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In December 2001, LoVersantvoort who is thLoeff is now the first anJohn specialises in corestructuring and in crJapan and East Asia. John obtained a LL.M. European law (1995). PDutch Law from the Unspeaks Japanese. He cand his e-mail address

UK tax lawyer in Sing

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JANUARY 2002 EDITION OF THEYENS & LOEFF ASIA NEWSLETTER

ENS & LOEFF, ASIA NEWSLETTER, JANUARY 2002 EDITION

resence in Asia

law practice as per December 2001

ho Jimu Bengoshi Jimusho

yens & Loeff opened a civil law practice in Tokyo. The practice is led by John A.J.M.e only attorney-at-law from the Netherlands admitted to the Japanese Bar. Loyens &d only Dutch firm that offers fiscal, legal and notarial services in Japan. rporate law, securities law and European law. He is mainly involved in corporateoss-border mergers & acquisitions and joint ventures. His activities are focused on

Degree in East-Asian Law from the University of London, where he also studiedrior to that, he obtained a M.A. Degree in Japanese Studies and a LL.B. Degree in

iversity of Leyden, The Netherlands (1994). John is fluent in English and Dutch andan read French, German, Italian and Spanish. He can be contacted in our Tokyo officeis: john.versantvoort@loyensloeff.com

apore as per January 2002

nounce the recruitment of Geraldine Scaife, who is a UK qualified senior tax

worked with Slaughter and May in London. Geraldine has extensive experience

range of tax matters having advised large corporations on domestic and

ucturing and restructuring for mergers and acquisitions and group re-

ition, she has particular expertise in transfer pricing, double taxation treaty

r leasing and structured finance. Geraldine will be based in Loyens & Loeff’s

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Singapore office, and advise on all aspects of taxation for the Asian countries. Geraldine, a German

speaker, has also worked in Germany and extensively with top US and continental European tax

advisers. We believe that Geraldine will add an extra dimension to our Singapore based tax practice

with her knowledge and experience of common law jurisdictions. Her extensive transactional

experience will be an asset in providing our clients with a top quality service.

Asean

Original six member states achieve goals for import duty reduction

• As per 1 January 2002, Brunei Darussalam, Indonesia, Malaysia, Philippines, Singapore and

Thailand have reduced their import duty rates to 5% or below on inter-state imports of goods

between ASEAN member states. The reduction is in line with the goals set out by the 1992 and its

subsequent amendments. With the exception of sensitive products such as rice, and those

permanently excluded (narcotics etc.), the reduced tariffs apply to a wide range of manufactured

and agricultural products. Because they became members of the Asean Free Trade Association at

a later date, the final dates for achieving 0-5% import duty rates have been agreed to be 2006 for

Vietnam, 2008 for Laos and Myanmar, and 2010 for Cambodia.

• With the dismantling of tariff rates, South East Asia enhances its competitive advantage as an

international production base. China and Korea have been approached and have expressed their

willingness to join this free trade area, consequently further enhancing the usefulness of South

East Asia as a manufacturing base or investment base for investments in China and Korea. With

the possible participation of Japan in a later stage, South East Asia would only strengthen its

long-term position for attracting strategic investments.

Australia

Special note

Business Council of Australia Report on Australia's International Tax Regime

We would like to thank the tax department of Blake Dawson Waldron in Sydney, for their kind contribution tothe Australian section of this newsletter.

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• On 17 December 2001 the Business Council of Australia ("BCA") launched its report into

Australia's international tax regime. The Business Council of Australia commissioned a discussion

paper prepared by accounting firm Andersen entitled Removing Tax Barriers to International

Growth (the "Report"). The launch of the Report follows the Federal Government's promise to

maintain tax reforms as a priority and outlines a series of reforms to increase Australia's

international tax competitiveness.

The Report recommends:

(a) the urgent creation of an internationally attractive holding company tax regime. This is to be

done by allowing a CGT exemption for the disposal of certain overseas subsidiaries of

companies incorporated in Australia but wholly (or substantially) owned by foreign investors

(so called "conduit holding companies" or "CHCs").

(b) changes to the corporate residency test so that only companies incorporated in Australia, and

not companies managed and controlled in Australia, are considered corporate residents.

(c) changes to the taxation of foreign executives. The Report notes the Government's recent

policy statement to not tax executives on temporary visas for up to four years on capital gains

from the sale of offshore assets and earnings from foreign sources. The proposed changes are

expected to be effective from July 2002. The BCA proposes tax exemption for pre-posting

income and assets, the end of the requirement to make superannuation contributions as well

as the elimination of the deemed disposal rules that apply at the time of leaving.

The Report has been greeted warmly by businesses in Australia, and the Government has

acknowledged the importance of international tax reform to Australia's international

competitiveness.

Draft Ruling Seeks to Widen Australia's International Tax Base

• Taxation Determination TD 2001/D14, released on 12 December 2001, outlines the Australian

Tax office’s (ATO’s) view on the application of the controlled foreign company ("CFC") provisions in

Part X of the Income Tax Assessment Act 1936 (the "ITAA 1936") with respect to so called 'hybrid'

entities – such as limited liability companies and limited partnerships. Under the draft

determination, profits of such entities may be attributable under the CFC rules – potentially

making such profits part of the taxable income of Australian investors regardless of whether such

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profits are remitted to Australia. The ATO's view is that the profits of such entities will be

considered earned in "unlisted countries" for the purposes of the CFC rules, unless those entities

are taxed on a worldwide basis in the UK or US (as the case may be).

Treatment of Capital Gains Under Pre-CGT Tax Treaties – Taxation Ruling TR 2001/12

• The ATO issued Taxation Ruling TR 2001/12 (previously released as Draft Taxation Ruling

TR 2001/D12) outlining the ATO view regarding the treatment of capital gains under Double Tax

Agreements ("DTAs") negotiated before 20 September 1985 ("pre-CGT DTAs"). The ATO has

adopted the position that Australia's rights to tax capital gains under Part IIIA of the ITAA 1936 or

Part 3-1 of the ITAA 1997 is not limited by pre-CGT DTAs. The ATO's view is that the pre-CGT

DTAs did not intend to cover capital gains. To support its view the ATO cites the fact that when

the DTAs were negotiated Australia did not have a comprehensive CGT regime, the history of

negotiations of pre-CGT DTAs and the fact that subsequent DTAs have specifically included capital

gains. Whilst pre-CGT DTAs do have a mechanism to extend coverage to taxes not in existence at

the time of signature, such extension is limited to similar taxes. It is the ATO's view that capital

gains taxes are not similar taxes to those covered in the pre-CGT DTAs. Further to this, the ATO

maintains that even if taxes covered by pre-CGT DTAs include capital gains taxes, Australia still

has the right to tax capital gains under the capital gains tax regime on the basis that the

distributive rules of pre-CGT treaties do not limit domestic law taxing rights over capital gains.

The Ruling:

(d) acknowledges that gains on the borderline of the income/capital gain distinction (borderline

gains) are covered by the pre-CGT DTAs;

(e) does not deal with the treatment of income gains from the alienation of property and;

(f) applies to years commencing before and after the date of issue.

Australia/Vietnam Double Tax Agreement – ‘Vietnamese Tax Forgone'

• The Australian Government and the Government of the Socialist Republic of Vietnam exchanged

letters on 30 August 2001 to amend the Australia/Vietnam DTA. The amendment affects Article

23 of the DTA which allows an Australian resident deriving income from Vietnam a credit for

Vietnamese tax paid (including Vietnamese tax forgone). The amendment reflects changes made

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by the Government of Vietnam to the meaning of the words "Vietnamese tax forgone" under

Articles 23(5)(a)(i) and (a)(ii) and 23(7)(a). The exchange of letters constitutes an agreement

between the two Governments and will enter into force when domestic requirements have been

completed.

Interpretation of Double Tax Agreements – Taxation Ruling TR 2001/13

• On 19 December 2001 the ATO issued Taxation Ruling TR 2001/13 which provides guidance on

the interpretation of Australia's DTAs. The Taxation Ruling covers:

(a) the objectives behind DTAs including how these objectives are met by the use of the tie-

breaker rule for determining residence, the allocation of taxing rights and the availability of

credits for tax paid in another country;

(b) the various types of DTAs and the basic models on which they are based and discusses the

differences between DTAs;

(c) the reason for different terminology between DTAs and use of terms in a manner different to

their ordinary use in domestic law;

(d) the process by which DTAs are implemented and their interpretation. In particular, it covers

the interpretation of undefined terms, the interpretation of Australian legislation implementing

DTAs and the factors taken into consideration;

(e) a discussion on the general rules of interpretation of DTAs (including supplementary sources

such as foreign court decisions, Model Conventions and Commentaries and explanatory

memoranda)

Test for Residency

• A decision of the Full Federal Court has potentially expanded the definition of Australian resident.

Under section 6(1) of the ITAA 1936 a person is a resident of Australia if his/her domicile is in

Australia or he/she has been in Australia for more than half the income year unless the

Commissioner is satisfied that his/her usual place of abode is outside Australia. The appeal

concerned a decision of the Administrative Appeals Tribunal (the "AAT") that determined that a

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Singaporean woman who had come to Australia for medical treatment was not a resident because

her usual place of abode was not in Australia. In overturning the decision of the AAT, the Full

Federal Court distinguished between a usual place of abode being "outside Australia" and being

"not within Australia". In most cases, a person will either have a usual place of abode in Australia

or one outside Australia. This decision does not affect the outcome of such cases. However, the

distinction between "outside" and "not within" is potentially determinative where a person has no

usual place of abode, a so-called "bird of passage". In such circumstances, the person would fall

within the definition of residency as they would have no usual place of abode outside Australia.

Transfer Pricing and Permanent Establishments: TR 2001/11

• The Taxation Ruling covers: The ATO has released a Tax Ruling dealing with the application of the

international transfer pricing provisions in Div 13 of the ITAA 1936 to multinationals. The Ruling

focuses on the attribution of tax where a multinational enterprise ("MNE") is structured as a single

legal entity that conducts business operations though permanent establishments ("PE"). The

Ruling complements and adopts similar methodologies and results as in other Tax Rulings that

deal with agreements between separate but associated entities (TR 94/14, TR 97/20 and TR

98/11).

In determining issues relating to the taxing of PEs, the Ruling adopts the following approaches:

The arm's length principle embodies the policy behind the taxation of PEs and the application

of the legislation must be consistent with that principle as understood under Australian law

Relevant guidance from the OECD should be followed except where Australia's DTAs and

domestic law require or permit a different approach to be taken

China

WTO

• China joined the World Trade Organisation (WTO) on December 11, 2001. This is expected to

have consequences in respect of China’s current tax holiday policies for foreign investors (it was

announced that these will be eliminated), foreign ownership restrictions (China will have to relax a

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number of foreign investment restrictions, to create a level playing field between foreign and

domestic investors) and foreign exchange controls.

New Unified Enterprise Income Tax Law

• On the 24th of October 2001 it was announced that China's State Council and State

Administration of Taxation completed their draft of the new Unified Enterprise Income Tax Law

that is expected to be promulgated by the National People's Congress late 2002. At present, a

preferential treatment of foreign investment enterprises (FIEs) exists through various tax incentive

practices. Consequently, one of the main drivers for the reform comes from pressure to eliminate

the competitive advantage FIEs have over domestic companies resulting from that preferential

treatment.

PRC will abolish tax privileges for foreign invested enterprises

• On the 26st November 2001 the P.R.C. government announced that it will provide most-favored-

nation status to foreign enterprises. Both P.R.C. and foreign enterprises will enjoy the same tax

treatment, according to an official with the State Administration of Taxation. Currently, the tax on

imported products is higher than the tax imposed on P.R.C.-made goods. Commencing in 2002,

the P.R.C. will abolish its preferential tax policies promoting exports, except for preferential

policies relating to VAT and tax rebates for exports, the official said. The P.R.C.'s commitments

under the WTO system require the abolition of its preferential tax policies.

Tax fraud

• On the 26st of November 2001 it was also reported that the P.R.C.'s State Council has issued a

circular calling for a crackdown on tax fraud. The council said that since April 2001, tax

administrations across the P.R.C. had intensified their efforts to collect individual income tax and

crack down on fraudulent export tax rebates. However, many tax-related crimes remained

unresolved, and the number of cases involving tax evasion, forged VAT invoices, and illegal tax

exemptions was increasing. The circular calls for the continuation of the crackdown on export tax

rebate fraud, and states that VAT invoice fraud remains the main source of major tax crimes.

Cooperation among judicial and administrative bodies is required to combat the fraud.

Withholding tax on leases and loans

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• Under a notice issued by the Ministry of Finance on 1 July 1983 [(83) Cai Shui Zi No. 348],

interest paid on commercial credit or leases by a Chinese enterprise to overseas parties

relating to the supply or lease of technology or equipment will be exempt from withholding tax

if the principal amount can be repaid in the form of products processed with the relevant

technology or equipment. It was reported that the Ministry of Finance and the State

Administration of Taxation jointly issued a notice on 8 September 2001 (Cai Shui [2001] No.

162) which provides that this special tax treatment has been abolished with effect from 1

September 2001.

China to remove special economic zones

• It was reported in the Financial Times on November 13, 2001 that China will remove the

preferential tax treatment for corporate income tax rates offered in special economic zones as

part of its efforts to conform to the WTO standards. Foreign companies in those special

economic zones currently enjoy a 15 percent corporate income tax rate, instead of the

standard income tax rate of, in total, 33%, which is also the income tax rate applicable to

Chinese domestic companies. It has yet to be announced what the new tax rate will be. One

can roughly distinguish two groups: one group favors a 25% tax rate, while the other pushes

for 33% income tax.

Share transfer tax

• The Chinese Ministry of Finance announced on November 19, 2001 that the tax on shares

transactions has been reduced by 50%, from 0.4% to 0.2% for A shares and to 0.3% for B

share trading. The tax cuts are meant to encourage market activity as a result of the 30 per

cent drop in share prices in China over the last four months.

Hong Kong

Hong Kong / Sino Joint ventures in Beijing

• On 23 October 2001, it was announced that Beijing’s mayor had freed Hong Kong investors from

all foreign-venture restrictions in Beijing. Major Hong Kong companies are reportedly in the

process of linking up with Beijing firms to take advantage of the incentive package offered by the

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mainland government. The incentives include lower borrowing rates, tax cuts, quicker processing

of project permits, discounts, preferential treatment and financial assistance. Under the incentive

package, meant to help Beijing to prepare itself for hosting the Olympic Games in 2008, Hong

Kong-mainland joint ventures in the capital will be treated as local businesses, qualifying for a

range of tax and fee exemptions which they were previously denied. It was stated that joint-

venture businesses will not be bound by restrictions of enterprise type, ownership relations or

geography.

• Hong Kong officials welcomed the policies, saying that the privileges endorsed by the policies are

provided within the regulation of the WTO. They also stated that they intend to negotiate with

other mainland cities for similar inter-city privileges, to expand the market for Hong Kong

businesses.

Shipping agreement Hong Kong/Netherlands takes effect

• On 17 November 2001, the shipping tax agreement between Hong Kong and the Netherlands,

signed in November 2000, has come into force, and will take effect for any year of assessment or

taxable year and period beginning on or after 1 January 2002. Under the treaty, shipowners in

either country need only pay tax in one location on income derived from international shipping

business.

India

Share transfer tax

• On November 14, 2001 it was announced that India's Finance Ministry is considering a

proposal to tax all share transactions, as part of its budgetmaking exercise for the 2002-2003

fiscal year. The proposed tax would be deducted at source with two rates; one for those

dealing in shares at 0.25 percent and another for investors selling shares directly at 0.1

percent. The government is thinking of taking that step because it is not receiving the revenue

it expected from the current 10 or 20 percent tax on capital gains from shares.

Offshore services rendered to Indian companies

• In November 2001 it was reported that the Delhi High Court ruled in Commissioner of Income

Tax v. Bharat Heavy Electricals that the amount paid to a foreign company for the services of

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two consulting engineers is not deemed to accrue or arise in India and, therefore, would not

be taxable in India under section 9(1)(vii) of the Income Tax Act, 1961. The Court also ruled

that the amount was exempt under section 10(6)(vi) of the act. The Court held that the

engineers were employees of a foreign concern that was not doing business in India. The

amount was not paid to the foreign company for technical services fees deemed to accrue or

arise in India under section 9(1)(vii) of the act. The Court held that the payment to the

engineers was for services requisitioned while seeking guidance as well as consultation

services, and therefore, the amount was tax exempt under section 10(6)(vi) of the act.

Transfer pricing

• The guidelines on transfer pricing were introduced in India in Finance Act 2001. In view of the

complexity of the matter, the Central Board of Direct Taxes (CBDT) feels that its officers need

training on the implementation of the rules, to avoid confusion and gain clarity on the issue.

• To ensure a smooth implementation of the guidelines, CBDT has tied up with the Organization

for Economic Cooperation and Development (OECD) for training of income-tax officials at its

academy in Nagpur.

Minimum Alternative Tax (MAT)

• The CBDT issued a circular on 9 November 2001 in which it clarified that companies liable to

pay Minimum Alternative Tax (MAT) under section 115JB of India Income tax Act, 1961 would

also be liable to pay advance tax. The new provision of section 115JB provides that if tax

payable on total income is less than 7.5 per cent of the book profit, the tax payable under this

provision shall be 7.5 per cent of the book profit.

• The aforesaid circular is issued because a large number of companies are reportedly

defaulting in making the advance tax payments. As a consequence, the penalty provisions of

section 234B and 234C apply.

Indirect taxation

• The Indian government reportedly proposes amendments to the Central Sales Tax Act (CST

Act) which are likely to include a removal of the bar on multi stage taxation of declared goods,

making ‘C’ Form compulsory for all inter-state sales, making ‘F’ Form compulsory for all inter-

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state consignment transfers and amending the definition of ‘sale’ as covered by the CST Act to

include sale by work contract and sale by lease. The Finance Ministry has also announced that

the Government is proposing to amend the CST Act to facilitate the introduction of Value

Added Tax (VAT) by States.

LNG business and tax holidays

• The Indian Ministry of Finance is reportedly considering a tax holiday for a period of 10 years

for the LNG business. The Petroleum Ministry has proposed that the rate of custom duty on

import of capital equipment for the construction of LNG terminals be brought down to 22.38

per cent as against 52.82 per cent applicable on other industrial units. The Finance Ministry

did not support that the customs duty on the import of capital goods for the construction of

LNG terminals should be at par with the power projects. The Petroleum Ministry’ noted that

all LNG imports be on freight-on-board (FOB) basis with a mandatory 26 per cent minimum

participation by Indian shipping companies during the entire LNG contract period. The note

proposes that the Indian shipping partner either on its own or with an Indian

company/investors as collaborator will have 50 per cent equity participation.

Indonesia

Trading activities and taxable income of trading rep offices

• In a recently issued tax office circular, Indonesia's Director General of taxation has clarified

the definition of "gross export value" for tax treatment of a nonresident taxpayer with an

Indonesian trading representative office. An earlier decree stipulated that the taxable income

of a nonresident taxpayer with an Indonesian trading representative office is deemed to be 1

percent of the gross export value of goods sold in Indonesia and is subject to a final tax of

0.44 percent of that income. The guidance also contains procedures for payment of the final

tax.

VAT and decentralised filing

• The Director General of Taxation recently came out with further clarification of how companies in

Indonesia with different operational units in the country (branches) outside the main office of the

company’s registration in Indonesia, need to go about if they wish to centralise their VAT filing at

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the main office, rather than having to file different VAT returns per branch. The rule nowadays

(unlike previously) is that VAT returns have to be filed by each branch individually, unless

approval is obtained to make centralised VAT filings at the place of the headoffice of the

company, failing which penalties will be incurred and input VAT credits may be denied.

Debt restructuring facilities

• In a few cases of major debt restructurings in Indonesia, successes have been booked over the

past few months by Indonesian corporate debtors, who, after negotiations through the Jakarta

Initiative Task Force (JITF) with the Director General of Taxation under Government Regulation

7/2001, successfully obtained tax rulings from the DG of Taxation, whereby their debt

restructuring received the blessing from the DG of Taxation without adverse Indonesian tax

consequences. We see this as a positive sign that the government is willing to look constructively

at the current economic situation of the country.

Japan

Fiscal Year 2002 Tax Reform Guidelines

• The ruling parties recently announced the guideline of the fiscal year 2002 tax reform. Due to

some delay in the process in the Japanese Diet, many expect that the law to amend current tax

laws will be approved around early May 2002 at the earliest. However, it has been confirmed that,

once approved, many of the amended rules will have retroactive effect as from April 1, 2002.

Some of the important proposals are highlighted below.

Consolidated taxation system to be introduced

• A consolidated taxation system will be introduced for a group of companies for corporate income

tax purposes. Briefly, this system entails that Japanese corporate income tax would be charged

on the profit or loss of a group on a consolidated basis. Basically, a Japanese parent company

and its 100% direct or indirect Japanese subsidiaries will be eligible for the consolidated taxation

system. In order to apply for the consolidated taxation system, an application to this effect must

be filed in advance and approved by the Commissioner of the National Tax Agency. Once

approved, the Japanese group is required to apply this system consistently. In brief, a taxable

profit and a tax liability are calculated as if the consolidated group were a single entity. Details of

fiscal adjustments for these calculations will be set forth in tax laws. The amount of the tax

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liability on a consolidated basis is subsequently allocated to each Japanese company in the same

tax group based on a taxable profit or loss, calculated on a standalone basis.

• Although one might think that the introduction of the consolidated taxation system would bring

merely good things to Japanese companies, care should be taken that this will not always hold

true. The Japanese government did not forget to take some measures to cope with the expected

fall of tax revenue due to the introduction of the consolidated taxation system. These can be

classified into two categories, (1) detrimental measures in the consolidated taxation system itself

and (2) measures to broaden the tax base.

• As regards the detrimental measures in the consolidated tax system itself, the following can be

noted. Firstly, is the imposition of a 2% surtax on the consolidated taxable profit for the coming 2

years. Whether the surtax is to be abolished or not will be discussed two years later. Secondly,

certain subsidiaries are not allowed to join the consolidated group in 2002, even if it concerns

100% Japanese subsidiaries. A non-qualified subsidiary in brief is a subsidiary that requires a

revaluation of material assets (as mentioned below) at the time of the entry into the consolidated

tax group. Thirdly, material assets of the consolidated subsidiaries must be revalued immediately

before the entry into the consolidated tax group. Assets which are subject to the revaluation

include fixed assets, land, trade or loan receivables, securities and deferred assets, but those

assets which have a book value of less than Yen 10 million are excluded from the compulsory

revaluation. The revaluation gain or loss is subject to corporate income tax. Furthermore, losses

of a subsidiary incurred prior to the entry into the consolidated tax group are in principle

disallowed for carry-forward in the consolidated taxation system.

• The guidelines stipulates that certain material assets of certain qualifying companies (defined as

fixed assets, land, receivables, securities or deferred assets, excluding those assets, whose

unrealized capital gain or loss is less than lesser of the following amounts, 1/2 of paid in capital

or Yen 10 mio) need not be revalued upon entry into the consolidated group. For instance, a

Japanese parent company of the consolidated group and its Japanese 100% subsidiaries which

have been continuously held for 5 years or more by the parent will qualify without conditions.

Furthermore, even in case of a Japanese subsidiary that has been acquired during the past 5

years by the parent, the subsidiary can join a consolidated tax group without any revaluation of its

assets, provided that some additional conditions are met. In any case, the eligibility for non-

revaluation of the subsidiary’s assets should be checked on a case by case basis before applying

for the consolidated taxation status.

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• Please note that far-reaching anti tax avoidance measures will be introduced, to deal with various

types of tax avoidance schemes that could emerge. It remains to be seen how the tax authorities

will apply these anti-tax avoidance measures in practice.

Broadening of a tax base

• In order to compensate significant revenue losses due to the introduction of the consolidated

taxation system, the abovementioned guidelines contain the following measures. Please note that

these measures apply to all Japanese companies, irrespective of whether they apply for the

consolidated taxation system or not.

• Firstly, the calculation method of dividend received deduction (“DRD”) will be amended.

Currently, 100% or 80% DRD is available for dividend income received from a domestic company.

Although interest expenses that are ‘mathematically’ attributed to the shareholding of the

domestic company are generally excluded from the amount of DRD, certain qualifying interest

expenses do not need to be excluded from the DRD (thus resulting in an increased DRD amount).

However, the guidelines mention that the non-exclusion of certain qualifying interest expenses will

be abolished. Furthermore, 80% DRD will become 50% DRD. The 100% DRD will remain

unchanged.

• Secondly, an allowance for the retirement payment obligation will no longer be recognised for tax

purposes. Currently, allowances for the retirement payment obligation can be created for tax

purposes, and an increase of the allowance account is treated as a deductible expense. From April

1, 2002 onwards, however, this will not be possible anymore. Since such an allowance account is

normally recognised for accounting purposes, fiscal adjustments will be necessary. The

outstanding allowance account balance will have to be released gradually over either a 10 year

period (for small and mid-sized companies) or over a 4 year period (for large companies), which

may result in significant taxable profits. Similar measures will also be taken for an allowance

account in respect of special maintenance costs.

10% discount for non-listed stocks valuation for inheritance tax purposes

• In order to facilitate a smooth succession of small or mid-sized businesses to next generations, a

taxpayer will be able to choose a 10% discount when calculating the taxable value of non-quoted

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stocks for inheritance tax purposes. The 10% discount is ax deductible if the following conditions

are met: (1) the value of all the issued and outstanding stocks as measured under inheritance tax

rules is less than Yen 1 billion and (2) the deceased has held 50% or more of all the stocks and

(3) the heirs continuously hold the inherited stocks, and (4) the heirs are directors and involved in

the management of the company in question. Please note that the discount is capped at 10% of

the lower of the following, (a) the value of 1/3rd of all the issued stocks or (b) Yen 300 million.

• It should be noted that if the taxpayer elects the 10% discount for non-listed stocks, he/she will

not be able to opt for special valuation methods (80% or 50% discount) allowable for certain

qualifying land and buildings. This implies that tax professionals as well as their clients need

more meticulous estate tax planning.

Limitation on deduction of entertainment expenses are slightly relaxed

• Currently, only 80% of the lower of (a) the amount of actual entertainment expenses incurred or

(b) Yen 3 million is tax deductible for companies with a beginning-year share capital in the range

of Yen 10 mio to Yen 50 mio. Under the new rules, this Yen 3 million limit will be raised to Yen 4

million. Please note that all entertainment expenses incurred by a large company with its share

capital exceeding Yen 50 mio will remain non-deductible for corporate income tax purposes.

Tax reforms in international context

• An interesting development is the proposed imposition of withholding tax on profit distributions

made under a Japanese commercial code partnership, or commonly called “TK” (Tokumei Kumiai).

• Currently, in case a so-called TK operator (similar to a general partner) enters into a TK contract

with less than 10 TK investors (similar to limited partners), non-resident TK investors could

receive the profit distributions from the TK operator free of withholding income tax. Furthermore,

depending on the resident country of the TK investors, they could even be exempted entirely from

Japanese income tax obligations, since such profits received from the TK contracts typically

qualify as “other income” under a number of bilateral tax treaties concluded by Japan, and the

taxing right on the “other income” is exclusively allocated to the resident country under those tax

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treaties. In these cases, it was generally understood that the TK investor would be free from any

tax reporting or payment obligation in Japan.

• However, the introduction of withholding tax in the domestic legislation seems to imply that, even

if the TK investor enjoyed the abovementioned exemption in the past, there will be at least some

reporting obligation on the TK investors’ side. It is still to be seen how this item will be worked out

in the legislation.

• Apart from the above, the guidelines mention that the government will take measures to combat

certain anti-tax avoidance schemes which in their views abuse the Japanese foreign tax credit

system. In a recent court case it was decided by a Japanese district court that the current tax

laws are vulnerable to some foreign tax credit schemes involving a transfer of cross-border

receivables. Under the proposed new rules, tax laws will have an explicit provision in which foreign

taxes paid in relation to the scheme involving a transfer of cross-border receivables are not

eligible for the purpose of the foreign tax credit in Japan.

• Furthermore, an exemption from withholding income tax that currently applies to interest received

by non-resident individual or company from qualifying Japanese government bonds will be

extended to cover qualifying non-resident investment trust funds. As in the case of non-resident

individual or company, the applying investment trust funds need to provide sufficiently detailed

information of their identity etc.

Disposal of treasury stocks

• Further to our report in the previous edition of this newsletter, the guidelines clarify the tax

treatment of a disposal of treasury stocks. Under the proposed new provisions, a capital gain (or

loss) arising from the disposition of treasury stocks will be treated as an increase (or decrease) of

additional paid in capital for tax purposes.

• In September 2001, the Corporate Accounting Deliberation Committee decided that the

disposition of treasury stocks should be accounted for as a capital transaction, as a result of

which the disposition does not affect a profit and loss account.

• Accordingly, the same approach has been taken for both accounting and tax purposes in respect

of a disposal of treasury stocks.

17/33

Scope of qualified stock option to be expanded

• As reported in the previous edition of this newsletter, the recent amendment to the Japanese

commercial code has enabled a Japanese company to grant its stock options to people or entities

outside the company, provided that the shareholders meeting agrees with it and other legal

formalities are complied with. In this connection, the guidelines stipulate that the scope of tax-

qualified stock options will be broadened to include those granted to directors and employees of

its subsidiaries held for more than 50% by the company awarding the options. Major shareholders

of the company awarding the options as well as their related parties will be excluded for this

purpose.

• The annual upper limit of stock options exercised will be raised from Yen 10 million to Yen 12

million.

Korea

Budget 2002

• It was proposed on 27 December 2001 to reduce the Korean corporate income tax rate from 28%

to 27% on taxable profits of Won 100m or more, and from 16% to 15% on taxable profits of Won

100m or less.

REIT (real estate investment trust companies)

• In the continuing saga regarding the tax relief measures applicable to REITs (giving the REITs the

opportunity to benefit from the standard income tax rate (28%) rather than the higher rate

applicable to metropolitan area based entities), additional reliefs have been proposed. Broadly,

these regard the reduction of certain tax rates (surtax on capital gains 7.5% instead of 15%,

acquisition and registration tax 1% and 1.5% instead of 2% and 3%, respectively), certain tax

exemptions (in case of qualifying reorganization) and the introduction of an investment loss

reserve.

New rulings regarding permanent establishments

• The Korean National Tax Service (“NTS”) published new ruling policy regarding foreign companies

which are operating in Korea with a local subsidiary. These subsidiaries may be deemed to

constitute a permanent establishment in Korea of the foreign company, if they provide the foreign

18/33

parent company with information relevant to decide whether or not to invest in certain projects.

Consequently, these subsidiaries may be subject to adverse Korean corporation taxes. However,

this approach may be in conflict with some of Korea’s tax treaties. The issue regarding permanent

establishments clearly enjoys increasing attention, as also shown in the Autumn edition of this

newsletter.

Transfer Pricing

• The Ministry of Finance and Economy allows the NTS to use a broader definition of affiliated

entities (based on corporate law rather than transfer pricing law). Consequently, a foreign

company may deemed to be a related party for Korean corporate income tax purposes, even if it

does not qualify as such under Korean transfer pricing law. In this connection it can also be

mentioned that the NTS announced to investigate inter company fees between foreign entities and

their Korean subsidiaries more extensively in the near future. Moreover, the Korean High Court

recently ruled a case regarding transfer pricing. I.a. it ruled that it is up to the taxpayer to prove

that the at arm’s length price it used during the litigation is more reasonable than the price

determined by the tax authorities if the latter price was determined on the basis of information

provided by the tax payer in the course of a tax audit.

Excise Tax

• To support public spending, the Korean authorities plan to substantially reduce the excise taxes

on specific luxury products (e.g. jewelry, leisure and air conditioners). Tax on automobiles may

even be reduced (temporarily) by 50%.

Tax incentives

• In order to support the Korean airline industry, the Korean government announced to grant both

Korean based airlines substantial tax breaks and beneficial tax rates (and even temporarily

exemptions on imported fuel) and favorable loans.

• Various tax benefits and favorable loans were also granted to companies operating in a broad

range of businesses, including the entertainment business, transportation business, telecom

business, design business and science/technology business. Also certain qualifying foreign

investors, making large financial investments or employee-intensive investments, may benefit

from certain specific incentives (e.g. tax holidays, free rent of land to establish plants).

19/33

• It was announced on October 17, 2001 by the Ministry of Commerce, Industry, and Energy that

foreign companies investing more than US $50 million and employing more than 300 employees

in South Korea will be eligible for a 10-year tax exemption and free land use for 50 years. We

understand from local reports in the Korea Times that only companies with more than US $100

million to invest and more than 1,000 employees were able to receive the benefits in the past. The

new proposals reportedly state that investments exceeding US$5 million would also be allowed to

freely use the land if they establish their plant at one of the special economic zones. Thusfar,

reportedly, only investments exceeding US$10 million could receive a 75 percent discount off

their land rental fees.

• It was announced on 11 January 2002, that foreign firms will be given tax holidays on their

investments in 44 newly designated sectors, 30 of which are advanced technology sectors,

including information technology, biotechnology, and nanotechnology. Qualified foreign

companies will be granted tax exemptions for their corporate and income taxes for the first seven

years from the point of investment with a 50 percent reduction for an additional three years, the

news service said. Other exemptions included in the plan apply to acquisition, registration, and

property taxes for the first five years, with a 50 percent reduction for an additional three years. A

ministry official said the decision to offer those tax breaks to foreign investors was a way of

promoting the transfer of high technologies from international firms to local firms, which have yet

to effectively develop or commercialise. Foreign companies will also benefit from tax incentives

for investing in the creation of flight schools aimed at training pilots. A number of technologies

will be excluded from the list of industrial sectors, such as antennas and contact lenses.

International Tax Developments

• On October 5, 2001 South Korea and Nepal signed a tax treaty for the avoidance of double

taxation in Korea. Details of the treaty are not yet available and will be reported in due course.

Malaysia

Amendments give protection to well-known trademarks

• Malaysia's Trademarks Act 1976 has been amended to recognise and protect well-known

marks in compliance with the Trade-Related Intellectual Property Agreement (otherwise

known as TRIPs). The amendments have important implications for e-businesses that wish to

use their trademarks as part of their domain names. Prior to the amendments, well-known

20/33

marks had to be registered or used in Malaysia to be protected. Foreign corporations that had

established goodwill in their marks in jurisdictions other than Malaysia, which then found that

the marks had been registered or were being used in Malaysia by an unauthorised third party,

had no recourse under the Trademark Act to stop such use. The amended act specifically

provides that the proprietor of a well-known mark is entitled to obtain an injunction to restrain

unauthorised use in Malaysia of a trademark (or domain name) which is identical to, or closely

resembles, the proprietor's mark in respect of the same goods or services, where the use is

likely to cause deception or confusion. For the purposes of this provision, the act states that a

'well-known mark' is a mark that is well known in Malaysia as being the mark of a particular

entity, regardless of whether that entity carries on business, or has any goodwill, in Malaysia.

The amended act also states that a well-known mark (domain name) cannot be registered in

Malaysia by an entity other than the proprietor in respect of the same goods and services for

which the well-known mark (domain name) is used by its proprietor. The law does not,

however, prohibit registration of a well-known mark (domain name) by a third party in respect

of other goods and services, unless (i) the well-known mark has been registered in Malaysia,

and (ii) use by the third party would indicate an erroneous connection with the proprietor of

the well-known mark sufficient to damage the proprietor's reputation. Therefore, it is advisable

that if a company wishes to use its well-known mark as its domain name, it should register

both the mark and the domain name in Malaysia, to ensure that they are not registered in

respect of different goods and services.

Budget 2002

• On 19 October 2001, Malaysia's Prime Minister presented the government's 2002 budget. The

budget aims at stimulating the Malaysian economy and addressing some domestic issues.

Malaysia's economic growth should be increased through domestic expenditure by enhancing

the role of the private sector and increasing competitiveness. The domestic issues include an

equitable distribution of wealth between urban and rural areas, between high- and low-income

groups, and between the more developed and less developed states.

• The budget proposes to cut the individual income tax rates by 1-2 percentage points for all

income bands. The maximum tax rate will be reduced from 29% to 28% and the threshold for

chargeable income subject to the maximum tax rate will be increased from more than MYR

150,000 to more than MYR 250,000. The tax rate for non-residents will also be reduced from

a fixed rate of 29% to 28%. These proposals, once enacted, will take effect from the year of

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assessment 2002.

• Contrary to expectations, corporate income tax cuts were not included in the 2002 Budget.

The Budget did include tax incentives for specific types of businesses. Further measures include100% capital expenditure allowances and an extended 'pioneer status' regime. Higher value-added

manufacturing activities, such as logistics services, integrated market support services and

utility services centres will be eligible for (i) an exemption on 70% of statutory income for a

period of 5 years; (ii) an exemption on 85% of statutory income for a period of 5 years for

projects located in the Eastern Corridor of Peninsular Malaysia, Sabah or Sarawak; and (iii) an

exemption from import duty and sales tax on equipment.

• The Budget also proposes to expand the scope of some industrial building allowances. The

initial allowance of 10% will be extended to capital expenditure incurred in the acquisition of

buildings; the annual allowance will be increased from 2% to 3%. Furthermore, the industrial

building allowance will be extended to hotels, airports and motor racing circuits, retroactively

from the year of assessment 2001.

Foreign exchange regulations

• Malaysia still operates foreign exchange regulations. Depending on the country’s macro-

economic position, the central bank of Malaysia (Bank Negara Malaysia, hereinafter BNM)

seems to change its views and policies in this regard from time to time. We have the

impression that the Central Bank (Bank Negara) has recently tightened its policy on exchange

controls. With respect to investments in a foreign company through a Malaysian investment

holding company, we understand that BNM approval would be required. BNM would look into

the commercial rationale for setting up a company in Malaysia. Simply employing one or two

staff would probably not be sufficient. The shareholder of the Malaysian company would need

to show substance in Malaysia (and better still, contributions to the Malaysian economy) such

as the intention to use Malaysia as a regional holding jurisdiction.

• With respect to the opening and maintenance of a foreign currency account by a Malaysian

company, we understand that no approval from BNM is required, provided the Malaysian

company does not have any domestic borrowing and the account is maintained with one of the

commercial banks in Malaysia. If the Malaysian company would have domestic borrowings,

approval is required if the balance of the foreign currency account exceeds USD500,000.

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Approval is also required if it maintains foreign currency accounts with overseas banks.

• As regards the transfer of shares in a Malaysian company by one non-resident shareholder to

another, we understand that no BNM approval will be required (please note that Foreign

Investment Committee (FIC) issues might arise in this respect).

• With respect to the repatriation of dividends by a Malaysian company, we understand that the

repatriation of dividends would not require BNM approval. The Malaysian company would

however need to complete Form P for payment of foreign currency to non-residents exceeding

RM10,000 (so, no approval, notification only).

• As an alternative to an ordinary status limited liability company in Malaysia, foreign investors

may in forthcoming cases consider to use a Labuan offshore company.

New Zealand

Taxation Bill 2001

• The Taxation (Relief, Refunds and Miscellaneous Provisions) Bill 2001 was introduced into the

New Zealand parliament on 3 December 2001. It proposes some major tax reforms including:

changes to remove the need for contractors from countries with whom New Zealand has a tax

treaty, to apply for a certificate of exemption from tax in New Zealand if they are in New

Zealand for less than 62 days;

the refund of imputation credits once a company has filed a return for that imputation year.

Philippines

International Developments

Philippines signs tax treaty with Bahrain

• The governments of Bahrain and the Philippines signed an income tax treaty 7 November in

Manila. Further details are not yet available.

Tax reforms

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• A tax reform proposal was recently submitted to Congress, which seeks to reduce the income tax

rate by 50% imposed on corporations and individuals. The proposed 15% tax would be levied on

gross income, whereas the present rate of 32% is imposed on net income. The proposal is

reportedly meeting quite some negative reactions from the local business community, who argue

that due to the current economic situation of the country, there is no compelling reason to go into

the gross modified tax scheme.

Increase of tax on US Dollar deposits

• The Development Budget Co-ordinating Council, an interagency committee under the Office of

the President of the Philippines, has endorsed a proposal on 14 Nov 2001 to increase the tax

on interest on dollar deposits from 7.5 percent to 10 percent. The new measure must be

passed by Congress before it can be implemented. It is expected that the proposal will face

opposition in Parliament.

Regulation carryover of losses

• On 3 December 2001, the Philippines Bureau of Internal Revenue (BIR) has issued Revenue

Regulation 14-2001, which prescribes the rules for deducting the Net Operating Loss

Carryover (NOLCO). The deductibility of NOLCO from gross income shall be limited only to net

operating losses accumulated beginning January 1, 1998. The deduction can be claimed in

the three tax years following the year in which the loss accrued. NOLCO of the taxpayer shall

not be transferred or assigned to another person, whether directly or indirectly, such as, but

not limited to, the transfer or assignment thereof through a merger, consolidation or any form

of business combination of such taxpayer with another person. NOLCO shall also be allowed if

there has been no substantial change in the ownership of the business or enterprise in that

not less than 75% in the nominal value of outstanding issued shares or not less than 75% of

the paid-up capital of the corporation, if the business is in the name of the corporation, is held

by or on behalf of the same persons.

• The carryover is on a "first-in, first-out" basis. Taxpayers currently exempt from income tax,

such as offshore banking units; enterprises registered with the Philippines Economic Zone

Authority, Board of Investment, and Subic Bay Metropolitan Authority; and international

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airlines and shipping lines are not entitled to NOLCO.

A regional / area headquarters (RHQ) not subject to tax for reimbursed costs

• The BIR recently ruled that an RHQ will not be subject to income tax as long as its invoices to

operating companies will not include fees or compensation paid to the RHQ for services

rendered or performed. The payments should only comprise the reimbursement of the

operating companies’ share in the allocated RHQ expenses. If not, the RHQ will be taxable as

a regional operating headquarters. In other words, the RHQ should not report their taxable

income on the basis of the so-called cost plus 5% method. Interestingly, arm’s length

considerations would typically require the RHQ to make a profit on its activities including

costs incurred by the RHQ. On the basis of this ruling, it seems possible to operate regional

headquarters from the Philippines in a very tax efficient manner without the need to observe

the profit charging element.

• BIR further confirmed that an RHQ is not subject to the 10% VAT and that sale or lease of

goods and property and the rendition of services to the RHQ is entitled to VAT zero-rating.

Finally, the BIR ruled that Filipino employees of an RHQ occupying managerial and technical

positions equivalent to alien executives will be subjected either to the preferential tax of 15%

or to the standard tax rate based on their taxable income in accordance with the tax table

under Section 24(A)(1)(c) of the 1997 Tax Code, regardless of whether there is an alien

executive occupying the same position.

Regional Operating Headquarters (ROHQ) / withholding tax management and technical consultants

• Recently, the BIR ruled that payments made to a Regional Operating Headquarters (ROHQ) for

qualifying services rendered are not subject to withholding tax (was 5% at the time of the

ruling, currently 10%) imposed on management and technical consultants. In the case at

hand, a multinational company established an ROHQ in the Philippines pursuant to the

Omnibus Investment Code of 1987. The ROHQ is only authorised to render certain qualifying

services for the benefit exclusively of its affiliates, branches or subsidiaries. In consideration

for services rendered to a Philippine affiliate, the ROHQ received from its affiliates a

reimbursement for the expenses it incurred in providing the qualifying services plus a certain

percentage mark-up on cost. The question arose whether the payments made to the ROHQ are

subject to the five percent (5%) (now 10%) withholding tax imposed on income payments

25/33

made to “management and technical consultants.” BIR ruled that “Management and technical

consultants” normally render services to unrelated parties in the ordinary course of business.

These entities are engaged to supervise, direct and/or control the management and operation

of other companies. On the other hand, ROHQ’s are specifically identified as entities

permitted to perform only certain qualifying services. It is prohibited from offering qualifying

services to entities other than its affiliates, branches or subsidiaries, as specified in its

registration with the Securities and Exchange Commission (SEC). Furthermore, ROHQ’s

cannot participate in any manner in the management of any subsidiary or branch that they

may have in the Philippines. Therefore, the withholding tax of the 5% (now 10%) CWT will not

apply to ROHQ’s.

International Tax Developments

• Bahrein. The governments of Bahrain and the Philippines signed an income tax treaty on 7

November 2001. No details are available at this moment.

Singapore

Directors are being challenged on interest-free loans

• It was brought to our attention that further to the ‘Raffles Town Club’ debacle which occurred

in 2000 and 2001, the Singapore IRAS is currently investigating and challenging situations

where directors of Singapore incorporated or registered companies are taking out interest-free

or soft loans from the company. We urge our readers to prepare sufficient documentation to

support the reasons for the loans and their terms and conditions.

The Monetary Authority of Singapore (“MAS”) issues revised take-over code

• On 6 December, The MAS, on the advice of the Securities Industry Council (“SIC”), issued a

revised Singapore Code on Take-overs and Mergers (“Take-over Code”) pursuant to section 321 of

the Securities and Futures Act. The amendments take effect on January 1 2002. The revised code

will apply to (i) listed companies, and to (ii) unlisted public companies with 50 or more

shareholders and net tangible assets of SGD 5 million or more.

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• Under the revised Take-over Code, a person will be required to make a general offer for a public

company if: (i) he acquires 30% (instead of 25% now) or more of the voting rights of the

company; or he already holds between 30% and 50% of the voting rights of the company, and he

increases his voting rights in the company by more than 1% in any 6-month period (instead of 3%

in 12 months now).

• Under the present Code, the parties who incur an obligation to make a take-over offer must pitch

the offer at the highest price paid by him for the target company shares in the preceding 12

months. In view of increasingly volatile markets, the revised Code shortens the price reference

period to 6 months to strike a better balance between market efficiency and equity. Changes have

furthermore been made to rules on the offer timetable, share distributions, conditional

agreements and schemes of arrangement.

Singapore issues guidelines on securities lending and repos

• On 23 November 2001, the Inland Revenue Authority of Singapore has issued guidelines on

the income tax treatment of qualifying securities-lending and repurchase (repo) arrangements,

and on tax concessions for promoting the Singapore securities market. Qualifying repo

transactions will not be taxable for repo intermediaries (mostly qualifying banks) and

dividends paid on shares which were subject to the repo transaction, will be deemed franked

income in the hands of the original seller of the shares in the repo transaction, which is

necessary in order to enable it to distribute the income earned with this transaction without

adverse franking credit charges (as capital gains are non taxable profits).

International Tax Developments

• According to a Singapore Ministry of Finance statement, Austria and Singapore signed an

income tax treaty on 30 November 2001 in Vienna, Austria. The Ministry indicated that further

details of the agreement will be made available after the ratification of the treaty by both

countries.

Taiwan

Proposed introduction of a branch profits tax

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• In contrast to local companies, profit remittances by branches of foreign companies in Taiwan are

currently not subject to taxation. Dividends distributed by local companies are subject to

withholding tax at the minimum rate of 20% (for the application of this rate prior approval is

required), unless reduced by tax treaties. Reportedly, Minister of Finance Yen Ching-chang, is

concerned that the current discrepancy encourages local organisations to establish shell

companies abroad with branches in Taiwan, in order to take advantage of the absence of branch

profits remittance tax. The government is therefore considering to impose a 20% tax on the

remittance of the net income of branches of foreign companies in Taiwan. On the 2nd of November

2001 it was announced that members of Taiwan's Cabinet Tax Reform Committee had proposed

two methods to tax dividend income: a 20 percent withholding tax on branch profit remittance, or

a dividend tax on the head office. The debate on the proposals continues in committee.

• As a result of the abovementioned proposed changes, tax treaty planning has become very

important in order to reduce the branch profits tax to a lower rate. We encourage foreign investors

to revisit their existing investment structure in Taiwan in order to prepare for the adverse effects

of this proposed change. A useful opportunity would be to structure investments through a Dutch

company. Taiwan recently ratified its tax treaty with the Netherlands, which contains very

favourable tax provisions for foreign investors.

WTO membership

• On 1 January 2002, Taiwan became the 144th member of the World Trade Organisation (WTO).

The official status of Taiwan within the WTO will be that of a “separate customs territory”, such to

avoid political sensitivities surrounding the PRC’s claim of sovereignty over Taiwan. The

Taiwanese president expressed his wish that the WTO membership would lead to a constructive

co-operation between Taiwan and China.

• In a move anticipating membership of the World Trade Organisation (WTO), Taiwan has adopted

55 bills. The bills primarily cover (i) the removal of non-tariff trading restrictions (such as import

quota etc.); (ii) the reduction or removal of foreign ownership restrictions for investment in certain

industries; (iii) the establishment of new tax systems and reductions in import taxes and domestic

tax; and (iv) the enhancement of the protection of intellectual property.

Tax incentives

28/33

• In an effort no to attract foreign investors, Taiwan has amended the Statute for Industrial

Upgrading. The amendment reportedly caters for a 5 year tax break to multinationals choosing to

establish their headquarters in Taiwan. Companies qualifying for this tax break should have

offices in Asia, Europe, and America, must employ a minimum of 500 staff, and should report

annual revenues of at least US$145 million (NT$5 billion).

• For financial institutions falling under the Law Governing Financial Holding Companies, the

following tax incentives have become available; (i) exemption of registration fees, (ii) deferral of

land value increment tax for land transfers, (iii) with respect to business assignments; exemption

of stamp duty, deed tax, income tax, business tax, and security transaction tax, and (iv) with

respect to transfer of shares; exemption for income tax and security transaction tax.

Business Tax Law / Value Added and Non-Value Added Tax Law

• Amendments to the Business Tax Law have entered into force as per 1 January 2002. The name

of the law has been changed to Value Added and Non-Value Added Tax Law. After 1 January 2002,

imports by VAT registered businesses will no longer be exempt from VAT. The VAT due in this

respect is, however, creditable as input VAT.

• Under the Business Tax Law, income from core activities of financial institutions was taxed with

Gross Business Receipt Tax at the rate of 2%. As of 1 January 2002, these core activities (such as

banking, insurance, trust investments securities, commodities, bond and pawn related activities)

will be exempt. Gross business receipts from non-core activities (such as credit card services) of

financial institutions will remain object of tax at the rate of 5%.

Thailand

Thai investment board may limit corporate tax holidays

• On November 19, 2001 it was announced that an amendment to article 31 of the Investment

Promotion Act grants the Board of Investment the authority to seriously limit the corporate tax

holidays of businesses that receive the status of "promoted person." In the future, the amount of

the corporate income tax exemption may be determined according to the amount invested

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(excluding land and working capital). The amendment was approved by the Cabinet and awaits

publication in the Royal Gazette.

Tax concessions for foreign companies establishing regional headquarters in Thailand

• On the 15th of December 2001 it was announced that regional headquarters located in Thailand

will qualify for a 10% corporate income tax rate, which is one-third of the standard rate (30%)

charged at present. Interest earnings and revenue from research and development in Thailand will

also be charged at 10%. In addition, the government will waive taxes on dividends paid to the

headquarters by domestic and foreign subsidiaries, and taxes on dividends paid by the

headquarters to its overseas parent. According to Thailand’s finance minister, the new package

offers the most generous tax incentives in the region to companies to set up regional operating

headquarters in Thailand, outstripping measures offered by both Singapore and Malaysia.

• The new incentive will reportedly apply to both existing regional headquarters and to new

companies setting up in Thailand. Regional operating headquarters must be set up under Thai law

to qualify for the incentives. No shareholder restrictions or requirements have reportedly been set

for the programme. The incentives are to be formalised in a royal decree next month.

• Analysts said the Thai measures, though a step in the right direction, did not go far enough. They

said the

measures restricted regional HQs to providing services, and doing research and development, but

kept

them out of the lucrative manufacturing sector. Further, Thailand allows regional HQs to carry

forward losses for only five years, whereas e.g. Singapore allows carry forwards indefinitely. The

flat 15% personal income tax rate offered to expatriate staff (which compares favourably with the

normal income tax rate for resident individuals of 37%) is available for only two years.

• Regional operating headquarters must be set up under Thai law, and companies must have a

paid-up

capital of at least 10 million baht, with the headquarters offering services to group subsidiaries or

branches in no fewer than three other countries. At least half of the headquarters' earnings must

be

derived from overseas operations, although this requirement will be reduced to one-third for the

first three

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years.

International tax developments

• Bahrein. Thailand signed an income tax treaty with Bahrain on 3 November in Bangkok. These

countries also concluded economic and technical cooperation agreements. Details of these

treaties have not yet been released.

• Tax treaty with the USA. On December 7, 2001 it was announced that Thailand’s income tax

treaty with the USA will not terminate because Thailand has decided to change its income tax

legislation on the point concerning the confidentiality of income tax records. Article 28 of the

Thailand-U.S. income tax treaty is the exchange of information provision. Section 10 of the Thai

Revenue Code hinders implementation of the exchange of information provisions under Thai

income tax treaties, including article 28 of the Thailand-U.S. income tax treaty. Section 10

provides that an official who has acquired information regarding a taxpayer's affairs may not

disclose the information to any other person. Thailand decided to find a solution that would

enable it to fulfill its international obligations. That issue was not resolved when Thailand and the

United States negotiated the income tax treaty. However, the U.S. delegation included in the

treaty a provision for automatic termination if the issue is not resolved within a specific period

after the treaty enters into force. The treaty was signed in 1996 and entered into force on 1

January 1998. Unless Thailand submits the diplomatic note described in 28(3) by 30 June 2003,

the Thailand-United States income tax treaty will terminate from 1 January 2004. A diplomatic

note has not yet been submitted, but the U.S. IRS has, in recent months, increased its requests

that a diplomatic note be executed. The U.S. government has made it clear that if Thailand does

not put the necessary arrangements in place to implement the exchange of information provision,

then the treaty will be terminated. A number of alternatives had reportedly been considered by

the Thailand government. The Revenue Department has decided that section 10 needs to be

amended to meet Thailand's international obligations. Drafts of the amended section 10 are being

prepared. The Revenue Department was reluctant to undertake that procedure because of the

bureaucratic formalities and time involved. It seems that the Thai government has no option but

to proceed with a legislative intervention. It was reported on 14 January 2002 that the United

States and Thailand have exchanged diplomatic notes providing for the implementation of the

exchange of information provisions of the US-Thailand income tax treaty of 26 November 1996.

The exchange reportedly took place in Washington DC on 14 December 2001.

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Vietnam

Import taxes on petroleum products

• The increase and decrease of the rates of the import taxes on petroleum products seemed to resemble the

movement of a yo-yo. For ease of reference, we have included a summary of the petroleum products related

decisions below.

Decision 76dated

08/8/01

(%)

Decision 83dated

30/8/01Effective:

4/9/01(%)

Decision 105dated

10/10/01Effective:12/10/01

(%)

Decision 107dated

18/10/01Effective:22/10/01

(%)

Decision 110dated

31/10/01Effective:02/11/01

(%)

Aviation petrol 15 15 15 15 15White petrol 10 10 10 10 10Other 60 40 50 60 70Diesel fuel 20 10 15 20 25Madut 0 0 0 0 0Jet fuel 25 25 25 25 25Kerosene 10 5 10 15 20Naptha, reformete andother preparations forspirit mixing

60 40 50 60 70

Condensate and similarpreparations

25 15 25 35 45

Other 10 10 10 10 10

• The increases from October 2001 were due to the reduction in world prices (down by 15-

30% since September 2001) and the anticipation by the Ministry of Trade that prices will

rise in the next few months.

• Vietnam recently had to raise import taxes on several petroleum products again (including

gasoline and diesel fuel), following the recent drop in world oil prices. The import tax on

automobile gasoline, naphtha, and reformate was raised from 70 percent to 75 percent.

The tax on diesel was also raised from 25 percent to 30 percent, the rate on kerosene was

raised from 20 percent to 30 percent, and the rate on condensate was raised from 45

percent to 55 percent. Import taxes for other types of oil remained unchanged. The rates

went into effect on 16 November.

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Tax relief measures announced in view of global economic downturn

• On 4 December, Deputy Finance Minister Le Thi Bang Tam announced that the Vietnamese

government is considering to issue various tax relief measure which should help companies

operating in Vietnam to cope with the global economic downturn. The relief measures would

comprise a reduction of corporate taxes, a replacement of the three current corporate tax

brackets by just one (domestic and foreign companies would then be subject to the same rate

of tax), a reduction of import taxes on imported parts (which would then be used for assembly

in Vietnam), and an increase of the number of goods eligible for VAT exemptions.

Proposed increase of formalities for VAT refunds

• The government announced that the formalities for VAT refunds procedures will be increased,

after admitting that that it lost more than US $2 million last year by refunding false VAT

claims. Investigations of 2,550 businesses proved that 990 of them did not comply with the

requirements of the VAT law. The government plans to develop a better attitude towards the

VAT requirements by intensifying its monitoring procedures and co-ordinating with tax

authorities in neighbouring countries to check and certify declaration papers for exported

goods.

Introduction of Assets Tax Law

• As a result of the phasing out of the import-export taxes as stipulated in the ASEAN

agreement, the government will have to seek alternative sources of income. This alternative

source of income has been found by the introduction of an Assets Tax Law. The asset tax will

apply to personal property with large values and to certain state-controlled property, and it

will replace registration fees. Current property-related tax categories will not be fundamentally

altered, although they will be tweaked. On January 4, 2002 however, the Ministry of Finance

announced that the tax would be cancelled in respect of state assets of state-owned firms as

complaints arose that the system of taxation was unmanageable.

Trade agreement with the USA

33/33

• On 10 December 2001, the bilateral trade agreement (BTA) between the United States and

Vietnam entered into force. The agreement was signed on 13 July 2000. The BTA is

comprehensive and covers trade in goods, services, investment, intellectual property rights,

business facilitation, transparency, and rights of appeal. Except for customs matters, it does not

specifically address tax matters.