Asia Newsletter
January 2004
AT T O R N E Y S TA X L AW Y E R S C I V I L L AW N O TA R I E S
The information below is produced by Loyens & Loeff in Singapore and Tokyo. It is designed to alert those (interested in) doing business in
the Asian region to recent developments in the region. Such developments are discussed in brief terms and are based on generally available
information. The materials contained in this publication should not be regarded as a substitute for appropriate detailed professional advice. The
information below was assembled based on information available as at 5 February 2004.
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Asean
Japan to negotiate bilateral Free Trade Agreementswith Malaysia, Philippines and Thailand
• At the Japan-ASEAN summit in Tokyo, it was announced that
negotiations for bilateral free trade agree-ments between Japan and
Malaysia, the Philippines and Thailand would commence in early
2004. ASEAN member States have been very active over the past
year in respect of bi- and multi-lateral free trade agreements (Japan,
China). A recent Mc Kinsey report indicated that the South East
Asian economies should integrate in order to maintain their
competitive edge. A number of plants manufacturing goods for the
ASEAN market has already been established within ASEAN borders,
in view of the customs duty benefits which can be so achieved.
Thailand, for instance, has been very successful in luring the major
automotive manufacturers to set up production facilities in Thailand.
Common Effective Preferential Tariff (CEPT) – updated
• ASEAN recently revised the so called ‘CEPT Rules of Origin and
Operational Certification Procedures’ The revised Rules of Origin
now clearly define the method of calculating local content (required
for claiming the reduced tariffs) and provide principles and guidelines
for determining the cost for ASEAN Rules of Origin purposes.
Australia
We would like to thank Greenwoods and Freehills in Sydney for their contribution
to the Australian section of this newsletter.
Enactment of rules for foreign exchange gains and losses
• Complex new measures dealing with the taxation of foreign exchange
gains and losses were enacted on 17 December 2003 with
retrospective effect from 1 July 2003. Generally, the new measures
treat foreign exchange gains and losses as being assessable or
deductible upon the occurrence of a “realisation event” and apply
to foreign currency transactions entered into by taxpayers (excluding,
in general, banks and other deposit-taking institutions) on or after
1 July 2003.
Foreign hybrid legislation introduced
• New rules dealing with the tax treatment of foreign hybrid entities
have been introduced into Parliament but not yet enacted. Broadly,
these rules will apply, once enacted, to treat limited partnerships
established under a foreign law and entities such as US limited
liability companies, as partnerships (and, therefore, as “look-through”
vehicles) rather than companies (as is currently the case) for
Australian tax purposes.
Amendments to tax consolidation regime announced
• Further amendments to the tax consolidation regime for Australian
corporate groups were announced on 4 December 2003. The effect
of these amendments will be backdated to 1 July 2002. Whilst many
of the amending measures are for finetuning and clarification
purposes, the most significant is the introduction of legislation
which will allow taxpayers to revoke certain elections (apart from
the election to form a consolidated group) up to 31 December 2004.
Interest deductions denied
• A recent decision of the Full Federal Court (Spassked Pty Ltd v
Commissioner of Taxation [2003] FCAFC 282) affirmed the Court’s
decision at first instance, denying a tax deduction for interest
payments on borrowings used to fund the acquisition of shares
where there was no reasonable expectation of dividend income.
The taxpayer has lodged an application seeking special leave to
appeal to the High Court.
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International Tax Developments
• The first tranche of the changes foreshadowed in the Government’s
2003 Budget in response to the Review of International Tax
Arrangements to increase the attractiveness of Australia as a place
for business has been introduced into Parliament. The amendments
relate to widening certain exemptions from the foreign investment
fund (“FIF”) rules (in particular in the attributable income calculation
for complying superannuation entities and related wholesale trusts)
and an exemption from interest withholding tax for unit trusts that
is similar to the exemption available to companies in respect of
widely offered debentures. The amendments also alter the basis
for calculating attributable income from controlled foreign companies
(“CFCs”) that are resident of broadly comparable tax jurisdictions.
It will no longer be necessary to include third country sourced income
derived by the CFC unless specifically identified by regulation. The
final item in this package of bills removes the potential for double
taxation of tax on royalty payments where there has been a transfer
pricing adjustment (that is, by both the denial of a deduction and
imposition of withholding tax). The Commissioner will now be able
to reduce the withholding tax to the extent the transfer pricing
rules operate to deny a deduction for royalty payments.
• UK and Russia. New tax treaties between Australia and the UK
and Australia and Russia entered into force on 17 December 2003.
The new treaties will generally have effect for Australian income
and withholding taxes from 1 July 2004.
China (PRC)
Tax registrations
• With effect from 1 February 2004, each taxpayer will have only one
tax registration certificate which will be issued and stamped by both
the competent State Tax Bureau and the local tax bureau in charge
of the taxpayer.
Income Tax reform
• In recent weeks, at various occasions, the State Tax Bureau and
government officials in Beijing have announced that they are
actively pursuing new tax legislation to replace the current income
tax laws applicable to foreign and domestic investors respectively.
• The proposed new income tax will integrate both the foreign enterprise
income tax law (FEIT) and the domestic enterprise income tax, and
present a harmonized tax law for both foreign and domestic investors.
Reports are that the new income tax rate will be 25%, which is 8%
points lower than the current standard income tax rate in China.
Further, tax holidays currently applicable to foreign investors will be
abolished and replaced by a uniform system for everyone, which is
proposed to be a 1 year full (100%) income tax holiday followed by
another year for which a 50% income tax holiday applies. This is
good news for domestic investors but unwelcome news to foreign
investors who are currently enjoying far more generous tax facilities.
It is understood that existing FIE investment applications will be
grandfathered provided they are approved before the new tax
legislation takes effect. The plans are for the new income tax law
to take effect on 1 January 2005. Where appropriate, foreign investors
should seek legal and tax advice to consider maximising the income
tax facilities applicable to their investment in China.
VAT reform
• With effect from 1 January 2004, on a trial basis, a consumption,
rather than the generally applicable production oriented VAT system,
applies in China's three Northeastern provinces. The immediate
effect hereof is that VAT charged on fixed assets by local suppliers
can be credited by the buyer against its output-VAT, whereas under
the present general VAT system applicable in the other parts of
China, VAT on purchases of fixed assets can not be credited against
output VAT, and thus is a cost of business.
Export VAT
• There have been several developments in this field late 2003.
Based on an export VAT Circular (Cai Shui (2003) 222 in October)
the State Tax Bureau and the MOF have jointly issued two
implementing circulars. Exports of goods purchased from small
scale taxpayers will be eligible to VAT credits capped at 6% whereas
exports of software products is exempt from VAT as of 1 January
2004, so that no VAT refunds or credits will be given to the exporter
in the latter case.
Trading activities
• China has relaxed the conditions for trading activities by allowing
joint venture companies or wholly-owned enterprises to establish
Chinese 'procurement' companies provided that registered capital
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is at least RMB 30m, the foreign investor has an overseas distribution
network and the local Chinese partner in a joint venture situation
has a sound creditworthiness and financial position.
International Tax Developments
• Macao. China signed a Tax Arrangement with Macao on 27
December 2003. The Arrangement is similar to a full fledged double
tax treaty and unlike China's Arrangement with Hong Kong, this
one also covers passive income such as e.g. dividends, interest
and royalties, but it does not cover business tax on airline and
shipping profits, which the Arrangement with Hong Kong does
cover. The withholding tax rates are in most cases 10% which
is not spectacular, given China's statutory withholding tax rate
of 10% currently. China also has a CEPA arrangement (see below)
with Macao, as it has with Hong Kong.
• China's new tax treaty with Cuba entered into force on 17 October 2003.
Hong Kong
Shipping agreement with Singapore
• A shipping agreement was signed between Hong Kong and
Singapore on 28 November 2003. The agreement is awaiting
ratification before it can enter into force. It provides that shipping
and airline activities will be taxable only in the country where the
business has its management and control.
Investment facilities because of the CEPA
• According to reports in the regional media, multinational
companies are rushing to take advantage of the Closer Economic
Partnership Arrangement (CEPA) between Hong Kong and the
Chinese mainland.
• In the last week of December 2003, the Hong Kong government
announced that the trade and Industry Department, in parallel
with five government approved certification organisations, have
begun accepting applications for Certificates of Hong Kong
Origin (which are required in order to benefit from the tariff
exemption between the mainland and Hong Kong on certain
goods) from today.
• The five approved certification organisations are the Hong Kong
General Chamber of Commerce, the Federation of Hong Kong
Industries, the Chinese Manufacturers' Association of Hong Kong,
the Indian Chamber of Commerce and the Chinese General Chamber
of Commerce.
Tax exemption for offshore funds
• The Hong Kong government on 14 January said it will have a
month long consultation on proposed amendments that would
exempt fund entities and nonfund entities that reside outside
of Hong Kong from profits taxes for income arising from
transactions in Hong Kong. The changes would bring Hong Kong
in line with other major financial centers, which do not tax the
profits generated through the involvement of a fund manager in
their jurisdiction.
• The proposed amendments to the tax law seek to exempt fund
entities and non-fund entities resident outside Hong Kong from
profits tax in respect of any income derived from transactions
undertaken in Hong Kong through a broker or an approved
investment adviser. To prevent round-tripping by local funds, anti
avoidance measures are also proposed. The Hong Kong government
stated that if the results of the consultation are positive, the
government plans to seek an early introduction of legislation.
Tax treaty with Belgium
• Hong Kong and Belgium on 10 December 2003 entered into
Hong Kong's first comprehensive income tax treaty and protocol.
Hong Kong has an existing Memorandum of Understanding on
the Arrangement for Avoidance of Double Taxation with China,
but the arrangement does not address the treatment of dividend,
interest, and royalty income. The treaty has to be ratified by both
jurisdictions before it can enter into force. The treaty will serve to
protect investors from one of the jurisdictions against income
tax in the other jurisdiction, if these investors make occasional
trips to the other jurisdiction to meet with customers or to carry
out projects, provided these visitis do not exceed a prescribed time
threshold. Furthermore, the treaty provides for reduced withholding
tax rates in Belgium on dividends (5% or 15%), interest and qualifying
royalty payments. The treaty, we believe, will provide an interesting
platform for Hong Kong investors who wish to invest into Europe.
Through Belgium, these investors can tap into the European Union
tax exemptions.
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India
Taxation of outsourced businesses
• In recent years, India has seen a steady growth of outsourcing
of business processes by nonresidents or foreign companies to
information-technology-enabled entities in India. Such entities are
either branches or associated concerns of the foreign enterprises,
or independent Indian enterprises. Their activities range from
procuring orders for the sale of goods to providing services such
as software maintenance, debt collection, software evelopment,
and credit card and mobile telephone-related services. In some
cases, a business process outsourcing (BPO) unit in India performs
all revenue-generating activity of the nonresident enterprise, or a
significant portion thereof.
• It was reported on 7 January 2004 that the Central Board of Direct
Taxes issued a circular clarifying the tax treatment of nonresidents
outsourcing to BPO units in India. The government notes in the
circular that the manner and extent of the attribution of profits
resulting from BPO units will ultimately depend on the facts of
each case and the nature of the services provided by the BPO unit,
as determined in accordance with the provisions of the relevant
treaty and applicable domestic law.
• Essentially, however, profits attributable to the provision of incidental
services are exempted from income tax in India, whereas profits
attributable to core activities are not. The CBDT defined the terms
‘incidental’ and ‘core’.
Budget 2004/2005
• On 3 February 2004, the Indian government issued its budget for
the period from 1 April 2004 through 31 March 2005. It is an interim
budget because general elections are up shortly and therefore the
current government will not seek to implement new legislation to
adopt the budget proposals. If re-elected, the current government
commits to adopt the interim budget statements. The tax aspects
are highlighted below:
• In India, stamp duty is levied either by the Central Government
or the State Government. It is proposed to reduce the stamp
duty by 50% on all instruments on which stamp duty is imposed
by the Central Government.
• The income tax rates for corporates and individuals would not
be changed.
• The income tax exemption provided for in section 80IA of
the Income Tax Act relating to new undertakings in the power
sector starting transmission or distribution at any time till 31
March 2006. This date is proposed to be extended till 31
March 2012.
• Currently long term capital gains on certain listed securities
purchased between 1 March 2003 and 1 March 2004 are tax
exempt. It is proposed to extend this exemption in respect of
securities purchased till 28 February 2007.
• A tonnage tax scheme, with notional income at a fixed rate on
the basis of net registered tonnage is proposed to be considered
for Indian shipping business.
Increased focus on Liaison Offices
• It was reported on 15 January 2004 that India's tax authorities are
looking at foreign companies that have set up "liaison offices" to
determine whether those offices actually carry on business in India,
which could subject them to tax, local media have reported. Under
the foreign exchange regulations, foreign companies are permitted
to set up liaison offices in India, but those offices are not allowed
to undertake any business or commercial activity in India or to earn
any income in India.
• India's tax authorities believe that, in some cases, liaison offices
employed large numbers of people and carried on business-
generating activities in India. If the liaison offices are actually
carrying on business in India, the authorities say, the income
attributable to those business activities would be subject to tax
in India.
Computer software purchase a royalty?
• It was reported on 21 November 2003 that in the case of Lucent
Technologies Hindustan Ltd. v. I.T.O., an Indian Income Tax
Appellate Tribunal has clarified that a payment for the importation
of computer software is not necessarily a royalty subject to
withholding tax.
• The tribunal appreciated the taxpayer's arguments distinguishing
between a payment for a copyrighted article -- an item with an
imbedded copyright -- and a payment for a copyright. The tribunal
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concluded in Lucent Technologies Hindustan that the taxpayer's
payment to a U.S. company had been for the acquisition of a
copyrighted article, but that the taxpayer had acquired no rights
in that article. The payment, therefore, was not a royalty subject to
tax withholding.
Service Tax and Export of Services
• It was reported on 19 December 2003 that responding to requests
from service providers for clarification of the meaning of "export of
services," India's Ministry of Finance recently released a discussion
draft setting forth the criteria to be used for determining when a
service is deemed to have been exported and is thus exempt from
service tax in India.
International Tax Developments
• Mauritius/India tax treaty. We refer to the previous edition of our
newsletter, in which we reported on the Supreme Court decision on
tax treaty protection under the tax treaty between India and Mauritius.
Reportedly, on 24 November 2003, a Review Petition was filed with
the Supreme Court of India, which will come up for admission in
next few weeks.
• As a result of the recent case with Mauritius, where the Indian tax
authorities had to concede defeat as the Supreme Court (inter alia)
ruled that tax treaty residence certificates issued by overseas tax
authorities override domestic tests applied in India, the Indian
government has reportedly decided that it will seek to include a
Limitation of Benefit clause in its first time or renewed tax treaties.
This would mean that certain prescribed minimum substance
conditions would have to be met in order to benefit from the tax
treaty reduced tax rates.
Indonesia
Tax reform
• The Indonesian tax authorities have announced plans to make major
changes to the income tax legislation. Based on oral statements
made by the Director General of Taxation on 24 October 2003,
Indonesia is considering to reduce the income tax rates to 12% for
the first IDR 75 million of taxable income, and 28% on the balance
(presently the maximum rate is 30% for corporates and 35%
for individuals). The authorities are also contemplating a possible
amendment to the VAT legislation. Finally, changes are expected
in the General Tax Law. The government plans to no longer make
tax refund requests automatically subject to a tax audit. They have
announced that they expect to issue draft legislation in the first
two months of 2004.
VAT and Luxury Sales Tax also due in Batam
• With effect from 1 January 2004, businesses operating on Batam
island have to pay and charge VAT and Luxury Sales Tax on domestic
sales, both in and outside Batam itself. An exception applies if
the sale is an export sale, i.e. to a foreign country, which will continue
to be free of VAT and Luxury Sales Tax provided the business in
Batam is operating in one of the Free Trade Zones on the island.
This is an important development for many businesses which
have been established in Batam because of its close proximity to
Singapore and because of the combination of (1) low labour
costs for production and (2) the Free Trade Agreement between
Singapore and the USA, which allows Singapore companies to
use Batam based manufacturers and still enjoy the import duty
privileges provided the Singapore company has a local content
of 40%.
International Tax Developments
• Netherlands. The new Dutch/Indonesia tax treaty which was
signed on 29 January 2002, was ratified by both countries in
December 2003 and has, according to a statement made by the
Dutch embassy in Jakarta taken effect on 1 January 2004. The
treaty contains a number of very interesting features, particularly
with respect to financing Indonesian borrowers. Under the treaty,
provided this is properly implemented, loans made out for more
than 2 years are exempt from interest withholding tax in Indonesia.
This presents a unique opportunity to avoid withholding tax on
funding costs by using a Dutch company to provide or arrange
the funding for an Indonesian borrower. The treaty also contains
an interesting provision with respect to dividend withholding tax,
and provides for a 10% withholding tax rate on dividends regardless
of the relative size of the interest in the company that pays the
dividend. In most of Indonesia's tax treaties a threshold interest
of at least 25% applies, in order to enjoy the reduced dividend
withholding tax rate under a treaty. Hence, not so in the new
Dutch/Indonesia tax treaty. Finally, the treaty contains a specific
exemption of withholding tax on technical service fees and a
10% withholding tax rate on royalties.
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• North Korea. More than one year after signing an income tax
treaty with the Democratic People's Republic of Korea, Indonesia
has ratified the treaty by issuing Presidential Decree 96, dated
14 November 2003. However, under article 28(1) of the treaty,
it will not enter into force until it is ratified by both contracting
countries. The treaty was signed 11 July 2002 in Jakarta.
• Thailand. Indonesia has reportedly ratified the new tax treaty
with Thailand and the wait is now on Thailand to ratify the treaty
before it can enter into force. The tax treaty does not contain
spectacular withholding tax reductions, as most rates will be reduced
to 15% withholding tax under the new treaty.
Japan
Tax reform 2004
• On 19 December 2003, the Ministry of Finance in Japan (“MOF”)
announced a tax reform package for the fiscal year 2004. The tax
reform still needs to be approved by the Diet. Various topics in the
package are highlighted below:
• The period for losses to be carried forward is extended from
5 years to 7 years. This will be applicable retroactively to losses
from business years beginning on or after 1 April 2001. The 5
year period for statutory limitations and book keeping obligations
will be extended to 7 years correspondingly;
• The 2% additional tax applicable to the corporations using
consolidated taxation will be abolished as per 1 April 2004;
• The income tax rate on capital gains from unlisted stocks will
be reduced from 26% (currently) to 20%. This will apply to
capital gains realised as from 1 January 2004;
• The scope of qualified “venture” for the purpose of reduced
taxation of income tax will be expanded;
• The amount of certain stocks of family owned small and medium
size companies that are eligible for a special reduced calculation
of inherited assets for the purpose of inheritance tax will be
increased to JPY 1,000 million (currently 300 million);
• Gains on the sale of inherited unlisted stocks to the issuing
company for the purpose of the payment of the inheritance tax
will be taxed as capital gains, rather than deemed dividends. For
income tax purposes, a deemed dividend is taxed at progressive
rates (maximum 50%, including the local tax) while capital
gains are taxed at a flat rate (reduced from 26% to 20% as part
of the 2004 tax reform);
• The tax rate on capital gains of unlisted stocks will be reduced
to 20% (see taxation of small and medium size company);
• Capital gains on open stock investment funds (stock-type
investment trusts) will be taxed at the same reduced rate of
10% as capital gains of stocks. Capital losses incurred from the
sale of open stock investment funds may be carried forward for
3 years;
• The tax rate of income tax for long term capital gains on the sale
of land and buildings will be reduced from 26% to 20%;
• The special deduction in the amount of JPY 1 million for capital
gains on land for creation of high quality residential land will be
abolished. On the other hand, the special tax rate of income tax
for the capital gains will be reduced to 14% for the first bracket
of capital gains in the amount of Yen 20 million;
• The tax rate of income tax for short-term capital gains from
the sale of land and housing will be reduced to 39%; and
• The compensation of capital gains and losses from the sale of
land and housing with other income will be abolished. These
measures will be applied to sales on or after 1 January 2004.
Court case regarding profits realised stock option
• The Yokohama Direct Court ruled on 21 January 2004 in favour of
the national tax authorities with regard to taxation of profits
gained from stock options. The profits were treated as salary income
upon which the higher income tax rate is levied (compared to the
lower rate for occasional income). On 30 January 2004, the Tokyo
District Court also decided that profits from stock options should
be treated as salary income. These decisions run counter to other
Tokyo District Court decisions taken in 2002 and 2003.
Korea
Corporate Tax rates reduced
• On 9 December 2003 the Korean authorities have formally
agreed that as from 1 January 2005, Korean corporate income tax
rates will be lowered to 25% (currently 27%) for taxable income
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to the extent exceeding KRW 100 million; below that amount
the rate will be lowered from 15% to 13%.
• In addition to the above the Korean Parliament agreed on various
other bills. These regard, amongst others, inheritance and gift tax
and income tax.
Tax incentives: Foreign Investment Promotion Law
• At the end of 2003, the government of Korea announced again
further tax incentives for foreign investors. The plans consist of
more tax cuts for investments in specific sectors (a.o. medical
sector, welfare sector and infrastructure related sectors) and industries,
as part of its overall tax reform plans.
• As of 9 January 2004 the amended Foreign Investment Promotion
Law applies, in order to increase foreign investment into Korea.
Amongst others, the amendments regard easier access for
foreign investors to many kind of investment related (tax) incentives,
for example by lowering required minimum invested amounts
required for such incentives.
Transfer Pricing
• At a public meeting held in Seoul last December, an official of the
Korean National Tax Service gave some insight in the policy of
the Korean tax authorities (NTS) with respect to tax audits of
Korean companies owned by foreign shareholders in relation to
transfer pricing issues. He said that such companies will only
be targeted in a situation whereby a clear manipulation indication
exists. In order to prevent too much reluctance at the foreign
investor’s level to invest in Korea, a foreign owned Korean company
will benefit from this favourable attitude.
Shipping: tonnage tax regime
• Korean authorities announced plans for the introduction of a
tonnage tax system applicable as from 2005 for qualifying shipping
industries. Accordingly, the weight of the vessels used will be the
basis for the calculation of the amount of taxable income, rather
than the operational profits. As a result of this change of system
the overall tax burden for shippers can decrease substantially.
Deductibility corporate expenses
• As of the beginning of 2004, the tax deductibility of entertainment
expenses has been restricted. The tax authorities will check the
legitimacy of costs in excess of KRW 500,000 more strictly on the
basis of required documentation.
Stock options• Early January 2004, a Korean court ruled that gains on stock options
granted by a foreign parent company to employees based in Korea
are in principle subject to Korean income tax.
Malaysia
Tax incentives to acquire foreign-owned companies
• The Malaysian government is providing tax incentives to
Malaysian companies that venture abroad in search of profitable
businesses and are able to acquire new technology or find new
markets for local produce. Examples of Malaysian local produce
currently being exported are palm oil, cocoa, rubber, wood-based
products and tin ore. In August the government released a specific
tax ruling -- Income Tax (Deduction for Cost on Acquisition of a
Foreign Owned Company) Rules 2003 -- that entitles companies
to a deduction based on the acquisition of a foreign-owned company.
To qualify for the deduction a locally owned company must be
incorporated under the Company's Act 1965, have at least 60 percent
Malaysian equity ownership, and be involved in manufacturing,
trading, or marketing activities. According to the ruling, an amount
equal to one-fifth of the cost of acquisition for the year of assessment
and for each of the following four years of assessment will be
allowed as tax deductions. The ruling is effective retrospectively
from 21 September 2002.
Labuan Offshore Companies – Malaysian marketingoffices permitted
• Labuan Offshore Companies (“LOC”) were recently permitted to
establish marketing offices in Kuala Lumpur and/or Johor Bahru.
An annual fee of M$5,000 is payable in respect of each office that
is established. Operating restrictions apply in respect of such offices.
In particular, those offices may be used only for meetings with
existing or potential clients of the LOC. LOCs are prohibited from
carrying on trading activities through those offices, or keep their
accounting records there. It however does provide offshore
companies with the opportunity to set up a base in peninsular
Malaysia, something which should make the day-to-day business
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operations for an offshore company much more efficient.
Time apportionment for expatriates working inOHQ / Regional offices
• The 2003 budget proposed that expatriates working in operational
headquarters and regional offices (a status which grants a number
of tax incentives) be taxed only on that portion of their income
attributable to the number of days they are in Malaysia in the course
of their duties. Recently, the proposed law was finally gazetted,
effective from the Year of Assessment 2003. With these measures,
Malaysia aims to bring its legislation in line with Singapore’s NOR
scheme, Thailand’s OHQ incentive and Hong Kong’s rules in
respect of employees with regional responsibilities.
International Tax Developments
• Germany. A new tax treaty between Germany and Malaysia was
initialled on 8 July 2003. Once in force, the initialled treaty will
replace the Germany-Malaysia income tax treaty of 8 April 1977.
No further details are yet available. The current tax treaty between
Malaysia and Germany has the interesting feature that the
Malaysian withholding tax on technical service fees for services
carried out in Malaysia is reduced to nil.
• Denmark. A protocol to the Denmark-Malaysia income tax treaty
of 4 December 1970 was signed on 3 December 2003. The
provisions of this treaty are not spectacular. The more interesting
ones are as follows:
• A permanent establishment also includes a gas well and a warehouse.
Supervisory activities in connection with a construction or assembly
project constitute a permanent establishment if they continue for
more than 6 months in any 12-month period;
• Denmark applies a tax sparing provision in respect of specified
income which has been subject to tax in Malaysia and lower
(effective) rate under one of Malaysia’s incentive schemes. Denmark
also exempts dividends which have been taxed at a reduced rate
or exempted in Malaysia because of special incentive measures.
The tax sparing provisions will apply for the first 10 years for which
the protocol is effective but this period may be extended by the
competent authorities;
• A limitation of relief article is inserted, under which relief from
taxation under the treaty is only given on income subject to tax to
the extent that the income is remitted to or received in a state.
• India. Details of the new income tax treaty and protocol between
Malaysia and India, signed on 14 May 2001, have become available.
On entry into force, the new treaty will replace the current
Malaysia-India income tax treaty of 25 October 1976. The new treaty
generally follows the OECD Model Convention. The treaty and
Protocol at a glance:
• The treaty provides for a withholding tax rate of 10% on dividends,
interest, royalties and technical fees (as regards the latter this is
a departure from the exemption under the previous tax treaty).
• A permanent establishment includes (i) a farm or plantation,
(ii) a sales outlet, (iii) a warehouse and (iv) a building site, or a
construction, installation or assembly project if it lasts for more
than 9 months;
• There is a tax sparing credit applicable in both states. The new
treaty makes no specific reference to special tax regimes in either
Malaysia or India and it is assumed that the new treaty applies
to entities qualifying for any such regimes.
• Australia. The second protocol of 28 July 2002 to the Australia-
Malaysia income tax treaty of 20 August 1980 entered into force
on 23 July 2003. With regard to the tax sparing provisions, the
protocol applies retroactively, in Australia, in respect of tax on
income for any year of income beginning on or after 1 July 1992 and,
in Malaysia, in respect of tax for any year of assessment beginning
on or after 1 January In any other case, the protocol will apply, in
Australia, in relation to income for any year of income beginning
on or after 1 July 2004 and, in Malaysia, in respect of tax for any
year of assessment beginning on or after 1 January 2004. The more
interesting points to note are as follows.
• Art. 10 (Dividends) is replaced with a new article, which provides
that, in Australia, no tax is charged on dividends to the extent that
they have been "franked" if the recipient is a company which holds
directly at least 10% of the voting power in the paying company.
In all other cases, the rate of withholding tax is 15% - and, in Malaysia,
no withholding tax is levied on dividends paid by a company resident
in Malaysia;
• Art. 12 (Royalties) is amended so that the exemption for approved
L O Y E N S & L O E F F – A S I A N E W S L E T T E R – J A N U A R Y 2 0 0 49
industrial royalties derived from Malaysia and for royalties subject
to cinematograph film-hire duty in Malaysia, is removed. The
definition of royalties now includes payments for the use in connection
with television, radio or other broadcasting, or the right to use in
connection with such broadcasting, visual images or sounds, or
both, transmitted by satellite or cable, optic fibre or similar technology,
and for the use of, or the right to use, some or all of the part of the
radiofrequency spectrum specified in a relevant licence; and
• Art. 21 (Income of dual resident) is replaced by an Other income
article, which is similar to that of the OECD Model, except that
the article also provides that other income derived by a resident of
one state from the other state may also be taxed in the other state.
New Zealand
This summary has been prepared by Buddle Findlay, Lawyers, Auckland,
Wellington and Christchurch, New Zealand
New tax legislation
• The Taxation (Annual Rates, GST, Trans-Tasman Imputation and
Miscellaneous Provisions) Bill 2003 received royal assent in
November 2003. The changes introduced by this Bill are as follows:
• Certain business-to-business supplies of financial services
previously classified as exempt supplies for GST purposes are
now “zero-rated” supplies with the effect that tax credits will be
available to the financial service providers in respect of GST they
pay on business supplies;
• A reverse charge mechanism is introduced to impose GST
on certain imports of services, which will include supplies
between intra-group companies such as management fees and
internal charges;
• New Zealand’s imputation laws have been reformed to reduce
double taxation of trans-Tasman investments, as part of an
agreement with Australia (similar legislation was enacted in
Australia in June 2003). Companies can elect to use this regime
from 1 April 2003 and are able to pay dividends pursuant to the
new rules from 1 October 2003;
• A deferred deduction rule is introduced to combat aggressive
tax arrangements, such as those arrangements which result in
investors receiving more in tax deductions than the money they
invest in the arrangements;
• Amendments have been made to the controlled foreign company
regime to allow a New Zealand resident’s attributed foreign
income/loss or foreign investment fund income/loss to be nil
if there is a lack of information available in respect of the controlled
foreign company as a result of stock exchange rules or the
laws of the particular country preventing disclosure of the
required information; and
• The new legislation will come have effect from the first day of
a financial quarter (1 January, 1 April, 1 July or 1 October) some
time in the next twelve months.
New Zealand Supreme Court announced
• The appointment of judges to the new Supreme Court, which will
replace the Privy Council as New Zealand’s highest court, was
announced in November 2003. As previously announced, the
Supreme Court has come into being on 1 January 2004 and hearings
will commence on 1 July 2004.
International recruitment
• Proposals to reduce the tax barriers to international recruitment
are set out in a government discussion document released by
the Inland Revenue Department in November 2003. The proposals
include a temporary exemption from some of New Zealand's
international tax rules for people recruited to work here (as employees)
who have been non-resident in New Zealand for tax purposes for
the previous ten years.
Proposals to lift barriers impeding international venturecapital access to New Zealand
• The Government has detailed two new tax proposals which are
intended to lift the barriers impeding access by international venture
capital to New Zealand.
• Under the first proposal, certain non-residents (including most
of New Zealand’s tax treaty countries) will be eligible for an
exemption on any tax which they may incur on profits from the
realisation of shares in small, unlisted New Zealand companies.
The exemption will apply to persons who, because they are exempt
from tax in their own jurisdiction, cannot claim any relief from
New Zealand tax.
• Tax changes for special partnerships intended to make it easier
for non-residents to invest with New Zealand-resident persons
in a special partnership structure.
L O Y E N S & L O E F F – A S I A N E W S L E T T E R – J A N U A R Y 2 0 0 4 1 0
• These tax proposals will be included in the first taxation Bill
for 2004 and are scheduled to take effect on 1 April 2004.
International Tax Developments
• Chile. New Zealand signed a double tax agreement (DTA) with Chile
in December 2003. It will come into force once both countries
legislate for it. Details are not yet available.
Philippines
Suppliers of certified exporters are also entitled tozero-rating
• A VAT-registered supplier of goods of a certified exporter is
treated as “indirect exporter” of goods. It is entitled to zero-rating,
subject to the following conditions: (i) the supplier is a duly
accredited indirect exporter under R.A. No. 7844; (ii) a Permit
for VAT zero-rating pursuant to Section 4.107-1(d) of Revenue
Regulations No. 7-95 has been issued to the supplier; (iii) the
exporter has furnished the supplier with a copy of its “Certificate
of Accreditation as Eligible Exporter”; (iv) the supplier issued the
exporter a VAT-registered invoice for zero-rated sales duly registered
with the BIR with the words “zero rated” imprinted on the invoice.
A VAT-registered supplier of service of a certified exporter is also
entitled to the benefit of zero-rating for as long as (i) the services
it provides to the exporter involve processing, converting or
manufacturing goods used in the exporter’s business, (ii) the
export sales exceed 70% of the total annual production, (iii)
the VAT-registered supplier of service is either accredited by the
Board of Investments or by the Export Development Council,
(iv) the supplier has been first issued with a BIR Permit for
VAT zero-rating, and (v) the supplier issues to the exporter a
duly-registered VAT invoice for VAT zero-rated sales.
Philippines plans another tax amnesty
• President Gloria Macapagal Arroyo wants to offer another tax
amnesty before the 2004 presidential election and is urging
Congress to expedite the passage of a bill that would allow
taxpayers to settle tax debts free of penalties or prosecution.
It is expected that the Bill will pass somewhere in the course
of February.
International Tax Developments
• The investment protection agreement between the Belgian-
Luxembourg Economic Union and the Philippines, signed on
14 January 1998, will enter into force on 19 December 2003.
Confirmation of the entry into force of the agreement was published
in the Belgian Official Gazette of 27 November 2003.
• Sweden. The new income tax treaty between Sweden and the
Philippines, signed on 24 June 1998, entered into force on
1 November 2003. The new treaty will generally apply from 1 January
2004. The treaty generally follows the OECD Model Convention.
It provides for reduced withholding tax rates of 15% (25% under
the former treaty) on dividends generally and 10% (15% under
the former treaty) if paid to a company that holds directly at least
25% of the capital of the company paying the dividends, 10% on
interest, and 15% on royalties. To avoid double taxation, both states
generally grant an ordinary tax credit. In respect of dividends, the
Philippines will also allow credit for the underlying corporate tax
payable in Sweden if the Philippine company owns directly or
indirectly more than 50% of the voting power in the Swedish
company paying the dividends. Sweden will no longer grant any tax
sparing credits. A limitation on benefits provision renders the
treaty benefits inapplicable to income of, and dividends from,
companies that are residents of a contracting state and derive their
income primarily from listed activities from third states if such
income is taxed significantly more leniently than income from
similar activities carried out in that contracting state.
Singapore
GST relief for trust and logistics companies
• Amendments to Singapore's Goods and Services Tax Act, together
with a related Circular, extend the zero-rating provision for trustee
services to cover qualifying services provided by a Singapore trust
company to a foreign trust of which that company is not the trustee,
effective 1 July 2003.
• The amendments open the possibility for the Minister of Finance
to issue regulations implementing the Approved Third Party
Logistics Company Scheme, under which qualifying companies will
be able to import certain goods without paying GST and to move
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them to certain parties without charging GST, effective 1 January
2004. Singapore has increasingly shown a focus on luring logistics
companies in order to strengthen its profile as a hub for the region.
IRAS issues circular on tax audits
• The Inland Revenue Authority of Singapore has a systematic method
of selecting candidates for tax audits and in December 2003 issued
a circular explaining Singapore's taxpayer audit process. The Circular
focuses on common errors made, the way in which these may be
avoided, and reiterates categories of non-deductible expenses.
IRAS issues additional circular on Not OrdinarilyResident scheme
• The IRAS has issued a new circular on the NOR scheme. Under
the clarifications contained in the additional circular, the IRAS
aims to mitigate some of the practical problems which arose in
respect of the NOR scheme.
GST circular on hire purchase and other financinginstruments
• The IRAS Circular of 18 November 2003 provides clarifications
regarding the GST treatment of hire purchase and other financing
instruments. Under a hire purchase agreement, the transfer of the
possession of goods to a hirer gives rise to a taxable supply for
goods subject to GST, even if legal ownership is not transferred.
Instalment credit finance is, however, an exempt supply if a separate
charge of interest is made on the hirer. If the hirer defaults on
payments and the financier repossesses and subsequently sells
the goods to satisfy the debt, the financier must charge GST on
the sale.
• Other financing or leasing instruments are treated as hire purchase
agreements if (i) the lease provides an option or right for the
lessee to purchase the goods prior to or at the end of the lease
period and (ii) the goods are not recognized as the lessor's assets
in his accounts.
• The gross margin scheme, under which GST is charged on the
excess of the sale price over the purchase price of the goods sold,
applies to used goods if they are supplied under a hire purchase
agreement and to new goods if they are supplied under a hire
purchase agreement by pure financiers, such as banks and finance
or leasing companies, which have obtained prior approval.
GST guidelines on e-commerce
• The GST guidelines of November 2003, 4th edition on e-commerce
clarify that the supply of goods or services in Singapore via the
Internet or any other electronic media is subject to GST similar
to traditional commerce. Physical goods purchased over the Internet
are subject to GST if the supplier is a GST-registered person and
the supply is made in Singapore. Physical goods delivered to an
overseas destination are zero-rated as exports. Physical goods
imported into Singapore are subject to GST if the value of the
goods exceeds SGD 400. Services or digitized goods supplied
over the Internet are subject to GST, unless they are zero-rated,
e.g. services performed for a person who does not "belong in
Singapore". Services or digitized goods from overseas suppliers
imported into, or downloaded in, Singapore are not subject to GST,
regardless of value.
Circular on income tax treatment of foreign exchangegains or losses
• The Inland Revenue Authority of Singapore issued a circular on
28 November 2003 regarding the income tax treatment of foreign
exchange gains or losses for businesses.
• As a concession, with effect from the year of assessment 2004,
the accounting treatment for recognizing foreign exchange gains or
losses will be accepted for tax purposes, provided that the same
treatment is applied to both gains and losses and the gains and
losses are revenue in nature.
• Unrealized gains or losses in prior years will be deemed to be
realized in the year of assessment 2004. The concession will be
granted automatically and taxpayers who do not wish to avail
themselves of the concession will have to make an irrevocable
election not to do so. In this case, the normal tax treatment will
apply, under which foreign exchange gains or losses will not be
taxable or allowable for tax purposes until there is a physical
conversion of the foreign currency into the functional currency of
the business.
• Capital gains and losses will remain not taxable or allowable.
Gains or losses arising from the translation of financial statements
in the businesses' non-Singapore dollar functional currencies into
Singapore dollars merely for presentational purposes (recognized
on the balance sheet) will also not be taxable or allowable. In
addition, any gain or loss arising from the translation of the year-
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end balance of a designated foreign currency bank account will be
taxable or allowable for tax purposes if the account is maintained
solely for the purposes of receiving payments from sales on revenue
accounts or trade debtors and making payments for such accounts.
Tax cuts for oil traders to compete with Thailand
• Singapore is considering to cut corporate income tax rates for
approved oil traders from 10 percent to 5 percent as a countermeasure
to the recently announced reduction by Thailand for oil traders
operating in Thailand.
International Tax Developments
• India. Singapore’s Deputy Prime Minister Lee Hsien Loong has
recently expressed interest in concluding a tax treaty with India
which would have similar features to the treaty currently in place
between Mauritius and India. Mauritius has been very successful
in capitalising on the tax treaty and is currently the single biggest
country investor into India. The most interesting feature of the
tax treaty between Mauritius and India is the exemption from
Indian tax for capital gains realised upon the alienation of qualifying
interests in Indian companies. As Mauritius, on the basis of domestic
legislation, does not tax such capital gains either, equity investments
made via Mauritius allow for a tax efficient exit. Singapore also
does not tax capital gains, so if the Singapore government would
be able to negotiate an exemption from Indian capital gains tax,
such would directly rival the Indian Mauritius tax treaty. Both
governments are aiming to complete the process by April of this
year, although impending Indian general elections may delay
any agreement.
• Egypt. Details of the first-time income tax treaty and protocol
between Singapore and Egypt, signed on 22 May 1996, have become
available. The treaty generally follows the OECD Model Convention.
The treaty provides for a 15% withholding tax rate on dividends,
interest and royalty payments. In Singapore, a tax sparing provision
also applies for 10 years from the date the treaty has effect, under
which taxes paid in Egypt include tax which would otherwise
have been payable but for special incentive measures to promote
economic development. Under this provision, the deemed credit
for Egyptian taxes paid on dividends, interest and royalties cannot
exceed 10%.
• Hong Kong. Singapore signed a shipping and air transport treaty
with Hong Kong on 28 November 2003. It provides for an exemption
on income derived from the operation of ships or aircraft in
international traffic by an enterprise of one state from income tax
in the other state. The exemption also applies to gains from the
alienation of ships or aircraft, and related movable property, and
to income or gains from the participation in a pool, joint business
or international operating agency. Remuneration from employment
exercised aboard a ship or aircraft is taxable only in the state of
the operating enterprise, unless it is derived by a resident of the
other state.
• Oman has ratified its tax treaty with Singapore. Treaty between
Singapore and Oman signed Singapore and Oman signed a first-
time income tax treaty and protocol on 6 October 2003. Once
in force, the treaty will replace the Singapore-Oman air transport
treaty of 29 June 1998, except for the protocol to the air transport
treaty. The tax treaty generally follows the OECD Model Convention.
It provides for a withholding tax of 5% on dividends, 7% on interest
and 8% on royalties. There are anti-abuse provisions under
which the dividends, interest and royalties articles do not apply
if tax avoidance is the main reason why parties use the treaty.
A permanent establishment includes a building site, a construction,
assembly or installation project or connected supervisory activities
if they last for more than 9 months. A tax sparing provision applies
under which taxes paid include tax which would otherwise have
been payable but for tax incentives which are designed to promote
economic development. The tax sparing provision applies for 10
years from the date the treaty has effect, but the competent
authorities of the states may consult each other to determine if this
period will be extended.
Taiwan
Technology contribution as means of paying up shares
• It was reported on 24 November 2003 that technology contributions
in exchange for shares of a Taiwanese company will become
immediately taxable as a gain on properties transaction based on
the difference of the total par value of shares issued and the cost
of acquiring or developing the technology.
• With that announcement, the MOF reversed its previous policy,
under which capital gains tax is due when sales were subsequently
sold. By explanation letter issued in the mid-1980s, the Ministry of
Finance said that special techniques invested in a corporation for
1 3 L O Y E N S & L O E F F – A S I A N E W S L E T T E R – J A N U A R Y 2 0 0 4
the purpose of obtaining stock amounted to bartering one property
for another. There were no tax consequences arising from the
transaction until the subsequent disposition of the stocks.
• Under this system, income tax on property transaction income
stemming from special techniques can be escaped without difficulty
because the sale of the stocks may not occur until long after they
are acquired. To close this tax loophole, the MOF has now changed
its policy to require that property tax on individuals of special
techniques be taxed immediately when the stocks are obtained.
Advance Pricing Agreement guidelines
• It was reported on 5 January 2004 that in conjunction with a
newly proposed transfer pricing regime, Taiwan's MOF has unveiled
its proposed rules on advance pricing agreements (APA's). In
their present form, the APA rules are limited to international
transactions and cross-border investments. The new rules apply
to inbound and outbound investors as well as entities involved in
cross-border transactions.
Dividends paid to foreign branches
• The government on 24 December 2003 approved a bill revising
the income tax law to bring the tax treatment of dividends paid
to foreign branches in line with that of dividends paid to foreign
subsidiaries by imposing a separate 20 percent tax on dividends
paid to foreign branches.
• Currently, Taiwan's income tax law provides an exemption from
withholding tax on intercorporate dividends received by enterprises
who are subject to corporate income tax in Taiwan. As a result,
dividends received by foreign subsidiaries and foreign branches
from other Taiwanese corporations are not subject to withholding
tax. However, because foreign subsidiaries are required to withhold
tax at 20 percent on dividends distributed to their parent corporations
while foreign branches can remit their profits to their headoffices
without withholding any such tax, a discrepancy exists between the
tax treatment of the two.
• When the bill becomes law, dividend income received from Taiwanese
corporations by foreign subsidiaries and foreign branches both will
ultimately be taxed at 20 percent. For the subsidiaries this takes
the form of withholding tax, and for the branches, it will take the
form of the separate tax that these revisions introduce.
Transfer pricing
• On 2 January 2004, Taiwan added a new article 114-1 to the Guidelines
for the "Assessment of Profit-Seeking Enterprise Income Tax," which
provides a mechanism to adjust intercompany transfer pricing.
• The addition of new article 114-1 of the guidelines on 2 January
marks the first time the Ministry of Finance has established a
mechanism for the adjustment of intercompany transfer pricing.
The new article provides a preferential order for adjusting
intercompany transfer pricing when article 43-1 of the Income Tax
Law is applied as follows: comparable price method; resale price
method; cost plus method; and other methods as established by
the ministry.
Thailand
Tax cuts rate for oil traders and refiners approved
• On 27 January, the Thai cabinet approved measures to reduce the
corporate income tax rate for oil traders and refiners from 30 percent
to 10 percent. Singapore is considering to reduce the corporate
income tax rate for approved oil traders from 10% to 5%.
Valuation of imported goods
• The cabinet approved a new draft Ministerial Regulation on 25
November 2003 regarding the valuation of imported goods for
customs duties purposes. The new Ministerial Regulation was
necessary to comply with the 1994 General Agreement on Tariffs
and Trade and to align Thai customs valuation methods with
international standards. When finalized, the Ministerial Regulation
will have retroactive effect from 1 October 2003.
Tax incentives for skills, technology and innovationprojects announced
• The Board of Investment (BOI) announced in a press release of
19 November 2003, that extensive tax incentives will be granted
to skills, technology and innovation projects. The incentives are
specifically aimed at the automobile industry, the fashion industry
and the information and communication sector. The incentives
package will include a 1-year extension of the normal tax holiday
L O Y E N S & L O E F F – A S I A N E W S L E T T E R – J A N U A R Y 2 0 0 4 1 4
(but not exceeding a maximum of 8 years) with no restriction on
benefits, as well as exemption from import duties on machinery for
the project, regardless of location. The conditions to qualify for the
incentives include: (i) a minimum of 1% to 2% of the annual sales
must be spent on research and development (R&D) activities
in the first 3 years; (ii) a minimum of 1% to 4% of the employees
must be graduates with bachelor or higher degrees in areas relating
to science, engineering or R&D regarding technology or design; and
(iii) a minimum of 1% of the expenditure in the first 3 years must
be spent on providing education to Thai employees or improving
their manufacturing skills. The incentives will also be available
to projects which are directly related to improving science and
technology, i.e. scientific, pharmaceutical or medical equipment
manufacturing, scientific experiments, electronic designing,
calibration, R&D, human resources development facilities and
science parks which are required to have facilities as specified by
the BOI.
Other tax incentives
• The Board of Investment (BOI) issued several notifications and
announcements on 16 October 2003 regarding tax incentives for
various sectors. The specific industries include the Designing,
Jewellery and accessory manufacturing, Agriculture and food-related
activities and Small / Medium sized enterprises recognised under
the One Tambol One Product Program (OTOP).
Revenue department reissues request for transferpricing documentation
• Thailand's Revenue Department recently reissued letters requesting
taxpayers' transfer pricing documentation. Thailand recently adopted
transfer pricing guidelines and the Thai Revenue hope to identify
possible areas for further scrutiny. In addition, since the tax authorities
are relatively inexperienced in this area, the request is aimed at
expanding the Revenue’s transfer pricing database.
End to tax breaks for property sector
• Tax breaks for Thailand's property sector have expired as planned
at the end of 2003 and will not be renewed The tax breaks, introduced
after the 1997 financial crisis, were designed to invigorate the property
sector. The government believes the sector has sufficiently bounced
back and extending the breaks would be unfair to other sectors.
Transitional measures are planned to ease the impact that the expiry
of the tax breaks will have.
International Tax Developments
• Seychelles. Details of the first-time income tax treaty between
Thailand and Seychelles, signed on 26 April 2001, have become
available. The treaty generally follows the OECD Model Convention.
The treaty provides for a withholding tax rate of 10% on dividends,
15% on interest in general and 10% on interest received by any
financial institution including an insurance company, and 15% on
royalties. It also permits the states to impose a branch profits tax.
(Thailand has a branch profits tax of 10%). A tax sparing provision
applies under which taxes paid include tax which would otherwise
have been payable but for special incentive laws designed to promote
economic development in the other state.
• Taiwan. Details of the first-time income tax agreement with
Taiwan, signed on 9 July 1999, have become available. The agreement
generally follows the OECD Model Convention. It provides for a
withholding tax of 10% on dividends in general and 5% if the
beneficial owner holds directly at least 25% of the capital of the
company paying the dividends; 15% withholding tax on interest
in general and 10% on interest received by financial institutions
including insurance companies. A withholding tax of 10% applies
to royalties. The definition of royalties includes payments for the
use of, or the right to use, industrial, commercial or scientific
equipment. The agreement permits a territory to impose income
tax up to a maximum rate of 5% on the disposal of profits realized
by a permanent establishment in accordance with its laws. A tax
sparing provision applies for 5 years (extendable by mutual
agreement) from the date on which the agreement enters into force
under which taxes paid include tax which would otherwise have
been payable but for special incentive measures.
• Turkey. Details of the first-time income tax treaty and protocol
between Thailand and Turkey, signed on 11 April 2002, have
become available. The treaty generally follows the UN Model
Convention. It provides for 10 or 15% withholding tax on dividends
and interest payments, and 15% on royalties. A permanent
establishment includes a building site or a construction project if
it lasts for more than 12 months, which is a generous time shelter
to help avoid that projects carried out in the other state becoming
taxable. The treaty includes a tax sparing provision operating
in Turkey for 3 years from the applicable date for the treaty, under
which taxes paid in Thailand include tax which would otherwise
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Vietnam
Tax exemption for foreign investors considered
• In an effort to level the playing field for all investors and attract
more foreign direct investment into Vietnam, the government
plans to exempt foreign investors from paying taxes on profits
transferred abroad, officials from the Ministry of Planning and
Investment announced on 8 January. New laws are expected to
be submitted to the National Assembly for approval by late 2004.
New Tax laws entered into force
• Substantial amendments to Vietnam's Enterprise Income Tax Law,
Value Added Tax Law, and Special Consumption Tax Law became
effective 1 January 2004. At the end of 2003, the Ministry of Finance
issued implementing regulations.
• The General Department of Taxation (“GDT”) is currently
drafting a new circular on FCWT to replace the existing Circular
as a result of the recent changes in VAT and EIT laws. The draft
circular seeks to impose higher tax rates and deemed taxable
income on a number of activities of foreign contractors. These
include the increase of the deemed percentage of taxable
income for VAT in respect of “supply of goods” from 20% the
current 10%, and 40% for construction with supply of equipment
from current 30%. We understand that if the draft circular is
signed off and released as it currently stands, the tax costs for
foreign contractors (and the Vietnamese contracting party) will
likely increase significantly.
Personal income tax reform
• Among the substantial overhaul of the main tax laws, the
amendments to the Personal income tax laws were not approved
by the National Assembly. The National Assembly indicated that
amending the Personal income tax laws was not (yet) opportune.
Vietnam's taxes on employees are among the highest in the Asia
Pacific region. Foreign staff are taxed at a rate of up to 50 percent
on their worldwide income. For local staff, payroll costs are further
inflated by a 30 percent surtax on income in excess of about US
$1,000 per month, a 17 percent social insurance cost, and a 5 percent
health insurance cost.
have been payable but for special incentive measures designed to
promote economic development.
• Norway. The new income tax treaty and protocol between
Thailand and Norway, signed on 31 July 2003, entered into force
on 29 December 2003. The new treaty applies from 1 January
2004. The new treaty generally follows the OECD Model
Convention. The withholding tax rates are similar to those in the
treaty with Turkey mentioned above, except that a 5% withholding
tax rate applies to royalties for the use of, or the right to use, any
copyright of literary, artistic or scientific work and 10% on royalties
for consideration for the use of, or the right to use, industrial,
commercial or scientific equipment. Instead of a 12 months time
shelter, this treaty provides for a 6 months time shelter for projects
carried out in the other country. A limitation of benefits clause
applies, under which relief from taxation is granted only on amounts
of income subject to tax in the other state to the extent that
the income is remitted to, or received in, that other state. The
protocol includes a most-favoured nation clause, under which,
if a treaty is subsequently concluded by one of the states with a
third state under which interest is taxed at a lower rate than under
this treaty, the lower tax rate will apply. A tax sparing provision
applies for 10 years (extendable by mutual agreement), under
which, on approval by the Norwegian competent authority,
taxes paid in Thailand include tax which would otherwise have
been payable but for special incentive measures. Thailand provides
for the credit method to avoid double taxation.
• Myanmar (Burma). Details of the first-time income tax treaty
between Thailand and Myanmar, signed on 7 February 2002, have
become available. The treaty generally follows the OECD Model
Convention. It provides for a 10% withholding tax rate on dividends
and interest generally, and 15% on royalties. A 5% rate applies to
royalties for the use of, or the right to use, any copyrights of literary,
artistic or scientific work and 10% on royalties for consideration in
respect of any services of a managerial or consultancy nature or
information concerning industrial, commercial or scientific experience.
The treaty permits a state to impose a branch profits tax in accordance
with its laws. A limitation of relief article applies under which treaty
relief is granted only on amounts of income subject to tax in the
other state to the extent that the income is remitted to or received
in that other state.
• Bahrain and Thailand signed an income tax treaty on 27 December
in Manama. Details are not yet available.
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CuraçaoAngel Gomez OsorioJ.B.Gorsiraweg 4PO box 507WillemstadNetherlands Antillest +599 9 434 11 00f +599 9 465 15 18
EindhovenWim HagensParklaan 54a5613 BH EindhovenThe Netherlandst +31 40 239 44 44f +31 40 239 44 40
FrankfurtBart RubbensKastorgebäude/ 15. StockPlatz der Einheit 160327 Frankfurt am Maint +49 69 97 15 70f +49 69 971 571 00
GenevaFrank JonkerRue du Rhône 59 (1er étage)CH-1204 GenevaSwitzerlandt +41 22 818 80 00f +41 22 312 02 03
LondonMarc Klerks26 Throgmorton StreetLondon EC2N 2ANUKt +44 207 826 30 70f +44 207 826 30 80
LuxembourgTax AdvisersTeun Akkerman/Simon Paul5, rue Eugène RuppertL-2453 Luxembourgt +352 46 62 30f +352 46 62 34
Loyens WinandyAttorneys at LawJean-Pierre Winandy5, rue Eugène RuppertL-2453 Luxembourgt +352 26 06 22 18f +352 26 06 20 87
New YorkTom Claassens /Mark van Casteren712 Fifth AvenueNew York, NY 10019USAt +1 212 489 06 20f +1 212 489 07 10
ParisAttorneys at LawAlfred Hoogveld1, Avenue Franklin D.Roosevelt75008 ParisFrancet +33 1 49 53 91 25f +33 1 42 89 14 60
Tax AdvisersEgbert Jan Jonker1, Avenue Franklin D.Roosevelt75008 ParisFrancet +33 1 49 53 91 25f +33 1 49 53 94 29
RotterdamHans de GrootWeena 6903012 CN RotterdamThe Netherlandst +31 10 224 62 24f +31 10 412 58 39
SingaporePieter de Ridder80 Raflles Place14-06 UOB Plaza 1Singapore 048624t +65 6532 30 70f +65 6532 30 71
TokyoAttorneys at LawJohn VersantvoortNishimoto Kosan KandaNishikicho Building, 12F3-23 Kanda NishikichoChiyoda-kuTokyo 101-0054Japant +81 3 52 81 55 87f +81 3 52 81 55 89
Tax AdvisersLoyens & Volkmaars BV,Tokyo branchPieter StalmanNishimoto Kosan KandaNishikicho Building, 12F3-23 Kanda NishikichoChiyoda-kuTokyo 101-0054Japant +81 3 52 81 55 82f +81 3 52 81 55 83
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