EY Tax Alert – Vol. 21 Issue no. 16 | 31 July 2018 1

Malaysian developments

Updated Real Property Gains Tax (RPGT) Guidelines

The Inland Revenue Board (IRB) has recently published on its

website the RPGT Guidelines dated 13 June 2018 (2018

Guidelines) in Bahasa Malaysia, titled “Garis Panduan Cukai

Keuntungan Harta Tanah”. This new 61-page 2018 Guidelines

replaces the earlier Guidelines dated 18 June 2013 (see Tax Alert

No. 15/2013). The 2018 Guidelines contain the following 25

sections and set out 15 examples:

1. Introduction

2. Objective

3. Scope of imposition

4. Rate of tax

5. Date of disposal and acquisition

6. Disposal price and acquisition price

7. Excluded expenditure

8. Chargeable gains or allowable losses

9. Deduction of allowable losses

10. Exemptions

11. Transfer of assets by way of gift

12. Transfer of assets by way of inheritance

13. Joint venture with developers

EY Tax Alert Vol. 21 - Issue no. 16

31 July 2018

Malaysian developments

• Updated Real Property Gains Tax

(RPGT) Guidelines

• Extension of Common Reporting

Standard (CRS) submission deadline

• Indirect tax matters

Overseas developments

• Hong Kong passes tax and transfer

pricing legislation to counter BEPS

• India: Tribunal rules that allowances

received outside India through a travel

currency card are not taxable in India

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2 2

14. Transfer of assets to controlled companies

15. Transfer of assets into stocks

16. Shares in real property companies

17. Application of Paragraph 34A and Paragraph

34 of Schedule 2 of the Real Property Gains

Tax Act 1976 (RPGT Act) are exclusive

18. Procedures for filing a RPGT return

19. Disposer’s responsibilities

20. Acquirer’s responsibilities

21. Acceptance of RPGT returns

22. Methods of filing RPGT returns

23. Cancellation of disposal / sales transaction

24. RPGT payments

25. Procedures for a RPGT refund

Appendix

The 2018 Guidelines introduce several new

Sections that explain and restate various key

provisions from the RPGT Act. The 2018 Guidelines

also incorporate the changes introduced to the

RPGT Act since the previous 2013 Guidelines.

For example, Section 10 of the 2018 Guidelines

provides guidance on the changes to Paragraph 2 of

Schedule 4 of the RPGT Act, which were proposed

during Budget 2016 and which took effect from 31

December 2015 (see Tax Alert No. 22/2015). The

formula to compute the amount of exemption

allowed for a partial disposal (by an individual) was

amended such that the exempted amount is to be

the higher of 10% of the chargeable gain, or the

amount is to be ascertained based on the formula

below:

A/B x C Where A is part of the area of the chargeable asset disposed, B is the total area of the chargeable asset and C is RM10,000.

Another example of an update is in Section 24.1 of

the Guidelines, which has now incorporated the

following changes on the withholding obligations of

the acquirer of the chargeable assets:

• Pursuant to the Finance (No. 2) Act 2014, with

effect from 1 January 2015 Section 21B(1) of

the RPGT Act was amended to provide that an

acquirer is required to withhold either the whole

amount of money received or 3% (previously 2%)

of the total value of the consideration,

whichever is lower. The sum withheld must be

remitted to the IRB within 60 days from the date

of disposal (see Tax Alert No. 21/2014).

• Pursuant to Finance (No. 2) Act 2017, a new

Section 21B(1A) was introduced, which

stipulates that where a disposer is not a

Malaysian citizen or a permanent resident, the

acquirer shall retain the whole amount of money

received or 7% (previously 3%) of the total value

of the consideration, whichever is lower. The

amount withheld is to be remitted to the IRB

within 60 days from the date of disposal (see

Special Tax Alert: Highlights of 2018 Budget –

Part II). This was effective from 1 January 2018.

Notwithstanding the above, Section 5 of the 2018

Guidelines, which provides guidance on the dates of

disposal and acquisition, does not elaborate on

conditional contracts or explain the change in law

with effect from 1 January 2018. Further to this

change, approval required from an “authority or

committee appointed by the Government” would no

longer impact the RPGT disposal date (unlike, for

example, State Government approvals) (see Special

Tax Alert: Highlights of 2018 Budget – Part II).

The procedure to obtain a RPGT refund has also

been updated. Where the refund is to be remitted to

the acquirer, an “agreement letter” as provided in

the Appendix to the Guidelines will need to be

completed and submitted accordingly.

Extension of Common Reporting Standard (CRS) submission deadline

Following the enactment of the relevant rules for

the Automatic Exchange of Information by the

Malaysian Government (see Tax Alerts No. 2/2017,

No. 1/2018, No. 4/2018 and No. 6/2018) under

the Common Reporting Standard (CRS), Malaysian

Financial Institutions (MYFIs) are required to collect

and report to the Inland Revenue Board (IRB) the

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3

financial account information of non-residents. The

IRB will exchange this information with the

participating foreign tax authorities of those non-

residents from 2018.

The IRB has recently announced on its website that

the due date of the first CRS report filing, which was

originally due by 31 July 2018, has been extended

to 15 August 2018.

Indirect tax matters

RMCD publishes FAQs and proposed

implementation models for SST

In preparation for the introduction of the Sales Tax

and Service Tax (SST) on 1 September 2018, the

Royal Malaysian Customs Department (RMCD) has

released a list of frequently asked questions (FAQs)

and details pertaining to the proposed

implementation models for SST.

The table below summarizes the key points of the

proposed SST implementation models:

Framework Sales Tax Service Tax

Scope Levied on:

► Taxable goods

manufactured

in Malaysia by

a taxable

person and

sold, used or

disposed by

him; and

► Taxable goods

imported into

Malaysia

Certain goods will

be exempted from

sales tax

Charged on

any provision

of taxable

services made

in the course

or furtherance

of any

business by a

taxable

person in

Malaysia

Framework Sales Tax Service Tax

Registration

and

threshold

Person who

manufactures

taxable goods and

the annual

turnover exceeds

MYR500,000

Service

provider who

provides

taxable

services and

the value of

the taxable

services

provided for a

period of 12

months

exceeds

MYR500,000

Rate(s) 5%, 10% or a

specific rate

Fixed rate of

6%, and a

specific rate

of MYR25 for

the provision

of credit card

or charge card

services

Accounting

basis

Sales Tax is

required to be

accounted for at

the time when the

goods are sold,

disposed of or

first used (accrual

basis)

Service Tax is

generally

required to be

accounted for

at the time

when the

payment is

received

(payment

basis)

Filing of

returns

Submission on a

bi-monthly basis

via electronic

filing or by post

Submission on

a bi-monthly

basis via

electronic

filing / by post

The scope of the Service Tax has been expanded to

include provision of IT services, electricity and

domestic flights, excluding Rural Air Services.

Below is the list of services which will be subject to

Service Tax.

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• Hotel

• Insurance and

takaful

• Food and beverage

preparation

• Club

• Gaming

• Telecommunications

• Pay-TV

• Forwarding agents

• Legal

• Accounting

• Surveying

• Architectural

• Valuation

• Engineering

• Employment agency

• Security

• Management

services

• Parking

• Motor vehicle

service or repair

• Courier

• Hire and drive car

• Advertising

• Domestic flight

except Rural Air

Services

• IT services

• Credit / charge card

• Electricity

• Consultancy

Along with the expansion in scope, it is anticipated

that certain exemptions from the previous SST

legislation will be removed or restricted under the

new Acts, such as the exemption for the provision

of services to companies within the same group and

certain other exemption facilities.

RMCD has also clarified that it will continue with

Goods and Services Tax (GST) audits for closure

purposes, after the SST comes into effect.

To access the list of FAQs, the proposed

implementation models for SST and the list of

proposed goods exempted from Sales Tax, use the

links below:

• Sales Tax FAQ (English) or Sales Tax FAQ

(Bahasa Malaysia)

• Service Tax FAQ (English) or Service Tax FAQ

(Bahasa Malaysia)

• Proposed Sales Tax Implementation Model

• Proposed Service Tax Implementation Model

• Proposed Goods Exempted from Sales Tax

Between June and September 2018, businesses will

have to consider two sets of indirect taxes – the

GST, that was reduced from 6% to 0%, and the

planning for the transition from GST to the SST.

During this period, businesses need to focus on the

technical and operational aspects of transitioning

between the two indirect tax regimes.

In parallel to managing the transition, businesses

also need to consider, among others, the Price

Control and Anti-Profiteering Act 2014 (PCAP Act)

and other regulatory requirements.

In ensuring a smooth transition to SST

implementation, businesses need to consider the

following:

• People, processes and systems, to comply with

the new indirect tax laws and regulations

• Relevant regulations that may have an impact

post-SST implementation, e.g. the PCAP Act

• Stakeholder engagement on potential

commercial implications

Overseas developments

Hong Kong passes tax and transfer pricing legislation to counter BEPS

On 4 July 2018, the third and final reading of the

(Amendment) (No. 6) Bill 2017 (the Amendment

Bill) passed in Hong Kong’s Legislative Council.

The Amendment Bill was gazetted and formally

became law on 13 July 2018.

The Amendment Bill codifies certain transfer pricing

(TP) principles, introduces mandatory TP

documentation requirements into the Inland

Revenue Ordinance (Cap. 112) (IRO), and

implements the minimum standards outlined in the

Consultation Report on Measures to Counter Base

Erosion and Profit Shifting (BEPS) (the Consultation

Report), dated 31 July 2017.

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The Amendment Bill amends the IRO to:

• Codify TP rules

• Require income or loss from provisions between

associated persons to be computed on an arm’s-

length basis for tax purposes

• Provide for an advance pricing arrangement

(APA) regime

• Require documentation for related party

transactions (intra-group transactions and intra-

entity dealings)

• Introduce a statutory dispute resolution

mechanism for cross-border tax treaty-related

disputes

• Enhance the current tax credit system

• Amend certain profits tax concessions to

introduce revised eligibility criteria (including

eligibility for the half-rate concession for

corporate treasury centre activities)

Different effective dates apply for different

purposes, for example:

• Accounting periods beginning on or after 1

January 2018 for Country-by-Country Reporting

• Accounting periods beginning on or after 1 April

2018 for master file/local file and APAs

• Years of assessment beginning on or after 1

April 2018 for profits taxes under the IRO

• Years of assessment beginning on or after 1

April 2019 for deeming provision on intellectual

property and Authorized OECD Approach for

permanent establishments

This Alert highlights the key provisions in the

Amendment Bill as clarified in a report by the Bills

Committee (the Bills Committee Report).

Detailed discussion

Background

BEPS refers to the exploitation (or perceived

exploitation) of the gaps and mismatches in

international tax rules by multinational enterprises,

to artificially shift profits to low or no-tax locations

where there may be little or no economic activity.

The Organisation for Economic Co-operation and

Development (OECD) released a package of 15

action plans in October 2015 to counter BEPS.

In June 2016, Hong Kong indicated its commitment

to implementing the BEPS package. In October

2016, the Financial Services and the Treasury

Bureau (FSTB) launched a public consultation

process on proposed measures to counter BEPS

strategies. In July 2017, the Government released

the Consultation Report, indicating that the

Government received broad support during the

consultation process for its implementation

strategy with regard to the BEPS package.

On 29 December 2017, the Government published

the Amendment Bill for further reading at the

Legislative Council (LegCo). The Amendment Bill

codifies recommendations released in the

Consultation Paper.

From 10 January 2018 to 4 July 2018, the

Amendment Bill received a total of three readings at

the LegCo. A Bills Committee was also formed to

study the Bill at nine Bills Committee meetings,

which moved a series of Bills Committee Stage

Amendments (CSAs) before the Bill was tabled for

final reading.

The following sections summarize the main issues

covered in the Amendment Bill, as amended by the

relevant CSAs:

1. TP regulatory regime

2. TP documentation

3. Other related matters

TP regulatory regime

Codifies the OECD’s TP rules into the IRO

The Amendment Bill codifies the arm’s-length

principle into the IRO through the proposed

fundamental TP rule (Fundamental Rule). The

Fundamental Rule allows Inland Revenue to adjust

the profits or losses of an enterprise where the

actual compensation made or imposed between two

associated persons departs from the compensation

which would have been made between independent

persons (and that departure has created a tax

advantage).

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The scope of the Fundamental Rule covers persons

who are associated and applies to transactions

involving the sale/transfer/use of assets and

provision of services. Financial and business

arrangements between different parts of an

enterprise, such as dealings between a head office

and a permanent establishment, are also covered.

Associated parties are defined based on tests of

participation in the management, control and

capital of another, or of common participation by a

third party.

The OECD’s TP guidelines are relied on to provide

guidance on how the TP principles should be

interpreted, and a legal basis for its application is

provided in the IRO. In particular, the Amendment

Bill provides that the Fundamental Rule

interpretation is to be consistent with the OECD’s

TP guidelines.

The Fundamental Rule applies to years of

assessment beginning on or after 1 April 2018.

The implementation of the Authorized OECD

Approach as reflected in the Amendment Bill on

attributing income or loss to permanent

establishments has been deferred by 12 months,

i.e. it will apply to years of assessment beginning on

or after 1 April 2019.

In respect of fees for an APA application, the

service charge will be capped at HK$500,000. This

excludes direct costs of engaging external advisors

as well as travelling costs, which will be fully

reimbursed by the APA applicant.

Coverage and risk-based approach

The Bills Committee Report clarifies that the

Fundamental Rule applies to both cross-border and

domestic transactions. In practice, in applying the

TP rules the Inland Revenue Department (IRD) will

consider the overall Hong Kong tax position of the

transactions involved.

Specifically, insofar as domestic transactions

between associated persons do not give rise to

actual tax difference, or domestic transactions

involving non-arm’s length loans (e.g. interest-free

loans) are not carried out in the ordinary course of

money lending or intra-group financing business,

and provided that such transactions do not have a

tax avoidance purpose, then the relevant persons

will not be obliged to compute the income or loss

arising from these transactions on the basis of the

arm’s-length provision when preparing their tax

returns and no corresponding assessment on that

basis will be made by IRD.

The IRD will provide further guidance in a

Departmental Interpretation and Practice Note

(DIPN) at a future date.

In addition, the Fundamental Rule applies to all

types of tax, including profits tax, property tax and

salaries tax. This is because Hong Kong adopts a

scheduler income tax system which is different from

the comprehensive income tax regimes of many

overseas tax jurisdictions whereby all sources of

income are aggregated for assessment purposes.

Deeming provision on intellectual property

The Amendment Bill also incorporates the OECD

guidance in the development, enhancement,

maintenance, protection or exploitation (DEMPE)

functions related to the creation of intangibles.

Specifically, a new provision will be added to the

IRO to target situations where a person in Hong

Kong has contributed to the DEMPE functions in

respect of certain intellectual property rights (IPRs),

but income from such IPRs accrues to a non-

resident outside Hong Kong.

In such a case, the Hong Kong person will be taxed

under the deeming provision. The tax will be

imposed on an amount accruing in respect of the

exhibition or use of the relevant IPRs as is

attributable to the person’s contribution in Hong

Kong, even if the sum accrues to an associate of the

person outside Hong Kong.

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The Bills Committee Report clarifies that in applying

the deeming provision, the IRD will make sure that a

person will not be subject to double taxation in

respect of the same income from intellectual

property. The non-resident associate will also not be

subject to the profits tax in respect of the relevant

sum to the extent that the new deeming provision

applies.

To allow more lead time for taxpayers to prepare,

the commencement of the deeming provision on

IPRs will be postponed by 12 months. Hence, the

deeming provision will be applicable to the years of

assessment beginning on or after 1 April 2019.

Penalties

The Amendment Bill introduces administrative

penalties relating to transfer pricing; however,

given that transfer pricing is not an exact science,

the penalties have been set at a level lower than the

existing penalties for other non-compliance under

section 82A of the IRO. Specifically, penalties will

be imposed where a tax return is made with

incorrect information on transfer pricing without a

reasonable rationale or with the intent to evade tax.

Taxpayers will be liable for an administrative

penalty calculated as an additional tax not

exceeding the amount of tax undercharged (instead

of an amount trebling the tax undercharged, as is

currently imposed for incorrect returns and other

offences under section 82A of the IRO).

That said, the IRD has not ruled out the possibility

of imposing more stringent penalties or initiating

criminal prosecutions on blatant cases, in

accordance with the relevant provisions of the IRO.

The availability of TP documentation alone will not

qualify for an automatic exemption from penalties,

but will be considered in determining whether

individual taxpayers have a “reasonable excuse” to

be exempt from the penalties.

In assessing whether the taxpayer is able to

substantiate his/her reported/claimed amount, the

Bills Committee Report clarifies that:

a) A taxpayer will be accepted as having

substantiated his/her reported/claimed amount

if such amount is within the arm’s-length range.

b) The proposed section 50AAF will not apply

where the existing section 15C (valuation of

trading stock on cessation of business) is

applicable.

TP documentation

The Amendment Bill adopts the OECD’s

recommended three-tiered documentation

structure, comprising a master file, local file and

Country-by-Country Reporting.

Master file and local file

For fiscal years starting on or after 1 April 2018,

Hong Kong taxpayers are required to prepare

master file and local file documentation.

Exemptions based on business size and/or related-

party transaction volume have been adopted. A

waiver on the requirement to prepare master file

and local file documentation for domestic

transactions has also been applied.

Specifically, enterprises engaging in transactions

with associated enterprises will not be required to

prepare master file and local file documentation if

they can meet either one of the following

exemption criteria:

• Exemption based on size of business: Taxpayers

meeting any two of the following three

conditions are not required to prepare the

master file and local files:

­ Total amount of revenue not more than

HK$400 million;

­ Total value of assets not more than HK$300

million; and

­ Average number of employees not more than

100

• Exemption based on related party transactions: If

the amount of a category of related party

transactions (excluding domestic transactions)

for the relevant accounting period is below the

prescribed threshold, an enterprise will not be

required to prepare a local file for that particular

category of transactions:

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­ Transfer of properties (other than financial

assets and intangibles): HK$220 million;

­ Transactions in respect of financial assets:

HK$110 million;

­ Transfers of intangibles: HK$110 million; and

• Any other transaction (e.g., service income and

royalty income): HK$44 million

• Exemption in respect of domestic transactions:

Master and local files need not be prepared for

domestic transactions between associated

persons.

If an enterprise is fully exempted from preparing a

local file (i.e. its related-party transactions of all

categories are below the prescribed thresholds), it

will not be required to prepare a master file either.

The information to be included in the master file

and local file is specified in the Amendment Bill and

is broadly consistent with the OECD requirements.

The master file and local file must be prepared

within nine months after the end of the enterprise’s

accounting period. The master file and local file can

be prepared in English or Chinese. Taxpayers must

retain documentation for at least seven years.

In-scope taxpayers who fail to prepare master file

and local file documentation without reasonable

excuse are liable to a Level 5 fine (HK$50,000), and

may be ordered by the court to prepare such

documentation within a specified time. Failure to

comply with that order carries a Level 6 fine

(HK$100,000) on conviction.

Country-by-Country (CbC) Reporting (CbCR)

The CbCR filing threshold is set in accordance with

the OECD recommendation, i.e. €750 million, which

is approximately HK$6.8 billion.

The primary obligation of filing a CbC report falls on

the ultimate parent entities (UPEs) of multinational

groups that are resident in Hong Kong. But the

Amendment Bill continues to also embrace the

OECD’s mandate in relation to the implementation

of ”secondary” and ”surrogate” filing mechanisms.

The information to be included in the CbCR is in line

with the OECD’s requirements.

A CbC report has to be prepared for each

accounting period beginning on or after 1 January

2018. The Amendment Bill announced a transitional

arrangement for accepting voluntary filing of CbC

reports for taxpayers with a UPE located in Hong

Kong. These voluntary filings will cover accounting

periods commencing between 1 January 2016 and

31 December 2017.

A Hong Kong enterprise which is a constituent

entity will be required to file a notification to the

IRD within three months after the end of the

enterprise’s accounting period.

Penalty and offense provisions have been

introduced to cover matters such as failing to file

reports or notifications; providing misleading, false

or inaccurate information; or omitting information

in the CbC report furnished by the Reporting entity.

Penalties which may be applied include:

a) On summary conviction – a fine at Level 3 and

imprisonment for six months

b) On conviction on indictment – a fine at Level 5

and imprisonment for three years

Penalty and offense provisions will also apply to the

service providers engaged by the reporting entity.

Other tax matters

Double taxation relief

As previously announced, the Amendment Bill

enhances the current tax credit system by

extending the period for claiming a foreign tax

credit from two years to six years. The stated

objective of this measure is to counterbalance the

increased number of claims for double tax relief

that the IRD expects to receive as a result of the

implementation of statutory TP rules and the

continued expansion of Hong Kong’s

Comprehensive Double Taxation Agreement (CDTA)

network.

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However, the above change is accompanied by

several new conditions for claiming a foreign tax

credit, including:

i) A requirement to make full use of all other

available reliefs under CDTAs and the local

legislation of foreign jurisdictions before

claiming a foreign tax credit, which will only be

satisfied if all reasonable steps are taken to

minimize the amount of foreign tax payable

before resorting to a foreign tax credit

ii) A requirement to notify the IRD of any

adjustment to foreign tax payments that could

result in the foreign tax credit granted being

excessive

In addition, the Amendment Bill removes the option

for a taxpayer to obtain relief from double taxation

by way of either a foreign tax credit under section

50 of the IRO, or an income exclusion or deduction

under section 8(1A)(c) or 16(1)(c) of the IRO where

the claim involves a CDTA territory; in such case,

only a foreign tax credit can now be claimed.

According to the IRD, this change is consistent with

the view that CDTAs provide comprehensive

solutions for all tax matters within their scope and

the expectation of Hong Kong’s CDTA partners is

that double taxation will be relieved by way of tax

credit as agreed under the CDTAs. Commencing

from the year of assessment 2018/19, the income

exclusion or deduction approach under section

8(1A)(c) or 16(1)(c) of the IRO will be limited to

cases involving non-CDTA territories.

As a result of the above changes, the IRD is

expected to place greater scrutiny on foreign tax

credit claims and require additional supporting

documentation from taxpayers. The modifications

are also likely to result in an increase of mutual

agreement procedure (MAP) applications by

taxpayers, in an effort to minimize foreign taxes

where the foreign jurisdiction overly imposes taxes.

Dispute resolution mechanism

The Amendment Bill introduces a statutory dispute

resolution mechanism to facilitate the handling of

cross-border treaty-related disputes. This new

mechanism replaces the current reliance on

administrative guidance for defining the rules

surrounding MAP applications.

The new statutory dispute resolution mechanism

specifies that a taxpayer may present a case for

MAP and/or arbitration under the relevant Hong

Kong CDTA. A key feature of the statutory

mechanism is that it requires the IRD Commissioner

to give effect to any solution, agreement or decision

resulting from the application of MAP or arbitration

under any of Hong Kong’s CDTAs by making an

appropriate adjustment. The form of an adjustment

is left to the discretion of the Commissioner, but the

Amendment Bill specifies that it may include a

discharge or repayment of tax, the allowance of

credit against tax payable, or the making of an

assessment.

In the course of the deliberations with the Bills

Committee on the Amendment Bill, the IRD has

advised that it would allow a taxpayer to apply for

the holding-over of the tax in dispute under the IRO

in a case where an application for MAP has been

presented or an issue has been referred for

arbitration under a CDTA.

In light of the upcoming OECD peer review process

on dispute resolution, which is scheduled to begin in

December of this year with respect to Hong Kong,

the administrative framework associated with the

new statutory mechanism is expected to be

formulated in accordance with the OECD’s Model

Tax Convention, BEPS Action 14 and the relevant

peer review documents.

Countering harmful tax practices

To counter the artificial shifting of profits derived

from internationally mobile activities (such as

financial and other service activities) to low- or no-

tax jurisdictions, BEPS Action 5 (countering harmful

tax practices) includes a minimum standard

requiring that preferential tax regimes present in a

jurisdiction satisfy certain criteria in order to avoid

being designated as “harmful.”

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These criteria stipulate, among others, that

preferential regimes must not be ring-fenced from

the domestic economy, and require the eligibility for

preferential regimes be subject to a minimum level

of substance in the jurisdiction (the so-called

“substantial activities requirement”). On 5

December 2017, the European Union (EU) also

released a list of “non-cooperative” tax

jurisdictions, where fair taxation is one of the

criteria in assessing a preferential tax regime.

To satisfy commitments made by Hong Kong to the

OECD and the EU in the area of preferential tax

regimes, the Amendment Bill modifies the profits

tax concessions for corporate treasury centres

(CTC), and reinsurance and captive insurance

activities, to remove their ring-fencing feature.

With these amendments, the half-rate concessions

under these three regimes are extended to profits

derived from domestic transactions. These

modifications essentially replicate the change made

last year to the aircraft leasing regime, which made

the benefits under the regime available in respect of

onshore qualifying activities (in addition to the

already covered offshore qualifying activities).

Recently, legislation was also similarly passed to

extend the profits tax exemption for privately-

offered open-ended fund companies, to Hong Kong

incorporated private companies.

To prevent tax arbitrage where the payer concerned

is associated with the recipient benefiting from a

tax concessionary rate, the Amendment Bill

however restricts the amount of deduction that can

be claimed by the payer under all three

concessionary regimes.

The above changes to the CTC, reinsurance and

captive insurance regimes are effective from the

year of assessment 2018-2019 onwards.

As regards the substantial activities requirement,

the Amendment Bill empowers the IRD

Commissioner to prescribe substance threshold

requirements in terms of minimum number of full-

time qualified employees and amount of operating

expenditure in the tax regimes for CTCs,

professional reinsurers, captive insurers, ship

operators, aircraft lessors and aircraft leasing

managers. A separate gazette will be published to

specify the detailed full-time qualified employee and

operating expense thresholds, after consultation

with stakeholders. These changes are also expected

to be effective from the year of assessment 2018-

2019 onwards, subject to adequate legislation

being timely put in place.

As a result of the announcement made last year by

the Hong Kong Government that the five above-

mentioned preferential tax regimes would be

amended to satisfy the BEPS Action 5 minimum

standard, none of the regimes were found to be

harmful in a progress report on BEPS Action 5

published in October 2017 by the OECD, and more

recently in an OECD update on preferential tax

regimes issued on 2 May 2018. This announcement

also contributed to avoiding the inclusion of Hong

Kong in the EU blacklist of uncooperative tax

jurisdictions.

Advance ruling application fees

The Amendment Bill also increases the fees in

respect of an application for advance ruling from

HK$30,000 to HK$45,000, together with certain

other related fees.

India: Tribunal rules that allowances received outside India through a travel currency card are not taxable in India

An Indian tax tribunal has ruled that allowances

received through a travel currency card for services

performed overseas, are not taxable under

domestic law even though they are paid by an

Indian employer.

In light of this development, employers should

evaluate the ruling and the means by which they

EY Tax Alert – Vol. 21 Issue no. 16 | 31 July 2018

11

pay such allowances, to determine if their current

approach to taxing these allowances remains valid.

Background

Many employers second employees overseas, while

keeping them on an Indian payroll and paying their

salaries into an Indian bank account. In addition to

salary, employers also provide allowances to the

employees to cover cost of living in the host

country. These allowances are usually provided

either through a travel currency card or payments

to a bank account.

In the case in question, the individuals were non-

residents in India and were on a short-term

assignment overseas. Their salaries were paid into

an Indian bank account and allowances were

provided through a travel currency card issued by

an Indian bank. The Indian employer paid the

salaries and allowances after deducting normal

withholding taxes.

The individuals filed their tax returns in India,

claiming the allowances received through the travel

currency card were exempt under domestic law as

they were received overseas and were for services

performed overseas and therefore not taxable

under domestic law.

The exemption was denied by the tax authorities at

lower levels on the grounds that there was an

employer-employee relationship in India and the

credit/receipt of the allowances was in India. The

first appellate authority overruled the decision of

the lower authority and provided an exemption to

the taxpayers.

The tax authorities disagreed with the order of the

first appellate authority and appealed to the tax

tribunal.

Ruling of the tribunal

The tax tribunal held that the allowances received

by the taxpayers through a travel currency card

were accrued and received overseas. Therefore the

allowances are outside the scope of tax under

domestic law. The conclusion of the tax tribunal was

based on the following observations:

• The taxpayers performed the duties overseas

and the allowances were received by them for

these services.

• Though the instructions to pay the allowances

were received from an Indian employer, the

credit of the allowances happened outside India

in the travel currency card through an overseas

account maintained by the bank.

• The funds for making the payment of the

allowances by the bank were made available by

the Indian employer from an Exchange Earners

Foreign Currency Account.

• The allowances were credited in the travel

currency card for the first time outside India and

the taxpayers were able to get control over the

funds for the first time only in the host country

and not in India.

• In the subsequent years, the tax authorities have

allowed the exemption for allowances received

overseas after a detailed examination.

Next steps

The ruling confirms that if the services are provided

outside India and the income is received overseas,

then the income is not taxable in India, even though

it is paid by an Indian employer. The ruling also

provides clarity on whether allowances are

considered as received in India or overseas, when

paid through a travel currency card issued by an

Indian bank.

In light of this, employers should evaluate the ruling

and the means by which they pay such allowances.

EY Tax Alert – Vol. 21 Issue no. 16 | 31 July 2018

12 12

Contact details

Principal Tax contacts Yeo Eng Ping eng-ping.yeo@my.ey.com +603 7495 8288 Amarjeet Singh amarjeet.singh@my.ey.com +603 7495 8383

Global Compliance and Reporting Simon Yeoh simon.yeoh@my.ey.com +603 7495 8247 Julian Wong julian.wong@my.ey.com +603 7495 8347 Datuk Goh Chee San (based in Sabah) chee-san.goh@my.ey.com +6088 235 733 Janice Wong janice.wong@my.ey.com +603 7495 8223 Julie Thong julie.thong@my.ey.com +603 7495 8415 Lee Li Ming (based in Johor) li-ming.lee@my.ey.com +607 334 1746 Liew Ai Leng ai-leng.liew@my.ey.com +603 7495 8308 Koh Leh Kien leh-kien.koh@my.ey.com +603 7495 8221 Mark Liow (based in Penang) mark.liow@my.ey.com +604 263 6260

People Advisory Services Tan Lay Keng lay-keng.tan@my.ey.com

+603 7495 8283 Irene Ang irene.ang@my.ey.com +603 7495 8306

Christopher Lim christopher.lim@my.ey.com +603 7495 8378 Business Tax Services Amarjeet Singh amarjeet.singh@my.ey.com +603 7495 8383 Farah Rosley farah.rosley@my.ey.com +603 7495 8254 Robert Yoon robert.yoon@my.ey.com +603 7495 8332 Wong Chow Yang chow-yang.wong@my.ey.com +603 7495 8349

Transaction Tax Services Yeo Eng Ping eng-ping.yeo@my.ey.com +603 7495 8288 Sharon Yong sharon.yong@my.ey.com +603 7495 8478

International Tax Services

Anil Kumar Puri anil-kumar.puri@my.ey.com +603 7495 8413

Asaithamby Perumal asaithamby.perumal@my.ey.com +603 7495 8248

Transfer Pricing Sockalingam Murugesan sockalingam.murugesan@my.ey.com +603 7495 8224 Vinay Nichani vinay.nichani@my.ey.com +603 7495 8433 Hisham Halim hisham.halim@my.ey.com +603 7495 8536

Indirect Tax Yeoh Cheng Guan cheng-guan.yeoh@my.ey.com +603 7495 8408

Aaron Bromley aaron.bromley@my.ey.com +603 7495 8314

Financial Services Bernard Yap bernard.yap@my.ey.com +603 7495 8291

EY Tax Alert – Vol. 21 Issue no. 16 | 31 July 2018

13

EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. © 2018 Ernst & Young Tax Consultants Sdn. Bhd. All Rights Reserved. APAC no. 07001366 ED None. This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific

advice.

Important dates

31 July 2018 6th month revision of tax estimates for companies with January year-end

31 July 2018 9th month revision of tax estimates for companies with October year-end

31 July 2018 Statutory deadline for filing of 2017 tax returns for companies with December year-end

15 August 2018 Due date for monthly instalments

31 August 2018 6th month revision of tax estimates for companies with February year-end

31 August 2018 9th month revision of tax estimates for companies with November year-end

31 August 2018 Statutory deadline for filing of 2018 tax returns for companies with January year-end

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