Bdo Asean Investment Tax News_issue1_2014

ISSUE 1/2014WWW.BDO.MY/ASEAN

FEATURE ARTICLES

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NEWS

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ASEAN INVESTMENT& TAX NEWS

CONTENTSP1 FOREWORD

P2 FEATURE ARTICLES uASEAN — Best Prospects Worldwide for Foreign Direct Investments (FDIs) uThe Singapore Perspective

P4 NEWS uIntroduction of Goods and Services Tax in Malaysia uSingapore Tax Authority adopts the rights-based approach for characterising software and right to use information payments uVietnam intensifies tax audits & investigation uThe draw of Special Economic Zones in Cambodia uMyanmar to introduce new investment laws uIndonesia implements strategic measures to attract investors

With presence in all but one ASEAN country, BDO is well positioned to provide you with seamless services and practical advice to help you tap into opportunities in this region. We are optimistic of completing the picture with the addition of BDO in Lao PDR by the first half of 2014. The BDO network in ASEAN provides a full range of services not only in Tax, but also in Audit and Advisory including outsourcing and setting up of companies. In this maiden issue of ASEAN Investment & Tax News, my colleagues have put together news of interest on investments and latest tax developments. My counterpart from BDO Singapore also shares with you his perspective on factors that have made Singapore an exemplary economy in ASEAN.

We hope that you enjoy reading this publication. Should you require in-depth advice on any of the topics covered herein, please do not hesitate to contact us. We look forward to continuing to provide you with exceptional client service in 2014. Happy New Year.

DATO’ GAN AH TEERegional Senior Partner

Welcome to the inaugural issue of BDO’s ASEAN Investment & Tax News. As the countries in ASEAN move towards closer co-operation with the advent of the ASEAN Economic Community (AEC) in 2015, we thought it timely to introduce this quarterly newsletter to provide you updates on the tax and regulatory environment impacting businesses in the region.

ASEAN, with a combined population of more than 600 million mostly aged 55 and below, presents huge opportunities and traction for businesses in terms of consumer base and competitive cost of doing business. The region enjoys a robust gross domestic product (GDP) growth of 5.7 per cent at US$2.31 trillion in 2012, led by the services sector which contributed between 35 and 60 per cent of total GDP of the 10 nations.

FOREWORD

2 ASEAN INVESTMENT & TAX NEWS

FEATUREASEAN — BEST PROSPECTS WORLDWIDE FOR FOREIGN DIRECT INVESTMENTS (FDIS)

ASEAN is becoming a foremost destination for FDIs. The 10 nations constituting ASEAN comprise a market of more than 600 million people with a combined annual gross domestic product (GDP) of US$2.31 trillion, low manufacturing costs, robust growth and an expanding middle class.

In 2012, ASEAN received US$ 111 billion in (FDIs). Singapore stands out among ASEAN countries in terms of FDIs, having received US$57 billion, Indonesia received US$20 billion, Malaysia US$10 billion, Thailand US$9 billion, Philippines US$2.8 billion, Cambodia US$1.6 billion, Myanmar US$1.4 billion.

The ASEAN Economic Community (AEC) is set to come into existence in 2015. It is established to eliminate tariffs and

other trade barriers between members, effectively creating one of the world’s largest single market. According to the “2013 ASEAN-Business Advisory Council Survey on ASEAN Competitiveness” released recently, ASEAN offers the best prospects worldwide for FDIs over the three year period from 2013-2015.

57% of the international businesses surveyed have voted ASEAN as the most attractive destination for FDIs. Their main reasons for investing in ASEAN countries include “to access a new or growing market”, “to supply main or leading customers” and “to profit from low-cost production facilities”. These are not surprising in view of the diverse opportunities offered by ASEAN, both as a manufacturing base and as a vibrant market for goods and services. ASEAN

spans the spectrum from Singapore, a financial and hi-tech industrial hub with a higher GDP per capita than Switzerland, through the manufacturing bases of Malaysia and Thailand, the newly industrialised economies of Vietnam and Cambodia, to the natural resources of Indonesia and Brunei and the raw potential of Myanmar. Almost half of the businesses planning to invest in ASEAN consider the investment attractiveness of the region as a whole rather than of individual countries in the bloc.

With the ongoing progressive dismantling of trade and regulatory barriers among the ASEAN countries envisaged by the AEC, investors will not want to miss the opportunities to realize the massive business potential that will be unleashed in the region in the coming years.

3ASEAN INVESTMENT & TAX NEWS

FEATURETHE SINGAPORE PERSPECTIVEby Frankie ChiaManaging Partner, BDO Singapore

We have witnessed in recent years the shift of business frontiers from the West to the East. Multinational corporations and industry leaders are fast finding ripe opportunities in the Asia Pacific markets to internationalise and regionalise their businesses. As India and China grow into economic giants, so too are ASEAN countries gaining recognition within the region following intensive structural reform and infrastructure development.

By 2015, ASEAN countries are expected to form the ASEAN Economic Community (AEC), a significant step toward regional economic integration. Singapore, one of ASEAN’s key players and strongest economies, has established itself as an economic gateway for foreign trade and investments. Its strategic location in the heart of Asia Pacific as well as an emphasis on fostering a pro-business environment have solidified its position as one of the world’s most significant financial hubs. Singapore therefore serves as an exemplary business model for its peers in the region.

There are a multitude of reasons why Singapore is an ideal site for investment and business opportunities: favourable tax rates, a skilled workforce, low start-up costs and a stable political environment are crucial factors credited for turning Singapore into ‘a home away from home’ for businesses of various industries. These factors were essential to overcoming the lack of natural resources, technology and infrastructure faced by Singapore’s economy in its early years.

As most of the ASEAN countries are still developing economies, the obstacles they currently face are somewhat similar to Singapore’s to a certain extent. However, most of these countries possess an advantage we did not have – vast potential by way of natural resources and labour. These emerging countries can learn from and work with their more developed counterparts as geographical borders and trade barriers are lifted. That is the aim of the AEC– to foster strong economic relationships between the ASEAN countries in order to achieve prosperity for the region.

Today, Singapore continues to maintain its competitive edge and is arguably one of the leading economies in the region. As 2015 approaches, I look forward to the results of an intensifying collective effort in economic integration. We should not take our strong position for granted, for there is always much to gain from working with our neighbours in the region.


NEWSMALAYSIAINTRODUCTION OF GOODS AND SERVICES TAX

Malaysia has announced it will introduce the Goods and Services Tax (GST) at a rate of 6% with effect from 1 April 2015.

FEATURES OF GSTGST is a broad based consumption tax applicable at each stage of the supply chain. Once a business is registered for GST, it can claim GST input tax paid against the GST output tax it charges on the supplies it make. The input tax and output tax credit mechanism of the GST system ensure that the tax is levied on the value-added component or services at each stage of the production, hence it is cost neutral to business with the tax ultimately borne by the end consumer.

GST is charged on any taxable supply of goods and services made in the course of any GST registrant business in Malaysia. GST is also applicable to goods and services imported into the country. There are four (4) categories of GST rates applicable to goods and services under the GST system in Malaysia.

Standard ratedThis is the default rate applicable to goods and services under the GST system unless

there are provisions to apply different rates to certain specific goods and services. Zero ratedUnder the zero rated taxable supply, GST input tax paid is recoverable and the onward GST output tax is levied at 0%. If most of the goods and services supplied by a registrant business are mostly zero rated, it may end up in a refundable position with the Royal Customs.

ExemptUnder this category, no GST will be levied on the supply of goods and services. Business supplying goods and services under this category will not be able to recover GST input tax paid in making those exempt supplies.

Out of scopeThese are supplies that are outside the GST system.

GST IS APPLICABLE TO EVERYONEGST will affect everyone who consumes goods and services once the system takes effect on 1 April 2015. GST registrant business will need to account for GST in

their business transactions and remit the net amount payable to the Royal Customs on a pre-determined basis. A business only need to register for GST once it reaches the threshold of RM500,000 in a 12 month moving or rolling basis or where it is expected that it will reach the threshold soon.

GST WILL REPLACE EXISTING TAXES GST will replace the existing sales tax of 5%/10% and service tax of 6% once it is implemented.

MEASURES ANNOUNCED BY THE GOVERNMENT TO CUSHION iMPACT ON BUSINESSES AND iNDIVIDUALS ON THE iNTRODUCTION OF GST

Effective from year of assessment (YA) 2015

Individual• Individual income tax rate will be reduced by 1%-3%;• Top individual tax rate to apply to chargeable income exceeding RM400,000 (previously RM100,000); and• One-off cash assistance of RM300 to eligible households under the Bantuan Raykat 1Malaysia Scheme (BRIM).

Businesses• Reduction in income tax rate for corporations from 25% to 24% and for small medium enterprises (SMEs) from 20% to 19% - both effective from YA2016;• Income tax rate for cooperatives reduced from 1% to 2% from YA2015;• Tax deductions of up to RM5,000 for secretarial fee and up to RM10,000 for tax filing fee from YA2015;• Extension of accelerated capital allowance (ACA) on capital expenditures incurred on information and communication equipment (ICT) till YA2016;• Double deductions on GST-related training expenses on accounting and ICT for YA2014 and YA2015; and• Grants for training of employees in preparation for GST in 2013 and financial assistance to SMEs on purchase of accounting software in 2014 and 2015.


goods, for personal consumption or for use within his business operations. In many instances, the user is provided with a copy of a product which is downloaded to a device for use. Any right obtained to enable the end-user to copy the digital signal onto a media is incidental to the process in which the content is captured and stored and does not constitute a transfer of the copyright right. In contrast, this will not fall within the withholding tax provisions. Such transaction will not be taxable in the hands of the non-resident unless the payment constitutes income derived from a trade, business, profession

NEWSSINGAPORETAX AUTHORITY ADOPTS THE RIGHTS-BASED APPROACH FOR CHARACTERISING SOFTWARE AND RIGHT TO USE INFORMATION PAYMENTS

The Singapore tax authority has announced that, with effect from 28 February 2013, the rights-based approach will be used to characterise a payment based on the nature of the rights transferred in consideration for the payment. This payment is characteristically associated with payment of software and payment for the use of or the right to use information and digitised goods. A distinction is drawn between the transfer of a “copyright right” and the transfer of a “copyrighted article” from the owner to the payer.

A transaction involves a copyright right if the payer is allowed to commercially exploit the copyright. The term “commercially exploit” means to be able to (i) reproduce, modify or adapt and distribute the software, information or digitised goods; or (ii) prepare derivative works based on the copyrighted software program, information or digitised goods for distribution. A payment of this nature will be treated as a royalty and will be subject to withholding tax if it is made to a non-resident person.

A copyrighted article is transferred if the rights are limited to those necessary to enable the payer to operate the software or to use the information or digitised

• Thepayerisallowedtocommerciallyexploitthecopyrightandableto: (i) reproduce, modify or adapt and distribute the software, information or digitised goods; (ii) prepare derivative works based on the copyrighted software program, information or digitised goods for distribution• Thetransferofpartialrightsinthecopyrightasinthecaseof licensing of the copyright for exploitation by the payer

• Paymentsmadetoacopyrightownerforacompletealienationofhis copyright in the software, information or digitised goods.

• Acopyrightedarticleistransferrediftherightsarelimitedtothose necessary to operate the software or to use the information or digitised goods, for personal consumption or for use within his business operations.

Royalty

Any gains derived by the copyright owner constitutes either business income or capital gain.

Business income to the recipient

No WHT (*)

No WHT (*)Copyrighted Article

10% on payment to non-resident unless reduced by tax treaty

(*) unless the payments constitute income derived from a trade or business carried on by the recipient in Singapore or income effectively connected with any permanent establishment of that person in Singapore.

or vocation carried on by the permanent establishment of the non-resident person in Singapore.

The application of the rights-based approach does not require prior approval from IRAS. However, proper documentation such as agreements and invoices should be maintained so as to be available for submission to IRAS upon request.

The following table outlines broadly the tax implications on the payment for copyright right versus copyrighted article.

CopyrightRight

Tax Treatment of Copyright Right versus Copyrighted Article

Description Nature of payment Withholding Tax Implication (WHT)


VIETNAMINTENSIFIED ACTIONS ON TAX AUDITS AND INVESTIGATIONS

Vietnam’s General Department of Taxation (GDT) has announced that it will intensify tax audits on more companies to recover lost revenue and penalties. Taxpayers are not allowed to amend their tax returns once GDT identifies a particular tax period for tax audit. Additional tax payable as a result of tax adjustments arising from tax audit is subject to late payment interest rate of 0.05% per day. The rate will increase to 0.07% per day commencing from the 91st day effective 1 July 2013. For tax evasion cases, the increased penalty of 100% to 300% will be imposed.

A special focus of GDT is transfer pricing audits and investigations. The GDT has recently stepped up its enforcement activity on transfer pricing and require submission of transfer pricing documentation.

NEWSCAMBODIATHE DRAW OF SPECIAL ECONOMIC ZONES

A report by the Cambodian government in October 2013 indicates that since their inception in 2006, the country’s Special Economic Zones (SEZs) have attracted a total investment of US$1.65 billion.

SEZs are mainly situated along the borders with Thailand and Vietnam, and the outskirts of Preah Sihanouk province and Phnom Penh. Out of the 21 SEZs in Cambodia, 11 have received investments from local and foreign investors, mostly from China, South Korea and Japan. 105,000 jobs have been created in the SEZs and the investments there include production of vehicles and spare parts, bikes, garments, shoes, drinking water, food and beverages, electric products, sugar and agro products. Investors in SEZs generally get to enjoy incentives on income tax, customs and VAT.

“The Government sees the SEZs as an important part to boost the country’s economic development as they bring infrastructure, jobs, skills and enhanced productivity,” said the report of the Council for the Development of Cambodia.


NEWS

MYANMAR NEW INVESTMENT LAWS TO BE INTRODUCED

The International Finance Corporation (IFC), a member of the World Bank Group, has recently signed a memorandum of understanding with Myanmar’s Ministry of National Planning and Economic Development to work on a new set of investment law and regulations to improve protection for both foreign and domestic investors and streamline investment approval procedures to promote a business friendly environment.

The new law aims to replace the two existing separate laws for domestic andforeign investors.

The IFC is providing advisory services to Myanmar’s government in undertaking market oriented reforms to strengthen the private sector. The IFC is also collaborating with the government and financial sector to introduce microfinance to enhance access to finance for small and medium-sized enterprises.

“The cooperation with IFC will help accelerate our continued efforts to create a more business friendly environment for

both domestic and foreign investors,” said Aung Naing Oo, Director-General of the Ministry’s Directorate of Investment and Company Administration.

“Improving Myanmar’s investmentpolicy and strengthening the regulatory framework will encourage private sector investment and increased competition within Myanmar as the country becomes more integrated with ASEAN and the rest of the world”, said Vikram Kumar, IFC’s resident representative for Myanmar.


INDONESIA STRATEGIC MEASURES TO ATTRACT INVESTORS

The Indonesian government will allow greater foreign ownership in the operation of airports (49%) and seaports and railways (95%), announced Mahendra Siregar, Chairman of Indonesian Investment Coordination Agency in October, 2013.

The Chairman said that the policy is aimed at diminishing current account deficit following the capital outflows ahead of implementation of US tapering off policy.

He also said that as of the third quarter of 2013, total domestic and foreign investments have reached US$ 26.7 billion, about 75% of the target (US$ 35.5 billion) this year. To achieve this year’s investment target, the government will implement strategic measures to attract more investors, including speeding up investment and business licensing processes, swift installation of electricity, telephone and clean water in investment sites, faster procedure for building construction permit and land certification.

NEWS

BRUNEITel: +673 333 6589Fax: +673 334 0010E-mail: [email protected]

PHILIPPINESTel: +632 844 2016Fax: +632 844 2045E-mail: [email protected]

CAMBODIATel: +855 23 218 128Fax: +855 23 993 225E-mail: [email protected]

SINGAPORETel: +65 6828 9118Fax: +65 6828 9111E-mail: [email protected]

INDONESIATel: +62 21 5795 7300Fax: +62 21 5795 7301

www.bdo.co.id

THAILANDTel: 0-2261-1251-4Fax: 0-2261-1255E-mail: [email protected]

MALAYSIATel: +603 2616 2888Fax: +603 2616 2970E-mail: [email protected]

VIETNAMTel: +84 (0)8 3911 0033Fax: +84 (0)8 3911 7439E-mail: [email protected]

MYANMARTel: +95(0)1-229023 / +95(0)1-377822E-mail: [email protected]/myanmar

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This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Tax Services to discuss these matters in the context of your particular circumstances. BDO Tax Services, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

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CONTACTS

Mahendra, who was previously Indonesia’s deputy finance minister, said his office has set a target to achieve a total investment of about US$ 41 billion for Indonesia in 2014, 15% higher than the investment target for 2013.

Indonesia received a total of US$20 billion in 2012 and was ranked the fourth of the top five countries to receive the most FDI in east and Southeast Asian region last year, based on the 2013 World Investment Report released by the United Nations Conference on Trade and Development (UNCTAD).