lorenz & partners legal, tax and business consultants © lorenz & partners page 1 of 20 29...

Lorenz & PartnersLegal, Tax and Business Consultants

© Lorenz & Partners of 2029 September 2010

International Taxation and Double Taxation Agreements

Mr. Michael LorenzGerman Attorney at Law, Registered Foreign Lawyer in Hong Kong and Vietnam

29 September 2010



About Lorenz & Partners - International firm of business lawyers headquartered in

Bangkok since 1995

- The firm is specialised in legal, tax and business consultation for foreign companies investing in Southeast Asia.

- We maintain offices in: Bangkok, Berlin, Hong Kong, Ho Chi Minh City and Taipei.

- Our services, e.g.:• International Commercial Law• Mergers & Acquisitions, Joint Ventures• International Tax Planning• Labour Law Issues• Management support



Overview

• General

• International Tax Law

• Avoidance of Double Taxation

• Charateristics in Vietnam



General

• What are taxes?

• Why are they raised?

• Different kinds of taxes



What is a tax?

A tax is a cash benefit without an individual consideration.

Generally those taxes are imposed by a public community in order to generate revenue.

Taxes can be inflicted on everyone that realizes the tax-related circumstances.



Why are they raised

Taxes are generally the main income source of a country and the main instrument for funding of its territorially defined state and other (supranational) tasks. Only few countries only raise a few or no taxes at all to their citizen (UAE etc.).

In return, the state is able to use this income, for example in order to provide infrastructure or to support the health or the social system.

So in the end, the (taxpaying) population benefits from the generated revenue.



Different kinds of taxes

Taxes can be classified in different tax brackets. Mainly, they are divided into:

1. Classification by economic purpose• Transaction Taxes such as the VAT or – internationally –

the Foreign Contractors Tax, customs duties etc.• Excise Taxes such as electricity tax

2. Classification by object of taxation• Excise tax, that build on the effort for a particular asset or

behavior • Consumption tax, such as tobacco tax



International Tax Law

• Basic Principle

• Definitions

• World income principle

• Territoriality principle



Basic Principle

International tax law deals with the complexity of problems occuring in cross border cases, which are of particular importance regarding the taxation of natural persons, business partnerships and incorporate companies.

Without legal regulations improper double taxation would be found, and would restrain international trade and investments.



Definition

• Unlimited Tax Liability: Resident taxpayer is subjected to income tax with the whole income by state of residence.

• Limited Tax Liability: Non-resident taxpayer is subjected to income tax with the income earned in the state of source.

• World income: Income achieved worldwide



Worldwide Income Principle, (i.e. Germany, Vietnam)

Model case: Vietnam

Resident Non-resident

Unlimited tax liability in Vietnam for worldwide

income

Limited tax liability

in Vietnam

Unlimited tax liability

in country of residence

Double Taxation



Territoriality Principle (i.e. Hong Kong, Singapore, Switzerland)

Model Case: Income generated in Hong Kong

Resident Non-resident

Tax liability in Hong Kong

Tax liability

in Hong Kong

Unlimited tax liability

in country of residence

Double Taxation



Avoidance of Double Taxation

• Definition

• Unilateral measures

• Double Taxation Agreements („DTA“)



Definition

Double Taxation occurs in transactions, in which income, that has already been taxed according to national tax law, is taxed again.

As tax law should be as less disortive as possible, transboundary double taxation should be eliminated.

A cross-border double taxation should be avoided as this might affect investment decisions of companies.



Unilateral Measures

Unilaterally, double taxation is avoided if one state waives its right of taxation.



Double Taxation Agreements

On a bilateral basis, the prevention of double taxation is achieved by the conclusion of DTA.

A DTA is a contract under international law between two countries which regulates the extent a contracting party is entitled to its taxation jurisdiction.

The Organisation for Economic Co-operation and Development („OECD“) publishes and updates a model tax convention which serves as a template for bilateral negotiations regarding tax coordination and cooperation. This model is accompanied by a set of commentaries which reflect OECD-level interpretation of the content of the model convention provisions.

Most DTAs are modelled in accordance to the OECD Convention.



Generally, there are two standard methods in bilateral agreements to avoid double taxation

Credit Method Exemption Method

Income taxed in one state is not taxed in the other state again.

Income tax paid in one state is offsetted on the income tax payable in the other state.



Characteristics in Vietnam

• DTAs of Vietnam

• Foreign Contractors Tax

• ASEAN



DTAs of VietnamVietnam concluded DTAs with the following states:

Austria, Belgium, Brazil, Australia, Algeria, Belgium, Bulgaria, Belarus, Bangladesh, Brunei, China, Czech Republic, Canada, Cuba, Denmark, Egypt, France, Finland, Germany, Hungary, India, Italy, Indonesia, Iceland, Japan, Korea, South Korea, Rep.Laos, Luxembourg, Malaysia, Mongolia, Netherlands, Norway, Poland, Philippines, Pakistan, Russia, Romania, Sweden, Singapore, Switzerland, Spain, Seychelles, Srilanka, Thailand, Taiwan, UK, Uzbekistan,Ukraine.

A DTA has also been concluded with Myanmar, but this has never been implemented in the Myanmar law and is therefore in fact not in force.

There is no DTA with the USA so far.



Foreign Contractors Tax

• The Foreign Contractors Tax is deducted by the Vietnamese customer in case of supplying services or services associated with goods from a Foreign Contractor or Foreign Sub-Contractor being supplied in or outside Vietnam and which are consumed in Vietnam.

• The term Foreign Contractor means any foreign business organisation with or without a permanent establishment in Vietnam, and all foreign business individuals doing business in Vietnam.

• The Foreign Contractors Tax consists of two elements, namely the collection ofa value-added tax

element and a corporate tax

elementfor corporations or a personal income tax

element for individual.



The Foreign Contractors Act also has effects on double taxation issues. Those shall be displayed using the example of DTA Germany-Vietnam:

The Foreign Contractors Tax is raised as a source tax, i.e. the tax obligation of the Foreign Contractor is to be deducted by the Vietnamese party from any payment made to a foreign contractor.

In accordance with the protocol to the DTA Vietnam, the Foreign Contractor Tax is deemed a profit tax. Corporate income Tax in Vietnam can now, under certain circumstances, be offset against German tax.



ASEAN

Vietnam is a member of ASEAN since 1995 and took over the position of ASEAN Chairman for 2010.

ASEAN is aiming to create an ASEAN Economic Community (AEC) by 2015.

The foundation of the AEC is the ASEAN Free Trade Area(AFTA), a common external preferential tariff scheme to promote the free flow of goods within ASEAN.



The primary goals of AFTA seek to:

Increase ASEAN's competitive edge as a production base

in the world market through the

elimination, within ASEAN, of tariffs

and non-tariff barriers

Attract more direct foreign investments to

ASEAN

ASEAN has also concluded free trade agreements with other countries, such as the PR China, Korea, Japan, Australia, New Zealand and most recently India. ASEAN is currently negotiating a free trade agreement with the European Union. An FTA with the USA is not planned yet.



Thank you for your attention!

Any questions?

Lorenz & Partners 22nd Floor, Sathorn City Tower175 South Sathorn Rd., Sathorn

Bangkok 10120, ThailandTel.: +66 (0) 2 287 1882Fax: +66 (0) 2 287 1871e-mail: [email protected]

lorenz & partners legal, tax and business consultants © lorenz & partners page 1 of 20 29...

Documents

electricity tax

vietnam lorenz partnerslegal

foreign contractors

different tax brackets

behavior consumption

taxrelated circumstances

object of taxationexcise

international taxation