Headline Verdana Bold2019 Asia Pacific Financial...Headline Verdana Bold2019 Asia Pacific Financial Services Tax Conference Confidence through disruption Hong Kong | 1 March 2019 Global

Headline Verdana Bold2019 Asia Pacific Financial Services Tax ConferenceConfidence through disruptionHong Kong | 1 March 2019

Global Information Exchange—Efficient compliance2019 Asia Pacific Financial Services Tax ConferenceBreakfast workshop

2019 Asia Pacific Financial Services Tax Conference© 2019. For information, contact Deloitte Touche Tohmatsu Limited 3

Speakers and Panellists

Roy PhanTax DirectorDeloitte China

Candy ChanTax PartnerDeloitte China


Agenda

Recent updates for FATCA and CRS

Compliance activities

CRS operational assurance

Middleware

© 2019. For information, contact Deloitte Touche Tohmatsu Limited 52019 Asia Pacific Financial Services Tax Conference

Recent updates for FATCA and CRS


FATCA and CRS continue to evolve

Regulatory updates

IRS large business and international compliance campaign

• FATCA filing accuracy

• Offshore providers

OECD updated handbook

• Additional guidance for trusts

• Compliance review guidance

Citizenship/Residency by investment schemes

• Jurisdictions that potentially pose a high-risk to the integrity of CRS

• FAQ—FIs expected to take additional considerations while performing its CRS due diligence procedures.

IRS registration portal and guide, FAQs

• Expanded FATCA classifications

• Responsible officer and point of contact information

• Certifications not required for model 1 IGA FIs

Reporting of avoidance schemes

• Model Mandatory Disclosure Rules for CRS Avoidance Arrangements and Opaque Offshore Structures


Selected approaches to the OECD release

Citizenship/residence by investment schemes

Australia Hong Kong Japan Malaysia Singapore UK

ATO AEOI Guidance updated to require closer scrutiny of documentation

Local implementation is required after the rules are mandated by OECD

No specific guidance No specific guidance No specific guidance HMRC view that the OECD release is not part of the UK CRS guidance and is not mandatory





The OECD updated CRS Handbook guidance for tax authority reviews includes a number of matters to be considered in developing compliance frameworks.

CRS compliance review guidance

Risk assessment of an FIs policies, procedures and

systems

Investigations and sanctions related to an FIs compliance with AML/KYC procedures

Reporting issues

(e.g., significant number of undocumented accounts or

account closures, fluctuations in reporting volumes,

significantly fewer accounts than similar FIs)

Key risk areas identified during implementation and

consultation

Review of an FIs internal controls, including

documentation of internal controls, and sample reviews

“The Global Forum is therefore reviewing in detail each jurisdiction’s domestic legislative frameworks to ensure their compliance with the AEOI Standard, as well monitoring the international legal frameworks being put in place to ensure the delivery of the commitments made. The Global Forum is also developing a peer review process to ensure the effective operation of the AEOI Standard in practice.”

Global Forum on Transparency and Exchange of Information for Tax Purposes, Automatic Exchange of Information Implementation Report 2018



A CRS compliance review may be included as a part of the tax authority’s normal taxpayer review cycle (OECD Implementation Handbook)

• Internal control framework review

• Sample review

• Risk-based approach

Review methodology

• Proportional detail to business-specific factors

• Compliance program

Documentation of internal controls as a common starting point

• Spot check with numerical audit trail

• Objective information ready for tax authoritiesReview by testing a sample of accounts

• Tax authorities

• External or internal reviewersResources available to conduct a compliance review


The questionnaire includes questions for tax authorities covering:

• Overall framework ensuring compliance

• Procedures to ensure all FIs have been identified

• Risk assessment process

• Approach to verify compliance—spot checks, audits (including how many FIs have been audited, how many reportable accounts were not reported or reported incorrectly, etc.)

• Procedures to enforce compliance, sanctions for non-compliance

• Procedures related to undocumented accounts

• Processes of following up notifications from other jurisdictions

Responses required by June 2019

A CRS compliance questionnaire to ascertain CRS compliance approaches issued to all participating jurisdictions

OECD CRS compliance activities


The ATO questionnaire includes questions covering:

• Overall responsibility for managing compliance with CRS obligations

• Documented policies and procedures for complying with CRS-related due diligence and reporting obligations

• Testing of internal controls and compliance with CRS obligations

• Self-certifications for new accounts

• Progress in reviewing pre-existing accounts

The ATO sent a CRS questionnaire to some financial institutions. The ATO has also recently requested meetings with large reporters.

ATO activities


• Australia — following the CRS questionnaire, ATO conducted a number of discussions with taxpayers, no format audits yet

• Indonesia — no audit activities announced

• Singapore — no audit activities announced

• Malaysia — no audit activities announced

• Korea — no audit activities announced

• Hong Kong—initial notices on status of reportable accounts, DD procedures

• China — no audit activities announced

• Japan — no audit activities announced

CRS audit approaches


Increased risk and stricter enforcement are leading businesses to consider at what point reviews are relevant for their programme

OECD Common Reporting Standard enforcement action

Transition into

business as usual

Regulatory change

programme

Establishing governance and performing reviews

Efficiency and

optimisation

Current state?

Stricter enforcement over regulation lifetime

Building a robust defence




Clearly defined roles and responsibilities coupled with a written framework and policy and procedure documents are critical to success


Govern

ance

Opera

tional

pro

cesses

Basis

Oversight

PMO and leads

Management information

Policy document and controls

Business requirements

Entity classification ReportingProduct/service analysis Due diligence

Monitoring

Business specific interpretations

Laws, regulations and guidance


The policies and procedures must be in writing, but can be across different documents. They are specific to an organisation’s approach and systems.

Policies and procedures

Entities and products

• Review of accounts

• Documents/on-line portals

• Contact plan and follow up for recalcitrant account holders

• Validity and reasonableness of self-certifications

• Presumptions and reason to know

Pre-existing account review procedures

• For change in circumstances and actions to be taken

• For changes in requirements and guidanceMonitoring

• Classification of legal entities and products and identification of account holders

• Registrations (FATCA)

• Change in status, including acquisitions and divestments

New account onboarding procedures

• Documents/on-line portals

• Validity and reasonableness of self-certifications

• Presumptions and reason to know

• Reportable accounts

• Data sources, validity and completeness

• Due dates

• Process including third party providers

Reporting


Policies and procedures

Up-to-date written policies and procedures, including compliance with AML/KYC requirements.

Testing

Periodic, independent, risk-based testing of effectiveness of controls and documentation of results. Sampling of accounts from onboarding to reporting.

Sufficient systems

Maintenance of sufficient systems for due diligence, record keeping and reporting.

Remediation

Remediation program to address any errors and failures of internal controls identified.

Training and monitoring

Adequate training and monitoring of compliance with the policies and procedures by the FIs employees.

Oversight

Oversight of CRS requirements.

The actual internal controls should correlate to the business risks and number of accounts maintained by the FI

Example internal controls


OECD Common Reporting Standard review approach

Obtaining appropriate oversight of your end-to-end compliance and identifying areas requiring periodic review

Health check (Annual) Detailed review (2-3 yearly)

Design effectiveness

• High level review of reasonableness and completeness of design

• Peer benchmarking

• Demonstrates good governance

• Detailed review of reasonableness and completeness of design

• Document Op Model and Responsibilities

• Identify optimisation opportunities

Operational effectiveness

• High level review of operational procedures

• Detailed review of high risk process areas

• Interview based

• Recommendation for deep dive reviews

• Detailed review of operational procedures

• Review across the end-to-end process following agreed upon procedures

• Detailed issue log and remediation plan

Scala

ble

to b

usin

ess n

eed

s

Builds a detailed remediation plan


Middleware


Deloitte FATCA and CRS assessment tool:

• Series of questions in a workshop format with report provided following the workshop

• Covers entity classification, financial account analysis, pre-existing account due diligence, new account due diligence, reporting and governance


• Provides peer comparison


FIs are looking for comments regarding the robustness of their programmes in the context of the expectations of tax authorities—gap assessment

Review readiness


Analyse your reportable and non reportable customers Daily, weekly or monthly. What challenges do you have?

A new way to look at AEOI compliance

Monthly data analysis and MI dashboards




Monthly data analysis and MI dashboards Main Reporting season





Aug Oct Dec JulNovSep Feb AprMarJan May Jun


Middleware—it solves your challenges between onboarding and reporting.

All of your AEOI needs in a single solutions

Analysis end to end of all customers

Determines Reportability for FATCA and CRS

Analyses FATCA and CRS

classifications for accuracy

Year on year comparisons

10,000 Tests against Schema Requirements, Local Rules and

Compliance

Generates XMLs

Presumption logic and publically

available information to

solve Undocument A/cs

Automated data driven

transformations (e.g.,

sophisticated address data

solver)

Financial crime analytics

A Dashboard driven managed solution to ensure AEOI compliance from the minute

after a customer is onboarded through to XML filing and ultimately, when a

Tax Authority turns up!


All roads ultimately lead to the increasing combination of the Financial Crime standards with Tax Transparency!

The landscape has changed…Its not about XMLS

PEP

MDR

DAC 6

Bank3rd

partyClient

Compliance

Tax

Data

Tax

DD

Sanctions

KYC AML Tax

FATCA

CRS

BBSI

CCO Fraud

Local

Law


Automated analysis

Our solution provides deep insight into your AEOI population

• Reporting overview dashboards including:

– Reportable population by tax residence

– Reportable classification split for CRS and FATCA

– Reportable population by account balance (normalised to US$)

– Spread of account opening dates

– Risk view of CRS and FATCA (change in classifications [CY vs PY])

Data Analytics

Dashboard

Responsible Officer

Dashboard

• Provides insight into the number of validation and data issues allowing drill down and split by:

– Customers

– Accounts

XML Report

• FATCA and CRS XML reports generated in relevant schema for each reporting Financial Institution.

• Report will have been checked for data validation errors to mitigate the risk of reports being rejected by local portals.


10,000 tests to determine compliance

Deliverables

There are three categories of deliverables from the Deloitte Managed Service in relation to FATCA and CRS reporting:

• Test results—The results from the data integrity, data completeness and reportable determination tests that are carried out as part of the reportingoperating model are provided in excel format, summarising the results and providing a line-by-line breakdown

• Final XML Files—Once the information in the reports have been approved, we will provide you with a copy of the final XML files

• Management Information dashboards—Based on the information contained in the final XML files, we have created two separate MI dashboards for dataanalytics, detailing validation and data issues, and for Responsible Officers, providing high level MI of the overall report

Reportability

Determination

Data Validation

Test Results• Report providing the count of specific errors, their description and a list of

affected customers/accounts.

• Validation report providing breakdown of reportable/non-reportable account holders/accounts by reporting entity and reporting regime.

• Summary of decision logic outcomes for each piece of indicia detected.

• Detailed line by line analysis of population confirming reportability at an indicia level and for the overall account holder.


Underpinned by forensic technology

Middleware solution

01

Purpose Built from Day

From Day 1, our FATCA and CRS “Middleware” was underpinned by Deloitte Forensic Technology. From detecting US indicia through to using the latest address transformation technology.

100sFCR and TT Tests

Our “Middleware” is purpose built to take a Financial Crime standard to tax transparency compliance. If there are Financial Crime Risks embedded in your Tax Data, the reputational consequences and tax compliance risks are significant.

Tax Transparency


Actual successful high risk “middleware” interventions

What is lurking in your tax data?

• North Korean Tax Residents

• Crimean Tax Residents

• Purchased Citizenships

• Undeclared US persons

• Deceased persons as beneficial owners

• Multiple accountholders using the same Fake TIN

• Account aggregation avoidance

• An accountholder named “Do not disclose to HMRC”

• Accountholders registered as living in Bank addresses

• Dummy accounts being reported

• Trading on closed accounts


Forensic technology driving financial crime and tax transparency analysis. Each block of tests is customisable to the data available

Test blocks—financial crime meets tax transparency

High risk taxpayer analysis

High risk jurisdictional

analysis

High risk word scan and

profanity scan

Non-reportable high risk

customers

Transaction and balance risks

Self-certification data risks

High risk address data

Tax transparency reasonableness

High risk change in circumstance

Quality compliance through lower risk

Headline Verdana BoldThe changing international and financial services tax landscape2019 Asia Pacific Financial Services Tax ConferenceHong Kong | 1 March 2019


• There is an increasing burden on tax departments caused by legislative change and disclosure requirements e.g.,:

• The politicisation of tax has added further pressure on tax departments to align with the wider regulatory environment whilst delivering efficiencies e.g.,:

• In response, tax departments are reviewing operating models and their use of technology, e.g., robots and AI

• The future of the tax department: the GE model which is being explored by a number of US Financial Services groups

Global themes

Issues in financial services tax

DAC6 in Europe that requires disclosure of all transactions

that satisfy certain tax hallmarks and is expected to be

burdensome

US tax reform in the US which is the biggest change to US

corporate tax since 1984

Brexit The code designed to protect US jobs—BEAT

Current issues in financial services tax2019 Asia Pacific Financial Services Tax ConferenceBreakout A


Speakers & Panellists

Jonathan CulverTax PartnerDeloitte China

Michael VeltenTax Partner, Asia Pacific Financial Services Industry Tax & Legal LeaderDeloitte Asia Pacific

C.A. GuptaTax PartnerDeloitte India

Hirokazu YoshidaTax DirectorDeloitte Japan

Scott OlesonTax Partner, Inbound Tax Service LeaderDeloitte Korea

Kerry LambrouTax PartnerDeloitte Singapore

Natalie YuTax Partner, China Global Financial Services Industry LeaderDeloitte China

Matthew LovattTax Senior ManagerDeloitte Singapore

Alvin Noel R. SaldañaTax PartnerDeloitte Philippines

Cheli LiawTax PartnerDeloitte Taiwan


BEPS 1 update

Evolution of blockchain and cryptocurrencies

Intangibles in financial services: Transfer pricing considerations

Multilateral instrument

Impact of accounting changes on tax

Regional tax updates

• China

• Indonesia

• Hong Kong

• India

• Japan

• Malaysia

• Singapore

• South Korea

Common Reporting Standard: Recent updates

Tax amnesty update

IBOR reform

Agenda


BEPS 1 update


Action 1 refresher and developments

OECD BEPS Project

Recap

• Taxation of the digital economy

• 2015 Report: digital is impossible to ring-fence

• Features exacerbate BEPS risks due to ease of profit-shifting (remote operating models, etc.)

Update

• Publication of Policy Note by the OECD on 23 January 2019

• Outlines two pillars:

− Appropriate allocation of taxing right

− Addressing residual BEPS issues

• Report to G20 in June 2019 and final report targeted for 2020

− Aiming for "consensus-based long-term solution"

− "without prejudice" basis; i.e., all options on the table

Initial proposal

• Nexus rules supplemented by anti-BEPS rules

• Principles-based

• Could include withholding taxes

Interesting aspects

• Allocation of "more taxing rights to market or user jurisdictions in situations where value is created by a business activity through participation in the user or market jurisdiction"

• Specifically noted that it may be necessary to "reach into the fundamental aspects of the current international tax architecture"

− Echoes approaches by jurisdictions like Italy and the EU: “significant digital presence”-type measures which demonstrate a move away from traditional PE concepts

− Noted that "in the absence of multilateral action there is a risk of un-coordinated, unilateral action" and "a number of countries [have already pursued] unilateral measures"

Deloitte comment

• 2015 Report largely focused on remote operating models

• Technology and operating models have developed more quickly than the BEPS project; OECD has been reactive rather than proactive: perhaps an implicit acknowledgement?

• Nexus perhaps addresses automation, as focus on front-end activity

• Decentralised technologies—how to define nexus?

• Rebalancing of taxation with reference to activity/capital?


OECD BEPS Project

Action 1 Consultation

Consultation document

• Published on 13 February 2019

• Latest proposals for a consensus-based solution to the tax challenges of the digital economy

• Acknowledges risks of no consensus and uncoordinated action

• Call for responses by 1 March 2019: Very little time to respond given gravity of proposals

• Public consultation meeting in Paris on 13 and 14 March

Three nexus and profit allocation proposals

• 3 proposals to revise nexus and profit allocation rules:

− user participation;

− marketing intangibles; and

− significant economic presence

• Share the same objective of expanding the taxing rights

Plus an anti-base erosion proposal

• Taxation of profits where income subject to no/low taxation

− Income inclusion rules + denial of deduction rules

Implementation

• Domestic law inclusion provisions

• Treaty provisions

− Denial of relief where undertaxed

− Strong dispute prevention and resolution components

− Cue MLI 2…!

• Additional date points to be collected for EOI purposes

• Ordering/co-ordination rules necessary due to potential for overlap of various elements of this proposal


OECD BEPS Project

Action 1 Consultation: Nexus and Profit Attribution proposals

• Nexus proposals go beyond traditional concepts

− Move away from physical presence

− Value be considered to be created in the user jurisdiction?

− Approximation as next best alternative

• OECD acknowledges the need for simplicity, but…

− Various proposals inherent complex

− Would indirect taxation be better?

User Participation

proposal

• Focuses on highly-digitalised businesses

• Proposal based on user participation

representing the most significant contribution

to value creation

• Limitation to social media, search engines and

online marketplaces

• Profit attribution on a residual profit split

basis, allocated with reference to user-base

(after allocation of routine profits)

Marketing Intangibles

proposal

• Application to all types of businesses, not just

digitalised

• Proposal based on an 'intrinsic link' between

marketing intangibles and market jurisdiction

• Profit attribution on a residual profit split

basis, allocated with reference to use of

marketing intangibles (after allocation of

routine profits)

• Allocation would apply regardless of DEMPE

functions

Significant Economic

Presence proposal

• Taxable presence would arise where there is a

purposeful and sustained interaction through

technology or other automated means

• Different options to be considered with

respect to profit attribution

• Could include fractional apportionment based

on application of global profit rate to revenues

and then apportioning the tax base

• Moving away from arm's length standard


OECD BEPS Project

Action 1 Consultation: Anti-Base Erosion proposal

Anti-base erosion proposal

• Some jurisdictions don't consider the 2015 recommendations to provide a comprehensive solution to base erosion issues

• Design requirements:

− Respect sovereign right to tax

− But would also enable higher-tax jurisdictions to tax where others have not adequately done so

• Proposal not limited to highly-digitalised businesses

• Two elements: Income inclusion + denial of deduction

First element: Income inclusion rule

• CFCs: Shareholder with a significant ownership interest, would be required

to bring proportionate share of income into account if not subject to tax

above a minimum rate (to supplement rather than replace CFC rules)

• Exempt foreign branches: 'switch-over rule' to replace exemption with

credit where branch subject to low local tax

Second element: Tax on base-eroding payments

• Undertaxed payments rule: Would deny deduction of certain types of

payment made to a related party unless subject to a minimum ETR

• Subject to tax rule: Additional treaty provisions to deny relief in respect

of under-taxed payments under certain treaty articles (e.g., interest and

royalties). Could be limited to related party payments.


The consultation’s global anti-base erosion proposals give rise to particular issues concerning reinsurance and insurance.

In particular:

• The proposed income inclusion rule could impact groups with insurance operations whether or not those operations will be taxed under a parent jurisdiction’s controlled foreign company rules, for example operations writing only local business in a lowertaxed jurisdiction. There are further design issues to be addressed if the proposal goes ahead, including circumstances wherediffering tax regimes give rise to material timing differences in income recognition over the life of an insurance policy and the interaction with foreign tax credit provisions

• The proposal to deny tax deductions for base eroding payments that are “undertaxed payments” is broadly written and has the potential to apply to related party reinsurance, along with other payments. There are a number of important questions to consider in relation to any reinsurances that come within the proposed rules. These are not wholly new, as tax policymakers and legislators have considered them in relation to other rules

These questions include:

• whether the premium payment is a gross or net premium;

• whether, if there is no deduction for premiums, related reinsurance recoveries should be free of tax; and

• the application of any rule to claims payments.

The issues above also apply to related party insurance premiums paid within a non-insurance group.

Potential impact on insurance groups

OECD BEPS Project




The first 10 years


Satoshi

Nakamoto's

White Paper

Criminal

money and

hacks

Blockchain

revolution

Crypto

Winter

ICO

“Cambrian

Explosion”

Security

Tokens

2008 2018

Credit: Matthew Roszak, Chairman & Co-Founder of Bloq, Inc.


Relevance to financial services


What is blockchain?

• In simple terms, a database with memory

What's the big deal?

• Platform for decentralised/cloud execution of processes

• Enables a high degree of automation

Why is it relevant to me?

• New unique asset classes

− Cryptocurrencies and utility tokens

• Payments services

− Peer-to-peer

− Stablecoins

• Automation

− Middle- and back-office functions

• Tokenisation of equity, debt securities, derivatives, etc.

− Emergence of security tokens

− Digitalisation and enhancement of inefficient processes

Challenges

• Integration with legacy systems

• AML/KYC and source of funds

• Bank of one: challenge to the status quo

• Payments: low start-up costs leading to new competitors

• Application of international tax concepts

• Somewhat esoteric: large educational gap


Industry trends


Convergence Regulation

• Shift toward STOs is leading to a

convergence of blockchain technologies

• Permissioned blockchains are highly useful

in the STO context as permissioning is

more aligned with the regulated nature of

securities markets

• Public blockchains: crypto and utility

• Private blockchains: securities and

enterprise applications

• Increased regulatory scrutiny

• Tendency for stakeholders to be actively

seeking regulation

• Bermuda legislation (government-led) vs

Singapore Code of Conduct (industry-led)

• US: Industry doesn't think that the SEC will

close big exchanges as action would need

to be industry-wide. Considered more likely

to be delistings and fines

• Crypto investors generally now looking for

cash-flow businesses—much less willing to

take a risk on the future profitability of the

issuer/business

• Shift away from ICOs to STOs

• General move away from the SAFT due to a

lack of investor protection

• Stablecoin adoption suggested to facilitate

entry to/exit from ecosystem

Evolution


Industry trends (cont.)


Enterprise applications Taxation

• Traditional businesses focusing on cost

savings rather than revenue generating

opportunities

• Automation of middle- and back-office

processes that historically have not

received as much investment as the front

office

• Development largely being led by consortia

• Blockchain: unlikely to affect taxation

• Crypto: Typically no specific rules

• Analysis by way of analogy; application of

tax rules to new business models

• Answers buried in technical detail

• Rules not always fit for new purpose

• GST: many countries exempt, but some

outliers; e.g., in Singapore, supply of

tokens is a supply of services

• Blockchain widely applicable

• VC and PE: liquidity enhancements

• Payments: speed, accuracy and cost

savings

• Clearing and settlement: automation of

back-end processes

• FX: optimisation

• Elimination of nostro/vostro accounts

• Lack of custodians: next growth area?

Financial services


Current GST treatment

• In many countries:

− Recognised as performing similar function to money

− Transfers disregarded or exempted for VAT/GST purposes

• In Singapore:

− Treated as a supply of services

− Supplies taxable at the standard rate or zero rate depending on the belonging status of the recipient

− Token-for-token: barter transactions

• Token issuances:

− Invariably not possible to identify belonging status of token purchaser due to the pseudononymous nature of a blockchain address:

− e.g., 1A1zP1eP5QGefi2DMPTfTL5SLmv7DivfNa

− Can result in application of standard rate by default due to lack of evidence to support zero-rating → erosion of funds raised

− Structuring options exist, but add operational complexity

• Exchanges:

− perhaps easier to address practical issue due to AML/KYC obligations → potential to cross-reference information to identify

belonging status

Consultation questionnaire

• IRAS is consulting on whether treatment should be changed

• Submissions required by end January 2019, but ongoing industry engagement

• Central questions:

− Should crypto transactions be outside of scope?

− Argument: medium of exchange analogous to fiat currency

− Should crypto transactions be exempted?

− Argument: supply analogous to an exempt financial service (e.g., utility tokens may simulate securities)

• Observations:

− Crypto is sui generis: singular classification would not take account of the infinite variety of token structures

− Possibility for developments in late 2019?

Singapore update

Cryptocurrencies


Action 1 proposals: Observations

Blockchain and cryptocurrencies

How future-proof are the proposals?

• Previous Action 1 papers focus on remote operating models, and the current consultation largely picks-up where those left-off

• Consultation goes a little further and implicitly acknowledges the development of operating models and the proliferation of automation

• However, challenges of automation come across somewhat of an afterthought and are not addressed in detail

• OECD still seems to focus on modern iterations of traditional business models

Decentralisation and automation

• Consultation implies that the significant economic/digital presence concept could solve issues arising from automation

• Perhaps adequate where functions merely performed in the cloud

• However, omits reference to highly-decentralised operating models

− Proposal assumes the existence of a central operator: inconsistent with the concept of a DAO and certain blockchain models

− How should nexus be identified in a decentralised automated context (e.g., blockchain smart contract automation)?

• In addition, efficacy depends upon ability to identify location of customers

− How can nexus be applied amongst pseudononymous counterparties?


Intangibles in financial services

Transfer pricing considerations



Insufficient focus on

intangibles in FS to date. Historically focused on

customer lists and regulatory

licenses.

Noticeably different

positions taken e.g., license fee for intangible vs

(more commonly) cost + recharge for

services.

Technology—not usually recognised as intangible. Not

considered as providing a competitive

advantage but more as ‘ticket to

play’.

Emergence of greater number of intangibles e.g.,

technology

Increased weighting to the intangibles section in

transfer pricing documentation

Consistent approach across MNE groups (e.g., consistent messaging across master file

and local files)

Greater education/awareness

across the business (tax and non-tax)

Rise of Fintech and consolidation via M&A activity expected to result in

previously unrecognised intangibles

Current/Historical approach Catalyst for change Potential future approach

Tax regulation changes - BEPS 8 calls for a deeper dive into recognition and

pricing of intangibles

Technology increasingly embedded in financial services sector offerings e.g.,

robotics, automation technologies, algorithmic models etc.

Increased focus from tax authorities on ‘missing transactions’ in TP

documentation

Transfer pricing on intangibles



Manage and reduce risk and

unlock opportunity

Re-examine the existence of potential intangibles.

Particular focus on identifying the location of

intangibles.

Update transfer pricing (“TP”) documentation and intercompany agreements.

Behind the scenes work required in the form of benchmarking studies to produce consistent,

comprehensive documentation.

Revisit existing TP positions around remuneration to

check if fit for purpose. Challenge existing cost plus

service fees to ensure level of sophistication of

intangible and associated value chain is captured.

Ensure consistency between marketing and tax

related messaging.

Transfer pricing on intangibles (cont.)


Multi-lateral instrument


A few facts

The Middle East and Asia-Pacific

• Twenty jurisdictions in Asia Pacific and the ME regions have signed the MLI, out of which:

− Australia, Israel, Japan and New Zealand ratified and deposited their instruments of ratification with the OECD by 1 October 2018. The MLI entered into effect as from 1 January 2019 for these jurisdictions

− Singapore ratified and deposited its instrument of ratification with the OECD on 21 December 2018. The MLI will enter into effect as from 1 April 2019 for Singapore. Hong Kong has not yet ratified the MLI.

• For other jurisdictions in the AP and the ME regions, the MLI likely will enter into effect as from 1 January 2020 if they deposit their instruments of ratification before the last quarter of 2019

• Lebanon, Oman and Thailand are considering signing the MLI, but there are no further details

Hong Kong SAR

China

India

Iran

KazakhstanMongolia

Saudi Arabia

Iraq

Pakistan

Yemen

Myanmar

Afghanistan

Thailand

Indonesia

Oman

Uzbekistan

Japan

Turkmenistan

Kyrgyzstan

Malaysia

Tajikistan

Cambodia

Jordan

North Korea

Georgia

BangladeshPhilippines

Azerbaijan

Sri Lanka

Armenia

UAE

Kuwait

Qatar

Brunei Darussalam

Singapore

Nepal

Bhutan

Lebanon

Egypt

Israel South Korea

Laos

Vietnam

Syria

Papua New Guinea

New Zealand

Australia

Legend:

5MLI jurisdiction, ratified the MLI, instrument of ratification has been deposited with OECD

16 MLI jurisdiction, MLI ratification pending

3Non-MLI jurisdiction, expressed its intention to sign MLI

23 Non-MLI jurisdiction


Current position

MLI in Middle east and Asia-Pacific

Jurisdiction Tax treaty network

Domestic anti-abuse rules

Current MLI position Possibility to obtain binding ruling on eligibility for treaty benefits2

2018 Changes in 2019

Signed the MLI

Ratified the MLI

Entry into force date

Article 7 of MLI: PPT/LOB

Date of PPT/LOB application to relevant treaty1

MLI jurisdictions

China Broad Yes No Yes No Not yet clear PPT Not yet clear No

Hong Kong SAR

Broad Yes No Yes No Not yet clear PPT Not yet clear Yes

Indonesia Broad Yes No Yes No Not yet clear Both Not yet clear No

Japan Broad Yes No Yes Yes4 1 January 2019

PPT 1 January 2019

No

Malaysia Broad Yes No Yes No Not yet clear PPT Not yet clear No

Singapore Broad Yes No Yes Yes 1 April 2019 PPT 1 January 2020

No

South Korea Broad Yes No Yes No Not yet clear PPT Not yet clear Probably

UAE Broad No No Yes No Not yet clear PPT Not yet clear No

Non-MLI jurisdictions

Philippines Broad No No No N/A N/A N/A N/A Yes

Thailand Broad No No No6 N/A N/A N/A N/A Yes


Position in Asia Pacific

Expanded PE definition

Country Expanded

agency PE

Specific activity exemptions Anti-fragmentation rule Splitting-upof contracts

China × × × ×

India A

Japan A ×

Korea × × × ×

Singapore × B × ×

Hong Kong × × × ×

Malaysia A ×

Australia × A

New Zealand A

Indonesia A

South Korea × × × ×


Impact of accounting changes on tax


IFRS 9—Tax authority progress tracker

Legislation or tax authority guidance published on IFRS 9

SingaporeHong Kong

• Banking lobbying efforts have resulted in changes in treatment from the MOF

• Specific legislation previously introduced• Legislation newly introduced allowing an election to follow IFRS 9 w/adjustments

Malaysia

No legislation published, but tax follows accounting

• Tax follows accounts. Uncertainty over tax authorities’ position

China TaiwanThailandThe Philippines

• Tax follows accounts. But tax authorities are likely to adopt realisation principle



Tax does not follow IFRS 9, impacts may still arise

• Regime does not rely on IFRS 9, but impacts can arise. Ongoing consultation regarding tax following accounts

• Regime does not rely on IFRS 9, but impacts can arise

• Unlikely to have any tax impact at current stage


Japan KoreaAustralia Indonesia IndiaVietnam


• Tax follows accounts, but JGAAP is widely used as opposed to IFRS


IFRS 9—In focus

Hong Kong Malaysia

• Taxpayers may elect to be taxed under the new regime for IFRS 9

• Failure to elect will result in being taxed on a realisation basis, the fair value filing concession is likely not be refreshed

• On election, transitional adjustments will arise such that the taxpayer is treated as having always been taxed under the IFRS 9 regime

• Items reclassified from amortised cost to the OCI or P&L will receive additional attention from the IRD

• Impairments for loan provisions will be allowable only in respect of Stage 3 Credit Impairments. Certain recapture provisions apply when transferring loans between parties

• Specific rules apply to: off-market loans, embedded derivatives, preference shares, designated hedges of capital items

• The term “discount” distinct from interest has also been recognised for the first time in the IRO and is specifically taxable/deductible

• The standard modifies certain deductibility provisions and may have implications for Hong Kong’s interest deduction limitation rules

• Rules apply across industry sectors

• The banking industry has been lobbying the MOF to obtain some alignment between IFRS 9 and tax

• Changes to credit impairment allowances have been agreed to by the MOF:

− Stage 1 (performing)—no tax deduction is allowed

− Stage 2 (underperforming)—50% tax deduction is allowed

− Stage 3 (non-performing)—only specific provision is allowed

for tax deduction and element of future losses/expected credit

losses should be excluded

− Reversal of impairment losses (tax deduction claimed) are

subjected to tax

• Incremental impairment losses arising from PYA would be allowed a full deduction for YA2018 (Dec YE) and YA2019 (non-Dec YE)

• Reversal of impairment losses would be taxable to the extent the tax deduction was claimed previously

• Changes apply to banking industry only, changes have not been made for insurers/asset managers


IFRS 17—Tax authority progress tracker

Active industry consultation

Singapore

Malaysia

No legislation published, but tax follows accounting

China

TaiwanThailandThe Philippines

Japan Korea

Australia

IndonesiaIndiaHong Kong

New Zealand

The IASB has delayed IFRS 17 implementation broadly until January 2022


IFRS 15 & IFRS 16—Tax authority progress tracker

IFRS 15

• The majority of jurisdictions (other than Singapore) have not introduced specific legislation in respect of IFRS 15—Revenue Recognition

• Where tax follows accounts, as a result of the spreading of revenue recognition over time, profit and loss and therefore tax maybe less volatile. However, uncertainty exists

• While India has not introduced specific legislation in respect of IFRS 15—Revenue Recognition, taxable income is required to becomputed in accordance with Income Computation and Disclosure Standards relating to revenue recognition

IFRS 16

• Similar to IFRS 15, the majority of tax authorities (other than Singapore) have not introduced specific legislation with regard to IFRS 16—Leases

• Generally, the treatment of leases for tax purposes tends to already be separately legislated, giving more certainty around whether disposal events may occur/how rental will be taxed


Regional tax updates

622019 Asia Pacific Financial Services Tax Conference© 2019. For information, contact Deloitte Touche Tohmatsu Limited

China

Regulatory reform


Regulatory changes to boost foreign investments

China

Further opening up to foreign investment by relaxing the foreign holding investment percentage:

Banks and financial asset management companies

• Cancelled the restrictions on foreign shareholding percentage of banks and financial asset management companies (no more than 20% by a single foreign investor and no more than 25% by all foreign investors in total)

Insurance companies

• For a joint venture of life insurance company established by a foreign insurance company and a Chinese company within the territory of China, the foreign shareholding percentage should not exceed 51% of the total equity (changed from 50% of the previous regulation)

Security companies

• The aggregate shareholding percentage held directly or indirectly by foreign investors shall be in line with the arrangements of the State with respect to the opening-up of the securities industry

• In practice, the foreign shareholding percentage could be up to 51%

Wholly foreign owned Private Fund Manager (PFA)

• More wholly foreign invested PFAs got the licenses and increased the speed to issue fund products


Outline of Guangdong-Hong Kong-Macao Greater Bay Area Development Plan released, setting a “15-year” strategy blueprint of cross-regional corporation in the Guangdong-Hong Kong-Macao Greater Bay Area (“the bay area”)—covering Hong Kong, Macau and 9 cities in mainland

The overall plan is to turn the Greater Bay Area into a global technology innovation center and build advanced manufacturing and modern services industries

Opportunities for financial industries:

− Gradually expand the scale and scope of the cross-border use of RMB

− Encourage banks in the bay area to carry out cross-border RMB business (i.e., lending, trading, and derivatives)

− Grant enterprises in the bay area to issue cross-border RMB bonds

− Support Hong Kong institutional investors to raise RMB funds in the bay area to invest in Hong Kong capital markets, or to participate in private equity investment funds and venture capital funds in Mainland China

− Support China domestic insurance institutions to conduct cross-border RMB reinsurance business with Hong Kong and Macao insurance institutions

− More deeply develop “Bond Connect”, “SH-HK Stock Connect” and “SZ-HK Stock Connect”

− Support the qualified banks, insurance institutions to set up business in Qianhai, Nansha and Zhuhai

Cooperation in Financial supervision and coordination in the bay area and improvement of information exchange for anti-money laundering, anti-terrorist financing and anti-tax evasion

Greater Bay Area Development Plan

Overall update on investments into China for financial institutions


Tax incentives to encourage foreign investments

China

Deferral of WHT on profits derived by foreign investors from PRC resident companies in China and directly reinvested into all non-prohibited foreign invested projects. The implementation rules were issued through Caishui [2018] No. 102 and SAT Bulletin [2018] No. 53.

• Form of reinvestment: The distributed profits of foreign investors must be used in a "direct investment” such as:

− Increasing the paid-in capital or capital reserves of an existing PRC resident company in China by a new capital injection or by transferring retained earnings to capital

− Setting up a new PRC resident company in China

− Acquiring an equity interest in an existing PRC resident company in China from an unrelated party

• Source of profit: The distributed profits derived by a foreign investor must be dividends or other equity investment income arising from the actual distribution of the retained earnings realised by a PRC resident enterprise in China

Enterprise income tax and VAT: Grant a three-year exemption of Enterprise income tax and VAT on the interest income derived by the foreign institutional investors from their investments in the Chinese bond market (Caishui [2018] No. 108)

EIT exemption on income derived by foreign institutional investors from commodity futures trading in China; a three-year IIT exemption on the income derived by foreign individual investors from commodity futures trading in China (Caishui [2018] No. 21)


Indonesia

Withholding tax documentation


Withholding tax documentation

Indonesia

PER 25:

• From 1 January 2019 onwards, a simplified form for claiming tax treaty benefits is available (PER 25 updates PER 10)

• Foreign taxpayers seeking to claim a treaty rate may evidence eligibility using this simplified form

• The changes relate primarily to reducing administrative burden on the taxpayers, e.g., the new form is 1 page in length compared to the old form which was 3 pages long

• There are no material changes to the contents of the form

• Similar to PER 10, if the foreign taxpayer fails to provide the simplified form to the Indonesian payer for onward submission to the tax authorities, they will not be eligible for the reduced treaty rate

• Initial observations and discussions with tax authorities about practical aspects of the roll out are ongoing

• The Singapore tax authority, IRAS, has noted that Singaporean taxpayers should apply for certificates of residence as opposed to requesting that the simplified form be certified by IRAS from 1 February 2019 onwards

“Old” PER 10 requirements:

• PER-10/PJ/2017 (PER-10) was introduced in 2017 and made a number of operational changes to the claiming of reduced rates of withholding tax (WHT) under Indonesian tax treaties (DTT)

• In particular the regulations provided that DTT partner countries must now either certify the new versions of DGT-1 and DGT-2 forms or issue a certificate of residence. A number of issues existed with the detailed PER-10 regulation

• Question 5, Part VII of DGT-1 included a “beneficial ownership” type requirement that asks the entity if it has contract(s) which oblige the entity to transfer the income received to a resident of a third country

• They required a certificate of residence to include of specified period of validity, the DGT-1 & DGT-2 forms also required a DTT partner jurisdiction to specify the period for which the DGT-1 and DGT-2 forms should apply


Hong Kong

Budget, LAC rules, AOA and domestic PE rules


HK Budget update


Tax Measures

Business registration fee

exempt

Waiving business

registration fees for

2019/20

Tax measures for financial industry

The Government is

studying the

establishment of a limited

partnership regime as well

as introducing a more

competitive tax

arrangement for private

equity funds

CDTAs

Hong Kong has signed

CDTAs with 40 tax

jurisdictions

Profits tax relief

Reducing 2018/19 final

profits tax payable by

75%, subject to a ceiling

of HK$20,000

01 02 03 04 05

Tax measures for insurance

industry

Tax concessions for

marine insurance and the

underwriting of specialty

risks, and allowing for the

formation of SPV

companies specifically for

issuing ILS


Industry Wish-list

Enhance innovation and technology

Loosen the requirements for becoming an approved R&D institution and increase the transparency of the application process. WHT exemptions and profits tax exemption for royalties.

02

01

Encourage Fintech

To provide a concessionary tax rate of 8.25% for businesses in the Fintech sector in particular those focusing on the areas of mobile or cashless payment systems, block chain technology, etc.

04Promote HK as regional headquarter hub

Concessionary tax rate of 8.25%

03Reinforce status as an international financial centre

To speed up the process of codification of the limited partnership regime and leverage on the existing regimes of the international asset management centers

Relax foreign exchange control to promote capital flows

Areas of focus


Banking LAC rules

Hong Kong

New legislation enacted on 15 February has extended the special tax treatment currently provided to Regulatory Capital Security (RCS) to other instruments which provide Loss Absorbing Capacity (LAC) (as defined under the Financial Institutes (Resolution) Ordinance). In particular:

• The definition of RCS would be expanded to LAC instruments and components of these instruments

• The RCS rules which currently only apply to financial institutions would now be applicable to all companies subject to a bankingLAC requirement

• LAC instruments would be deemed as debt instruments and payments from LAC instruments will be deemed as interest in respect of RCS

• Interest, gains and profits arising in respect of LAC instruments would be deemed chargeable

• A LAC banking entity would be prevented from being considered a qualifying corporate treasury center, but would still be subjectto intra-group financing business rules


Banking LAC rules (cont.)

Hong Kong

Certain areas regarding LAC instruments still need further certainty, some of these are the same areas of uncertainty facing RCS:

• Whether under section 50AAK deductions in respect of securities issued by head office and not pushed down can be “attributed”to a branch

• Uncertainty as to the interaction of section 17G with section 50AAK—whether a consistent approach will be taken or whether section 17G may override section 50AAK

• Practical application of the tracing rule under section 17F

• When clean holding companies will exist and how entities with a banking LAC requirement but little other activity will be treated

• Practical thresholds of activity regarding the definition of intra-group business in section 16(3)

• Ongoing controversy exists regarding deductibility of coupons pre-RCS rules


Update on AOA

Hong Kong

• The AOA is given effect by section 50AAK of the IRO, which is effective for the year of assessment 2019/2020

• IRD guidance is due to be released on the application of the AOA, but given the importation of the TPG into Hong Kong’s domestic transfer pricing law, OECD guidance of branch profit attribution should be influential

• Capital allocation and Thin Cap authorised approaches likely to be acceptable

• The IRD have publicly stated that their views are informed at least in part by the HMRC approach and referenced their public manuals

• However, we anticipate the IRD may depart from these manuals and OECD guidance with regard to the attribution of funding expenses (AT1, T2, vanilla debt) which are not currently attributed to the branch

• Currently some uncertainty around the scope of section 50AAK separate enterprise principle deeming and how this could interact with Hong Kong’s source regime and other profits tax provisions


Monitor the DIPNMonitor the status of the IRD’s guidance notes which should specify methodologies acceptable to tax authorities

Steps to take on AOA

Hong Kong

01

Understand the lawAs with most DIPNs a conservative view is likely to be presented, taxpayers should be informed as to what is allowable under law

02

Review group approachExisting methodologies should be reviewed and leveraged or departed from as appropriate, stakeholders should be consulted

03

Gap analysis and asset allocationForm a view as to whether additional assets not reflected in the branch accounts could be allocated to HK for tax purposes

04

ModellingThin cap VS Capital allocation approaches should be considered and benefits/compliance costs etc. understood

05

Corporate tax analysisConsideration should be issues that may arise as a result of the application of Part 4 of the IRO to section 50AAK

06


Reduced threshold of PE creation

Hong Kong

• Hong Kong has introduced a reduced PE threshold for the creation of a PE, which is in line with the BEPS Action 7 definition

• Hong Kong has NOT made the associated PE threshold election for MLI purposes and so the reduced definition will not yet have effect in the majority of Hong Kong’s treaties

• However, the IRD have publicly stated that they anticipate that new treaties may be entered into using the reduced PE threshold

• Non-treaty jurisdictions such as the US, Singapore, Australia will be affected immediately

• It is currently uncertain whether, in practice, the technical risk of a DAPE can be mitigated through appropriate transfer pricing


India

Stamp Duty


• Finance Bill 2019 seeks to amend the Stamp Act for levy and administration of stamp duty on securities market instruments by the States at one place through one agency viz., through Stock Exchanges or its Clearing Corporation or Depositories, and forappropriately sharing the same with respective State Governments based on State of domicile of the ultimate buying client

• In order to implement the amendments to the Stamp Act, it is proposed to create an Inter-State Council for Stamp duty related matters under the Constitution of India. The amendments shall come into force from the date to be notified in the official Gazette by the Government

• Stamp duty proposed to be levied on transfer of securities in dematerialise form

• Finance Bill 2019 inter alia seeks to insert certain definitions viz. “allotment list”, “debenture”, “market value”, “securities”, and amend the definition of “marketable security” in the Stamp Act

• Definition of “instrument” broadened to provide for documents in electronic form or otherwise created for transactions in stock exchange/depository

• Stamp duty is payable only on principle instrument for issue, sale or transfer of securities on stock exchange/depository and nostamp-duty is charged on any other instruments relating to any such transaction

• Mechanism provided for disbursal of stamp duty collected on issue, sale or transfer of securities through stock exchanges or clearing corporation or depositories to respective State Governments based on State of domicile of the buying client as mentioned below:

− Either where the residence of the buyer is located; or

− In case the buyer is located outside India, to the State Government having the registered office of the trading member or broker of such buyer; or

− In case where there is no such trading member of the buyer, to the State Government having the registered office of the participant

Reform to the Indian Stamp Act, 1889

India


• In case of issue of securities otherwise than through stock exchange or depository, the stamp duty is payable in the State whereregistered office of the issuer is located on the total “market value” of the securities so issued at the specified rates

• “Market value”, in relation to an instrument through which:

− Any security is traded in a stock exchange, means the price at which it is so traded

− Any security which is transferred through a depository but not traded in the stock exchange, means the price or the consideration mentioned in such instrument

− Any security is dealt otherwise than in the stock exchange or depository, means the price or consideration mentioned in such instrument

Reform to the Indian Stamp Act, 1889 (cont.)

India


• Onus of payment of stamp duty provided:

• Impact: The amendments proposed are expected to usher in a very streamlined system. Stamp duties would be levied on one instrument relating to one transaction and get collected at one place through the Stock Exchanges

Regulatory landscape (cont.)

India

Particulars Duty by whom payable

In case of sale of security through stock exchange By the buyer of such security

In case of sale of security otherwise than through stock exchange By the seller of such security

In the case of transfer of security through a depository By the transferor of such security

In the case of transfer of security otherwise than through a stock exchange or depository

By the transferor of such security

In the case of issue of security, whether through a stock exchange or a depository or otherwise

By the issuer of such security

In the case of any other instrument not specifiedBy the person making, drawing orexecuting such instrument


• Proposed rates of stamp duty:

Regulatory landscape (cont.)

India

Stamp duty on debentures Rate

Issue 0.005%

Transfer and re-issue 0.0001%

Stamp duty on securities other than debentures Rate

Issue of security 0.005%

Transfer of security on delivery basis 0.015%

Transfer of security on non-delivery basis 0.003%

Derivatives:

• Futures (equity and commodity) 0.002%

• Options (equity and commodity) 0.003%

• Currency and interest rate derivatives 0.0001%

• Other derivatives 0.002%

Government securities 0%

Repo on corporate bonds 0.00001%


Japan

Tax reform


Japan

Earning Stripping Rules

• Proposed to be strengthened (applicable from fiscal years beginning on or after 1 April 2020)

• Deduction limit reduced: 20% of the “adjusted income” (down from current 50%)

− 20% limitation applies on a group basis (total of a Japanese corporation and its related Japanese corporation with more than 50% shareholding and with the same fiscal year beginning and ending dates)

− Exempted dividend is excluded to arrive “adjusted income” (currently, exempted dividend is added back)

− 20% limitation applies to total of current year’s net interest expense and excess net interest expense carried forward (7 years)

• Interest payments both to related parties and third parties (currently: foreign related parties only)

• Interest payments which are taxable in Japan in the hands of the recipient is excluded. Therefore, there is a need to identify bondholders (i.e., coupon recipients). An election is available to use “place of issuance” determination

• The interest deduction limitation applies to all the industries, including banks, securities and funds

• Careful attention is needed with respect to investment SPCs in Japan when they raise funding overseas

Recent tax reforms


Japan

Permanent establishment (PE)

• The definition of PE was revised to more closely align with BEPS projects and OECD Model Treaty

• “...habitually concludes contracts...principal role leading the conclusion of contracts...on behalf of...”

• Scope of the “Independent Agent” exclusion was narrowed from 1 January 2019

• Related parties (more than 50% directly or indirectly owned/controlled) does not qualify as an “Independent Agent”

• A fixed place of business solely for storage/display/delivery is excluded from PE only when such activity is of a preparatory or auxiliary nature

• The FSA is to revise “PE questions and answers” for asset management to reflect these changes

Recent tax reforms


Malaysia

Changes to the Labuan Tax regime


Changes to Labuan Tax Regime

Malaysia

Pre-2019 position

Labuan lenders benefits from low tax regime (i.e., RM20,000 tax or 3% of audited net profits, whichever is lower)

Borrowers did not face any tax restrictions

Labuan banks and branches could operate remotely from the home country or co-located office on Malaysia mainland. No physical presence in Labuan and minimal operating expenditure

Labuan banks faced restrictions in transacting with Malaysian residents and in Ringgit Malaysia

New position effective 1 Jan 2019

Lenders must now pay higher tax (i.e., 3% of net audited profits)

Borrowers face a disallowance of 33% on the interest paid to Labuan lenders

Substance requirements introduced, a new requirement to have at least 3 full time employees stationed in Labuan and annual operating expenditure of at least RM180,000

Transaction restrictions removed


Singapore

Budget 2019


Funds exemptions and REIT taxation

Singapore Budget 2019

• Circular to be issued by end of May 2019

Extension of Funds schemes to 31 December 2024

• Offshore fund exemption under 13CA ITA

• Onshore fund exemption under 13R ITA

• Enhanced Tier Fund exemption under 13X ITA

• Sovereign Wealth Fund scheme

• GST remission

Changes to 13CA/13R effective 19 February 2019

• Removal of requirement that a 13CA/13R fund cannot be wholly-

owned by Singapore persons

• Simplification of administrative requirements for managers

• Relevant information to be published on website to

enable investors to determine whether they are

qualifying/non-qualifying investors

• Annual statements only to non-qualifying investors

• 13R relaxed to exclude incidental income from warehousing,

short-term money market instruments and bank accounts set-up

in anticipation of commencing operations

Changes to 13X effective 19 February 2019

• Expansion to include application to managed accounts and a greater

variety of master/feeder fund structures.

• Committed capital concession extended to include debt and credit

funds, and amendments to clarify application to PE funds

• DUT scheme set to lapse – MAS view: effectively subsumed by 13X

Changes to Designated Investments and Specified Income lists

effective 19 February 2019

• Removal of currency and counterparty restrictions

• Designated Investments ("DIs") to include: emission allowances,

accounts receivable, letters of credit and credit facilities and

advances, and Islamic financial products equivalent to other DIs

• Unit trusts no longer need to wholly invest in DIs

• Specified Income to include interest deemed to have a Singapore

source due to the loan capital being used in Singapore and/or

interest being deductible against assessable income

Singapore REIT taxation

• Non-resident 13CA/13X funds to benefit from 10% concessionary

rate available to qualifying non-resident investors from 1 July 2019

• S-REITs and REIT ETFs concessions extended to 31 December 2025


South Korea

2019 tax reform proposals


South Korea

Permanent establishment changes (BEPS Action 7)

New expanded permanent establishment (PE) rules*:

• Specific activities that currently do not give rise to the level of a PE (e.g., purchasing, storage, market research, etc.) willcontinue to be exempt from PE status only if they are preparatory or auxiliary in nature

• Preparatory or auxiliary activities may constitute a PE if the activities are performed complementarily each other with the activities of affiliate companies in Korea and those activities when combined are not preparatory or auxiliary in nature(Anti-avoidance)

• The scope of dependent agent PE status has been expanded to include situations where an agent does not have the authority to conclude contracts for a foreign corporation. A dependent agent that habitually plays an important role in concluding contracts without material modification by a foreign corporation would constitute a PE

*Effective for taxable years beginning on or after 1 January 2019


South Korea

Offshore Investment Vehicle (OIV) regime

Previously:

Due to conflicting precedents, it was not entirely clear which entity should be regarded as the beneficial owner of the income in the offshore fund investment scheme.

Amended to:

Investors, rather than the fund (i.e., offshore investment vehicle) itself, will be generally regarded as the beneficial owner who can apply a reduced DTT rate, except for the following cases:

• If the fund entity is liable to tax in its country of residence and was not set up for tax avoidance, a look-through approach will not apply and instead the fund entity will be regarded as the beneficial owner

• The fund does not disclose the information of investors. (In such a case, no DTT will apply [i.e., 22% will apply])

• The fund entity (offshore investment vehicle) is treated as a beneficial owner under the relevant DTT

Korean entities

Holding Co

OIV

Investor Investor

Offshore

Onshore

*Effective for taxable years beginning on or after 1 January 2019


Common Reporting Standard

Recent updates


Regulatory updates

FATCA and CRS continue to evolve

IRS large business and international compliance campaign

• FATCA filing accuracy

• Offshore providers

OECD updated handbook

• Additional guidance for trusts

• Compliance review guidance

Citizenship/residency by investment schemes

• Jurisdictions that potentially pose a high-risk to the integrity of CRS

• FAQ—FIs expected to take additional considerations while performing its CRS due diligence procedures

IRS registration portal and guide, FAQs

• Expanded FATCA classifications

• Responsible officer and point of contact information

• Certifications not required for model 1 IGA FIs

Reporting of avoidance schemes

• Model Mandatory Disclosure Rules for CRS Avoidance Arrangements and Opaque Offshore Structures


Updated OECD CRS Handbook : Guidance for tax authority reviews


Risk assessment of an FIs policies, procedures and

systems

Investigations and sanctions related to an FIs compliance with AML/KYC procedures

Reporting issues

(e.g., significant number of undocumented accounts or

account closures, fluctuations in reporting volumes,

significantly fewer accounts than similar FIs)

Key risk areas identified during implementation and

consultation

Review of an FIs internal controls, including

documentation of internal controls, and sample reviews

“The Global Forum is therefore reviewing in detail each jurisdiction’s domestic legislative frameworks to ensure their compliance with the AEOI Standard, as well monitoring the international legal frameworks being put in place to ensure the delivery of the commitments made. The Global Forum is also developing a peer review process to ensure the effective operation of the AEOI Standard in practice.”

Global Forum on Transparency and Exchange of Information for Tax Purposes, Automatic Exchange of Information Implementation Report 2018


The ATO questionnaire includes questions covering:

• Overall responsibility for managing compliance with CRS obligations

• Documented policies and procedures for complying with CRS-related due diligence and reporting obligations

• Testing of internal controls and compliance with CRS obligations

• Self-certifications for new accounts

• Progress in reviewing pre-existing accounts

ATO CRS questionnaire



Tax amnesty update


Indonesia• Post tax amnesty; three (3) year lock up ending

in 2019

• Focus on capital outflow and whether to apply another tax incentive

• Potential implementation of Tobin tax, or Financial Transaction Tax

• Potential revision of CFC rule

• Tax Reform

• Foreign Tax Credit

Tax amnesty update

01

02

03

04

Key features

Philippines• Tax amnesty law: 3 parts. General Tax Amnesty

(Vetoed); Estate Tax Amnesty (Partial Veto); Tax Amnesty on Delinquencies (Passed).

• Detailed IRR will be published within 90 days from the passage of RA 11213

• Period to avail—Estate: Within 2 years from IRR issuance. Delinquency: Within 1 year from IRR issuance

• Applicable for 2017 and prior years

• Tax amnesty on delinquency basis: 40%, 50%, 60%, 100% of basic tax due depending on the circumstances.

Malaysia• Tax amnesty period: 3 Nov 2018 to 30 Jun 2019

• Income tax, real property gains tax, stamp duty

• Reduced Penalty rates:

− 3 Nov 2018 to 31 Mar 2019: 10%

− 1 April 2019 to 30 Jun 2019: 15%

• Upon expiry, penalty range: 80% to 300%

Taiwan• Proposed lower tax rate on HNW overseas

income if brought back to Taiwan; subject to conditions

• Recent ruling issued to ease documentation to justify proof of cost basis of overseas income to be taxed

• Conditions to be met for lowered tax rate:

− Funds deposited in special escrow account

− Repatriated funds directed into investments in encouraged industries

− 8% for 1st year; 10% for 2nd year and onward


IBOR reform


IBOR reform

Corporate tax

Potential re-negotiation/amendment of contracts related to IBOR rates:

• Possible crystallisation of tax charges on both sides of a transaction:

- Tax implications of a genuine shift in FV of contracts giving rise to gains/losses on instruments referencing IBOR

- Potential crystallisation event for taxpayers depending on where taxed on a FV or realisation basis—particularly problematic for third party contract

- Potential for intra-group mismatches for example a treasury company (revenue account) lending to a corporate (capital account), or other tax implications associated with new contracts

• Potential invalidation of existing tax rulings as instruments are amended

• Potential for intra-group transactions to be reassessed, in particular the spread in addition to the benchmark rate


IBOR

Transfer pricing

• Where possible, start pricing and writing new business on the replacement reference rates

• The bottom line is valuation—if cash flows change after reference rate replacement, and a change in present value, then likely an accounting hit to P&L, particularly for hedges. This leads to the tax gain or loss when tax follows accounting

• The transfer pricing action is to inventory all related party agreements based on IBOR, and perform same exercise as if a 3rd party customer—refinance at arm’s length or re-paper these I/C funding arrangements

• Timing : Technically financial institutions have about 2 years, and some contracts will run off—depends on volume and materiality:

− If a UK bank with most exposure to GBP LIBOR, cash flow modeling and gap analysis has already started

− If an Australian bank using BBSW, less material and much lower volume as RBA continues to support BBSW (for now)

• Duty is charged on any other instruments relating to any such transaction

• Talk to customers, develop a message around the forthcoming change, manage the fallback clauses

Real estate tax developments 2019 Asia Pacific Financial Services Tax ConferenceBreakout A


Speakers and panellists

Siew-Kee ChenTax PartnerDeloitte Australia

Richard BeaumontTax PartnerDeloitte UK

David AllgaierTax PartnerDeloitte China

Hiroyuki AnanTax PartnerDeloitte Japan

William LeeTax DirectorDeloitte China

Catherine HouTax DirectorBlackstone


Global capital markets

• Global transaction activity

• Global real estate outlook

Asia

− China

− Japan

− Australia

United States

United Kingdom

Europe

Agenda


Global capital markets


Global transaction activity


Closed-end private real estate dry powder, 2007-2018

Global quarterly closed-end private real estate fundraising, 2013–1H2018

Fundraising and dry powder retained their momentum in 1H2018

Global private equity real estate

108118

137127 126

59

340

378 374361

336

121

0

50

100

150

200

250

300

350

400

0

20

40

60

80

100

120

140

160

2013 2014 2015 2016 2017 1H2018

Aggregate Capital Raised ($B)

No. of Funds Closed (RHS)

165 168176

150161

135

201194

228237

249

274 278

0

50

100

150

200

250

300

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Q1 2

018

Q2 2

018

Dry powder ($B)

Source: Preqin quarterly update: Real estate Q2 2018http://docs.preqin.com/quarterly/re/Preqin-Quarterly-Real-Estate-Update-Q2-2018.pdf

Note: Dry powder refers to cash reserves on hand, especially to cover future obligations


Global commercial real estate investment (CRE) Upward trend continued in quarter 1, 2018

5869

56

56

30

40

0

20

40

60

80

100

120

140

160

180

1Q2017 1Q2018

Americas EMEA APAC

19%

0%

33%

285249

245 307

131149

0

100

200

300

400

500

600

700

800

2016 2017

Americas EMEA APAC

14%

25%

-13%

Global CRE investment volume (US$ Billion)

Source: JLL Global Market Perspective, February 2018, (http://www.jll.com/research/201/jll-global-market-perspective-february-2018)


Real estate investment in EuropeAsia investment

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

UK commercial property investment by quarter (£ million)

Q1 Q2

Peak of the market “never to be repeated”

• Maturing sector

• International appeal

• Quest for income

Source: www.propertydata.com/investmentcostar.co.uk

Q3 Q4

Sources of investment into Europe

Total acquisitions of European real estate by region:

Global funds* – US$32.4bn

Asia Pacific – US$23bn

Middle East - US$8.5bn

Americas - US$15.6bn

Source: JLL Global Capital Flows Q4 2018

* Funds with less than 70% of funds sourced from a single jurisdiction/area

Locations of investment

London remains the most active city, whilst Paris recorded its best annual performance since 2007.

Other European cities receiving significant amounts of cross-border investments were Frankfurt, Munich, Berlin and Warsaw.

Investment also increased in regions such as Portugal, Poland and Ireland.

Real estate investment in Europe totalled US$293bn, 6% lowerthan 2017. Total investment in France and Germany increased in2017, by 10% and 6%, respectively.

UK commercial property investment was down 6% in 2017, butremains buoyant compared to previous years.


• Source of investment: largest investor groups were (1) Canada, (2) China, and (3) Singapore.

• Location of investment: Manhattan remains top location for cross-border buyers;

− Other leading markets were Houston, Los Angeles, and Washington DC

• Investment from China: (US$ billion)

Asia investment

Real estate investment in the United States

Asia Pacific

China 8.9

Singapore 7.7

Hong Kong 2.6

South Korea 2.1

Japan 1.6

Australia 0.9

Canada

20.3

Europe

Germany 5.1

Netherlands 3.5

Switzerland 1.3

Norway 1.2

UK 1.1

France 0.8

Spain 0.7

Middle East

Israel 0.9

12 months through Q1, 2018 (US$ billion) Top 15 countries

Source: “Cross-Border Investment in US Edges Up in Q1,” RCA, May 2018https://www.rcanalytics.com/us-cross-border-q118/

Source: Rhodium Group, China Investment Monitor

3.9 4.7

16.911.0

0.4

12.814.9

45.6

29.4

2.0

0

10

20

30

40

50

60

70

2014 2015 2016 2017 2018 Q2

Real Estate Investment Total Investment


Outbound trend

• Outbound direct real estate investment from Japan in the first half of

2018 was lower than the same period last year, mainly due to a

decrease in investment in the U.S., the largest investment destination

• Investors’ willingness to invest in overseas real estate is continuously

strong

• Investment in real estate development projects continues to be active,

mainly in Asia

Inbound trend

• Appetite for investment in Japan remains strong but concern over a

decline in prices prompts slight increase in cautious sentiment

• Asian investors are likely to continue being the main driver of inbound

investment in Japan in 2019

• Tokyo is the most preferred city for overseas investors:

− “Abe-nomics”

− 2020 Olympic

− Exchange rate (weak JPY)

− Japan’s low interest policy

− Attractive risk-return characteristics

Outbound and inbound trends

Real estate investment in Japan

SourceCBRE (https://www.cbre.co.jp/ja-jp/research-reports)MSCI (https://www.msci.com/documents/10199/6fdca931-3405-1073-e7fa-1672aa66f4c2)Tokyu Land Capital Management Inc. (http://www.retio.or.jp/research/pdf/kaigai_16_003_02.pdf)


Global real estate outlook





Asia


China


Foreign investors are not allowed to acquire Chinese real estate properties directly

• 10 percent withholding on dividend from China

• Potential 5 percent reduced rate under tax treaties with Hong Kong or Singapore

• Difficult for SPV to obtain reduced WHT rate

• Local requirement on tax residency certificate

• Chinese beneficial ownership requirement

• The new “Derivative benefit rules” may be considered if the foreign investor is a “qualified person”

Tax on exit

• 10 percent on the gain if direct disposal of China Co

• Potentially same income tax implications for exit at Hong Kong/Singapore SPV level:

− Exception for intra-group reorganisation

− Voluntary reporting

− Strategy for buyer versus seller

Typical real estate investment structure into China

China

Real

Estate

Foreign Investor

HK/SG SPV

China Co

Dividend

Dividend

= Equity

= Underlying asset

= Corporate entity

Key:


• “NPL exchange” established in Shenzhen

• An OTC market

• 10 percent withholding on interest from China

• Potential 7 percent reduced rate under tax treaties with Hong Kong

• Difficult for SPV to obtain reduced WHT rate

− Local requirement on tax residency certificate

− Chinese beneficial ownership requirement

• Potential 6 percent VAT on interest (if applicable)

• Tax on exit

- 10 percent on the gain from disposal of NPLs

- NPL exchange may assist in tax reporting and cash remittance

Investment in non-performing loan (NPL) in China

China

NPLs

Foreign Investor

HK/SG SPV

= Equity

= Underlying asset

= Corporate entity

Key:

NPL Exchange

Interest/gain


Japan


TMK (Special Purpose Company)

Dividends from TMK

• Treated as deductible expense if more than 90% profit is distributed and other requirements are satisfied

• Subject to 20.42% withholding tax, which may be exempted or reduced under tax treaties

Regulations

• Asset liquidation plan needs to be submitted to the government

TK (Silent Partnership)

Distributions from TK

• Treated as deductible expense of the general partner

• Subject to 20.42% withholding tax, which may be exempted or reduced under tax treaties

Regulations

• Certain regulations must be satisfied under the Financial Instruments and Exchange Act or the Real Estate Syndication Act

Typical Japanese real estate investment structures


More than 50% equity must be issued onshore

TMKSpecial Purpose Company

Actual Real Estate

or

Trust Beneficiary

Right

Loans

Bonds

Preferred Equity

Specified Equity

LendersInstitutional

Investors

Investors

GK or KK as TK operatorSilent Partnership

Actual Real Estate

or

Trust Beneficiary

Right

Loans

Bonds

TK Investment

Ordinary Capital

LendersInstitutional

Investors

No onshore investment restriction

TKInvestors

Equity owners

TK agreement



Relevant Japanese tax developments

2018 Tax Reform

2018 Tax Reform tightened capital gains taxation of nonresidents by amending the definition of “real estate holding company”

A corporation is treated as a RE holding company if 50% or more or its assets consists of real estate in Japan based on the FMV at the time of transfer

The 2018 tax reform expanded the scope of when a RE holding company is attested from the date of transfer to any day preceding one year from the date of transfer

The 365 day look-back assessment is consistent with the OECD’s BEPS Action 15

For individual nonresidents:- Effective on or after 1 January 2019

For corporate nonresidents:- Effective for fiscal years beginning on or after 1 April 2018

Old

New

2019 Tax Reform Proposals

• Clarification of Non-control Ownership Requirement of J-REIT

A J-REIT is restricted not to hold at least 50% of the shares of another company

2019 Proposed Tax Reform clarified that the 50% requirement includes equity investment in a TK structure

• Reduced “Registration and License Tax”

The scope of eligible transactions for reduced registration and license tax is expanded to transactions by a certain qualified TK structure investing in actual real estate

Implementation of MLI

• MLI took effect in Japan on 1 January 2019


Australia


Impact on transaction structuring

• Integrity measures aimed at foreign investors

− Draft legislation released on 20 September 2018: Treasury Laws Amendment (Making Sure Foreign Investors Pay their Fair Share of Tax in Australian and Other Measures) Bill 2018

− Tax rate (15 percent vs 30 percent)

− Stapled structures

− Asset classes (vital infrastructure, residential vs affordable housing, agricultural land)

− Debt financing

− Investor profile (pension fund and sovereign wealth funds)

• Stamp Duty and Land Tax (foreign purchaser surcharge)

• Increased foreign resident CGT withholding tax

− 12.5%

− A$750,000 threshold

• New Foreign Investment Review Board Procedures

− Tax conditions and increased role of the Australian Taxation Office

• Significant Global Entities

− Proposed expansion of the definition and implications

Australian real estate tax changes

Australia


Inbound structures: Managed investment trust (MIT)

Australia

Stapled structure

Overseas

MIT

Property Trust

Qualifying Investors

Operating Company

Active income

Tax=30%

Units Shares

MIT

Property Trust

Qualifying Investors

Tax=15%Units

Units Units

Tax=15%

Australia

Overseas

Australia


Australia

Impact of upcoming federal election on real estate

Source: BBC

Labor Party (opposition):

• Proposals impacting real estate


United States


Additional guidance issued

United States: impact of tax reform

864


Portfolio interest exemption provides for 0% withholding tax on US-sourced interest payments if the following conditions are satisfied:

• Interest is paid on a debt obligation

• Interest is paid on an obligation in registered form

• Interest is not paid to a bank or lending institution

• Statement is provided to withholding agent that the beneficial owner is not a US person

• Interest is not contingent interest

• Interest is not paid to a 10% shareholder of the obligor

Portfolio interest exemption

United States: Structuring investments

US investor/

developer

Non-US investor

(non-treaty)

US Property Co

Loan

Interest


United Kingdom


Structures


Overview

April 2019: NRCGT April 2020: NRL Transition to CT

The most significant changes to

the taxation of UK

property in a generation


"Typical" UK real estate holding structuresCurrent rules and key changes

UK tax implications

Current rules

• Gains on investment property generally exempt.

• Low effective tax rate on income, in part due to deductions for shareholder financing.

New rules

• Corporation tax rules apply from April 2020 (including interest and loss restrictions)

• Property rental business losses at April 2020 can be carried forward and offset in full

• Non-resident capital gains tax changes

Singaporean

REIT

PropCo (non-UK) PropCo (non-UK)

HoldCo

(non-UK)

Fund/

JV Vehicle

(non-UK)

Property(UK)

Property(UK)

HoldCo

(non-UK)

Property(UK)

Property(UK)

JPUT (non-UK)

English LP

(UK)

Other

investorsSingaporean

REIT

Other

investors

Shareholder debtShareholder

debt


NRCGT: new rules

UK tax implications under NRCGT

• Commencement: 6 April 2019

• Rebasing to 6 April 2019 with option to use “historic cost”

• Direct charge

• Indirect charge

- ≥75% UK property-richness requirement

- ≥25% substantial indirect interest requirement (except for Collective Investment Vehicles [CIVs])

Singaporean

REIT


HoldCo

(non-UK)

Fund/

JV Vehicle

(non-UK)

Property(UK)

Property(UK)

HoldCo

(non-UK)

Property(UK)

Property(UK)

JPUT (non-UK)

English LP

(UK)

Other

investors

Singaporean

REIT

Other

investors

Indirectcharge

Directcharge

UK tax on gains for non-UK residents


NRCGT: basic exemptions

NRCGT: basic exemptions

• Double Tax Treaties (DTT) (subject to Anti-Forestalling Provisions).

• Direct disposals by some institutional investors (such as Sovereign Wealth Funds).

• Substantial Shareholding Exemption (“SSE”):

- Holding period of 12 months continuously in 6 years before sale

- Gain on share sale exempt (fully if ≥80% qualifying institutional investors “QIIs”, or proportionate if ≥25% QIIs)

- QII: includes Sovereign Wealth Funds

- No step-up in asset basis on exit

Singaporean

REIT


HoldCo

(non-UK)

Fund/

JV Vehicle

(non-UK)

Property(UK)

Property(UK)

HoldCo

(non-UK)

Property(UK)

Property(UK)

JPUT (non-UK)

English LP

(UK)

Other

investors

Singaporean

REIT

Other

investors

SWF/SSE (QII)

Directcharge

Indirect charge

Direct charge

SSE (QII)

SWF/SSE (QII)



NRCGT: possible elections—transparency election

NRCGT: possible elections—transparency election

• Conditions

- Offshore CIV

- UK property-rich

- Income tax transparent

- All investors must consent

- 12 months to elect

- Irrevocable

• Effects

- Asset disposals taxed in hands of investors based on their tax position

- Effective step-up in asset basis on exit

- Already income tax transparent

HoldCo

(non-UK)

Property(UK)

Property(UK)

JPUT

(non-UK)

English LP

(UK)

Singaporean

REIT

Other

investors

SWF/SSE (QII)

Transparent—direct charge arises to HoldCo



NRCGT: possible elections—exemption election

NRCGT: possible elections—exemption election

• Exemption election

- Offshore CIV or a company owned by an LP

- UK property-rich

- GDO/non-close + other conditions

- Reporting requirements

- 12 months to elect from date exemption is to apply

- Revocable

• Effects

- Gains within fund structure exempt (direct and indirect, with 40% minimum ownership of subsidiaries)

- NRCGT arises at level of investors on capital disposals, redemptions and distributions based on their tax position

- Effective step-up in asset basis on exit

- HoldCo may benefit from exemption on capital redemptions/sale

- Structure still subject to UK tax on income profits

Singaporean

REIT


HoldCo

(non-UK)

Fund/

JV Vehicle

(non-UK)

Property(UK)

Property(UK)

HoldCo

(non-UK)

Property(UK)

Property(UK)

JPUT (non-UK)

English LP

(UK)

Other

investors

Singaporean

REIT

Other

investors

SWF/SSE (QII)

ExemptExempt



UK REIT

• Property rental business profits and gains are exempt from tax.

• Requirement to distribute 90% of property rental business profits.

• Distribution subject to withholding tax, although can be reclaimed in full by those with sovereign immunity and in part under the Singapore/UK DTT.

• Various conditions to be met.

Property(UK)

Property(UK)

JPUT (non-UK)

English LP

(UK)

Singaporean

REIT

Other

investors

Singaporean

REIT


Fund/

JV Vehicle

(non-UK)

Property(UK)

Property(UK)

Other

investors

REITCo/HoldCo (UK/non-UK)

REITCo/HoldCo (UK/non-UK)

UK tax on gains for non-UK residentsUK REIT


Europe


A period of change

European tax environment

EU directivesImplementation of

BEPS and EU initiatives

Domestic law

Implementation of EU directives and BEPS initiatives

BEPS

Ongoingdevelopments


European tax environment

France

• Lux—France DTT

• 30% EBITDA

Germany

• RETT

• CGT on sale of German land rich entities

Sweden

• 30% EBITDA

• Exit tax on disposal of Swedish shares

Luxembourg

• Lux—France DTT

• 30% EBITDA

Netherlands

• Dividend WHT

• 30% EBITDA

Norway

• 25% EBITDA

• Tax residence

Denmark

• 30% EBITDA

• Anti-hybrid

• GAAR

UK

• NRCGT

• 30% EBITDA


Structuring an acquisition in a BEPS environment

Shareholder

Holdco

Local Holdco

Local Bidco

Target Group

Shareholder loan

Banking group

ShareholderAction 2 (anti-hybrids)

• May fall within scope either under hybrid financial instrument or under imported mismatch rules. Risk would be for Local territory (i.e. UK) to deny deduction on SHL.

Action 5 (harmful tax practices)

• Holdco (i.e. Lux) benefits from cross-border ATA & APA that would have to be exchanged as with other EU Member States (EU Commission will also be notified).

Action 7 (permanent establishment)

• Under extended definition, a permanent establishment may now arise based on activities of deal teams when it comes to negotiating and concluding SPAs.

Action 6 (treaty abuse)

• Commercial rationale for location of Holdco.

• Increasing focus on substance.

• WHT on interest and dividends. Exemptions/reduced treaty rates may not apply.

• Absence of capital gain on sale of Local Holdco may rely on double tax treaty. Need to consider alternative exits (e.g. sale of Luxco or sale of Bidco followed by upstream dividend or liquidation).

• Real estate rich clauses may apply.

• Use of non-local propcos to hold real estate

Action 4 (interest deductibility)

• Numerous interest deductibility rules.

Action 13 (CbC reporting)

• Holdco may become Reporting MNE (if required to prepare Consolidated FS under GAAP of tax residence jurisdiction).

New risk areas in acquisition structures

Also EU changes—ATAD I and II; mandatory disclosure

Key issues related to branch capital attribution and funds transfer pricing2019 Asia Pacific Financial Services Tax ConferenceBreakout A



Samuel GordonTax PartnerDeloitte Japan

Stan HalesTax PartnerDeloitte Australia

Stephen WestonTax PartnerDeloitte UK

John LeightleySenior ManagerDeloitte China

Samir GandhiTax PartnerDeloitte India

Carlo NavarroTax PartnerDeloitte Philippines


Key Issues in Authorised OECD Approach (AOA)

• The AOA basics

• How and where is the AOA applied?

• A comparison of AOA capital attribution approaches

• Preparing for the AOA rollout in Hong Kong

Key Issues in Funds Transfer Pricing (FTP)

• The FTP basics

• FTP tax management

• OECD Financial Transactions Discussion Draft Basics

• The OECD Discussion Draft: industry views and long term implications

Agenda


Key Issues in Authorised OECD Approach


The “Separate and Independent Enterprise” principle is applied to determine the profits that the permanent establishment (PE) might be expected to make if it were a separate and independent enterprise engaged in the same or similar activities under the same conditions.

A two step process

The Authorised OECD Approach (AOA) basics

STEP 1A functional and factual analysis

STEP 2The pricing on an arm‘s length basis of recognised dealings

1. Attribution to the PE the rights and obligations arising out of transactions between the enterprise of which the PE is a part

2. Identification of significant people functions relevant to the attribution of economic ownership of assets

3. Attribution of economic ownership of assets to the PE and the assumption/attribution of risks to the PE

4. Identification of other functions of the PE

5. The recognition and determination of the nature of those dealings between the PE and other parts of the same enterprise

6. Attribution of free capital based on the assets and risks attributed to the PE

1. The determination of comparability between the dealings and uncontrolled transactions, established by applying the OECD transfer pricing (TP) Guidelines' comparability factors directly or by analogy

2. Selection and application of the most appropriate TP method to arrive at an arm‘s length compensation for the dealings between the PE and the rest of the enterprise


Functional and factual analysis for banks and global trading

The AOA basics

The Key Entrepreneurial Risk Taking (KERT) concept

Basic criteria • Is applied to determine the significant people functions relevant to the assumption of risk and economic ownership of assets

• Functions involving decision making with regard to acceptance or management of individual risks or portfolios of risks

• Remuneration is often (but not always) linked to the revenue or PL of the relevant business

Banking criteria • Creation and management of loan assets are KERT functions

• Sales /trading are likely to be KERT functions in the creation of a loan in wholesale commercial lending business

• Marketing may be a KERT function that leads to the initial assumption of risk for a newly created financial asset in the retail banking business

• Credit risk management is the most relevant management function and may be a KERT function

• Setting and monitoring risk limits generally are not KERT functions

Global trading criteria • Creation and management of trading assets are KERT functions

• Trading functions involving pricing and decisions to enter into trades are KERT functions

• Structuring to meet the needs of clients and negotiating with clients may be a KERT function

• General sales that does not involve structuring is typically not a KERT function

• Hedging of market and credit risk of trades is a KERT function

• Setting and monitoring risk limits generally are not KERT functions


A PE should have sufficient capital to support the functions it undertakes, the assets it economically owns and the risks it assumes and free capital is funding that does not give rise to a tax deductible return in the nature of interest. An attribution of free capital is important to determining the arm’s length amount of debt capital and the arm’s length interest expense deduction for the PE.

Allocating free capital to bank branches and securities brokerage branches

The AOA basics

Three approaches defined by the OECD

Capital allocation approach • Free capital is allocated based on the attribution of risk and financial assets with reference to the enterprise’s overall capital structure

• With reference to Basel standardised approach to risk weighting assets (RWA), PE RWA/enterprise RWA is multiplied by the enterprise’s total free capital (i.e., Core Tier 1 Equity) including any portion in excess of the enterprises regulatory minimum Or multiply the PE RWA/enterprise RWA by total (free and debt) capital

• Applying an internal (regulator approved) model for RWA may be appropriate if there is no “black box effect” and the model assumptions are in line with the arm’s length standard

Thin capitalisation approach • Capital is allocated based on amount of free capital a comparable bank holds and comparability issues include comparative capital structures and regulatory requirements, and mix of business

Regulatory minimum approach • Minimum amount of free capital is determined based on the amount of regulatory capital a comparable bank would hold(a potential safe harbour)


In principle, the risk measurement models approved by the bank’s regulator should be acceptable from an AOA perspective, if sufficient documentation on the models can be provided to the tax authorities; and data is available to determine the risk at a branch level.

The RWA of the branch and, in case of the Capital Allocation Approach the bank as a whole, can determined in line with the internationally accepted regulatory requirements of the Basel Accords for credit risk and in some cases market risk.

A simple example illustrates the interrelation of the three approaches authorised by the OECD: the bank has Tier 1 equity capital of 5,000 and RWA of 25,000, i.e., a Tier 1 capital ratio of 20%. Its foreign branch has RWA of 2,500. Similar independent banks in the host jurisdiction of the branch shall have a Tier 1 ratio of 15% while the regulatory minimum is 10%.

Base case example

A comparison of AOA capital attribution approaches

Bank balance sheet

RWA 25,0000 Tier 1 Capital 5,000

Other assets 5,000 Debt 25,000

Total assets 30,000 Total Capital 30,000


Applying the Capital Allocation Approach

The BIS ratio for the Capital Allocation Approach would therefore be 10% and the PE would need to be attributed 10% of the bank’s Tier 1 capital.

As a result, the branch would have the same Tier 1 capital ratio of 20% as the bank as a whole, i.e., 500.

Applying the Thin capitalisation Approach

Under the Thin capitalisation Approach the branch would have equity capital of 375, i.e., a Tier 1 ratio of 15% in line with independent banks carrying on similar activities as the branch.

Applying the Regulatory Minimum Capital Approach

The regulatory minimum Tier 1 capital ratio is generally also the floor for tax purposes in the branch’ host country, in this simple example 250.

Working through the numbers

A comparison of AOA capital attribution approaches

Branch capital allocation

RWA 2,500 Capital attribution 500

Other assets 500 Debt 2,500

Total assets 3,000 Total capital 3,000


APAC countries

How and where is the AOA applied in APAC?

Australia China Hong Kong Japan Korea India

What is the basis under domestic law for the attribution of income to PEs?

Separate entity hypothesis but different from AOA

Local TP rules plus working capital without compensation of no less than CNY200mn or the equivalent

Yes along with sourcing rules

How to the two will apply together is unclear

Yes Based on domestic TP rules

Arm’s length principle within local TP rules

If AOA or domestic TP rules are the basis for attribution of income to PEs is there detailed guidance particularly with respect the attribution of free capital?

Not based on AOA or TP rules

Australian domestic law and rules under PCG 2018/1

Not applicable Detailed guidance is pending

For inbound banks the capital allocation approach should be use applied

For bank branches when computing the deductible interest on internal borrowing, interest on free capital is not allowed as deductible interest according to the deemed capitalisationrule

Thin cap and TP rule also apply

There is no AOA guidance however banks are subject to regulatory capital levels set out by the Reserve Bank of India

Please inform us of any other limitations placed PEs interest deductions.

LIBOR cap under the Part IIIB election

If no election based on TP rules

China thin cap rule for FSIs 5:1 debt to equity ratio

Rules limiting deductions in respect of regulatory capital securities which also reference the AOA

Earnings stripping rules apply

No specific limitations on interest deductions

Under your country’s tax treaties and domestic law can taxpayer apply AOA for the determination of income to PEs?

No No Publicly stated as so but yet to be documented in IRD guidance

Under all treaties with specific language; others require specific analysis

Local TP rules similar to OECD TP guidelines

No

Are there local requirements for annually documenting the attribution of income to PEs? Are the requirements the same or similar to TP documentation requirements?

Yes Yes Yes Yes Yes Yes

Is there tax controversy over the attribution of income to PEs in your country and are you aware cases where taxpayers have requested Competent Authority to resolve this type double taxation?

Yes, The ATO’s Foreign Bank Strategy group for inbound banks focuses on (amongst other things) branch attribution tax outcomes

Yes but less frequent than TP examinations

There are disputes which typically get settled domestically

Yes and CA has been used to resolve double taxation

(this was one reason for domestic AOA adoption)

Yes however CA is not a common resort used by PEs, it is too lengthy and complicated

There is significant controversy


APAC countries

How and where is the AOA applied in APAC?

Indonesia Malaysia New Zealand Singapore Taiwan Thailand

What is the basis under domestic law for the attribution of income to PEs ?

Force of attraction rule Based on domestic TP rules and source rules

Separate entity and arms length principle based rule

Based on domestic TP rules

Force of attraction rule Source based rule

If AOA or domestic TP rules are the basis for attribution of income to PEs is there detailed guidance particularly with respect the attribution of free capital?

No No No No Not applicable Not applicable

Please inform us of any other limitations placed PEs interest deductions.

Interest deduction is only available for bank branches

Deductions are only available for interest attributable to capital employed in the production of income

Thin cap rules Deduction is only available for interest attributable to capital employed in the production of income

Thin cap rules Not applicable

Under your country’s tax treaties and domestic law can taxpayer apply AOA for the determination of income to PEs?

No Nothing specific but in practice AOA principles may be used

Does not endorse AOA as outlined in the latest model tax convention; follows approach under pre-2010 model tax convention

Must file branch financial statements if the branch size is above a certain threshold

No Yes No

Are there local requirements for annually documenting the attribution of income to PEs? Are the requirements the same or similar to TP documentation requirements?

No local requirements Audited accounts and annual TP documentation

No TP like requirements

Must file branch financial statements if the branch size is above a certain threshold

Yes No TP like requirement

Books and records requirement

TP documentation

Is there tax controversy over the attribution of income to PEs in your country and are you aware cases where taxpayers have requested Competent Authority to resolve this type double taxation?


Minimal Regularly inquired about by IRAS


A few non FS APA cases


Within the Asia Pacific region: Japan

How and where is the AOA applied?

BAU issue 1: Error in accurately recognizing the amount of interest related to the business of the PE

BAU issue 2: Error in attributing free capital to the PE; source of problem was RWA allocation factor (should have used consolidated group RWA in the denominator

BAU Issue 3: Error in attributing interest expense corresponding to tier 2 capital to PE


Within the Asia Pacific region: Hong Kong

How and where is the AOA applied?

The AOA is given effect by section 50AAK of the IRO, which is effective for the year of assessment 2019/2020, impacting transactions from April 2019

IRD guidance is due to be released on the application of the AOA, but given the importation of the TPG into Hong Kong’s domestictransfer pricing law, OECD guidance of branch profit attribution should be influential

Capital allocation and Thin Cap authorised approaches likely to be acceptable

The IRD have publicly stated that their views are informed at least in part by the HMRC approach and referenced their public manuals

However, we anticipate the IRD may depart from these manuals and OECD guidance with regard to the attribution of funding expenses (AT1, T2, vanilla debt) which are not currently attributed to the branch

Currently some uncertainty around the scope of section 50AAK separate enterprise principle deeming and how this could interact with Hong Kong’s source regime and other profits tax provisions


Monitor the DIPNMonitor the status of the IRD’s guidance notes which should specify methodologies acceptable to tax authorities

Key consideration

Preparing for the AOA rollout in Hong Kong

01

Understand the lawAs with most DIPNs a conservative view is likely to be presented, taxpayers should be informed as to what is allowable under law

02

Review group approachExisting methodologies should be reviewed and leveraged or departed from as appropriate, stakeholders should be consulted

03

Gap analysis and asset allocationForm a view as to whether additional assets not reflected in the branch accounts could be allocated to HK for tax purposes

04

ModellingThin cap vs Capital allocation approaches should be considered and benefits/compliance costs etc. understood

05

Corporate tax analysisConsideration should be issues that may arise as a result of the application of Part 4 of the IRO to section 50AAK

06


Key issues in FTP


An evolving framework

The FTP basics

Basic concept

• A framework to ensure a bank meets its payment obligations under stressed market scenarios and ensure businesses recognise the appropriate liquidity premiums based on the character and behavior of each business’ assets

Liquidityrequirements

• A framework to ensure regulators, counterparties, and investors that a bank can continue to meet its Basel III and other regulatory requirements for liquidity and solvency

Market transparency

• A framework through which a bank’s Treasury function credits liability balances and charges assets balances by charging a FTP rate to users of funds and crediting fund providers

Managementdecisions

• A framework to help inform management decisions on how much 3rd party funding is needed, how to allocate funds to businesses, and how evaluate the net interest margins on businesses

FTP


• The consistency/linkage of management views and tax positions is at the core of tax risk management and optimisation of legalentity treasury arrangements

Management position vs. tax position

Tax management of FTP

Interestrate

component

Term liquidity

component

Liquidity buffer

component

Business Line 1

Interestrate

component

Term liquidity

component

Liquidity buffer

component

Business Line 2

Treasury management accounting

?

Interestrate

component

Term liquidity

component

Liquidity buffer

component

Business Line 1

Legal entity

Interestrate

component

Term liquidity

component

Liquidity buffer

component

Business Line 2

Tax position

??

?

?

?

?

• Do i/c funding rates reflect the term structure of 3rd party funding cost?

• Is funding cost in trapped funding entities or booking entities?

• Are allocations of liquidity cost deductible?

• Can i/c prices be explained/supported?


Tax management of FTP issues—Group funding

Group scenario• An i/c lender provides i/c short term funding on an uncommitted basis to

i/c borrowers

• The i/c borrowers expect the i/c interest rates to reflect the i/c short term funding term structure

• The i/c lender cannot fund all of the i/c short term funding on a short term basis in 3rd party markets

• Group treasury’s policy is to recover the economic cost of all i/c funding

For consideration• Understand the behavioral factors underlying the i/c arrangements

Does the i/c borrower use the short term i/c funding to fund assets with a similar term structure?

Does the i/c borrower regularly roll over short term i/c funding?

How different or similar is the i/c borrower’s mix of short term and long term funding to 3rd parties, the group, the i/c lender?

What is the i/c borrower have a stand alone liquidity risk management plan and/or resources?

• If the behavior supports it, consider a comparison of term liquidity adjustments

Internal data on 3rd party term liquidity

External yield curve data

External funding facility commitment fee data

Tax TP conflicting view points• The tax administration in i/c borrower’s jurisdiction focuses on

comparables 3rd party rates of similar term as the i/c funding to test the i/c rate

• The tax administration in i/c lender’s jurisdiction expects 3rd party cost irrespective of term structure to be recovered


Tax management of FTP issues—Liquidity cost allocation

Group scenario• Entities that raise 3rd party funds hold highly liquid asset for the group

• These entities directly bear the losses equal to the return on highly liquid assets minus the 3rd part funding cost (i.e., liquidity cost)

• These entities allocate the liquidity cost to group affiliates based on factors like cash capital usage

For consideration• Benefits

Does the allocation recipient have the stand alone resources to meet its liquidity risk management objectives?

Expertise

Equity capital + retained earnings

Long term 3rd party funding

In the liquidity risk management policy or plan for the allocation recipient what role does group treasury and the allocating entity play?

• Contract

Is there a pre-existing funding agreement in place between the parties?

If so what level of commitment does the funding entity have?

If not would a contingent funding agreement better align obligations and benefits of liquidity risk bearing and management?

Tax TP questions• How should the benefits to the allocation recipient be determined and

supported?

• What contractual arrangement(s) best reflects the obligations and benefit of the arrangement?


Background

• Discussion Draft on the transfer pricing aspects of financial transactions released on 3 July 2018

• Follows the work previously undertaken by the G20/OECD in relation to Actions 8-10 of the BEPS Action Plan on aligning transfer pricing outcomes with value creation

• Not a consensus position of the governments involved, but is designed to provide substantive proposals for further review and comment

• Comments are invited by 7 September 2018. The OECD intends to prepare a further discussion draft after considering input received

Once finalised, it is likely that this guidance will form part of the OECD guidelines

Accurate delineation of intercompany financial transactions

• Accurate delineation is necessary before pricing a transaction to determine if adjustments are required, for tax purposes, to the legal form of the transaction

• This includes how to accurately delineate the capital structure used to fund an entity

• Not intended to prevent countries from implementing alternative approaches to address capital structure, and interest deductibility, under domestic legislation

• Guidance on the application of the economically relevant characteristics discussed in Chapter 1 to accurately delineate financial transactions and to identify arm’s length conditions

• Guidance on determining risk free rates of return and risk adjusted rates of return that is relevant to the application of the principles in Chapter 1 to

“capital-rich” group members with low functionality

The big picture

The OECD Financial Transactions Discussion Draft basics


Old and new concepts

The OECD Discussion Draft basics

New

concepts or

2017 OECD

TP guideline

concepts

Delineation

of

transaction

(2 sided

analysis)

Concepts

from

country

rules and

cases

Loans and

guarantees

Economically

relevant

characteristics

Using the

group

credit

rating

Risk free

return

Risk

adjusted

return

Captive

insurance

Arm’s

length

capital

structure

Pricing

methods


The OECD Discussion Draft: industry views and long term implications

Industry commentary on the Discussion Draft

• The Banking and capital markets industry should be able to take into consideration the regulatory requirements which heavily influence capital structure and 3rd party and related party funding

• Practical consideration should be given to the fact that the volume of intercompany funding in a bank requires a level of standardization that the discussion draft fails to appreciate

Where do we go from a non-consensus draft?

• Where is the OECD going with this guidance?

• Even if the OECD leaves the guidance in draft is already something examiners can and/or do draw upon in examinations and disputes?

• If your country has not already is it likely to produce regulations or guidance for this transactional area?

Headline Verdana BoldMergers & Acquisitions (M&A): Current strategic and tax considerations2019 Asia Pacific Financial Services Tax ConferenceBreakout B






Benjamin TausigTax PartnerDeloitte Singapore


William LeeTax DirectorDeloitte China

Cheli LiawTax PartnerDeloitte Taiwan

Dionisius DamijantoTax PartnerDeloitte Indonesia


Introduction

Trends in M&A

Themes in M&A tax

• Increased transaction scrutiny

• Impact of regulatory developments on transactions/transaction structuring

• Indirect transfers: China, India, Taiwan and Vietnam

Impact of US Tax reform

Bancassurance

Merger/de-merger related developments: Australia, China, India, Indonesia and Malaysia

Region specific issues: Middle East

Conclusions

Topics for discussion


Trends in M&A


2018 vs 2017

Transaction trends—Asia Pacific (excluding Japan)

4.4%Inbound

52.4%Outbound

2.2%Domestic &

Intra-regional

23.5%

Industrials & Chemicals

Source: Asia Pacific Trend Summary Q1-Q4 2018, Mergermarket

Energy Mining & Utilities

8.8%

Technology

32.5%FinancialServices

41.7%

Consumer

2.3%


Sector breakdown by deal value—2018


16.1%

15.7%

11.7%

11.6%

9.0%

7.0%

6.9%

5.8%

16.3%

Industrial & Chemicals

Technology

Financial Services

Energy, Mining & Utilities

Consumer

Transport

Real Estate

Pharma, Medical & Biotech

Other



42

76

95 93

127122

3033

60

43

67

117

0

20

40

60

80

100

120

140

2013 2014 2015 2016 2017 2018

PE buyout PE Exit

Valu

e o

f deals

(U

S$B)

Private equity: 2013-2018


• 514 deals worth US$124.1B announced in 2018, slight dip from 2017

• 2018’s largest deal: US$14B acquisition of Ant Financial by GIC-led consortium

• Financial services sector second highest by deal value for buyouts (US$25.6B)



Australia

• “Bancassurance” model, a catalyst for acquisitions in the previous two decades:

− BT/Rothschild (acquired by Westpac)

− Colonial (acquired by CBA)

− MLC (acquired by NAB)

− ING wealth management and life insurance (JV interest acquired by ANZ)

• Recent shift away from banks to specialist platform providers, dismantling vertically integrated model

• Royal Commission into Misconduct:

− Slowdown of cross-border M&A activity in 2018 due to uncertainty of impact of findings

− Final Report issued 1 February 2019

− Accelerate bank divestitures of non-core businesses (particularly financial advice and mortgage broking)

− Future regulatory reforms and impact on pricing

M&A drivers in Australia


M&A Drivers in Australia (cont.)

Transaction trends

• Significant inbound investment

• Emergence of private equity investors

• Dominance of trade sales (vs. IPO/demergers)

Target Acquirer Sector

Signed

CommInsure & Sovereign (CBA) AIA Life insurance

OnePath (ANZ) Zurich Life insurance

Suncorp Life TAL Dai-ichi Life Life insurance

MLC Life (NAB) Nippon Life Life insurance

AMP Life Resolution Life Life insurance

CFSGAM (CBA) Mitsubishi UJF Bank Wealth mgt

OnePath (ANZ) IOOF Wealth mgt

Scottish Pacific Affinity Equity Partners Lending

Pepper Group KKR Lending

La Trobe Financial Blackstone Lending

Bluestone Cerberus Capital Lending

Announced

MLC IPO/trade sale Wealth mgt

Colonial (CBA) Demerger Wealth mgt

Source: “Sticky fingers in many pies”, Atlas Funds Management”, 2018


Themes in M&A tax


Themes in M&A tax

Increased transaction scrutiny


Increased scrutiny from regulators—FIRB process

Australia

• Objective: assess whether proposed transaction contrary to national interest

• Treasurer/FIRB approval required for:

− Investment by a foreigner

− Substantial interest in land, substantial interest in a business or direct interest by a foreign Government/SOE

− Exceeds monetary threshold

• Treasurer’s powers:

− Allow, prohibit or unwind transaction

− Impose conditions

Federal Treasurer/FIRB ATO consultation Tax conditions

• FIRB consults ATO to assess tax impact of foreign inbound transactions

• ATO scope considers impact of foreign investments on:

− Tax revenue

− Integrity of the tax system

• Following review, ATO issues tax risk rating to FIRB (high/medium/low)

• ATO risk rating only one of the matters considered by FIRB

• Imposition of tax conditions common

• “Standard” tax conditions:

− Obligation to comply with tax laws

− Produce information as required by the ATO

− Pay outstanding tax debts

− Report on compliance with conditions (includes entities in the applicant’s “control group”)

• Additional tax conditions may be imposed

• Penalties/prosecution for non-compliance


Increased scrutiny from regulators—FIRB/ATO considerations

Australia

• Bid structure:

− Residence of investment vehicles and upstream investors

− Tax character of entities

• Purchase price allocation

• Capital structure:

− Debt/equity funding mix

− Legal vs tax character of instruments used

− Terms/features of debt funding arrangements (including quantum and pricing)

− Rating of cross border related party instruments under PCG 2017/4 risk matrix

• Thin capitalisation position

• Distribution and withholding tax profile

• Effective tax rate achieved by ultimate investors

• Arrangements covered by ATO taxpayer alerts

• Previous ATO compliance activity

Deal team considerations:

• Impact on bid timetable

• Longer timeline required for FIRB approval

• Detailed structuring and financial modelling work needs to be completed pre-bid

• Changes to structure post FIRB application need to be disclosed

• Impact on transaction documents (e.g., CPs)

• PMI workstream to manage tax conditions


Themes in M&A tax

Impact of regulatory developments on transactions/transaction structuring


Regulatory constraints for the acquisition of insurance companies in Southeast Asia

Mergers and acquisitions

Restrictions on foreign ownership

• Insurance is one of the sectors being liberalised by ASEAN Members States. However, protective measures have been introduced to increase the net retention in country and promote increased capacity in the local market

− Indonesia: from May 2018, foreign ownership of insurance groups is limited to 80%, with existing ownership arrangements grandfathered

− Malaysia: Bank Negara Malaysia previously confirmed that the 70% foreign ownership limit would be strictly enforced and groups in breach of the regulations would have to pare down their ownership by 30 June 2018. However, political uncertainty created by new Government has led to an effective delay on enforcement

Key considerations for insurance M&A in Indonesia

• FDI restrictions: although existing share ownership positions have been grandfathered, all new equity raised must be raised in the maximum proportion of 80%/20% between foreign and local subscribers

• Single point of presence: an entity (whether foreign or local) may only be the controlling shareholder of in one life insurance company, one general insurance company or reinsurance company

• Conditions for the controller: a foreign entity that wishes to become a controlling shareholder of a privately held insurer should (inter alia) satisfy the following criteria:

− It, or one of its subsidiaries, must be an insurance company in the same line of business as the domestic insurer which it is seeking to control

− It must have equity in excess of five times the value of its investment in the domestic insurer (either on the insurers establishment or where it subscribes for or acquires shares in it)

− It must comply with the requirements of OJK’s fit and proper test


• New entrants would require a local JV partner

• However, existing players may be able to purchase 100% of the interest in the target

− If target is already 100% foreign owned, it may be possible to enter into a merger with the target company and then purchase the vendors’ shares in the merged entity

− However, not a viable option if existing foreign ownership is less than 100%

− It may be possible to enter into a business transfer to acquire the target’s insurance portfolio but this could give rise to significant tax inefficiencies:

– VAT on the non-financial assets

– Gains on non-financial assets although potential to amortise them in the transferee

– Final tax and duty on land and buildings

− Any business transfer may have to be followed by a share acquisition

• Opportunities to fund the capital required for the business transfer

Potential to acquire 100% of an Indonesian insurance company


Vendor(not 100%

foreign)HoldCo

TargetCo

Existing InsuranceCo

Assets and liabilities


Indirect transfers

China, Taiwan and Vietnam


• Sales of shares of a listco: not automatically exempted

• Individual Seller: principle in Bulletin 7 will apply under the new IIT Law

• Interest payment triggering point for Seller: the day after the due date set forth by the tax authorities according to Bulletin 7 or 1 June of the year following the assessment year according to the EIT implementation Law?

• Consideration for capital gain calculation—purchase price allocation to China may be challenged by the tax authority

• Tax cost base on exit

− when the acquisition was not taxed

− When exit is at a different level from the acquisition

• Experience from recent exits:

− Procedures for multi-province case are complex and requires more strategic approach

− Pick a local tax authority for the reporting

− Top-down approach may be necessary—proactively communicating with the SAT and ask the SAT to align the local tax authorities

− SAT Anti-avoidance division coordinating multi-province cases, and Non-resident division provide technical guidance

− China value over 50% of the group value is not necessary a dead case; substance in offshore holdcos is an important factor

− Good housekeeping and maintain documentation

− Avoid China tax resident exposure

Indirect transfer of Chinese taxable assets

China


Indirect transfer—Capital gain tax on real estate

Taiwan

19

By combining taxes on gains from land and building sales, the reform will result in more tax burden to the investors

In the past, the Taiwanese government imposed taxes on gains derived from disposal of land and building separately, based on government-assessed values of land and building

• Land sales—Land Value Increment Tax

• Building sales—Income Tax

However, government-assessed values are generally lower than market values, resulting in low tax burden on real estate transactions


Indirect transfer—Capital gain tax on real estate (cont.)

Taiwan

• The foreign entities or private equity funds sell more than 50% of shares of direct or indirectly-held offshore companies, of which more than 50% of the value derived from the value of lands and buildings in Taiwan, then the real estate tax up to 45% (35% if the holding period is less than one year) will be triggered

• The indirect transfer of the following types of Taiwan companies, which potentially could be “land-rich companies”

− Real estate investors

− Hotel owners

− Hugh investment in land and plants

• Scope of tax: Starting from 1 January 2016, sales of lands and buildings acquired

− After 1 January 2016; or

− After 2 January 2014 and possessed for less than 2 years

• Tax basis

− Sales proceeds of lands and buildings—related cost/expenses—increment in government assessed land value

21

Offshore Holding Co.

Taiwan Sub(Land Rich Co.)

• Capital gain tax

• Capital gain tax

• Security transaction tax


Indirect transfer

Vietnam

• Vietnam does not have a separate capital gains tax regime. Income from the transfer of capital in a non-public company is subject to corporate income tax at 20%

• There are no specific provisions in Vietnam’s tax law taxing offshore indirect transfers other than upstream oil and gas projects

• There was ruling (OL 2268/2012) which provided certain circumstance in which indirect transfers would not be taxed

• The tax authorities are no longer likely to apply this ruling

• In 2016 tax was imposed on a widely publicized US$1.1B indirect transfer (Big C). This precedent, as well as public statements by the tax authorities indicate their intention to tax indirect transfers

Current status

• Challenges exist that in the absence of specific provisions it is not clear how the tax is to be calculated and declared

• In 2018 the Vietnam tax authorities imposed tax on an indirect transfer in the real estate sector. Notably this was triggered by a change in the legal representative of the Vietnam entity upon acquisition

• It can also be observed that the Vietnam Tax authorities are not receptive to allowing treaty relief. This could arguably have been available in the Big C transaction

• It is not clear whether specific new regulations will be introduced to tax offshore indirect transfers. A proposed flat 2% tax on capital transfers generally has been proposed to apply from 2020

Future application


• Where a capital transfer is between two foreign parties it is the Vietnam entity that has the responsibility to declare and pay the tax on behalf of the seller

• Therefore, if the buyer does not agree to any level of risk and will not accept an indemnity for the statutory limitation period(10 years) it is difficult for the seller to take a no-filing position

• The buyer may request the seller obtains a ruling. However, in the Vietnam tax environment tax rulings are rarely issued in favor of the taxpayer

• Where tax has been assessed and paid to date on indirect transfers the buyer was generally prevented from taking legal ownership and carrying on the business unless the tax was paid

• It is likely that where the buyer does not wish to take any risk tax will begin to be paid voluntarily on indirect transfers

• This will mean that the tax authority’s position will become increasing difficult to challenge

Indirect transfer (cont.)

Vietnam


Impact of US tax reform


M&A considerations in view of tax reform

United States

General structuring observations

• New advantages of asset vs stock deals

• New cross-border issues (e.g., GILTI, FDII, and BEAT)

• Application of section 338(g) and section 338(h)(10) elections to buyer and seller

• Debt placement considerations under section 267A and section 163(j)

Financing observations

• Stricter limits on interest deductibility (elective exception to real estate)

• Alternative financing may be considered (e.g., leases, preferred partnership interests with guaranteed payments)

• Coupled with lower US corporate income tax rate, more debt may be placed outside US

• Impact of revised limitation after 31 December 2021


Overview of base erosion and anti-avoidance tax (BEAT)

• BEAT imposes an additional tax on US corporate taxpayers in relation to perceived excessive base erosion deductible payments to foreign related parties

• BEAT does not apply to taxpayers with average annual gross receipts of US$500 million or less (3-year average) AND has a base erosion ratio of less than 3% (2% for banks)

Potential options to mitigate BEAT

• Classify CFC as a branch of US Parent for US tax purposes

• Modify the business model to have third-party customers contract directly with CFC

• Have US Parent assign contracts to CFC in exchange for a service fee

• Subcontract services to an unrelated third party

• Transfer pricing strategies (e.g., qualify payments under the service cost method)

Tax Planning for BEAT

United States

US Parent

CFC

Deductible payment(e.g., services)

Third-partyrevenue


Company profile

• Manufacturing takes place outside of the US

• Finished goods are sold to US customers (e.g., through a US sales office/distributor)

Overview of opportunity

• Manufacturing Co and Sales Co are each classified as a branch of Parent Co for US tax purposes

• Manufacturing and third-party sales activities are deemed to be the activities of Parent Co for US tax purposes

• Sales/distribution income is not considered US source and, as such, not subject to US federal income tax

Considerations

• Tax: US and non-US tax considerations (e.g., income tax, transfer pricing, indirect tax)

• Supply chain: toll or contract manufacturing; R&D activities, IT systems

• Legal: employment, regulatory, customer contracts

Tax Planning for US sales/distribution

United States

Non-US

Parent Co

Manufacturing Co

(e.g., PRC)

Sales Co

(US)US Customer

1 2

1Manufacturing Co produces goods that are sold by Manufacturing Co (or Parent Co) to Sales Co

2Sales Co sells goods to US customers (may also include marketing and distribution activity)


Bancassurance


21

9

6

910

1110

13 13

15

0

2

4

6

8

10

12

14

16

0

1,000

2,000

3,000

4,000

5,000

6,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

US$ M

M

Non-Life Value Life Value Composite & Others Total Volume

Rising volumes in M&A and bancassurance in recent times

Note: Announced deals; exchange rate as at date of transaction; Includes deals with undisclosed values.

Source: Mergermarket, 1 January 2019.

1 2 3 3 9# bancassurance deals in emerging SEA

Key points:

• Volume in M&A leads the cycle

• Larger tends to happen later

• Split by type follows population (in volume)

• Specific near term triggers for action:

− Trouble at home

− Banking consolidation

− Changed rules on ownership

• Bancassurance ramping up in new markets

7


Year Country Buyer Target Bank Size (US$, million)

2018

Vietnam Chubb VietABank NAThailand Prudential Siam commercial bank NA

SG, MY, TH, ID, VN Prudential UOB 851

Indonesia Zurich Asuransi Adira Dinamika (80% Stake) PT Bank Danamon 412

Vietnam Prudential Shinhan Bank NA

Vietnam Prudential Vietbank NA

Vietnam Chubb Viet Capital NA

2017

Singapore Allianz NA Standard Chartered NA

Singapore Chubb NA DBS NA

Philippines Allianz & PNB Allianz PNB Life Insurance HSBC NA

Philippines Insular Life NA Union Bank NA

Thailand AIA NA Bangkok Bank NA

Vietnam AIA NA VP Bank 96

Vietnam Manulife NA Techcombank 100

Vietnam Aviva NA VietinBank NA

Thailand FWD NA TMB NA

Indonesia AIA NA BCA NA

Vietnam FWD NA Nam A Commercial Joint Stock Bank NA

2016

Indonesia Fairfax Multi Artha (80%) Panin 163

Indonesia Allianz NA Maybank Indonesia NA

Indonesia Sun Life PT CIMB Sun Life (51% Stake) PT CIMB Niaga 42

Malaysia Sompo NA CIMB 250

2015

Philippines AXA Charter Ping An (100%) MetroBank 44

Singapore Manulife NA DBS 1200

Philippines Ageas NA Eastwest NA

Philippines Allianz PNB Life (51%) PNB NA

2014

Indonesia Sumitomo BNI Life (40%) BNI 360

Thailand Generali NA Kiatnakin Bank NA

Malaysia Metlife AmLife (50%) AmBank 248

Regional Prudential NA Standard Chartered 1250

2013

Indonesia Dai-ichi Panin Life (40%) Panin 338

Malaysia Sun Life CIMB-Aviva (98%) CIMB 599

Regional AIA NA Citibank NA

Bancassurance activity in Southeast Asia

A consistent flow of transactions, large relative to Life M&A volumes

Source: mergermarket, Company’s announcements

Habitually bigger dollar, which highlights value attributed to the channel


Bancassurance transactions: tax consequences for insurance groups across APAC


Overview

Three types of payments from a local insurance company to a local bank:

• Access fees: lump sum payments made by a local insurance company to a local bank for access to the bank’s customers/distribution network

• Milestone payments/additional commissions/conditional profit split: payments made by a local insurance company to a local bank once certain annual premium targets have been met

• Sales and marketing allowance: defined as an annual payment made by a local insurance company to a local bank for sales and marketing costs incurred by the bank in connection with the bancassurance agreement

Insurance Company

Local Bank

Access Fees

Milestone Payments/Additional Commissions/Conditional Profit Split

Sales and marketing allowance


Bancassurance transactions: CIT considerations for insurance groups across APAC


Access Fees Milestone PaymentsAdditional CommissionConditional Profit Split


Australia Risk that it is capital and non-deductible Should be generally deductible provided they are referable to volume of business rather than a profit split

Generally deductible

China Generally deductible for CIT purpose, with the threshold of not exceeding 10% of premium (minus surrender) for life insurance, and 15% for general insurance. The current ratio is under discussion by tax authority and maybe increased.

Hong Kong Risk that it is capital and non-deductible. Non-deductible for Life companies taxed on 5% net premium basis.

Generally deductible other than for Non-deductible for life companies taxed on 5% net premium basis

Indonesia Generally deductible

Malaysia Non deductible Possibly deductible for general insurers but not deductible for life companies

Deductible for general insurers but not deductible for life companies

Philippines Generally deductible

Singapore Generally non deductible Generally deductible Generally deductible

South Korea Generally deductible, with any amount in excess of the expense limit set by the Insurance Business Regulations being treated as non-deductible.

Taiwan Generally deductible

Thailand Generally deductible

Vietnam Potentially deductible if it can be demonstrated that the access fees are a bonus for the bank for entering into Agency Agreement with the Life insurers. For general insurers, total Agency Management Fee incurred by a non-life insurer in a year could not be higher than 50% of the insurance commission paid in such year

Potentially deductible Potentially deductible although for general insurers total Agency Management Fee incurred by a non-life insurer in a year could not be higher than 50% of the insurance commission paid in such year


Bancassurance transactions: GST/VAT considerations for insurance groups across APAC


Access Fees Milestone PaymentsAdditional CommissionConditional Profit Split


Australia GST should apply and credits should be available

China VAT is due and creditable to the extent that it relates to supplies of taxable insurance. Amounts related to non-taxable insurance, e.g., long term life insurance, are not taxable.

Hong Kong Not applicable as no indirect tax in Hong Kong

Indonesia VAT would be due and is not creditable

Malaysia

Philippines VAT would be due and creditable, as both life and general insurers are subject to VAT

Singapore VAT is due and creditable to the extent that it relates to supplies of taxable insurance. Amounts related to non-taxable insurance, e.g., life insurance, are not taxable.

South Korea VAT exempt supply

Taiwan 5% VAT business tax which is not creditable

Thailand VAT is due on the service fee. Life insurers are exempt from VAT and thus any VAT would not be creditable whereas general insurers are subject to VAT and thus the VAT would be creditable

Vietnam If treated as an agency fee, would be subject to VAT. Life insurers and various classes of general insurance are exempt from VAT and thus any VAT would not be creditable

Commissions are not subject to VAT declaration and payment but incentives (based on sale target) are subject to VAT

Cash support to the agency, generally not subject to VAT declaration and payment


Merger/de-merger related considerations


Australia


Demerger relief

Australia

Shareholders

Sub 1 Sub 2

Head Co

Shareholders

Sub 1

Head Co Sub 2

Requirements:

• “Restructuring” of a demerger group

• Demerger group stops owning at least 80% of the ownership interest in the demerged entity (Sub 2)

• Shareholders receive new interests and nothing else

• Shareholder’s proportion of new interest in demerged entity (Sub 2) = shareholder’s proportion of original interests in head entity (Head Co)

• Shareholder’s proportionate total market value of ownership interests in head entity (Head Co) before demerger = shareholder’s proportionate total market value of ownership interests in the demerged entity just after demerger

Outcomes:

• Tax neutral for shareholders

• Capital gains/losses arising from certain CGT events for demerging entity (Head Co) disregarded

Pre-demerger Final structure


CR 2018/7: Eneabba Gas

Australia

EneabbaShareholders

GCC Methane

1A Sale of shares inexchange for CRPS

Problem:

• “Restructure” considered to include sale of shares in GCC Methane and Ocean Hill in exchange for CPRS in UIL Energy

• UIL not a demerger subsidiary, therefore no demerger group to which demerger relief can be applied

UIL Energy

Ocean Hill

Eneabba1B Issue of CRPS

2 In-specie distributionof CRPS (demerger)

EneabbaShareholders

GCC Methane

UIL Energy

Ocean Hill

Eneabba

100%



CR 2018/31: Sale of Westfield Group

Australia

WCLWFDT

WestfieldShareholders

WAT

Westfield stapled group

OneMarket

1 Demerger of OneMarket

WestfieldShareholders

WCLWFDT WAT

Westfield stapled group

OneMarket Unibail-Rodamco

Unibail-Rodamco

Sale2

Problem:

• Demerger conditional on Unibail-Rodamco takeover proceeding

• “Restructure” considered to include subsequent takeover, and the “and nothing else” condition not satisfied

OtherShareholders


Presentation title[To edit, click View > Slide Master > Slide Master]

Member firms and DTTL: Insert appropriate copyright[To edit, click View > Slide Master > Slide Master]

201

China


≥ 85%

Circular 59 and Circular 109: Tax Implications of Special Treatment

China

Special tax treatment on restructuring• Transferor: deferral of EIT

• Transferee: carryover of the tax basis of acquired assets/equity

Assets Transfer Equity Transfer

Transferee

Assets

Transferor

transfer

equity

Transferee

Transferor

transfer

equity

Subsidiary

≥ 50%≥ 50%

≥ 85%


Bulletin 40: Qualifying Intragroup Assignments—4 Cases

China

In addition to the conditions in Circular 109, an intragroup assignment of shares/ assets must fall within one of the following cases to qualify for special tax treatment

Cases of Qualifying Intragroup Assignment

Parent assigns shares/assets to 100% subsidiary

• Consideration: equity interest in the subsidiary

Parent assigns shares/assets to 100% subsidiary

• No consideration

100% subsidiary assigns shares/assets to Parent


100% subsidiary assigns shares/ assets to 100% subsidiary




204

India


APL

GIPL

Others

Promoters

9.54%

NCLT rulings on GAAR: Gabs Investments Private Limited (GIPL) and Ajanta Pharma Limited (APL)

India

Scheme—before the NCLT• The scheme of amalgamation and arrangement between GIPL (a private limited

company) and APL (a listed company) and their respective shareholders filed before the National Company Law Tribunal (NCLT)

• As per the scheme, GIPL was proposed to be merged with APL with shares of APL to be allotted to the shareholders of GIPL

• Rationale for the scheme was simplification and rationalization of shareholding structure as well as reduction of shareholding tiers

• No adverse comments from independent valuer’s report, merchant banker’s fairness opinion and observation letter from SEBI

Objection by the tax authoritiesThe Scheme is an Impermissible Avoidance Arrangement and a deliberate measure to avoid taxes i.e., tax on sale of shares and dividend distribution tax on distribution of post-tax profits

Ruling of the NCLT• The NCLT observed that through this Scheme, GIPL and promoters were avoiding tax

liability, thereby, resulting into huge tax losses to the government

• The Scheme would benefit only promoters and no public interest is envisaged to be served

• The NCLT relied on judgement of National Company Law Appellate Tribunal (NCLAT) in the matter of Wiki Kids Ltd. v. Aventel Ltd. wherein NCLAT held that if the scheme was not in public interest, the same can be rejected by NCLT

100%

61.17% 29.29%Proposed merger


NCLT rulings on GAAR: NIIT Technologies Ltd

India

Scheme—before the NCLT

• PIPL BA and GSPL AS proposed to be merged into NIIT

• In consideration, NIIT to allot proportionate number of shares to shareholders of PIPL BA and GSPL PS (i.e., Pawar Family Trust and Thadani Family Trust) which are promoter family trusts

• Objective of the scheme is simplification and streamlining of shareholding structure, reduction of shareholding tiers, providing transparency to the promoters’ direct engagement with NIIT and succession planning of the promoters

Objection by the tax authorities

Objections raised by the tax authorities to sanctioning of the Scheme citing that the purpose of the Scheme was tax avoidance.

Merger

Ruling of the NCLT• When tax authorities object to the NCLT sanctioning any scheme,

the onus is on the tax authorities to demonstrate that the sole purpose of the scheme is tax avoidance

• Whether the scheme is designed solely for avoiding tax or merely adopts a tax efficient way of undertaking the desired transaction is the key question that needs to be decided

• A tax payer can arrange his affairs to reduce his tax burden in a lawful manner (Difference between tax avoidance/evasion and tax mitigation/saving recognized by the NCLT relying on various rulings)

• Reliance placed on the Bombay High Court ruling in case of AVM Capital Services Private Limited wherein the High Court approved a similar merger

• The NCLT concluded that the tax authorities were unable to convincingly demonstrate any tax avoidance and, accordingly, approved the scheme



207

Indonesia


Indonesia

Tax Neutral Merger—Cross Border Merger or Amalgamation

Indo Co

Offshore Subsidiary

Offshore Shareholder

Offshore

Indonesia

Indo Co or New Indo

Co

Description Tax Neutral Merger

10% VAT for the assets transfer May be subject to VAT as the Law only mention if both entity is VATable entity

Capital gain tax at 25% No(Subject to book value approval)

5% final transfer tax on land/building for the transferor (based on higher of NJOP or market value)

Yes or No if the land/building is located offshore

5% acquisition duty on land and building (BPHTB) (based on higher of NJOP or market value)

Yes (50% reduction subject to approval) or No if the land/building is located offshore

Tax losses Surviving entity must have less tax loss

Any liabilities (including tax liabilities) of dissolving entities carried forward to surviving entity

Yes

Intangibles (may arise from the transfer of customers lists, existing contracts or other intangibles)

N/A(goodwill may be amortizable)

Automatic tax audit risk for dissolving entities Yes (onshore entity)


Indonesia

Tax neutral spin-off

PT AB

Shareholder

PT B

Shareholder

PT A

Criteria

• Transferor entity intended to IPO;• Already listed company, the spin-off entity must conduct IPO;• Spin-off sharia business;• Spin-off company received capital injection at least IDR 500 billion (US$36

billion);• State owned holding.


Regulation updates—MoF No 192/PMK.03/2018 on Foreign Tax Credit “Offshore Loss Can Be Net-off If Has Effective Connection”

Indonesia

Indonesia

Country A

PT A

Branch A

Country B Country C

Interest A Ltd

Loss on Asset

DividendDividend InterestLoss on Asset

Key Takeaway

• To invest via Branches or Subsidiary for a Risky investment• Tax credit is for each type of income and each country• Maximum tax credit can be utilized for the year is the lowest amount of Treaty rate or Tax credit amount or proportional calculation



211

Japan


2019 tax law reform: Corporate reorganisations—Expansion of qualified consideration in corporate reorganisations

Japan

A Co.

100%

Merger

100%

B Co.

C Co.(Japan)

D Co. share

holders

D Co.(Japan)

A Co.

100%

100%

B Co.

C Co. (Japan)

A Co. (ex-D Co.)

shareholders

Merger Post-merger structure

Disappearing company

Current: non-tax qualified

Proposed: tax qualified

22

A Co. shares

Surviving company


2019 tax law reform: Corporate reorganisations—More flexibility for post share-for-share exchange reorganisations

Japan

A Co.

90%⇒100%

B Co. shares

B Co.

Minority share

holders

A Co.

100%

B Co.

Cash

10%⇒0%

Merger

Surviving company

Disappearing company

Share-for-share exchange Tax qualified downstream merger

Current: non-tax qualified

Proposed: tax qualified

23



214

Malaysia


Amendments of Section 15 and 15A of Stamp Act 1949

Stamp duty

Existing company/ Transferee should remain as beneficial owner of shares issued/acquired for at least 2 3 years

Existing

company

Transferee

company

Reconstruction, amalgamation, liquidation or Government Policy on capital participation

Consideration

Acquisition/undertaking/Shares

Amendments of Section 15 (Effective from 28 December 2018)

Additional conditions:

• Has to achieve greater efficiency in operation [Section 15A(2)(b)]

• Transferee company must be incorporated in Malaysia [Section 15A(2)(c)]

• Must remain associated for 3 years [Section 15A(4)(c)]

• Must hold the property for 3 years [Section 15A(4)(d)]

(2) For the purposes of a claim for exemption under subsection (1), a company which has, in connection with a scheme of reconstruction or amalgamation, issued any unissued share capital, shall be treated as if it had increased its nominal share capital.

Nominal share capital

Issued share capital

Amendments of Section 15A Effective from 28 December 2018)

Responsibility to notify the

Collector

within 30 days from the date

the breach has occurred

[new subsection 15(6A) &

15A(6)]

Company A

Company B

Company C

Transfer of property

Transfer of property between associated companies (90% shareholding) will be exempted from stamp duty.

If declaration is found to be untrue will be charged with duty & interest of 6% per annum[new subsection 15A(5)]

Statutory declaration to be submitted to the Collector by:- Advocate & Solicitor (Peninsular Malaysia)- Advocate of High Court

(Sabah & Sarawak)[new subsection 15A(7)]

Co

nsis

ten

cy


Region specific issues

Middle East


Key tax considerations

Tax in the M&A deal process

Key Middle East M&A tax considerations

• Blacklisting

• Substance requirements

• Introduction of VAT

• Delay in receiving TRC (impact of cashflows)

• Legal ownership requirements

• Introduction of transfer pricing

• Zakat vs CIT

• Long statute of limitations

• Tax on transfer of goodwill

• Free zones vs mainland

• Global sanction/embargos

• CIT introduction…?


Conclusions

Outsourcing arrangements: Managing tax costs2019 Asia Pacific Financial Services Tax ConferenceBreakout B



Senthuran ElalingamTax Partner, Asia Pacific Financial Services Indirect Tax LeaderDeloitte Asia Pacific

Alvin Noel R. SaldañaTax PartnerDeloitte Philippines

Yong Wei Gooi Tax PartnerDeloitte Malaysia




Agenda

Introduction

Current trends

Tax considerations in key SSC markets

• Philippines

• Malaysia

• India

International considerations

Discussion


• Shared services centres (SSCs) and similar outsourcing arrangements continue to deliver greater value year on year, through productivity gains and cost savings

• Businesses are continuing to expand the use of SSCs through adopting a multi-SSC strategy covering specific regions. Although cost remains a priority when establishing or relocating SSCs, organisations are increasingly emphasising proximity to existing operations or headquarters

• Knowledge-based processes are on the rise. Although transactional processes remain predominant at SSCs, adoption of more complex, knowledge-based processes has doubled or in some cases, tripled in recent years. Functional scope continues to expand. The number of SSCs with more than three functions continues to rise dramatically

Introduction

• Robotic process automation is a rapidly emerging technology that will fundamentally change how SSCs operate, slashing the effort for routine tasks and enabling advanced cognitive applications that augment or replace human judgment in knowledge-based processes

• Whilst gaining process efficiencies, reducing costs and maintaining quality of work and internal controls remain as key benefit areas for those implementing SSCs. Surprisingly, tax is still viewed as a lower priority, and not as a strategic element in organisations’ SSC decision-making process

• In considering the continued evolution of the tax systems in the key Asia SSC markets, the priority of tax will need to change


Current trends


• Biennial Survey of SSC and Global Business Services that has been conducted since 1999

• Most recent edition surveyed 330 global participants (23% from Financial Services & Insurance) operating over 1,100 SSCs

• 44% of respondents indicate plans to establish new shared service centres—or consolidate existing ones—to further enhance their geographic footprint

• Cost efficiency is the most important factor for SSC selection strategy and cost of service is the most important factor for business unit customers of SSCs

• India remains a relatively low-cost option and continues to be one of the more popular SSC locations

• Finance has consistently remained the most popular function for SSCs, though interest in other functions has increased notably over the past two years. Shared services for Human Resources has seen a significant increase in the last several years across all process areas measured by the survey. All IT processes are generally well-adopted

• Technology appears to be the next frontier in value capture, as more organisations are willing to reinvest savings from productivity improvements into this area, particularly in the robotics and cognitive automation space

• Nonetheless, technology automation and standardisation persistently came up short in terms of meeting expectations, indicating that organisations continue to struggle to effectively incorporate technology improvements as part of their SSC transitions

Deloitte’s Shared Services Survey

Current trends


What is the scope of your shared services organisation?

Current trends

Which functions are performed in your SSCs, including transactional and knowledge-based centres?

How many functions (such as HR, Finance, etc.) are performed in your largest SSC?


Of the 32% respondents with the tax function in their SSCs, what processes are represented and how are they delivered?

Current trends

Which Tax processes are included in your SSCs1? What is the delivery reach of each Tax process?

Tax scope and delivery reach

• Tax Data Collection is most commonly cited Tax process within SSCs, and experienced a dramatic increase from 45% in 2013

• Tax Return Preparation was least commonly performed in SSCs, but has since almost doubled adoption since 2013 (16%)

• For all Tax processes, Regional delivery is the most preferred method of deployment, followed by Multi-regional delivery for seven of ten total Tax processes


Are service-level agreements (SLAs) a common and effective tool for governance?

Current trends

Does your SSC/GBS organisation leverage SLAs to drive governance?

SLAs and chargebacks

• Over two-thirds of respondents indicated use of SLAs as part of their governance strategy, which has declined from 77% in both 2015 and 2013

• 50% of the respondents indicated that services are charged back to divisions based on volume of services utilised, only 5% include penalty pricing in their charged back model

How are services being charged back to divisions serviced by your Shared Services organisation?


Tax considerations in key SSC markets


Philippines Malaysia India China

Corporate Income Tax Rates

• 30% regular corporate income tax

• 25% headline rate

• 3% for Labuan entities

• 25%* subject to fulfilment ofcertain conditions

• In other cases 30%*

• 25% regular corporate income tax

Deductibility of set-up costs

• Generally tax deductible • Generally not tax deductible

• Pre-commencement expenses not tax deductible

• Generally not tax deductible but specified set-up costs subject to limits are deductible over a 5 year period

• Generally tax deductible

Availability of tax incentives or special schemes for outsourcing, BPO, and SSC

• Registrable with Investment Promotion Agencies such as Philippine Economic Zone Authorities which may grant tax incentives such as income tax holiday, 5% special income tax rate on gross income, VAT and duty free importations etc.

• Previous incentives (OHQ, RDC, IPC) rationalised into Principal Hub

• Tax exemption ranging from 50% to 100% over a 15 year period for Special Economic Zone units

• Tax linked incentives available at Central level (under Foreign Trade Policy of India) for notified services

• Additionally, incentives for certain services like R&D, IT, IT enabled services in few states

• 15% preferential tax rate for qualified advanced technology service enterprises. If the enterprise is mainly doing offshore service outsourcing business, including the information technology outsourcing service (ITO), technical business process outsourcing service (BPO) and technical knowledge process outsourcing service (KPO), such enterprise is likely to be a qualified advanced technology service enterprise

Country-by-Country Snapshot

Outsourcing Breakout Survey

*plus applicable surcharge and cess


Philippines Malaysia India China

GST/VAT rates • 12%, 0% or VAT exempt • 6% (service tax)• 5%, 10% (sales tax)

• 18% standard GST rate • Rate on notified

goods/services‒ Lower rate of 5%, 12%‒ Higher rate of 28%

• 6% standard VAT rate/0% for offshore service outsourcing business

Exemption or Zero-Rating on exported services

• Yes, subject to conditions • Yes with exceptions • Export of services are zero rated (i.e., no GST on supply of services and refund of GST paid on procurements is available)

• Offshore service outsourcing business, including ITO, BPO, and KPO, are VAT zero rated

Availability of indirect tax refunds

• Yes, subject to conditions • N.A. • Refund of GST (paid on procurements) can be obtained in case of export of services or supplies to Special Economic Zones in India

• No

Generally expected

margin on

outsourcing

arrangements

• Expected net cost plus margin for routine service providers (e.g., engaged in back-office support) is around 5% to 7%

• Cost plus (Ranging from 6% to 12% depending on type of service)

• Cost plus (Ranging from 18% to 24% depending on type of services)

• Cost plus (Generally ranging from 6% to 15% depending on type of service)

Country-by-Country Snapshot (cont.)

Outsourcing Breakout Survey


Philippines


TRAIN Package 2: Taxes at a glance

Philippines

Corporate income tax Current Train package 2

House Senate

No incentive 30% net income 28% (2021)—20% (2029) 25% flat rate (2019)

RHQs Exempt Exempt Removed

ROHQs 10% taxable income Phased out within 2 years from effectivity of package 2

Removed

Philippine economic zone authority 4-8 year ITH New registrations: 3-5 yearsExisting: continue using ITH for remaining period but not over 5 years

18% (2019)-13% (2029)


2 versions:

House of Representatives

• 10 September 2018—Approved the third and final reading House Bill No. 8083 (TRABAHO Bill)

Senate of the Philippines (endorsed by the Department of Finance)

• Pending with Committee on Ways and Means—Senate Bill No. 1906 filed by Senator Sotto.

• 25 September 2018—First public hearing conducted by the Senate Committee on Ways & Means.

What to expect: Delay

• House & Senate Recess

− 15 December—13 January

− 14 January—08 February

− 20 May—07 June

• Mid-term Elections

− 13 May

TRAIN Package 2: Legislative update—Still a work in progress

Philippines


Malaysia


Outsourcing policy for financial institutions issued by the Central Bank of Malaysia dated 28 December 2018

Malaysia

Assessment of service provider

Outsourcing agreementProtection of data

confidentialityBusiness continuity

planning

• Exposure to additional risk (e.g., country risk)

• Financial institution should have in place appropriate controls and safeguards to manage the risk

• Financial institution must ensure that outsourcing arrangements undertaken outside Malaysia are

conducted in a manner which does not affect:

• (a) the financial institution’s ability to effectively monitor the service provider and execute the

institution’s BCP;

• (b) the financial institution’s prompt recovery of data in the event of the service provider’s failure,

having regard to the laws of the particular jurisdiction; and

• (c) the Bank’s ability to exercise its regulatory or supervisory powers, in particular the Bank’s timely

and unrestricted access to systems, information or documents relating to the outsourced activity

Outsourcing outside Malaysia

• Financial institution should take effective

measures to address risks associated with

data accessibility, confidentiality, integrity,

sovereignty, recoverability and regulatory

compliance

• Financial institution may rely on third party

certification and reports made available by

the cloud service provider for the audit and

inspection

• Financial institution must be able to access

information

Outsourcing—cloud services

Outsourcing process and management of risk


Malaysia tax incentive—Principal Hub

Malaysia

• Collection and consolidation centre for finished goods, components and spare parts produced by its own group of companies for its own brand to be distributed to dealers, importers or its subsidiaries or other unrelated companies within or outside the country.

2003

Regional Distribution Centre (RDC)

• Locally incorporated company, which carries on a business in Malaysia to undertake procurement and sale of raw materials, components and finished products to its group of related companies and to unrelated companies in Malaysia and abroad.

2003

International Procurement Centre (IPC)

• Locally incorporated company that carries on a business in Malaysia to provide qualifying services to its offices or related companies within or outside Malaysia.

2004

Operational Headquarters (OHQ)

2015

Principal Hub (replace

RDC, IPC & OHQ)


Malaysia tax incentive—Principal Hub (PH)

Malaysia

3-tier incentive

Tier 3 Tier 2 Tier 1

Blocks (years)

5(+5) 5(+5) 5(+5)

Tax rate 10% 5% 0%

New services company Existing services company

A locally incorporated company that uses Malaysia as a base for conducting its regional or global businesses and operations to manage, control and support its key functions

Full tax exemption

on value added

income

*e.g., Economic/Investment Research Analysis, Corporate Training and Human Resource Management, Finance & Accounting (Transactions, Internal Audit) and etc.

• High value jobs creation

• Business spending

• Number of countries served

Corporate tax rate

Previous approved

OHQ/IPC/RDC

status - Enjoy PH

incentive for 5

years only

Eligible criteria

• Incorporate under Company Act 2016

• Paid-up capital > RM2.5 million• Annual sales ≥ RM300 million • Serves and control network

companies in ≥ 3 countries outside Malaysia

• Carry out at least 3 qualifying services* (one of it must be Regional P&L/ Business Unit Management from the strategic services cluster)

• High value jobs creation (15 to 50 with 3 to 5 key strategic positions)

• Annual business spending (RM3 to 10 mil)

• Significant use of Malaysia’s banking and financial services and other ancillary services and facilities

Facilities accorded to PH

• No local equity/ownership condition• Expatriate posts based on

requirements of applicant’s business plan subject to current policy on expatriates

• Foreign Exchange Administration flexibilities will be accorded in support of business efficiency and competitiveness of companies under the PH


Other potential tax issues

Malaysia

1

2

3

4

5

Benefit test (intragroup services)• Important to prove that the services have been actually received and has resulted in benefits for the service recipient• tax authority would analyse whether a third party in similar circumstances would consume these services on similar terms—whether

outsource or consume internally (would employ persons with necessary qualification—for example, would employ a lawyer)

Substance test (outsourcing)• Imposition of substantive conditions for Labuan companies in Forum of Harmful Tax Practices• Labuan entity carrying on a Labuan business activity shall have the number of full time employees and an amount of annual operating

expenditure specified in the schedule in P.U.(A) 392—Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2018

Mismatch (outsourcing or shared service centres in Malaysia)• Description of services actually provided mismatch with the services documented in tax incentive application will result in the disallowance

of incentive

Method of computation of recharge (outsourcing or shared service centres in Malaysia)• Volume, time cost, etc.• Resulted in under-recovery of costs

Categorisation of services and mark up (outsourcing or shared service centres in Malaysia)• Appropriate mark up for each category of service


Service tax

Malaysia

The abolishment of the GST and the transition to Service Tax has resulted in significant uncertainty in relation to the treatment of activities performed by SSCs and similar.

The rules continue to evolve with frequent changes to the Law and guidance, including a recent expansion to tax imported services.

The authorities view that activities of the SSCs fall within the scope of the 6% tax though the technical basis for this remains unclear.

Concessions exists for intragroup transactions for both domestic and cross-border transactions, but this require meeting rather stringent conditions.

Businesses need to review existing arrangements to mitigate additional costs and to minimise the potential impact of cascading tax due to the non-creditable nature of the tax.


India


• Tax exemptions ranging from 50-100% for units set up in Special Economic Zone (SEZ) before 1 April 2020 subject to satisfaction of specified conditions.

• While cost plus method is followed, the margin on outsourcing arrangement varies depending upon type of services.

• Options for obtaining certainty:

− Safe Harbour rules

− Advanced Pricing Agreement (APA)

• Export of services is treated as a zero rated supply under Goods and Service Tax (GST) and hence, is not liable to GST.

• Input taxes paid on procurement of goods and services for business purposes, subject to certain restriction can be claimed as refund (in cash) against export of services.

• Foreign Trade Policy 2015-2020 has introduced “Services export from India Scheme” to provide certain benefits to service providers engaged in export of services.

Tax considerations


Issues to consider

India

Sunset clauseFor availing corporate tax deduction, the unit must be set up in SEZ before 1 April 2020

0201

Economic adjustments for working capital considered only selectively and Risk adjustment normally not allowed04

03

05

06

Unit set up in SEZ still liable to pay to tax on income under provisions of Minimum Alternate Tax/Alternate Minimum Tax

Ruling by Authority for Advance Ruling—Tax authorities are issuing notices to service providers to pay GST at the rate of 18%Ruling by Apex Court—Exposure of Permanent Establishment to be evaluated

Revenue authorities applying mark-up in the range of 25% to 35% considering high margin companies as comparables

Repatriation of cashCost plus arrangement could lead to piling up of cash with the service providers


Concluded APAs—Industry wise analysis

India

*Source : Annual Report on the APA programme in India FY 2017-18

Close to 50% of the total unilateral APAs entered into are with information technology and banking/finance industries.

54

40

36

16 15

8 10 96 6

3 3 52 3 5 3 2 1 1 2 0 1 2 22 0 2 2 0 0 0 0 0

50 0 0 2 0 0 1 0 0 1 0 0

50 0 0

0

10

20

30

40

50

60

No.

of APAs c

onclu

ded

Nature of industry

Industry-wise APA conclusions

Unilateral Bilateral

• Close to 1000 applications filed in 6 APA cycles

• Close to 85% of the applications filed are unilateral. Of the total bilateral applications, maximum applications are with US, UK and Japan

• Over the period, 35 *unilateral applications have been converted to bilateral

• Only one bilateral has been converted to unilateral




Objective

• Depending on the location of their current regional headquarters, organisations may wish to centralise contracting through a hub location for commercial reasons and/or tax reasons. Alternatively a direct contracting model may be preferred.

• A cost benefit analysis should be undertaken in either scenario.

Considerations

• The service provision model (i.e., pay per use, cost sharing, subscription) and the legal nature of services provided (service fee/royalty etc.) may impact classification for tax purposes.

• Withholding tax considerations

− Applicable treaties between:

− SSC and contracting hub

− Contracting hub and customer locations

− Potential application of the Principal Purpose Test (PPT)

− Level of active or passive substance in hub location

• Transfer pricing

− Functionality in hub location

− Pass through costs versus a mark up

− Balance between TP documentation and PPT documentation to support pass through in hub jurisdiction, but non-application of PPT by customer jurisdiction

• Potential DAPE creation through the use of the contracting hub.

• Indirect taxes applicable in the SSC regime and the contracting hub regime.

SSC direct contracting or contracting hub?


Global/regional

customers

HK SG

services

payments

MY INCH PH

services

payments

services

payments

Central contracting hub

SSC

Headline Verdana BoldBusiness models and transfer pricing methods in the asset management sector2019 Asia Pacific Financial Services Tax ConferenceBreakout B




Ivan MullinaxManaging DirectorDeloitte US


Sebastian Ma’ileiTax PartnerDeloitte UK


Business models and trends

• A comparison of business models across subsectors

• Key economic drivers across subsectors

• Investment management outlook: Predictions for 2019

Review of transfer pricing (TP) methods

• TP method selection

• Traditional asset management TP case

• Hedge fund TP case

• Private equity (PE) and real estate (RE) TP patterns

• Asia Pacific TP trends

Agenda




A comparison of business models across subsectors: the products


Fund type Traditional Hedge PE/RE

Life span Open Fixed/Open Fixed

Number of investors High Low Low

Type of investors Retail, Institutional Institutional Professional

Investor lock-in No Yes/short term Yes/long-term

Customer Fees % AUM % AUM + performance % AUM + performance

Typical investment Shares, Bonds Shares, Bonds, Financial instruments Companies, Buildings

Typical holding Minority Minority (some majority) Majority (some minority)

Investment liquidity High Medium Low

Buy/Sell process Instant- Active/Passive Instant/Mid-term Long

Short Selling No Yes No

Regulation Higher Lower/increasing Lower/increasing


Overall • Attracting clients • Client relationship management • Direct sales • Indirect sales via 3rd party channels

• Strategic oversight• Research • Product development• Asset selection• Portfolio analysis• Trading operations

• Custody• Fund Accounting • Operations and administration• Tax, legal and compliance• Human resources

Traditional • Retail channel distribution often involves significant cost

• Institutional clients provide large AUM at lower fee levels than retail clients

• 3rd party outsourcing i.e., sub-advisory, white labelling

• Investment committee level of involvement?

• Fund accounting, compliance and regulatory burden of retail products is typically higher than other subsectors

Hedge • Involves capital raising mainly from institutional and HNW individuals

• 3rd party outsourcing of part of capital raising activities not uncommon

• Delegated authority/trading with trade limits set by manger

A comparison of business models across subsectors: the value chain


Marketing/Distribution Advisory/Sub-advisory Administration/back office


Overall • Attracting clients • Client relationship management • Direct sales • Indirect sales via 3rd party channels

• Strategic oversight• Research • Product development• Asset selection• Portfolio analysis• Trading operations

• Custody• Fund Accounting • Operations and administration• Tax, legal and compliance• Human resources

Private Equity

• Involves capital raising mainly from institutional and HNW individuals

• 3rd party outsourcing of part of capital raising activities not uncommon

• Can involve significant bespoke research, due diligence, and structuring on an individual asset level than traditional and hedge fund subsectors

• Significant financing and operational management/change at a portfolio company level

Real Estate • Can involve significant bespoke research, due diligence, and structuring on an individual asset level than traditional and hedge fund subsectors

A comparison of business models across subsectors: the value chain (cont.)




Traditional—VolumeThe scale of AUM as a function of management fee rates vs. cost drive profitability


01

Traditional—Cost managementIn advanced markets passive strategies and exchange traded funds (ETFs) products continue to advance given their cost effectiveness

02

Hedge—Relative returnIs determinate of performance fees and marketability of hedge fund managers

03

Hedge—Investment strategiesDrive actual or perceived market differentiation from traditional asset managers through more concentrated positions/strategies

04

RE/PE—Aligned incentivesPE Managers, investors and portfolio company management all have ownership stakes and benefit from success

05

RE/PE—Operational and Financial OptimisationGreater ability to influence portfolio investments to make big operational changes, or employ complex financing to improve returns

06

Key economic drivers across subsectors


Investment management outlook: Predictions for 2019


Proprietary indexing

The number of firms launchingproprietary ETF indices is expected to increase, enablingthem to lower expense ratios of these new index funds

Redesign customer platforms

Many investmentmanagers will strive to offer newly designed customerportals, most likely by acquisition or partnership withtech-savvy firms.

Differentiate through customer experience

Customer engagement and building meaningful relationships will be more in focus than ever as investment managers competefor AUM in 2019

Alternative data

PE firms are likely to join traditional set managers in using alternative datafor identifying investment opportunities. Long-onlymanagers will join their hedge fund brethren by usingalternative data sets such as satellite data, Internet ofThings data, and social sentiment data to augment their investment decisions

Fulcrum fees for active funds

The fulcrum fee model, in which the investment manager is rewarded for generating alpha. This trend could accelerate with more than 10 firms adopting this pricing approach in the next12–18 months

Crossing the Great Wall

Success in China and other Asian countries depends on distribution agility, local partnerships, and product transparency


Review of transfer pricing methods


While the basic value chain for many businesses is very similar, other factors can drive differences in key functions and accordingly require consideration for TP method selection, for example:

• Advisory activities can vary significantly by asset classes (e.g. distressed debt vs. high yield debt, etc.)

• Investor type can significantly impact the level of effort and resources required for distribution and client service

• Multi-functional roles (e.g. portfolio managers involved in capital raising, etc.)

• Increasing use of algorithms and electronic trading systems adding an intangible element to the value chain

• Regulatory changes forcing operational changes or altering client fee/manager cost structures.

• Active participation of founding personnel or concentrate decision making authority

Accordingly the method selection process should include:

• Understanding the fund/group legal and operating structure

• Establishing commercial and market facts about the business

• Understanding functions undertaken, risks assumed and assets utilised by each entity

• Properly delineating the transaction(s)

TP method selection

Review of transfer pricing (TP) methods


Properly delineating the intercompany transactions involves:

TP method selection (cont.)

Review of TP methods

• It results in a comparison of the contractual terms related to the risk management people functions and entities financial capacity to bear risk

• Finally the selected TP method should reflect the risk return profile based on the people, functions and the financial capacity to bear risk

• Some consideration can be given the Financial Services regulatory allocation of risk

6-step approach to analysing risk in relation to controlled transactions

Step 1 Identify economically significant risks with specificity

Step 2 Determine contractual assumption of risk

Step 3 Perform functional analysis with specific attention to risk

Step 4 Interpret steps 1-3 (including a review of contracts)

Step 5 Allocate risk (if needed)

Step 6 Price transaction


Be mindful of the fund manager profile, location, and after transfer pricing economics

• Main contracting party

• Typically offshore and often in low tax jurisdiction

• Receives management fees and expense reimbursement from Fund

• May get performance fee (via another entity)

• Retains fees for carrying out its functions and residual fees

Typical Methods include:

• Cost Plus

• Fee Splits

• Profit Splits

Data sources include

• Management fee data—Lipper database, US SEC form ADV II data, others

• Cost Plus—Traditional TP Databases (Oriana, Osiris, etc.)

TP method selection (cont.)



Traditional • Fee split (share of % of AUM) or bps

• (Standalone placement agents get % of funds raised)

• Advisor—Fee split (share of % of AUM) or bps

• Subadvisor—Fee split

• Typically remunerated on a cost plus basis

Hedge

• Internal often cost plus

• Advisor—Fee split (share of % of AUM and performance fees)

• Subadvisor—Fee split or cost plus

Private Equity • Advisor—Fee split (share of priority profit share)

• Subadvisor—Cost plus

Real Estate • Advisor—Fee split (share of priority profit share)

• Subadvisor—Cost plus

Commonly applied TP methods




Fact pattern

• Contractual fund manager is a Fund Manager which sub-contracts portfolio management to Advisor HK, marketing and distribution to Distribution Entity US additionally Advisor HK and Distribution Entity US perform various administrative functions to support their value driving activities.

• Under the current TP model Fund Manager receives approximately 10% of management fees net of cost plus for administrative functions and the balance of net management fees is split between Advisor HK and Distribution Entity US.

The TP question:

• Does contractual risk warrant 10% of net management fees if the Fund Manager does not house key risk decision makers?

Key considerations

A traditional asset management TP case


Portfolio management and administration

Portfolio management, distribution and administration

FundCayman Islands

Fund ManagerCayman Islands

AdviserHK

Investors

Distribution EntityUS

Units

Distribution


Fact pattern

• Hedge fund A is managed by Fund Manager Co in the UK with limited AUM allocated to fund managers in Sub-Advisor Co in Hong Kong. Sub-Advisor Co also performs sales and marketing for Hedge fund A.

• The TP method applied is a revenue split that attributes a specified percentage of revenue based on AUM and defined percentage splits for the portfolio management function vs. sales and distribution function. The affiliates bear their respective cost.

• The Hedge fund A’s weighting to Asia assets (i.e., AUM) managed by Sub-Advisor Co’s portfolio managers is relatively low and the capital raised from Asian investors by Sub-Advisor Co has been relatively low and stable for a number of years. Given these facts the TP method leaves Sub-Advisor Co in a pre-tax loss position annually.

The TP question

• Should the TP method take into consideration business strategy and economic factors such that Sub-Advisor Co should be expected to earn a pretax profit? If so, how?

Key considerations

Hedge fund TP case



Activity 1• Local affiliate provides service to an off-

shore fund manager with respect to local market research and other activities

Considerations• Level of oversight

• Decision makers

• Fundraising


Activity 2• Local affiliate provides services to an onshore

Property Holding Company

Considerations• Administrative only

• Full Asset/Property management

• Separate fees to Hold Co, investment SPVs

Fact pattern 3• Local affiliate provides services to an Operating

Group (investee company)

Considerations• Charge to Op Group

• Who directs?

• Integration with deal teams

Advisory and support services (1)

Fund Manager(UK)

Local affiliate(Hong Kong)

FundCayman Islands

3rd party Investors

Investment Management Services

Units/share/LP interest

Property Hold Co(Hong Kong)

Operating Group Co(China)

Consulting and support services (pattern 3)



PE and RE TP patterns


• Hong Kong—Is IRD scrutiny of cost-plus advisor TP methods in line with prior years, as we head into the first year of formal Hong Kong TP documentation requirements?

• Southeast Asia—in response to BEPS, countries are adjusting (abolished/amended) their preferential tax regimes; more experienced local taxauthorities—active tax audit

• Japan—Examinations are picking up. With the change in domestic permanent establishment laws last year, the FSA is re-evaluating PE guidelines for avoiding creating Japanese PEs of offshore funds

• India—Successful use of APAs has reduced the number of contentious audits in the IM sector. Permanent Establishment arguments and assertions of local value contribution are not uncommon

• Regional/global—An increasingly mobile workforce is putting pressure on TP and Permanent Establishment

• Regional/global—Technology is changing client interface/markets, automating trades and shifting

• Regional/global—TP approaches for start ups/new offices

Asia Pacific asset management TP trends


Key transfer pricing considerations for insurers and brokers with respect to new operating models2019 Asia Pacific Financial Services Tax ConferenceBreakout C



Sebastian Ma’ileiTax PartnerDeloitte UK



Young Soo (Chris) InTax PrincipalDeloitte Korea

Louisa LuTax DirectorDeloitte China


Agenda

Introduction

Hub and Spoke model

Managing General Agent and Insurance Intermediaries

Brokerage commission sharing and IP

Key takeaways


Hub and Spoke model


• A Hub and Spoke model in an insurance context is based on having a centralised underwriting function, typically at the head office level, which is responsible for setting the overall underwriting strategy/guidelines within which the local underwriters operate

• The Hub is supplemented by either subsidiaries or branches (Spokes), which operate within the framework established by the Hub with reduced functionality, which may range from sales relationship only operations to full delegated underwriting authorityarrangements

• Benefits of Hub and Spoke model for insurers/reinsurers include:

− Managing capital and compliance demands more effectively where branch structures are involved

− Streamlining of operations to result in a more efficient operating model

− Consolidate underwriting into a single platform and reduce the cost of compliance by dealing with a single supervisor

Overview

Hub and Spoke model


Facts

• Head office sets the underwriting guidelines and strategy and is responsible for performing product development as well as all underwriting decisions to bind the risk. The product heads for each line of business (e.g., Casualty, Property, CAT) are typically based in the head office

• The subs and branches do not have any delegated underwriting authority and are therefore responsible for sales and marketing and ongoing client support only

• In a pricing context, the branches have limited discretion over the premium rates which are set by the head office

• This operating model may include centralised automated underwriting models, which are developed and maintained by the head office

Transfer pricing (TP) considerations

• Certain jurisdictions may require underwriting functions to be performed locally from a regulatory perspective.

• Level of reward to the branches/subs, which may either be a cost plus or %-based commission ( overrider plus profit share)

• If there is any form of local acceptance of risk, from a tax perspective it can be argued that there is a split of the key entrepreneurial risk taking (KERT) function, as discussed in the following slide.

Sales and marketing models

Hub and Spoke model

Head Office(Singapore/Hong

Kong)

Branch(APAC 1)

Sub(APAC 2)

Sub(APAC 3)


Facts

• The head office ( InsurerCo) sets the underwriting guidelines and underwriting authority limits for the legal entity as a whole, which are cascaded down to the local underwriters in the branches and subs

• Each branch/sub is permitted to bind customers within their delegated authority limits up to a certain limit. Where a branch/sub exceeds its underwriting limits, the opportunity is referred to head office (or another branch/sub where Product Head is based) for review and approval before the risk is bound

• The branches and subs of InsurerCo are also responsible for sales and marketing, claim management (within delegated limits), as well as other underwriting related support activities

TP considerations

• Does the ability of Sub (APAC2 and APAC3) to bind risks create a dependent agent PE of InsurCo in country 2 and 3? If so, do exemptions apply?

• Pricing of reinsurance premiums ( proportional vs non-proportional and life vs non-life) and commissions, commercial rationale and functional substance of reinsurer

• Split KERTs between InsurerCo and APAC 1 Branch?

Delegated underwriting authority models and intra-group reinsurance

Hub and Spoke model

InsurerCo(Singapore/Hong

Kong)

Branch(APAC 1)

Sub(APAC 2)

Sub(APAC 3)

Group Reinsurer

Intra-group

reinsurance


Managing General Agent/Insurance Intermediaries


Facts

• InsurCo is an insurance company which grants delegated underwriting authority to the MGA to source opportunities and bind risk onto InsurCo within underwriting limits

• Where an MGA identifies an opportunity which exceeds delegated underwriting authority limits, the opportunity is referred to InsurCo for review and approval

• The MGA may also perform support functions such as claims management under a delegated authority basis

Tax and TP considerations

• Level of reward to the MGA, which may either be a cost plus or a %-based commission

• Does the MGA create a dependent agent PE of InsurCo in country? If so, is the agent of independent status exemption available under the relevant treaty?

• Where no exemptions are available, what is an appropriate level of profit attributable to the PE?

Managing General Agent (MGA)/insurance intermediaries

InsurCo(Singapore/Hong Kong)

MGA(APAC)

MGA(APAC)

MGA(APAC)


Brokerage commission sharing & IP key takeaways


Commission sharing

Brokerage commission sharing

Flow of services

Flow of fees

Placing Office (Singapore)

Places business

Shares commission for placement

Producing Office (APAC)

Facts

• The Producing Office is responsible for sourcing business and the Placing Office has the expertise to place a particular line of business in their local market

• The Placing Office has also several product heads and is involved in ad-hoc consultancy services and peer reviews without being directly involved in certain placement opportunities

TP considerations

• Does the commission sharing arrangement provide an appropriate arm’s length reward to both parties?

• How does one reward the Placing Office for ad-hoc consultancy services? This may be charged out as a separate service fee or embedded within the commission sharing arrangement

• Consider GST and local tax deductibility issues


Integrated technology within a brokerage business

Brokerage commission sharing & IP key

Flow of services/IP

Flow of fees

Placing Office (Singapore)

Places business

Shares commission

Producing Office (HK)

IP Hub

Provision of brokerage services including IP

Shares commission

Facts

• An IP Hub contributes to the broking process by providing data analytics tools/other software platforms and associated services

• All the significant people functions associated with the technology (e.g., development, maintenance) are performed by the IP Hub

• The technology is considered to be critical to revenue generation

• The Producing Office also uses the data analytics tools for placing business domestically

TP considerations

• Does IP provide an economic benefit to Producing Office and Placing Office to warrant a charge?

• Where there is a direct nexus between use of these tools/services and generating commission income, the IP Hub charges the Producing Office for these via a share of the commission, or a separate license fee

• Where these tools/services are used only domestically (e.g. Producing Office is placing business), or where there is no nexus between their use and generating commission income, a royalty is charged based on the relevant revenue stream

• Consideration should be also given to wider tax issues such as GST, WHT and local tax deductibility issues


Key takeaways


• Review operating models to ensure that they are fit for purpose from a TP perspective

1. Is technology being used in the business and is it appropriately compensated for? Or should it be charged in the first place?

2. Identify any new or existing intercompany flows ( e.g. reinsurance and profit allocation methodology)

3. Review and develop transfer pricing policies for the intercompany flows whilst considering other tax implications (e.g. GST, WHT etc.)

4. Document the transfer pricing policies in locally compliant transfer pricing files to support the filing position and act as the first line of defence in an audit

5. Consideration of Advanced Pricing Agreement (APA) to obtain certainty on new transfer pricing model

Key takeaways

US tax reform: Additional guidance and practical issues for inbound and outbound2019 Asia Pacific Financial Services Tax ConferenceBreakout C


Speakers and panellists


Kyle KarrenbauerTax Senior ManagerDeloitte US

Ivan MullinaxManaging DirectorDeloitte US


Agenda

Expected timeline of regulatory guidance 3

Possible tax agenda for new Congress 4

Interest deductibility 5

BEAT 8

GILTI 10

US partnership dispositions 12


Expected timeline of regulatory guidance

US tax reform

864


Tax implications of election: (1) Congressional agenda (2) committee composition (3) extenders legislation

Possible tax agenda for new Congress

US tax reform

Source: https://www.politico.com/election-results/2018/ (February 12, 2019)


Interest deductibility—new 163(j)

US tax reform

Disallowance of deduction

• Limitation on deduction applies to every business regardless of form

• Deduction is disallowed for business interest expenses in excess of the sum of the following:

− Business interest income (interest income from property allocated to a trade or business)

− 30% of adjusted taxable income (ATI) and

− Floor plan financing interest (generally related to acquisition of motor vehicles and farming equipment for sale/lease)

• ATI is taxable income without regard to the following:

− Non-business items

− Business interest income and business interest expense

− Deductions with respect to NOLs and new pass-through deduction

− Deductions for depreciation, amortisation, and depletion (only for tax years beginning before 2 January 2022)

Non-US

Parent

US Co

Interest

Interest


Interest deductibility—new 163(j)

US tax reform

Reserved for future guidance

• Tiered partnership situations

• Partnership mergers and divisions

• Treatment of intercompany transfer of partnership interest that results in termination of the partnership

Proposed regulations

• Released 26 November 2018

• Highlights include:

− Definition of interest (four categories of items treated as interest)

− Calculation of ATI (clarifications and additional adjustments)

− Allocation of items between businesses

− Consolidation rules (consolidated group generally treated as a single taxpayer; intercompany obligations are ignored)

− Partnership provisions (limitation determined at partnership level)

− Application to CFCs (generally applies in same manner as US domestic corporations)


Disallowance of deduction

• Deduction for any interest or royalty paid or accrued is disallowed if it is a:

− Disqualified hybrid amount

− Disqualified imported mismatch amount or

− Specified payment described in the anti-avoidance provisions

• Proposed regulations released December 20, 2018

− Disqualified hybrid amount

− Hybrid transaction

− Branch rules

− Exceptions

− Disqualified imported mismatch amount

− Set-off rules

− Funding rules

Interest deductibility—hybrid transactions

US tax reform

Non-US

Parent

(Country X)

US Co

Country X: equityUS Co: debt

Non-US

Parent

(Country X)

Non-Sub

(Country Y)

Country X: EquityCountry Y: Debt

US Co

Loan

Disqualified hybrid Disqualified imported mismatch


Basic framework

• If US Co is an “applicable taxpayer” then US Co owes BEAT equal to the excess (if any) of:

− “BEAT rate” * modified taxable income (MTI) over

− Regular tax liability (reduced by certain amounts)

• Applicable taxpayer satisfies all three of the following:

− Corporation (not a REIT, RIC, or S corporation)

− Gross receipts test: average annual gross receipts of at least US$500 million (three year average)

− Base erosion percentage test: base erosion % for the tax year is at least 3% (or 2% for bank or registered security dealer)

• BEAT rate varies by tax year (years below assume calendar year end)

− 2018: 5% (6% for bank or registered security dealer)

− 2019-2025: 10% (11% for bank or registered security dealer)

− After 2025: 12.5% (13.5% for bank or registered security dealer)

Base erosion and anti-abuse tax (BEAT)

US tax reform

Parent Co

Non-US Co US Co

Base erosionpayment


Items not addressed in regulations

• No specific rule for determining whether a payment is a deductible payment, or (when viewed as part of a series of transactions) should be viewed in a different manner (e.g., principal-agent principles, reimbursement doctrine, case law conduit principles, assignment of income or other principles or generally applicable tax law)

• No specific rule for determining cost of goods sold

Base erosion and anti-abuse tax (BEAT)

US tax reform


• Released 13 December 2018


− Clarification of services cost method exception

− Regulatory exceptions to base erosion payments (e.g., payments that result in effectively connected income)

− To determine if a payment is a base erosion payment, partnership treated as aggregate of partners

− Base erosion payment can include cash, property, stock, or assumption of liabilities

− MTI calculation clarified: add-back, no re-computation of taxable income

− Amount of base erosion payment generally determined on gross basis

• Anti-abuse rules


Global intangible low-taxed income (GILTI)

US tax reform

Basic framework

• GILTI is a new category of income that ends deferral of taxation on foreign earnings (measured by a return in excess of 10% return on foreign tangible asset base)

• The income inclusion is offset by a specified deduction (50%; 37.5% starting in 2026) and a reduced (80%) foreign tax credit (results in current taxation at a reduced effective tax rate of 10.5% from 2018 and 13.125% from 2026, minus the foreign tax credit)

US Co

CFC1 CFC2



• Released September 13, 2018


− Clarification of basic rules for determining inclusion amount

− Consolidated groups

− GILTI anti-abuse rules

− Anti-abuse rule for determination of pro rata share

− Reduction in stock basis for tested loss

− Partnerships

− No broad high-tax exception for GILTI

Items not addressed in regulations

• 50% deduction for GILTI inclusion

• Foreign tax credits (deemed paid credits, expense allocation and apportionment to GILTI basket, and GILTI “look through”)

Global intangible low-taxed income (GILTI)

US tax reform


US partnership dispositions

US tax reform

US PartnerNon-US

Partner

USP

US trade or business

Sale of interest

Gain or loss treated as effectively connected income

• Gain or loss of a disposition by a non-US individual or corporation of all or a portion of an interest in a US partnership that is engaged is a US trade or business is treated as effectively connected income to the extent that the distributive share of gain or loss would be treated as effectively connected income if the US partnership sold all of its assets at fair market value immediately before the sale or exchange of the partnership interest.

• Enactment of provision is in response to 2017 US Tax Court ruling in Grecian Magnesite Mining case

• Proposed regulations released 20 December 2018

− Dispositions of publicly traded partnerships (no determination whether disposition of 5% or less interest would remain exempt under other provisions)

− Non-recognition transactions (proposed regulations do not trump non-recognition provisions)

− Provision is non-exclusive (other provisions may apply to treat the gain or loss as effectively connected income)

Tax developments in the investment management sector2019 Asia Pacific Financial Services Tax ConferenceBreakout C


Speaker and Panellists


Natalie YuTax Partner, China Global Financial Services Industry LeaderDeloitte China


Roy PhanTax DirectorDeloitte China

Gavin BullockTax PartnerDeloitte UK




Ricci ChanSenior Tax Manager, Product HSBC


Agenda

Investment management global outlook

Brexit impact on European managers

Asset level

• China

• Japan

• India

• Indonesia

Fund level

• Asian Region Funds Passport

• New fund vehicles

• Operational tax assurance

• Product tax hot topics

Fund manager level

• Themes in reward design for alternative funds

• Carried interest: Structural considerations

• Carried interest: Regimes across the jurisdictions

• Additional considerations

Investor level

• Appendix A: CRS reporting considerations

• Appendix B: OECD developments


Regulated funds

Investment management from four perspectives

Structure of the panel discussion

Investment SPV

Fund Vehicle

Investors

SecuritiesSecurities

Fund Manager

Investor level• Investor reporting regimes and requirements

• FATCA/Common Reporting Standards (CRS)

Fund level• Vehicle choice—new Asian funds (Australia, Singapore, Hong Kong)

• Ability to distribute cross-border (passport regimes)

Asset level• Operational tax considerations (non-resident CGT and transfer taxes)

• Indirect transfer legislation (China, India, Japan)

Fund manager level• Reward design for alternative funds


Investment management global outlook


Exhibit 1: Asset management industry expansion of assets under management, 2013-18E

Challenges and Opportunities for Investment Managers

Investment Management Outlook

2% 2% 1% 0%3%

1%

23%

9%

2%6%

12%

7%

0%

5%

10%

15%

20%

25%

30%

2013 2014 2015 2016 2017 2018E

Capital appreciation Net new flow AUM growth

Note: excludes ChinaSource: casey quirk/mclagan performance intelligence, casey quirk global demand model, public firm filings


Around the world

Australia/New Zealand

Asia

Americas

Europe

Global

Key


Brexit impact on European managers


There are two main consequences for the asset management industry from Britain’s decision to leave the EU:

Key issues

Brexit for asset managers

Loss of regulatory passporting

Loss of UCITS designation for UK

based funds

Loss of ability to distribute

funds to EU countries

under a UK MiFID licence

Loss of ability to

manage EU funds using a UK based

management license

Loss of UCITS status for UK funds

UK funds may incur

higher WHT rates


Most UK regulated managers will want to move to a structure where permissions are within an EU manager but delegated back to the UK:

Points for consideration:

• Method of transfer

• Impact on segregated mandates

• Self managed funds

Distribution functions will need to be performed within an EU entity with EU permissions, which can be passported:

Points for consideration:

• Valuable transfer where distribution activities move?

• Likelihood of local EU regulator accepting a UK branch?

The response—loss of regulatory passporting

Brexit for asset managers

EU Fund

EU ManCo UK ManCo

EU Fund

EU Distributor

UK Distributor

EU branchesEU branches

Contract for EU distribution

Contract for Management

‘Transfer’ of contract‘Transfer’ of contract

‘Transfer’ of branches


Asset level


China


QFII/RQFII investment

• Further deregulated the inbound investment rules by combining the two regimes

• Relaxation of cross-border funding flow and removal of lock-up period of principal capital

• Expanding scope of investments to allow stock index futures, FX derivatives, NEEQ (new third stock), bond repurchase, privateinvestment fund, commodity future, etc.

• QFII/RQFII quota has been doubled from US$150B to US$300B

Stock connect: SH HK stock connect/SZ HK Stock connect

• SH-London Stock connect (expected to be launched early this year)

CIBM/Bond Connect

Mutual recognition funds

Foreign capital investment into Chinese security market


Bond interest

• Provided three years exemption of WHT and VAT from 7 November 2018 to 6 November 2021

• Uncertainties:

− How to account for 7 November 2018 as starting date, interest payment date or interest accrual date or any other date?

− Unclear treatment on income from other investment such as ABS, bond future, etc.?

− Taxes not withheld prior to 7 November 2018?

QFII & RQFII

• Exemption of WHT on capital gain and VAT on trade securities

• Uncertainties:

− Whether the gains/income on holding and trade of various derivatives can be exempted?

Bond Connect

• No clear tax exemption rule

• Practice

Tax rules

Foreign capital investment into Chinese security market


Japan


If a Foreign LP is considered to conduct its business in Japan jointly with other partners through the partnership (e.g., Japanese partnership), the Foreign LP shall be deemed to have a permanent establishment (PE) in Japan. As a result, profit allocations to Foreign LP is subject to withholding tax at 20.42%, and is subject to Japanese tax approximately 30% (if a Foreign LP is a corporate) and is required to file tax returns. The withholding tax is creditable by filing a tax return. However, if a Foreign Partner satisfies certain conditions (*) and filing an application, the Foreign Partner will be exempt from Japanese taxation on certain income attributed to their Partnership investment.

Private equity investment into Japan—Permanent establishment

(*) All requirements of through (i) to (v) below must be satisfied

(i) The Foreign LP is a limited partner of the partnership, (ii) The Foreign LP is not engaged in the conduct of business regarding the business of the partnership, (iii) The Foreign LP must have a percentage interest of the asset of the partnership of less than 25%, (iv) The Foreign LP does not have a special relationship with a general partner of the partnership, and (v) The Foreign LP does not have a PE in Japan other than business conducted by the partnership.

General treatment

Foreign LP Foreign LP

Overseas

Japan

Taxes in Japan

JapanesePartnership

Japanese target

Japanese GP

Special treatment

Foreign LP Foreign LP

Overseas

Japan

Exempt in Japan

JapanesePartnership

Japanese target

Japanese GP


If a Foreign LP does not have a PE in Japan, capital gains from the disposition of Japanese shares is not generally subject to Japanese taxation. However, if the disposition of the shares meets (i) the 25%/5% rules or (ii) certain shares of a Holding Company, etc., then, the capital gain is subject to Japanese tax around at 24% (if a Foreign LP is a corporate) and also have obligation to file a tax return.

(The 25%/5% rules):

I. A non-resident or foreign corporation has owned 25% or more of the outstanding shares of a Japanese company at any time during the preceding 3 years etc.

II. A non-resident or foreign corporation transfer 5% or more of the outstanding shares, etc.

The threshold above refers to the total shareholding at the level of a Partnership under general treatment, however, with respect to the determination of the threshold may be able to determine the shareholding at the level of each partner under special treatment if Foreign LP satisfies certain conditions and files an application.

Private Equity investment into Japan—Capital gain

General treatment

Foreign LP A Foreign LP C

Overseas

Japan

CaymanPartnership

Japanese target

Foreign LP B

70% 20% 10%

Total shareholding at the level of a Partnership is 25% or more, all Foreign LPs are taxed

100%

Special treatment

Foreign LP A Foreign LP C

Overseas

Japan

CaymanPartnership

Japanese target

Foreign LP B

70% 20% 10%

Foreign LP B & C are not taxed since shareholding at the level of each partner is less than 25%

100%


India


What has changed in the last 5 years?

Investing in India

2014

2016

2018

2015

2017

• India’s first International Financial Service Centre (IFSC)—Gujarat International Finance Tec-City (GIFT City) started operation

• Special tax regime notified for onshore management of offshore funds

• Special tax regime notified for REITs/InvITS/AIF

• Regulation notified for new investment structures—REITs/InvITS

• Revamped regulations for Foreign Portfolio Investors notified

• Non-resident corporate taxpayers having no presence in India have been excluded from the levy of Minimum Alternate Tax (MAT) levy

• Indirect transfer tax regulation—Relaxation to investors in certain category of FPIs (Category I and Category II FPIs)

• General Anti-Avoidance Rule (GAAR) comes in force

• Exemption on capital gains tax leviable on long term investment in equity traded on Indian stock exchange withdrawn. Cost step-up up to 31 January 2018 available for long term investments on Indian stock exchange

• Tax treaty relief for equity investment also curtailed through amendment of tax treaty (Mauritius, Singapore and Cyprus)

• India is signatory to the OECD BEPS Action Plan. India yet to ratify

• India introduces Significant Beneficial Owner reporting for corporates/Know your client norms for FPIs


Available investment routes

Investing in India

Foreign Direct Investments—FDI

Foreign Portfolio Investments—FPI

Investment Vehicles—AIF/ReITs/InVITs

Foreign Venture Capital Investors (FVCI)

International Financial Services Center

Permitted Investments:

Equity shares/Partly paid shares/Share

warrants/Convertible preference

shares/Convertible debentures

Permitted Investments: Listed securities/Unlisted debentures/debt securities

Permitted Investments:Units of AIF, ReITs and InVITs

Investment in venture capital undertakings in specified sectors

Securities in IFSC

• No specific tax regime• Interest income earned and gains on transfer of investment taxable as per domestic tax law

• Treaty relief may be available, subject to GAAR and MLI

• Specific regime under the domestic tax law

• Income from FVCI taxable in the hands of the investor

• Treaty relief may be available subject to GAAR and MLI

• Transfer of securities listed on stock exchange located in IFSC

not a taxable transfer


• Income from REITs, InVITs, Category I AIF and Category II AIF

taxable in the hands of the investor (Pass through)



• Interest income earned and capital gains taxable at

concessional rate


Income tax implications


Recent developments

Regulatory

Regulatory

IFSCKYC

• Know Your Client norms notified by SEBI for FPIs

• Revision in framework for FPI investment in debt securities

• International Financial Services Center is operational

• Reporting of significant beneficial owner (SBO) by Indian Companies

• Liberalisation of norms for issue of overseas rupee denominated bonds/ECB regime


Recent developments

Income tax

Income tax

• Treaties with Singapore, Mauritius and Cyprus amended

• Principal Purpose Test• Limitation of benefits

• Exemptions for Category I and II FPIs

• Long-term capital gains taxable from 1 April 2018

• Cost step-up as on 31 January 2018 available• Relaxation of the requirement for payment of

Securities Transaction Tax (STT) on purchase transactions notified on 1 October 2018

• Exemptions for FPIs if treaty relief is not claimed

• Prosecution proceedings could be initiated on failure to submit a return of income by a company

• Concessional rate of 5% on interest income earned up to 1 July 2020

• Exemption on interest income earned form 17 September 2018 to 31 March 2019

• Transfer of bonds from NR to NR outside India not a taxable transfer

BEPS/MLI

Treaty changes

Bonds by Indian

company (other than

Masala Bonds)

Masala Bonds

Long-term gains

Indirect transfer

tax

GAAR in force

Tax Return


Master fund

Indian securities

India

Feeder fund

Investors

Payment of capital gains tax on sale of Indian securities

Tax to be withheld under indirect transfer rules upon redemption

Tax to be withheld under indirect transfer rules upon redemption

Outside India

Indirect transfer

India

Categories of funds which are impacted

• Private equity funds

• Category III FPIs and AIFs

• Category I and II AIFs where income is not chargeable to tax in India

Implications of indirect transfer tax

• Double (or multiple) taxation of the same income

• Withholding tax requirement by payer (fund/purchaser of fund shares)

• Tax rate could be in excess of 40%

• Tax officer can apply the provisions retrospectively

• Difficulty in claiming foreign tax credit by investors

• Investors to apply for tax ID and file tax returns in India

Strategies to mitigate indirect transfer tax

• Treaty benefit under the two layer investment model

• Upstreaming of income through distribution of dividend

• Private equity fund invests through a Category 1/2 AIF

• Tax neutral merger of corporations at offshore level


Investment in Masala Bonds

• Transfer outside India not taxable

• Interest income received till 31 March 2019 is exempt. On or after 1 April 2019, interest taxable @ 5% (plus applicable surcharge and cess)

Investment in Bonds issued by Indian companies (other than masala bonds)

• Interest income till 30 June 2020 taxable a beneficial tax rate of 5% (plus applicable surcharge and cess)

• Tax treaty relief on capital gains may be available (Mauritius/Singapore/Cyprus)

Leverage of surcharge levy

• Difference in surcharge rate for trust and company

Investment opportunities

Taxpayer Surcharge

Trust • Up to INR 50 lakhs—NIL

• Exceeding 50 lakhs to INR 1 crore—10%

• Exceeding INR 1 crore—15%

Foreign Company • Up to INR 1 crore—NIL

• Exceeding INR 1 crore to INR 10 crore—2%

• Exceeding INR 10 crore—5%


Cost step up—Long-term capital gains on equity traded on India stock exchange

The aforesaid cost step up is available only to shares acquired on or before 1 February 2018 and transferred on or after 1 April 2018.

Interpretation issue

Long term capital gains tax

Particulars Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 5

Sale price 200 200 120 90 80

Less: Cost of AcquisitionHigher of:a) Actual Cost of Acquisitionb) Lower of:

i. Fair Market Value as on 31 January 2018ii. Sale price

100

250200

100

150200

100

150120

100

15090

100

5080

Cost of Acquisition [higher of (a) or (b)] 200 150 120 100 100

Long Term Capital Gain/(Loss) 0 50 0 (10) (20)

Any corporate action which may involve issuing of fresh shares in lieu of existing shareholding and the condition of shares acquired prior to the dates prescribed above may not be satisfied on plain reading of the law


Indonesia


Listed Bonds or Shares

CIC MF

Long Term

Projects

Real Estate

CICREIT

CICLPF

CICABS

NPL or credit card

Foreign

Investors

Investment in Collective Investment Contract

1. Indonesian capital market provides many collective investment contract schemes:

a) DIRE (REIT) for real estate

b) Reksadana (Mutual Fund) for listed bonds/shares/money market

c) RDPT (Limited Participation Fund) for long term projects

d) EBA (Asset Back Securities) for loans, credit cards etc.

2. CIC is a legal contract between local investment manager, local bank custodian as well as investors as unit holders (who can be foreign or local holders). CIC needs to get approval from the Indonesian financial service authority (OJK)

3. While CIC is a legal contract, from Indonesian tax perspective CIC is treated as a corporate tax payer. Hence, CIC is subject to corporate income tax at 25% (non transparent entity)

4. CIC receives tax facility in the form of withholding tax deduction that is typically applied at 15% when CIC receives interest income from Indonesian bonds i.e., 5% WHT (2014 to 2020) or 10% WHT (2020 onwards)

5. The main benefit for unit holders is income received by local or foreign tax residents is exempted from Indonesian tax. However, where investors receive fixed cash flow (interest) from CIC ABS (KIK EBA), the interest is subject to final WHT income tax 15% for local or 20% WHT for non Indonesian tax residents (subject to lower rate in tax treaty)

6. Sharia based CIC also exists with investment overseas

7. CIC is suitable for foreign investors who would like to invest in Indonesian underlying assets

Collective Investment Contract

Tax Implication


Fund level


Asia Region Funds Passport


“The Asia Region Funds Passport (the passport) will, once implemented, provide a multilaterally agreed framework to facilitate the cross-border marketing of managed funds across participating economies in the Asia region.”

Source: http://fundspassport.apec.org/about/fundspassport.apec.org


2019 update• Now live: Australia, Japan

and Thailand ready to receive Passport registrations

• In progress: New Zealand and Korea progressing with local requirements

South Korea

Japan

Thailand

Australia

New Zealand

Operational


Comparison with other regional initiatives


ASEAN Collective Investment Schemes (CIS) Hong Kong–China MRF Asia Region Funds Passport

Eligibility • Qualifying CIS operators in Singapore, Malaysia and Thailand

• Retail investors

• Hong Kong and mainland Chinese operators of compliant local funds


• Qualifying fund operators from Australia, Japan, South Korea, New Zealand, Thailand


Application • Home regulator assesses suitability for cross-border distribution

• Streamlined authorisation process

• Domiciled on the host country, fund registered with home regulator

• Streamlined authorisation process

• Fund must be registered in home country as a Passport fund

• Streamlined authorisation/notification process

Fund requirements

• Qualifications of trustee/fund supervisor

• 5 years experience

• US$500 million of assets under management, shareholder equity of US$1 million

• Authorised for over one year

• Fund size not less than RMB200 million

• Less than 20 percent of assets in host country

• Investment management function remains on home country

• Must appoint a host country representative

• Distribution to host country investors doesn’t exceed 50 percent of total assets

• Five years experience, US$500 million FUM for fund manager, qualifications test

• Min US$1 million + 0.1 percent (capped at US$20 million)

• Mandatory custodian

• Independent oversight

Investment restrictions

• Transferable securities, money market instruments, deposits, units of other CISs and financial derivatives

• Additional rules apply for money market funds, master feeder funds, funds of funds and exchange-traded funds

• Only general equity funds, balanced funds, bond funds and unlisted index funds—no money market funds

• Only liquid assets, mandatory diversification, no leverage, restrictions on using derivatives

Ongoing requirements

• Home regulator rules generally apply

• Ongoing reporting in host jurisdiction

• Breach reporting requirement

• Home jurisdiction rules generally apply unless it relates to sale and distribution


• Assets are managed in accordance with home economy laws, unless it relates to disclosure and distribution

• Ongoing reporting to both economies



New fund vehicles

Australia, Hong Kong and Singapore


Structuring considerations

Fund vehicles

Australian CCIV Hong Kong open-ended funded company

Singapore VCC

Open/closed-ended • Both • Open-ended • Both

Legal form • Company; segregated portfolios • Company; segregated portfolios permitted

• Company; segregated portfolios permitted

Board • Corporate director • Natural persons only

• Minimum two

• Natural persons only; Minimum one person who is director or representative of fund manager; Authorised schemes require three including one independent

Management/corporate director

• Corporate director must be a public company registered and licensed to operate as a CCIV

• Must be managed by a Type 9 licensed/regulated person

• Must be managed by an MAS regulated/licensed fund manager, subject to oversight of the board

Sub-funds • Must have at least one • Can be established as a standalone entity or as part of an umbrella structure

• Can be established as a standalone entity or as part of an umbrella structure

Assets • CCIV must hold legal title, with each asset being allocated to a single sub-fund

• OFC must hold legal title; where relevant assets must be allocated to a sub-fund

• VCC must hold legal title; where relevant assets must be allocated to a sub-fund

Depository • Must be appointed to hold assets on trust for the CCIV

• Cannot control/be controlled the corporate director

• Assets must be segregated from the investment manager and held on trust by an independent custodian

• Authorised scheme must have Approved Trustee as custodian

• Restricted scheme must have certain prescribed custodians

Compliance plan • Required for Retail CCIV

• Not required for Wholesale CCIV

• Fund manager must have appropriate compliance arrangements

• Fund manager must have appropriate compliance arrangements

Offer document • Required for Retail CCIV

• Not required for Wholesale CCIV

• Required • Required for ‘authorised’ schemes


Australia


Proposed CCIV regime• Legal form shares

• Tax transparent

• Vehicle is intended to be:

− More familiar for foreign investors; and

− Support the Asia Region Funds Passport Regime.

• Scheduled to become law in the near future

Australia

Corporate Collective Investment Vehicle (CCIV)

CCIV

Sub-fund

1

Sub-fund

2

Sub-fund

3

Assets Assets Assets

Investors Investors Investors

Depositary

Custodian

Custody of assets

Constitution

Corporate

director

Corporate

director board

Administrator

Investment

managerOversight

duties

Management

and operation

Constitution

and compliance

plan

Custody of

assets


Hong Kong


Timeline—Hong Kong profits tax (HKPT) exemption for funds

Mar 2006 July 2015 July 2018 Dec 2018

Offshore hedge fund exemption:

The Revenue (Profits Tax Exemption for Offshore Funds) Ordinance 2006 was enacted

Offshore PE fund exemption: The Inland Revenue (Amendment) (No. 2) Ordinance 2015 was enacted

Unified fund exemption: The Inland Revenue (Profits Tax Exemption for Funds) (Amendment) Bill 2018 was gazetted


Introduction

“Unifying” the fund exemption regime—why?

EU’s concerns • Ring-fencing features of the existing regime

− Fund level and investment level

Consolidate HK’s competitive edge in asset and wealth management industry• Incentive for funds to be domiciled/managed in HK


Features of the “unified” fund exemption regime

“Unified” fund exemption

regime

A “fund” as defined (regardless of location of its central management

and control)

Transactions in “qualifying assets” (include private

companies incorporated in HK subject to conditions) and incidental transactions

(with a threshold)

Qualifying transactions carried out or arranged in HK

by a “specified person”

or

the “fund” is a qualified investment fund

Remove ring-fencing at fund level

Remove ring-fencing at investment level



Definition of a “fund”

Similar definition as “collective investment scheme” in SFO

The property is managed as a whole by the person; the contributions and profits/income are pooled

The participating persons do not have day-to-day control over the management of the property

Excludes business undertaking for general commercial/industrial purposes, for example:

• Purchase, sale, or exchange of goods or commodities

• Supply of services

• Production of goods or construction of immoveable property

• Making direct investments that derive rent, royalties, or lease payments



Transactions in “qualifying assets”

Class of qualifying assets

1) Securities

2) Shares, stocks, debentures, loan stocks, funds, bonds, or notes of, or issued by, a private company (whether incorporated in or outside HK)

3) Futures contracts

4) Foreign exchange contracts

5) Deposits other than those made by way of a money-lending business

6) Bank deposits

7) Certificates of deposit

8) Exchange-traded commodities

9) Foreign currencies

10) Over-the-counter derivative products

11) An investee company’s shares co-invested by a partner fund and Innovation and Technology Venture Fund Corporation under the Innovation and Technology Venture Scheme


Decision tree for tax exemption on PE investment


Yes

(a) The private company

holds >10% of its assets

in immovable property

in Hong Kong

(b) The private company

is controlled by the fund

or a special purpose

entity

No tax exemption

Yes No

Tax-exempted

No

(c)(i) The private

company has been held

by the fund or a special

purpose entity for

less than 2 years

Yes

Tax-exempted

(c)(ii) The private company

holds more than 50%

value of its assets in

short-term assets

Yes

No tax exemption

Tax-exempted

No

No

• Not a “qualifying asset”

• Not immoveable property in HK

• Held for less than 3 consecutive years before disposal



“Specified person” or “qualified investment fund”

Satisfy either

i. Qualifying transactions carried out or arranged by a “specified person” (i.e., corporation or authorized financial institution registered under the SFO for carrying out any regulated activity)

or

Originator Investor InvestorInvestor Investor Investor

Fund

Capital commitments < 10%

Net proceeds

≤ 30%

Qualified investment fund

ii. The fund is a “qualified investment fund”



No tainting effect

With tainting

Fund

Fund

Qualifying

transactions

Non-qualifying

transactions

All or nothing

No tax exemption; general tax rules apply

Without tainting

Fund

Qualifying

transactions

Non-qualifying

transactions

Tax-exempt No tax exemption; general tax rules

apply


Singapore


Variable Capital Company (VCC)—Key features

Singapore

The Variable Capital Companies Act 2018 was passed by the Singapore Parliament on 1 October 2018. It has not taken effect as various subsidiary legislation remains to be published.

Requires a licenced fund managerShares must be issued, redeemed or purchased at a price equal to NAV (although this may be adjusted be adding or subtracting fees/expenses)except for listed VCCs

May be set up as open-ended or closed-ended funds. Protected cells available.

Property of a VCC must be evaluated on a fair value basis.

Allowed to hold single asset/not required to diversify its investments. Able to hold traditional and alternative assets.

No capital maintenance—Can freely redeem its shares and pay dividends out of its capital.


VCC

Singapore

• Equivalent foreign corporate form funds can be re-domiciled as VCC.

VCCApproved fund

manager

Assets

Sub-fund

Assets

Sub-fund

Assets

Sub-fund

Directors (individuals)

Custodian*

* Requirements as to custodians for authorised/restricted scheme only.

One director of VCC must be ordinarily resident in Singapore and is also the director or representative of the fund management company.

Custody of assets


Interaction with existing incentives

Singapore

• 13R/13X available to the VCC—the tax incentive conditions under both schemes and the corresponding economic commitments are to be applied to the umbrella VCC

• GST credit reclaim will be available similar to Section 13R/13X corporate funds

• Able to access Singapore tax treaties. IRAS will issue Certificate of Residence in the name of the VCC, with the names of the relevant sub-funds included

• Government had initially said “VCC will be treated as a single entity for income tax purposes”—but query what this means (as it is not consistent with the protected cell concept)

• Some information has been released by MAS in a circular in Oct 2018.

• Further details on the tax treatment will be released by MAS/IRAS.


Funds exemptions and REIT taxation

Singapore Budget 2019

• Circular to be issued by end of May 2019

Extension of Funds schemes to 31 December 2024

• Offshore fund exemption under 13CA ITA

• Onshore fund exemption under 13R ITA

• Enhanced Tier Fund exemption under 13X ITA

• Sovereign Wealth Fund scheme

• GST remission

Changes to 13CA/13R effective 19 February 2019

• Removal of requirement that a 13CA/13R fund cannot be wholly-owned by Singapore persons

• Simplification of administrative requirements for managers

– Relevant information to be published on website to enable investors to determine whether they are qualifying/non-qualifying investors

– Annual statements only to non-qualifying investors

• 13R relaxed to include incidental income from warehousing, short-term money market instruments and bank accounts set-up in anticipation of commencing operations

Changes to 13X effective 19 February 2019

• Expansion to include application to managed accounts and a greater variety of master/feeder fund structures

• Committed capital concession extended to include debt and credit funds, and amendments to clarify application to PE funds

Changes to Designated Investments and Specified Income lists effective 19 February 2019

• Removal of currency and counterparty restrictions

• Designated Investments (DIs) to include: emission allowances, accounts receivable, letters of credit and credit facilities and advances, and Islamic financial products equivalent to other DIs

• Unit trusts no longer need to wholly invest in DIs

• Specified Income to include interest deemed to have a Singapore source due to the loan capital being used in Singapore and/or interest being deductible against assessable income

Singapore REIT taxation

• Non-resident 13CA/13X funds to benefit from 10% concessionary rate available to qualifying non-resident investors from 1 July 2019

• Concessions applicable to S-REITs and REIT ETFs extended to 31 December 2025


Operational tax assurance


The tax function is undergoing significant change in the quest to balance internal and external pressures

Tax governance and risk for IM

Quality of compliance Cost of compliance

• Tax authority enforcement actions

• Data protection and financial crime regulations

• Oversight of outsourced processes

• Move from annual to daily compliance

• Expanding list of tax regulations

• Duplication of processes

Efficient governance and tax risk management


Increased risk and stricter enforcement are leading businesses to consider at what point reviews are relevant for their programme

OECD Common Reporting Standard enforcement action

Transition into business as

usual

Regulatory change

programme

Establishing governance and performing reviews

Efficiency and optimisation

Current state?

Stricter enforcement over regulation lifetime

Building a robust defence

OECD peer reviews on enforcement of legislation

First FATCA conviction

LU—<EUR 250K for due diligence non-compliance

KY—<KYD 50K on directors for failing to document policies and procedures

FR—2018 audits for Financial Institutions

Over-reporting presents a data protection, resource and litigation risk


Obtaining appropriate oversight of your end-to-end compliance and identifying areas requiring periodic review

OECD Common Reporting Standard review approach

Health check (annual) Detailed review (2-3 yearly)

Design effectiveness


• Peer benchmarking


• Detailed review of reasonableness and completeness of design

• Document op model and responsibilities

• Identify optimisation opportunities

Operational effectiveness

• High level review of operational procedures

• Detailed review of high risk process areas

• Interview based

• Recommendation for deep dive reviews

• Detailed review of operational procedures

• Review across the end-to-end process following agreed upon procedures

• Detailed issue log and remediation plan

Scala

ble

to b

usin

ess n

eed

s

Builds a detailed remediation plan


Product tax hot topics


Transfer tax

Product tax update

UK

• Dual regime of stamp duty and SDRT• 50bps charge• Changing Stamp Office practice• Exemptions for buy and sell side

Ireland

• Highest standard rate of 100bps• New rate of 600bps could apply• Exemptions for buy and sell side

Hong Kong

• Hong Kong listed securities• Split liability for fund and investor• 10 bps per party• Exemptions for buy and sell side

France

• Changing tax regime at 30 bps• HFT and CDS also in scope• Exemptions for buy and sell side

Italy

• Newest tax with varying rates• 10 bps on exchange, 20 bps OTC for shares• Derivatives & HFT also in scope• Exemptions for buy and sell side

Spain

• Oct 2018 political announcement• Legislation based on the French FTT written in 2014• Gross v net?• Exemptions?


Capital gains tax

Product tax update

Examples of ‘high tax risk’ countries:• Argentina• Brazil• China• India• Pakistan• Indonesia• Venezuela

India/Pakistan• Highly complex tax system• Local Tax Agent required• Tax assessment• Aggressive position of local tax

authorities

China• Highly complex tax system• Great uncertainty despite

recent publication of tax circulars

Venezuela• Local Tax Agent required• Repatriation issues• Specific taxable basis

Argentina• High penalty if no

payment• Remaining uncertainties

Brazil• No treaty access for

Irish funds


Product tax update

The fund lifecycle


Product tax update

The fund lifecycle


Pressure points and solutions

Product tax update

In-house or outsource

If tech is the engine, data is the fuel

Consult

Validate

Anticipate

Product tax=

Opportunities for business

growth through active management

Industry

• Amplified growth

• Increased competitive landscape

• New and changing regimes

• Brexit planning

Manager

• Squeezed/stagnant margins

• Reduced headcount

• Target operating models

• MIFID II, PRIPPS, FLA et al.

Products

• Rationalisation

• Front office development

• Suitability

• Accurate pricing

• M&A activity

Investors

• Value for money

• PE investment due diligence

• Regain trust


Fund manager level


Themes in reward design for alternative funds


Themes in reward design for alternative funds

Sample overall reward package for alternative fund managers

Annual bonus

Cash award based on annual

objectives

Fixed pay

Base salary, benefits, pension

Co-investment?

Carried Interest

/LTIP

Ownership Share?

Variances amongst asset classes

• Overall total cash compensation structure (fixed pay and annual incentive) similar

• Key difference within long-term incentive structure

Venture capital

• Carry arrangements remain the market norm

• Variances reflecting nature of investments

Private equityShort- term real

estate

Long-term real

estate &

infrastructure

• Carry arrangements remain the market norm

• Key areas of focus:

– Focus on dynamic structures

– Vesting/leaver provisions

– Participation

– Allocation and warehousing

– Escrow

• Nature of performance fee has significant impact

• Where traditional fee—carry remains common

• Where bespoke fees agreed—move towards bespoke long-term incentives


Carried interest: Structural considerations


Carried interest: structural considerations

Is it treated as investment return or employment income?

Investment return:

• Taxed according to nature of returns?

• No employer-related obligations/costs?

Employment income:

• Income tax and withholding?

• Social security/similar charges?

• Employer reporting?

Key considerations:

Basis of taxation

Overall legal structure

Acquisition of interest

Carry returns

• Specific tax regime?

• Other protective measures, e.g., elections/rulings, available?

• Legal structure often integral to tax treatment of carry

• May require other structural features, e.g., minimum holding periods/co-investment

• Payment of “market value” at acquisition to prevent upfront employment tax charge?

• If market value not paid, are future returns taxed as employment income?

• Presence of certain conditions, e.g., vesting, forfeiture and discretion over reallocations, may increase risk of treatment as employment income


Carried interest regimes across the jurisdictions


Carried interest regimes across the jurisdictions—an overview

Spa Lux Fra Ger Ita Swe Ned US UK Sgp HK

Carry-regimeRed: Yes, to tax as incomeGreen: Yes, to tax as investmentGrey: No

Potential lower tax rates for individual

23%0%-46%

30% 28.5% 26%20%/58%/30

%25%

20%—37%

28%—45%

22% 15%

Potential higher rates for individual* Not employment tax

45%/45%* 46%* 55%/7

5%* 47%47%/5

7%58%

52%/52%* 38.5% 47% 22% 15%

Employer social chargesRed: UncappedGreen: CappedGrey: n/a

26% 28% 31% 1.5% 14%

Withholding taxRed: YesGreen: NoGrey: n/a

The taxation of carry is complex, we recommend you take specific advice in relation to your circumstances. Rates below are rounded and in some cases indicative as sometimes conditional on numerous factors.


Spa Lux Fra Ger Ita Swe Ned US UK Sgp HK

Carry-regimeRed: Yes, to tax as incomeGreen: Yes, to tax as investmentGrey: No

Potential lower tax rates for individual

23%0%-46%

34% 28.5% 26%20%/58%

/30%25% 20%

28%—45%

22% 15%

Entity considerationsLoc: LocationType: Transparency, reg status etc.

Loc Type Loc Type Loc Type Type Type Type N/A Type

Minimum co-investRed: Yes requiredGreen: Not required

Minimum holding periodRed: Yes requiredGreen: Not required

ConsiderationRed: Yes, required/recommendedGreen: Not necessarily required

Employment conditionsRed: Employment tax treatment more likely/Amber: Less likely

Rulings on taxRed: No/Amber: Not generally sought/Green: Sometimes sought

Carried interest regimes across the jurisdictions—key elements

V


Cayman Islands substance requirements


• The ES Law requires an entity that is in scope of the law (“relevant entity”) to satisfy the economic substance test (“ES Test”).

• The ES Test requires that a relevant entity:

− conducts Cayman Islands core income generating activities (“Cayman Islands CIGA”) in relation to that relevant activity;

− is directed and managed in an appropriate manner in the Islands in relation to that relevant activity; and

− with regard to income derived from activities carried out in the Islands

(i) has an adequate amount of operating expenditure incurred in the Islands;

(ii) has an adequate physical presence (including maintaining a place of business or plant, property and equipment) in the Islands; and

(iii) has an adequate number of full-time employees or other personnel with appropriate qualifications in the Islands.

Substance requirements

Cayman Islands economic substance legislation


• Consideration for Cayman management companies that delegate all functions to an onshore entity carrying on active investment management business

• Question whether there is a requirement to satisfy substance requirements around core income generating activities

• Indication from Cayman service providers that management companies will not be in scope

• The Cayman Islands Department for International Tax Cooperation has published links to legislation (http://www.tia.gov.ky) and guidance (http://www.tia.gov.ky/pdf/Economic_Substance.pdf)

• The guidance suggests investment funds are not within the scope of the substance requirements

• Broadly, the legislation lists fund management as a ‘relevant activity’ for these purposes but notes persons carrying on ‘securities investment business’ as excluded from requiring a license under the law

• The position should be monitored as the conversation develops further

Applicability to fund management

Cayman Islands economic substance legislation


Additional considerations


• Warehousing

• Valuation

Additional considerations

Mid-life awards of carry

Inpatriates

Individual reporting

Entity reporting

• Responsibility

• Consistency

• Regimes

• Impact of relocation on existing carry

• K-1s, German partnership reporting

• FATCA, CRS


Investor level


Appendix A

CRS reporting considerations


Reporting challenge

Reporting considerations

Data element identification, validation, and organization to render FI and Reportable Account data fit for purpose for

each unique jurisdictional requirement.

The file generation process requires additional validation and remediation steps prior to generation of submission ready

files. Robust validation is critical to avoid follow up.

Data readiness

Jurisdictional filing requires the use of Tax Authority web based Portals that vary widely in complexity.

Upon successful submission, an audit trail is to be produced and archived for use in any future challenge, and for use in

any future filings.

File generation

Jurisdictionalfiling

Audit trail/documentation

Throughout this lifecycle, appropriate "case management" technology, process, and procedures are to be maintained to

ensure timely, accurate tracking, and submissions.Case management

Key considerations


Apart from reporting, what should financial institutions focus on during 2018?

Other focus areas

1

2

3

4

5

Preparing for tax authority reviews• CRS requires peer reviews—likely result in tax authority reviews of Fis• Prepare by doing a “health check”

Documentation of procedures• Many jurisdictions require written documentation of procedures and penalties apply if not in place • Linked to tax authority reviews

Due diligence and remediation• For late adopters, the deadlines for pre-existing account due diligence is 2018 (or during 2019 for sub-wave 2

jurisdictions)

Track changes across jurisdictions• Countries continue to sign up, exchange relationships continue to be activated and guidance continues to develop and

be clarified

Transition to BAU • As implementation winds down, CRS will move into the BAU environment


Appendix B

OECD developments


Project Trace proposals

OECD developments

• Further discussions regarding the possible implementation of a blockchain based system of linking investors together with underlying investments and applying treaty benefits directly to the investor through a blockchain based system

• The idea being that Collective Investment Vehicles would then not need to apply for treaty benefits themselves, and issues around substance, etc. may fall away

Controversy—Tax audit developments across key jurisdictionsAsia Pacific Financial Services Tax Conference 2019Hong Kong | 1 March 2019



Jun TakaharaTax PartnerDeloitte Singapore



Wei Yong Gooi Tax PartnerDeloitte Malaysia

Johnny FounTax PartnerDeloitte China

Hirokazu YoshidaTax DirectorDeloitte Japan



Introduction

Macro level—Tax administration environment

Tax controversy—Jurisdiction specific issues

• Australia

• China

• Hong Kong

• Indonesia

• Japan

• Malaysia

• Singapore

Best practices

Topics for discussion


Asia Pacific—Tax administration environment and common themes

Tax controversy

BEPS

MLI

Transfer

pricing

Information

exchange

Anti-

avoidance

Reputation

risk

Technology

MAP

Hong Kong SAR

Indonesia

Australia

China

SingaporeMalaysia

Japan

Increased

audits


Jurisdiction specific issues

Tax controversy

Australia

Transfer pricing (TP)

• ATO focus on related party financing, licensing and royalties

• Attribution of profits and in M&A deals

• Documentation

Increased transparency to the ATO

• OECD initiatives

• Mandatory disclosure regime

Other areas of focus

• AASB17 implementation

• Data integrity

• Changes to tax rules e.g., MIT regime

• Supply chains

• Hybrid instruments, DPT

0201China

Transfer pricing -2019 Jiangsu pilot project

• Risk ratings based on information collected

• 150 taxpayers, expect 10% coverage across 10 provinces

• Information requested for 10 year period

Other transfer pricing trends

• Challenge to outbound service fee payments

• IT fees deemed royalties

• Focus on intangibles

Insurance commission deduction cap

• AASB17 implementation

• Data integrity


Jurisdiction specific issues (cont.)

Tax controversy

Hong Kong

Transfer pricing

• Banks targeted, expect further challenges

• Investment management arrangements involving Cayman advisors

• Cost plus arrangements to HK investment advisors

Deductibility of expenses

• AT1 & T2 interest deductions under scrutiny

• Challenges around classification, timing and link to chargeable profits

Residency claims

• High burden of proof to obtain COR

0403Indonesia

Non deductibility of claims expense for life insurers

• Industry wide issue

• Claims treated as paid from balance of premiums reserve

• Recommended that detailed documentation be maintained from policy inception stage to claim stage (including physical copies)

• Lobbying through onshore and offshore associations (AAJI, ACLI, CMTC)

• Consider cost benefit analysis and wider appetite for litigation

Banks

• Reserve expense and calculation of collateral

• Interest on NPL

Investment management

• Joint cost in mutual fund (gross vs net basis on income)

• Foreign tax credit requirement where tax return of investee cannot be obtained (new regulation to apply)


Jurisdiction specific issues (cont.)

Tax controversy

Malaysia

Insurance focus in FS space

Deductibility of PRAD

• MIRD argues is a general provision

• Taxpayer view as a regulatory requirement based on actuarial forecasts

Lobbying of interest

• 2 failed lobby attempts

Reinsurance profit commission

• MIRB argues PC taxable as ‘other incidental income’

• Tax payer view is taxable as underwriting income of life fund

• Clarification from MIRB sought

Singapore

IRAS Field audits• Large taxpayers targeted (S$100M+)• Errors found lead to more serious consequences as no

penalty waiverACAP• Push for FS sector participation continues• Implications of joining v decliningTransfer pricing• Noted increase in TP queries since FY16• Arm’s length price for centralized services, liquidity costs and

intra-group financing• SG losses from global profit split • IM-employee stock compensation

0605


Tax controversy

Best practices

Hong Kong SAR

Indonesia

Australia

China

Singapore

Malaysia

Japan


Appendices Appendix A: Australia

Appendix B: China

Appendix C: Hong Kong

Appendix D: Indonesia

Appendix E: Japan

Appendix F: Malaysia

Appendix G: Singapore


Appendix A

Australia—Tax and TP Audit developments in Australia


Significance of the financial services industry

• Contributed 43% or AU$16 billion of all large corporate groups income tax in 2016

ATO objective

• More taxpayers paying their fair share of tax

• “Support community confidence” through transparency and behavioural changes

Increased transparency and new disclosure requirements from large corporate tax groups

Greater public transparency

• Tax transparency (compulsory and voluntary)

• General purpose financial statements

Increased transparency to the ATO

• Tax return disclosures (including Reportable Tax Position schedule, International Dealings Schedule)

• OECD initiatives (e.g. Country-by-country reporting)

• MLI—Exchange of Information

• Mandatory disclosure regime

Australian taxation office and the financial services industry

Appendix A: Australia


ATO activities

• Communication of tax risks

• Justified Trust

• Tax review of Top 100 and Top 1000

• Areas of focus

− Tax governance

− Specific tax risks

− Sector issues

• Prevention and resolution of disputes

− Litigation (selective)

− Legal Professional Privilege (use and abuse)

Australian taxation office and the financial services industry (cont.)



Domestic issues

• Fragmentation of active business

Transfer pricing

• Related party dealings

• Related party financing

• Transfer pricing documentation

• Licensing and royalty arrangements

Cross-border issues

• Supply chains (inbound and outbound)

• Hybrid instruments

• Marketing hubs

• Holding entities

• Legislative implementation (Diverted Profits Tax, Anti-Hybrids)

ATO areas of focus: Large corporate groups



Banking

• Branch attribution of profits

• Research and development of core software

• Franking trades

• Offshore Banking Units

• M&A deals (e.g. divestments of non-core operations)

• Goods and Services Tax (apportionment and Input Tax Credits) for financial services

Insurance

• Emergence of previously bank owned life insurance companies

• Implementation of AASB17

Superannuation

• Data integrity from underlying systems

• Increased non-portfolio offshore investments

• Franking credit schemes marketed to large superannuation funds

ATO areas of focus: Financial services sectors


Source“Tax and the Financial Services Industry—ATO Observations”, Jeremy Hirschhorn and Andrew Mills (ATO), The Tax Institute 2019 Financial Services Tax Conference “The ATO’s approach to significant financial services tax issues”, Jeremy Hirschhorn (ATO), The Tax Institute 2018 Financial Services Tax Conference


Investment Management

• Data integrity from underlying systems

• Implementation of new tax rules (e.g. Attribution Managed Investment Trust regime)

Infrastructure and Real Estate

• Application of Commissioner’s Infrastructure Framework and Taxpayer Alert

ATO areas of focus: Financial services sectors (cont.)


Source“Tax and the Financial Services Industry—ATO Observations”, Jeremy Hirschhorn and Andrew Mills (ATO), The Tax Institute 2019 Financial Services Tax Conference “The ATO’s approach to significant financial services tax issues”, Jeremy Hirschhorn (ATO), The Tax Institute 2018 Financial Services Tax Conference


Appendix B

China


TP audit trend

Jiangsu pilot project to assign risk ratings to 150 taxpayers—expected to be rolled out to 10 provinces in 2019

• Pilot program to improve tax management for MNEs with significant related party transactions

• As much as 10% of the targets may be audited—partly limited by capacity of TB to conduct audits

• Information has been requested going back 10 years to assess financial trends over time

• Intention is to roll out across 10 provinces (including Beijing, Shanghai, Guangdong, Zhejiang) in 2019

Outbound inter-company service charges

A focus on outbound inter-company service charges. Key tax bureaus’ challenges:

• Challenges to management fees for Chinese subsidiaries with substance

• Taxpayer’s KPI (e.g. inter-co service charges/operating revenue) excessive compared to peers’

• IT & IT related service charges

Development on the insurance commission deduction cap

Tax controversy updates

Appendix B: China


Appendix C

Hong Kong


Ongoing climate of issues/challenges around deductibility of expenses, transfer pricing arrangements and residency claims

Appendix C: Hong Kong

Deductibility

AT1 & T2 interest deductions in respect of interest paid pre-RCS rules:

• Taxpayers claimed expenses on the basis that legal form interest was properly incurred to produce chargeable profits

• IRD ruled negatively on a number of these arrangements then went on record with their position of non-deductibility when introducing RCS rules

• IRD continues to challenge taxpayers

IRD continues to make various deductibility challenges around the proper classification of expenses, timing and whether expenses are incurred to produce chargeable profits

Transfer pricing

• Transfer pricing queries have been initiated with a number of banks, transfer pricing arrangements being the target of queries to collect information. Expectation of further queries and challenges

• Investment management arrangements involving Cayman advisors continue to come under scrutiny

• Cost-plus arrangements to onshore investment advisors continue to be scrutinised and challenged

Tax residency certificates

• The burden of proof for obtaining tax residency certificates continues to be high


Appendix D

Indonesia


Tax dispute: Industry issues


Banks

• Reserve expenses and calculation of collaterals

• Interest on NPLs

• Write off of loans (Tax ID and requirements)

• Employee Loans (negative spread of interest)

• VAT on sale of foreclosed assets

Life insurance

• Reserve expenses relating to unit linked products

• Claims expense if premium reserve is greater than claim

• Joint cost of expense related to income (final vs non-final tax)

• VAT on unit linked products

Investment management

• Joint cost in mutual fund (gross vs net basis of income)

• Foreign tax credit requirement where tax return of investee cannot be obtained (new regulation to apply)


Tax dispute: Industry issues (cont.)


Securities

• Attraction of revenue to Indonesia from joint underwriting activity with overseas affiliate (form over substance approach)

• Joint cost on expense related to final and non final tax

• Tax treaty applicability (beneficial owner test on DGT form)

Consumer finance

• Calculation of reserve (a lesser of accounting vs tax)

• Imposition of VAT on foreclosed asset vs gain or loss on repossessed asset


Non-deductibility of claim expense


Regulation

Indonesian Tax Office's understanding is that PMK-81/2009 (PMK-81), which is an amendment of PMK-83/2006 (PMK-83), states that claim expenses shall be charged to the balance of premium reserve

New interpretation

The Tax Office's understanding is that as long as there is still a balance of premium reserve (balance sheet—liabilities), claim expenses cannot be charged as expenses by a Life Insurance Company but must instead be paid as arising from the balance of premium reserves

The Tax Office's understanding is that the creation of premium reserves as per the mandate of PMK-81 is based on the cumulative balance of all Policyholders, as opposed to on a policy-by-policy basis

Mitigation

Preparation

• A Life Co must collect detailed documentation from insurance policy stage to claims document stage which requires considerable effort

Tax litigation

• Life Co must consistently be prepared to defend the case in tax objection, tax appeal and even the Supreme Court

Business association

• Both onshore and offshore Association like AAJI, ACLI, CMTC need to be involved to demonstrate the urgency of the matter


Appendix E

Japan


GAAR (General anti-avoidance rule)

• No GAAR in Japan—but some specific anti-avoidance rules in the area of “family companies” transactions, tax deferred reorganisations and tax consolidations which could impact the financial services sector

• Heavier audit challenge compared to past years

Transfer pricing

• Continued focus in tax audits

− Audit scope now expanding to include smaller firms/companies

• Audit challenges on cost-plus method/loss allocation method

• TP documentation is examined in detail

• KERT concepts remain the same as before

− Audit requests include management PL and interviews with management/traders/sales

• Intangibles—limited application to financial industry to date

Others

• Limited audit cases for Principal Purpose Test (tax treaties)/Hybrids

• Legal ownership vs beneficial ownership still under discussion amongst the authorities

Key topics

Appendix E: Japan


Appendix F

Malaysia


Insurance tax issues: Deductibility of provision of risk margin for adverse deviations (PRAD)


PRAD

• Component of the value of the insurance liabilities that relates to the uncertainty/volatility inherent in the estimate

• Additional component of the liability value aimed at ensuring that the value of the insurance liabilities is established at a level such that there is a higher level of confidence that the claims liability levels will ultimately be sufficient

“Presently, only admitted claims are allowed as a deduction in arriving at the assessable income of the general insurance business. To further promote sound management practice and establish the true financial position of insurance companies, especially in reserving for liability claims, it is proposed that IBNR claims, as confirmed by Bank Negara, be fully deductible as an expense in arriving at assessable income from the general insurance business of an insurer.”

Finance Minister Budget speech 1995

Before 1995

• “claims admitted in that period (being claims made against him under general policies issued by him)”

After 1995

• “claims incurred in that period in connection with his general policies”

Change in wording of Section 60(5)(b)(i) before and after YA 1995

Provision and estimation vs incurred?

Tax deductible?

PRAD


Malaysian Inland Revenue Board’s (MIRB) view Taxpayer’s view

• PRAD is not tax deductible because it is a “provision” in nature and an “estimate that is not incurred for tax purposes”

• Section 33(1) of the Income Tax Act, 1967 (“the Act”)

• PRAD is tax deductible pursuant to Section 60(5)(b)(i) of the Act

• PRAD is an actuarial estimate made based on statistical data and it is not a pure estimate

• PRAD is a regulatory requirement of the Risk Based Capital Framework mandated by Bank Negara Malaysia (BNM) and represents a component of the Claims Liability

• PRAD is reported as and is a component of the Claims Incurred in the Statement of Claims for BNM reporting purposes

• Exxon Chemical (Malaysia) Sdn Bhd v KPHDN (2006)

• Owen v Southern Railway of Peru (1956) 36 TC 602

Insurance tax issues: Deductibility of provision of risk margin for adverse deviations (PRAD) (cont.)


Lo

bb

yin

g


Insurance tax issues: Other issues


Funding cost

• Insurance companies do not receive a deduction for interest cost (not available under Section 60)

• As an increasing number of insurance companies start to issue debt/quasi-equity for funding, they will have a growing tax burden because all the funding cost is not tax deductible

• Lobby attempts by industry to MOF have failed twice

Profit commissions from reinsurance

• MIRB’s view that profit commissions from reinsurance should be subject to tax under Section 60(8) of the Act as “other incidental income”

• Pursuant to Section 5(2) of the Financial Services Act 2013, profit commission from reinsurance should be part of the life insurance policy, hence should be taxed as underwriting income of the life fund

• Seeking clarification from the MIRB


Appendix G

Singapore


IRAS field audits

• IRAS is targeting large taxpayers (S$100M+) not in ACAP for field audits

− Onsite for several days at least, interviews, walk-throughs and providing listings

− Errors found lead to more serious consequences as there is no penalty waiver

Singapore GST controversy—issues



• Noted increase in TP queries by the IRAS for FSI entities over the last few years (i.e. since FY 2016)

• Expect that the FSI sector shall continue to be under the IRAS's radar going forward

• Key issues in the past have been:

− Group/centralised services provided and whether costs have been charged out with arm's length mark up

− Allocation of common liquidity costs

− Losses attributed to the Singapore entities based on global profit split methods

− Pricing for intra-group financing transactions and commercial rationality of the terms and conditions attached to such transactions

− Investment management: Inclusion of employee stock compensation in cost base for mark-up

• Possible issues post BEPS:

− Extensive evaluation of the contribution of the Singapore entity in global profit split arrangements vis-à-vis the contribution of other related parties—appropriateness of the profit split model in light of Singapore contribution to the entire value chain

− Trading desks in Singapore compensated on a cost-plus basis in cases where key risk taking decisions are made by the trading desk

− Front office, middle office and back office services provided by Singapore entities and whether the corresponding mark-ups are at an arm's length

− Allocation of centralised costs/expenses (e.g. group liquidity costs)

Singapore TP controversy—issues


Headline Verdana BoldThe tax function—Building a tax operating model for the future2019 Asia Pacific Financial Services Tax ConferenceHong Kong | 1 March 2019



Piyus VallabhTax Partner, Asia Pacific Tax Management Consulting LeaderDeloitte Asia Pacific


Drivers of change


Trends impacting tax departments

Drivers of change

Global regulatory changes

Rapidly changing

technology

Brand risk

Global transparency

Limited resources

Add more value


Internal and external factors

Drivers of change

Operating modelchange drivers

Focus on being a business partner

Changing demands for talent combined with a focus on

reducing costs

Great transparency and a need to show you are “getting it right”

Increase in technological

substitutes (e.g., RPA and

cognitive)

Value chain remodelling and

proactively dealing with Brexit

Finance Transformation

Increased collaboration among tax authorities and digitalisation

of tax

Impact of new regulations, particularly BEPS

AP and global rules has layered in additional

commitments for businesses

Business

risk review

2.0

2019-20

VAT fraud

2017

CCO

2017

DAC6

2020SAF-T

Reporting

Tax

strategy

2017

India GST

Banking

Code of

Practice

2009

”We plan responsibly”“We comply, we manage risk and we engage with tax authorities” “We don’t help others evade tax”


The digital future


The digital future


Tax authority digitisation

The digital future

Real-time

Reporting

e-Filing

e-Audit

Response time

Periodic

Immediate: Real-time reporting requires immediate data transfer.

Key points:• Report as-is: no adjustment

On Request: More time is taken to report larger datasets. Focus is on all data correctly reported.

Key points:• Time to adjust information• Large, complete datasets• Design reporting into traditional tax processes

Real-time reporting encroaching on finance functions:

• Indonesia e-invoicing:Electronic invoicing with companies directly connect to the e-SPT program.

• India e-matching of invoice: Electronic matching of input and output tax claims

e-Filing focus on driving automated process from source to file:

• India, China, Japan Taiwan: All require e-fling of indirect returns.

e-Audit focusing on all data hosted within ERP and other systems. Slower to respond, but more comprehensive:

• Norwegian SAF-T: Require entire ERP system to be uploaded in electronic filing format. Potentially looking at entire back-up of ERP systems.

• AP – Revenue authorities have ability to extract data at GL level


Tax operating model


Where does technology sit within the tax function?

Tax function components

Enterprise-wide RPA

Tax

New ways of organising and working to adopt and collaborate with new digital co-workers

Operating Model

Taking a transformational approach to change enabled by technology

Transformation

• Wider finance and IT environment• Operating Model• Changing technologies• Global versus local

Key considerations for technology

strategy

Policies, standards, governance, ways of working and roles and responsibilities to support tax function activities

Enablement standards and control framework

• Having a holistic plan and update it• Working with finance and IT• Technology and strategy ownership• Portfolio—Streamline, Enhance,

Transform

Key success factors for technology

strategy


Focus

Tax operating model

Process

improvementMap To BeBuild in controlsAutomateStreamlineImprove

Understand root causes

Identify issuesUnderstand As-Is

Deloitte Tax Services

Record to Report Processes

Function

Components

Governance and Business Partnering

CorporateIncome TaxCompliance

Indirect Taxcompliance

EmploymentTax

TransferPricing

Group TaxReporting

StatutoryAccounts

OperationalTaxes

CorporateEntity

Management

Transactionsand Advisory

Governanceand Risk

Core

activitiesCIT return VAT/GST returns

Payroll

complianceBenchmarking Cash Tax

Financial

statements

production

Stamp and

Transactional TaxAnnual Report ETR management

Tax Audits/

Enquiries

Tax Payments Partial exemption Benefits reportingContracting

Year end and

interim

reporting

Audit

managementWithholding Tax Shareholders Tax structuring

Electronic

Audit/Digital Tax

Authorities

Local country

fillings

Statistical

reporting

Leavers/

joiners

Operational

TP – Profitability

Management

Forecasting and

planning

National Bank

Filings/

statistical

reporting

Capital Gains Tax BoardsMergers and

Acquisitions

Controls

Frameworks

Global mobility

and PE

consequences

Operational

TP – Cost

Allocations

Uncertain tax

positionsRecord to report

Operational Tax

Reporting

(including BBSI)

Regulation and

complianceSupply chain

Tax Strategy

Management and

Corporate Affairs

Credits/

Incentives

Executive

remuneration

Transfer Pricing

documentationSubsidiaries

Workflow

management and

status monitoring

Country by

Country Reporting

BEPS

Brexit

Managing VAT

registrations

Bank Levy QI/QDD

SAO/BCOP/BRR

Regulatory

reporting

FATCA/CRS

CCO/VAT FraudDAC 6


Areas of current focus

Tax operating model

Process






Function

Components




EmploymentTax

TransferPricing

Group TaxReporting

StatutoryAccounts

OperationalTaxes

CorporateEntity

Management


Governanceand Risk

Core


Payroll


Financial

statements

production

Stamp and


Tax Audits/

Enquiries


Year end and

interim

reporting

Audit


Electronic

Audit/Digital Tax

Authorities

Local country

fillings

Statistical

reporting

Leavers/

joiners

Operational


Management

Forecasting and

planning

National Bank

Filings/

statistical

reporting


Acquisitions

Controls

Frameworks

Global mobility

and PE

consequences

Operational

TP – Cost

Allocations

Uncertain tax


Operational Tax

Reporting

(including BBSI)

Regulation and


Tax Strategy

Management and

Corporate Affairs

Credits/

Incentives

Executive

remuneration

Transfer Pricing


Workflow

management and

status monitoring

Country by

Country Reporting

BEPS

Brexit

Managing VAT

registrations

Bank Levy QI/QDD

SAO/BCOP/BRR

Regulatory

reporting

FATCA/CRS

CCO/VAT FraudDAC 6

• Group Tax

Reporting

• CIT

Automation

• Data

Classification


Areas of current focus (cont.)

Tax operating model

Process






Function

Components




EmploymentTax

TransferPricing

Group TaxReporting

StatutoryAccounts

OperationalTaxes

CorporateEntity

Management


Governanceand Risk

Core


Payroll


Financial

statements

production

Stamp and


Tax Audits/

Enquiries


Year end and

interim

reporting

Audit


Electronic

Audit/Digital Tax

Authorities

Local country

fillings

Statistical

reporting

Leavers/

joiners

Operational


Management

Forecasting and

planning

National Bank

Filings/

statistical

reporting


Acquisitions

Controls

Frameworks

Global mobility

and PE

consequences

Operational

TP – Cost

Allocations

Uncertain tax


Operational Tax

Reporting

(including BBSI)

Regulation and


Tax Strategy

Management and

Corporate Affairs

Credits/

Incentives

Executive

remuneration

Transfer Pricing


Workflow

management and

status monitoring

Country by

Country Reporting

BEPS

Brexit

Managing VAT

registrations

Bank Levy QI/QDD

SAO/BCOP/BRR

Regulatory

reporting

FATCA/CRS

CCO/VAT FraudDAC 6

• ERP

Sensitisation

• Indirect Tax

Determination

• Real Time

Reporting

Technologies

• Big data

solutions

• Partial

Exemption



Tax operating model

Process






Function

Components




EmploymentTax

TransferPricing

Group TaxReporting

StatutoryAccounts

OperationalTaxes

CorporateEntity

Management


Governanceand Risk

Core


Payroll


Financial

statements

production

Stamp and


Tax Audits/

Enquiries


Year end and

interim

reporting

Audit


Electronic

Audit/Digital Tax

Authorities

Local country

fillings

Statistical

reporting

Leavers/

joiners

Operational


Management

Forecasting and

planning

National Bank

Filings/

statistical

reporting


Acquisitions

Controls

Frameworks

Global mobility

and PE

consequences

Operational

TP – Cost

Allocations

Uncertain tax


Operational Tax

Reporting

(including BBSI)

Regulation and


Tax Strategy

Management and

Corporate Affairs

Credits/

Incentives

Executive

remuneration

Transfer Pricing


Workflow

management and

status monitoring

Country by

Country Reporting

BEPS

Brexit

Managing VAT

registrations

Bank Levy QI/QDD

SAO/BCOP/BRR

Regulatory

reporting

FATCA/CRS

CCO/VAT FraudDAC 6

• Transfer

Pricing

Documentation

tools

• Operational

Transfer

Pricing

Monitoring



Tax operating model

Process






Function

Components




EmploymentTax

TransferPricing

Group TaxReporting

StatutoryAccounts

OperationalTaxes

CorporateEntity

Management


Governanceand Risk

Core


Payroll


Financial

statements

production

Stamp and


Tax Audits/

Enquiries


Year end and

interim

reporting

Audit


Electronic

Audit/Digital Tax

Authorities

Local country

fillings

Statistical

reporting

Leavers/

joiners

Operational


Management

Forecasting and

planning

National Bank

Filings/

statistical

reporting


Acquisitions

Controls

Frameworks

Global mobility

and PE

consequences

Operational

TP – Cost

Allocations

Uncertain tax


Operational Tax

Reporting

(including BBSI)

Regulation and


Tax Strategy

Management and

Corporate Affairs

Credits/

Incentives

Executive

remuneration

Transfer Pricing


Workflow

management and

status monitoring

Country by

Country Reporting

BEPS

Brexit

Managing VAT

registrations

Bank Levy QI/QDD

SAO/BCOP/BRR

Regulatory

reporting

FATCA/CRS

CCO/VAT FraudDAC 6

• Big data

solutions for

FATCA/CRS

• Artificial

Intelligence to

determine

reporting

obligations



Tax operating model

Process






Function

Components




EmploymentTax

TransferPricing

Group TaxReporting

StatutoryAccounts

OperationalTaxes

CorporateEntity

Management


Governanceand Risk

Core


Payroll


Financial

statements

production

Stamp and


Tax Audits/

Enquiries


Year end and

interim

reporting

Audit


Electronic

Audit/Digital Tax

Authorities

Local country

fillings

Statistical

reporting

Leavers/

joiners

Operational


Management

Forecasting and

planning

National Bank

Filings/

statistical

reporting


Acquisitions

Controls

Frameworks

Global mobility

and PE

consequences

Operational

TP – Cost

Allocations

Uncertain tax


Operational Tax

Reporting

(including BBSI)

Regulation and


Tax Strategy

Management and

Corporate Affairs

Credits/

Incentives

Executive

remuneration

Transfer Pricing


Workflow

management and

status monitoring

Country by

Country Reporting

BEPS

Brexit

Managing VAT

registrations

Bank Levy QI/QDD

SAO/BCOP/BRR

Regulatory

reporting

FATCA/CRS

CCO/VAT FraudDAC 6

• Planning and

modelling

• Documentation

creation tools



Tax operating model

Process






Function

Components




EmploymentTax

TransferPricing

Group TaxReporting

StatutoryAccounts

OperationalTaxes

CorporateEntity

Management


Governanceand Risk

Core


Payroll


Financial

statements

production

Stamp and


Tax Audits/

Enquiries


Year end and

interim

reporting

Audit


Electronic

Audit/Digital Tax

Authorities

Local country

fillings

Statistical

reporting

Leavers/

joiners

Operational


Management

Forecasting and

planning

National Bank

Filings/

statistical

reporting


Acquisitions

Controls

Frameworks

Global mobility

and PE

consequences

Operational

TP – Cost

Allocations

Uncertain tax


Operational Tax

Reporting

(including BBSI)

Regulation and


Tax Strategy

Management and

Corporate Affairs

Credits/

Incentives

Executive

remuneration

Transfer Pricing


Workflow

management and

status monitoring

Country by

Country Reporting

BEPS

Brexit

Managing VAT

registrations

Bank Levy QI/QDD

SAO/BCOP/BRR

Regulatory

reporting

FATCA/CRS

CCO/VAT FraudDAC 6

• Artificial Intelligence

• Machine Learning

• RPA

• Data Warehousing

• Data Wrangling

• Analytics and dashboards

• Workflow and process management


Capability and skills

Tax operating model

Tax professional skills Past Future

Tax technical

Global project management

Data management

Technology application

Process optimisation

People change management

Consultative business

Required Not required


How to start transforming your operating model

Tax operating model

Understand as is

Design to be model

Design processes

Design governance framework

Develop technology roadmap

Develop implementation

planDevelop your Vision

Align with Finance Transformation

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