippon Individual Savings Account (NISA) programme by five years beyond 2037.

International Tax Developments

ECUADOROn 28 December 2019, the Ecuador-Japan Income Tax Treaty entered into force. The treaty generally applies from 28 December 2019 for the provisions of article 25 (Exchange of Information) and from 1 January 2020 for other taxes. With respect to article 26 (Assistance in the Collection of Taxes), the treaty will apply on a date to be agreed between the governments of the two countries through an exchange of diplomatic notes.

PERU According to a press release of 19 November 2019, published by the Japanese Ministry of Foreign Affairs, Japan and Peru signed the Japan-Peru Income Tax Treaty on 18 November 2019 in Lima.

JAMAICA On 12 December 2019, the Jamaica-Japan Income Tax Treaty was signed in Tokyo.

JAPAN

MAYER BROWN | 23

KoreaJURISDICTION:

Task Force on Digital Tax to be Set UpOn 16 December 2019, it was reported that the Finance Ministry is planning to set up a task force to study the digital tax on advertising by global internet companies like Facebook and Google. The scope of taxation on electronic services provided by foreign providers has been expanded previously under the 2019 tax proposals to cover “cloud computing services”. The government is now taking steps to further expand the scope to include taxing digital advertising as the task force will join international discussions on the matter to draft the relevant tax measures.


ARMENIA On 3 October 2019, the investment protection agreement (IPA) between Armenia and Korea, signed on 19 October 2018, entered into force.

NEW ZEALANDOn 29 October 2019, Korea and New Zealand signed a social security agreement in Seoul.

CROATIA On 1 November 2019, the Croatia-Korea Social Security Agreement will enter into force. The agreement generally applies from 1 November 2019.

CAMBODIAOn 25 November 2019, Cambodia and Korea signed an income tax treaty on the sidelines of the 2019 Association of Southeast Asian Nations (ASEAN)-Republic of Korea Commemorative Summit, taking place in Busan from 25 to 26 November 2019.

PHILIPPINESOn 25 November 2019, Korea and the Philippines signed a social security agreement in Busan.

VIETNAMOn 27 November 2019, Korea and Vietnam signed an amending protocol to update the Korea-Vietnam Income Tax Treaty, in Seoul.

KOREA

MAYER BROWN | 25

MalaysiaJURISDICTION:

Budget 2020On 11 October 2019, the Budget for 2020 was presented to the parliament by the Minister of Finance. The main tax proposals of the Budget, which unless otherwise indicated will apply from 1 January 2020, are summarised below. On 18 December 2019, the Senate passed the Labuan Business Activity Tax (Amendment) Bill 2019, the Petroleum (Income Tax) (Amendment) Bill 2019, the Income Tax (Amendment) Bill 2019 and the Finance Bill 2019 (the bills) after the bills were passed in the House of Representatives.

CORPORATE TAXATION• Special investment incentives packages

for five years will be awarded to attract Fortune 500 companies and global unicorns companies that are involved in the high technology, manufacturing, creative and economic sectors.

• The current tax incentives for venture capital and angel investors will be extended up to year of assessment (YA) 2023.

• To further enhance sustainable development within the country, the existing Green Investment Tax Allowance and Green Investment Tax Exemptions will be extended to YA 2023. Companies undertaking solar leasing activities will be given up to 70% income tax exemption.

• Tax incentives, as follows, will be provided to qualifying companies under the electrical and electronics (E&E) industry that promotes the transition of 5G digital economy and Industry 4.0:

>> income tax exemption up to 10 years; and

>> special investment tax allowances for existing qualifying E&E companies that have exhausted the current reinvestment allowance incentive.

• Accelerated capital allowance and automation equipment capital allowance for manufacturing sector on the first MYR 2 million and MYR 4 million incurred on qualifying capital expenditure. This incentive will be extended up to YA 2023.

• The existing tax deductions on cost of issuance and additional deductions on sukuk issuance costs under the Wakalah principle will be extended up to YA 2025.

• Various tax incentives targeted to promote tourism are introduced, such as:

>> income tax exemption for organisers of approved activities, including arts and culture, international sports recreational competitions and conference organisers;

>> investment tax allowance or 100% income tax exemption for new investments in international theme park projects; and

>> the current tax deduction up to MYR 70,000 for companies that sponsor arts, cultural and heritage activities in Malaysia will be increased to MYR 1,000,000 per year of assessment.

• Small and medium-sized enterprises (SMEs) will be taxed at 17% on the first MYR 600,000 of chargeable income (instead of the current MYR 500,000 threshold).

PERSONAL TAXATION• A new band for top income earners was

introduced, whereby taxpayers with taxable income above MYR 20 million will be taxed at 30% (currently 28%).

• Income tax exemption for women who return to work after a career break will be extended up to YA 2023.

• Personal relief on fees paid to child care centres and kindergartens will be increased from MYR 1,000 to MYR 2,000.

• The scope of serious diseases relief (with tax relief amount up to MYR 6,000) will be expanded to include medical costs related to fertility treatment.

• Tax deduction on donations to approved institutions which were previously capped at 7% of the aggregate income will be increased to 10%.

INDIRECT TAXATION• Training and coaching services provided by

training service providers to disabled persons will be exempt from services tax.

• Services tax on digital services by foreign service providers will be implemented with effect from 1 January 2020.

OTHER MEASURES• A comprehensive review and revamp of the

existing incentive framework is ongoing (including the incentives under the Income Tax Act 1967, the Promotion of Investments Act 1986 and Special Incentive Package), the new framework being expected to be completed by 1 January 2021.

• A Tax Identification Number (TIN) system will be introduced to all Malaysians above the age of 18 and corporate entities. This is expected to take effect from January 2021.

• Real property gains tax (RPGT): With respect to the acquisition of assets prior to 1 January 2013, the acquisition price of the assets will be deemed to be the market value as at 1 January 2013 for RPGT purposes.

• Stamp duty: the maximum stamp duty payable for a loan in foreign currency will be increased to MYR 2,000.

Principal Hub Incentive On 8 October 2019, the Malaysian Investment Development Authority (MIDA) issued updated guidelines for the principal hub (PH) incentive (PH 2.0 guidelines, the guidelines). The guidelines incorporate changes announced by the govern-ment in the Budget 2019. The PH 2.0 guidelines, which supersede the previous guidelines, are effective for applications received by MIDA from 1 January 2019 to 31 December 2020.

The PH incentive is only eligible for manufacturing and services companies. Commodity-based com-panies can no longer apply for the PH incentive.

The new reduced corporate taxation rates for new companies will be 5% and 10% for Tier 1 and Tier 2 companies, respectively, for a period of five years (an extension of another five years is available upon meeting certain requirements).

MALAYSIA


The reduced corporate taxation of 10% for Tier 3 companies is removed.

For existing companies, the incentive will be granted in the form of a concessionary corporate taxation rate of 10% on statutory income derived from qualifying PH activities for a period of five years of assessment.

Companies applying for the PH incentive must meet the following criteria:

• being locally incorporated under the Companies Act 2016 and Malaysian tax residents;

• having paid-up share capital of more than MYR 2.5 million;

• having minimum annual sales of MYR 500 million (additional requirement for companies applying for tax exemption on trading income);

• serving and controlling a minimum number of network companies as specified in the Appendices provided under the PH 2.0 guidelines;

• core income-generating activities must include the compulsory services activities, i.e. the Regional P&L Business Unit Management, and Strategic Business Planning and Corporate Development and a minimum number of other qualifying services as specified in the Appendices;

• providing an adequate number of high-value jobs as specified in the Appendices;

• incurring an adequate amount of annual operating expenditure as specified in the Appendices;

• the applicant company should be the planning, control and reporting centre for the qualifying services provided;

• Malaysian-owned and incorporated businesses are encouraged to provide headquarters-related services and expertise to their overseas companies; and

• significant use is made of Malaysia’s banking and financial services and other ancillary services and facilities.

An approved PH company will be able to enjoy certain facilities accorded to it, such as no local equity/ownership conditions, acquisition of fixed assets for business purposes, foreign exchange administration flexibilities, etc. Existing companies which are granted the PH incentive are required to conduct structured internship programmes or equivalent training schemes introduced by the government as specified in the Appendices.

Royalties and other income derived from intellec-tual property rights (IPR) are excluded from the PH incentive. Companies must submit the PH-CAF (Principal Hub-Compliance Assessment Form) to the MIDA annually (within six months from the date of financial year-end) for evaluation of performance. An approved PH company must comply with the stipulated conditions throughout the exemption period.

Where the approved PH Company fails to comply with the stipulated conditions in any year of assess-ment of the exemption period, the company may not enjoy the exemption on statutory income derived from PH qualifying activities for that year of assessment. The full eligibility criteria are provided in Appendix A (New company), Appendix B (Existing company approved International Procurement Centre, Regional Distribution Centre, Operational Headquarters with or without incentive) and Appendix C (existing company), respectively.

Digital Services Tax On 27 September 2019, the Ministry of Finance issued the Service Tax (Digital Services) Regulations 2019 (the Regulations) for the implementation of service tax on the provision of digital services by a foreign service provider (FSP). All FSPs providing any digital services to consumers with a total value exceeding MYR 500,000 will be liable for service tax registration. The application for registration can be made using Form DST-01. Notification of successful registration will be made in writing by the Director General, and a registration number will be assigned accordingly. Any changes in the particulars of the FSP must be reported in writing to the senior officer of service tax.

MALAYSIA MALAYSIA

The invoice for the provision of digital services must contain several particulars as provided under the Regulations. Every FSP must file a service tax return for every taxable period using Form DST-02. Payment of service tax/penalties must be made to the Director General via electronic banking or any manner determined by the Director General. The total amount of service tax payable will be declared in Ringgit Malaysia in the return. Any person who is eligible to claim a refund for digital service tax purposes must apply for this to the Director General in the form and manner determined by the Director General. An authentication code and an account for the use of electronic services provided under section 87 of the Service Tax Act 2018 may be assigned to any person by the Director General.

Ordinary hours for the purpose of receiving returns and making payments of service tax or penalties payable through electronic banking will be from 7.30am to 11.30pm Malaysian standard time (UTC/GMT + 8 hours) at any day of the week. Returns or payments received beyond ordinary hours will be deemed to be received on the following day. Any person committing an offence under the regulation will be liable, upon conviction, to a fine not exceed-ing MYR 30,000 or to imprisonment for a term not exceeding two years, or both.

Parts II (registration) and V (electronic services), and regulations 17 (general penalty) and 18 (forms) of the Regulations came into operation on 1 October 2019. Parts III (invoice), IV (return, payment and refund) and VI (miscellaneous), with the exception of regulations 17 and 18, of the Regulations will come into operation on 1 January 2020.

ITA, PITA AND RGPTA RETURNS: PENALTY FOR LATE FILING On 16 October 2019, the Inland Revenue Board (IRB) issued Operational Guideline No. 5/2019 (the guideline) to provide clarifications on the penalty that will be imposed for late filing of the tax return under subsection 112(3) of the Income Tax Act 1967 (ITA), subsection 51(3) of the Petroleum Income Tax Act 1967 (PITA) and subsection 29(3) of the Real Property Gains Tax Act 1976 (RPGTA).

Under the guideline, the penalty for late filing to be imposed under subsection 112(3) of ITA and sub-section 51(3) of PITA is as set out below.

• 15% (if the filing is done up to 12 months from the filing deadline).

• 30% (if the filing is done after 12 months but not later than 24 months from the filing deadline).

• 45% (if the filing is done after 24 months from the filing deadline).

With effect from the year of assessment 2019, any company, limited liability partnership, trust body or co-operative society that fails to inform the IRB of a change to the accounting period pursuant to subsection 21A(3A) of ITA will have the penalty for late filing imposed under subsection 112(3) of ITA regardless of whether the filing is done before the filing deadline of the new accounting period.

The filing of the tax return is considered late if the tax return is not filed within the grace period provided by the IRB and the grace period will be disregarded accordingly for the purpose of deter-mining the late filing penalty rate. The penalty for late filing to be imposed under subsection 29(3) of RPGTA is as set out below.

• 15% (if the filing is done up to 12 months from the filing deadline).

• 20% (if the filing is done after 12 months but not later than 24 months from the filing deadline).

• 25% (if the filing is done after 24 months from the filing deadline).

If a taxpayer fails to file his tax return within the stipulated deadline in a particular year of assess-ment, an estimated assessment may be made and the following penalties may also be imposed:

• 45% under ITA.

• 45% under PITA.

• 25% under RPGTA.

The guideline came into effect on 1 October 2019 and replaces the previous guideline No. 1/2015 dated 5 March 2015.


Development Cost for Customised Computer SoftwareOn 3 October 2019, the Ministry of Finance issued Income Tax (Capital Allowance) (Development Cost for Customised Computer Software) Rules 2019 (the rule) to gazette the granting of a capital allowance on the development cost for customised computer software incurred by a person.

The salient points of the rule are set out below:

• development cost for customised computer software means consultation fees, payments for rights of software ownership and incidental fees relating to the development of customised computer software;

• the rule is applicable for a Malaysian resident in respect of the development cost for customised computer software incurred by the person in the basis period for a year of assessment;

• the development cost is deemed to be incurred by the person in the basis period for a year of assessment in which the customised computer software is ready for use;

• the initial allowance and annual allowance is 20% of the development cost incurred respectively; and

• the rule is not applicable where during the basis period the person is eligible and has claimed in respect of that customised computer software:

>> an incentive under the Promotion of Investments Act 1986;

>> a deduction under section 33 of the Income Tax Act 1967 (the Act);

>> a deduction under section 34A of the Act;

>> a reinvestment allowance under Schedule 7A of the Act;

>> an investment allowance for the service sector under Schedule 7B of the Act;

>> an accelerated capital allowance under any rules made under section 154 of the Act; or

>> a tax exemption under paragraph 127(3(b) or subsection 127(3A) of the Act in respect of the statutory income of the person.

• The rule will take effect from the year of assessment 2018 onwards.

Taxation of Foreign Fund Management Company On 3 December 2019, the Inland Revenue Board (IRB) issued Public Ruling No. 7/2019 (the PR) explaining the tax treatment of income received by a foreign fund management company (FFMC) that provides fund management services to foreign and local investors. The PR replaces Public Ruling No. 6/2014 of 4 September 2014, with some updates and amendments made to the PR.

The basis period for a year of assessment (YA) of an FFMC will be its financial accounting period, which will be determined in accordance with the provi-sions of sections 20 and 21A of the Income Tax Act 1967 (ITA). Example 1 of the PR provides that, where an FFMC commenced operations on 1 November 2015 and drew up its accounts up to 30 June 2016 and remained the same financial year end annually, the basis periods are from 1 November 2015 to 30 June 2016 for YA 2016, 1 July 2016 to 30 June 2017 for YA 2017, and 1 July 2017 to 30 June 2018 for YA 2018.

The statutory income derived by FFMC from providing fund management services to foreign and local investors in Malaysia according to Syariah principles are exempt from the payment of income tax up to YA 2020.

With effect from YA 2021, the tax rate applicable for FFMCs in respect of income derived from providing fund management services to both foreign and local investors will be 24% instead of the current 10%.

MALAYSIA MALAYSIA

Tax Treatment of Perquisites from Employment On 19 November 2019, the Inland Revenue Board (IRB) issued Public Ruling No. 5/2019 (the PR) to explain the tax treatment of perquisites from an employment received in respect of having or exercising the employment in Malaysia. The PR replaces PR No. 2/2013 dated 28 February 2013. The contents of the PR are generally in line with the old PR. The main updates are set out below.

It is clarified that gifts provided by the employer and monthly bills paid by the employer on behalf of the employees for the following items are limited to one unit for each asset category:

• the gift of a fixed line telephone, mobile phone, tablet, pager or PDA which is registered under the name of the employee;

• monthly bills paid by the employer for the above-mentioned items registered under the name of the employee; and

• monthly broadband subscription bills paid by the employer for broadband registered under the name of the employee.

The tax treatment provided under Example 4 is expanded to provide that where a taxpayer is given a watch costing MYR 5,000 for serving the company for 20 years as a gift, the watch is a perquisite provided to the taxpayer and is taxable under section 13(1)(a) of the Income Tax Act 1967 (the Act). However, the taxpayer is also eligible for an exemp-tion of MYR 2,000 under paragraph 25C, Schedule 6 of the Act because the watch was received for his long service award. Therefore, the balance of MYR 3,000 will be taxed as a perquisite for the relevant year of assessment.

It is clarified that payment in lieu of notice or buy-out payment made by an employer to a new employee to reimburse the amount to be paid to his previous employer as immediate compensation at an amount equal to that which the employee would have earned as salary or wages by working through the whole notice period is considered a perquisite provided to the employee and must be treated as gross income from employment under section 13(1)(a) of the Act. In addition, the employer has to account for Monthly Tax Deduction with regard to such payment.

Tax Treatment of Expenditure for Repairs and Renewals of Assets On 26 November 2019, the Inland Revenue Board (IRB) issued Public Ruling No. 6/2019 (the PR) explaining the tax treatment of expenditure incurred on repairs and renewals of assets employed in generating gross income of a person.

• Repairs expenditure is tax-deductible if it is wholly and exclusively incurred in the production of gross income under subsection 33(1) of the Income Tax Act 1967 (ITA). Where the expenditure incurred on repairs is not wholly and exclusively incurred in the production of gross income, such expenditure is not tax-deductible.

• The PR provides that the term “repairs” means restoring something to good condition by renewing or replacing the damaged parts without any element of improvement, addition and alteration.

• Expenditure incurred in maintaining an asset (which is employed in generating income from a source) to enable it to function properly and efficiently is allowed as a deduction in ascertaining the adjusted income from that source.

• It is clarified that if an asset is acquired in a state of disrepair or an asset has not been used for a long time and is in need of repairs before the asset can be effectively used, the initial repairs expenditure incurred is not tax-deductible.

• It is clarified that where renewal expenditure involves the replacement of the whole asset, such expenditure is capital in nature and not tax-deductible. As such, it is important to distinguish between replacing a part of the entire asset and replacing the entire asset (entirety). Expenditure involving replacement of parts of a larger asset is revenue expenditure and tax-deductible.

MAYER BROWN | 3130 | Asia Tax Bulletin MALAYSIA

• Replacement of part of an asset which is damaged is tax-deductible if the original structure of the asset is retained without any improvement. Where repairs or replacement expenditure involves improvement which causes changes to the asset, the expenditure incurred is capital in nature and not tax-deductible.

• It is clarified that where the replacement and repairs expenditure cause changes to the asset but does not alter the original function of the asset, and the expenditure simply restores the asset to its original use in the business, the expenditure incurred is tax-deductible.

• Expenditure incurred on the replacement, repairs and renewal of implements, utensils or articles that have an expected life span of not more than two years used in the production of income of a person is allowed as a deduction from gross income on replacement basis. It is clarified that the said expenditure is tax-deductible only if it is incurred for the second time onwards. Expenses incurred for the first time on the asset are regarded as capital expenditure and not tax-deductible.

Labuan Offshore CompaniesEffective year of assessment (YA) 2020, a Labuan entity which does not comply with the substantial activity requirements will be taxed at the rate of 24% of its chargeable profits for that YA.

Effective 1 January 2019, royalty income or other income derived from the commercial exploitation of an intellectual property right are excluded from the profits of a Labuan entity carrying on Labuan non-trading activity and subject to tax under the Income Tax Act 1967 (ITA).

Effective YA 2020, for the purpose of double taxation arrangements effected under section 132 of the ITA, a Labuan entity carrying on a business or businesses is resident in Malaysia for the basis year for a YA if at any time during that basis year the management and control of its business are exercised in Malaysia and any other Labuan entity is resident in Malaysia for the basis year for a YA if the management and control of its affairs are exercised in Malaysia at any time during the basis year for a YA by its directors, partners, trustees or other controlling authority.

Effective YA 2020, additional assessment may be raised by the Director General within five years after the expiration of the YA if there is no sufficient assessment made by the person.

Effective YA 2020, the Director General may disregard and make adjustments accordingly on certain transactions as he thinks fit. The Director General is also granted the right to substitute the price in respect of the transaction to reflect an arm’s-length price for the transaction between associated persons.

Philippines

Transfer Pricing Audit Guidelines IssuedThe Bureau of Internal Revenue (BIR) recently issued Revenue Audit Memorandum Order No. 1-2019 (RAMO 1-2019) dated 20 August 2019 on transfer pricing audit (TPA) guidelines. The guidelines provide standardised audit procedures and techniques for conducting audits of taxpayers with related party and/or intra-firm transactions. The TPA guidelines serve as a manual for BIR’s internal revenue officers and employees in the audit/investigation of tax returns.

The TPA guidelines are applicable for:

• controlled transactions including the sale, purchase, transfer and utilisation of tangible and intangible assets, provision of intra-group services, interest payments and capitalisation, between related/associated parties, where at least one party is assessable or chargeable for tax in the Philippines;

• business restructuring within a multinational group and cost contribution arrangements; and

• transactions between a permanent establishment (PE) and its head office or other related branches. For the purposes of these guidelines, the PE will be treated as a separate and distinct enterprise from its head office or other related branches/ subsidiaries for tax purposes.

The transfer price in a related party transaction must conform with the arm’s length principle as stipulated in section 5 of Revenue Regulations No. 2-2013 (transfer pricing guidelines). Auditing transfer pricing on related transactions is a test of the application of arm’s length price to the related transactions.

JURISDICTION:


SingaporeJURISDICTION:

FATCA Reporting On 30 September 2019, the Inland Revenue Authority of Singapore (IRAS) issued updated guidance on the Foreign Account Tax Compliance Act (FATCA) reporting. IRAS had earlier announced that FATCA returns submitted via the International Data Exchange System (IDES) will no longer be accepted with effect from 1 April 2020. The updated guidance for FATCA reporting includes the following:

• supplementary XML schema guide for preparing the FATCA reporting data file: this provides additional guidance on how the information for certain data elements must be presented for FATCA reporting to IRAS via the myTax Portal effective from 1 April 2020. The supple-mentary guide is to be read in conjunction with the FATCA regulations and other FATCA guidance materials;

• reporting Singaporean financial institu-tions (SGFIs) must provide their FATCA registration information to IRAS, otherwise they will not be able to file their FATCA returns via the myTax Portal from 1 April 2020; and

• the list of US IRS-approved certificate authorities has been updated.


EURASIAN ECONOMIC COMMUNITY On 1 October 2019, the Eurasian Economic Community (Armenia, Belarus, Kazakhstan, Kyrgyzstan, Russia) and Singapore signed a free trade agreement (FTA) in Yerevan.

EU On 21 November 2019, the free trade agreement between the European Union and Singapore, signed on 19 October 2018, has entered into force, providing import duty exemptions on many products imported into the EU from Singapore.

The audit procedure on transfer pricing consists of three phases:

• Preparation: in preparation for the audit, the revenue officer will collect and analyse the taxpayer’s data in respect of special relationships with their related/associated parties. The audit plan will address the issues identified, audit steps, timelines and the communication process. The BIR will review available documents that include annual income tax returns, audited financial statements, tax treaty rulings/applications and prior annual audit reports;

• Implementation: implementation of an audit involves the following: i) determination of the characteristics of the taxpayer’s business, (ii) selection of the transfer pricing method; and (iii) application of the arm’s length process; and

• Reporting: reporting of an audit on transfer pricing must be carried out according to the reporting requirements under the RAMO and the conduct of the audit must comply with all reporting requirements specifically provided in the TPA guidelines.

Transfer pricing methods provided in the TPA guidelines are consistent with the transfer pricing guidelines. The TPA guidelines describe the methods in great detail accompanied by examples and the steps to apply the arm’s length principle in accordance with the method chosen.


SWEDENOn 1 November 2019, the Philippines-Sweden Social Security Agreement and its administrative arrangement will enter into force. The agreement generally applies from 1 November 2019.

PHILIPPINES

MAYER BROWN | 3534 | Asia Tax Bulletin SINGAPORE SINGAPORE

GERMANY On 9 December 2019, Germany and Singapore signed an amending protocol to update the Germany-Singapore Income and Capital Tax Treaty in Berlin.

KOREAOn 31 December 2019, the Korea-Singapore Income Tax Treaty entered into force. The new treaty generally applies from 31 December 2019 for the provisions of article 24 (Exchange of Information) and from 1 January 2020 for withholding and other taxes. From these dates, the new treaty generally replaces the tax treaty signed in 1997, as amended by the 2010 protocol.

TUNISIA On 17 December 2019, the Singapore-Tunisia Income Tax Treaty entered into force. The treaty generally applies from 1 January 2020.

Taiwan

Procedure for Withholding Taiwan-Sourced Income of Foreign Companies On 26 September 2019, the Ministry of Finance (MoF) enacted an amendment to the Regulations for Taiwan-sourced Income Recognition under article 8 of the Income Tax Act (Taiwan-sourced Income Rules). The new article 15-1 allows applications to the relevant Taiwan tax authorities to be made by foreign companies with neither a fixed place of business nor a business agent in Taiwan for pre-approval of the ratio of Taiwan-sourced income to total income (generally referred to as the “contribution ratio”) and profit rate to be used by the companies.

Under the amendment, after approval is granted, tax on certain deemed Taiwan-sourced income earned by foreign companies will be withheld on a net basis instead of on gross income. Under the approval, the withholding agent may apply the approved contribution ratio and profit rate to calculate the amount of net Taiwan-sourced income for withholding tax purposes.

Further guidance under Tax Ruling No. 10804544261 on the determination of contribution ratios and profit rates is set out below.

DETERMINATION OF PROFIT RATE• For income for which relevant

accounting records and documentation are available, the profit rate may be assessed based on the actual amounts of Taiwan-sourced income and the relevant costs and expenses.

• For income without any relevant accounting records or documentation being available, but where the tax authority had previously assessed the taxpayer’s contracts with identical content that were executed within the

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MAYER BROWN | 37TAIWAN

past three years on an actual basis, the profit rate will be the three-year average of the assessed profit rates.

• For income that does not meet the above criteria, but where the category of the applicant’s main business may be determined, the standardised deemed profit rate of the category prescribed by the MoF may be used.

• The tax authority reserves the right to use actual profit rates if they are higher than the rates determined based on the previous two methods.

DETERMINATION OF CONTRIBUTION RATIO• Where the taxpayer is able to provide sufficient

documentation to substantiate the source of the income (onshore or offshore), the contribution ratio may be assessed based on actual data provided.

• Where the taxpayer is unable to provide sufficient documentation to substantiate the source of the income, but where the tax authority had previously assessed the taxpayer’s contracts with identical content and transaction flows that were executed within the past three years on an actual basis, the contribution ratio will be the three-year average of the assessed contribution ratios. However, if the tax authority finds that the actual contribution ratio is higher than the average contribution ratio, the tax authority may assess the income based on the actual ratio.

• For income that does not meet the above criteria, the contribution ratio is deemed to be 100% (i.e. the income is considered to be wholly Taiwan-sourced income).

Incentive for Reducing Retained Earnings Tax by Substantial Investment On 1 October 2019, the Ministry of Finance pub-lished the draft “Regulations on Deduction of Undistributed Earnings and Application for Tax Refund for Substantive Investment Made by a Profit-seeking Enterprise or a Limited Partnership” pursuant to article 23-3 of the Statute for Industrial

Innovation in relation to incentives for reducing retained earnings tax.

Currently, earnings of the current year that are not distributed by a company in the next fiscal year are subject to a surtax of 5%. The incentive aims to encourage companies to make substantial invest-ments rather than retaining earnings in corporate bank accounts or distributing them to shareholders.

A company will be exempted from the retained earnings tax if the following conditions are met:

• the minimum amount of investment is TWD 1 million in a fiscal year;

• the incentive is applicable to after-tax earnings generated in 2018 and onwards. For example, if a company uses the earnings from 2018 to invest in buildings, equipment, software and technology, the taxable base will be reduced by the investment amount actually paid in 2019 and the retained earnings tax liability will be reduced in the filing of the corporate income tax return in May 2020; and

• the investment must be made within three years after the generation of earnings. For example, if a company uses earnings generated in 2018 to make investments, the payment for the investments must be made before the end of 2021 in order to qualify for the tax incentive.

Where any company has claimed the above-men-tioned tax deduction and subsequently disposes, transfers, rents out, or returns the assets within three years, the exempted taxes are required to be repaid to the tax authority and interest charges will be imposed accordingly.

• The draft regulations are available for public comment and are expected to be enacted before the end of 2019.

Safe Harbour Rules for Master File and CbC Report • On 10 December 2019, the Ministry of Finance

published Tax Decree No. 10804651540 (the decree) which amends the safe harbour rules for the Master File and Country-by-Country report (CbCR) respectively. This decree replaces Tax Decree No. 10604700690 dated 13 December 2017. The decree comes into effect retrospectively from fiscal year 2017 onwards.

SAFE HARBOUR RULES FOR MASTER FILEA Taiwan profit-seeking enterprise which is a constituent entity of a multinational enterprise (MNE) group is exempted from submitting a Master File according to Article 21-1, paragraph 3, of the Regulations Governing Assessment of Profit-Seeking Enterprise Income Tax on Non-Arm’s-Length Transfer Pricing (Taiwan TP Guidelines) if the criteria set out below are met.

• The amount of net operating revenue and non-operating revenue in a fiscal year is less than TWD 3 billion or the aggregate of cross-border controlled transactions in a fiscal year is less than TWD 1.5 billion.

• The aggregate of cross-border controlled transactions refers to the aggregation of the absolute amount of all types of transactions between the Taiwan profit-seeking enterprise and its related parties outside of Taiwan.

• If there are two or more entities of an MNE group within Taiwan, the safe harbour rule applies on an individual basis. If there are two or more entities that are required to prepare and submit a Master File, one entity may be designated to submit the Master File in accordance with Article 21-1 of the Taiwan TP Guidelines.

SAFE HARBOUR RULES FOR CBCRA Taiwan profit-seeking enterprise which is a constituent entity of an MNE group is exempted from the submission of a CbCR in accordance with Article 22-1, paragraph 6, of the Taiwan TP Guidelines if the following criteria are met:

• the Taiwan profit-seeking enterprise is the ultimate parent entity (UPE) of the MNE group and the total consolidated revenue of the group in the preceding fiscal year is less than TWD 27 billion or EUR 750 million (based on the average exchange rate on January 2015 translated into TWD); or

• the UPE of the MNE group is not within the jurisdiction of Taiwan and one of the following conditions are met:

>> the jurisdiction in which the UPE is a tax resident has established the CbCR requirement and the MNE group meets the safe harbour rules of the jurisdiction;

>> the jurisdiction in which the UPE is a tax resident has not established the CbCR requirement and the surrogate parent entity (SPE) meets the safe harbour rules of the jurisdiction in which the SPE is a tax resident;

>> the jurisdiction in which the UPE is a tax resident has not established the CbCR requirement and there is no SPE, but the Taiwan safe harbour rules are met; or

>> the Taiwan profit-seeking enterprise meets the above safe harbour rules for the Master File and is exempted from submission of a Master File.

Even if a Taiwan profit-seeking enterprise meets the above safe harbour rules, the tax authority may still request the Taiwan profit-seeking enterprise to provide a Master File or CbCR during a tax audit if the MNE group is obligated to submit these documents based on the requests of other tax jurisdictions.

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ThailandJURISDICTION:

Repeal of Existing Tax Incentive Tax Benefits On 1 November 2019, the Thai Official Gazette published Royal Decrees No. 685, No. 686 and No. 687 (the Royal Decrees) providing details of the repeal of tax benefits granted under the previous Board of Investment (BOI) incentive programmes: Regional Operating Headquarters (ROH), International Headquarters (IHQ) and International Trading Centres (ITC).

• The preferential corporate income tax rate and exemptions provided under ROH 1 (original scheme) for income derived from borrowing and onlending activities will be applicable only until the accounting period commencing on or after 1 January 2020 but not later than 31 December 2020.

• The exemptions for service income and the preferential corporate income tax rate for income derived from borrowing and onlending activities provided for under ROH 2 (new scheme) were terminated with effect from 31 May 2019.

• The preferential corporate income tax rate and exemptions provided for under IHQ for royalty income was terminated with effect from 31 May 2019.

• The specific business tax exemption provided for under IHQ on income derived from treasury management services was terminated on 31 May 2019.

• The tax rate for certain income arising from domestic R&D operations under IHQ will be reduced. Further, certain income arising from domestic R&D operations under IHQ will be exempt from income tax provided that certain requirements have been fulfilled.

• Withholding tax will be imposed on dividends distributed under ROH 2, IHQ and ITC to overseas shareholders with effect from 1 January 2021.

Tax Implications of Investment Income On 12 November 2019, the Thai Official Gazette published royal decree No. 689 which provides the details on the tax implications of investment income derived by individuals and companies. The decree entered into force on 13 November 2019.

• Investment income derived from debt securities and mutual funds will be subject to withholding tax at a rate of 15%.

• Certain investment income from the transfer of investment units in specified mutual funds under the law governing securities and stock exchange are exempted accordingly.

Withholding Tax Implication on Interest Payment Made to Mutual Fund On 2 December 2019, the government published Ministerial Regulation No. 353 (the regulation) which provides the withholding tax (WHT) implication on the interest payment made by a Thai corporate entity to a resident mutual fund. It is provided that when a Thai corporate entity (the payer) makes an interest payment to a resident mutual fund, the payer is required to deduct WHT at a rate of 15% in relation to the interest payment made. The WHT should be remitted to the Thailand Revenue Department within seven days after the end of the month in which the payment is made. The regulation is to be applied retroactively from 20 August 2019.

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VietnamJURISDICTION:

Loan Interest Earned by Representative Office On 24 October 2019, the Department of Taxation of Ha Noi City issued Official Letter No. 80503/CT-TTHT (the Letter) providing clarification on the tax implications of interest income from term loans.

The Letter clarifies that where a foreign bank establishes a representative office in Vietnam and derives interest income from term loans granted in Vietnam, the interest payments are subject to withholding tax, with the representative office being responsible for declaring and paying the withholding tax in accordance with clause 3 of article 7 and clause 2 of article 13 of Circular No. 103/2014/TT-BTC. The interest income from term loans is exempt from value-added tax in accordance with article 8 of Circular No. 151/2014/TT-BTC.

Tax Implications TAX IMPLICATIONS OF ADVERTISING AND MARKETING SERVICES PERFORMED OUTSIDE VIETNAM

On 9 October 2019, the General Department of Taxation issued Official Letter No. 4102/TCT-CS (the Letter) providing clarification on the tax implications of advertising and marketing services performed outside Vietnam.

The Letter clarifies that, according to Clause 4, article 2 of Circular No. 103/2014/TT-BTC, advertising and marketing services performed outside Vietnam are exempt from withholding tax. Accordingly, foreign individuals hired by a company to perform the aforementioned services in the foreign market are also exempt from having to pay withholding tax. However, the exemption does not apply to online advertising and marketing services.

The company is required to keep proper documentation substantiating that the expenses incurred on advertising and marketing services performed outside Vietnam are incurred for business purposes. Such documentation includes service contracts, reports on results of advertising and marketing of products, documents of money transfer and other related documents.

TAX IMPLICATIONS OF TUITION FEES PAID FOR CHILDREN OF FOREIGN EMPLOYEES

On 14 October 2019, the Department of Taxation of Ha Noi City issued Official Letter No. 78137/CT-TTHT (the Letter) providing clarification on the tax implications of fees paid by enterprises for the tuition of children of foreign employees.

Under clause 2.4, article 4 of Circular No. 96/2015/TT-BTC, where the tuition fees are clearly specified in the employment contract and supporting documents substantiating the above exist, the enterprise is entitled to deduct the expenses incurred.

The foreign employees will be exempt from the withholding of personal income tax (PIT) relating to such tuition fees in accordance with point g.7, clause 2, article 2 of Circular No. 111/2013/TT-BTC.

TAX IMPLICATIONS OF SALE OF GOODS VIA FORWARDING COMPANY

On 16 September 2019, the Department of Taxation of Ha Noi City issued Official Letter No. 72267/CT-TTHT (the Letter) providing clarification on the tax implications of the sale of goods by a foreign company in Vietnam via a forwarding company.

The Letter explains that, pursuant to clause 3, article 1 of Circular No. 103/2014/TT-BTC (the Circular), where the foreign company hires a local company to perform distribution services or other services relating to the sale of goods owned by the foreign company in Vietnam, the foreign company is subject to withholding tax accordingly.

Where the foreign company does not meet the conditions for declaring and paying taxes in Vietnam directly, the local company is responsible for withholding the tax in accordance with the guidelines provided under articles 12 and 13 of the Circular.

Furthermore, the local company is also required to declare and pay value-added tax and income tax on the fee for forwarding services and money collection services paid to the foreign company.

TAX IMPLICATIONS OF PAYMENT FOR USE OF FOREIGN BRAND NAME

On 19 August 2019, the Department of Taxation of Ho Chi Minh City issued Official Letter No. 8754/CT-TTHT providing clarifications on the tax implications of payments for the use of a foreign brand name.

It is clarified that in accordance with the guidelines in official letter No. 15888/BTC-CST, when a company imports goods from another country and the payment made for the goods includes the payment for the use of a foreign brand name, the payment for the use of the foreign brand name shall be considered a royalty payment.

As such, the company is responsible for remitting the tax on the royalty payment at the following rates:

• 5% under value-added tax (VAT); and

• 10% withholding tax under enterprise income tax (EIT).

The VAT paid on behalf of the foreign contractor qualifies for input VAT deduction if the conditions in Clause 10, Article 1 of Circular No. 26/2015/TT-BTC are met.

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TAX ON GAINS FROM CAPITAL TRANSFER BY FOREIGN COMPANIES

On 4 September 2019, the Department of Taxation of Ha Noi City issued Official Letter No. 69382/CT-TTHT (the letter) providing clarification on the tax on gains from a capital transfer by foreign organisations.

It is clarified that when a foreign company transfers the capital invested in a Vietnamese company, the foreign company will be subject to tax on the gains from the capital transfer in accordance with article 14 of Circular No. 78/2014/TT-BTC (the circular) even though the company does not have a permanent establishment in Vietnam.

Where the capital is transferred to an organisation/individual in Vietnam, the transferee will be responsible for withholding and paying the tax on behalf of the foreign company in accordance with point c, clause 2 of article 14 of the circular.

Further, if the transfer contract does not specify any payment price or the tax authority has grounds to conclude that the payment price is not in line with the market price, the tax authority may inspect and fix the transfer price in accordance with point a, clause 2 of article 14 of the circular.

TAX IMPLICATIONS OF REMUNERATION PAID TO BOARD OF DIRECTORS

On 23 October 2019, the Department of Taxation of Ha Noi City issued Official Letter No. 80200/CT-TTHT (the Letter) providing clarification on the tax implications of remuneration paid to members of a board of directors (BOD). The Letter clarifies that according to point d of clause 2.6, article 4 of Circular No. 96/2015/TT-BTC (the circular), the remuneration paid to a member of a BOD is not tax-deductible if the member of the BOD is not directly involved in directing the production and business of the company.

However, if the member of the BOD is directly involved in directing the production and business of the company, the remuneration paid to such member, in line with the conditions provided under article 4 of the circular, will be a tax-deductible expense.

TAX IMPLICATIONS OF CANCELLATION OF LOAN BY FOREIGN ORGANISATION

On 10 December 2019, the Department of Taxation of Ha Noi City issued Official Letter No. 92132/CT-TTHT (the Letter) clarifying the tax implications of the cancellation of a company’s loan by a foreign organisation.

The Letter clarifies that where a loan (principal and interest) obtained by a company is cancelled by the foreign organisation, the foreign organisation will be exempt from withholding tax on the interest, while the company is not required to account for the withholding tax.

However, the company must regard the cancelled loan (principal and interest) as other income and account for enterprise income tax accordingly.

TAX IMPLICATIONS OF IMPORTATION OF EQUIPMENT WITH SOFTWARE

On 4 December 2019, the Department of Taxation of Ha Noi City issued Official Letter No. 90747/CT-TTHT (the Letter) providing clarification on the tax implications of the importation of equipment with software. The Letter clarifies that where the imported equipment system comes with controlling software, value-added tax (VAT) and enterprise income tax (EIT) will be applicable upon the importation of the equipment.

VAT will be imposed on the value of the machinery and equipment upon importation, whereas the software is exempt from VAT according to Clause 13, article 4 of Circular No. 219/2013/TT-BTC.

EIT of 10% will be imposed on the value of the software, and 1% on the value of the machinery.


KOREAOn 27 November 2019, Korea and Vietnam signed an amending protocol to update the Korea-Vietnam Income Tax Treaty in Seoul.

VIETNAM42 | Asia Tax Bulletin


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