asset & wealth management tax highlights – asia pacific

Asset & WealthManagementTax Highlights –Asia Pacific

October to December 2015In this edition’s asset and wealth management tax highlights forthe Asia Pacific region, we highlight industry developments fromAustralia, China, Hong Kong, India, Indonesia, Korea, and thePhilippines, which may impact your asset and wealthmanagement business. We hope you find these updates of interest,and will be pleased to discuss these developments and issues withyou further.

Australia

New tax system for ManagedInvestment Trusts

On 3 December 2015, the AustralianGovernment introduced Bills into Parliamentcontaining legislation to implement the newtax regime for managed investment trusts(MITs) and a number of relatedamendments.

The new MIT regime will apply to incomeyears commencing on or after 1 July 2016.Eligible MITs will be able to elect to becomean Attribution MIT (AMIT) by irrevocablechoice. An ability to ‘opt in’ early (for incomeyears commencing on or after 1 July 2015) isalso available.

There will now be broadly three types ofMITs for tax purposes:

• Ordinary MIT: eligible to make the MITcapital account election. This electionallows the MIT to treat its investments oncapital account and therefore, access thecapital gains tax discount concession.

• Withholding MIT: has the same baseoutcomes as an ordinary MIT but with thebenefit of concessional withholdingprovisions inrespect of certain ‘fundpayments’ because it has a substantialproportion of its investment managementactivities inAustralia.

• Attribution MIT: has the same baseoutcomes as an ordinary MIT, however, itis subject to the new AMIT provisions (ascontained inthe Bill). An AMIT may or maynot be a withholdingMIT.

2 Asset & Wealth Management Tax Highlights – Asia Pacific

Some of the key features of the AMITprovisions are as follows:

• An AMIT is an MIT where interests ofmembers are ‘clearly defined’ and thetrustee has made an irrevocableelection to apply the regime. An MITthat is a registered scheme will bedeemed to have clearly definedinterests. For unregistered schemes,the rights to income and capital arisingfrom each of the interests in the trustwill need to be the same (disregardingcertain factors such as imposition ofdifferent fees, issue and redemptionprices etc.).

• AMITs will be deemed to have fixed

trust status for tax purposes.

• The trustee has the option to recogniseclasses of multi-class trusts as distinctAMITs, and therefore, the tax positionof each class is kept separate.

• The trustee allocates trust componentsto members of an AMIT based on an‘attribution’on a fair and reasonablebasis in accordance with the trust deed,ratherthan on a ‘present entitlementbasis’ under the old regime.

• Streaming of components to membersbased on tax characteristics of membersis not allowed with certain exceptionssuch as the allocation of capital gainstoa redeeming unit holder where thecapital gain arises as a result of theredemption.

• The industry practice of recognising‘unders and overs’ is codified. Undersand overs are permitted to be carriedforward on a component bycomponent basis in the year ofdiscovery. There is generally a fouryear time limit on the requirement to‘discover’ unders and overs. As analternative to recognising unders andovers, an AMITcouldre-issue its annual statements(AMMA statements) to members.

• There are administrative penaltiesthat may apply to the trustee of anAMIT where any individual under orover is considered to arise due to theintentional disregard of a taxation lawor recklessness by the trustee as to theoperation of a taxation law.

• In addition to downward cost baseadjustments required under currentlaw as a result of distributions of taxdeferred amounts, AMITs are nowentitled to make upward adjustmentsto cost bases of the units in the AMITwhere the distribution membersreceive is less than their attributedshare of taxable trust components.

• The tax treatment of tax deferreddistributions to members holding theirunits of an AMIT on revenue accounthas now been clarified (i.e. reduce thecost base of the units rather than treatas ordinary income).

• There have been modifications to thewithholding tax provisions to ensurethat withholding tax applies toattributed amounts.

• A non-arm’s length rule has beenintroduced such that the trusteeof anMIT will be liable to pay tax on theportionwhichexceeds the arm’s lengthamount.

Other related changes include thefollowing:

• The definition of MIT has beenexpanded to include foreign lifeinsurance companies, entities that arewholly owned by one or more qualifiedinvestors, and limited partnershipswhere all the limited partners arequalified investors and the generalpartner owns 5% or less interest. Thesechanges apply for income years on orafter 1 July 2014.

• The start-up concession has beenincreased to a maximum of 2 yearsfrom the existing 18 months to giveadditional time for MITs to meet thewidely held and closely held tests. Thischange applies from the time the AMITprovisions take effect.

• There are certain rules under Division6C of the Tax Act which taxes a publicunit trust that does not carry on eligibleinvestment business similar to acompany. The existing rule whichdeems a trust to be a public unit trustwhere certain exempt entities andsuperannuation funds hold 20% ormore interest in the trust will berepealed with effect from income yearson or after 1 July 2016. In addition,Division 6B of the Tax Act which soughtto tax corporate unit trusts in a similarmanner to companies will be repealedwith effect for income yearscommencing on or after 1 July2016.

Multinational integritymeasures

The Australian Parliament has passedthe following measures affectingmultinationals operating in Australia:

• Financial reporting for multinationals.“Significant global entities” (i.e. entitiesthat are part of a group with globalincome of more than AUD 1 billion) willbe required to prepare general purposefinancial statements for their Australianoperations. The general purposefinancial statements will be need to besubmitted by the taxpayer to theAustralian Taxation Office (ATO) bythe time of filing the tax return if theyhave not been previously filed with theAustralian Securities and InvestmentsCommission (ASIC). The ATO willshare the financial statements withASIC. Documents filed with ASIC areavailable to the public. The newfinancial reporting requirements willapply from years beginning on or after 1July 2016.

Asset & Wealth Management Tax Highlights – Asia Pacific 3

• New multinational anti-avoidance law(MAAL). The MAAL is designed tocounter the erosion of the Australiantax base by multinational entities usingartificial or contrived arrangements toavoid the attribution of business profitsto Australia through a taxable presencein Australia. These measures willgenerally apply in relation to schemeswhere a taxpayer derives a benefit on orafter 1 January 2016.

• Country-by-Country (CbC) reporting.Consistent with the OECDrecommendations, all Australian andforeign groups with an Australianpresence with global turnover of morethan AUD 1 billion will be required tofile a master file and local file with theATO. The first reports will not be dueto be filed until late 2017.

• Increase in penalties: Penaltiesimposed on significant global entitiesthat enter into tax avoidance or profitshifting schemes have beensignificantly increased (to apply inrelation to an income yearcommencing on or after 1 July2015).

In addition to the above, the followingtransparency measures have beenreleased:

• New transparency laws allowing certaintax information of public companies andAustralian subsidiaries of foreign groupswith Australian turnover of AUD 100million or more, and Australian privatecompanies with turnover of AUD 200million or more to be published. Forpublic companies and Australiansubsidiaries of foreign groups, the ATOhas implemented these rules bypublishing this information in December.

• The Board of Taxation released aconsultationpaperon a voluntary taxtransparency code in relationtoadditional disclosure of tax informationby ‘large businesses’ (Australianturnover of at least AUD500 million)and ‘medium businesses’ (Australianturnover of at least AUD 100 million butless than AUD 500 million).

Third partyreporting

The Australian Parliament has passedlaws introducing new third partyreporting requirementsdesigned to equipthe ATO with more data to enable pre-filling of income tax returns forindividualsand for compliance and datamatching activities.

Under the regime, affected entities (suchas Government entities, ASIC listedcompanies and trusts, fund managers andcustodians, and banks) will have annualobligationsto report information to theATO including Government grants andpayments to suppliers, transfers of realproperty, transfers of shares and units,and business transactions throughpayment systems. Third party reportingobligationswill applyto transactionshappening on or after 1 July 2016 (fortransfers of real property and ASICmarket integrity data) and on or after 1July 2017 (for other transactions).

OECD CommonReporting Standard

On 3 December 2015, the AustralianGovernment introduced a Bill intoParliament introducing the OECD’sCommon Reporting Standard (CRS)for the automatic exchange of financialaccount information.

Hong Kong

Consolidated response fromthe government forimplementing AEOI in HongKong

On 12 October 2015, the HKSARGovernment published a consolidatedresponse (the Response Paper) afterconsidering views from the public on theimplementation of automatic exchange ofinformation in Hong Kong. With only afew months before a draft Bill will beintroduced to the Legislative Council, it isnot likely that there will be significantdeviations in the draft Bill from whathave been set out in the Response Paper.It is therefore imperative that financialinstitutions analyse impact of theCommon Reporting Standard (CRS) ontheir business and work towardsimplementing CRS compliant processesand procedures.

For further details, please refer tohttp://www.pwchk.com/home/eng/crs_oct2015.html

Understanding the IRD’s viewson emerging corporate taxissues, in particular the practiceon processing Hong Kong taxresident certificateapplications

In the 2015 annual meeting between theIRD and the HKICPA, the IRD expressedits views on various emerging corporatetax issues in the domestic as well as cross-border context, including: (1) taxation ofroyalties from licensing of intellectualproperty rights; (2) the IRD’s assessmentof Hong Kong tax resident certificateapplications; (3) application of tax treatiesto non-resident partnerships; (4) foreigntax credit claims of Hong Kong branchesof overseas banks and (5) Hong Kong’sresponses to the Organisation forEconomic Cooperation and Development’sBase Erosion and Profit Shifting (BEPS)project.

Whilethe meeting minutes are not lawand are not legally binding, the minutesserve as a good reference of the IRD’sstance on various emerging tax issues. Inparticular, thisyear’s minutes have shedsome light on the impacts of the BEPSproject on the tax regime in Hong Kong,which are mainly in the areas ofconsiderationof corporate tax incentives,preventing treaty abuse and transferpricing. Companies with businessoperations in Hong Kong or doingbusiness with Hong Kong should take intoaccount the views expressed by the IRDin the meeting minutes in both of theirtax planning and tax filing processes foran effective management of their taxmatters.

For further details, please refer tohttp://www.pwchk.com/home/eng/hktax_news_nov2015_10.html

China

PN60 – new tax treaty benefitclaim procedures

The State Administration of Taxation (SAT)issued SAT Public Notice 2015 No. 60(PN60) on 11 September 2015 to supersedethe prevailing Guishuifa[2009]No.124 ontax treaty application. PN60 introduces anew mechanism of self assessment on theeligibility for tax treaty benefits (reducedtaxation or exemption) by non-residenttaxpayers. The pre-approval process orrecord filing acknowledgement from theChinese tax authorities is no longernecessary. Instead, the non-residenttaxpayers and their withholding agents willbe required to file certain prescribed formsand other supporting documents whenperforming tax filing to justify their claimsfor the tax treaty benefits.

For further details, please refer to

http://www.pwchk.com.hk/home/eng/chinatax_news_nov2015_44.html

http://www.pwchk.com.hk/home/eng/chinatax_news_sep2015_40.html

http://www.pwchk.com.hk/home/eng/hktax_news_sep2015_8.html


India

Regulatoryupdates

• Guidelines on overseasinvestments and other issues /clarifications for AlternativeInvestment Funds (AIFs) orVenture Capital Funds (VCFs) –On 1 October 2015, the Securities andExchange Board of India (SEBI) issueda Circular partially modifying theircircular dated 9 August 2007 on theGuidelines on overseas investmentsand other issues or clarifications forAIFs/ VCFs. Under the Circular,VCFs/AIFsare, from the date of thecircular, permitted to invest in OffshoreVenture Capital Undertakings whichhave an Indian connection (being acompany which has a front officeoverseas and back office operations arein India) of up to 25% of the investiblefunds of the VCF/AIF. Further,VCFs/AIFsshall not invest in jointventures/wholly owned subsidiarieswhile making overseas investments.The Circular also clarifies that from thedate of the Circular, the tenure of anyscheme of the AIF shall be calculatedfrom the date of final closing of thescheme.

• Foreign Direct Investment (FDI)Reforms – On 10 November 2015,the Indian Government published aPress Note outlining significantreforms in the FDI Policy. Thereforms are aimed at attracting moreforeign investments through furthereasing, rationalising and simplifyingthe process of foreign investments inthe country and putting more FDIproposals under automaticroute.

• Insurance Regulatory andDevelopment Authority of India(IRDAI) regulations for issue ofother forms of capital – On 13November 2015, IRDAI released thefinal regulations for issue of otherforms of capital (i.e. other than equityshares). The regulations, IRDAI (OtherForms of Capital) Regulations, 2015permits insurers to issue following twotypes of instruments with specific priorapproval from IRDAI and subject tocertain specified criteria.

1. Preference share capital; and

2. Subordinated debts (i.e.

debentures or any other debt

permitted by IRDAI)

5

• Foreign Investment in AIF, RealEstate Investment Trusts (REIT),Infrastructure Investment Trusts(InvIT) – On 16 November 2015, theReserve Bank of India (RBI) notifiedthe much-awaited regulations enablingforeign investments under theautomatic route in AIFs, REITs andInvITs and other entities regulated bythe SEBI or any other authoritydesignated for such purpose(collectively referred to as “InvestmentVehicles”). NRIs and RegisteredForeign Portfolio Investors (RFPIs) arealso permitted to invest in units ofInvestment Vehicles under this route.Downstream investment by anInvestment Vehicle are classified asforeign investment where neither theSponsor nor Manager nor InvestmentManager are Indian-owned andcontrolled. For this purpose, the extentof foreign investment in the corpus ofthe Investment Vehicle is irrelevant.Where the downstream investment isregarded as foreign investment, it willbe subject to sectoral caps andconditions/ conditions for FDI in LLP.

• Investment by Foreign PortfolioInvestors (FPI) in debtinstruments which are underdefault – On 26 November 2015, theRBI has decided to permit FPI toacquire NCDs/bonds, which are underdefault, either fully or partly, in therepayment of principal on maturity orprincipal installment in the case ofamortising bond. The revised maturityperiod of such NCDs/bonds,restructured based on negotiationswith the issuing Indian company,should be three years ormore.

• SEBI Circulars in relation to SEBI(Listing Obligations andDisclosure Requirements)Regulations, 2015 – On 30November 2015, the SEBI issuedcirculars prescribing additionalrequirements and disclosures to bemade under specified clauses of theSEBI (Listing Obligations andDisclosure Requirements) Regulations,2015, and to avail exemption under rule19(7) of Securities Contract(Regulations) Rules, 1957 in thefollowing areas:

1. Requirements for Scheme ofArrangement of Listed Companies:The circular provides theresponsibilities of the listedcompany and stock exchange inrelation to a particular Scheme ofArrangement.

2.Manner of achieving minimumpublic shareholding: The circularprescribes the various modes inwhich the minimum publicshareholding is achieved by a listedcompany.

• External CommercialBorrowings (ECB) Policy – NewFramework – On 30 November 2015,RBI issued a Circular outlining the newframework for ECB, replacing theexisting guidelines issued about adecade ago. The overarching principleof the new framework has been toliberalise and encourage long termECBs denominated in foreign currencyand ECBs denominated in INR. Forthis purpose, these ECBs have beensegregated from other ECBs as separate‘Track II’ and ‘Track III’ respectivelyunder the new framework. Further,there have been various amendmentsmade in respect of other ECBs havingaverage maturity of less than 10 years.

• Enrolment of ForeignCompanies with the Registrar ofCompanies – On 11 December 2015,the Indian Government issued a pressrelease which stated that every foreigncompany, as defined under Section2(42) of Companies Act, 2013 (the Act),is required to get itself registered withRegistrar of Companies, New Delhiwithin 30 days of its establishing aplace of business in India inaccordance with Section 380 of the Act.Such foreign companies also includethose which have a place of business inIndia established through electronicmode.

• IRDAI norm on issuance ofcapital by Indian InsuranceCompanies transacting otherthan Life Insurance Business –On 15 December 2015, the SEBInotified that no Indian insurancecompany transacting the Generalinsurance or Health insurance orReinsurance business shall approachthe SEBI for public issue of shares andfor any subsequent issue without thespecific previous approval of IRDAI.

Tax updates

No Minimum alternative Tax(MAT) on foreign companies for theperiod prior to 1 April 2015

On 23 December 2015, the IndianGovernment issued instruction no.18/2015 to reiterate its earlier standmentioned in the press release dated 24September 2015 and the commitmentmade by the Government before theSupreme Court by stating that with effectfrom 1 April 2001 the provisions of section115JB shall not be applicable to a foreigncompany (including an FII/FPI) if –

1. The foreign company is a resident of acountry with which India has a DoubleTaxation Avoidance Agreement(DTAA) and such foreign companydoes not have a permanentestablishment in accordance with theprovisions of the relevant DTAA,or

2.The foreign company is a resident of acountry with which India does nothave a DTAA and such foreigncompany is not required to seekregistration under section 592 of theCompanies Act, 1956 or section 380of the Companies Act, 2013.

Taxation of rupee denominatedoffshore bonds

The Central Board of Direct Taxes (CBDT)issued a press release on 29 October 2015stating that:

1. interest income from investment inRupee Bonds shall be subject to awithholding tax of 5% (which is in thenature of final tax), as applicable foroffshore dollar denominated bonds

2. capital gains arising from appreciationof rupee between the date if issue andthe date of redemption against theforeign currency in which investment ismade shall be exempt from tax.

The CBDT proposes to introduce anamendment to the law during thenextUnion Budgetpresentation.

Asset & Wealth Management Tax Highlights – Asia Pacific


Tax treatiesupdate

India – Israel – On 7 October 2015, theUnion Cabinet, through a press release,approved the protocol amending the taxtreaty with Israel to provide forinternationally accepted standards foreffective exchange of information on taxmatters including bank information andinformation without domestic taxinterest. The amended protocol furtherprovides that information received fromIsrael in respect of an Indianresidentcan be shared with other lawenforcement agencies withauthorisation of Competent Authorityof Israel and vice versa, and thelimitation of benefit clause, whichpermits application of domestic lawprovision and measures concerning taxavoidance in the event of treatymisuse.

India – Japan – On 2 December 2015,the Union Cabinet, through a pressrelease approved the protocol amendingthe treaty with Japan. The Protocol willfacilitate exchange of information, asper accepted international standards,on tax matters including bankinformation and information withoutdomestic tax interest. There is a furtherprovision in the Protocol for sharingany information received from Japan,with the authorisation of the competentauthority in Japan and vice versa, inrespectof a resident of India,

with other law enforcement agencies.The Protocol also has a provision forIndia and Japan to lend assistance toeach other incollection of revenueclaims, as well as for exemption ofinterest income from taxation in thesource country, with respect to debt-claims insured by the Government orGovernment-owned financialinstitutions.

India– Thailand– On 1 December2015, the Indian Government notifiedthe treaty between Government of Indiaand Government of Kingdom ofThailand signed on 29 June 2015. Thetreatywill be effective from 1 April 2016.

India – Turkmenistan – On 5November 2015, the Union Cabinet,through a press release approved theprotocol amending the treaty withTurkmenistan to provide forinternationally accepted standards foreffective EOI on tax matters includingbank information and informationwithout domestic tax interest. Theamended protocol also inserts the LOBclause which enables use of domesticlaw provisions and measuresconcerning tax avoidance in the event oftreaty misuse. It further provides thatinformation received fromTurkmenistan in respect of an Indianresident can be shared with other lawenforcement agencies withauthorization of respective CompetentAuthorities.

Indonesia

Exchange of information– and update

Following some noteworthyinternationaltax agreements that Indonesiahascommittedto, the Minister of Finance(MoF) has updated the Indonesia’sprovisionson Exchange of Information(EoI) through the issue of RegulationNo.125/ PMK.010/2015(PMK-125) dated7 July2015, which amends the MoFRegulation No.60/PMK.03/2014(PMK-60).

PMK-125 expands the list ofinternational tax agreements which arethe basis of EoI, to be as follows(additionsare highlighted inred):

a) Double Taxation Agreement(DTA/ taxtreaty)

b) Tax Information ExchangeAgreement (TIEA)

c) Convention on Mutual AdministrativeAssistance in Tax Matters(Convention)

d) Intergovernmental Agreement (IGA)

e) Multilateral or bilateralCompetent Authority Agreement(CAA)

f) Otheragreements

The types of EOI and theassociated application procedurestipulatedin PMK-125 remain thesame as inPMK-60.

For EoI purposes, the DGT can requestsupporting data from the relevanttaxpayers (including permanentestablishments) or other third partieshaving information relevant to thedisputed taxpayer, such as financialinstitutions (FIs) in Indonesia as well asits customers, and offshore entities whoseinformation is possessed or stored byIndonesian parties. If the data requestedis restricted banking information, thewritten request should come from theMoF and should be addressed to the Headof the Financial Services Authority(Otoritas Jasa Keuangan/OJK), wherepreviously it would have been addressedto the Governor of Bank Indonesia.

Under PMK-125, the DGT is authorisedtoprovide informationunder automatic EoIto a country partneron detailedinformation on tax withholding/collection,or financial information relatedto FIcustomers.The scope of financialinformation includes: account balances,total income generatedfrom assetsmaintained in FIs, securitiessale proceeds,and income paid or creditedto bankaccounts.

Debt to equity ratio

After having been stipulated in theIncome Tax Law for over three decades,the MoF has finally issued theimplementing regulation on Debt toEquity Ratio (DER) for tax calculationpurposes through the issuance ofRegulation No.169/PMK.010/2015(PMK-169)dated 9 September 2015 which isapplicable starting from fiscal year 2016.

This ratio is applicable to corporatetaxpayers that are establishedor domiciledin Indonesia whose capital consists ofshares, with the following exemptions.

Exemptparties

PMK-169 provides an exemption fromthe application of this ratio to thefollowing taxpayers:

a. Banks

b. Financing institutions

c. Insurance and reinsurancecompanies

d. Taxpayers in oil and gas mining,general mining, and other miningcompaniesunder a Profit SharingContracts, Contract of Works, orMining CooperationAgreements, andthe relevant contract/agreementcontains provisionsgoverning DER. Ifthe contract/agreement does notcontain such a provision or thecontract/agreement has expired, therelevant taxpayer is subject to the 4:1ratio

e. Taxpayers whose whole income issubject to final tax

f. Taxpayers in the infrastructureindustry

What is theratio?

A single ratio of 4:1 is applicable acrossthe board, which means the amount ofdebt allowable in order to obtain fulldeductibility of the financing cost islimited to four times the equity amount.Debt amount exceeding four times ofequity will result in an adjustment onthe deductible financing cost amount.

What is considereddebt

Falling under the category of debts are:

a. Long-term debt

b. Short-termdebt

c. Trade payables which bear interest

There is no differentiationbetween debtfrom a thirdpartyand from a related party,although it is mentioned that thedeductibilityof financing cost derivedfroma related party loan is still subject to arms’length principle on top of the DER.


What is consideredequity

PMK-169 defines equity as:

a. all items that are recorded under theequity section based on theprevailing accounting standards;and

b. an interest-free loan fromrelated parties.

What is considered financingcost

Financing costs are defined as all costsof funds, as follows:

a. Loan interest

b. Discount and premium related tothe loan

c. Arrangement of borrowings

d. Financing cost in leasingarrangement

e. Guaranteefee

f. Foreign exchange derived fromthe financing costs in points (a)to (e) above.

How to apply the ratio ina tax calculation

The amount of debt for the purpose ofcalculating DER is the monthlyaverage debt balance during the fiscalyear or part of the fiscal year.

Similarly, the amount of equity for thepurpose of calculating DER is themonthly average equity balance duringthe fiscal year or part of the fiscal year.In the case where the balance of equityis zero or minus, all financing costs ofthe taxpayer cannot be deducted.

If the actual ratio of the debt andequity exceed 4:1, the deductiblefinancing costs must be adjusted to anallowable amount based on the 4:1ratio. It is silent on the treatment if theration is less than 4:1.

When some of the income is subject tofinal tax, the taxpayer must firstcalculate the DER, apply it to the totalfinancing cost to derive a deductiblefinancing cost amount, then later adjustthe deductible amount based on aproration of the final and non-final-taxed income.

However, if some of the debt is used togenerate non-taxable income, the loanand relevant financing costs areexcluded prior to calculating the DER.

Offshore loan reporting requirement

Taxpayers who have an offshore privateloan must submit a report to theDirectorate General of Tax (DGT)regarding the amount of this offshoreloan. Failure to do this will result in non-deductibility of the relevant financingcost. The reporting mechanism will begoverned under a separate DGTregulation.

Although the applicability of the DERstarts in the 2016 fiscal year, taxpayersmay want to review the potential impactof this regulation on the deductibility oftheir future financing costs under thecurrent financing arrangement.

Real estate investment fund

The Minister of Finance issuedRegulationNo.200/PMK.03/2015 (PMK-200) on 10 November 2015 regardingincome tax and Value Added Tax (VAT)treatment for certain CollectiveInvestment Contracts to enhance thefinancial sector.

This regulation stipulates the taxtreatment for a Collective InvestmentContract in the form of a Real EstateInvestment Fund (Kontrak InvestasiKolektif – Dana Investasi RealEstate/KIK-DIRE).


Definition

A KIK-DIRE is a collective investmentcontract that raises public funds in orderto invest these in real estate assets,assets related to real estate, and/or cashand cash equivalent.

A KIK-DIRE scheme can be establishedwith or without a Special PurposeCompany (SPC). The SPC is owned atleast 99.9% by the KIK DIRE.

Income Tax Treatment

Dividend from SPC to KIK DIRE

Under the scheme where the KIK DIRE isestablished with a SPC, the SPC isconsidered an integral part of the KIKDIRE. Therefore, any dividend receivedby the KIK DIRE from the SPC is nottaken into account as taxable income atKIK level. This means that the dividendis not considered taxable income and nowithholding tax is due.

Tobe eligible for the above treatment,the KIK DIRE must attach the followingdocuments in their annual CorporateIncome Tax Return (CITR) for the fiscalyear where the dividend was received:

a. Copy of notification letter ofstatement of effective registration ofthe KIK DIRE that is issued by theFinancial Services Authority(Otoritas Jasa Keuangan/OJK);

b. Explanation from OJK that thetaxpayer is a SPC under KIK DIRE;and

c. Statement letter with stamp dutystating that the SPC is formedsolely for KIK DIRE purposes.

Transfer of real estate from originalasset owner (“originator”) to the SPC orKIK DIRE

The transfer of the real estate assets fromthe originator to the SPC or KIK DIRE isnot subject to the 5% final tax on thetransfer of land and building rights. No taxexemption letter (Surat Keterangan Bebas)is requiredfor this treatment. However,the gain is subject to income tax.

The originator must submit a writtennotification to the tax office of such assettransfer using the template provided inthe regulation. This notification letterand the documents outlined in point a, b,and c in the above section must beprovided to the authorised officials (suchas a notary) for them to be able to signthe transferdocument.

VAT Treatment

The SPC or KIK DIRE is considered as alow risk entrepreneur and therefore canenjoy the preliminary VAT refundprocess. Toenjoy this facility, thetaxpayer must submit an application(through a VAT return or a separateapplication letter) and meet the followingcriteria:

• The taxpayer has been appointedas alow risk entrepreneur;and

• There is an input VATclaim fromthe acquisition of the realestate.

Tobe appointed as a low riskentrepreneur, the SPC or KIK DIRE mustsubmit an application and attach it withthe documents outlined in point a, b, andc in the above section. The DirectorGeneral of Tax (DGT) must issue adecision within 15 working days,otherwise the application is deemedapproved and a decision must be issuedwithin 15 working days from the initialdeadline. The decision is applicable for 12months. Should this period end, thetaxpayer may reapply for appointment asa low risk entrepreneur.

The appointment decision is declaredinvalid if the taxpayer is (i) subject to apreliminary evidence tax audit orinvestigation; or (ii) subject to a taxaudit where it is discovered that thetaxpayers does not carry out the KIKDIRE scheme.

Upon application for the preliminary VATrefund, the DGT will conduct anexamination and issue a decisionwithinone month from the complete application,otherwise the applicationis deemedapprovedand a decision must be issuedwithinseven days from the initialdeadline.

The preliminary VAT refund processmay be rejected if:

• The taxpayer is not a SPC or KIK DIREthat has obtained the appointment aslow riskentrepreneur;

• There is no input VAT claim fromthe acquisition of the realestate;

• Attachment of the VATreturnis incomplete;

• There is no overpayment of VAT;and/or

• VATpayment made by the taxpayeris incorrect.

The DGT shall notify this rejection andprocess the VAT refund process underthe normal procedures for which thedeadline is 12 months.

On 15 December 2015, Korea’s Ministryof Strategy and Finance (MOSF)introduced the Combined Report ofInternational Transactions (CRIT) tobetter align the transfer pricingdocumentation requirements containedin the Law of the Coordination ofInternational Tax Affairs (LCITA) withAction 13 of the OECD’s Base Erosionand Profit Shifting (BEPS) project. TheCRIT, in its current form, is comprised ofa Master file and a Local file.

Proposed amendments to thePresidential Enforcement Decree(LCITA-PED) released on 24 December2015 provide further guidance on thespecific application of the CRITrequirements. According to the proposedamendments, all corporations (domesticor foreign) engaging in cross-borderrelated party transactions exceedingKRW 50 billion and reporting salesrevenue exceeding KRW 100 billionduring the relevant fiscal year will berequired to submit both a Master file anda Local file to the local tax office by thecorporate tax return filing deadline (i.e.three months after fiscal year end). Thenew requirements will apply to taxpayerswith fiscal years beginning on 1 Januaryand after.

Korea

Introduction of new transferpricing documentationrequirements


The Philippines

A foreign corporation may betreatedas an NRFC even if ithas a branch or RO

(BIR Ruling No. ITAD 274-15 and 269-15dated 11 September 2015)

As a rule, dividends paid to a non-resident foreign corporation (NRFC) aresubject to withholding tax of 30%.However, these dividends may besubjected to a reduced or preferential taxrate to the extent required by any treatyobligation on the Philippines.

In these rulings, the treaty applied was thePhilippines-Japan tax treaty, whichprovides that if the dividends are paid to acompany that has a permanentestablishment in the Philippines, and thesame is effectively connected with thepermanent establishment, the treaty rateshall not apply. Instead, the dividends shallbe subject to 30% income tax rate. TheBureau of Internal Revenue (BIR), in theserulings, held that the dividends came fromtransactions that are separate andindependent from the Philippine branchand representative office (RO) of theforeign company. Thus, the dividends arecovered by the preferential treaty rates.

BIR issues rules onPhilippines-Qatar Tax Treaty

(Revenue Memorandum Circular No.72-2015 dated 28 October 2015)

The Commissioner of Internal Revenue(CIR) circularised the treaty(Agreement) entered on 19 May 2015between the Government of the Republicof the Philippines and the Government ofthe State of Qatar for the Avoidance ofDouble Taxation and the Prevention ofFiscal Evasion with respect to taxes onIncome and Capital Gains.

Pursuant to Article 28 of theAgreement, the same shall have effectwith respect to taxes on income andcapital gains, including taxes withheldat source on income paid to a non-resident, for any taxable periodbeginning on or after 1 January2016.

The BIR reiterated that tax treaty reliefapplications invoking the Philippines-QatarDouble Taxation Agreement should be filedwith the International Tax Affairs Division(ITAD) of the Bureau of Internal Revenue.A Qatari resident income earner or hisauthorised representative should file a dulyaccomplished BIR Form 0901 (Applicationfor Relief from Double Taxation) with therequired documents specified at the back ofthe form pursuant to RevenueMemorandum Order No. 72-2010.

Adoption of AutomaticExchange of Information –Common Reporting Standard

Korea has begun implementing theCommon Reporting Standard (CRS)on 1 January 2016 and will participatein the automatic exchange ofinformation in 2017 with otherparticipating jurisdictions. Korea’sFinancial Services Commission issuedfinal guidance on Automatic Exchangeof Financial Information in December2015.

Individual income taxexemption on gains from fundsinvesting in foreign listedsecurities

Pursuant to recent amendments to theRestriction of Special Taxation Act(RSTA), capital and foreign exchangegains earned by individual investorsarising from investments in qualifyingfunds that invest 60% or more of assetsin listed securities traded on foreignstock exchanges will not be taxed for 10years form the date of buying such funds.The tax exemption is effective forinvestments made in qualifying fundsbeginning on or after 1 January2016.

For further informationon the above,please refer tohttp://www.pwc.com/kr/en/industry/financial.html

However, in a 2013 Supreme Court caseit was held that an administrativeissuance requiring the filing of a taxtreaty relief application within aprescribed period cannot takeprecedence over a tax treaty for theavailment of treaty benefits.

Tax sparing rule applies toAustralia

(BIR Ruling No. 389-2015dated 29 October 2015)

Dividends paid to an Australian residentare subject to 15% final tax

In a ruling, the BIR recognisedtheapplication of the tax sparing rule on adividendpayment to an Australianresident. The BIR said that because theAustralian tax law exempts from tax thedividendsfrom the Philippines, in effect,Australia allowsa credit for taxes deemedpaid in the Philippinesof at least 15%. TheBIR cited a Supreme Court case where itheld that such exemption satisfies thecondition for the applicationof the taxsparing rules. As such, the lower dividendtax rate of 15% (normally it is 30%) underthe Tax Code shall apply.

Either party pays DST but noton bank loans

(CTA Case No. 8459 dated 23 November2015)

When one of the parties in a taxabletransaction subject to DST is a bank, theremittance of the payable DST shall be theresponsibility of such bank.

The Court of Tax Appeals (CTA) voided aDocumentary Stamp Tax (DST)assessment against a taxpayer-corporationon its borrowings from banks. The CTAsaid that Revenue Regulation No. 09-00provides that if any of the parties to atransaction subject to DST shall be a bank,the remittance of DST on the loan shall bethe responsibility of the lender-bank, andnot of the borrower.

DST assessment computed onyear-end balances ofintercompany accounts is void

The CTA also voided a DST assessmentwhich was computed on year-end balancesof advances/loans to affiliates as indicatedin the audited financial statements.According to the CTA, theseamounts donot actually represent new transactionsentered into by the corporation within thetaxable year. As a rule, deficiencyassessmentsmust be based on actual factsand not merely a result of arbitrarycomputation. Thus, mere presumptions onthe balancesas basis for DST assessmentis void, and would not prevail underjudicialscrutiny.

For more information, please contact the following territory partners:

Country Partner Telephone Emailaddress

Australia Ken Woo +61 (2) 8266 2948 [email protected]

China Jeremy Ngai +852 2289 5616 [email protected]

Hong Kong Florence Yip +852 2289 1833 [email protected]

India Gautam Mehra +91 (22) 6689 1155 [email protected]

Indonesia Margie Margaret +62 (21) 5289 0862 [email protected]

Japan Akemi Kitou +81 (3) 5251 2461 [email protected]

Stuart Porter +81 (3) 5251 2944 [email protected]

Korea Kwang-Soo Kim +82 (10) 3370 9319 [email protected]

Malaysia Jennifer Chang +60 (3) 2173 1828 [email protected]

New Zealand Darry Eady +64 (9) 355 8215 [email protected]

Philippines Malou P. Lim +63 (2) 845 2728 [email protected]

Singapore Anuj Kagalwala +65 6236 3822 [email protected]

Taiwan Richard Watanabe +886 (2) 2729 6666 26704 [email protected]

Thailand Prapasiri Kositthanakorn +66 (2) 344 1228 [email protected]

Vietnam Van Dinh Thi Quynh +84 (4) 3946 2231 [email protected]

This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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