tax compliance traps - bdo usa, llp€¦ · tax compliance traps . 25 august 2015 . page 2 . cpe...

Malcolm Joy / Jiger Saiya / Jerry Seade / Richard Wiseman / Jessie Yang

TAX COMPLIANCE TRAPS

25 AUGUST 2015

CPE AND SUPPORT

CPE PARTICIPATION AND REQUIREMENTS – TO RECEIVE A CPE CREDIT FOR THIS WEBCAST

• You’ll need to actively participate throughout the program

• Be responsive to at least 75% of the polling questions. Please note, the polling questions will not be announced, but will appear on the right-hand-side of your screen throughout the presentation.

CERTIFICATE OF ATTENDANCE

• If you are logged in the entire time and respond to all polling questions, you will be notified via email when your certificate is available.

CONTACT

Please email [email protected] with any queries.

mailto:[email protected]

AGENDA

SETTING THE STAGE 04

FUNDING THE GROWTH 14

REPATRIATION AND EXIT 32

CLOSING REMARKS 35

TAX FILINGS 18

SETTING THE STAGE

STAGES

DIRECT OR INDIRECT

INVESTMENT

REGISTRATION OR ESTABLISHING A LEGAL ENTITY

FUNDING RE-INVESTMENT

OPERATIONS

REPATRIATION

EXIT

DIRECT VERSUS INDIRECT INVESTMENT

PARENT (US)

SUB 1 (CHINA) SUB 2 (INDIA)

PARENT (US)

SUB 1 (CHINA) SUB 2 (INDIA)

HOLDCO (TBD)

PARENT (US)

CHINA 'BRANCH'

INDIA BRANCH

DIRECT OR INDIRECT INVESTMENT

TAX COMPLIANCE TRAP

• China ‘branch’ / rep office • US Check-the-box elections

– Per Se entities and eligible entities – Timing for election

• Application of LOB and similar provisions in Treaties, GAAR concepts.

• Branch

• Legal entity types

• Use of a holding company structure.

LEGAL ENTITY IN CHINA

Generally, a foreign company is not allowed to establish a branch in China (although there are exceptions for financial institutions). As a result, there are two choices of structure that could be considered for investment into China:

1. Wholly owned foreign enterprise ('WOFE')

2. Representative office ('RO').

A WOFE is an entity incorporated in China (generally regarded as a Chinese resident enterprise) whereas an RO is not.

GENERAL INFORMATION

KEY CONSIDERATIONS RO WOFE

Set-up Process Set-up procedure Simple Complicated

(more approvals)

Set-up time Generally short Generally long

Business Operation

Registered capital requirement No Some industries require particular levels

of registered capital

Allowed business scope/activities

Activity is restricted (e.g. contract conclusion not allowed)

Generally full-scale activity for allowed industry

Operation costs Generally lower (Smaller-scale)

Generally higher (Larger-scale)



KEY CONSIDERATIONS RO WOFE

Tax Treatment

Tax/financial incentives Generally no Generally yes (e.g. for certain encouraged industries, in certain districts)

Tax loss carried forward Not available Tax losses incurred can be carried forward for five years

Reinvestment in China No Tax free for reinvestment in China

Profit repatriation Tax clearance No tax clearance procedure Withholding tax clearance required

LEGAL ENTITY IN INDIA

• Indian exchange control regulations (FEMA) govern foreign investment in India

• Following forms of entities permissible under repatriation route.

GENERAL INFORMATION

PROJECT OFFICE (PO) LIMITED LIABILITY PARTNERSHIP (LLP)

LIASON OFFICE (LO) BRANCH OFFICE (BO)

JOINT VENTURE (JV) WHOLLY OWNED SUBSIDIARY (WOS)


KEY CONSIDERATIONS LO BO / PO LLP JV / WOS

Set-up Process Set-up procedure Prior approval

required Prior approval required

Prior approval required

Automatic approval (except certain sectors)

Set-up time Long Long Long Short

Business Operation

Registered capital requirement

No No No Yes, can be nominal

Allowed business scope/ activities

Restricted to liaison activity. No commercial activity.

Restricted to the approval obtained

No restrictions (except for prohibited activities)

No restrictions (except for prohibited activities)

Operation costs Low Moderate Moderate to High High


KEY CONSIDERATIONS LO BO / PO LLP JV / WOS

Tax Treatment Tax Rate* Not taxable 40% 30% 30%

Tax loss carried forward No Yes Yes Yes

Profit repatriation

Dividend Distribution tax NIL NIL NIL 20%

Winding up Level of Ease Simple Comparatively Easy Moderate Slightly more

difficult

*Additional Surcharge and ‘Cess’ will apply

FUNDING

FUNDING IN CHINA

REGISTRATION OF CAPITAL AND DEBT INSTRUMENTS

• Procedure to be followed and approval required for the change of registered capital/foreign loan. Registration required under strict foreign exchange control for fund flows

• Trapped cash concerns: Cash reserves should be 10% of net profit.

TAX CONSIDERATIONS

• Withholding tax may need to be paid to Chinese tax authorities prior to payment of dividends, interest etc. from China to an overseas recipient.

• Payers of the remittances are usually required to withhold relevant PRC taxes

• Interest can be deductible if it meets thin capitalization rules or it satisfies the arm’s length standard.

FUNDING IN CHINA

THIN CAPITALIZATION

• If an entity’s debt-to-equity ratio exceeds 2:1 (5:1 for financial institutions), the excess portion of interest expenses on related party loans is generally non-deductible, unless the interest rate can be shown to meet the arm’s length rule and the income tax rate of the payer is not higher than that of the recipient

• There is no deferral of interest expenses in China.

FUNDING IN INDIA

FACTORS EQUITY COMPULSORY CONVERTIBLE PREFERENCE SHARES/DEBENTURES

OPTIONALLY CONVERTIBLE PREFERENCE SHARES/DEBENTURES

FOREIGN CURRENCY CONVERTIBLE BONDS

EXTERNAL COMMERCIAL BORROWING

Nature Equity Hybrid Hybrid Hybrid Debt

End Use No Restriction No Restriction Restricted Restricted Restricted

Returns Dividend can be repatriated in full

Dividend can be repatriated in full

Ceiling on interest rate; maturity



Withholding NIL/Distribution tax NIL/Distribution tax Applicable Applicable Applicable

Deductible Expenditure

Dividend not tax deductible

Dividend not tax deductible

No thin cap, interest fully deductible



TAX FILINGS

MANAGING THE COMPLIANCE BURDEN EXISTING COMPLIANCE GAPS

HAVE WE FILED IN ZIMBABWE? WHY IS MY ENTITY BEING STRUCK OFF IN DENMARK?

CAN I REFILE MY TAX RETURN? WILL MY CORPORATE BOOKS SATISFY LOCAL REQUIREMENTS?

HOW DO I SATISFY THIS TAX AUDIT REQUEST?

MANAGING THE COMPLIANCE BURDEN INCREASED PRESSURE ON GLOBAL TAX TEAMS

TYPICAL GLOBAL TAX TEAM CHALLENGES:

• Resource constraints

• Quality data

• Non-standard processes

• Limited technology innovation

• Changing tax requirements

• Risk management controls.

Traditional reporting and

tax compliance activities

Supporting local tax

compliance matters

Developing and innovating tax

strategy

MANAGING THE COMPLIANCE BURDEN GLOBAL COMPLIANCE MODELS

MANAGING THE COMPLIANCE BURDEN CENTRALISED OUTSOURCING

BDO Central

project team

BDO Local

compliance experts

CLIENT

EXTERNAL ENTITIES Auditors/ reviewers

TAX FILINGS

FINANCIAL YEAR & TAX YEAR

• Financial year – 1st April to 31st March

• Prior approval for choice of different financial year

– Permissible only in cases where parent follows a different financial year

• Tax year – 1st April to 31st March.

INDIA

PERMANENT ACCOUNT NUMBER (PAN – INDIAN TAX IDENTIFICATION NUMBER)

• Compulsory for all taxpayers with liability to pay tax (or withholding) in India

• In case of non-residents with taxable income sourced from India, absence of PAN could result in higher withholding

• PAN by itself does not trigger a PE or create a tax obligation in India.

TAX FILINGS

CORPORATE TAX

• Corporate Tax Rate – 30% (Plus applicable surcharge & cess)

– Proposal to reduce to 25% over next four years.

• Corporate Tax Return e-filing mandatory, irrespective of taxability of income

– 30th November – Transfer Pricing cases

– 30th September – Other cases.

INDIA

• No extension permissible

• Losses not allowed to be carried forward if tax return not filed on time

• Non-disclosure/incorrect disclosure may be treated as concealment resulting in penalty ranging from 100% to 300% of tax.

TAX FILINGS

TRANSFER PRICING

• Extensive coverage

– Transfer of shares, excessive expense on foreign brand promotion, overdue receivables are all subject to Transfer Pricing

– Certain transactions with unrelated entities covered.

• Safe harbours prescribed for certain types of transactions

• Mandatory local file (with an annual update) in case where transactions exceed INR 10m

INDIA

• Filing of certificate from Chartered Accountant before filing tax return

• Heavy penalty for non-disclosure/non-compliance

• Advance Pricing Agreements (APAs) recently introduced to bring more certainty

– Applicable for up to five years forward with four years roll back (optional).

TAX FILINGS & COMPLIANCES

FILING OF TAX AUDIT REPORT

• Audit required under Income Tax Law, if turnover exceeds INR 10m (or more than INR 2.5m income from a profession)

• Filing of Audit Report mandatory before filing of tax return

• Reporting of tax deductions, disallowances and other items impacting tax computation.

INDIA

WITHHOLDING TAX COMPLIANCES

• Applies to an extensive range of transactions

• For payments to non residents withholding tax rates can be reduced by tax treaties

• Expenditure is disallowed if applicable WHT is not withheld

• E-filing of tax returns for both the payer and the recipient. Challenge include the matching of the receipts and payments.

OTHER FILINGS & COMPLIANCES INDIA

STATUTORY & REGULATORY FILINGS

• Compulsory filing of balance sheet and certain other information

- Information open to public examination.

• Annual reporting under Exchange Control Regulations

• Specific filings for Branch / Project Office / Liaison Office.

INDIRECT TAX FILINGS

• Multiple laws requiring multiple filings

– Custom Duty on import, Excise Duty on manufacture, VAT/CST on sale of goods, Service Tax on services, local levies and taxes

– Some taxes are not creditable, others creditable upon fulfilment of conditions

– GST being introduced, will require a change in value chain planning and management.

TAX COMPLIANCE FLOW FOR DIRECT INVESTMENT TO CHINA

STAGES MAJOR TAX CONSIDERATIONS

Site Selection • Policies are different in regions. • Later changing location of registration could be very complicated.

Registration • New entities need to be registered with different local bureaus • Detailed requirements may vary for particular industries.

Tax Incentive Application

• Certain encouraged industries / investment locations can enjoy tax incentives • Entities need to communicate with authorities and prepare application documents

Recurring Tax Filing • Enterprise income Tax (EIT): quarterly/monthly EIT and annual EIT filing • Value added tax (VAT): monthly /quarterly VAT filings • Business Tax (BT): monthly filing • Individual Income Tax (IIT): monthly IIT and annual filing.

Ad Hoc Issues • Withholding tax applied to non-trade remittances overseas (e.g. dividend, interest, service fees) • Foreign exchange registration / foreign loan registration / change of capital • Permanent establishment registration / tax filing • Indirect share transfer reporting.

Liquidation • Tax clearance • Tax deregistration process.

COMMONLY SEEN TAX PITFALLS IN CHINA

FOREIGN EXCHANGE CONTROLS BENEFICIAL OWNERSHIP TO QUALIFY FOR TREATY BENEFITS

MANAGEMENT FEES – NOT DEDUCTIBLE IF MERELY STEWARDSHIP COSTS

PERMANENT ESTABLISHMENT RISK ON CROSS-BORDER TRANSACTIONS

COMMERCIAL SUBSTANCE IN INTERMEDIATE HOLDING COMPANIES FOR INDIRECT TRANSFER OF CHINESE ASSETS

CHANGING LEGISLATION AND LOCAL PRACTICE VARIANCE

WHAT’S IMPORTANT FOR TAX COMPLIANCE IN CHINA?

EFFECTIVE COMMUNICATION WITH CLIENTS

• Specialized tax compliance service and tailor made solution for clients

• Coordinate with clients and their branches in different locations at one-stop.

RELIABLE QUALITY CONTROL

• Each deliverable shall be participated and reviewed by different levels of experienced team members

• Up-to-date internal and external trainings of tax policies and hot topics

• Communicate with authorities for understanding their latest practice for new rules.

WHAT’S IMPORTANT FOR TAX COMPLIANCE IN CHINA?

SKILLFUL COMMUNICATION WITH THE CHINESE AUTHORITIES

• In most regions, different categories of taxes are charged by state authorities or local authorities separately. Multiple levels of officials might be involved for some cases

• Chinese tax authorities have discretion on the interpretation and application of the tax laws. Effective communication and strategic negotiation with authorities is important in many instances (risk of penalties for non-compliance; deemed profit rates for remittance).

ROBUST BUSINESS PROCESSES

• Identify the existing/ potential risks

• Improve internal control policies through effective tax compliance services.

REPATRIATION & EXIT

REPATRIATION & EXIT

REPATRIATION

• Dividends subject to distribution tax @ 20%

• Interest, royalties, management fees and technical fees fully tax deductible once proved for purpose of business, not in nature of capital expenditure, appropriate tax withheld and justified for transfer pricing purposes

• Buyback of shares permissible, subject to withholding tax.

INDIA

EXIT

• Sale of shares - capital gains based on period of holding

• Certain tax treaties provide for taxation in country of residence of shareholders (not India)

• Transfer of shares of foreign company may be subject to tax in India, if value derived substantially from assets situated in India (Indirect Transfers).

REPATRIATION & EXIT

REPATRIATION

• Dividends paid to foreign investors are not deductible for enterprise income tax purpose, and dividends are generally subject to a 10% withholding tax in the absence of tax treaties

• Interest, royalties and services fees are subject to withholding tax and turnover taxes (i.e. VAT and business tax).

CHINA

EXIT

• Capital gains from direct sales of shares are subject to income tax

• Tax clearance procedure to be followed when Chinese entities are liquidated. This will usually involve a review of the last three years’ tax returns

• Reporting of indirect share transfers of Chinese entities is strongly recommended to avoid potential interest and penalties.

CLOSING REMARKS

THANK YOU

MALCOLM JOY [email protected] | +44 (0)207 893 3718

JIGER SAIYA [email protected] | +91 (0)22 2439 3600

JERRY SEADE [email protected] | +1 713 986 3108

RICHARD WISEMAN [email protected] | +44 (0)118 925 8526

JESSIE YANG [email protected] | +86 021 3331 2129

tax compliance traps - bdo usa, llp€¦ · tax compliance traps . 25 august 2015 . page 2 . cpe...

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