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© 2
011 M
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HOT TOPICS
Asia Region Tax
ITR Asia Tax Executives Forum
Singapore, May 8, 2013
Presented By
Eric N. Roose Morrison & Foerster (Moderator)
Amit Gupta, Dell Global BV (Singapore Branch)
Miaw Hui Goh, United Technologies
Peter Ni, Zhong Lun
Pieter de Ridder, Loyens & Loeff
This is MoFo. 2
Asia Tax Environment Today
Asia tax environment continues to change rapidly
China
India
Becoming more complex
Beneficial ownership
Indirect transfers
Substance requirements
Becoming more uncertain
GAAR
Tax audits are increasingly aggressive
China
Tighter enforcement of the existing and new tax rules/regulations
China
But .... Singapore tax environment remains a bright spot in the region
Singapore vs. Hong Kong competition heats up
This is MoFo. 3
Hot Topics Beneficial ownership
Anti-abuse legislation to limit treaty benefits
Indirect equity/share transfers
Aggresive tax audits
M&A – Divestiture issues
Myanmar – Taxation Primer
Hong Kong versus Singapore – the competition heats up
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Beneficial Ownership
Developments
This is MoFo. 5
China Developments Circular 601
A beneficial owner is defined as a person having ownership right and
disposal right over the relevant income and shall generally conduct
substantive business activities
Seven unfavorable factors regarding the income recipient
1) It is obligated to pay or distribute the majority (e.g. 60%) or all the income
within a prescribed timeframe (e.g. 12 months)
2) Other than owning the assets or rights that generate income, it does not
have or almost does not have any business activities
3) In the case of a company, its assets, scale of operations and number of
employees are not commensurate with the amount of the income received
4) It has no or almost no controlling or disposal rights on the income or the
assets or the rights that generate the income, and bears no or very little risk
5) The treaty partner does not tax or exempts the income, or taxes the income
at a very low effective tax rate
……………
This is MoFo. 6
China Developments Circular 601
In practice, the tax authorities mainly apply the “substantive business
activities” test and would deny the treaty benefit if the substantive
business activities are not enough
In particular, the tax authorities would rely on the following factual
information:
Whether the income recipient has income from active trade or business
Whether there are employees and a physical office
Whether there are business expenses such as employee compensation and
office expenses
Whether the income recipient is subject to no tax or very low tax in its home
jurisdiction
This is MoFo. 7
China Developments Circular 30
The determination cannot be just based on the existence of one single
unfavorable factor in Circular 601. Rather, a comprehensive analysis of all
the factors is required
The tax authorities shall review the following information before making a
determination:
Articles of association, financial statements, cash flow records, board meeting
minutes, board resolutions, HR and material resources status, expenditure
information, function and risk assumption status, etc.
Circular 30 also provides a safe harbor rule
Dividends paid to a non-resident that is publicly listed in the relevant treaty
country and is a tax resident of that country
Dividends paid to a non-resident that is 100% owned (directly or indirectly) by
the above mentioned listed company and is also a tax resident of that country
This is MoFo. 8
China Developments
Safe harbor rule illustration
HK Listco
China
HK Listco
HK or BVI (but
HK resident)
China
76
HK Listco
BVI
China
This is MoFo. 9
China Developments Circular 30
More clarification under Circular 30
The use of payment receipt agent does not t impact the determination of
beneficial ownership, as long as the agent makes an agency declaration
To get the money out quickly, a taxpayer can pay the withholding tax at the
standard rate (10%) and apply for the treaty benefit and a refund later on
If a taxpayer needs to apply with multiple tax authorities (e.g. it has multiple
Chinese subsidiaries) which make different determinations, the taxpayer can
take the applications to the upper level tax authorities for a final decision
Circular is helpful but still too general regarding how to determine the
beneficial ownership
This is MoFo. 10
China Developments Circular 165 (Brand New)
Issued on April 12 but still not made public as of May 3
Good news to taxpayers
If a HK applicant doesn’t distribute dividends to its non-HK shareholders, it is
out of the first unfavorable factor stipulated in Circular 601
Investments in subsidiaries (e.g. holding companies) are considered
“substantive business activities”
A holding company formed purely for holding one subsidiary shall still be
respected if other factors support the determination
Assets don’t equal registered capital. Also, one cannot just rely on the number
of the employees or labor costs when making a determination. Rather, the
focus should be on their job responsibilities and substance
As to whether the HK applicant has enough controlling or disposal rights on the
income or the assets/rights generating the income, and bears enough risk, the
answer should be yes if the articles of association confirm that and the relevant
decisions are made by its own decision making authority, e.g. the board
The fact that HK doesn’t tax non-HK sourced income is not considered a key
unfavorable factor
This is MoFo. 11
China Beneficial Ownership Local tax bureau asking more detailed questions/information
- background of the foreign shareholder
- why the shareholder is established in that country e.g. Hong Kong
- why business income is small, compared to investment income
- copies of Board minutes , financial statements of Shareholder (in Chinese)
- why the 601 unfavorable factors do not apply
Trend is likely to continue and process may become increasingly difficult
Delay in processing and approving the reduced WHT application
Maintain good relationship and close communications with local tax bureau
Educate/train the local finance team to respond to the tax bureau’s queries
Work towards obtaining the 5% WHT and avoid creating a bad precedent
This is MoFo. 12
India – Beneficial Ownership
Requirement of Tax Residency Certificate (TRC) in specified format
scrapped as per amended Finance Bill 2013 dated 30 April 2013;
TRC is a valid proof of residence; Assessee shall be required to
provide such other documents and information, as may be
prescribed along with the TRC
‘Beneficial Ownership’ under GAAR will be questioned specifically in
the context of capital gains (for royalties, etc. BO is already required):
Corporate structure maybe disregarded
Treaty benefits denied
Place of residence and/or situs of an asset can be reassigned
Article 13 of Mauritius India tax treaty doesn’t mention “beneficial
owner”, it just mentions “resident” of a contracting state
GAAR WILL SHIFT THE FOCUS TO SUBSTANCE OVER FORM
This is MoFo. 13
Indonesia Developments
Beneficial ownership victories for the taxpayer in the Tax Court
concerning pre-2010 cross border payments
Also victories for the taxpayer on the ‘mode of application’ stance of
the Tax Office as per their 2005 tax circular
Tax treaty Indonesia/Hong Kong took effect on 1 January 2013
5% dividend WHT rate if > 25% interest
Income tax exemption on sale of shares of Indonesian company
10% interest WHT
Beneficial ownership requirement, business purpose test, Indonesian domestic
anti avoidance tax provisions may be applied
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Anti Abuse Rules
Developments
This is MoFo. 15
China Developments
Chinese GAAR
Targeted arrangements of the Chinese GAAR
Abuse of tax incentives
Abuse of tax treaties (Circular 601)
Abuse of corporate vehicle (Circular 698)
Use of tax havens to avoid taxes
Other arrangements that lack business purposes
The current focus is on cross-border transactions (as opposed to
domestic transactions)
The Chinese tax authorities are enforcing such rules diligently and
aggressively
China joined the Joint International Tax Shelter Information Centre
(JITSIC) in 2011
The enforcement of the Chinese GAAR is a new focus of the Chinese tax
authorities
This is MoFo. 16
India Developments
GAAR in India will be effective from April 1, 2015 (FY2015-16)
Any arrangement “main purpose of which is to obtain a tax benefit”
can be regarded as “impermissible avoidance arrangement”
“Tax benefit” includes a reduction or avoidance or deferral of Indian
tax, as a result of a tax treaty
Burden of proof that an arrangement is not entered into for the
purpose of obtaining a tax benefit is on the assessee (tax payer)
No grandfathering for investments already in place before August,
2010
No monetary threshold of the tax benefit for invoking GAAR
prescribed
This is MoFo. 17
India General Anti-Avoidance Rule (GAAR)
.
Main purpose of an arrangement is to obtain a tax benefit
AND
Not at arms
length
Misuse/abuse of
tax provisions OR
Lacks commercial
substance OR
Not for bonafide
purposes OR
Impermissible Avoidance Arrangement
The Consequences could be ..... Next page
EFFECTIVE FY2015-16: BURDEN OF PROOF IS ON THE TAX PAYER
This is MoFo. 18
India General Anti-Avoidance Rule (GAAR)
.
Consequences if an arrangement is
Impermissible Avoidance Arrangement
Look through
and
disregard
any
corporate
structure
Denial of tax
treaty benefit
Recharacterize
equity-debt,
income-expenses
Disregard/
Recharacterize
whole or part of
the arrangement
Reallocate amongst the
parties accrual/receipt of
capital, revenue,
expenditure, deduction, etc.
Place of residence,
situs of an asset or
transaction can be
reassigned
This is MoFo. 19
Indonesia Developments
Much focus on cross border transfer pricing matters by the Tax
Office
Purchasing
Sales
Royalties
Intra-group services
Both income tax and VAT
Fake invoices
This is MoFo. 20
Singapore Developments
The High Court on 18 December 2012 handed down its decision on
an appeal by AQQ against the decision of Board of Review regarding
the application of the general anti avoidance provision of s.33 ITA
AQQ v CIT [2012] SGHC 249
This is MoFo. 21
AQQ
B (MALAYSIA)
C (MALAYSIA) D (SINGAPORE)
E (SINGAPORE)
G (SINGAPORE)
H (SINGAPORE)
100% 100%
50% 50%
This is MoFo. 23
AQQ
s.33(1) Predication principle: to objectively determine whether the
purpose or effect of an arrangement is to reduce or avoid tax, with
reference to the terms of the arrangement and the manner in which it
was implemented
Two part structure: the Restructuring and the Financing Arrangement
High Court agreed with BOR that the Financing Arrangement fell
within s.33 ITA:
Interest expenses reduced the chargeable dividend income and
no withholding tax on the interest due to interposing a bank and
stripping coupons from principal of financing
This is MoFo. 24
AQQ
s.33(3) – Subjective motive test: Was the arrangement carried out
for bona fide commercial reasons and had not as one of its main
purposes the avoidance or reduction of tax?
The Restructuring: yes
The Financing Arrangement: no, based on the relevant evidence: it
was done to monetize s.44 credits of the SPO subsidiaries
The Comptroller’s counteraction powers were not exercised in a fair
and reasonable manner as he should not have disregarded the
dividend income and certain of the interest expenses
Therefore AQQ won the case
AQQ highlights that the Comptroller is vulnerable to his
counteraction being invalidated unless he gets it absolutely right
This is MoFo. 25
Dealing with GAAR Ensure underlying tax processes are strong
Ensure activities are understood, properly analyzed and documented
e.g. business purpose and substance for the transaction
Watch out for published tax cases where tax authorities have challenged
transactions and are overly aggressive
Monitor legislative developments especially tax rules that have retroactive
application to prior years
Manage relationships with the relevant tax authorities
Increase awareness of key stakeholders on GAAR rules, and
on the importance of documentation and communications through email
E.g. Be careful about documenting tax risks, especially via email
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Indirect Transfer
Developments
This is MoFo. 27
China Developments
Unanswered questions under Circular 698
What kind of business purpose is considered a reasonable business
purpose for setting up the offshore holding company
Whether there shall be a safe harbor rule under which an indirect minority
shareholder can be exempt from the Circular 698 reporting requirement
Whether the transfer of red chip company shares should be exempt from
the Circular 698 reporting requirement
Whether and how the offshore holding company being transferred can get
a tax basis step-up in its Chinese subsidiary to avoid potential double
taxation
Whether a group transfer relief will be available anytime soon
What is the penalty for non-compliance
This is MoFo. 28
India Developments
Indirect transfers now liable to tax - Supreme Court decision in
Vodafone overturned:
Retroactive amendment made (wef FY1961-62)
Typically intended to apply where shares derive value “substantially” from assets in
India
“Substantially” not defined
Validation Clause inserted in Finance Act 2012 - Notwithstanding
anything contained in any judgment, decree or order of any Court or
Tribunal or any authority, all notices sent or purporting to have been
sent, or taxes levied, demanded, assessed, imposed, collected or
recovered or purporting to have been levied, demanded, assessed,
imposed based on the retroactive amendments shall be valid
This is MoFo. 29
Indonesia Developments
Art 18 enables the Tax Office to disregard the immediate foreign
holding company if there is a special relationship and either the
transaction was not at arm’s length or if the foreign holding company
is located in a tax haven jurisdiction
No statutory definition of ‘tax haven’ but based on notes to the
Corporate Income Tax return, the term tax haven is a country with a
CIT return of less than half of Indonesia’s or if it has a bank secrecy
or limited exchange of information legislation
Singapore a tax haven?
Thus far relatively few cases reported where Tax Office is taking
action
This is MoFo. 31
The Environment in China Tax authorities are strengthening their tax collection and nationwide tax
inspections
Tax authorities are also increasingly more aggressive and enforcing the
rules more tightly
Jurisdictions behind their local tax revenue target could be driven to being
very “creative” in interpreting certain tax rules
Once tax audit is launched, tax officers may be very impatient and want to
close the case and collect the tax as soon as possible
Instead of being reasonable, they may take an overly creative position and
disregard the technical analysis of the tax issues
This is MoFo. 32
Tax Audits in China The recent focus of the Chinese tax authorities during tax audits:
- Intercompany charges such as service fee, royalty fee, etc
- Reversal of provisions/accruals that have been adjusted in prior years
- Legitimate supporting documents for tax deduction/credit
- Cross border restructuring
- Mergers/Acquisitions
- HNTE status qualification
(HNTE = High New Technology Enterprise)
- Transfer Pricing
This is MoFo. 33
India
Shell, Vodafone challenged on valuation of shares from transfer
pricing perspective:
Shell India issued shares to its parent
TPO/Tax office challenged that shares have been undervalued
Treating it as “income foregone” and levying interest on short receipt
(characterized as loan)
Tolerance band amended for Transfer Pricing:
1% in case of wholesale traders
3% in all other cases
TP Circulars issued on conditions for identifying development
centers engaged as contract research and development (R&D)
service providers with insignificant risk and on application of profit
split method in case of controlled transactions involving R&D activity
This is MoFo. 34
Indonesia
Tax audit procedures implemented in late 2011
Income tax and VAT on cross border transactions between related
parties
Tax Office has almost finished the first MAP case and is said to be
prepared to take on many MAP and APAs
This is MoFo. 36
M&A – Divestitures (China) 1/2
Managing the Capital Gains Tax (“CGT”) payable arising from the direct sale of a
Chinese entity, from Non Resident Enterprise (“NRE”) to NRE in China can be costly & tedious:
A Valuation Report of the divested entity is likely to be required by tax authorities, even
when the target entity is sold to unrelated Buyer or when Sales Proceeds>Investment Cost
It may be practically difficult for the non Resident Seller to:
- file the Capital Gains Tax Return without a Valuation Report;
- determine the cost base for calculating the capital gain (with supporting documentation);
- compute the right amount of CGT Payable (which exchange rates will apply etc?); and
- remit the monies to pay the CGT, Stamp Duty timely and to avoid any late payment
surcharges, which process is complicated by:
- currency fluctuations, enough buffer to cover CGT amount
- unexpected requirement from tax bureau to move up or push out the tax payment,
- Bank’s local practice for handling the exchange rate,
- balance refund to the NRE Seller,
- procedures and formalities both external and internal, etc
This is MoFo. 37
M&A – Divestitures (China) 2/2
If the Chinese entity is part of a Global Divestiture, would require the following:
- Separate Equity Transfer Agreement for each of the Chinese entity;
(each with an acceptable equity transfer price)
- Basis and allocation of the Global Purchase Price to the Chinese entity,
preferably followed by an external Valuation Report
Nil CGT filing may be rejected by tax bureau yet requested by the Buyer as evidence
that the tax filing obligation has been met
This is MoFo. 39
Myanmar
New Foreign Investment Law on 3 November 2012 and Foreign Investment
Rules issued on 31 Jan 2013
No 100% foreign ownership for investments in public health, natural
resources, environment, agriculture, livestock farming, fisheries,
manufacturing, services done by Myanmar citizens
Minimum investment of USD 500K for industrial projects and USD 300K for
service related activities
Local staff must be trained to increasingly fill skilled positions over time
5 Years Corporate Income Tax holidays can be enjoyed
Companies (FIL and non-FIL) and branches registered under the FIL are
subject to 25% CIT
Branches (non FIL) 35% CIT
Individual income tax rate is maximum 20% for residents – BIK planning may
reduce the tax burden
This is MoFo. 40
Myanmar
No VAT but Commercial Tax on prescribed goods and services with
rates mostly at 5% or 8% or up to 100% on certain luxurious or what
the government considers to be undesirable products
Customs duties range between 5-40%
No dividend withholding tax
15% interest withholding tax on cross border payments
20% royalty withholding tax on cross border payments
Non Resident Capital Gains Tax is 40% on disposal of shares of a
Myanmar company
Myanmar has 10 tax treaties which are currently in force: India,
Korea, Malaysia, Singapore, Thailand, UK, Vietnam
And tax treaties with Bangladesh, Indonesia and Laos which are
signed but not yet in force
This is MoFo. 42
Hong Kong versus Singapore
0.0% 10.0% 20.0% 30.0% 40.0% 50.0%
Hong Kong
Singapore
Taiwan
Malaysia
China
Thailand
Japan
India
16.5%
17.0%
17.0%
25.0%
25.0%
30.0%
41.0%
42.2%
Both have very low corporate tax rates
This is MoFo. 43
Hong Kong versus Singapore
Hong Kong vs. Singapore
Tax system Pure Territorial Quasi-territorial
Corporate tax
rate
16.5% 17%
Income received All foreign-source income is
exempt
Foreign-source dividends,
branch profits and service
income are exempt, subject to
conditions
Capital gain Exempt Exempt
Withholding tax Dividends: None
Interest: None
Royalties: 4.95%/16.5%
Dividends: None
Interest: 15%
Royalties: 10%
Tax incentives Few Many
Both have attractive territorial taxation systems
This is MoFo. 44
Hong Kong
vs. Singapore
In 2009, only 5 comprehensive income tax treaties
But signed 21 new tax treaties 2010-12
2003 2005 2006 2007 2008 2010-12
22
20
16
12
8
4
0
Signed only 5 new treaties in 2010
69 comprehensive income tax treaties in force treaties in force
Hong Kong’s Tax Treaty Network
This is MoFo. 45
Regional Holding Company
HONG KONG
Foreign dividends offshore sourced and non taxable
Gains on disposal of securities either non-taxable (capital gains)
or taxable (revenue gains) unless offshore sourced
No dividend withholding tax in Hong Kong
Growing tax treaty network (21 DTA’s in effect)
Good treaties with PRC, Indonesia
This is MoFo. 46
Regional Holding Company
Singapore Foreign dividends either offshore sourced and non taxable
(unless remitted to Singapore) or tax exempt
Headline tax rate at least 15%
Foreign income taxed (income tax or dividend withholding tax)
Gains on disposal of securities non taxable if either capital gain or if Singapore company holds an interest of at least 20% of ordinary shares and has held these shares for at least 24 months
No dividend withholding tax in Singapore
Wide tax treaty network (69 DTA’s in effect)
Good treaties with PRC, India, Vietnam and Japan
This is MoFo. 47
Singapore Fund Structure
.
Offshore Fund Singapore Fund
Management
Company Fund
Management
Agreement
Singapore Fund
Management
Company Fund
Management
Agreement
Singapore Fund
This is MoFo. 48
Hong Kong Fund Structure
.
Offshore Fund HK Fund
Management
Company Fund
Management
Agreement
HK Fund
Management
Company Fund
Management
Agreement
HK Fund