The High Court has held that legal advice privilege cannot be claimed in respect of tax advice received by a client from a tax accountant: R (on the application of Prudential PLC) v Special Commissioner of Income Tax (High Court, 14 October 2009). The court held that it was bound by the earlier Court of Appeal decision in Wilden Pump to reject Prudential’s contention that LPP should be construed as encompassing the advice of professionals other than lawyers on legal matters.

The case confirms, therefore, that, at common law, legal advice privilege will not be available for other professionals who advise on the law: whether accountants, insolvency practitioners, patent and trade mark attorneys, loss adjusters etc. Accordingly, it remains the case that it is only the clients of lawyers who are protected from disclosure of legal advice under legal advice privilege.

Background

HM Revenue & Customs (HMRC) served Prudential with notices under the Taxes Management Act 1970 (TMA 1970) seeking disclosure of documents relating to a commercially marketed tax avoidance scheme. Prudential sought judicial review of the decision to serve these notices and, in particular, argued that (1) the notices sought material subject to legal professional privilege (LPP) in the form of tax advice on the scheme received from PwC and (2) the notices sought material that was not relevant to the determination of any tax liability.

LPP defence

The House of Lords held in Morgan Grenfell that the TMA 1970 provisions authorising HMRC to require disclosure of material did not override LPP. Prudential sought to argue that LPP applies whenever “a person obtains skilled legal advice about tax law from an accountant, as opposed to a lawyer”, such that the legal advice on the tax avoidance scheme received from PwC was protected from disclosure.

It was common ground that there was no decided case in which the precise issue put forward by Prudential had been addressed and answered after a detailed examination of matter. Accordingly, the court went back to first principles and considered the intrinsic nature of LPP and its public policy justification. It was important to recognise the distinction between two aspects of LPP, legal advice privilege and litigation privilege. Importantly, the court was only concerned with legal advice privilege in this case. (Although Prudential argued that legal advice privilege and litigation privilege are integral parts of a single privilege right, and that, since litigation privilege can extend beyond lawyers in some circumstances so could legal advice privilege, the judge rejected the contention that the two aspects of LPP could not have separate requirements.)

The judge, Charles J, recognised that LPP is a common law principle and therefore can be developed by the courts to have regard to changing circumstances. Nevertheless, his review of legal advice privilege case law indicated that LPP is clearly linked to the legal profession and not just to the purpose and nature of the advice and assistance given. Indeed, the judge noted that all relevant textbooks (including Passmore: Privilege) “speak with a common voice that LPP applies to communications with lawyers and not other professionals” and that Parliament has proceeded on the basis that special provision needs to be made if an equivalent right is to be conferred clients of persons who are not members of the legal profession.

Ultimately, however, the judge held that he was bound by the earlier Court of Appeal decision inWilden Pump (curiously not referred to by either side in argument) to decide that legal advice privilege is, as currently determined, limited to legal advice from lawyers. Wilden Pump involved a claim that privilege applied to legal advice provided by patent agents. The Court of Appeal rejected that contention and the invitation to extend the common law privilege to other professionals with an important specialist knowledge of the law.

Relevance defence

Prudential pointed out that earlier guidance from HMRC (since withdrawn) had accepted that “pure legal advice”, that is advice concerned with whether specific pieces of legislation apply to a given transaction, is simply opinion on the law and would be exempt from disclosure except in exceptional circumstances. Prudential argued that departure from this practice was unlawful. The judge rejected this.

Firstly, there was no practice or policy to be departed from (it had been withdrawn, albeit without any fanfare).

Secondly, HMRC did accept that in many cases pure legal advice would not be disclosable as it would be irrelevant. However, the test for Prudential to overcome was whether HMRC had reasonable opinion that the documents contained or could contain information relevant to the tax liability in question. Information which may be relevant is not limited to factual material and it does not need to be necessary for the determination. To show that there was no possibility that the documents could contain relevant information is clearly a difficult burden.

In any event, based on documents already disclosed by Prudential, HMRC had formed the view that not all relevant documents had been disclosed. In particular, disclosed documents pointed to the existence of earlier drafts and proposals which would have relevance to how the scheme developed and correspondence with accountants dealing with implementation of the arrangements. These earlier documents suggested the careful omission of references to certain dividend payments, for example, to bolster arguments they were not an inevitability. The Special Commissioners had concluded that the officer was entirely reasonable to consider that the true purpose of the transactions had been glossed over in documents provided and that a decision to declare the dividend had already been made. That conclusion could not be impeached and, indeed, the court considered that what was being requested was not pure legal advice but information concerning the nature of the transactions and in particular what was or was not preordained.

Comment

Although the judge held himself bound by the decision in Wilden Pump, he did also accept that Prudential had put forward a “compelling, and indeed unanswerable, case” that in modern conditions accountants do what lawyers do in cases that establish LPP. He also expressed the view that “there is real strength in the argument that the extent of the right to refuse disclosure should not relate to the nature of the legal qualification of the person giving the advice”. The implication appears to be that, whilst the High Court could not amend the ambit of LPP, perhaps the Supreme Court might.

However, interestingly, the judge also suggested that rather than giving clients of accountants the same rights as clients of lawyers, a level playing field might also be achieved by reducing the rights of clients of lawyers to those of other professionals providing legal advice. Indeed, this appears to be the judge’s preference and he explicitly suggested that “the conclusion underlying LPP that there is a need for absolute confidentiality in respect of legal advice may need revisiting”. How this fits with Lord Hoffmann’s description of LPP is a “fundamental human right” is unclear.

As regards relevance, the decision supports HMRC’s current approach that, whilst pure legal advice is not normally relevant, in tax avoidance cases where the purpose of the parties is important, communications between adviser and client that go to the structuring of the scheme, the purpose of the scheme and whether certain elements are preordained are in a different category.

Ultimately, the decision means that clients of tax accountants, or indeed any other non lawyers that advise on legal issues, cannot claim legal advice privilege. As such, they will receive less protection from disclosure of legal advice than the clients of lawyers.

The Directorate General of Taxes of Republic of Indonesia (“DGT”) has issued two new tax regulations concerning the implementation of the Procedure of Double Tax Avoidance (DTA) agreement and the Prevention of Misuse of DTA agreement. In the regulations, DGT defines beneficial owner, agent, nominee and conduit company, as well as introducing two forms to be completed by the foreign taxpayers as a certificate of domicile. The tax regulations also govern the qualifyingforeign tax resident that can benefit from the reduced withholding tax tariff of tax treaty. The two new regulations will take effect on 1 January 2010.

Singapore has emerged the second largest investor in the Indian economy, contributing about nine per cent of the total foreign direct investment (FDI) into the country.

India received a total of US$35.16 billion (RM123 billion) from April 2008 through March 2009, with Singapore investing about US$3.4 billion (RM11.9 billion).

The Department of Industrial Policy and Promotion, under the Ministry of Commerce and Industry, has listed the island state behind Mauritius, while the United States was trailing after Singapore.

Most of Singapore’s investments were in the telecommunication, services, electrical equipment, power generation, oil refinery and transportation sectors.

Bulk of India’s FDI flows was via Mauritius, a tax haven due to its less than three per cent corporate tax, which attracted many foreign companies to channel their investments through the tiny Indian Ocean state.

Funds from Mauritius were estimated at about US$11 billion (RM38.5 billion), which was about 44 per cent of India’s total FDI.

American investments amounted to US$1.8 billion (RM6.3 billion) for the same period.

Source: Bernama 6 November, 2009

The ROC’s general policy toward tax treaties is to avoid double taxation, prevent fiscal evasion and strengthen substantive relations. The tax treaties that the ROC has entered into follow the OECD model and take into consideration matters relating to the political and fiscal status, economics, and trade of the mutual parties.

As of 31 December, 2008, there are 16 comprehensive income tax treaties and 14 international transportation income tax agreements which have been signed and brought into force. All tax treaties are listed below:

1. Comprehensive income tax treaties which cover all income flows: Australia, Belgium, Denmark, Gambia, Indonesia, Macedonia, Malaysia, the Netherlands, New Zealand, Senegal, Singapore, South Africa, Swaziland, Sweden , Vietnam and UK

2. International transportation income tax agreements: Canada, the European Union, Germany, Israel, Japan, Korea, Luxembourg, Macau, the Netherlands (Shipping, Air Transport), Norway, Sweden, Thailand and the United States.

The ROC’s withholding tax rate on dividends, interest, and royalties payable to a non-resident is 20%, but the dividend withholding rate is 30% for non-resident individuals and 25% for non-resident enterprises for investments not approved under the Statute for Investment by Overseas Chinese or the Statute for Investment by Foreign Nationals. However, with respect to dividends, interest, and royalties, reduced withholding tax rates ranging from 5-15% are provided for by treaty.

Source: Good Earth 9 November, 2009

From Business Standard

By: Mukesh Bhutani

Early last week, the Mumbai revenue department issued show cause notices to Vodafone, proposing to tax offshore transaction, as a result of which Vodafone acquired a controlling interest in GSM licences from Hutch.

This battle seems to be entering a climax, given developments in the past 18 months since the deal. Essentially, the dispute surrounds Indian tax administration’s claim to levy tax on controlling interest acquired by Vodafone (from Hutch) via a complex chain of offshore companies. Vodafone and Hutch claim that India does not have a right to tax such offshore sale transactions, given the interpretation of law on ‘transfer of assets’ located in India.

On the other hand, the tax administration continues to hold that such ‘indirect transfer of assets’ would be liable to tax in India, based on strict source based interpretation. As a matter of fact, several offshore transactions, including international takeovers and mergers have come under the tax administration’s scanner and multiple investigations are under way.

Recapping SC verdict
The last we heard on Vodafone was when, early this year, the Supreme court while declining to intervene in the matter, directed that Vodafone submit the relevant documentation to the revenue authorities such that a point of view can be formulated if indeed (the revenue) has the jurisdiction on such a deal. Remember, Vodafone besides challenging the withholding tax obligation, also challenged the jurisdiction (of revenue) to issue notices and seek information on the grounds that it is extra territorial.

Other grounds of challenge included constitutional validity of a retrospective amendment in 2008 budget to treat Vodafone as an “assessee in default” with respect to withholding tax obligation. The retrospective amendment, as most believe, was ostensibly intended to fasten withholding tax liability on Vodafone (as acquirer of interest in underlying Indian assets), should the tax administration fail in recovering tax from Hutch (alleged beneficiary of capital gains). To that, the courts declined to give its judement and felt that the most important aspect was ‘jurisdiction’ and not taxability or withholding obligation.

Whereas Vodafone seems to have rightly interpreted the apex court’s order that the revenue has merely assumed rights to determine the question of jurisdiction, the tax administration viewed it as a right to raise the tax demand, besides establishing jurisdiction. The fact that the revenue has issued a show cause suggests to me that the spirit of apex court’s decision is being adhered to.

Options before Vodafone
Though the contents of show cause notice are not public, in an unprecedented move, the revenue department issued a press release informing about the developments in the Vodafone case and in no uncertain terms, made its intent known to the world at large. The said release also mentions that Vodafone is being allowed time until November 16, to respond to the show cause.

It seems that the show cause notice runs into several hundred pages in addition to equal pages devoted to annexures. It will be interesting to observe how and when Vodafone responds to the show cause notice. If I paint a scenario, firstly, I feel the 16 day time period to respond is inadequate and I won’t be surprised if a suitable extension is sought. Secondly, what if Vodafone considers challenging the show cause? Plain reading of the Supreme court order suggests that Vodafone can challenge the jurisdiction (now that it has established it) and the jurisdictional High Court (Mumbai) shall have to admit the plea. It will not surprise me if Vodafone seeks a stay of proceedings until the high court gives its verdict on jurisdiction.

What would be the revenue department’s approach?
By thoroughly investigating the case and assembly of detailed facts (pursuant to supreme court’s order), the revenue seems to be bracing up for a long battle. The length of its show cause notice suggests a level of preparedness and spells out its intent loud and clear. The first step would be to establish jurisdiction and thereafter, raise the tax demand.

It is also clear that the revenue by not raising the issue on the taxability of income (in the hands of Hutch) shall successfully circumvent the dispute resolution panel (DRP) procedure, as mandated in the 2009 budget. The panel process suggests that all demands on foreign companies be subject to an approval by the panel, comprising of a collegium of 3 commissioners. Interestingly, the DRP provisions do not apply where a demand is being raised by invoking withholding tax provisions. Had the revenue pursued its case against Hutch, it would have been obligatory to follow the DRP process and thereafter, an appeal would lie with the tax tribunal.

International Developments
The international tax fraternity is anxiously observing the developments on Vodafone case as they continue to believe that India can exercise its fiscal jurisdiction to businesses that have a personal link or to income or assets which have a real or proprietary link to India. Further, taxation of capital gains has been intensively dealt with in model tax conventions, providing that the state of residence of a tax payer shall have primary jurisdiction to tax gains, subject to certain exceptions. However, despite established precedents, tax administrations in select jurisdictions are questioning international reorganisations.

Recently, Chinese tax authorities have asserted to impose tax on transfers by non-residents of equity interest that would otherwise appear not to be taxable in China. To me, these cases seem to have a treaty abuse undertone and do not in any way establish that China intends to tax all such transactions. Similarly, Brazil has been expanding its application of ‘substance over form’ doctrine in its tax law. Nevertheless, there are no reported instances of taxability of offshore transactions. Russian law allows tax authorities to disregard entities or recharacterise transactions, where there is ‘unjustified tax benefit’.

These provisions seem similar to proposals mooted in the direct tax code by way of general anti-avoidance rules. If the DTC provisions have to be viewed in its context, should India be imposing tax on such offshore sale transactions is a question in minds of the international tax fraternity? Though, the proposals under direct tax code clearly suggest that India would prospectively exercise its jurisdiction on such transfers (either by expansion of direct and indirect transfer of capital assets located in India or by invoking GAAR), it still doesn’t answer the question for past transactions under question.

Vodafone has become a case study in its own right, and it is anticipated that the case study be taken to a logical close. The question is how and when?

(The author is a Partner with BMR Advisors and views are entirely personal)

Source: Business Standard 9 November, 2009

Finance officials from the Group of 20 (G-20) industrialized and emerging market economies pledged to maintain economic stimulus measures until recovery from the global crisis is assured and asked the IMF to assess whether countries were on track for delivering strong, sustainable, and balanced growth to avoid future problems.

“Economic and financial conditions have improved following our coordinated response to the crisis,” the G-20 officials said in a statement. “However, the recovery is uneven and remains dependent on policy support, and high unemployment is a major concern. To restore the global economic and financial system to health, we agree to maintain support for the recovery until it is assured.”

Mutual assessment timetable

G-20 finance ministers and central bankers, gathered in the Scottish town of St. Andrews November 6-7, committed to a timetable for a new system of keeping an eye on each others’ economies, under which countries would present national and regional plans by the end of January to support sustainable recovery and job creation.

At their last meeting in Pittsburgh in September, G-20 leaders agreed a framework for peer review, assisted by the International Monetary Fund, that is designed to ensure that national economic policies are consistent with promoting balance in the global economy.

Officials want to avoid derailing the recovery by withdrawing the stimulus too soon or by leaving it so long that the resulting debt encourages investors to push up market interest rates. The IMF says the debt ratio of the advanced G-20 nations could be 40 percentage points above the pre-crisis level by 2014, threatening to drive up borrowing costs as much as 2 percentage points. The IMF outlined in a note to the G-20 leaders a series of seven principles to consider for unwinding the stimulus when appropriate.

The fragility of the rebound was highlighted by a report on November 6 showing the U.S. unemployment rate climbed to a 26-year high of 10.2 percent in October.

Financial sector tax

The G-20 officials—representing around 90 percent of the world’s wealth, 80 percent of world trade, and two-thirds of the world’s population—emphasized the need for quick implementation of banking industry reform, saying that stronger standards should be developed by the end of 2010, with the aim of implementation by the end of 2012 as financial conditions improve.

British Prime Minister Gordon Brown said it was time to consider a global financial levy, such as a tax on transactions or an insurance fee, to build up a “resolution fund” as a buffer against future bailouts. Banks needed “a better economic and social contract” that reflected their responsibilities to society. Any measures must be implemented by all major financial centers, Brown noted.

Following the Pittsburgh summit, the IMF has been working on suggestions for such a levy and plans to have some initial ideas by its Spring Meetings in April, to be held in Washington.

Several options

IMF Managing Director Dominique Strauss-Kahn told reporters the IMF was considering several options for the G-20 to look at. “We can’t go on with a system where some individuals take risks that finally all taxpayers, like you and me, have to pay for. The financial industry has made such big innovations that it is probably impossible to find a transaction tax that will not be avoidable by potential taxpayers. So it will be based not on transactions but on something else.”

He made it clear that there was no consideration of a currency transactions tax.

He said there were two possibilities for a financial sector tax, including a “possible windfall tax for 2009, a one shot thing.” The other would be a more long-term tax. Some trade off between regulation and taxation could be made: the more regulated a country, the less taxation would be needed. For example, European countries may need to tax the financial sector less because their banks were more regulated, while the less-regulated United States may want to impose a higher levy.

He said he was personally in favor of such a levy, that he referred to as “an IMF tax,” but countries could follow their own approach. “We don’t want an extra-simplistic solution that will not be effective. I am very pragmatic: I would prefer a second best solution we can all implement.”

“Think of it as a two-fold objective: (i) incentive for markets to take less risk; (ii) provide resources to an insurance fund if risk materializes.”

IMF First Deputy Managing Director John Lipsky is leading the group within the IMF to prepare a report for the G-20 on the issue. “It is widely accepted that deposit insurance should be funded by a tax on the banking system,” said Lipsky last month. “This can be viewed as a mandatory insurance plan. In the wake of the current crisis, it is appropriate to consider the same issues more broadly across the financial system.” The IMF’s report would cover how potential mitigation costs could be borne and whether it was right to think about specifically charging the financial sector.

Preventing the next crisis

Strauss-Kahn said the IMF was engaged with the G-20 in its deliberations on how the mutual assessment can be conducted and how the Fund could support and assist the G-20 efforts.. “We will ask countries to provide the overview of their policies for the next 2-3 years, and will check whether they add up—if they don’t we will provide scenarios and advice.”

G-20 leaders expect members to have completed their mutual assessment by April, with the aim of providing options to discuss when they meet in June. By November, they intend to refine those policy options “and develop more specific policy recommendations.”

“This will be the main job of the G-20 after this crisis: to prevent the next crisis,” Strauss-Kahn said. “We need to see how policies are consistent together or not.”

Asked by reporters what will happen if policies are not consistent, Strauss-Kahn said he did not expect to find that all G-20 countries’ policies were consistent with each other at present. “We need to provide advice to bridge the gap. It’s in the interest of all countries to avoid crises. If that’s true, they will work on this framework.”

Climate change

G-20 leaders also committed to take action to tackle the threat of climate change and work towards “an ambitious outcome” at a major UN conference in Copenhagen next month.

Officials are considering a finance package to help poorer nations develop green industries and adapt to climate change.

The G-20 comprises Argentina, Australia, Brazil, Britain, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United States, and the rotating EU presidency.

Source: IMF Survey 7 November, 2009

Background

Many investments into China are typically structured with the use of offshore holding companies located in countries or territories that have tax treaties with China.  Popular holding company jurisdictions for China include Hong Kong, Macau, Singapore, Barbados, Cyprus,  Ireland, Luxembourg, Mauritius, and Seychelles.  Benefits of using a holding company structure include the reduction of PRC taxes with respect to PRC source income generated by the investment.  This includes dividends, capital gains, interest, royalties, and other income.  China generally taxes such income at a rate of 10% under domestic law.  With the right holding company structure, however, this tax may be reduced or even avoided entirely. 

Gradually, the SAT has upgraded its domestic tax law to combat perceived abuses in connection with tax treaty planning.  This began with a general anti-abuse provision in Article 47 of the Enterprise Income Tax Law, effective January 1, 2008 and was followed up by the SAT’s Implementation Regulations for Special Tax Adjustments rules on January 8, 2009 which specifically targets tax treaty shopping for anti-abuse sanctions.  Subsequent developments included a number of striking cases in late 2008 where local State Tax Bureaus in Chongqing and Xinjiang actually denied tax treaty benefits using different means (ignoring the holding company in Chongqing and denying treaty residence for Xinjiang).  More recently, the SAT issued procedural rules on August 24, 2009 which took effect from October 1, 2009 (i.e., Administrative Measure on Treaty Benefit Application for Non-resident Enterprises [Trial]) regarding applications for tax treaty benefits.  Under this guidance, holding companies seeking benefits must produce residency certifications and follow other formalities relating to the analysis of their bona fide residency status.  However, until today, no further guidance had been offered on how to conduct such an analysis regarding the tax authorities’ use of the 2008 anti-abuse provision in a tax treaty context. 

The Notice on the Interpretation and Recognition of “Beneficial Ownership” under Tax Treaties (“Circular 601”), issued on October 27, 2009 and released on November 5, 2009 now addresses this issue.  A summary of this major international tax development is set out below.

“Beneficial Owner” Concept is Defined

·            The “beneficial owner” entitled to benefits under an income tax treaty is defined as any person who owns or has control and dominion over the income or the rights or assets which may give rise to such income. 

·            A beneficial owner must be engaged in “substantive” business activities (e.g., manufacturing, distribution or management) in the form of “individuals, cooperation or other forms.”  A pure “conduit” company or shell company that is formed merely to fulfill legal registration obligations in a foreign jurisdiction does not qualify for treaty benefit as a beneficial owner.  Conduit companies refer to companies incorporated for the purposes of the “evasion or reduction of tax, the transfer or the accumulation of income.”

·            The PRC tax authorities will evaluate and determine beneficial ownership based on their “substance-over-the-form” concept. 

Identification of Typical Conduit/Shell Company Structures

Circular 601 sets out the following as negative factors which could determine unfavorable tax benefit treaty status for the applicant:

·            the applicant has the obligation to pay or distribute all or a substantial part of its income (e.g., more than 60%) to a third country resident within a prescribed time (e.g., within 12 months after receiving such income);

·            the applicant has no or almost has no other business activities other than holding the assets or interests pursuant to which such incomes are derived;

·            the applicant’s nature is such that its assets, size, and personnel is relatively small and not commensurate with the income it derives;

·            the applicant has no or almost has no rights of control or disposal with respect to the income, assets, or rights based on which income is derived, and the applicant does not assume any risks or rarely assume risks; 

·            certain income is not taxable or otherwise exempt from tax in the treaty country, or taxed at a very low effective rate;

·            there exists a back-to-back loan through the applicant with terms similar to those for the loan agreement with respect to which is relevant to treaty benefits; and

·            there exists back-to-back royalties through the applicant with terms similar to those for the IP license agreements which are relevant to treaty benefits such as for copyrights, patents, and technology transfer agreements.

In addition, in order to qualify as a “beneficial owner” entitled to tax treaty benefits, the burden will fall upon the applicant to provide supporting documentation showing that it does not fall within any of these factors typical of a conduit/shell company structure.

Circular 601 is a major development in connection with the structuring of investments into China and will have significant implications for existing structures.  Firms will need to re-evaluate the efficacy of certain holding company structures in the first instance, restructure existing structures which may have been based on earlier assumptions, and consider how longer term planning with respect to creating more substance and re-deployment features into holding companies can be used to maintain beneficial treatment. 
O’Melveny & Myers unofficial translation – Notice of the State Administration of Taxation Regarding Interpretation and Recognition of Beneficial Ownership under Tax Treaties (Circular 601)

SECOND Finance Minister Datuk Seri Ahmad Husni Hanadzlah clarified that the Real Property Gains Tax, effective January 1 next year, is fixed at 5 per cent, irrespective of the property disposal year.

“The Real Property Gains Tax for the first year is 5 per cent and is the same for the second, third, fourth and fifth year,” he reportedly said on Saturday.

In a statement released from Putrajaya yesterday, Ahmad Husni reiterated that in the 2010 Budget, the fixed 5 per cent tax to be imposed on the gains from the sale of property is irrespective of the holding period and the category of the owner.

This rate of 5 per cent will be implemented through the Real Property Gains Tax (Exemption) Order 2009. This Order will be gazetted as soon as possible and is effective January 1, 2010.

Therefore, the current rate of RPGT, which is higher than 5 per cent as in Schedule 5 of the Real Property Gains Tax 1976, will no longer be applicable.

The Second Finance Minster said there are three circumstances where the property owner is exempted from the 5 per cent gains tax.

The first is where the level of exemption is increased from RM5,000 to RM10,000 or 10 per cent of the chargeable gains.

The second, is when the property sale are gifts between parent and child, husband and wife, grandparent and grandchild. And finally, when the disposal of a residential property is a once in a lifetime transaction.

Source: Business Times 26 October, 2009

Steel Forming and Rolling Specialists Pte Ltd (“SFRS”) was convicted of tax evasion by making false entries in its income tax returns for the Years of Assessment 2005 and 2006.  The total amount of profits under-reported was $1,356,000.  The company’s managing director, Mr Gan Oh Boon was also convicted of his role in assisting the company to evade tax.

The principal activities of SFRS are the manufacturing of pressure vessels and steel structures for use on ships.

Investigations revealed that SFRS set up 6 related companies in late December 2004 to abuse the tax exemption scheme for new companies under section 43(6A) of the Income Tax Act. 

Investigations also revealed that there was no work or services performed by the 6 related companies for SFRS. The 6 shell companies had no employees except for the SFRS directors themselves. Nevertheless, SFRS included fictitious expenses amounting to $1,622,000 in its audited statements of accounts for the years 2004 to 2006.  These comprised commission fees, technical consultancy fees, marketing consultancy fees, engineering consultancy fees and management fees. The said fees were for the work and services purportedly performed by the 6 shell companies. SFRS consequently under-reported its profits by the same amount of $1,622,000 in its income tax returns for the Years of Assessment 2005 to 2007.

Although the 6 related companies had reported the various fees as their income, each company paid a negligible amount of tax as the first $100,000 of their chargeable income was exempted from tax under the tax exemption scheme.  Therefore, SFRS had abused the tax exemption scheme and used these 6 shell companies to lower its own tax liability.

The tax exemption scheme under section 43(6A) of the Income Tax Act, which took effect from Year of Assessment 2005, was introduced to support entrepreneurship and encourage growth of local enterprises. Newly incorporated companies can enjoy a tax exemption on the first $100,000 of normal chargeable income (excluding Singapore dividends) for the first 3 consecutive Years of Assessment from the year of incorporation. Starting from Year of Assessment 2008, newly incorporated companies can claim a further 50% exemption on the next $200,000 of normal chargeable income (excluding Singapore dividends).

The company’s managing director, Mr Gan Oh Boon assisted the company to evade tax and authorised the abuse of the tax exemption scheme.

Investigations revealed that SFRS’ auditor, Mr Chng Chor Tong, had advised Mr Gan Oh Boon to set up new companies and charge expenses in the books of accounts of SFRS in order to make use of this tax exemption scheme. Mr Chng Chor Tong and his sole proprietorship, CT Chng & Co., was involved in the entire process of SFRS’ tax evasion – registering the 6 companies, preparing the management agreements between SFRS and the companies, creating invoices to support the fictitious expenses and making audit journal adjustments to post these expenses to the final audited statements of SFRS’ accounts.  

Mr Chng Chor Tong was the first practicing certified public accountant in Singapore to be convicted of tax evasion.  He was convicted on 28 April 2009 of evading tax on his income from his sole-proprietorship, CT Chng & Co, and was sentenced to 6 month’s jail and ordered to pay a penalty of $75,200.52. In addition, he paid $200,000 for compounding his offence of abetting one of his clients in the commission of a tax offence.

Investigations also revealed that SFRS’ managing director, Mr Gan Oh Boon had omitted employment income in the form of benefits-in-kind, made up of hire-purchase instalments for his private car and his other private expenses paid for by SFRS. 

Mr Gan Oh Boon was convicted of negligently making incorrect returns by omitting benefits-in-kind amounting to $405,335 for the Years of Assessment 2004 to 2006. SFRS was also convicted of negligently giving incorrect information about Mr Gan Oh Boon’s tax liability by omitting the said benefits-in-kind from his Form IR8A for the same Years of Assessment.

SFRS and Mr Gan Oh Boon were first charged in court on 16th January 2009 for 10 charges each. This morning, SFRS pleaded guilty to 2 charges under section 96(1)(b) and 3 charges under section 95(2)(b), and Mr Gan Oh Boon pleaded guilty to 2 charges under section 96(1)(b) and 3 charges under section 95(2)(a). The remaining charges were taken into consideration for sentencing. For the 5 charges, the Court

i) Sentenced SFRS to a fine of $24,000 and ordered it to pay a penalty of $988,933.58. 

ii) Sentenced Mr Gan Oh Boon to a total of 2 weeks of imprisonment and a total fine of $8,000.  In default of payment of the fine, the default sentence would be 6 weeks of imprisonment. He was also ordered to pay a total penalty of $988,933.58. In default of payment of penalty, the total default sentence would be 34 months of imprisonment.

The Ministry of Finance and State Administration of Taxation jointly released Circular 111 on September 27, clarifying the scope of the China’s business tax and providing temporary tax relief.

The BT regime was amended at the end of 2008 to bring within its scope any service, regardless of whether either the provider or if the recipient was in China. Since the adoption of this amendment, there has been a lot of debate over the introduction of specific exemptions or exceptions for certain overseas-performed services. Circular 111 clarifies the BT position for certain types of service provided overseas and is relevant to nearly all enterprises and individuals exposed to the impact of the new BT regime.

Main Issues of Circular 111
1) Articles 1, 2 & 5 provide for temporary BT exemption for the following items:
a. Individuals’ financial transactions,
b. Individuals’ granting of real estate and land use rights; and
c. Governmental fund and administrative fees.
2) Specific exemption/exception for certain overseas-performed services are stipulated in Article 3 & 4 as set out below:

Article 3: The following services provided overseas by PRC enterprises or individuals are temporarily exempt from BT.
a. Construction; and
b. Culture and sports (except televising).

Article 4: Certain services provided entirely overseas by overseas enterprises or individuals to PRC enterprises or individuals in non-PRC territories, will be deemed as falling outside the service scope regulated by the BT Statute provided in PRC as described in Article 1 of the BT statute, and thus they will not be subject to BT. The detailed scope of such services will be prescribed by the MOF and SAT.

In accordance with the above-mentioned principle, the following services provided out of PRC by overseas enterprises or individuals to PRC enterprises or individuals are not subject to BT:

a. Culture and sports (except televising)
b. Entertainment
c. Service business: hospitality, catering, warehousing; and
d. Other services: bath, haircut, laundry and dyeing, picture-mounting, copying, engraving, photocopying, and packaging

In general the BT statute changes the BT charge scope from basing the charge on the location where the services are performed to where the service provider or the service recipient is located. Under this principle, for cross-border services provision, if either the service provider or the service recipient is a PRC enterprise or individual, service proceeds for such service provision are subject to BT.

Circular 111 has clarified above implication by listing certain types of overseas-performed services which are beyond the BT charge scope. However, these listed services are limited in scope. Generally speaking, such services cannot be performed if the service recipient or service target is not at the location of the service provision. For most situations, both the service provider and service recipient should be out of PRC where the service is provided, for the exemption or exception to apply.

The effective date for Circular 111 has been retroactively set as January 1, 2009 for the purpose of making this circular a consistent supplement to the new BT regime. The circular also allows for overpaid taxes for services which qualify for BT exemption or exception to be used to offset future BT liabilities, or to be refunded.

Source: Dezan Shira 28 October, 2009

The Assistant Treasurer, Senator Nick Sherry, has launched the national Tax Practitioners Board, announcing its membership.

The chair of the new board will be Dale Boucher, PSM, a holder of the Public Service Medal, and former CEO of the Australian Government Solicitor’s Office.

Senator Sherry also announced the release of the proposed final form of the Tax Agent Services Regulations. They include new features such as:

• maintaining the existing ability for individuals with academic qualifications in law to seek registration as tax agents, even if they have not completed the additional practical legal training course required to practice law
• providing the Tax Practitioners Board with greater flexibility in determining which additional courses a specialist tax agent service provider is required to complete in order to be eligible for registration
• providing the board with greater flexibility in the types of organisations it is able to recognise for the purposes of the regulations
• confirming that Recognised Tax Agent Associations are not intended to exist exclusively for tax agent or BAS agent members as it is realistic for professional associations to seek to represent a wider group
• providing the board with the discretion to recognise a broader range of organisations that can seek to be recognised by the board
• confirming that if a Recognised Tax Agent Association’s registration is terminated by the board, the board will have full discretion to delay the termination of a tax or BAS agents registration so as to give them sufficient time to seek membership of an alternative association
• confirming that existing and aspiring agents would not be required to be a member of a professional association or BAS association to be registered under the regime.

Multinationals are facing new tax challenges due to growing transfer pricing (TP) scrutiny by world’s tax authorities, according to a survey.

The survey by international accounting firm Ernst & Young found a dramatic increase in the scope of TP documentation required by governments with penalties imposed more frequently and at higher levels when multinationals get it wrong.

Locally, Malaysia has introduced the new Sections 140A and 138C of the Income Tax Act 1967 relating to TP, which referred to the price charged by one part of an organisation for products and services it provides to another.

Given the need for governments to raise revenues in this challenging economic climate and the changing regulatory environment, the study anticipates heightened litigation in the near future.

This expectation is driven by the almost universal trend towards increased TP investigation resources within tax authorities, it said, adding that this trend is also shared by Malaysia.

“As governments search for tax revenues to offset growing budget deficits, many are sharpening their focus on compliance, enforcement and legislative approaches,” said Ernst & Young Malaysia’s partner and head of transfer pricing, Janice Wong.

“It has thus become inevitable that both domestic and multinational businesses will have to be prepared for more TP audits and investigations,” she said.

In Malaysia, the Inland Revenue Board (IRB) has set up a dedicated Multinational Tax Department to focus its efforts and resources on TP matters such as TP audit, compliance, policy and advance pricing arrangement.

The specialist resources consist of accountants, economists and those with business and finance backgrounds, and the dedicated resources are expected to increase significantly.

The survey report said the IRB revealed that it does not target specific industries for TP audits.

“Instead, TP audit targets are selected by the IRB’s computer system,” it said.

Wong said there has been an increase in court cases involving transfer prices and the deployment of a considerable amount of TP enforcement among local tax authorities.

“The IRB will continue to increase its focus on transfer pricing. Its overall target is an increase in tax revenue as a whole, as indicative of an increased level of compliance from taxpayers,” she said

Source: Bernama 31 October, 2009

New Zealand Trade Minister Tim Groser today signed an Arrangement to enhance cooperation in wine-related business with Hong Kong.

Mr Groser says the new Arrangement will help New Zealand wine exporters access the growing Asian market.

“Hong Kong is fast developing a sophisticated wine culture and is becoming the wine hub of the region. The Arrangement enhances knowledge transfer in wine education and will improve the marketing and profile of New Zealand wines in Hong Kong.

“The Arrangement specifically acknowledges New Zealand Winegrowers’ world-leading sustainability framework, which provides a significant point of difference for New Zealand in the Hong Kong market.

“New Zealand looks forward to a continued partnership with Hong Kong as it develops as a regional wine wholesaling, marketing and distribution centre in Asia,” Mr Groser said.

In early 2008, Hong Kong abolished its excise tax on wine as part of its strategy to become a regional wine hub. New Zealand’s wine exports to Hong Kong in the year to June 2009 were up by 44 per cent to NZ$ 8.9 million.

Source: voxy.co.nz 28 October, 2009

The Philippines’ tax chief abruptly quit his post on Friday 30 October, 2009  just two days short of marking a year in office and as the government continues to deal with below-target revenue collections.

Bureau of Internal Revenue (BIR) Commissioner Sixto S. Esquivias IV had tendered his resignation and would likely be replaced by Senior Deputy Commissioner Joel L. Tan-Torres, sources said.

This was confirmed by Finance Secretary Margarito B. Teves, who replied via text message, when asked if the sources’ claim was true: “Yes [Mr. Esquivias resigned last] October 30. Sorry I cannot disclose yet [who will be the new BIR chief]… to be decided and approved by President Gloria Macapagal-Arroyo.”

Mr. Esquivias or Mr. Tan-Torres were not immediately available for comment.

Sources, however, said one reason would be the BIR’s most likely being unable to meet this year’s P798.5-billion collection target.

Executive Order 827, which created the position of Senior Deputy Commissioner, states the said official will perform the Commissioner’s function in the latter’s absence.

It was not immediately known if this means Mr. Tan-Torres automatically becomes the officer-in-charge of the tax bureau.

Sought for comment, Tammy H. Lipana, chairman of the tax committee of the Philippine Chamber of Commerce and Industry, said: “I am surprised. But I respect his (Mr. Esquivias’) decision. His task is difficult considering the global economic crisis.”

“I hope the next commissioner is familiar with the revenue laws and regulations… The next commissioner should work hard to collect the receivables [from taxpayers] and to appeal to taxpayers to pay the right amount of taxes.

“He must continue the programs that are in place.”

Alexander B. Cabrera, managing partner of Isla Lipana and Co., said the next tax chief should be an efficient leader willing to listen to the concerns of businesses.

“I hope the new commissioner will also be sensitive to businesses. He should be fair to businesses to improve compliance. He should also be an objective and effective administrator,” he said.

The BIR, which accounts for around three-fourths of the government’s tax revenues, has often been criticized for missing its revenue targets. This year it has continued to fall deeper in the red during every quarterly reckoning.

The tax bureau collected just P154.8 billion in the first quarter, short of its P165.3-billion goal, which officials said was due to a slower economic activity and legislated tax cuts.

The shortfall widened to P12.8 billion in the first half as the BIR managed to collect only P375.6 billion against the target of P388.4 billion.

As of end-September, the bureau was down by P39.2 billion as it earned P557 billion against the goal of P596.2 billion.

The bureau needs to collect P241.5 billion in the last quarter to meet its P798.5-billion target for the year.

Officials, however, have admitted that this may be impossible as recent storms have disrupted the operations of businesses.

Mr. Esquivias, a lawyer and certified public accountant, started to work for the bureau in 1977 as field examiner. He then rose from the ranks and held various positions including Assistant Chief of Assessment Division and Deputy Commissioner for Legal and Inspection Group.

After more than two decades of service, Mr. Esquivias retired from the bureau in 2000 to work as managing partner of the Esquivias, Cruz, Condo and Yabut law firm.

He, however, returned to government service on Nov. 1, 2008 after he was named BIR commissioner to replace Lilian B. Hefti.

His resignation makes him the fifth tax chief since 2001 to leave his post under the Arroyo administration.

Source: BusinessWorld 2 November, 2009

The Supreme Court has set aside the judgement of the Delhi high court in the bid for the supply of two transmitters invited by Prasar Bharti. Arraycom India Ltd and M/s BECIL were found to be technically qualified. In the financial bid, the offer of Arraycom was for Rs 51.57 crore and that of BECIL was for Rs 47.35. Prasar Bharti found that BECIL’s bid was the lowest. The rival bidder moved the high court, which allowed the petition. It held that the bid of Rs 51.57 crore was inclusive of the central sales tax. On the appeal of BECIL, the Supreme Court stated that the high court had gone wrong on the question of sales tax. The offer of Arraycom was conditional on getting concessions from the government and ambiguous. The Supreme Court said that Prasar Bharti was right in choosing BECIL’s bid which was definite on the matter of tax. 

Insurance payout over fire

The Supreme Court has dismissed the appeal, Sonic Surgical vs National Insurance Company and upheld the order of the National Consumer Commission. A fire occurred in the company’s godown in Ambala, in Haryana. The company moved the consumer commission of the Union territory of Chandigarh. The commission allowed the petition for compensation under the insurance policy. The insurer moved the national commission which held that the Chandigarh commission had no jurisdiction to pass the order. It stressed that the insurance policy was taken at Ambala, the fire broke out in the same town and the claim for compensation was also made in the same place. This view was upheld by the Supreme Court, rejecting the claim of the company that the insurer had an office in Chandigarh. The court stated that if this argument was accepted, insurance claims could be filed anywhere in the country where the insurance company has a branch. It would lead to absurd results. 

HC judgement quashed

The Supreme Court quashed the judgement of the Kerala high court in the case, Ravindra & Associates vs Union of India, and reiterated that courts should not interfere in the findings of facts made by the arbitrator. In this case, the high court went into matters like the proportion of cement mixture, overtime paid to the labour and the use of hardwood in place of teak wood. All these have been decided by the arbitrator and the high court should not have gone into as if it was a court of appeal, the judgment emphasised. 

Conflict of views between benches resolved

A three-judge bench of the Bombay high court has resolved conflict of views between two division benches in an income tax case, Plastiblends India Ltd vs Commissioner of Income Tax. The question was whether for the purposes of availing allowable special deduction under Chapter VI-A of the Income-tax Act, the gross total income is required to be computed by deducting allowable depreciation even though the assessee had disclaimed the same for the purposes of regular assessment. The final answer of the high court is in the affirmative, that is, for the purposes of deduction under Chapter VI-A, the gross total income has to be computed by deducting the deductions allowable under Sections 30 to 43D of the Act, including depreciation allowable under Section 32. 

Hill Properties vs Union of India

Another larger bench of the Bombay high court, resolving a conflict of views in its earlier judgements, clarified that in view of the provisions of Section 29 of the Recovery of Debts Due to Banks and Financial Institutions Act read with Rules 11(1) and 11(6) of the Second Schedule of the Income Tax Act, a person against whom an order is passed is entitled to institute a suit in a civil court. It is not essential to file an appeal.

Compensation deemed unfair

The Delhi high court has ordered Jaipur Golden transport company to pay compensation to the victims of a chemical fire in its unauthorised godown in April 2004 in which four persons died and many others fell sick. The company had paid a pittance to settle the complaints, which the court called unfair and unconscionable. It ordered compensation for the deaths ranging from Rs 6 lakh to Rs 8 lakh. Those who were injured will get damages in the range of Rs 50,000. The company will pay 85 per cent of the amount, while the Municipal Corporation of Delhi will pay the rest, according to the decision in Jaipur Golden Gas Victims Association vs Union of India.

Source: Business Standard 2 November, 2009