tax planning international · asia-pacific focus International Information for International Business Volume 13, number 6 >>> june 2013 australia: changes to the international tax

tax planninginternationalasia-pacific focusInternational Information for International Business

Volume 13, number 6 >>> june 2013

www.bna.com

australia: changes to the international tax regime

india’s new tax provisions

Vat: risks and opportunities in china

malaysia’s new financial services act

r & D tax incentives in singapore

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2 06/13 Copyright � 2013 by The Bureau of National Affairs, Inc. TPAF ISSN 1478-5129

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Contents

ARTICLES

4 Malaysia: The tax implications of the newFinancial Services ActSue Wan Wong and Brian ChiaWong & Partners, Malaysia

8 India lowers its tax rate on interest payableon debt raised overseasRussell GaitondeBMR & Associates LLP, India

13 Australia’s Budget 2013: the taximplicationsTheo SakellBaker Tilly Pitcher Partners, Australia

18 VAT is a major source of risk andopportunity in ChinaKenneth Leung and Robert SmithErnst & Young, China

21 R&D tax incentives in SingaporeAlan Garcia, Chiu Wu Hong and HarveyKoenigKPMG, Australia and KPMG, Singapore

24 New Zealand: Budget 2013 and recent taxchangesCasey PlunketChapman Tripp, New Zealand

27 Australia’s first responses to base erosionand profit shiftingFletch Heinemann and FrancesLearmonthCooper Grace Ward Lawyers, Australia

31 Vietnam’s taxes on businessAlberto VettorettiDezan Shira & Associates, Vietnam

34 ‘‘Secondment’’ or ‘‘service’’ – the SAT ofChina gives its answerJacky Chu and Jessica MaPwC, Hong Kong

IN BRIEF

37 India: Proposed tax on buyback of unlistedshares

38 India: Tax on gains on the sale of aprivately-held Indian company: Anunnecessary controversy

39 Philippines: Developments in income taxon casino and gaming operators

40 Singapore: GST rules for exports of goodshave been revised

41 Taiwan: Royalties paid in 2011 andthereafter for foreign patents may beexempt from Taiwan income tax

42 Thailand: Extension of 7 percent VAT rate

06/13 Tax Planning International Asia-Pacific Focus BNA ISSN 1478-5129 3

Articles

Malaysia: The taximplications of thenew FinancialServices ActSue Wan Wong and Brian ChiaWong & Partners, Malaysia

I. A landmark legislation

The Malaysian Financial Services Act 2013(FSA) and the Malaysian Islamic FinancialServices Act 2013 (IFSA), recently enacted by

Parliament and expected to come into force before theend of the third quarter of 2013, will represent a land-mark change to the existing regulatory landscape forfinancial institutions in Malaysia. The FSA effectivelyconsolidates the Banking and Financial InstitutionsAct 1989, the Insurance Act 1996, the Payment Sys-tems Act 2003 and the Exchange Control Act 1953,with the aim of introducing a more integrated ap-proach to the regulation and supervision of financialinstitutions. Similarly, the IFSA will replace the Is-lamic Banking Act 1983 and the Takaful Act 1984, andprovide a comprehensive end-to-end Shariah-compliant regulatory framework for Islamic financein Malaysia.

Beyond the consolidation of existing piecemeal leg-islation that regulates various financial bodies, thereis a clear policy intent to introduce and establish mea-sures that will ensure stability in the financial sectorin Malaysia, bringing it in line with financial regula-tion of more global and sophisticated markets. TheActs are widely considered to amount to the most sig-nificant changes to Malaysia’s regulatory regime in thelast 20 years.

II. Indirect tax implications

As the main thrust of the FSA is regulatory in nature,the legislation will not result in any direct tax

implications at first instance. Nevertheless, everytransaction, regardless of form or scale, has a corre-sponding tax implication and – as will be expanded onin this article – it will become apparent that a numberof regulatory requirements under the FSA are likely tohold not insignificant tax consequences for financialinstitutions.

In particular, it is foreseeable that certain banks andinsurance companies would have to undertake corpo-rate restructuring and other obligations in order tocomply with the regulatory requirements under theFSA. It is likely that restructuring will need to takeinto consideration tax planning opportunities andconsequences in the process of restructuring existingbusinesses.

III. Acquisition and disposals of interests under theFSA

The acquisition and disposal of 5 percent or more ofthe issued share capital of a financial institution, or ofits controller, have always required the prior approvalof the Minister of Finance (MOF); approval must beobtained prior to the commencement of negotiationsand again before the definitive sale and purchaseagreement is executed. Whilst the two-stage approvalprocess has been retained under the FSA, going for-ward the approval of MOF or Bank Negara Malaysia(BNM) would only be required if:

s a proposed acquisition results in the acquirer ob-taining control or holding more than 50 percent ofthe equity interest in the financial institution; or

Sue Wan Wong isa SeniorAssociate andBrian Chia is aPartner at Wong& Partners,Malaysia


s a shareholder increases its existing shareholding ina financial institution by more than a multiple of 5percent (e.g. a shareholder who already owns 5 per-cent of the shares of a financial institution mayfreely purchase an additional 4.99 percent ofshares, after which any further increase in its share-holding would be subject to prior approval).Similarly, disposals will only be subject to the ap-

proval of MOF if a shareholder intends to dispose ofmore than 50 percent of its interests or if the disposalresults in the shareholder ceasing to have control overthe financial institution in question.

Furthermore, the 10 percent cap on individualshareholdings in financial institutions has been re-tained. However, the 20 percent cap on corporations’shareholding is notably absent from the FSA.

The new and less cumbersome approval require-ments for acquiring and disposing of interests underthe FSA and the removal of the 20 percent cap on non-individual shareholding, is likely to be a catalyst tomergers and acquisitions in the financial sector in thecoming years. As discussed in this article, insurancecompanies – holding composite licences in particular– are likely to have no choice but to restructure. As inmost jurisdictions, share deals in Malaysia generallyenjoy preferential stamp duty treatment as comparedwith asset transfers. Furthermore, the transfer ofshares will not attract any capital gains tax liability.

Capital gains are not taxed in Malaysia, except forgains derived from the disposal of real property or onthe alienation of shares in a real property company,which will be subject to tax at 15 percent or 10 percentdepending on the length of ownership of the realproperty in question prior to disposal. Unutilised taxlosses and unabsorbed capital allowances would inaddition generally be retained under a share transfer,although the Malaysian Income Tax Act (ITA) does re-strict the availability of unutilised loses where a sub-stantial change of ownership occurs. Considerationshould therefore be given to the tax planning aspectsof the restructuring contemplated to ensure that noexisting tax benefits are lost under a FSA-driven re-structuring.

IV. Introduction of the financial holding company

In line with the regulation of financial institutions inmore developed jurisdictions, the FSA introduces theconcept of a financial holding company (FHC) forcompanies holding or proposing to hold more than a50 percent equity interest in a bank or an insurer.These companies will be required to apply to BNM forapproval to become FHCs. This will empower BNM toexercise oversight over financial groups as a wholeand not only individual banking entities within thesegroups, as is currently the case under the Banking andFinancial Institutions Act 1989 (BAFIA). The require-ment for a shareholder to obtain approval as an FHCwill only apply to companies incorporated in Malay-sia; a major or controlling direct shareholder in abank or insurer that is incorporated outside Malaysiawould not be subject to this requirement. The logicbehind this provision in the FSA is that foreign incor-porated holding companies would already be ad-equately regulated in their respective home countries.

Prudential requirements applicable to banks and in-surers would similarly apply to FHCs and their sub-sidiaries under the FSA. In addition, a FHC wouldhave to obtain prior approval from BNM before estab-lishing or acquiring a subsidiary, regardless ofwhether the incorporation or acquisition takes placewithin or outside of Malaysia.

In the interest of promoting financial stability, theFSA accords BNM broad-based powers to issue direc-tions to an FHC, its subsidiaries and/or senior officers.These directions may include prohibiting or restrict-ing proposed transactions to be entered into by anyentity in the FHC’s group of companies, as well as theright to direct that a capital raising exercise be under-taken by an FHC. BNM also has the ability to ring-fence the activities of a financial institution fromother activities carried out by its major sharehold-er(s), to ensure that the ability of the latter to meet thefinancial requirements of a financial institution is notcompromised by the risks associated with its otherbusiness activities.

Financial institutions may already be held by hold-ing companies in the same group, which would natu-rally be the entities that would be required to obtainFHC status. There is also the possibility that compa-nies that hold more than 50 percent of a financial in-stitution may pare down their respective stakes toavoid having to apply for FHC status since FHCswould come within the purview of BNM and be madesubject to regulatory requirements regarding capital,risk management and liquidity under the FSA.

For corporate groups that intend to restructuretheir shareholdings (e.g. to nominate another entitywithin the group to obtain FHC status and for thisother entity to have control over the financial institu-tion), any stamp duty liability incurred as part of thegroup restructuring scheme and/or amalgamation,may qualify for stamp duty exemption provided thatthe requisite qualifying criteria are met.

One criterion to qualify for stamp duty relief is forthe transferee to be incorporated in Malaysia, or haveincreased its capital with a view of acquiring not lessthan 90 percent of the issued share capital of any par-ticular existing company. Stamp duty relief may alsobe available for transfers of properties between asso-ciates where the beneficial interest in the propertiesare transferred from a limited liability company to an-other company and both companies in question areassociated. In fact, it is possible that as the restructur-ing would have been undertaken to fulfil a newly-introduced regulatory requirement, an exemptionmay be available as of right, although no definitiveregulation or order has been issued at this point.

V. De-mergers of composite insurers

The FSA will prohibit the carrying on of a compositeinsurance business (other than the exception for li-censed professional reinsurers and retakaful opera-tors). Existing composite insurers will be given fiveyears to establish separate legal entities for their lifeand general businesses. This would align Malaysianinsurers with their counterparts in other developed ju-risdictions, and also facilitate mergers and acquisi-tions. A stand-alone life or general insurancecompany that lacks scale may result in its shareholder


seeking to sell-out of the business in its entirety or joinforces with a stronger foreign partner.

Each de-merged insurance entity would have toensure that it has sufficient reserves to meet the mini-mum capital funds requirement under the FSA. Forinsurance companies that already have separate re-serves for both life and general businesses, capitalwould not be an issue. There could potentially be sig-nificant overheads for those who do not currentlyhave separate reserves.

Where an asset transfer to a related party is contem-plated in de-merging a composite insurance business,the relatively new transfer pricing and anti-avoidanceprovisions should be carefully examined to ensurethat the allocation of purchase price to the assets to betransferred is commercially justifiable. To this end, anadvance pricing agreement can be obtained from thetax authorities if necessary. The transfer of propertybetween associated companies (90 percent controltest) may benefit from a stamp duty exemption. Itshould also be noted that, in Malaysia, any tax incen-tive that is currently enjoyed by the grantee cannot betransferred to the acquirer of the asset (i.e. the life orgeneral insurance business). If necessary, consulta-tion with the appropriate fiscal authority may be nec-essary before the de-merger exercise is implemented.

Where the assets of an insurance company are to beacquired by an unrelated party, the acquirer may beable to claim capital allowances on the considerationpaid for qualifying expenditure whilst the vendor maybe subject to a balancing charge on the excess of dis-posal proceeds received over their tax written downvalues of assets sold, if any.

VI. Extension of BNM’s powers

It is apparent from many of the amendments to be in-troduced under the FSA that BNM would be grantedextensive discretion to monitor and scrutinise the es-tablishment and operation of financial institutionsgoing forward.

In addition to all the rights discussed above, theFSA would also empower BNM to assume controlover whole or part of the business, affairs or propertyof a financial institution, manage it and/or appointany person to do so on behalf of BNM in circum-stances where BNM considers that the financial sta-bility of the institution in question is at risk. As analternative to winding-up, BNM may designate a

bridge institution to be vestedwith the business, assets andliabilities of the distressed fi-nancial institution.

Furthermore, the MOFcould designate financial inter-mediaries not under the super-vision of BNM as a prescribedfinancial institution, wheresuch institutions are deemedto pose a risk to financial sta-bility. This would bring themwithin the purview of BNM.

When the FSA comes intoforce, BNM would effectively –as it is clearly intended to –have tight control over share-holding changes to and any

significant merger and acquisition that is proposed tobe undertaken by financial institutions. The ability offinancial institutions to structure their group compa-nies and/or to implement group-wide tax planningmay be curtailed going forward, as any major mergerand/or acquisition could be scrutinised by BNM andcalled into question if deemed not entirely necessaryfor the purposes of fulfilling regulatory requirements.

VII. Other tax considerations

The fact that all Malaysian companies will be transi-tioning to a single-tiered dividend system by the endof 2013 is an important factor to consider when plan-ning any restructuring to meet the requirementsunder the FSA. Under the single-tier system, divi-dends are treated as tax-exempt income. Conse-quently, interest on loans used to finance acquisitionsof shares would not be available as deductions againstdividend income.

Companies may opt to push debt down to operatingcompany levels as a result or consider offshore financ-ing structures. The latter is permissible subject toBNM regulations, but withholding tax of 15 percenton interest paid to a non-resident will need to be takeninto account where offshore financing is being con-templated, although the withholding tax rate may bereduced under certain tax treaties. Malaysia does notlevy withholding tax on dividends.

Furthermore, investment holding companies cur-rently enjoy a number of favourable tax deductionsunder the ITA in Malaysia, where its activities consistpredominantly of the holding of investments and notless than 80 percent of its gross income is derivedfrom such investments. It will be interesting to see ifthis tax treatment will be extended to FHCs under theFSA.

VIII. Conclusion

The changes introduced by the FSA and the IFSA gomuch further than merely consolidating the currentregulatory regime for financial institutions in Malay-sia. Increased prudential regulation appears to be oneof the more significant thrusts of the FSA, providingfor powers of BNM that in many instances go beyondthose of similar regulators of more mature financialmarkets.

‘‘The fact that all Malaysiancompanies will be transitioning toa single-tiered dividend system bythe end of 2013 is an importantfactor to consider when planningany restructuring...’’


The breadth and width of the changes introducedby the FSA appear to be in the right direction in rela-tion to:s the BNM’s stated objectives of strengthening the

legal framework for the financial sector;s managing risks from the activities of financial in-

termediaries that may occur outside the bankingsystem; and

s enhancing its powers in the event that timely inter-vention is required to ensure financial stability ismaintained in the sector.

Furthermore, the streamlining of approval require-ments for major transactions involving the acquisi-tion and disposal of interests seem to be a step in thedirection of making mergers and acquisitions in thesector more commercially viable. All of these couldresult in the financial sector becoming more attractiveto investors, both domestic and foreign.

Nevertheless, BNM will face a challenge in convinc-ing existing market participants that the new regimewould not result in undue costs of compliance or thatthe almost draconian powers accorded to it under the

FSA would not be misused to restrict the ability of fi-nancial institutions to plan their affairs for commer-cially justifiable reasons.

From a tax perspective, there are no major directtax consequences under the FSA but the regulatorychanges that require implementation will result in anumber of indirect tax implications. Due diligenceshould be carefully carried out in any major transac-tion and transfer pricing guidelines properly adheredto. In any event, it may prove to be an opportunity forfinancial institutions to examine the soundness oftheir structures and in restructuring to meet the re-quirements under the FSA, it would be advisable thatany M&A strategy includes a strong tax planning com-ponent.

Sue Wan Wong is a Senior Associate at Wong & Partners,Malaysia. She may be contacted by email [email protected].

Brian Chia is a Partner at Wong & Partners, Malaysia. He maybe contacted by email at [email protected].


mailto:[email protected]


India lowers its taxrate on interestpayable on debtraised overseasRussell GaitondeBMR & Associates LLP, India

The growth rate of the Indian economy slippedlast year to its lowest level in a decade. This ar-ticle examines a tax concession India has in-

troduced to help reduce its current account deficit.

India’s growth rate is currently 5 percent, a far cryfrom the 9 percent growth in the period 2005 to 2007.Even more worrying is India’s current account deficit(CAD). The Finance Minister (FM) in his UnionBudget speech before the Indian Parliament on Feb-ruary 28, 2013 stated that his biggest concern is thatIndia will need US$75 billion to bridge the CAD andthat this could be achieved only through ForeignDirect Investment (FDI), Foreign Portfolio Invest-ment (FII) and External Commercial Borrowings(ECBs).

In addition, India needs approximately US$600 bil-lion over the next five years for infrastructure develop-ment. There is no doubt that the same sources willneed to be tapped to fund this as well.

To facilitate and incentivise foreign flows into theIndian debt market to both finance infrastructure de-velopment and to fix the CAD problem, the FM hassought to significantly lower the tax rate that wouldapply to interest payable to foreign investors that seekto lend monies to Indian corporations or which seekto invest in Indian Government Securities (G-Secs),from the current 20 percent to a reduced 5 percent.This fiscal benefit that is being granted by the IndianGovernment is for a temporary period, the tenor ofwhich varies depending on the investment windowbeing accessed by the foreign investor.

The provisions for reducing the tax rate are con-tained in a set of two new provisions that have beenintroduced in the Indian Income-tax Act, 1961 (Indiandomestic tax law): i.e. section 194LC (which was ini-tially introduced in 2012 but which has only recentlybeen activated) and section 194LD (which was intro-duced in 2013). This article, presents a critique on

these new tax provisions and sheds some light on theopportunities and challenges they bring for foreign in-vestors seeking to explore this window of opportunity.

I. Section 194LC: foreign currency debt

Broadly speaking, the Indian tax laws set out distinctprovisions relating to:1. the levy of tax on non-residents;2. the collection of such tax through a system of tax

withholding by the payer;3. the need for the non-resident to get itself registered

with the Indian Revenue Authorities (IRA) by pro-curing a tax registration number, which is colloqui-ally referred to as a Permanent Account Number(PAN), should the non-resident wish to avail of anyconcessional tax rates at the time of tax withhold-ing; and

4. the need for the non-resident to file an annual taxreturn in India with the IRA, at the end of theIndian financial year, which runs from April 1 to thefollowing March 31.Section 194LC is a withholding tax provision. It

states that an Indian corporation that pays interest toa non-resident on ‘‘monies borrowed’’ by it from thenon-resident, during the period July 1, 2012 to June30, 2015 (the eligible period), in foreign currency andfrom a source outside India either:s under a loan agreement; ors by way of issue of long-term infrastructure bonds

(LTIB),shall withhold tax on such interest at the rate of 5

percent on a gross basis. The tax withholding appliesat the time of payment or credit of such interest to theaccount of the non-resident, whichever is earlier. Theprovision comes with two riders, inter-alia, that (i) theborrowing by the Indian corporations, and (ii) thequantum of interest payable on such a loan, are to beapproved by the Indian Government.

Russell Gaitonde isa Partner at BMR& Associates LLP,India


Correspondingly, the Government amended theprovisions relating to the actual levy of tax on non-residents to synchronise it with the tax rate that isspecified in the withholding tax provision. Therefore,the tax law clearly states that non-residents grantingloans to Indian corporations would be levied a finaltax of 5 percent on the interest income they earn fromsuch corporations and that the borrower companywould discharge this tax liability for the non-residentsby way of withholding tax on the interest payouts.

Furthermore, the Government has also amendedthe provision relating to mandatory quoting of PANsto avail of the concessional withholding tax rate, by al-lowing Indian corporations to extend the concessionaltax rate to those foreign investors who have investedin foreign currency denominated LTIB that are issuedby an Indian corporation even though the foreign in-vestor may not have procured a PAN.

However, the need for mandatory quoting of a PANby the foreign investor to avail of this concessional taxrate still remains for those foreign currency borrow-ings which are done under a normal loan agreementand which are not LTIBs. In both the above situations(i.e. dealing with borrowings by way of a loan agree-ment or by way of LTIBs), if interest is the only Indiansourced income for the foreign investor and taxeshave been properly withheld at source by the Indiancorporation, then the foreign investor is exemptedfrom filing an annual tax return with the IRA at theend of the Indian financial year.

Having said that, there are several anomalies in thenew legislation which are currently being grappledwith by both Indian corporations as well as foreign in-vestors, who are keen to explore this window of oppor-tunity.

A. Operational considerations

(i) The need for the Indian corporation to obtainprior Government approval each time it raisesforeign currency debt to secure the 5 percent taxrate.

This requirement potentially brings about a great ad-ministrative and operative burden on Indian corpora-tions raising the foreign currency debt. Realising this,the Indian Government, through the Central Board ofDirect Taxes (CBDT)1 issued a circular2 clarifying thatany borrowings complying with the following condi-tions would be treated as automatically approved bythe Indian Government for the purposes of section194LC:

1. Borrowings made, whether by way of a loanagreement or issuance of LTIBs, must be permittedunder the ECB framework of the Reserve Bank ofIndia (RBI)3, additionally:

2. For loans:s The borrowing should not be used to restructure an

existing loan being undertaken solely to take benefitof the reduced withholding tax rate.

s No part of the borrowing should have occurredprior to July 1, 2012.3. For LTIBs:

s The bonds should be issued for a minimum periodof three years.

s The proceeds should be used only in the ‘‘infrastruc-ture sector’’, as defined by the RBI in the ECBpolicy.Borrowings that do not comply with the above con-

ditions require prior Government approval to be eli-gible for the concessional tax rate. The IndianGovernment would consider granting such approvalson a case-to-case basis. With this circular, the proce-dural aspects were made fairly clear. The issues, there-fore, now remain only with respect to certaintechnical interpretations of section 194LC.

B. Interpretational considerations

(i) What is meant by ‘‘monies borrowed’’?

The term ‘‘monies borrowed’’ is not specifically de-fined in Indian domestic tax law. Furthermore, the cir-cular imposes certain additional conditions, such as(i) no part of the borrowing should have taken placeunder the loan agreement before July 1, 2012; and (ii)that restructuring of existing loans being undertakensolely to avail of the reduced withholding tax rate willnot be permitted. Therefore, the drafting of the provi-sions could raise various potentially questions. For ex-ample:s Which date needs to be considered for granting the

concessional tax rate, i.e. the date of the loan agree-ment / the actual sanction of the loan or the date ofactual drawdown of the loan?

s What happens if the loan is structured in a mannersuch that the drawn down takes place in multipletranches, some prior to July 1, 2012 and someduring the eligible period?Depending on the answers to these questions, a par-

ticular borrowing could either be eligible or ineligiblefor the reduced tax rate.

Therefore, interpreting the term ‘‘monies borrowed’’gains significant consideration. Based on judicialprecedents in India – though issued in a different con-text – it appears that the term ‘‘monies borrowed’’ought to be interpreted to mean that there must exista debtor-creditor relationship between two parties toconstitute ‘‘monies borrowed’’ between them. In ourview, mere signing of a loan agreement or sanctioningof a loan would not create such a relationship: suchacts would only finalise the terms based on which alender agrees to provide financial support to a bor-rower. These terms have no significance if there is noactual borrowing. Furthermore, in our view, everydraw down should be treated as independent ‘‘moniesborrowed’’, starting from the date of the actual drawdown and interest on such tranches of borrowingshould be computed from that date onwards.

Hence, it is this act of drawing down of a loan thatought to be treated as ‘‘monies borrowed’’ for the pur-poses of this section. Consequently, only those loansthat are drawn down during the eligible period shouldbe eligible for the concessional tax rate. Additionally,even new tranches that are being drawn down of anexisting loan (that exist as on July 1, 2012) and whichare drawn down during the eligible period ought to beeligible for the concessional tax rate. The fact that thecircular provides that no part of the borrowing shouldhave taken place under the agreement before July 1,2012, should, in our view, be interpreted to mean that


the concessional tax rate cannot be applied to thosetranches of the loan agreement that were drawn downprior to July 1, 2012. This provision of the circularshould not be interpreted restrictively to mean thatonly those loans that are drawn down entirely (i.e.with no single tranche being drawn down prior to July1, 2012) during the eligible period would qualify forthe concessional tax rate; this is because such a re-striction is not provided for in section 194LC, and acircular cannot restrict / override the provisions of thelaw.

Indian corporations that restructure existing for-eign currency loans for proper commercial reasons,such as varying the tenor of the loan or reducing thecorporations’ borrowing costs etc., should be able toextend the concessional tax rate of 5 percent to theirforeign lenders (for such loans being restructuredduring the eligible period). Both, the Indian corpora-tion and the foreign investor will need to be able toprove that the Indian corporation did not restructureits existing foreign currency loan, purely to extend theconcessional 5 percent tax rate to the new foreign in-vestor. Hence, it is advisable for foreign lenders thatare engaging in such restructuring / refinancing ar-rangements to negotiate properly with the Indian cor-poration to satisfy themselves that the restructuring /refinancing is not being undertaken solely by theIndian corporation to extend the concessional tax rateto the foreign investor. Refinance transactions that aredone properly can be executed with the same foreigninvestor.

(ii) For how long will this tax benefit beavailable?

There is no time limit. So long as the money is bor-rowed by the Indian corporation during the eligibleperiod, the interest payable on such borrowing oughtto be eligible for the concessional tax rate throughoutthe tenor of the borrowing. Therefore, a 10-year loantaken during the eligible period should enjoy this con-cessional tax rate on all interest payouts over theentire life of the loan. This is obviously subject tothere being no change made in the Indian domestictax law in the future.

C. What are the practical difficulties faced by foreigninvestors in seeking the concessional tax rate?

(i) Withholding tax versus final tax of non-residents

The Indian tax system which provides a withholdingtax obligation on the payer and separately sets out atax levy on the recipient of income sometimes createsunnecessary complications for both parties. More

often than not, payers in India tend to be extremelyconservative when withholding tax on paymentsmade to non-residents, as the consequences of an er-roneous tax withholding could be severe interest andpenalty obligations devolving on the payers.

Given that there could be some level of interpreta-tion required in certain instances – as we have dis-cussed in the above paras – to be eligible for theconcessional tax rate, an Indian corporation maychoose to be cautious at the time of undertaking thetax withholding, by insisting on not granting the non-

resident the concessional taxrate benefit and by withholdingtax at the normal rates pre-scribed in the Indian domestictax law (which is currently 20percent) or the applicable taxtreaty rate (if any). In such asituation, all is not lost for thenon-resident. The non-residentcan claim a tax refund from the

IRA for the excess tax withheld by the Indian corpora-tion, by filing a tax return in India with the IRA.

While technically the non-resident does not go out-of-pocket on an aggregated basis for the excess taxwithheld by the Indian corporation, it does create aseries of problems for the non-resident: such as a li-quidity issue, a timing issue and a currency risk issue.This is because the non-resident will receive itsincome-tax refund from the IRA in Indian Rupees(INR) after a few years. On the flip side, in case of a taxprotected loan contract, the Indian corporation maychoose to adopt a more aggressive position at the timeof tax withholding and see how the issue of eligibilityto the concessional 5 percent tax rate will play outwith the IRA, after all, in such a case the Indian cor-poration may need to foot the final Indian tax bill ofthe non-resident. Given the manner in which cross-border financing agreements typically get negotiatedby Indian corporations – especially in the context oftax protected contracts – it is important for the foreigninvestor to negotiate the terms of tax protection prop-erly, so as to avoid any tax risks devolving on it at afuture date on account of short tax withholding by theIndian borrower.

(ii) Only foreign currency debt and not INR debtis covered

A significant drawback of section 194LC is that itgrants the benefit of the concessional tax rate only toborrowings denominated in foreign currency. A largeamount of cross border debt, especially in the natureof hybrid debt that are taken by Indian corporationsin INR – for example, Fully Compulsorily ConvertibleDebentures (FCCDs) – fall outside the purview of thissection, merely because the liability is not recognisedby the Indian corporation as a foreign currency liabil-ity. Hence, if the Indian Government is unable to fixthe CAD issue soon, it may wish to consider extendingthe concessional 5 percent tax rate benefit, even tocross-border-hybrid-INR-denominated debt that israised by Indian corporations.

‘‘...the new tax provisionsappear to be pro foreigninvestment...’’


II. Section 194LD: debt investments by ForeignInstitutional Investors / Qualified Foreign Investors4

Portfolio investors, such as Foreign Institutional In-vestors (FIIs) play a pivotal role in the growth, devel-opment and strengthening of the Indian capitalmarkets. The Indian capital markets have predomi-nantly comprised of the equity markets; though a lotneeds to be done to grow and strengthen the Indiandebt markets (IDM). Most investors in the IDM com-prise of institutional investors, particularly domesticinstitutions such as local banks, non-bank financecompanies, mutual funds and insurance companies;some of the foreign investors that participate in theIDM include FIIs.

Section 194LD is aimed at providing tax relief toFIIs and Qualified Foreign Investors (QFIs), whoinvest in Indian corporate debt securities and G-Secs;much like how section 194LC offers such tax relief toforeign investors who lend to Indian corporationsunder the ECB window. The broad construct of sec-tion 194LD is similar to that of section 194LC, in asmuch as it is a withholding tax provision that extendsthe concessional 5 percent tax rate to FIIs / QFIs whoinvest in certain Indian securities, subject to certainconditions. The Government has correspondinglyamended the other provisions in Indian domestic taxlaw that deal with the taxability of FIIs / QFIs so as tosynchronize them with the withholding tax provi-sions.

Specifically, section 194LD provides that any personresponsible for paying interest to a FII / QFI shallwithhold tax from the interest payable, at the time ofpayment or credit, whichever is earlier, at a conces-sional rate of 5 percent on a gross basis. The conces-sional tax rate applies to the following:s interest payable on or after June 1, 2013 but before

June 1, 2015 (the relevant period);s such interest should be in respect of an investment

by a FII / QFI in:s an INR denominated bond of an Indian corpora-

tion, provided that the rate of interest does notexceed the rate as prescribed by the Central Gov-ernment in this behalf;

s a G-Sec.The Central Government is yet to notify the rate of

interest discussed above.This section, though similar in nature to section

194LC, is materially different from it in various ways.For example, (i) it applies only to a certain class ofnon-residents, ie FIIs and QFIs; (ii) it does not appearto concern itself with when the bond or G-Sec wasissued5, but only the period during which the interestis payable; and (iii) it covers foreign investment inINR denominated debt paper.

While we still await a Government notificationwhich would clarify which types of INR denominatedbonds could potentially be covered, and to whatextent the interest paid on such bonds would be eli-gible for the concessional tax rate, there are varioustechnical issues around this section that merit discus-sion.

A. What is meant by ‘‘interest payable’’?

The provision applies to ‘‘interest payable’’ during therelevant period. The issue at hand would be best

understood by an illustration. Let us assume thatthere is a bond which pays interest annually amount-ing to INR 12. The last interest was paid on July 1,2012 and the next interest installment is due on July 1,2013. Would the entire interest of INR 12 payable onJuly 1, 2013 be eligible for the concessional tax rate of5 percent? Or, would only that portion of the interestwhich accrues after June 1, 2013 (i.e. the date men-tioned in the new section 194LD) amounting to INR 1be eligible for the concessional tax rate, while the in-terest which accrues for the months of July 1, 2012 toMay 30, 2013, attract the normal tax rate of 20 percentor the applicable tax treaty rate (if any)?

In India, courts recognise the difference betweenthe legal principle of ‘‘accrual’’ from the accountingprinciple of ‘‘accrual’’. From a legal perspective, inter-est ‘‘accrues’’ when it is ‘‘due’’ or ‘‘payable’’. Account-ing, on the other hand, which works on the principleof conservatism, requires the recording of expenses ina timely manner over a period of time, such that all ex-penses are adequately provided for when they become‘‘due’’ or ‘‘payable’’. This gives rise to the recording ofinterest expenses in the hands of the Indian issuercompany periodically, by following the ‘‘accrued anddue concept’’ and ‘‘accrued but not due concept’’.

Based on judicial precedents in India, for tax pur-poses, the legal concept is what is relevant: not the ac-counting principle. Therefore, interest is ‘‘payable’’when it is ‘‘due’’, not before that. Prior to the date onwhich the interest becomes ‘‘due’’, the lender has noright to demand any interest from the borrower;hence, until the due date nothing is ‘‘payable’’. There-fore, in the above example, there could be a good casefor an FII / QFI to contend that the entire interest ofINR 12, which is receivable on July 1, 2013 and whichcovers the period July 1, 2012 to June 30, 2013, oughtto be eligible for the concessional tax rate. This wouldbe subject to the terms of issue of the bond and whatrights the parties have against each other, as regardswhen the interest is payable.

On the same facts and for the same bond, in calen-dar 2015, the interest that will be payable to the FII /QFI on July 1, 2015 and which will cover the periodJuly 1, 2014 to June 30, 2015 will attract the normaltax rate of 20 percent applicable to FIIs / QFIs or theapplicable tax treaty rate (if any). Hence, the axe couldswing in the opposite direction in 2015. Whether theIndian Government will extend the concessional taxrate of 5 percent to FIIs / QFIs beyond the relevantperiod is something that one will need to wait andwatch for in future years.

B. Does the structure of the bond itself have anyrelevance?

Bond issuances can be structured in various ways de-pending on what is acceptable to the borrower and thelender. For example, bonds that are:s issued at par and redeemed at par, and which carry

an interest coupon;

s issued at a discount and redeemed at par;

s issued at par and redeemed at a premium;

s have a combination of the above features.Under Indian domestic tax law, the term ‘‘interest’’

is defined very broadly to cover not only the interestcoupon payable on a bond, but also the discount on


issue and premium on redemption of the bond. How-ever, Indian courts do recognise that in case of debt se-curities that carry an interest coupon and which alsopay a premium over the issue price of the bond, thereis a difference between why the lender earns a returnby way of ‘‘interest’’ and why the lender earns a returnby way of ‘‘premium’’ on redemption of the bond; thatthe two streams of income that arise to the lender aredifferent and hence ought to be taxed separately.

There appears to be a case for Indian corporationsto structure their bond issuances to FIIs / QFIs, whichhave the above features, which could enable the FIIs /QFIs claim the concessional tax rate of 5 percent onthe interest income, while a tax exemption for capitalgains arising on redemption of the bond (assumingthe FII / QFI were entitled to claim such tax exemptionbenefits under a tax treaty). It would be good if theIndian Government could clarify the above treatmentand whether the interest cap that is to be notified by iton bonds that are eligible for the above concessionaltax rate, should consider all payouts on the bond oronly the interest coupon payable on the bond.

C. Bonds versus debentures, is this going to be aproblem?

Strictly technically, there is a legal difference betweena ‘‘bond’’ and a ‘‘debenture’’. This difference is recog-nised in Indian corporate law, Indian securities lawetc. Even the Indian domestic tax law recognises‘‘bonds’’ and ‘‘debentures’’ to be separate, especially inother sections that are codified in the law. The regula-tions governing FIIs and QFIs also mention the twoterms separately. All these imply that the two termsare different and cannot be used inter-changeably.This would, unwittingly, imply that the provisions ofsection 194LD apply only to ‘‘bonds’’ issued by Indiancorporations; not ‘‘debentures’’.

FIIs and QFIs have historically invested in non-convertible debentures (NCDs) issued by Indian cor-porations, and hence there is a question mark onwhether interest payable by an Indian corporation onNCDs issued to FIIs / QFIs would be eligible for theconcessional tax rate in the first place. While the legis-lative intent does not appear to keep ‘‘debentures’’ out-side the purview of section 194LD, it would be good ifthe Indian Government were to clarify its position inthis regard, to avoid unnecessary litigation with theIRA on this very technical issue.

D. What could be some of the practical challenges thatFIIs / QFIs may face while trying to access thisconcessional tax rate?

Section 194LD comes into effect from June 1, 2013.However, there is lack of clarity on all the above men-tioned issues. Even the press release that was issuedby the Indian Government on May 21, 2013 does notaddress the above issues. Hence, until there is clarityon the above points, some Indian corporations mayadopt the conservative approach of withholding tax at

the normal tax rate of 20 percent or the tax treaty rate(where it is applicable), while making payments toFIIs / QFIs. The FIIs / QFIs would be free to adopttheir own positions with regard to their eligibility forthe concessional tax rate of 5 percent under section194LD, when they file their respective tax returns withthe IRA at the end of the financial year. However, thiswould mean that the FIIs / QFIs would have to claimtax refunds from the IRA, on account of surplus taxesthat may have been withheld by the Indian corpora-tions, which could create the same liquidity issue,timing issue and currency risk issue as we discussedin the context of cross-border lending that is done inforeign currency.

III. Conclusion

Both the new tax provisions appear to be pro foreigninvestment and appear to extend the concessional taxrate of 5 percent to foreign investors fairly unambigu-ously. However, regardless of the intent behind thelegislation, the legal drafting of the law has createdsome ambiguities, which need to be clarified on a pri-ority basis, should the Indian Government wish thistemporary window of opportunity be used success-fully by foreign investors, and which will also helpIndia fix its CAD problem.

Russell Gaitonde is a Partner in BMR’s corporate tax practice inMumbai. Specialising in tax and regulatory matters, Russell hasover 16 years of experience in advising financial services groupson matters relating to corporate tax, foreign investment andexchange control regulations, banking laws, securities laws andinsurance regulations. Russell has represented various clientsbefore the Indian tax authorities and appellate authorities inIndia to help resolve their tax matters. He also regularlyinteracts with various Indian regulatory authorities, such as theFIPB, RBI and SEBI to assist clients procure regulatoryapprovals and licenses where required. He has been supportedby Vishal Agarwal, who is a Director with the Firm, in preparingthis article. The views expressed are personal.Russell may be contacted by email [email protected]

NOTES1 The CBDT is the apex tax administration body in India. It is part ofthe Department of Revenue which is housed within the Ministry of Fi-nance.2 Circular 7/2012 dated September 21, 20123 The RBI is the Central Bank of India. In addition to formulating andadministering the monetary policy of the country, the RBI helps theGovernment, inter-alia, in managing the country’s foreign exchange re-serves. The RBI sets out detailed guidelines which provide for the con-ditions on the back of which an Indian corporate is permitted to raiseforeign currency loans either under the automatic route, or pursuantto a specific approval from the RBI.4 QFIs represent a new class of foreign investors that were recently al-lowed to invest into Indian debt securities and equities. QFIs do not re-quire a prior registration with the Securities and Exchange Board ofIndia (SEBI) to be eligible to invest in Indian securities, unlike howFIIs do. QFIs are merely required to establish a relationship with cer-tain custodian banks in India and complete KYC procedures to com-mence investing in India.5 This has specifically been clarified in a press release issued by theGovernment on May 20, 2013.



Australia’s budget2013: the taximplicationsTheo SakellBaker Tilly Pitcher Partners, Australia

On May 15, the Australian Budget was an-nounced. This article identifies and detailsthe main components of the budget.

I. Introduction

In handing down the 2013–14 Federal Budget, Trea-surer Wayne Swan blamed a stubbornly high Austra-lian dollar and lower commodity prices for a dramaticfall of some AUS$17 billion in forecasted tax receipts,leading to an estimated budget deficit for 2012–13 ofAUS$18 billion.

This is obviously a far cry from the ‘on time, aspromised’ budget surplus of AUS$1.5 billion that heannounced in the last budget.

In stating that the Government was ‘‘charting a sen-sible pathway to surplus over the forward estimates,’’Mr Swan said that he expected a reduced deficit ofAUS$10.9 billion in 2014–15, breakeven in 2015–16and a return to a modest budget surplus in 2016–17.The forecast for economic growth in 2013–14 is 2.75percent (revised down from the previous forecast of 3percent) and in 2014–15 the economy is expected togrow by 3 percent. The unemployment rate is ex-pected to increase slightly from 5.5 percent to 5.75percent by June 2014.

Being in no position to provide any pre-electionhandouts the Treasurer, instead, announced a cut to arange of benefits to middle income families, deferredpreviously announced tax cuts, a scrapping of theAUS$5,000 baby bonus and an increase in the Medi-care Levy of 0.5 percent in order to fund the NationalDisability Scheme.

On the tax front, it seems that the Treasurer is intenton driving increased tax revenues through a range oftax integrity measures, rather than through any struc-tural changes designed to promote business growthand make Australia more competitive.

To that end, the Government has announced arange of measures that are targeted at addressing taxbase erosion and profit shifting by multinationalsthrough loading a disproportionate amount of debt toAustralia, including a tightening to Australia’s Thin

Capitalisation rules, being rules that seek to limit theamount of debt deductions that can be claimed as atax deduction against income in certain circum-stances.

The only tax concession provided for business in theBudget is the increase in the thin capitalisation deminimus threshold from AUS$250,000 to AUS$2 mil-lion of debt deductions. However, we await clarifica-tion from the Treasury that this increase is not limitedto small business.

Other significant tax measures include the introduc-tion of a 10 percent non-final withholding tax for non-residents that dispose of Australian real property, withthe exception of residential property less thanAUS$2.5 million in value. The definition of TaxableAustralian Real Property (TARP) as it relates tomining assets will also be changed to include mining,quarrying or prospecting information, and rights tosuch information and goodwill, which are currentlynot subject to tax if disposed of by a non-resident.

Not unexpectedly, Mr Swan also announced an in-tegrity measure to prevent ‘dividend washing’ by so-phisticated investors who buy and sell shares thatcarry dividend rights in order to access two lots ofdividend franking credits in respect of essentially thesame shares.

Following a recent Board of Taxation report, theBudget contained measures to close a number of loop-holes in the tax consolidation regime. Of the 26 rec-ommendations made by the Board of Taxation in itsreview of the tax consolidation provisions, only 4 havebeen adopted by the Government. Interestingly, theyare all integrity measures.

The Budget also contained the changes to the super-annuation rules that were previously announced bythe Government on April 5, 2013. Broadly speakingthese relate to a rebating of the penalties that apply toexcess contributions, an increase on the cap for de-ductible superannuation contributions for those agedabove 50 and 60 respectively, and the taxing of super-annuation fund earnings where they exceedAUS$100,000 per year per member.

Theo Sakell is aTax Partner atBaker TillyPitcher Partners,Australia

06/13 Tax Planning International Asia-Pacific Focus BNA ISSN 1478-5129 1306/13 Tax Planning International Asia-Pacific Focus BNA ISSN 1478-5129 13

As with many previous Budgets, additional fundinghas been provided to the Australian Taxation Office(ATO) over four years to improve compliance by Aus-tralian taxpayers through expanding data matchingwith third party information, and also to enable theATO to establish a taskforce designed to target truststhat conceal income, mischaracterise transactions, ar-tificially reduce trust income and underpay tax.

However, with the election looming in September ofthis year, it ultimately remains to be seen just howmany of the Budget announcements will see the lightof day.

II. Corporate

A. Tax consolidation changes

(i) Board of taxation review andrecommendations

The Government released two reports from the Boardof Taxation (the Board) which contained 26 recom-mendations for improving the consolidation regime,including recommendations to simplify consolidationfor small businesses. Of all the Board’s recommenda-tions, only 4 were adopted by the Government, all ofwhich were integrity measures.

(ii) Small business concessions

The Board recommended a number of significant im-provements to the tax consolidation regime thatwould address the current inequities for small busi-ness. The recommendations included:

s Mitigating the complexity and costs of the currentgroup formation rules by allowing a group to retaintheir existing tax cost bases and utilise existinglosses.

s Providing micro-SMEs with alternative tax group-ing rules outside of tax consolidation.

s Facilitating group restructures into tax consoli-dated groups.

s Correcting the tax consolidation rules so that theyapply appropriately when interacting with the vari-ous capital gains tax and trust provisions.We note that the Board’s reports acknowledged the

substantial improvements delivered to the corporatetax system by the consolidation regime, a sentimentwith which the Government itself has agreed.

However, without exception, the Government hasneglected to adopt the above recommendations thatcould assist approximately 25,000 small businessgroups, of which 18,000 are still not consolidated.

Based on the recommendations, we would be sur-prised if any of these measures for the middle marketwould present a revenue cost for the Government. Inparticular, these recommendations were aimed atsimplifying compliance for this sector. This was aclear opportunity for the Government to make a state-ment in support of the middle market. The failure toact on these proposals is both difficult to explain anddisappointing.

(iii) Assessing liabilities for new joining entities

The Government has accepted the Board’s recommen-dation to assess the value of tax deductible accountingliabilities that an entity has on joining a tax consoli-dated group. This means that if the entity had (for ex-ample) a provision for annual leave of AUS$100, thehead company will now be taxed on AUS$100 on thesubsidiary entity joining the group. This removes thecurrent double benefit that occurs when there are de-ductible liabilities. The Budget states that this mea-sure will apply to transactions after May 14, 2013.This represents a clear watch-out for acquisitions andformations of a tax consolidated group after May 14,2013. Taxpayers and advisors will need to take this sig-nificant change into account when performing theirtransaction calculations. Unfortunately, very few de-tails have been provided on this measure, making itdifficult for taxpayers to assess the exact impact ofthis measure.

(iv) Introducing integrity measures

The three remaining integrity measures which wereannounced deal with:s value shifting within a consolidated group;

s transfers of assets from non-residents to controlledtax consolidated groups; and

s adjustments to the Taxation of Financial Arrange-ments (TOFA) regime.These announcements also apply from May 14,

2013. The Government has also announced a reviewof the provisions dealing with multiple entry consoli-dated (MEC) groups.

III. International tax

In response to growing fears of an eroding tax baseand claims of threat to national sovereignty, the Gov-ernment has pushed ahead with some of the biggestchanges to Australia’s international tax regime inrecent times. This will have significant implicationsfor taxpayers with inbound and outbound structuresand international dealings.

A. Abolition of interest deductions incurred in derivingforeign dividend income

The Government has announced the repeal of the pro-vision which currently allows a deduction for interestexpenses incurred in deriving non-assessable non-exempt foreign non-portfolio dividend income, witheffect from July 1, 2014.

A similar change will also be made to the equivalentprovision within the Taxation of Financial Arrange-ments regime.

B. Changes to foreign non-portfolio dividend exemption

There is currently a tax exemption for dividends paidby a foreign company to an Australian companywhich holds shares that grant at least 10 percent of thevoting power (referred to as non-portfolio interests).

The Government has announced that it will be pro-ceeding with the reform of the relevant provision, achange which was originally flagged in the 2009–2010Budget. These reforms will be included in the


consultation process on the thin capitalisationchanges. However at this stage it would appear thatthe changes will not apply until July 1, 2014.

C. Extension to dividends received via trustsand partnerships

A welcome, albeit previously announced, change tothe non-portfolio dividend exemption provision is theextension of the exemption to Australian companiesthat receive foreign non-portfolio dividend incomethrough an investment in a fixed trust or partnership.

This amendment should assist where nominee ar-rangements are in place, which can be necessary insome countries due to foreign ownership restrictions.However, we would hope that the final legislationwould extend to dividends derived via all trusts.

D. Proposed tightening of the thin capitalisation regime

The Government has announced a number of mea-sures intended to tighten and improve the effective-ness of the thin capitalisation rules. Effective fromJuly 1, 2014, these measures include:

s Increasing the current de minimis threshold fromAUS$250,000 to AUS$2 million of debt deductions;

s Reducing the safe harbour debt-to-equity ratiofrom 3:1 (i.e. 75 percent of gross assets) to 1.5:1 (i.e.60 percent of gross assets);

s Reducing the worldwide gearing test ratio from 120percent to 100 percent for outward investors andextending the worldwide gearing test to inward in-vestors.In addition, the Government has announced that it

will retain the arm’s length debt test. The Governmentwill seek to reduce compliance costs for taxpayerswho adopt this test and make the test easier for the(ATO) to administer. The Government has referredthis issue to the Board of Taxation for consultation.

E. Withholding tax on disposal of TAP assets byforeign residents

From July 1, 2016, the Government will introduce aforeign resident withholding tax regime on the sale ofcertain Taxable Australian Property (TAP) assets.

A 10 percent non-final withholding tax will apply tothe disposal of such assets by foreign residents. Thepurchaser will be required to withhold and remit 10percent of the sale proceeds to the ATO. The disposalof residential property will only be caught by the newrules where the sale is more than AUS$2.5 million.

F. Changes to the capital gains tax regime forforeign residents

The Government has announced that it will make sev-eral changes to improve the integrity of Australia’scapital gains tax regime as it applies to non-residents.

Currently, non-residents are subject to capital gainstax on the disposal of TAP. TAP includes:s direct interests in Australian real property and

mining, quarrying or prospecting rights (TARP);s membership interests in an entity where more than

50 percent (by value) of the entity’s assets are TARP(directly or indirectly).The Government has identified that the current

principal asset test may allow opportunities for indi-rect interests held by non-residents to fall outside the

TAP definition, as follows:s Through the generation of

intercompany dealings be-tween entities in the sametax consolidated groupwhich have the effect of di-luting the TARP percentageof a group.

s By excluding intangibleassets (such as mining infor-mation and goodwill) con-nected to mining, quarryingor prospecting rights fromthe value of the TARP thusreducing the TARP percent-age of a group.

The Government has proposed amending the prin-cipal asset test to address these perceived deficiencieswith effect for disposals on or after 7.30pm AEST onMay 14, 2013.

While the proposed rules appear to better reflect theinitial intention of the capital gains tax regime, we arekeen to review the legislation to ensure that there areno unintended consequences.

We are also concerned that any delay in drafting leg-islation for these proposed changes will create uncer-tainty for non-resident taxpayers.

G. Further deferral of CFC reforms

The Government has announced that previously an-nounced reforms to the Controlled Foreign Company(CFC) will be deferred and reconsidered after theOECD completes its analysis with respect to base ero-sion and profit shifting.

The Government has previously acknowledged thatthe CFC reforms would reduce the incentive for busi-nesses to adopt aggressive restructuring arrange-ments to shift profits, and reduce compliance costs foraffected Australian businesses, ensuring that theyremain competitive in global financial markets.

However, the Government appears reluctant toimplement these changes which were originally an-nounced in the 2009–10 Federal Budget, and identi-fied by the ICAA in its September 2012 submission tothe Treasury as a priority tax policy issue.

As it has been more than two years since the lastround of consultations for this reform, it begs thequestion as to how long the business community will

‘‘...the Government has pushedahead with some of the biggestchanges to Australia’sinternational tax regime in recenttimes.’’


have to wait for these priority changes to not only belegislated, but also to take effect.

We note with interest that the UK has recently re-vamped its CFC rules with the goal of creating a morecompetitive and modern CFC regime, even in themidst of the considerable global debate on cross-border tax planning issues.

The OECD is due to deliver an initial comprehen-sive action plan to address base erosion and profitshifting issues by June 2013.

H. International compliance activities

(i) AUSTRAC

The Australian Transaction Reports and AnalysisCentre (AUSTRAC) will be given additional funding tocounter money laundering, major crime and tax eva-sion. Taxpayers need to be aware that AUSTRAC hasthe ability to monitor all international fund transfers,irrespective of the value involved. This information isused by the ATO and other Government agencies tocreate a more complete picture of the business affairsof taxpayers, and can be provided to international taxauthorities via Australia’s network of information ex-change agreements.

We have seen such information prompt a number ofATO reviews and audits. This is, therefore, a timely re-minder for taxpayers to review their arrangements toensure that they are properly complying with theirAustralian tax obligations with respect to any foreignholdings or transactions.

(ii) Transfer pricing

The Government will provide additional funding forthe ATO to increase compliance activity targeted at re-structuring activity that facilitates transfer pricing op-portunities. With the information provided to the ATOby the new International Dealings Schedule, and theextended powers given by the proposed amendmentsto the transfer pricing rules, the ATO will be in astrong position to challenge pricing methodologiesadopted by taxpayers for their internationally-relatedparty dealings.

This is another area where taxpayers should expectan increased level of scrutiny, and thus should ensurethat their transfer pricing documentation is both con-temporaneous and robust.

IV. Mining and exploration

A. Limiting immediate deductibility of explorationexpenditure

The Government has announced that it intends totighten the tax rules under which expenditure in-curred on mineral exploration or prospecting canqualify for an immediate deduction.

Specifically, it is proposed that expenditure to ac-quire mining rights and information will in certaincases only be deductible over the shorter of either 15years or the life of the mine, quarry or petroleum fieldto which it relates.

The intent of the proposed changes is to limit imme-diate deductions for such rights and information to

parties which are undertaking so-called ‘‘genuine ex-ploration’’ – i.e. parties which are themselves partici-pating in, and assuming the risks relating to, mineralexploration activity.

For these reasons, it is proposed that immediate de-ductibility will be limited to mining rights and infor-mation where an entity:

s incurs costs in generating or improving the infor-mation itself;

s acquires the rights under a farm-in, farm-out ar-rangement;

s acquires the rights or information from a relevantgovernment authority.Immediate deductions will continue to be available

in relation to depreciating assets first used for explo-ration and, in practice, explorers would generally stillbe entitled to immediate deductions for explorationwhich they themselves conduct.

While not specifically targeted at junior explorers,these changes still have an indirect impact on thissector. The market value of any rights and informa-tion generated by junior explorers (and, by extension,the market value of these exploration companiesthemselves) is likely to be reduced given the loss of theimmediate depreciation benefits that previously at-tached to such assets.

It is proposed that these changes will take effect im-mediately, although exceptions do exist for taxpayerswho are already committed to acquiring such rightsor information or are already taken to hold suchrights or information.

V. Transaction taxes

A. Goods and services tax

As expected, this year’s Budget does not contain anysignificant changes to the GST. Disappointingly how-ever, the Budget remains silent on when the previ-ously deferred measures implementing therecommendations of the Board of Taxation, whichwere intended to reduce the GST compliance costs oftaxpayers, will be put back on the reform agenda.

(i) GST instalment system

The Budget contains only one change to a measureannounced in the 2011-12 Budget in relation to the ex-tension of the GST instalment system to small taxpay-ers in a net refund position. The measure confirms theGovernment’s previous announcement on November5, 2012, being the time Exposure Draft legislation wasreleased, that the measure had been revised to allowonly those businesses already participating in the GSTinstalment system to continue to use the system ifthey move into a net refund position.

This year’s Budget confirms that the revision wasmade as a consequence of concerns identified that theoriginal measure may present a revenue risk andcould be in conflict with other initiatives designed totarget non-compliance in particular sectors of theeconomy. The measure will have effect from the dateof Royal Assent of the Exposure Draft legislationwhich was introduced into Parliament on March 20,2013.


(ii) Board of Taxation review

After significant announcements in the 2009 and 2010Budgets proposing to implement various recommen-dations of the Board of Taxation aimed at reducingtaxpayers’ GST compliance costs, many of which wereindefinitely deferred in the 2011 Budget, we have notseen the re-emergence of any of those measures in thisyear’s Budget.

In particular, changes to the GST grouping mem-bership rules to allow ‘‘closely connected’’ entities toform a GST group would have been of significant ben-efit for our clients who operate their businessesthrough trusts and who could benefit from the abilityto form a GST group in order to increase complianceefficiency.

The long-awaited clarification regarding the GSTtreatment of tax law partnerships would have alsobeen welcome, particularly given that they give rise todifficult GST issues in relation to real property trans-actions.

B. Customs and excise

(i) Excise on tobacco products

For those with long memories when the typicalBudget headline was ‘‘Smokes, Booze and Petrol Up’’,the latest changes to excise on tobacco products has aring of nostalgia about it. The Government intends tochange the way in which the excise imposed on to-bacco products is indexed in the future.

Rather than continuing to link the increases inexcise to movements in the Consumer Price Index(CPI), the Government will in future index the exciseon tobacco and tobacco products based on move-ments in Average Weekly Ordinary Time Earnings(AWOTE). The Government states that this will ensurethat tobacco excise keeps pace with incomes. As withthe current CPI indexation, the AWOTE based index-ation will occur bi-annually.

As an added bonus for the States, this measure willalso result in an increase in the GST collected on to-bacco and tobacco products. Based on historical data,it is expected that the change in indexation methodol-ogy will result in an increase of 7 cents for the cost ofa typical packet of 25 cigarettes in early 2014.

For confidentiality reasons, the Government has de-clined to publish details of the expected revenue gainfrom this measure.

VI. Tax compliance

The Government has announced increased funding tosupport further activity in the areas of administrationand compliance. Over AUS$220 million has been setaside for the Australian Taxation Office (ATO) topursue initiatives in respect to Australian BusinessRegister (ABR) and Australian Business Number(ABN) administration, trust compliance and datamatching.

A. Enhancing ABN and ABR administration

It is proposed that the ATO and the Department of Fi-nance and Deregulation will strengthen up-frontchecks for issuing ABNs and further promote theonline service of the Australian Business Register. TheGovernment has allocated some AUS$80 million tothis initiative for a purported revenue saving ofAUS$100 million and reduced compliance costs fortaxpayers.

B. Taskforce to target trusts

The Government will provide AUS$67.9 million to theATO over four years to undertake compliance activityin relation to the announced trusts taskforce. TheGovernment claims that this initiative will increaserevenue by AUS$379 million.

C. Improving compliance through third party reportingand data matching

The Government will provide the ATO with AUS$77.8million over four years to improve compliance by ex-panding data matching with third party information.This will cover not only domestic activities but extendto Austrac reported transactions. This is the highestreturn compliance measure identified by the Govern-ment with estimated revenue gains of AUS$610 mil-lion over the forward estimates period.

Theo Sakell is a Tax Partner at Baker Tilly Pitcher Partners inMelbourne, Australia. He may be contacted by email [email protected].



VAT is a major sourceof risk andopportunity in ChinaKenneth Leung and Robert SmithErnst & Young, China

VAT is an important component of the ChineseGovernment’s tax regime, as the share of taxrevenue coming from VAT is higher than in

many developed countries around the world.Based on figures from the Ministry of Finance for

the year 2011, China collected more than one third ofits entire tax revenue in the form of VAT. The ChineseTax Bureau (CTB) collected over 27 percent on do-mestic transactions and approximately another 8–10percent is collected by Chinese customs on importedgoods.

Companies and consumers in China are paying sig-nificant amounts of VAT. On top of that, China’s VATrules differ from many other countries and the systemis in a constant state of change.

VAT, in theory, is seen to be a neutral pass throughtax that only moves across the balance sheet of a com-pany’s financial statements and does not impact thebottom line. In principle, VAT is passed through byoffsetting input VAT, paid by the company to suppliersand/or customs, against output VAT collected fromcustomers. For export-oriented entities, they wouldapply for a refund of the input VAT paid since there islittle, or no, domestic sales and such transactions donot charge output VAT.

I. The cost of Chinese VAT

It is a myth that Chinese VAT is simply a cashflow itemwith no profit and loss impact and a limited risk pro-file. On closer examination, VAT in China is far fromneutral with ‘‘sticking’’ VAT, blocked input credits, cas-cading costs and other unique technical matterswhich can result in significant VAT-related costs hit-ting the bottom line (although these costs are prob-ably not directly visible as they are rolled into variousaccounts). A number of recent examples include bothforeign and Chinese companies having to make largeprovisions, or even restate financial statements, due toVAT-related errors or fraud.

The abundant risk/opportunity profile means it iscritical for companies to clearly understand how Chi-na’s VAT system works. While the risk profile may be

higher than anticipated, companies also usually haveopportunities to increase compliance, enhance cash-flow efficiency and reduce costs. Once you knowabout the complexities of China’s VAT regime, then itis clear that the ‘‘pass through’’ low-risk myth cannotbe true. That is, there are high levels of risk and oppor-tunities that should be explored.

Not surprisingly, the VAT costs and risks rise withthe complexity of the legal entity type and the quantityof daily transactional processing. This is exacerbatedin China since many companies have ‘‘mega-entities’’

Kenneth Leungand Robert Smithare both IndirectTax Partners atErnst & Young,China

Domestic VAT

Domestic Consumption Tax

Import VAT and Import Consumption Tax

Business Tax

Custom Duty

Corporate Income Tax

Individual Income Tax

Other Taxes

Note: import VAT and import consumption tax are

collected by China Customs and are not broken out

in the MoF statistics.

11%

Figure 1: China tax revenues in 2011

7%

14%

3%

15% 15%

8%

27%


that are part of an intricate global supply chain, andwhich process huge volumes of transactions. Eachlink in the supply chain may suffer VAT costs or ‘‘leak-age’’ which results in a less efficient recovery of VAT.Unfortunately this is a common, but lesser known, oc-currence in China. The following types of actual VATcosts incurred by a company operating in China thatcan impact the bottom line include:s export VAT ‘‘leakage’’;s VAT treated as non-creditable and required to be

‘‘transferred out’’;s blocked VAT on certain non-creditable expendi-

tures;s VAT directly related to exempt business taxable ser-

vices;s deemed VAT sales amounts that are not passed onto

customers;s input VAT paid but the invoice not verified prior to

expiration (e.g. 180 days);s input VAT invoices without proper documentation;s City Construction Tax (CCT) and Education Sur-

charge (ES) taxes that are assessed on VAT payableamounts;

s input VAT paid by a toll manufacturer;s cashflow funding costs on pending refunds or ex-

tended periods of input credit delays.Based on our experience, it may take significant ef-

forts to identify, extract, collate and analyse a compa-ny’s VAT data because this information resides inmany different systems and parts of the organisation.Identifying this data is not an established practice atmost companies yet, so it can be time consuming justto locate where the appropriate information resides.However, despite the difficulty, carrying out thesetasks will benefit the company in the long run. Man-agement is likely to be surprised about the size andmagnitude of the unexplored VAT, but this reactioncould spur a renewed interest in trying to manage thistax.

The following questions can help to assess yourlevel of understanding about Chinese VAT:s How much VAT throughput is being processed by

the organisation on a monthly or annual basis?s What is the VAT position of the organisation on a

regular basis (e.g., input VAT carry forward, net VATpayable, pending export VAT refunds, etc.) and dothese positions seem reasonable for the businessprofile?

s Are certain non-recoverable VAT costs incurred,either through non-VATable activities, export VAT‘‘leakage’’, VAT transfer out, etc? Are these amountsknown, managed and possibly reduced?

s How do company staff keep up-to-date with therapid pace of regulatory change? Is anyone respon-sible for proactively reviewing new developmentsfor impact to the company or does the companyonly respond reactively?

s How are VAT accounting transactions conducted inthe system and by whom? Is the accounting systemlinked to the Golden Tax System (GTS)?

s Who is managing the VAT return preparation andreporting obligations? Are they able to accumulatethe necessary data to accurately complete the re-turns on a timely basis? Where is the source datagathered from and how is it analysed prior to find-ing its way to a VAT return?

II. Changing VAT regulatory landscape

Recent years have seen large and small regulatorychanges that need to be understood by companieswho wish to be successful in China. For example,there have been over 500 updates to regulations fromdifferent agencies in each of the last few years, so it isnot surprising that tax staff may miss an importantVAT regulatory development that impacts the busi-ness.

The Chinese VAT pilot is a start to addressing thechallenges stemming from the inefficiencies of Chi-na’s indirect taxing system where services, intangiblesand other items covered by the business tax (BT)regime do not interact with the items covered by theVAT regime. Many have asserted that these tax poli-cies resulted in ‘‘double taxation’’, since BT and VATare not creditable against each other. Unlike othercountries with a merged GST regime, China has morecascading tax costs and blockage of VAT which other-wise would be creditable.

The VAT pilot transitioned three categories of busi-ness taxable items to the VAT regime and introducedtwo new rates along with a 0 percent rate for certainservices.

It is designed to test the outcomes arising from thetransition of certain BT services to VAT. The ShanghaiVAT pilot was launched in January 2012 and has af-fected over 120,000 new ‘‘in-scope’’ VAT taxpayers.

Figure 2: VAT pilot in-scope services

General VAT taxpayers Leasing Movable property leasing 17 percent

Transportation Transportation services 11 percent

Modern R&D technology services 6 percent

Information technology services

Culture and creative services

Logistics auxiliary services

Authentification and consulting services

Small-scale taxpayers All VAT pilot services 3 percent

Special Other exempt or zero rates servicesstipulated by the MoF and SAT

0 percent


The VAT pilot also sets the scene for future VATregulatory developments. The aforementioned in-scope VAT pilot services would be rolled out on a na-tionwide basis on August 1, 2013. Other services, suchas financial services and real estate transactions willeventually be folded into the GST regime. Rapid ex-pansion of the pilot to new locations may actually ac-celerate an overall reform due to the difficulties ofadministering different sets of rules that create cross-border transactions, even within China.

III. Managing VAT

Based on our experience, it is challenging to fully un-derstand and appreciate how Chinese VAT affects acompany. Especially since the governing regulationsand VAT accounting treatment vary greatly from otherinternationally recognised systems. It is not difficultto see how keeping up with these developments couldbe a full time job for one or many staff.

Unfortunately, most companies do not have dedi-cated VAT resources with either the allocated respon-sibility or sufficient time to monitor, read andcomprehend the frequently changing regulations.They are not able to develop insights into the implica-tions for the company or how to respond appropri-ately.

VAT work in China requires more of everything:more transactions, more documentation, more paper,more invoices, more steps in the process, more data,more returns, more involvement of the CTB. This canoverwhelm resources and lead to difficulty in main-taining compliance. In order to overcome the addi-tional workload created by all the ‘‘more’’, it isimportant to understand how the major componentsof VAT link together in the organisation.

It is not surprising that once companies understandall of these important factors that they decide to divedeeper into Chinese VAT. How should they begin thisjourney?

China is almost unique in that most companies willhave numerous legal entities performing differentfunctions and this affects VAT in different ways. Astarting point for assessing how to prioritise compa-nies could be based on variations of the types of VATtransactions and VAT complexity of the type of legalentity and processes. It is important to note that thisis not the only way to prioritise companies, nor doesthis equate to VAT risk — even a small legal entity withlimited transactions can have high levels of risk. Evensmaller companies can have more issues due to lim-ited staffing levels, less understanding of the regula-tions and incomplete processes.

By diving into the depths of Chinese VAT, compa-nies will benefit greatly through reduced risks, im-proved compliance, decreased costs and greatercashflow efficiency which can help both the top andbottom line.

Most companies can benefit greatly from focusedprojects that help to bring VAT operations to the sur-face, such as: VAT process reviews, discovery dataanalytics, reconciliations between ERP, VAT data; etc.Dedicated efforts at each legal entity will usually iden-tify areas of strength, areas for improvement and po-tential savings opportunities that can set the agendafor future action to be taken by responsible VAT staff.Notwithstanding this, Figure 3 below seeks to providea high-level idea of how types of legal entities may beplotted along the continuum of variations of transac-tions and overall complexity to assign a priority ofwhere to start. By diving into the depths of ChineseVAT, companies will benefit greatly through reducedrisks, improved compliance, decreased costs andgreater cashflow efficiency which can help both thetop and bottom line.

Kenneth Leung is an Indirect Tax Partner at Ernst & Young,China. He may be contacted by email [email protected]

Robert Smith is an Indirect Tax Partner at Ernst & Young,China. He may be contacted by email [email protected]

Low High

Less

More

Figure 3: How to prioritise where to focus onChina VAT?

Mega companyExport and domestic manufacturer, large salesvolume, trading and distribution activities, R&D,bonded and non-bonded transactions etc.

Large scale manufacturerMixture of domestic and export sales

Export manufacturerMostly export-oriented production

In-scope service companyR&D, transportation, service companyor other providing in-scope Pilotservices now subject to VAT

Simple manufacturerMostly domestic

FTZ trade company

FICE trade company

Va

ria

tio

ns

of

VA

Ttr

an

sa

cti

on

s

VAT complexity




R&D tax incentivesin SingaporeAlan Garcia, Chiu Wu Hong and Harvey KoenigKPMG, Australia and KPMG, Singapore

In our second article in Tax Planning InternationalAsia-Pacific Focus, canvassing the research anddevelopment (R&D) landscape across the Asia

Pacific region, we turn our country-specific focus toSingapore. Herein, we describe the basic tenets of Sin-gapore’s R&D tax regime and also provide some in-sights and examples from our experience in deliveringR&D tax services in the field. KPMG operates a globalR&D Incentives practice deploying an integrated net-work of R&D specialists to advise multinationals andlocal businesses alike on obtaining R&D tax entitle-ments.

I. Introduction

Singapore is positioning itself as a science and inno-vation hub. Central among its strategies to achievethis aim is to raise public and private sector R&Dspending.

In 2008, in an effort to encourage more private-sector spending on R&D, the Inland Revenue Author-ity of Singapore (IRAS) introduced a package ofgenerous incentives, from financial grants to tax in-centives, covering various activities along the produc-tivity and innovation value chain.

The R&D tax incentive is intended to apply to all in-dustries and is one component of Singapore’s Produc-tivity and Innovation Credit (PIC) scheme. Theprimary objective of this legislation has been to buildR&D capability in Singapore by providing benefits totaxpayers that incur R&D expenditure and are thebeneficiaries of the R&D activity.

II. R&D benefit categories

The PIC scheme provides a tax deduction of up to 400percent on the first SGD$400,000 of qualifying R&Dexpenditure for each year of assessment from 2011 to2015. The annual expenditure caps may be combinedover multiple years as follows:

s Combined cap of SGD$800,000 for years of assess-ment 2011 and 2012.

s Combined cap of SGD$1,200,000 for years of as-sessment 2013 to 2015.The three pillars of innovation under the PIC

scheme are summarised below:

1. Enhanced tax deduction for R&D expenditure

All industry sectors are included in the target audi-ence for the R&D tax incentive. Any business based inSingapore is eligible to lodge an R&D claim whetherthe R&D is undertaken in-house or outsourced, how-ever, the claimant entity must be the beneficiary of theR&D activities.

Qualifying R&D, whether undertaken in Singaporeor overseas, receives a tax deduction of 400 percent ofactual expenditure on the first SGD$400,000 in eachyear of assessment (YA) and effective for the years ofassessment 2011 to 2015.

For R&D conducted in Singapore, a tax deductionof 150 percent of actual expenditure applies toamounts above SGD$400,000. Moreover, taxpayersmay be able to obtain a further benefit capped at amaximum of 200 percent of expenditure incurred in-stead of 150 percent. This additional benefit schemerequires application to and approval by the SingaporeEconomic Development Board.

If R&D is conducted overseas, a standard tax deduc-tion of 100 percent applies to expenditure aboveSGD$400,000 per YA – that is, no enhanced deduc-tions apply.

If the taxpayer chooses to outsource its R&D, 60percent of the costs of that R&D are deemed as quali-fying expenditure unless otherwise justified.

2. Enhanced tax deduction for registration of IP rights

All industry sectors are eligible to access this en-hanced deduction of 400 percent on the firstSGD$400,000 of expenditure incurred on patentingcosts or other qualifying intellectual property (IP) reg-istration costs in each YA between 2011 to 2015.Beyond SGD$400,000 of such costs a standard deduc-tion of 100 percent applies.

The claimant entity must own the legal and eco-nomic rights to the IP for a minimum period of oneyear from the date of filing to the date of disposal. Ifthis requirement is not met, clawback provisions willapply.

Alan Garcia is anR&D Tax Partnerat KPMG,Australia and isKPMG’sAsia-PacificRegional R&DLead Partner,Chiu Wu Hong andHarvey Koenig areTax Partners atKPMG,Singapore.


3. Enhanced writing-down allowance for acquisition andlicensing in of IP rights

As for 2 overleaf, all industry sectors comprise thetarget audience for the enhanced IP write-down provi-sion which allows for a 400 percent claim on the firstSGD$400,000 of expenditure incurred in acquiring IPrights. This benefit applies for each YA between 2011to 2015.

The claimant entity must own the IP rights for atleast five years from the date of acquisition to the dateof disposal, failing which clawback provisions will beapplied.

Additionally, effective from the YA 2013, licensingrights have been included in addition to the currentbenefits for IP acquisition under the PIC scheme. Thisis in response to an evolving innovation ecosystemwhere companies may prefer to pay licence fees forthe use of certain IP rights (e.g. technology) instead ofalways acquiring the IP. With the current enhance-ment made to the PIC scheme, businesses that makelicence/royalty payments, excluding franchising ar-rangements, from YA 2013 to YA 2015 would qualifyfor the PIC benefits.

III. Qualifying as R&D

The Singapore Government requires that R&D activi-ties must be conducted either by the taxpayer directlyor contracted by the taxpayer to an R&D organisationwithin Singapore. In both of these scenarios, R&D taxconcessions will only apply to R&D expenditure in-curred by a taxpayer that remains the beneficiary ofthe R&D activity.

R&D activities may be performed overseas, how-ever, the activities must relate to the R&D claimant’sexisting trade or business.

Importantly, the Government recognises that R&Doccurs not only in the obvious areas of manufacturingand engineering, but also increasingly within the ser-vices sector of the Singapore economy.

IV. The definition of R&D

IRAS’s definition of R&D activity is largely alignedwith neighbouring jurisdictions which does simplifythe R&D tax claim process for multinationals. For thepurposes of determining tax concessions, Singaporedefines R&D as:

‘‘any systematic, investigative and experimental studythat involves novelty or technical risk carried out inthe field of science or technology with the object of ac-quiring new knowledge or using the results of thestudy for the production or improvement of materials,devices, products, produce, or processes. . .’’

The definition continues to exclude certain activi-ties which are further explained in the section below:What does not constitute R&D.

For the purposes of practical application, the abovedefinition can be broken down into three points toconsider as follows:

1. What type of activity was undertaken?The taxpayer must be able to demonstrate that its

R&D efforts were not comprised of random, uncoor-dinated or unstructured activities but rather that its

R&D was undertaken in a systematic, investigativeand experimental way within science or technologydisciplines.

The taxpayer should use suitably qualified person-nel to conduct the R&D and retain the data and/or re-sults from the R&D as well as any reports detailingsuccess or failures.

2. Why was the activity performed?The fundamental reasons for conducting R&D

should be to acquire new knowledge or to create newor improve existing products or processes. This meansthat the taxpayer is looking to test something that isnot known or not readily deducible without perform-ing the R&D activity.

Most importantly, success of R&D activities is not apre-requisite for eligibility of the R&D tax concessionas failure is often a good indicator of technical risk.

3. What was involved in the R&D activity?To achieve the objectives stated in the preceding

point, an R&D project must seek out a novel solutionor involve technical risk.

Novelty typically refers to something that is new inrelation to the creation or improvement of products orprocesses or the development of knowledge. For ex-ample, a company may satisfy the test for novelty if itmodified existing technology or processes from oneindustry for use in another industry where such use ofthe technology was not previously deployed.

Technical risk is usually encountered during anR&D project when the taxpayer needs to address sci-entific or technical issues that cannot be readily re-solved by a competent professional in the relevanttechnical field. Undertaking R&D in this context, thetaxpayer faces technical risk. Examples include theuse of new materials to improve or add functionality,using new materials to create new products thatbehave differently in a production environment, theproduction of smaller or lighter products as well asthe integration of technologies not previously at-tempted.

V. What does not constitute R&D?

By placing emphasis on aspects of novelty, technicalrisk, new knowledge, systematic, investigative and ex-perimental activities in science and technology fields,the Singapore Government thereby excludes certainactivities from being considered as R&D. Excludedactivities are quality control testing, other routinetesting, routine data collection, cosmetic modifica-tions or stylistic changes, market research, sales pro-motion activities, efficiency surveys or managementstudies.

IRAS excludes these types of activities from R&Dtax incentives for several reasons:

s To focus more clearly R&D on the fields of scienceand technology.

s To clearly delineate R&D from routine activities orimprovements that occur during the ordinarycourse of the taxpayer’s business.

s To separate R&D activities from work that occursbefore and after the R&D stage.


VI. Software R&D

In July 2012, IRAS amended the R&D tax legislationand removed the previous exclusions that related tosoftware development. The changes suggest that IRASrecognises software innovation and development asequally important to R&D undertaken in other areasof science and technology.

Specifically, for YA 2012 onwards, IRAS decided toremove the existing ‘‘multiple sale requirement’’which previously excluded software that was devel-oped without the intention for sale, rent, lease, licenseor hire to two or more unrelated parties, therefore dis-advantaging companies that developed innovativesoftware platforms that were for internal purposesonly.

The IRAS amendments acknowledge the impor-tance of software R&D whether for external sale or in-ternally focused on ERP, CRM or accounting systems.

However, IRAS has also released examples of thetypes of software development that would not be re-garded as R&D. These relate to routine software de-velopment, specifically the use or implementation ofcapabilities of existing software as it was intended tobe used and within existing limitations.

Overall, the changes provide a welcome opportunityfor all businesses to reassess any aspect of their R&Dactivity that may involve software development andto, therefore, convert significant IT investment intotax savings. This is especially true for service sectorbusinesses which thrive on the quality of their cus-tomer service. In our increasingly digital, real-timeand mobile world, the delivery of services requirescontinuous reinvention and transformation to meetand exceed customer demands.

VII. Claiming the R&D incentive

Businesses are required to lodge their enhanced R&Dtax deduction claims in their annual tax return. De-tailed technical project descriptions are requiredwhen aggregated R&D expenditure equals or exceedsSGD$150,000, net of any government subsidies in-cluding grants.

R&D tax claims are subject to detailed review byIRAS as part of their standard tax assessment proto-cols.

VIII. Examples and insights from R&D in Singapore

In accordance with the definition of R&D above, busi-nesses from all industries can now claim the R&D in-centive.

Examples of potentially qualifying projects are asfollows:

(i) The development of a new or significantlyimproved product

A food development company attempts to create anew or significantly improved formulation to achievehigher food quality (e.g. better texture and taste) that

is not available by competitors in the market. The de-velopment of formulations would potentially havetechnical risk if a competent professional would notknow how to achieve the desired result at the outset ofthe project.

For example, in the development of food formula-tions, technical risk may be present in achieving thecorrect balance of elements to achieve the desiredquality, or in undertaking development to increaseproduct quality while ensuring the product remainscost effective. Hence, the company is required to con-duct systematic, experimental and investigative pro-cesses to arrive at the ideal food formulation that maymeet the requirements of the definition of R&D in Sin-gapore.

(ii) The development of a new and advanced coreIT system in the financial sector

A commercial banking company attempts to designand develop an advanced core banking system withextensive functionality (e.g. new products and ser-vices) to be used by their clients. Due to the company’shighly complex and disparate IT infrastructure, thedevelopment may have significant technical risks.

For example, in the development of the core bank-ing system, technical risk may be present in achievinga system with extensive new functionalities while en-suring the system is highly secured and able to oper-ate in a variety of environments and meet stringentlegislative requirements. Ensuring communicationbetween multiple disparate technologies that have notcommunicated previously, and where there is no suchstandard, as well as the integration of multiple dispa-rate internal technologies may create technologicalrisk. Hence, the company may be required performseveral iterations of design, development and testingto ensure the advanced core banking system couldmeet its overall technical requirement.Alan Garcia is an R&D Tax Partner with KPMG in Melbourneand is KPMG’s Asia-Pacific Regional R&D Lead Partner. He hasmore than 17 years of R&D tax experience across all industriesincluding energy and natural resources, InformationTechnology, manufacturing, food-sector, agribusiness andbiotech as well as undertaking reviews for multi-site global andnational companies. Alan manages ‘high value’ R&D audits andappeals, providing advice on R&D issues, including strategyand R&D planning.Chiu Wu Hong and Harvey Koenig are R&D Tax Partners inSingapore with many years of income tax, R&D tax andinternational taxation experience.

For further information relating to this article, please contactthe authors by email at: [email protected],[email protected], [email protected]

Disclaimer

The information contained herein is of a general nature and isnot intended to address the circumstances of any particularindividual or entity. Although we endeavour to provide accurateand timely information, there can be no guarantee that suchinformation is accurate as of the date it is received or that it willcontinue to be accurate in the future. No one should act on suchinformation without appropriate professional advice after athorough examination of the particular situation.





New Zealand: Budget2013 and recent taxchangesCasey PlunketChapman Tripp, New Zealand

I. Introduction

The New Zealand Budget for 2013–14 was de-livered on May 16. In contrast to the Austra-lian Budget the week before, a combination of

successful expenditure control and revenues ahead ofprevious forecasts allowed the Government to main-tain its 2012 Budget forecast of returning to surplus in2014–15, although the size of the surplus predictedhas been trimmed since last year’s Budget to a barelymeasurable NZ$79 million.

The surplus has been achieved without any increasein general tax rates, other than an increase of 3 centsper annum for the next three years in the petrol excisetax (currently NZ$0.50 per litre, low by internationalstandards, and justified at least in part by a decline inthe volume of petrol sold).

On May 20, the Government introduced the Taxa-tion (Annual Rates, Foreign Superannuation, and Re-medial Matters) Bill. This Bill is primarily concernedwith overhauling the taxation of non-hydrocarbonmining (primarily gold, silver and iron sands), andproposing a new and simplified regime for the taxa-tion of immigrants with non-New Zealand workplacesavings.

II. Tax changes announced in the Budget

Reflecting the relatively favourable state of affairs inthe public finances, Budget 2013 includes only threemodest tax changes, two of which are taxpayer favour-able.

A. Deductions for ‘‘black hole expenditure’’

The first proposal favourable for taxpayers is to allowa deduction for certain items of expenditure for whichno deduction or capitalisation is currently allowed oravailable. These are the costs of:s failed patent or plant variety right applications;s failed applications for limited life resource con-

sents;s some company administration matters, e.g. annual

general meetings, or paying a dividend.

This change is proposed to come into force in the2014–15 tax year.

B. R&D tax credit

The second proposal is to introduce a cash refund oflosses arising from R&D expenditure incurred bystart-up businesses. This proposal is yet to be devel-oped, and seems unlikely to come into force before the2015–16 tax year. However, it is likely to gain impetusfrom a recent report showing New Zealand expendi-ture on R&D is only 1.2 percent of GDP, compared toan OECD average of 2.44 percent.

C. Expanding the thin capitalisation regime

The Budget confirmed the Government’s intention toexpand the current thin capitalisation regime. Theregime will apply not only to New Zealand companieswith a single foreign controller, but also to companieswhich are controlled by a group of non-residents. Leg-islation to achieve this is proposed to be introduced inAugust, to take effect in the 2014–15 tax year.

This measure is potentially the most far-reachingand complex of those in the Budget. New Zealand hasa relatively pure thin capitalisation regime, whichdenies a deduction for both related and third party in-terest incurred by an New Zealand corporate groupwhich is:s controlled by a single foreigner; and

s has a debt-to-asset ratio which exceeds the greaterof:s 60 percent; ors its worldwide debt to assets ratio.

If the regime applies, the company is effectively dis-allowed a deduction for the portion of its interest billwhich reflects the percentage by which its debt isabove the permissible maximum.

There is a separate regime for foreign controlledbanks, based on a requirement for capital equal to 6percent of risk weighed exposures.

The requirement for a single foreign controller ex-cludes from the regime both:

Casey Plunket is aTax Partner atChapman Tripp,New Zealand.


s majority foreign owned but widely held companieslike Telecom; and

s companies with a tighter majority foreign share-holding, such as often occur in forestry, or in com-panies controlled by a group of private equityfunds.The Government wants to bring this second group

within the thin capitalisation regime. The particular‘‘mischief’’ it has identified is the possibility that theshareholders will fund the company primarily withshareholder loans. With no thin capitalisation rulesapplying, interest on such loans is fully deductible,while the shareholders are generally subject to non-resident withholding tax on the interest at a rate of 10percent gross. This is a lower rate than the effective 28percent imposed on profits distributed on equity.

The main legislative features of the proposal will be:s a definition of when shareholders are acting to-

gether in a way that brings the company within theregime. This definition has yet to be developed. It islikely that it would include shareholders who areparty to a shareholders’ agreement, covering suchactions as voting and selling their shares. It is notclear how much further it might go; and

s an exclusion of shareholder debt when measuringthe worldwide debt-to-assets ratio.

III. Changes included in the Bill

A. Minerals mining

New Zealand’s current regime for the taxation of non-hydrocarbon mining contains numerous concessions.Most expenditure, whether it is on prospecting, explo-ration or development, is deductible either when in-curred, or up to two years before that time (subject tocertain requirements). The Bill proposes to continuewith a special purpose regime for such mining, but tobring it closer into line with general tax principles.However, important differences remain. The main el-ements of the regime as introduced in the Bill are:s Prospecting and exploration expenditure immedi-

ately deductible, though non-permit specific assetswill have to be depreciated.

s No deduction for expenditure on acquiring land formining purposes until the land is sold.

s Deductions for successful exploration expenditurerecaptured, if incurred on items subsequently usedto operate a mine.

s Mine development expenditure to be spread overthe life of a mine, either on a unit of productionbasis (for items whose life is tied to that of themine) or under the depreciation rules.

s Ordinary capital/revenue rules to determine the de-ductibility of costs incurred in operating a mine –(for example, costs incurred in acquiring a non-permit-specific depreciable asset would be deduct-ible under the ordinary depreciation rules).

s Repeal of the special rules allowing a corporateshareholder in a mining company a deduction forlosses on loans made to the company, if the loansare used to fund mining activities.

s Reclamation/restoration expenditure to be deduct-ible only when paid. This prevents an argument thatsuch expenditure is ‘‘incurred’’ (and therefore

deductible, under the usual test) as the obligation topay it accrues by virtue of mining operations. Al-though this seems an extraordinary and unwar-ranted departure from general principles, noexplanation is given for it. The Bill does proposethat a potentially complex refundable credit be al-lowed for such expenditure, to deal with the factthat it may be incurred after income has ceased tobe earned.

s The current treatment of mining tax losses to con-tinue. Generally this involves the ring-fencing oflosses to permit areas, and the ability to carry themforward without regard to shareholder continuity.The proposed extension has required some other

modifications to the regime for the newly includedgroups. They will not be subject to interest disallow-ance if they have no shareholder debt. If they do haveshareholder debt, then they will be subject to interestdisallowance if:s their total debt to assets ratio exceeds the 60 per-

cent threshold; and

s their shareholder debt exceeds 10 percent of theirthird party debt.These changes are intended to apply from the be-

ginning of the 2014–15 tax year. Submissions will becalled for by the Select Committee considering theBill.

B. Foreign superannuation

The tax treatment of interests in foreign superannua-tion schemes and other forms of retirement savingsheld by migrants to New Zealand has for years beenboth complex and unfair. While the four year transi-tional resident rule solved the issue for temporary mi-grants, for those remaining in New Zealand for alonger period, tax outcomes were sometimes arbi-trarily harsh, and non-compliance was correspond-ingly high (the Government estimated a 70 percentnon-compliance rate). Taxpayers were often particu-larly bemused by the application of the foreign invest-ment fund (FIF) regime, which imposed New Zealandtax on either purely fictional, or unrealised, gains.These are the same rules that apply to the taxation ofmost foreign portfolio equity investments made byNew Zealand residents.

The Bill proposes a special regime for taxing foreignsuperannuation interests held by New Zealand resi-dents, with effect from the 2014–15 tax year. Theregime has the following key elements:s Immigrants will generally be able to move their for-

eign superannuation into a New Zealand vehiclesubject to New Zealand tax with no New Zealandtax on the transfer, if they do so within four years ofbecoming New Zealand residents. This ability canbe used only once. Whether this is possible or advis-able will of course also depend on the tax and non-tax rules applying in the relevant foreignjurisdiction. One relevant fact may be that NewZealand savings vehicles are generally fully taxable,their only tax benefits being the maximum 28 per-cent tax rate and the exemption from tax on gainson Australian listed and New Zealand equities.

s After the four-year period, any payment out of a for-eign superannuation scheme to either the immi-grant, or an Australian or New Zealand scheme for


their benefit, will be taxable to the immigrant,under either the schedule method or the formulamethod. Amounts received on transfer of an inter-est will be taxed in the same way.

s The schedule method treats a portion of the pay-ment as income, regardless of whether that pay-ment has come from contributions to or earnings ofthe scheme. The portion increases over time, from4.76 percent in year 1 to 100 percent in year 26.

s The formula method attempts to tax only:s the portion of the payment which is attributable

to the growth in value of the superannuation in-vestment which occurs after the person has beenNew Zealand tax resident for four years; plus

s an additional amount to recognise the value ofdeferral (i.e. tax only on payment, rather thanaccrual).

s Transfers from one non-Australasian scheme to an-other are not taxable.

s The proposed regime does not apply to:s foreign pensions, annuities or social security re-

ceipts. As is currently the case, these paymentsare fully taxable on receipt, subject to potentialapplication of a tax treaty;

s payments from Australian superannuationschemes, which are specifically exempt underthe NZ/Australia tax treaty.

The Bill proposes to amend the provisions relatingto the statutory superannuation scheme, known as Ki-wiSaver, to allow early withdrawals to pay any tax im-posed on payments under the above regime.

The Bill also contains transitional provisions.

Anyone who previously declared income from theirforeign superannuation scheme under the FIF regimemay continue to do so.

Anyone who did not declare income from their for-eign superannuation scheme under the FIF regimeand who has received, or receives before April 1, 2014,a lump sum payment, can treat only 15 percent of thatpayment as taxable.

These changes are likely to be of reasonably wide-spread interest, given the high number of New Zea-land expatriates who eventually return to NewZealand. Again, submissions will be called for.

Casey Plunket is a Tax Partner at Chapman Tripp. He may becontacted by email at [email protected].



Australia’s firstresponses to baseerosion and profitshiftingFletch Heinemann and Frances LearmonthCooper Grace Ward Lawyers, Australia

I. The politics

The Australian Government has identified thatglobalisation and the rise of the digitaleconomy is jeopardising its corporate tax

base. The problem of globalisation is not new, but itssignificance continues to increase as Australian con-sumers of e-commerce products contract directly withoffshore entities. Multinationals such as Google, eBayand Apple have been caught in the political debate.

Treasurer Wayne Swan said in a media release onMay 14, 2013 that: ‘‘Protecting the integrity of our cor-porate tax system will ensure a stable source of rev-enue to fund vital investments in our economy andcommunity, underpinning a stronger, smarter andfairer Australia.’’1

This rhetoric is significantly more moderate thanprevious statements to the Australian FinancialReview made by the Assistant Treasurer that:‘‘[M]ultinationals that failed to pay their fair share oftax were ‘free riding on the efforts of others’.’’2

In May 2013, the Australian Government’s TreasuryDepartment released a paper titled Implications of theModern Global Economy for the Taxation of Multina-tional Enterprises, which highlighted the challengesfaced in an ever-changing global economy and withthe current international tax system. The paper statedthat: ‘‘These developments in the global economy overrecent decades pose a number of challenges to theability of the international tax system to deliver appro-priate outcomes for countries. A key issue is whethertax concepts developed for the industrial age can bemade to work in the era of the digital economy.’’3 (au-thor’s emphasis in italics)

The Treasury’s paper drew much of its substancefrom the Organisation for Economic Co-operationand Development (OECD) report titled AddressingBase Erosion and Profit Shifting. The OECD reportcommented on the importance of reform:

‘‘What is at stake is the integrity of the corporateincome tax. A lack of response would further under-mine competition, as some businesses, such as thosewhich operate cross-border and have access to sophis-ticated tax expertise, may profit from [base erosionand profit shifting] opportunities and therefore haveunintended competitive advantages compared withenterprises that operate mostly at domestic level.’’4

Unfortunately, the Australian Government’s pre-liminary response was to patch up some of the exist-ing provisions and rule out a comprehensive reviewthat would necessarily include a review of taxing con-sumption expenditure in Australia.

II. Inherent nature of base erosion

The serious tax challenge for Governments is thetrend of multinationals moving from replicating theirbusiness model in multiple jurisdictions to operatingan integrated global structure with favourable taxconsequences in a single economic environment. Anexample of this is the use of a structure such as the‘Double Irish Dutch Sandwich’, which has receivedsubstantial political airtime in Australia. The increas-ing importance, value of and mobility of intellectualproperty means that economic assets do not need tobe located near either production centres or salesmarkets. The OECD summarised the issue:

‘‘Globalisation is not new, but the pace of integrationof national economies and markets has increased sub-stantially in recent years. The free movement of capitaland labour, the shift of manufacturing bases from high-cost to low-cost locations, the gradual removal of tradebarriers, technological and telecommunication develop-ments, and the ever-increasing importance of managingrisks and of developing, protecting and exploiting intel-lectual property have had an important impact on theway multinationals are structured and managed. Thishas resulted in a shift from country-specific operatingmodels to global models based on matrix manage-ment organisations and integrated supply chains that

Fletch Heinemannis a SeniorAssociate andFrances Learmonthis a Law Clerk forCooper GraceWard Lawyers,Australia


centralise several functions at a regional or globallevel. Moreover, the growing importance of the servicecomponent of the economy, and of digital products thatoften can be delivered over the internet, has made it pos-sible for businesses to locate many productive activitiesin geographic locations that are distant from the physi-cal location of their customers.’’5 (author’s emphasis initalics)

The rise of the digital economy is a key example ofhow the current international tax rules fall short ofwhat is considered equitable tax. The OECD observedthat: ‘‘[C]urrent international tax standards may nothave kept pace with changes in global business prac-tices, in particular in the area of intangibles and thedevelopment of the digital economy.’’6

Consequently the adequateness and sustainabilityof taxing multinationals poses a challenge as it hasbecome apparent that it is now ‘‘possible to be heavilyinvolved in the economic life of another coun-try. . .without having a taxable presence therein.’’7

The heart of the base erosion problem in Australiais that income tax is levied on source and residency. Inthe digital era, economic activity in the form of salesto Australian consumers will remain untaxed as longas multinationals have no residence or permanent es-tablishment in Australia. Thereare many commercial reasonswhy multinationals would notwant to establish a residentsubsidiary or permanent estab-lishment in Australia.

There are local laws requir-ing compliance with corpora-tions, employment,immigration, consumer andcompetition, contract and in-tellectual property rules (toname a few). Simply in terms ofcompliance costs, in manycases it is attractive for multi-nationals to minimise theiroverseas presence, especially ifthis is multiplied across various jurisdictions, regard-less of the tax implications.

The solution requires a fundamental rethink of howto tax either consumption expenditure or e-commercetransactions connected with Australia. In Australia,consumption expenditure is currently taxed by theGST, but its base does not extend to adequately taxingconsumption of digital products from overseas suppli-ers. There is also heavy political reluctance to discussany amendments to the base and rate of the GST.

III. Proposals paper

In May 2013, the Australian Government released apaper titled Addressing profit shifting through the arti-ficial loading of debt in Australia. The proposal paperseeks to: ‘‘address profit shifting opportunities thatarise when multinational entities (multinationals)have the ability to artificially load excessive amountsof debt in their Australian operations.’’8

There are three limbs to the proposed reforms:9

1. Tightening the safe harbour settings in the thincapitalisation rules while still ensuring taxpayershave access to other tests where they have higherborrowings at commercially independent levels.

2. Implementing the 2009–10 Budget announcementto reform the exemption for foreign non-portfoliodividends (section 23AJ of the Income AssessmentAct 1936).

3. Repealing the special rule that allows tax deduct-ibility for interest expenses incurred in derivingexempt foreign income (section 25–90 of theIncome Assessment Act 1997).The above reforms are proposed to have effect for

income years that commence on or after July 1, 2014.This is to provide time for taxpayers to rearrange theirfinancing arrangements.

A. Shrinking the size of the thin capitalisation safeharbours

The safe harbours in the thin capitalisation rules pro-vide certainty to taxpayers. To the extent that Austra-lian debt deductions are within the safe harbour,those deductions are generally allowable (subject tothe general deductibility principles and specific rulessuch as the transfer pricing provisions). Currently,there is a general safe harbour for a debt-to-equityratio of 3:1.

The Treasury is concerned that the existing rules are

too concessional and have proved ‘‘ineffective inachieving their stated policy objective of ensuring thatdebt is not artificially loaded in the Australian opera-tions’’. The paper states:

‘‘The Reserve Bank of Australia’s Financial StabilityReview of March 2013 [which] indicates that businessgearing levels have remained at relatively low levels.Among listed non-financial corporates, the aggregategearing (book value debt-to-equity) ratio was esti-mated to be 54 percent as at December 2012. Accord-ing to the Treasury’s analysis of the 2011 financialstatements for 2044 ASX listed companies (other thanbanks) 95 percent of those companies had gearinglevels less than 1.5:1.’’10

Treasury considers that this means ‘‘taxpayers canload debt into Australia using the difference betweendebt levels that would be adopted for non-tax reasonsand the safe harbour limit’’.11 The proposed reformsalter the safe harbour debt to equity ratio from 3:1 to1.5:1 – or from 75 percent to 60 percent on a debt-to-total assets basis.

In addition, there is a proposal to amend the world-wide gearing test. The paper states:

‘‘The worldwide gearing test permits gearing to thelevel of the worldwide group of which the entity is a

‘‘The serious tax challenge ... isthe trend of multinationals movingfrom replicating their businessmodel in multiple jurisdictions tooperating an integrated globalstructure...’’


member. The test currently allows gearing in Australiato be equal to 120 percent of the group’s global gear-ing. This will be reduced to 100 percent so that de-ductible expenses for gearing in Australia isproportionate to the global gearing of the group. Aratio of 100 percent directly addresses the issue ofdebt being artificially loaded in Australia that the rulesare designed to address.’’12

Currently, the worldwide gearing test is only avail-able to outbound investors. However, in the proposedreform this will be extended to inbound investors onthe basis that:13

‘‘This test better reflects the policy intent of the thincapitalisation rules to prevent the excessive allocationof debt to Australia for tax purposes. It allows the Aus-tralian operations to claim deductions on their debtwhere they are geared to the same level as the globalgroup.’’

The legislation will continue to include an arm’slength test. This is generally used by taxpayers withworldwide gearing levels above the relevant safe har-bours, but with borrowings that are consistent witharm’s length arrangements.

In summary, the proposed thin capitalisation re-forms are as follows:s The safe harbour debt limit for ‘general’ entities will

be reduced from 3:1 to 1.5:1 on a debt to equitybasis. This translates to a reduction in the safe har-bour from 75 percent to 60 percent on a debt-to-total asset basis.

s For non-bank financial entities, the safe harbourdebt limit will be reduced from 20:1 to 15:1 on adebt-to-equity basis (or 95.24 percent to 93.75 per-cent on a debt-to-total asset basis).

s For banks, the safe harbour capital limit will be in-creased from 4 percent to 6 percent of the riskweighted assets of their Australian operations.

s For outbound investors, the worldwide gearingratio will be reduced from 120 percent to 100 per-cent (with an equivalent change to the worldwidecapital ratio for banks).The reforms also aim to reduce compliance costs

and ensure small businesses are excluded from theregime. The current de minimis threshold is proposedto be increased from AUS$250,000 to AUS$2,000,000in debt deductions.

B. Non-portfolio dividend exemption

There is currently an arbitrage opportunity in theincome tax provisions where an Australian entitylends to a related overseas entity.

The opportunity involves structuring the transac-tion so that the interest received by the Australianentity is characterised as an exempt non-portfoliodividend.14

The proposed reform is that such transactions arecharacterised based on their substance rather thanlegal form, with the effect that the Australian entity isliable for interest received from the related overseasentity.

C. Deductibility of interest for foreign exempt income

The current income tax rules contain specific provi-sions allowing certain deductions in relation to for-eign exempt income.

This provision is to be repealed under the proposedreforms.

IV. A meaningful review

The current proposed reforms are not intended to becomprehensive. However, the greater concern is thecurrent Australian Government’s reluctance tocommit to a meaningful review of the overarchingstructure for how international transactions must betaxed.

The OECD in their report recommended that:

‘‘[A] holistic approach is necessary to properly addressthe issue of [base erosion and profit shifting]. Govern-ment actions should be comprehensive and deal withall the different aspects of the issue. These include, forexample, the balance between source and residencetaxation, the tax treatment of intragroup financialtransactions, the implementation of anti-abuse provi-sions, including CFC legislations, as well as transferpricing rules. A comprehensive approach, globallysupported, should draw on an in-depth analysis of theinteraction of all these pressure points. It is clear thatco-ordination will be key in the implementation of anysolution, although countries may not all use the sameinstruments to address the issue of [base erosion andprofit shifting].’’15

In the Australian context, there needs to be a funda-mental shift in how the problem is dealt with at thepolitical level. Taxes on consumption expenditure(such as GST) or taxes on e-commerce transactions(such as those proposed in France) must be centralconsiderations in solving the base erosion issue. Dis-cussing these options must, at the very least, be con-sidered as part of a broader review. Plugging holes byamending thin capitalisation safe harbours andamending isolated provisions on exempt income anddeductibility will not protect the revenue base in anymeaningful way.

Former NSW premier Nick Greiner stated that areview of the GST was imperative ‘‘due to the perilouspublic finance conditions facing state governments.’’16

The unfortunate response from the Assistant Trea-surer was to issue a press release stating that:

‘‘The Liberals introduced the GST and now the Lib-eral Premiers are pushing Mr Abbott to increase thetax . . . A change to the GST would jack up the pricesfor consumers and rip away services from smallerstates like Tasmania and South Australia.’’17

Until there is acknowledgement that structuralreform is required, and that amendments to the scopeof the GST and other transactional tax solutions mustbe considered, the base erosion problem will continueto worsen regardless of the number of patches that areapplied in the meantime.

Fletch Heinemann is a Senior Associate at Cooper Grace WardLawyers, Australia. He may be contacted by email [email protected].

Frances Learmonth is a Law Clerk at Cooper Grace WardLawyers, Australia. She may be contacted by email [email protected].

NOTES1 Deputy Prime Minister and Treasurer, Protecting the Corporate TaxBase from Erosion and Loopholes, Press Release No.70, May 14, 2013.




2 Australian Financial Review, November 22, 2012 Labour targets digi-tal giants for tax by Katie Walsh.3 Treasury, 2013 Implications of the Modern Global Economy for theTaxation of Multinational Enterprises, p.6.4 OECD (2013), Addressing Base Erosion and Profit Shifting, OECDPublishing, p.50. http://dx.doi.org/10.1787/9789264192744-en.5 OECD (2013), Addressing Base Erosion and Profit Shifting, OECDPublishing, p.25. http://dx.doi.org/10.1787/9789264192744-en.6 OECD (2013), Addressing Base Erosion and Profit Shifting, OECDPublishing, p.7. http://dx.doi.org/10.1787/9789264192744-en.7 OECD (2013), Addressing Base Erosion and Profit Shifting, OECDPublishing, p.49. http://dx.doi.org/10.1787/9789264192744-en.8 The Australian Government the Treasury, 2013 Addressing profit shift-ing through the artificial loading of debt in Australia, p.1.9 The Australian Government the Treasury, 2013 Addressing profit shift-ing through the artificial loading of debt in Australia, p.2.

10 The Australian Government the Treasury, 2013 Addressing profitshifting through the artificial loading of debt in Australia, p.2.11 The Australian Government the Treasury, 2013 Addressing profitshifting through the artificial loading of debt in Australia, p.2.12 The Australian Government the Treasury, 2013 Addressing profitshifting through the artificial loading of debt in Australia, p.3.13 The Australian Government the Treasury, 2013 Addressing profitshifting through the artificial loading of debt in Australia, p.3.14 The Australian Government the Treasury, 2013 Addressing profitshifting through the artificial loading of debt in Australia, p.4.15 OECD (2013), Addressing Base Erosion and Profit Shifting, OECDPublishing, p.50. http://dx.doi.org/10.1787/9789264192744-en.16 The Australian, May 21, 2013 Time to consider raising GST, formerpremier Nick Greiner says.17 Assistant Treasurer, Senior Liberal Flags GST Review, Press ReleaseNo.79, May 18, 2013.


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Vietnam’s taxes onbusinessAlberto VettorettiDezan Shira & Associates, Vietnam

Given the weak global economic outlook andits internal economic issues, the Govern-ment in Vietnam is likely to extend a number

of beneficial measures to help companies to overcomeshort-term difficulties.

In a tough global economy, major foreign investorsin certain industrial sectors continue to prioritisetheir investments into Vietnam as a strategy to diver-sify sourcing options and supplier portfolios outsideof China. Many first and second tier suppliers, includ-ing small to medium-size enterprises, are following intheir footsteps, acting on the business potential thatVietnam holds for companies involved in a largersupply chain providing goods and services to manu-facturing hubs in Asia.

It is therefore increasingly important to understandthe taxes which Vietnam imposes on business, such asbusiness licence tax, corporate income tax and valueadded tax.

All taxes in Vietnam are imposed at the nationallevel, as there are no local, state or provincial taxes (al-though the implementation of these could have differ-ent interpretations according to different officials indifferent cities).

I. Business licence tax

Business licence tax (BLT) is an indirect tax imposedon entities conducting business activities in Vietnam,paid by enterprises annually for each calendar yearthat they do business in Vietnam. All companies, or-ganisations or individuals (including branches, shopsand factories) and foreign investors operating busi-nesses in Vietnam are subject to BLT.

The amount of BLT due is based on the amount ofcharter capital, as shown in the accompanying table.For state-owned enterprises, limited liability compa-

nies and joint stock companies, the registered capitalis the charter capital.

Business Licence Tax (BLT) Rates for EconomicEntities

Registered capital(billion VND)

BLT/year(VND)

Over 10 3,000,000

From 5 to 10 2,000,000

From 2 to under 5 1,500,000

Under 2 1,000,000

II. Corporate income tax

The Corporate Income Tax Law was approved by theNational Assembly in 2008 and came into effect in2009. Corporate Income Tax (CIT) is a direct tax leviedon the profits earned by companies or organisations.All income arising inside Vietnam is subject to CIT, nomatter whether a foreign enterprise has a Vietnam-based subsidiary or whether that subsidiary is consid-ered a permanent establishment. The standard CITrate is 25 percent for both domestic and foreign-invested enterprises (FIEs) in most industries.

In an effort to attract more foreign direct invest-ments, boost investment in Vietnamese businessesand to support struggling local enterprises, Vietnam-ese lawmakers have recently approved the Govern-ment’s proposal to reduce the current CIT rate from25 percent to 23 percent (the new rates are expected totake effect starting January 1, 2014).

This new tax rate would put Vietnam at an advan-tage over other neighbouring countries such as China(25 percent) Indonesia (25 percent) and the new risingstar Myanmar (30 percent). Having said that, othercountries such as Thailand do offer a lower CIT rate at20 percent and also more attractive incentives and taxbreaks for newcomers.

Now that macro-economic problems such as infla-tion, currency movements and high interest ratesseem to have been brought under control, Vietnamneeds to step up efforts to invert the trend of decliningforeign direct investment (FDI) in recent years. Overthe last decade, Vietnam has cancelled many of the taxbreaks and incentives it used to grant to investors. Atthe moment, only high tech, R&D, green technologies,

Alberto Vettorettiis ManagingPartner at DezanShira &Associates,Vietnam


selected services and software manufacturing sectors,including investments in economic zones and lowsocio-economic areas, attract CIT exemptions and de-ductions.

When calculating CIT, FIEs can deduct most ex-penses paid for production and business activities ifsupported by adequate lawful invoices and docu-ments. This is another area of concern for FIEs inVietnam, as frequently many expenses are barredfrom being deducted given the fact that they are notsupported by official invoices, or that they exceedsome pre-determined caps (for example, on advertis-ing, marketing and promotional expenses). This effec-tively means that in many cases the tax rate of acompany will be higher than 25 percent.

III. Value added tax

Value added tax (VAT) is imposed on the supply ofgoods and services at three different rates: 0 percent,5 percent and 10 percent (the standard rate).

Goods and services encouraged by the Governmentare exempt from VAT. These include agricultural prod-ucts, healthcare services andscientific activities, derivativefinancial and credit services, se-curities trading, insurance ser-vices, education and vocationaltraining, printing and publish-ing newspapers.

All organisations and indi-viduals producing and tradinggoods and services in Vietnamare liable to pay VAT, regardlessof whether the organisation hasa Vietnam-based establish-ment.

There are two different meth-ods of calculating VAT: thecredit method (also called the‘‘deduction method’’) and the direct method. Mostbusinesses are required to use the credit methodwhich applies to FIEs, foreign parties to business co-operation contracts, and business organisations fullyimplementing the accounting regime stipulated bylaw in Vietnam. The direct method is applicable tocompanies, organisations and individuals without aresident establishment in the country.

A. Credit method (deduction method)

Payable VAT amount = output VAT amount – creditableinput VAT amount

Under the credit method, payment and declarationof VAT is made on a monthly basis, where the taxpayersubtracts the input VAT from the output VAT, and paysor claims the balance to the relevant bodies. As men-tioned above, the direct method applies to businessestablishments and foreign organisations or individu-als without resident offices and which have not imple-mented the Vietnamese Accounting System, butgenerate income in Vietnam, along with those in spe-cific industries (such as gold, silver and gem tradingactivities).

B. Direct Method

Payable VAT amount = added value of sold goods or ser-vices X VAT rate

Added value of sold goods or services = selling price –purchasing price of said goods or services

According to this method, VAT depends on total rev-

enues. As such, the monthly payments are just provi-sional and the total amount of VAT may be different atthe end of the year. Therefore, when using the directmethod of calculation, tax finalisation proceduresmust be completed within three months following theend of the year.

For goods and services purchased from abroad, VATapplies to the duty paid value (the sum of the valueand the duty paid) of imported goods and services.The importer must pay VAT at the same time that theypay import duties to customs.

IV. Conclusion

Given the still weak global economic outlook and theinternal economic issues which are still hamperingthe development of local and foreign enterprises inVietnam, it is likely that the Vietnamese Governmentwill continue to extend a number of beneficial mea-sures to help companies to overcome short-term diffi-culties. These should include the extensions ofdeadlines for CIT and VAT payments of eligible enter-prises.

VAT Rates

Rate Applicability

0% Goods and services for export or sold tonon-tariff zones

5% 15 categoriess Fertiliserss Medical equipment and

instrumentss Scientific and technological servicess Cultural, exhibition, physical train-

ing and sports activities

10% Everything else

‘‘Given the still weak globaleconomic outlook and the internaleconomic issues... it is likely thatthe Vietnamese Government willcontinue to extend a number ofbeneficial measures...’’


At the same time, foreign companies in Vietnam arelikely to face harsher fines for missing tax deadlinesand for not being compliant to the various laws andregulations. Transfer pricing audits will also increasein number and depth, given the fact that exports countfor a whopping 70 percent of gross domestic productand that the majority of the sector is foreign invested.

The Vietnamese Government will have to play afragile balancing act. On one hand it has to ensurethat its fiscal grip is not too tight to choke the still deli-cate economy, disrupt the investment environment,and unnecessarily divert FDI to other neighboringcountries in search for the ideal manufacturing hub inAsia. On the other hand, it needs to ensure that fiscalcompliance is implemented efficiently and revenuescontinuously flow into the tax bureau’s coffers inorder to mitigate the inefficiencies of state-owned en-

terprises and their inability to pay back state bankloans and Government accumulated debts.

With the ASEAN free trade agreements coming intofull play by 2015 and the much anticipated additionaltrade pacts, Vietnam is scheduled to sign with boththe European Union and the United States. The coun-try has much to lose if the Government does not con-tinue along the hard but necessary road to economicdevelopment and financial stability.

Alberto Vettoretti is Managing Partner at Dezan Shira &Associates, Vietnam. He can be contacted [email protected] Shira & Associates is a specialistforeign direct investment practice providing a wide array ofbusiness advisory and corporate accounting services tomultinationals investing in emerging Asia. For further detailsplease visit http://www.dezshira.com.



http://www.dezshira.com

‘‘Secondment’’ or‘‘service’’ – the SAT ofChina gives itsanswerJacky Chu and Jessica MaPwC, Hong Kong

I. Introduction

In the last few years, many multinational groupshave been facing increasing scrutiny from theChinese tax authorities on their secondment ar-

rangements in China. This is because secondment ar-rangements were often suspected to be established tocover up the services provided by the foreign HomeEntity1 to the Host Entity2 in China. This has resultedin widespread tax disputes. In some cases, the HomeEntities were required to pay tax to China to settle thedisputes. Some had to incur extra time and costs todefend their cases many of them remain unresolved todate.

The State Administration of Taxation (SAT) recentlyreleased a long-awaited tax circular Public Notice[2013] No.19 (Public Notice 19). It provides both tech-nical and practical guidelines for the assessment ofthe nature of secondment arrangements. Hopefully, itwill help to resolve outstanding disputes and set out aclear framework for reference of Home Entities, HostEntities, and the Chinese tax authorities.

II. Issues in secondment arrangements

Under most secondment arrangements, the HomeEntity would settle the salary and benefits to the sec-ondees at the home country and seek to recover thesecosts from the Host Entity in China. The most conten-tious issue is whether such payment is merely for costreimbursement or in the nature of fees for servicesprovided by the Home Entity to the Host Entity via thesecondees. No Chinese corporate tax consequenceswould arise if it is merely a cost reimbursement. If thepayment is considered as fees for services, the HomeEntity may be taken as having created an establish-ment and place (E&P)3 or permanent establishment(PE)4 in China and subject to Chinese CorporateIncome Tax (CIT).

Although an existing SAT circular5 has already laiddown the principles for assessing the nature of sec-ondment arrangement, both the local-level tax au-thorities and multinational groups have been facingdifficulties in dealing with the issue (which mostlyended up with disputes) in the absence of practicalguidelines. Public Notice 19 now introduces practicalguidelines on the specific factors that need to be con-sidered and the detailed documentation requirement.

III. Overriding principle

According to Public Notice 19, the Home Entity shallbe taken as having created an E&P/PE for the provi-sion of services in China if the Home Entity:

s fully or partially bears the responsibilities and risksof the secondees’ work; and

s normally evaluates and assesses the secondees’ per-formance.The SAT mainly looks at which party is the eco-

nomic employer of the secondees in determiningwhether service has been provided by the HomeEntity to the Host Entity. This is the overriding prin-ciple in assessing the nature of the secondment ar-rangement and is generally in line with internationaltax practice.

IV. Five supplementary factors

Public Notice 19 also sets out the following fivesupplementary factors which have to be considered inapplying the overriding principle:

1. Whether the Host Entity pays management fees orservice fees to the Home Entity for the secondee;

2. Whether the Host Entity over-reimburses the HomeEntity for the salaries, social security and other ex-penses of the secondees;

Jacky Chu is a TaxPartner at PwCand Jessica Ma isSenior Managerat PwC, HongKong


3. Whether the Home Entity does not pay the fullamount received from the Host Entity to the sec-ondees and retains a certain amount;

4. Whether Chinese Individual Income Tax (IIT) hasnot been fully paid on the income of the secondeesthat is borne by the Home Entity;

5. Whether the Home Entity determines the number,qualifications, pay standards and the working loca-tions of the secondees.The first three factors focus on whether the Home

Entity would gain any financial benefits from the sec-ondment arrangement. It implies that even the chargeof reasonable administrative costs incurred by theHome Entity could lead to the potential creation of anE&P/PE in China.

The fourth factor should be welcomed by some mul-tinational groups. It is not uncommon to see that theChinese partner would disagree for the joint venturecompany to take up the full cost of the secondees fromthe foreign partner. Thus the Home Entity has to par-tially bear the cost of the secondees. It is good that theSAT does not simply take such circumstance as unfa-vourable to the Home Entity as long as IIT has alreadybeen paid on the income borne by the Home Entity.Having said the above, the term ‘‘fully paid’’ in thefourth factor can be challenging for some circum-stances. For example, what if a secondee concurrentlyneeds to take overseas trips to fulfil his overseas dutiesand settles his IIT on a time-apportionment basis?

According to the SAT’s interpretation, if the HomeEntity is assessed as the economic employer of a sec-ondee based on the overriding principle, the presenceof any of the five supplementary factors would lead tothe conclusion that an E&P/PE exists in China for theHome Entity. However, it remains to be seen how thelocal-level tax authorities would, in practice, assesscases where the Host Entity (instead of the HomeEntity) is proved to be the economic employer accord-ing to the overriding principle, but, at the same time,any of the five factors are pointing to the contrary. Wehope their practice will be holistic in its approach,rather than hooking on one or two factors.

V. Other clarifications

Public Notice 19 also sets out the detailed documentsand information6 that the in-charge tax authoritieshave to examine in assessing the nature of the second-ment arrangement. In particular, it reminds the taxauthorities to look into any disguised/hidden transac-tions on payments relating to the secondment ar-rangements, such as offsetting transactions, waivingdebts, related party transactions, etc. In other words,simply netting off inter-company account receivablesand account payables would not help to avoid theissue. Besides, the ‘‘economic substance’’ and ‘‘imple-mentation status’’ of the arrangement will also be re-viewed. Overall, these practical guidelines are seen asfair and less burdensome to the relevant parties of thesecondment arrangement.

It is a welcomed clarification that, if the HomeEntity sends personnel to the Host Entity merely forexercising the shareholders’ rights (e.g. attendingshareholders’ meetings or board meetings, etc.), theHome Entity would not be taken as having created anE&P/PE in China. However, it is important to consider

whether the relevant cost of these personnel would beeligible for tax deduction at the level of the HostEntity and/or the Home Entity.

Public Notice 19 requests that the in-charge StateTax Bureau (STB), which looks after the CIT, ex-changes information about the secondment arrange-ment with the in-charge Local Tax Bureau (LTB),which looks after IIT and Business Tax (BT). Once theSTB determines that the arrangement is of the natureof service, the LTB would levy BT of 5% on the gross‘‘service fee’’ which would be an additional tax burdento the Home Entity. The issue may become even morecomplicated if the Host Entity is located in the pilotcities in China currently implementing the ‘‘BT toValue Added Tax Transformation Pilot Programme’’.

VI. Concluding remarks

Public Notice 19 will become effective on June 1,2013. Any outstanding cases will be handled in accor-dance with Public Notice 19. Hence, it is possible thatthe local-level tax authorities would open the casesthat had not been agreed in the past and revisit theHome Entity’s Chinese tax treatment.

Parties involved in secondment arrangementsshould review the existing arrangements with refer-ence to this latest guidance to assess the risk level andconsider if a restructuring of the arrangement is nec-essary. If the Home Entity incurs significant adminis-trative costs for supporting the secondmentarrangement and has to recover such costs from theHost Entity in China, it is advisable to consider howthe charging mechanism be established without af-fecting the assessment of the nature of the second-ment arrangement.

Good documentation is always important in sub-stantiating the genuine nature of a secondment ar-rangement, bearing in mind the onus of proof lieswith the Host Entity, the Home Entity and the second-ees. Emphasis shall also be put on the actual imple-mentation of the secondment arrangement todemonstrate the Chinese entity has the characteristicsof an economic employer.

For those foreign companies who have entered orare going to enter into both a secondment arrange-ment and a service arrangement from their Chineseaffiliates, it is imperative for them to clearly separatethose expatriates who are under the secondment ar-rangement with those who are under the service ar-rangement as supported by both documentation andactual implementation. As such, the secondment ar-rangements will hopefully not be tainted by the ser-vice arrangement.

Public Notice 19 is newly issued. As is always thecase in China, it will take some time for the local-leveltax authorities to become familiar with the principlesand guidelines provided therein, and consider how toimplement them in their practice. The parties to thesecondment arrangements are advised to stay tunedwith the local implementation and practice of PublicNotice 19.

Finally, Public Notice 19 may be able to resolve thequestion of whether it is a ‘‘secondment’’ or ‘‘service’’.However, whether or not to charge and how much tocharge is actually more than a question of CIT expo-sure arising from E&P/PE. In fact, it has to be as-


sessed from all the angles of transfer pricing, taxcompliance efficiency, foreign exchange feasibilityand business strategy so as to strike the right balance.

Jacky Chu is a Tax Partner at PwC International AssignmentServices (Hong Kong) Limited and can be contacted by email [email protected].

Jessica Ma is Senior Manager at PricewaterhouseCoopersLimited and can be contacted by email [email protected].

Reprinted with the permission of Pricewater-houseCoopers Consultants (Shenzhen) Ltd, a China in-corporated entity. Copyright 2013PricewaterhouseCoopers Consultants (Shenzhen) Ltd.All rights reserved. The information in this article,which was assembled in May 2013 and based on thelaws enforceable and information available at that time,

is of a general nature only and readers should obtainadvice specific to their circumstances from their profes-sional advisors.

NOTES1 ‘‘Home Entity’’ refers to the foreign entity which dispatches the expa-triates to China.2 ‘‘Host Entity’’ refers to the Chinese entity where the seconded expatri-ates actually work.3 ‘‘Establishment and place’’ is a concept in Chinese Corporate IncomeTax Law. A foreign enterprise is liable to Chinese Corporate IncomeTax, if it has an establishment and place in China.4 The PE concept is a typical concept in the context of a Double TaxAgreement (DTA).5 SAT Guoshuifa Circular 75, which was issued in July 2010, providesguidance on the interpretation and implementation of the China–Singapore DTA. Meanwhile, it also applies to other DTAs concluded byChina if the provisions in those DTAs are the same as those in theChina–Singapore DTA.6 Documents include secondment agreements, internal policies regard-ing the secondees, accounting treatment, IIT payment, etc.




In Briefs India: Proposed tax on buyback of unlisted shares 37s India: Tax on gains on the sale of a privately-held Indian company: An unnecessary controversy 38s Philippines: Developments in income tax on casino and gaming operators 39s Singapore: GST rules for exports of goods have been revised 40s Taiwan: Royalties paid in 2011 and thereafter for foreign patents may be exempt from Taiwan

income tax 41s Thailand: Extension of 7 percent VAT rate 42

IndiaProposed tax on buyback of unlisted shares

The buyback of shares was facilitated by the Compa-nies (Amendment) Act (21/1999) which allowed com-panies to purchase their own shares from theirshareholders, thereby reducing the issued share capi-tal of the company. This proved to be a very popularmethod of distributing funds to shareholders when acompany had excess cash and wanted to mitigate thetax it would be subject to through the distribution ofdividends.

Indian companies have utilised the buyback ofshares method in order to reduce the taxes payable onthe distribution of dividends to its shareholders, effec-tively reducing the number of shares available fortrading and thus improving their share price, and as away to block hostile takeover bids.

Companies Bill implications

The Companies (Amendment) Act Section 77-A al-lowed Indian companies to repurchase their sharesonce a year – if the repurchase was approved by theboard – notwithstanding any other provisions in theAct. A buyback could previously be performed for upto 25 percent of the paid-up capital of the Indian com-pany in that financial year. The buyback method waswidely used by Indian companies and provided itsboard with a mechanism to interfere in the sharehold-ing of the company.

In 2012, the Lower House of Parliament introducedthe Companies Bill which proposed substantialchanges to the buyback of shares procedure carriedout by numerous Indian companies. There werestricter limitations imposed on the buyback of shares.One of the key changes included in the CompaniesBill, is that it clearly outlined that a second buybackoffer for shares that exceeded 10 percent of the paidup share capital of the company would only be carriedout if a period of one year had passed from the date ofthe last offer.

The existing legislation permitted a company tocarry out two buyback offers if the shares being repur-chased did not exceed 25 percent of the paid-up sharecapital.

Furthermore, the Companies Bill proposed higherpenalties if companies breached the legislation whencarrying out the buyback of their shares. Another keychange proposed by the Companies Bill was that a se-curities premium account could be included in thefree reserves of a company, which augments the poolof funds that can be utilised to perform share buy-backs. The Companies Bill is currently pending ap-proval by the Upper House of Parliament.

Tax implications

The Indian Finance Minister presented the annualbudget for 2013–2014 on February 28, 2013 and in-cluded a new proposed chapter in the Income Tax Act‘‘Chapter XII-DA Special Provisions Relating to Tax onDistributed Income of Domestic Company for Buy-back of Shares’’ which imposes a tax under section115QA in the hands of the company. The amendmentwill be effective from June 1, 2013.

Previously the buyback of unlisted shares was taxfree as it did not qualify as a dividend payment, as de-fined in Section 22(d) of the Income Tax Act 1961.Therefore, since the consideration paid to the share-holders was not treated as dividends, global investorscould utilise the buyback of shares method to distrib-ute funds exempt from tax. The buyback method wasmore attractive than the distribution of dividends,which are normally subject to a dividend distributiontax rate of approximately 15 percent plus any sur-charge or education cess.

The proposed tax on the buyback of unlisted sharestaxes the distributed income/net consideration (whichis calculated as the difference between the amountspaid as consideration for buying back the unlistedshares, and the consideration received by the com-pany when issuing these shares) at a rate of 20 per-cent. This tax would be imposed on the companywhich is buying back its shares. Buyback receiptswhich are taxed in the hands of the company wouldnot be subject to tax at the shareholders’ level.

Under the existing legislation the consideration re-ceived by a shareholder on the buyback of shares wastaxable as a capital gain under section 46A of theCompanies Act. Under various Indian double tax trea-ties, including those with Mauritius and Singapore,shareholders are permitted to claim capital gains taxexemption on the buyback of shares in an Indian com-pany.


One of the key implications of the proposed buy-back share tax is that by taxing the buyback of sharesin the hands of the company, it neutralises the benefitof the capital gains tax exemption which is availableunder various India double tax treaties, includingthose with Mauritius and Singapore.

Conclusion

The Companies (Amendment) Act which facilitatedthe buyback of shares in Indian companies was ini-tially implemented to boost the Indian capital mar-kets and attract investment, yet the restrictionsproposed in the Companies Bill coupled with the taxon buyback shares/securities has tax and legal impli-cations which may impact global investors’ structuresfor investments into India.

Charles Savva, Director, C. Savva & Associates Ltd, CyprusEmail: [email protected]

IndiaTax on gains on the sale of a privately-held Indiancompany: An unnecessary controversy

India’s income tax law was amended in 2012 to intro-duce a special tax rate of 10 percent (plus the appli-cable surcharge and cess) on gains derived from thetransfer of unlisted securities by foreign companiesand other non-residents. The general rate applicableto gains from the sale of shares of an Indian companyis 20 percent (plus the surcharge and cess). The 10 per-cent and the 20 percent rates apply only to long-termcapital gains, i.e. gains on shares that have been heldfor more than 12 months.

Some controversy has arisen in professional circlesover whether the concessional rate of 10 percentwould apply to gains derived from the sale of shares ofa privately-held Indian company. The law providesthat the 10 percent rate applies to the transfer of ‘‘un-listed securities,’’ the term that has given rise to thecontroversy.

In lay terms, the shares of a privately held companyclearly are regarded as unlisted securities. Under thelegal definition of the term in Indian tax law, unlistedsecurities are defined to mean securities other thanlisted securities. Listed securities are those listed on arecognised stock exchange in India.

The term ‘‘securities’’ is borrowed from the Securi-ties Contracts (Regulation) Act (SCRA), legislation de-signed to prevent undesirable transactions insecurities. The SCRA, which deals with stock ex-changes, the listing of securities, etc., defines the term‘‘securities’’ to include shares, scrips, stocks, bonds,debentures, debenture stock and other marketable se-curities of a similar nature. In some court decisionsinvolving the SCRA, the concept of ‘‘marketability’’has been accorded significance in the interpretation ofthe term securities. On the basis that the definition ofsecurities refers to ‘‘marketable securities,’’ there hasbeen some suggestion that, since the shares of a pri-vate company are not marketable, they do not qualifyas securities and, therefore, are not eligible for theconcessional 10 percent tax rate.

An interpretation that shares are not securities ismisplaced for several reasons. First, the SCRA essen-tially only deals with listed securities and the focus onmarketability must be understood in that context. It isrelevant to note that the Indian Supreme Court hasobserved that the definition of securities in the SCRAincludes all types of securities as commonly under-stood. Second, a conclusion that shares are not secu-rities would lead to absurd results, for example, thatemployee stock options of private companies mightnot be taxable under the provisions specifically en-acted for the purpose, which is clearly not the legisla-tive intent. Third, the use of the terms ‘‘share’’ and‘‘security’’ in a provision dealing with the holdingperiod for determining whether capital gains areshort-term or long-term in nature indicates that secu-rities include shares. Finally, if marketability is a pre-requisite for qualifying as a security, only shares thatare marketable and are unlisted (or listed outsideIndia) would qualify for the concessional tax rate. Thetwin conditions of a security being marketable but un-listed appear to be contradictory and self-defeating,and this is not what was envisaged by the FinanceMinister.

At the time the Minister proposed the change to thelaw to grant a concession to non-residents, he notedthat long-term capital gains derived by foreign institu-tional investors (FIIs) from the sale of unlisted securi-ties were taxed at a rate of 10 percent, while a 20percent rate applied to other non-resident investors,including private equity investors. The Minister pro-posed to reduce the rate to 10 percent to level the play-ing field and this rationale was also included in theSupplementary Memorandum explaining the amend-ment.

It is relevant to note that private equity investorstypically invest in unlisted companies. Moreover,other foreign companies that set up operations inIndia through a corporate entity also generally use aprivate limited company structure. Thus, the conces-sional 10 percent rate clearly was introduced to applyto investments in the shares of private limited compa-nies, so it is difficult to understand why that ratewould apply to gains on the transfer of such shares.

With respect to the computation of capital gains, incases where the 20 percent rate applies, the gains arecomputed in foreign currency and then converted intoIndian rupees. This mechanism does not operatewhere the special 10 percent rate applies, i.e. in thesecases, the capital gains are computed in Indianrupees.

There has been considerable debate about the rout-ing of investments into India using Mauritius as an in-termediary holding jurisdiction, especially with thegeneral anti-avoidance rule coming into effect in thenear future. Against this background, the move to levycapital gains tax at 10 percent on the disposal ofshares of an Indian company is a welcome measure,since it may encourage investors to make investmentsdirectly into India, without using the Mauritius route.Investors setting up operations in India need certaintyas to how those operations will be taxed; the contro-versy relating to the applicability of the 10 percent



rate to the disposal of shares of private limited compa-nies is an unnecessary distraction.

S. S. Palwe, Partner, Deloitte Haskins & Sells, MumbaiEmail: [email protected]

Pritin Kumar, Director, Deloitte Haskins & Sells, MumbaiEmail: [email protected]

This article reflects the personal views of the authors.Copyright 2013 Deloitte Touche Tohmatsu India PrivateLimited.

PhilippinesDevelopments in income tax on casino and gamingoperators

The Philippine Government’s push to capture a largerslice of global gaming revenues has encouragedgreater investment from local casino owners who, in-creasingly, are partnering with internationally-renowned casino management companies. At theforefront of this push is the Philippine Amusementand Gaming Corporation (PAGCOR), the governmentowned and controlled corporation (GOCC) that is au-thorised to operate, grant licenses to operate, andregulate gaming facilities and games of chance in thecountry.

Under generous fiscal concessions granted in the1970s by the then President Ferdinand Marcos, PAG-COR’s tax privileges were extended to its licensees andother parties with which it had contracts. However,subsequent amendments to the National Internal Rev-enue Code involving PAGCOR’s tax status, a 2012 Su-preme Court decision and a recent issuance by theBureau of Internal Revenue (BIR), have had the resultof limiting these privileges.

PAGCOR was created by Presidential Decree (PD)1067-A and by PD 1067-B, which were issued on Janu-ary 1, 1977. Both laws exempted PAGCOR from thepayment of all types of tax, except for a franchise taxof 5 percent of gross revenue. PD 1399 later ex-pounded on the scope of PAGCOR’s exemption. PD1869 consolidated these various laws and continues toexist as PAGCOR’s charter. Under Section 13(2)(b) ofPD 1869, the favourable tax treatment granted toPAGCOR extended to corporations with whomPAGCOR has: ‘‘. . .any contractual relationship in con-nection with the operations of the casinos authorisedto be conducted under [the PAGCOR charter] and tothose receiving compensation and other remunera-tion from [PAGCOR] as a result of essential facilitiesfurnished and/or technical services rendered toPAGCOR. . .’’1

Present contractual arrangements betweenPAGCOR and its licensees or contractors have the costof the franchise tax as part of the licence fees.

Interestingly, PAGCOR’s favourable tax treatment isenjoyed not just by its licensees, but also by any otherentity with which PAGCOR has a contractual relation-ship. Thus, in Ruling DA-268-00 (June 26, 2000), theBIR ‘‘confirmed the extension of the exemptionsenjoyed by PAGCOR’’ to a marketing consultancycompany that PAGCOR hired to promote the game ofJai-alai.

On January 1, 1998 the present National InternalRevenue Code2 (the Tax Code) took effect. Section27(c) of the Tax Code subjected GOCCs to corporateincome tax, but exempted a select few from having topay the tax. One of these GOCCs was PAGCOR. How-ever, in November 1, 2005 the Republic Act (RA) 9337amended the Tax Code but omitted to enumeratePAGCOR with a list of GOCCs that are exempt fromincome tax. RA 9337 – primarily a law that overhauledVAT but nonetheless touched on some of the TaxCode’s income tax provisions – went on to survive aconstitutional challenge in the Supreme Court. OnSeptember 1, 2005, upon the promulgation of the Su-preme Court case upholding the validity of RA 9337,the BIR issued Revenue Regulations (RR) 16-2005.Buried in the regulation’s provisions was the imposi-tion of VAT on PAGCOR and its licensees. PAGCORthen filed a lawsuit against the BIR with the SupremeCourt to challenge the VAT and income tax on it.

PAGCOR vs. the Bureau of Internal Revenue3

The Supreme Court ruled that PAGCOR is subject toincome tax – presently set at 30 percent of net income– and noted that legislative records indicate that thiswas indeed the intent of congress. The Court ex-plained that PAGCOR’s franchise to operate, maintainand license gaming operations may be amended, al-tered, or repealed by congress. This includes theincome tax exemption of PAGCOR, which RA 9337validly repealed.

On the other hand, the Court prevented the BIRfrom imposing VAT on PAGCOR. The Court clarifiedthat RA 9337 did not affect PAGCOR’s exemption fromtaxes other than income tax. In other words, RA 9337did not revoke the exemption from all other taxesgranted by PD 1869, the PAGCOR charter. This wasthe second time that the Court had occasion to rule onthe VAT on PAGCOR, its licensees and contractors: inCommissioner of Internal Revenue vs. Acesite (Phils.)Hotel Corp (G.R. 147295, February 16, 2007) it ruledthat both PAGCOR and its licensees or contractors areexempt from VAT.

Revenue Memorandum Circulars

As guidance to internal revenue officers, the Commis-sioner of Internal Revenue (CIR) issued RevenueMemorandum Circular (RMC) 8-2012, which quotedthe relevant portions of the Supreme Court’s decision,subjecting PAGCOR to income tax. PAGCOR paidincome taxes for the tax years 2011 and 2012, makingit to the BIR’s list of top 500 non-individual taxpayersfor 2011.

The CIR then followed this up with RMC 33-2013,which took effect on March 1, 2013. The circular sum-marized the taxes that are applicable to PAGCOR andits licensees or contractors. It is this circular thatstates that PAGCOR’s licensees or contractors are sub-ject to income tax.

Below is a summary of the present tax regime ofPAGCOR and its licensees or contractors post-RMC33-2013.




Taxpayer Income Tax Franchise Tax VAT OtherTaxes

PAGCOR Yes, for all income (whether or notthe income is connected to gamingoperations and/or licensing)

Yes for all income connected togaming operations and/or licensing

No No

Licensees orContractors

Yes Embedded in current PAGCORlicences/contracts

No No

The tax on income of PAGCOR licensees or contrac-tors comes at an important time in the Philippinegaming industry’s development. PAGCOR has so fargranted licenses to four casino operators, all of whichwill be located in the so-called Entertainment City,which sits on reclaimed land along Manila Bay andthat PAGCOR envisions to be Asia’s next gaming desti-nation.

Gaming analysts and investors are watching devel-opments closely to see what PAGCOR will do next.News reports quote senior PAGCOR officials as sayingthey will engage in discussions with the BIR to recon-sider its stance. Industry players have also stated thatthey will collectively file a position paper with the BIR.Whether the BIR will agree with their position is, ofcourse, another question.

Like many tax authorities the world over, the BIRhas stepped up their collection efforts, and will notjust ignore the gaming business. Industry players havealso indicated that they may move for the cancellationof the franchise tax cost component that is currentlyembedded in the license fees they remit to PAGCOR.Irrespective of the course of action it is important thatthe result will not impede the growth of the gaming in-dustry in the Philippines.

Emmanuel P. Bonoan, Chief Operating Officer and Vice-Chairman forTax, KPMG, Philippines

Email: [email protected] views and opinions expressed herein are those of

the author and do not necessarily represent the viewsand opinions of KPMG in the Philippines.

NOTES1 PAGCOR briefly lost its tax exemption from June 11, 1984 when itwas withdrawn under PD 1931, to September 28, 1984 when it was re-stored under Letter of Instruction 1430.2 Republic Act No.8424.3 G.R. 172087 (March 15, 2011)

SingaporeGST rules for exports of goods have been revised

GST was introduced in Singapore on April 1, 1994,with the tax imposed at a standard rate of 3 percent onnearly all transactions that involve the supply of goodsand services in the course or furtherance of a busi-ness. The rate has increased over the years and is nowat 7 percent with effect from July 1, 2007.

GST is generally chargeable at the standard rate ona supply of goods in Singapore. A supply of goods iszero-rated only if the goods are exported and pre-scribed export documents are obtained with the re-quired timeframe and maintained to substantiate the

movement of the goods. In this respect, the InlandRevenue Authority of Singapore (IRAS) has publishedguidelines on the prescribed export documentationthat must be maintained to satisfy the conditions forzero-rating exported goods. The guidelines, which arefound in the IRAS e-Tax guide A Guide on Exports,cover the various scenarios under which exports ofgoods may be made, and the types of export documen-tation required by the IRAS under the respective sce-narios.

The primary intention of the guidance is to ensurethat there is consistency in terms of the export docu-mentation that is required to support the zero-ratingtreatment for an export supply of goods. In fact, theguide that has been issued by the Singapore tax au-thority is not new as the First Edition was issued backin August 1994: the year that GST was implemented inSingapore. We now have the Eleventh Edition whichmeans that over the years, the tax authority has beenupdating the guide for new export scenarios that it hascome across or have been brought to their attention.

Apart from new scenarios, updates are made peri-odically to consider the implications arising from theintroduction of new GST schemes or for changes inGST rules affecting the zero-rating of goods. The keychanges in recent years involved the introduction ofthe Hand-Carried Exports Scheme in April 2009 andchanges to the GST treatment for ship and ship-related supplies following announcements made inthe 2010 Budget Statement.

The implementation of the Hand-Carried ExportsScheme has placed an additional obligation for GST-registered businesses to apply for an export permitbefore goods can be hand-carried from Singapore viathe Singapore Changi Airport. On the other hand, thechanges relating to ship and ship-related supplies ex-panded the scope of zero-rating and at the same time,the export documentary requirements were largely‘‘relaxed’’ to acknowledge the commercial reality anddifficulties. For instance, for a supply of goods to beused or installed on a ship in Singapore, one no longerneeds to produce evidence that the goods are physi-cally installed on board the ship before zero-ratingtreatment can be applied.

Due to the nature of export transactions, the Singa-pore tax authority has taken care to ensure that therelevant Singapore Customs requirements are re-flected or updated in the guide. For example, the guidehas been updated for the new Singapore Customs re-quirement that export permits have to be obtainedand submitted for all export of goods (via the differentmodes of transport). This requirement, known as the‘‘Advance Export Declaration’’, was previously onlyapplicable to exports of goods via land transport.

By and large, GST-registered businesses have beenable to comply with the export documentation re-



quirements that are prescribed in the guide. Busi-nesses are appreciative that the guide has provided adegree of certainty as to the types of export scenarioswhere zero-rating can apply. The guide has also beenhelpful as an authoritative reference during difficultconversations with customers in situations where thebusiness has to explain why zero-rating treatmentcannot apply to a particular transaction.

On the other hand, the export documentation rulesin the guidance are administered quite strictly by thetax authority. Failure to satisfy the requirements canresult in the zero-rating treatment being revoked andfor the export transaction to be subject to GST at thestandard rate of 7 percent.

For such cases, there is an avenue for the taxpayerto seek a ruling from the Singapore tax authority for avariation of the rules if there are strong commercialgrounds to support the request. What is important isfor the business to demonstrate that it has an ad-equate audit trail to show that the goods are exportedand taken out of Singapore.

Koh Soo How, Partner and Asia Pacific Indirect Taxes NetworkLeader, PwC Singapore

Email: [email protected]

Rushan Lee, Manager, PwC SingaporeEmail: [email protected]

TaiwanRoyalties paid in 2011 and thereafter for foreignpatents may be exempt from Taiwan income tax

According to the Income Tax Act, royalties and techni-cal service fees received by a foreign entity for provid-ing its patents, trademarks, and special technologiesto a Taiwan entity are, in general, subject to 20 percenttax which must be withheld by the Taiwan entity uponmaking the payment, unless tax exemption approvalis obtained.

Tax exemption on royalties for Taiwan patents

As part of the plan to elevate the value of domestic in-dustries, the Taiwan government grants certain tax in-centives to encourage technology transfers fromoverseas; for example, income tax exemption on roy-alties received by a foreign entity for licensing its pat-ents, trademarks, know-how or other licensed rightsto a Taiwan entity, if certain criteria are met. Thesecriteria are prescribed under the Rules on the Screen-ing of Applications for Exemption from Income Tax onRoyalty Payments and Technical Services Fees Collectedby Foreign Profit-Seeking-Enterprises (ExemptionRules), last amended on July 6, 2007.

Under the No. 5 of the current Exemption Rules,royalties that are eligible for tax exemption are limitedto those for patent rights that have been approved bythe Taiwan Intellectual Property Office. As a result, inpractice, foreign entities may include income tax costin royalties, in which case, the actual cost to Taiwanentities is increased.

Tax exemption on royalties for foreign patentsstarting from 2011

In order to further encourage the transfer of foreigntechnologies and reduce the burden on Taiwan enti-ties, the Ministry of Finance and the Ministry of Eco-nomic Affairs have been discussing the revocation ofthe tax exemption criteria and expanding the scope oftax exemption prescribed under the Exemption Rulesfor around two years. They have finally reached a con-sensus on expanding the scope of tax exemption onroyalties paid for foreign patents, while the criteria fortax exemption still apply.

Under the revised Exemption Rules which will soontake effect, royalties paid for foreign patents will alsobe exempt from income tax, and such exemption willapply retroactively to such royalties paid in 2011 andthereafter, provided that the following criteria aremet.

Criteria for tax exemption on royalties for foreignpatents

The patent rights licensed are duly registered with thecompetent authorities of a foreign jurisdiction andare valid.

The licensing must be for a technical cooperationproject. The term ‘‘technical cooperation’’ refers to acase where a foreign licensor licenses a Taiwan entitythe right to use its patent for any of the following pur-poses:

s The licensing arrangement will facilitate theTaiwan entity’s production of new product(s);

s The licensing arrangement will increase productionvolume, improve quality or reduce production costof the Taiwan entity;

s The licensing will facilitate the Taiwan entity’s de-velopment of new production techniques; or

s The market for the licensed product(s) under atechnical co-operation project is not limited toTaiwan.

Technical service fees

As a trade-off, the tax exemption on technical servicefees for special technologies, as prescribed underPoint No. 7 of the current Exemption Rules, will becancelled. In which case, an application for applyinga lower withholding tax rate (3 percent instead of 20percent) is worth considering.

Procedures for applying for tax exemption

An application must be filed by either the foreign li-censor or the Taiwan licensee with the Industrial De-velopment Bureau of the Ministry of EconomicAffairs for its issuance of a letter confirming that theExemption Rules apply to the subject case. Upon re-ceipt of said letter, the applicant should file anotherapplication with the local branch of the National TaxBureau where the licensee is located for its issuance ofa letter confirming tax exemption approval. After ob-taining these two approvals, the royalties payable tothe foreign licensor will be exempt from tax, and theTaiwan licensee will no longer need to withhold anyincome tax upon paying such royalties.




The Ministry of Finance and the Ministry of Eco-nomic Affairs will jointly publish the revised Exemp-tion Rules shortly.

Josephine Peng, Senior Counselor, Lee and Li, Attorneys-at-Law,Taiwan

Email: [email protected]

ThailandExtension of 7 percent VAT rate

The normal value added tax (VAT) rate of Thailand is10 percent, but has been temporarily reduced to 7 per-cent over periods of time. As the corporate income taxrate has been temporarily reduced from 23 percent inthe fiscal year 2012 to 20 percent in the fiscal years2013 and 2014, there had been anticipation in 2012that the reduction of the VAT rate to 7 percent mightnot be extended for another period of time, and thenormal 10 percent rate would be applicable. (The 7percent VAT rate expired in September 30, 2012.)

Taking into account the floods in Thailand in 2011,which dramatically affected the employment rate andlocal consumption, the Thai Government issued theRoyal Decree No. 549 in October 2012, to extend thereduction of the VAT rate from 10 percent to 7 percentfor another two years. The 7 percent VAT rate willexpire on September 30, 2014. It is believed that theextension of the reduction in VAT will increase thelocal consumption and reduce the cost of living ofconsumers. From October 1, 2014, the VAT rate willtechnically return to 10 percent; however, it is ex-pected that the 7 percent rate will again be extended atthat time.

Launching e-tax invoicing

In compliance with the e-Government policy, the Rev-enue Department has recently permitted VAT opera-tors to issue electronic invoices and tax invoices (e-taxinvoices) instead of paper tax invoices which have tobe delivered to the customers physically. This encour-ages entrepreneurs to use e-tax invoices and helps VAToperators reduce business operation costs.

To regulate the issuance of e-tax invoices systemati-cally, the Revenue Department issued a tax regulationin 2012 regarding ‘‘the preparation, delivery and stor-age of e-tax invoice and e-receipt.’’ Under the regula-tions, VAT operators must satisfy the followingcriteria.

1. The VAT operator must be a limited company orpublic limited company with paid-up registeredcapital of at least Baht 10 million;

2. The VAT operator must have stability and credibil-ity within the business operations. For example, itmust have a good tax payment history, must nothave any tax avoidance behaviour, must not usecounterfeit tax invoices in the past, or must havemore net assets than net liabilities;

3. The VAT operator must have proper accountingsystems and security systems necessary to accom-modate and implement a secured e-invoicingsystem; and

4. The VAT operator must have a good internal con-trol system which is able to prove that the e-tax in-voices and receipts prepared and sent to recipientsare complete and accurate.To implement the e-invoicing system, the VAT op-

erator must have its first digital signature (which is tobe created by the software of the Revenue Depart-ment) and the second digital signature certified by aCertification Authority. A submission of e-invoicingapplication to the Revenue Department and an ap-proval of the Director-General of the Revenue Depart-ment is needed before the VAT operator can issuee-tax invoices/invoices.

The first Thai VAT operator approved by the Rev-enue Department to issue e-tax invoices was ThaiDigital ID Co., Ltd., which is also authorised to be aCertification Authority (CA) to certify the correctnessof e-receipts and tax invoices and digital signatures.

Abolition of VAT exemption on sales of locally-produced cigarettes

Manufacturing cigarettes in Thailand is a monopolybusiness. Cigarettes sold in Thailand are manufac-tured by the Tobacco Factory which is a government-owned business. Resellers or distributors sellinglocally-produced cigarettes and imported cigarettesalso hold different licenses. Before October 15, 2012,sales of locally-produced cigarettes were exemptedfrom VAT, while VAT was imposed on sales of im-ported tobacco. It may be concluded that the locally-produced cigarettes received preferential VATtreatment over the imported cigarettes until a recentruling regarding Thai government’s violation of theGATT 1994.

On June 17, 2011, the World Trade Organization(WTO) by its Appellate Body upheld the Panel’s opin-ion that Thailand acts inconsistently with Article III: 2and 4 of the GATT 1994, by subjecting imported ciga-rettes to internal taxes in excess of those applied tolike domestic cigarettes and granting exemption fromVAT for resellers of locally-produced cigarettes to-gether with the imposition of VAT on resellers of im-ported cigarettes when they do not satisfy prescribedconditions obtaining input tax credits necessary toachieve nil VAT liability.

After the Thai government expressed its intent toimplement the rulings of WTO on August 11, 2011,with effect from October 15, 2012 onwards Thailandimplemented the WTO rulings/obligations by issuingRoyal Decree No.533 to revoke the VAT exemption onsales of locally-produced cigarettes.

Therefore, VAT is now chargeable on domestic salesof all imported and locally-manufactured cigarettes.

Transfer of future cashflow - a taxable supply forVAT purpose or disguised financing for specificbusiness tax purpose?

Among transactions involved in an establishment ofthe infrastructure fund (Fund), the spotlight is cur-rently focused on VAT treatments on the transfer offuture cashflow to the Fund at discount. The ruling ofthe Revenue Department issued in August 2012 heldthat the cash proceeds received by the transferor ofthe future cashflow is treated as a similar loan trans-



action under which the cash proceeds received by thetransferor from the Fund are not taxable income inthe hand of the transferor. The discount given by thetransferor to the Fund is therefore treated as a dis-guised interest payment and chargeable to 3.3 percentspecific business tax (SBT) similar to loan interest.

Royal Decree No. 544 grants exemption for VAT,SBT, and stamp duty in certain transactions involvedin establishment of the Fund which includes:1. exemption for asset owners on transactions relat-

ing to the transfer of assets to the fund; and2. exemption for the fund on transactions relating to

the transfer of assets back to original owners.Without any doubt, the above exemptions do not

cover the SBT levied on the discount (disguised inter-est) obtained by the Fund because it was not derivedfrom the transfer of assets back to the original owner.

Uncertainty arises as to whether the transfer offuture cashflow is considered to be a supply of goodswhich is subject to VAT (unless exempted), rather thana financing transaction similar to the loan.

Had the transfer of future cashflow been treated asa ‘‘sale’’ or a ‘‘supply of goods’’ for VAT purposes, thenext question is whether or not the cash proceeds re-ceived by the asset owner would be exempt from VATunder (1) above. Advisors should follow-up closely onfuture developments and interpretations towards VATand SBT treatments on the transfer of future cashflowtransactions.

Chinawat Assawapokee, Partner, Baker & McKenzie, ThailandEmail :[email protected]

Chanida Leelanuntakul, Associate, Baker & McKenzie, ThailandEmail: [email protected]


