EY widescreen presentation - c.ymcdn.comc.ymcdn.com/.../Feb_21_TS1703_Asia_Pacific_Update_P5.pdfThis presentation is provided solely for the purpose of enhancing knowledge on ... Asia-Pacific

TEI International Tax PlanningHouston

21 February 2017

Asia-Pacific update

Page 2

Disclaimer

► EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young

Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member

firm of Ernst & Young Global Limited operating in the US.

► This presentation is © 2017 Ernst & Young LLP. All rights reserved. No part of this document may be

reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical,

including by photocopying, facsimile transmission, recording, rekeying, or using any information storage

and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission

or distribution of this form or any of the material herein is prohibited and is in violation of US and

international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this

presentation or its contents by any third party.

► Views expressed in this presentation are those of the speakers and do not necessarily represent the

views of Ernst & Young LLP.

► This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not

provide tax advice to any taxpayer because it does not take into account any specific taxpayer’s facts

and circumstances.

► These slides are for educational purposes only and are not intended, and should not be relied upon, as

accounting advice.

Asia-Pacific update — TEI International Tax Planning

Page 3

Commonly used abbreviations

BEPS Base erosion and profit shifting MLI Multilateral Instrument

CbCR Country-by-country reporting NOL Net operating loss

CGT Capital gain tax OECD Organisation for Economic Co-operation and Development

COR Certificate of residency PE Permanent establishment

EBITDA Earnings before interest, taxes, depreciation and

amortization

SPV Special-purpose vehicle

GAAR General Anti-Avoidance Rules TP Transfer pricing


Page 4

Your presenters

Chris FinnertyPartner, Asia-Pacific Business Group Leader

Ernst & Young LLP—New York, NY

+1 212 773 7479

[email protected]

Nhung TranPartner, Asia-Pacific Business Group

Ernst & Young LLP—Toronto, ON

+1 416 943 2460

[email protected]

Trang MartinExecutive Director, Asia-Pacific Business Group

Ernst & Young LLP—Houston, TX

+1 713 751 5775

[email protected]


Page 5

Agenda

► Asia-Pacific BEPS developments and hot topics

► Exit strategies and considerations

► Key takeaways


Page 6

Asia-Pacific BEPS developments and hot topics


Page 7

Asia-Pacific BEPS developments and hot topicsInvolvement in global initiatives by Asia-Pacific jurisdictions

Membership/initiative Australia China*** Hong Kong India Indonesia Japan Korea

OECD

G20

BEPS associate

MCAA for CbCR*

MLI**

Membership/initiative Malaysia New Zealand Philippines Singapore Taiwan Thailand Vietnam

OECD

G20

BEPS associate

MCAA for CbCR

MLI

* Multilateral Competent Authority Agreement (MCAA) for automatic exchange of CbCR

** Multilateral Convention to Implement Tax Treaty Related Measures − countries involved in negotiation and not necessarily committed to adopt the MLI provisions

*** Refers only to the tax laws of Mainland China (also, “China” hereafter); tax laws in the Special Administrative Regions of Hong Kong, Macau and Taiwan are

completely distinct from those in China

Indicates participation/membership


Page 8

Asia-Pacific BEPS developments and hot topicsRecent trends (December 2015 to December 2016)

Action 3

Taiwan

Actions 8–10

Singapore

New

Zealand

Rules adopted Rules proposed Official communication Treaty changes

Action 5

Singapore

India

Action 13

Indonesia

Japan

China

Hong

Kong

Singapore

Korea

India

New

Zealand

Australia

Action 2

New

Zealand

Action 4

New

Zealand

Action 1

India

China

Indonesia

Taiwan

New

Zealand

Japan

Action 6

Japan

India

New

Zealand

Singapore

China

Australia

Action 7

Australia

Australia

VietnamVietnam

Malaysia

Hong

Kong

China

Hong

Kong

Australia

Japan

Australia

Australia


Page 9

Asia-Pacific BEPS developments and hot topicsHeat map or focus areas

BEPS Action Plan Australia China Hong Kong India Indonesia Japan Korea

Action 1 – digital economy

Action 2 – hybrid mismatches

Action 4 – interest deduction

Action 5 – harmful tax practices

Action 6 – tax treaty abuse

BEPS Action Plan Malaysia

New

Zealand Philippines Singapore Taiwan Thailand Vietnam

Action 1 – digital economy

Action 2 – hybrid mismatches

Action 4 – interest deduction

Action 5 – harmful tax practice

Action 6 – tax treaty abuse

High-focus area Increased-focus area Low-focus area Not a focus area

► Changes in tax legislation

► Draft legislation, projects and

discussions

► Tax authorities’ particular focus area

► International commitment

► Change in practice of tax authorities

or tax courts

► Government statement or press/public

consultation

► Discussion or projects on the change

in tax legislation that may be

expected

► Government’s position hard to

predict at this stage

► No legislation, projects and

discussions


Page 10

BEPS Action Plan Australia China Hong Kong India Indonesia Japan Korea

Action 7 – PE implication

Actions 8–10 – TP implications

Action 13 – TP documentation

Action 13 – CbCR

BEPS Action Plan Malaysia

New

Zealand Philippines Singapore Taiwan Thailand Vietnam

Action 7 – PE implication

Actions 8–10 – TP implications

Action 13 – TP documentation

Action 13 – CbCR

Asia-Pacific BEPS developments and hot topicsHeat map or focus areas

High-focus area Increased-focus area Low-focus area Not a focus area

► Changes in tax legislation

► Draft legislation, projects and

discussions

► Tax authorities’ particular focus area

► International commitment

► Change in practice of tax authorities

or tax courts

► Government statement or press/public

consultation

► Discussion or projects on the change

in tax legislation that may be

expected

► Government’s position hard to

predict at this stage

► No legislation, projects and

discussions


Page 11

► BEPS MLI

► In November 2016, the OECD released its final multilateral instrument to enable jurisdictions to amend tax treaties

in order to implement BEPS action items (Action items 2, 6, 7 and 14)

► Subsequently, in December 2016, Australia released a consultation paper outlining its preliminary approach to

adopting the MLI, and the initial signing of the MLI is planned in June 2017

► The recently revised treaty between Australia and Germany (in force since 7 December 2016) shows how MLI

approach has been applied in modifying a treaty

► Australia’s MLI adoption may set a standard for other countries in the region

► Treaty developments

► BEPS inspired provisions introduced to tax treaties (selected examples)

► Residence: Japan-Belgium

► Limitation on benefits: Japan-Belgium, Australia-Germany

► Principal purpose test: Singapore-Russia

► Mandatory arbitration: Japan-Belgium, Australia-Germany

► Spill over effects on treaty re-negotiations, e.g., revision to source country capital gains in India-

Mauritius/Singapore/Cyprus treaties

Asia-Pacific BEPS developments and hot topicsKey trends


Page 12

► Recent tax measures — India

Recent budget announcements in India focus on the key measures around anti-avoidance, tightening of TP norms,

thin capitalization rules, and indirect transfer rules. These measures are aligned with some of the BEPS developments

and recent global tax trends:

► GAAR will apply with effect from 1 April 2017, and no deferral has been announced

► In line with Action 4, thin capitalization norms were introduced. Interest expenses paid to related-party enterprises

are capped at lower of (i) 30% of EBITDA or (ii) interest paid/payable

► To align with OECD TP guidelines and international best practices, the tax officer is permitted to make secondary

TP adjustments

► Indirect transfer tax rules are rationalized (investments in Category I and II foreign portfolio investor excluded) and

clarifications have been issued

► Focus on TP

► Countries throughout the region are introducing guidelines to implement the three-tiered approach to TP

documentation, consisting of a CbCR report, master file and local file (recent examples include Hong Kong,

Indonesia, Malaysia and Singapore)

Asia-Pacific BEPS developments and hot topicsKey trends


Page 13

Exit strategies and considerations


Page 14

Exit strategies and considerationsShare transfer mechanisms

Asia Co

Parent/

Hold Co

Sale/transfer of

shares of Asia Co

Acq. Co

Intermediary

Hold Co

Parent/

Hold Co

Acq. Co

Asia Co

Sale/transfer of

shares of Asia Co

EU/Tax

Favored

Hold Co 1

Parent/

Hold Co

Acq. Co

Asia Co

Sale/transfer of shares of

Intermediary HoldCo1

Direct sale/transfer of shares Indirect sale/transfer of shares


Intermediary

Hold Co 2

Sale/transfer of

shares of

Intermediary

HoldCo2

Page 15

Country

Taxation of

direct

transfers

Transfer

taxes

China

India

Indonesia

Korea

Japan

Philippines

Vietnam

Exit strategies and considerationsRegional snapshot on direct transfers

Subject to tax under domestic law

Subject to tax (if certain thresholds for real property/real estate investments are met or other conditions)

Country

Taxation of

direct

transfers

Transfer

taxes

Australia

Malaysia

Taiwan

Thailand

Hong Kong

Singapore

New

Zealand

N/A

► Exemption from capital gains under the tax treaty may be available, subject to conditions

► Relief from transfer taxes (such as stamp duties) may be available, if specified conditions are met

► Certain countries impose reporting requirements in order to apply the treaty (e.g. submission of COR, official treaty claims forms, or other filings)

► Local country GAAR or substance-over-form rules will be evaluated, as applicable


Page 16

Country

Taxation of

indirect

transfers

Transfer

taxes

(stamp duty)

China

India

Indonesia

Vietnam

Australia

Japan

Malaysia

Exit strategies and considerationsRegional snapshot on indirect transfers

Subject to tax (if certain conditions are satisfied)

Subject to tax (if certain thresholds for real property/real estate investments are met)

Country

Taxation of

indirect

transfers

Transfer

taxes

(stamp duty)

Taiwan

Hong Kong

Korea

New

Zealand

Philippines

Singapore

Thailand

N/A

► None of the listed countries levy indirect taxes on indirect transfers

► Exemption from capital gains under the tax treaty may be available, subject to conditions

► Relief from transfer taxes (such as stamp duties) may be available, if specified conditions are met

► Certain countries impose reporting requirements in case of indirect transfers

► Impact on carry forward of NOLs/tax incentives will be evaluated


Page 17

Exit strategies and considerationsIndirect transfers—China update

► Announcement 7/Circular 68

► Safe harbor provisions provide that qualifying group restructurings should not be re-characterized

under the “look-through” approach as taxable but would be regarded as having reasonable

commercial purpose

► Safe harbor provisions, along with voluntary reporting, can provide greater flexibility and planning

opportunities

► Circular 68 provides further implementation guidelines for Announcement 7

► However, there is a trend that the tax authorities are taking a more stringent approach to

assess cases as well as impose interest and penalties

► There were numerous taxable cases in Beijing, Jiangsu and Hainan Provinces in 2016


Page 18

Exit strategies and considerationsIndirect transfers—India update

► An entity will be deemed to derive its value substantially from assets located in India if the

value of Indian assets: (a) exceeds INR100 million (USD7,500); and (b) the value represents

at least 50% of the value of all assets owned by the foreign entity

► India’s Central Board of Direct Taxes issued draft rules providing:

► Valuation standards in determining the 50% substantial test

► Determination of proportionate income attributable to Indian assets

► Details of information reporting and retention of documents in case of a taxable indirect transfer

► Indirect transfer provisions rules are rationalized (not applicable to transfer of investments in a

Category I and II Foreign Portfolio Investor) and clarifications were issued as part of the recent

budget announcements


Page 19

Exit strategies and considerationsIndirect transfers—Indonesia update

► Indirect transfer of Indonesian private shares

Transfer of shares in an SPV could be “deemed” as transfer of shares in the Indonesian company

Indirect transfer subject to 5% tax on the gross transfer value

May be exempt under an applicable treaty

Form DGT-1 and the COR should be retained if treaty benefits are claimed

► Sale of shares of holding company several layers above production-sharing contract (PSC)

contractor taxed as a transfer of PSC participating interest (PI)

Proposed changes to GR79: transfer of PSC PI subject to final tax inclusive of branch profits tax


Page 20

Exit strategies and considerationsIndirect transfers—Vietnam update

► Issuance of Circular 36/2016/TT-BTC dated 26 February 2016, guiding the taxation of

upstream oil and gas activities

► Applicable from 2016

► Confirms that an indirect transfer of an interest in petroleum contracts (PC) is subject to CGT in

Vietnam except for an internal restructuring

► Method for tax calculation not clearly provided

► Prior to the enactment of Circular 36, Vietnam’s tax authorities imposed CGT on indirect sale of

foreign party’s interest in a PC by virtue of broad interpretation of the tax rules


Page 21

Exit strategies and considerationsAsset/business sale mechanisms

Asia Co

Parent/

Hold Co

New Asia Co

Sale/transfer of

assets/transfer of

business

Acq. Co

Asia New Co

Parent/

Hold Co

Asia Spin Co

Demerger of assets/

business

Asset/business transfer Demerger of assets/business

Acq. Co

Asia Co

Parent/

Hold Co

Liquidation of entity/assets

Asia Co

Parent/

Hold Co

New AsiaCo

Sale of assets/

transfer of business

Intermediary

Hold Co

Acq. Co

Asia Cos New Asia Cos

Sale/transfer of

shares of

Intermediary

HoldCo

Asia Co

Parent

Hold Co

New AsiaCo

Intermediary

Hold Co

Acq. Co

Asia Spin Cos Asia New Cos

Sale/transfer of

shares of

Intermediary

HoldCo

Demerger of assets/

business


Page 22

Exit strategies and considerationsKey considerations

► Exit strategies are driven by various commercial objectives such as achieving greater shareholder value, increasing returns on core businesses, divesting of non-profitable businesses, and strategic decisions to exit certain market segments

► A function of these commercial objectives, tax considerations, and other factors such as exit timelines, negotiations with the buyer, and regulatory restrictions may determine or drive the choice of exit mechanism (e.g., spin-offs, demerger, transfer of shares, transfer of assets, etc.)

► Tax can play a key role in structuring the exit, and thus, up-front planning is important. To frame a tax-efficient planning strategy, both buyer and seller considerations have to be factored in:

► Key buyer considerations► Withholding tax obligations and treaty relief► Transaction costs: stamp duties, capital duties► Recognition of goodwill/intangibles► Step up in the basis of shares/assets acquired► Ability to set off the losses► Impact on tax incentives► Impact on tax attributes► Funding mechanisms and tax-efficient financing► Exchange control norms► Tax indemnities/warranties

► Key seller considerations► Withholding tax obligations and treaty relief► Transaction costs: stamp duties, capital duties► Structuring tax-free exits or minimization

strategies► Capital gains and treaty relief protection► Indirect taxes► Valuations► Tax indemnities/warranties► Reporting obligations► Repatriation


Page 23

Key takeaways


Thank you

EY | Assurance | Tax | Transactions | Advisory

About EY

EY is a global leader in assurance, tax, transaction and advisory

services. The insights and quality services we deliver help build trust and

confidence in the capital markets and in economies the world over. We

develop outstanding leaders who team to deliver on our promises to all

of our stakeholders. In so doing, we play a critical role in building a better

working world for our people, for our clients and for our communities.

EY refers to the global organization, and may refer to one or more, of

the member firms of Ernst & Young Global Limited, each of which is a

separate legal entity. Ernst & Young Global Limited, a UK company limited

by guarantee, does not provide services to clients. For more information

about our organization, please visit ey.com.

Ernst & Young LLP is a client-serving member firm of

Ernst & Young Global Limited operating in the US.

© 2017 Ernst & Young LLP.

All Rights Reserved.

ED None

This publication contains information in summary form and is therefore intended for general

guidance only. It is not intended to be a substitute for detailed research or the exercise of

professional judgment. Neither Ernst & Young LLP nor any other member of the global

Ernst & Young organization can accept any responsibility for loss occasioned to any person

acting or refraining from action as a result of any material in this publication. On any specific

matter, reference should be made to the appropriate advisor.

ey.com

Documents

EY widescreen presentation - c.ymcdn.comc.ymcdn.com/.../Feb_21_TS1703_Asia_Pacific_Update_P5.pdfThis presentation is provided solely for the purpose of enhancing knowledge on ... Asia-Pacific