Happy New Year

Happy new year from ATB.

DIPN46 issued…

e_dipn46

Australia: Claim for privilege fails

In Quality Publications Australia Pty Ltd v FCT, the Federal Court rejected a taxpayer’s claim that various documents created by its accountants were privileged.

Fraudulent phoenix activities: Australian Government proposals paper

The Assistant Treasurer, Senator Nick Sherry, has released a proposals paper canvassing options to address fraudulent phoenix activity.

Senator Sherry said estimates provided to him indicate that ‘phoenix activity may be ripping up to $600 million from the national revenue base’. The Australian government proposes a number of options for changes in the taxation and corporations law which include ensuring that there are anti-avoidance provisions in the taxation law to cancel any benefits derived through fraudulent phoenix activity. Comments are due by Friday 15 January 2010.

Life insurance bonds issued by tax haven entities

The ATO has released Taxpayer Alert TA 2009/17which deals with life insurance bonds issued by tax haven entities. The ATO is concerned with life insurance bonds issued from tax haven entities (eg in Vanuatu) to Australian residents which are designed to circumvent the Australian tax payable under the foreign investment fund measures.

The Commissioner of Taxation said he is concerned these arrangements may attempt to exploit the lack of transparency in tax havens.

Financial products and services: Ripoll report

The Parliamentary Joint Committee on Corporations and Financial Services had tabled its report (the Ripoll report) into financial products and services and the collapses of Storm Financial and Opes Prime.

The committee made 11 recommendations for legislative change which it believes would improve the quality of financial advice. The committee considers that a better regulatory framework for managing financial advisers’ conflicts of interest is needed.

The government said it will respond to the committee’s report in conjunction with the Cooper Review, which is also looking at commissions and fee structures in superannuation.

Commissioner of Taxation on use of tax treaties

In a recent speech, the Commissioner of Taxation, Mr Michael D’Ascenzo, spoke on the use of tax treaties.

Mr D’Ascenzo said ‘in general, tax treaties are not intended to provide ways to avoid paying tax altogether’.

‘Some in the marketplace appear to have a view that by coupling various treaty concessions of different countries together they can obtain tax concessions that would not be available had the transaction or investment taken place directly between the place of source and the place of residence,’ he said.

The Commissioner of Taxation warned that such arrangements need to be carefully considered as they may come within the general anti-avoidance provision of the Tax Act where tax is sought to be avoided.

 

KPMG India: GST Alert on Discussion Paper

GST Alert-October – Final

Ernst & Young China Tax & Investment Express

CTIE2009031(ENG)

CTIE2009032(ENG)

From Mondaq.com

United Kingdom: A Review Of Financial Regulations And Tax Issues For FSA-Regulated Businesses
From Smith & Williamson
http://www.mondaq.com/news.asp?e=1&a=89292

United States: IRS Targets Employment Taxes To Close Tax Gap
From Fulbright & Jaworski LLP
http://www.mondaq.com/news.asp?e=1&a=88708

From EY: Structures lacking substance and business purpose come under further challenge

ITS & TT Bulletin (EN) ITSTT200902

From the IRAS…

Media Releases:
Revised Annual Values for HDB flats from 1 January 2010 and a new property tax rebate for HDB owner-occupiers in 2010 (18 Nov 2009)
http://www.iras.gov.sg/irasHome/page04.aspx?id=9690

Singapore and Georgia sign Avoidance of Double Taxation Agreement (18 Nov 2009)
http://www.iras.gov.sg/irasHome/page04.aspx?id=9680

Singapore and Finland enhance tax cooperation (16 Nov 2009)
http://www.iras.gov.sg/irasHome/page04.aspx?id=9664

Singapore and Malta enhance tax cooperation (23 Nov 2009)
http://www.iras.gov.sg/irasHome/page04.aspx?id=9702

Updated Content:

Voluntary Registration for GST: New requirement with effect from 9 Dec 2009  (23 Nov 2009)
http://www.iras.gov.sg/irasHome/page04.aspx?id=650

New Asia Tax Blogs…

http://richardthornton.blogspot.com/

http://chinataxinsights.com/

Deloitte: Korean Tax Newsletter

October 2009

Proposed Revisions to Tax Laws

The proposed “Revisions to the Tax Laws in 2009”, which were announced on 25 August 2009 and covered in our August newsletter, have been further revised and refined.

Securities Transaction Tax Law

Beneficiary certificates of Exchange Traded Funds (“ETF”)

The securities transaction tax is proposed to be levied at a rate of 0.1% on transfers of beneficiary certificates of ETFs that are listed and traded on the Korea Exchange (“KRX”). Under the amended version of the proposal, this change is intended to take effect as from 1 January 2012.

Tax Incentive Limitation Law (“TILL”)

Exemption on acquisition tax and registration tax for ABS SPC, REITs, RET, REC, etc.

Under the current TILL, real property purchased by Asset Backed Securitization (“ABS”), Special Purpose Companies (“SPC”), Real Estate Investment Trusts (“REITs”) and collective investment vehicles (e.g. Real Estate Trusts(“RET”), Real Estate Companies(“REC”), etc.) before 31 December 2009 are 50% exempt from acquisition tax and registration tax. Further, the higher (i.e. three times higher) registration tax rate is not applied even if the property purchased is located in the Seoul Metropolitan Area. The proposed measures would extend the sunset clause of this exemption up to 31 December 2012, but the exemption rate for REITs and collective investment vehicles (RETs or RECs) would be reduced from 50% to 30%.

Exemption on acquisition tax and registration tax for Project Financing Vehicle (“PFV”)

Under current law, acquisition tax and registration tax levied on real property purchased by certain PFVs that meet all the requirements stipulated in Article 51-1 of the Corporate Income Tax Law (“CITL”) are reduced by 50% and the higher (i.e. three times higher) registration tax rate does not apply even if the property is located in the Seoul Metropolitan Area. The proposal introduces a sunset clause for this exemption that will allow PFVs to enjoy the benefit until 31 December 2012.

Self-billing Value Added Tax (“VAT”) invoices issued by purchaser

Under the current TILL, a purchaser of goods or services may issue a self-billing VAT invoice by complying with the procedures and conditions in the Presidential Decrees (“PD”) of the TILL, if the supplier does not issue a VAT invoice for the goods or services provided. The proposal will ease the procedures and requirements for the issuance of a self-billing VAT invoice.

Proposed Revisions to Other Laws

PD for Small- and Medium-Sized Companies Law (“SMCL”)

Scope of Small- and Medium-Sized Companies (“SMC’s”)

On 17 September 2009, the Small- and Medium-Sized Business Administration announced proposed revisions to the PD of the SMCL. Currently, where a company whose total assets exceed KRW 500 billion holds directly or indirectly at least 30% of the shares of a domestic company, the domestic company would be disqualified as an SMC (under the “ownership and management independence test”). Under the proposal, where a large company whose total assets exceed KRW 500 billion maintains directly or indirectly at least a 30% shareholding in a domestic company and, at the same time, is a majority shareholder of the domestic company, the domestic company would not be qualified as an SMC. In other words, if a large company is not the majority shareholder of the domestic company, the domestic company can maintain SMC status under the proposal.

Further, where certain financial companies described by the PD of the SMCL (such as new technology finance companies under the Credit Finance Law, etc.) own a domestic company, the ownership and management independence test can be waived.

Finally, an SMC is given an option to choose either the foreign exchange rate as of the previous year end or the average foreign exchange rate of the previous year for the conversion of total assets denominated in a foreign currency into Korean Won.

Foreign Investment Promotion Act (“FIPA”)

Scope of Foreign Investment

According to the proposed amendment announced on 21 October 2009, if a foreign-invested company converts its earned surplus reserve (i.e. this legal reserve is required for an amount equal to 10% of cash dividends up to 50% of paid-in-capital) into share capital according to article 461 of the Commercial Code, that conversion would fall within the scope of foreign investment as defined in the FIPA. This proposal will take effect for foreign investments made through such conversions on or after the revised FIPA enforcement date.

Foreign Investment Zone for foreign-invested company operating service business

Under the current FIPA, a manufacturing complex can be appointed as a foreign investment zone, in which foreign-invested companies can enjoy certain tax benefits such as an exemption from corporate income tax and local taxes, etc. Under the proposed changes, it will be possible for an area in which a foreign-invested company carries out certain service business may be designated as a foreign investment zone, which is not a manufacturing complex, provided the amount of space used by foreign-invested company is more than certain percentage. Details on qualifying service business and areas have not yet been announced.

PD of Act on External Audit of Chusik Hoesa (“AEACH”)

Scope of companies subject to mandatory external audit

Current law mandates a statutory audit by an external auditor for any company whose total assets at the end of the previous fiscal year are at least KRW 10 billion or if the company is listed on the KRX. However, the AEACH, which was revised on 2 March 2009, provides that the company’s total liabilities or the number of the employees, as well as its total assets should be taken into account in determining whether a company is subject to a mandatory external audit. The proposed revision of the PD of AEACH prescribes detailed criteria for companies subject to a mandatory external audit. The following companies will be added to the list of companies for which an external audit is mandatory:

- A Chusik Hoesa (“CH” or stock company) whose total liabilities as of the previous fiscal year end are at least KRW 10 billion and whose total assets as of the previous fiscal year end are at least KRW 7 billion;

- A CH that has at least 300 regular employees (excluding daily and dispached workers) as of the previous fiscal year end; and

- A CH whose annual sales in the previous fiscal year is KRW 20 billion or more.

PD of Capital Market and Finance Investment Business Law (“CMFIBL”)

Introduction of Special Purpose Acquisition Company (“SPAC”)

According to the proposal, if a SPAC, i.e. a CH that is established for the sole purpose of investing in another domestic company (“target”) through an initial public offering (“IPO”) and listing its shares on the KRX, and that is merged into the target after acquiring shares in the target, satisfies all of the following conditions, the regulations relating to collective investment businesses under the CMFIBL (e.g. approval/registration requirement for the establishment or limitation on the method of asset management) would be waived:

- The SPAC deposits or consigns funds raised by IPO to a securities finance corporation;

- The SPAC does not withdraw or provide a guarantee of funds before being merged into the target;

- At least one founder of the SPAC is a financial investment company that meets certain requirements set by the Financial Services Commision; and

- The SPAC meets requirements to be provided by the Financial Services Commision with respect to the protection of investors.

Relief of management control on private equity funds

Under the proposal, a domestic private equity fund will be allowed to invest in foreign companies that invest 50% or more of their assets in other domestic companies (“target companies”) if the target company falls within the definition of certain troubled entities (e.g. a company under restructuring or insolvency proceedings). If the private equity fund invests in a target company through a domestic SPC, the SPC will be able to extend a loan up to 300% of its net assets (currently, 200%). A domestic private equity fund also will be allowed to invest directly in social infrastructure within 50% of its net asset amount.

Developments at Tax Authorities

Plan for tax audit

On 24 September 2009, the National Tax Service announced the “Plan for Tax Audits,” the main features of which are as follows:

· Criteria for selection of a tax audit target company

Large companies

(Sales revenue of KRW 500 billion or more)

Medium-size companies

(Sales revenue of KRW 5 billion or more)

Small companies

(Sales revenue of less than KRW 5 billion)

Previous criteria

· Results of analysis of the extent of tax filing compliance

· Company that has not been audited by the tax authorities for a long time

· Results of analysis of the extent of tax filing compliance

· Company that has not been audited by the tax authorities for a long time

· Results of analysis of the extent of tax filing compliance

· Selection on a random basis

New criteria under the Plan

· Every 4 years

· Results of analysis of the extent of tax filing compliance

· Results of analysis of the extent of tax filing compliance

· Partial selection on a random basis

According to the Plan, the following companies would be excluded as tax audit targets for FY 2009:

- A company that has submitted a Plan for Job Creation to the district tax office;

- An SMC that, during FY 2009, has received a subsidy for sustaining employment from the Ministry of Labor;

- An SMC that has won first prize for the cooperation of labor and management;

- A small company that has met all of its tax compliance obligations and is not suspected of tax evasion (except for companies operating a rental business, saloon business or gaming business for adults, etc.).

In addition, a company that operates business selected as the 17 New Growth Engine Industries, such as LED, bio medicine, green finance, etc. is excluded from being a tax audit target company for three years after the year in which it starts to generate taxable income.

Recent Tax Rulings and Cases

Valuation of shares in unlisted company (Supreme Court 2009du2788, 2009.05.14)

The Supreme Court recently held that assets/liabilities recorded due to valuation gains and losses from derivatives should be excluded from net tax asset value in calculating the value of shares of an unlisted company under the share valuation formula in the Inheritance and Gift Tax Law, because such assets/liabilities resulting from derivative valuation gains/losses are not regarded as fixed assets/liabilities as of the valuation date.

A new Singapore tax case to keep a lookout for – withholding tax treatment of interest rate swap payments

Interesting case in which Andrew Ang J doubted IRAS’ circular on the application of withholding tax to interest rate swaps. However, this is (so far) only a preliminary decision on an application for leave to pursue judicial review of the CIT’s determination and to quash it.

2009-10 – A new Singapore tax case to keep a lookout for – withholding tax treatment of interest rate swap payments

[2009] SGHC 211 – ACC v CIT

China: Ministry of Finance Clarifies Tax Exemptions for NGOs

The Ministry of Finance has released two circulars clarifying the scope of tax-exempt income and tax-exemption identification for non-profit organizations (NGOs).

On the circular on tax-exempt income, there are five types of income considered as tax-exempt income for NGOs including money donated by individuals, units, and government subsidies. In addition, companies that qualify for the exemptions must be institutions, NGOs and foundations legally established and registered in the country according to another circular on recognizing qualifications.

Source: China Briefing 20 November, 2009

India Min: Vodafone Seeks Till Jan 29 to Respond on Tax Case

Vodafone Group PLC has sought an extension from India’s income tax department until Jan. 29 to explain the reasons for not deducting tax while paying $11.2 billion to buy a majority stake in a mobile phone operator, the country’s junior finance minister said.

The world’s largest mobile operator by revenue had until Nov. 16 to respond to a show-cause notice sent by the department on Oct. 30, S.S. Palanimanickam told the lower house of Parliament in a written reply.

Vodafone now owns 67% in India’s Vodafone-Essar.

India has slapped a tax bill on Vodafone International Holdings BV, reported by Indian media to be around $2 billion, related to its 2007 acquisition of a 67% stake in Hutchison Essar Ltd. from CPG Ltd., owned by Hutchison Telecommunications International Ltd.

But Netherlands-registered Vodafone International has argued that the deal with Cayman Islands-registered CPG isn’t liable to be taxed in India as it took place on foreign soil.

India’s tax department says Vodafone is liable to pay taxes because the transaction involved the transfer of an Indian asset. It also says Vodafone should have withheld tax on behalf of the government.

Source: Wall Street Journal 20 November 2009

Shell ordered to pay P7B in taxes

The Bureau of Customs has ordered Pilipinas Shell Petroleum Corp. to pay P7.34 billion in excise taxes  for unleaded gasoline imports from 2004 to October 2009 that it declared as a blending component rather than as a finished product.

The demand letter was signed by Customs Commissioner Napoleon Morales on Nov. 11 and was payable 10 days from its receipt. The amount does not include penalties.

The BOC order came 11 months after its Batangas district collector, Juan Tan, issued the first demand letter. The district uncovered Shell’s allegedly fraudulent scheme of passing off its unleaded gasoline as catalytic-cracked gasoline (CCG), which it claimed was a blending component not subject to tax.

But investigation by the office of Morales, Deputy Customs Commissioner Reynaldo Nicolas, and the Office of Presidential Adviser for Revenue Enhancement Narciso Y. Santiago Jr. upheld Tan’s recommendation that Shell pay P7.34 billion in taxes for the unleaded gasoline it started classifying as CCG five years ago.

The BOC noted that Shell had been paying value-added and excise taxes on its unleaded gasoline imports from 2001 to 2003.

The company stopped paying taxes, however, when it started bringing in CCG which it claimed was an intermediate product rather than a finished product and thus not subject to tax. Its position was upheld by Deputy Commissioner Jose Mario Buñag of the Bureau of Internal Revenue in a March 2004 opinion.

Then Revenue Commissioner Sixto Esquivias IV upheld Buñag’s ruling in June. Esquivias resigned as BIR chief on Oct. 30.

In its decision, the BOC ruled that “gasoline whenever imported shall be subject to excise tax and VAT based on the landed cost, whatever is the intention of the importer to the use thereof.”

The BOC pointed out that among the petroleum companies in the country, only Shell was not paying taxes on its unleaded gasoline imports. The BOC probers said the company had admitted that CCG was the same as unleaded gasoline.

The law does not qualify whether regular or unleaded gasoline will be used as a raw material or blending component to produce a finished product, according to the BOC.

In the petrochemical industry it has been expressly provided that naphtha, a raw material for plastic, would have zero excise tax if used as a raw material, the customs commissioner said.

Source: Inquirer.net 16 November, 2009

BoI plans incentives to triple overseas investment

The Board of Investment (BoI) is planning new incentives that it hopes will help Thai investment overseas triple in value over the next five years to US$10 billion.

BoI incentives currently apply only to projects in Thailand. The BoI’s new role supporting investment overseas was recently initiated by the government.

“The government’s move is aimed at getting local investors to tap into the opportunity overseas as the benefits and business opportunity are greater as a result of trade liberalisation through free trade agreements,” said Atchaka Brimble, the BoI secretary-general.

By the end of 2014, she said, the BoI hoped to lift local investment overseas to $10 billion from $2.83 billion recorded in 2008.

Target industries as well as high-potential destinations have been identified, while a sub-committee on overseas investment promotion will work out approaches to better support the business sector.

The targeted industries have three categories, according to whether they seek markets, resources or skills.

Consumer products, petrochemicals, plastics, hotels, restaurants and food products need new markets. Mining, power generation and processing agricultural products could benefit from foreign resources. Garments and jewellery need foreign manufacturing capability, as they face shortages of labour at home and high labour costs.

Targeted investment destinations include Asean, China, Africa, the Middle East, India and Central Asia.

Sorayud Phettrakul, an adviser to the Industry Minister, said investors would be supported with tax and non-tax incentives, on which BoI will need input from other government agencies.

Involved agencies include the Export Promotion Department, the Foreign Ministry, the Thai Trade Representative Office and the Agriculture Ministry.

Some incentives may need new laws or amendments. The BoI board chaired by the prime minister will determine if new Finance Ministry regulations would be required for promoting investment overseas through tax incentives, he said.

The BoI may also seek support from the Export-Import Bank of Thailand to help investors with financial difficulties.

The BoI will also encourage small business operators to take up these incentives. Large corporations invest successfully overseas because of their capital strength so SMEs should invest in clusters, taking a similar approach to Japanese SMEs in Thailand, he said.

To better handle the new role, a new working unit will be set up under the BoI. It will act as an information centre that supports businesses planning for overseas investment and improves co-operation with foreign trade agencies to facilitate doing business abroad.

Source: Bangkok Post 14 November, 2009

Malaysia: RPGT…

Exemption order an interim measure to a complete RPGT system

IN Malaysia, real property gains tax (RPGT) is imposed with the intention to curb property speculations. It is imposed on the gains on disposal of Malaysian landed properties and the rate varies from 5% to 30% depends on the holding period.

With effect from April 1, 2007, the Government decided to exempt RPGT in view of the economic slowdown and it was aimed at assisting property developers in disposing of their houses, and spearheading the economic progress.

Prime Minister Datuk Seri Najib Tun Razak, who is also Finance Minister, on Oct 23, however, reintroduced RPGT to put in place a fair administration of taxes.

In a nutshell, an equitable system will now be in place as income tax are imposed on income derived by any person in Malaysia while RPGT, on capital gains on disposal of landed properties. There will not be any loss of revenue to the Government.

In the Budget 2010 speech, the Government’s intention was clear. It is to ensure that the Malaysian tax system is equitable and continue to be able to generate revenue for development purposes. In line with this, the Government proposed that a tax of 5% be imposed on gains from the disposal of real property from Jan 1 2010. Any agreements signed between now till Dec 31 remains RPGT exempted.

Finance Minister II Datuk Seri Ahmad Husni Mohamad Hanadzlah then, exercising his power under section 9(3) of the Real Property Gains Tax Act 1976 (RPGTA), gazetted Real Property Gains Tax (Exemption) Order 2009 which will take effect from Jan 1, 2010. A fixed RPGT rate of 5% on gains from property gains is achieved through the application of this exemption order.

Malaysian individuals are accorded tax exemption of 10% of the chargeable gain (CG) from the computation of RPGT3. Thus, this would effectively mean that they will be paying less than 5% of RPGT rate while companies continue to pay 5%.

The RPGT Exemption Order exempts any person from the application of Schedule 5 of the RPGTA on the payment of tax on the CG arising from any disposal of assets on or after Jan 1, subject to the condition that the amount of CG exempted shall be determined in accordance with the following formula: A/B x C where:

A = Tax on CG at the appropriate tax rate reduced by the Tax on CG at 5%;

B = Tax on CG at the appropriate tax rate;

C = Amount of CG

Effectively, the exemption formula can be simplified as follows:

Chargeable gain x (Appropriate rate – 5%) / Appropriate rate

The appropriate tax rate to be applied on this exemption order depends on the holding period of the property which is summarised as per Table A.

Illustration: Malaysian citizen individuals

Chia Lat acquired a condominium in Bangsar for RM500,000 on Jan 1, 2008. On March 31, 2010 he decides to dispose the property for RM780,000. The RPGT to be paid by him would be as per Table B.

Illustration: Companies

Using the same example as above, and assuming the taxpayer is a Sdn Bhd, the RPGT payable would be as per Table C.

Mathematical confusion

The mathematical formula stipulated in the RPGT exemption basically restores to the fact that the RPGT is 5% on the CG. This is the mathematical equation:

Assuming the appropriate tax rate is y and CG is x, then the RPGT payable after the RPGT exemption would be :

[x – x(y - 5%)/y ] y =xy – xy + 5% x

= 5% of x

The Government has stated that the purpose of the RPGT is to have a fair administration of taxes. Thus the exemption is an interim measure to begin with RPGT of 5% taxes. In years to come, once the exemption order is revoked, RPGT payable would revert to the original position, ranging from 30% to 5%, depending on the holding period.

Policy reform: Currently, taxpayers are only required to keep accounting records for seven years under the law. It may not be feasible to impose 5% on the chargeable gain on gains derived from holding periods more than seven years. This would mean tax payers are required to keep their accounting records for an indefinite time to justify cost attributable to the acquisition.

It is therefore suggested that the Government impose 2% on selling price instead of holding periods exceeding seven years or as in the past, exempt these gains from RPGT. After all, the underlying purpose of RPGT is to curb speculation of properties rather than tax collection.

Moving forward, the Government may likely further align the taxes on landed transactions to be equitable with the income tax system. Therefore, it is crucial that the rakyat understand the Government’s overall objectives and appreciate that this exemption order is an interim measure to prepare the country for a complete restoration of the RPGT system when the time comes.

Once the country’s economy is paced and sustaining desired growth, this exemption may likely to be revoked and property gains will be back causing gains will be taxed at the appropriate rate.

Till then, this exemption order will continue to allow us to enjoy most of our short-term trading gains from real property transactions.

● Dr Choong Kwai Fatt is deputy dean, Research and Development, Faculty of Business and Accountancy, University of Malaya.

Source: The Star Online 16 November, 2009