TAX LETTER ASIA

#3 September 2014

In this issue China:

New Tax Policies on Non-Tax Resident Enterprises Operating International Transportation Business .................................................................................................. 1

Hong Kong: Tax Information Exchange Agreement with Denmark, the Faroes, Greenland, Iceland, Norway and Sweden and Double Tax Agreement signed with South Korea .................... 2 India:

Income Tax Appellate Tribunal, Hyderabad: no service PE for supervisory services in India ................................................................................................................................ 2

Thailand:

Military Government maintains reduced Tax Rates.......................................................... 3

Vietnam:

New regulations on deductible expenses ......................................................................... 3

China New Tax Policies on Non-Tax Resident Enterprises Operating International Transportation Business Martin Ng Partner Unit 031, 29/F Hang Seng Bank Tower No.1000 Lujiazui Ring Road Pudong New Area, Shanghai 200120 China T: +86 21 5047 8665 [email protected]

Recently the Chinese State Administration of Taxation (“SAT”) released an SAT announcement [2014] No.37 (Announcement 37), effective from 1 August 2014. Announcement 37 tightens the tax administration of non-tax resident international transportation companies regarding Corporate Income Tax (“CIT”). Announcement 37 expands the scope of taxable international transportation services income to include not only outward transportation services (existing sourcing rule), but also inward transportation services. Announcement 37 has further interpreted several ways of leasing, and which cases are regarded as “international transportation business” while others are not: a.

b.

the operation of voyage charter and time charter by ships and wet lease of aircrafts shall be classified as international transportation services. Hence the income from these operations should be subject to the CIT rate of 25% in China on the net taxable income. If applicable, the related enterprises may apply for the tax exemption under a double taxation agreement (“DTA”). income from bare-boat charter and dry lease of aircrafts are considered as rental income, and shall be treated as passive income and subject to withholding tax (“WHT”) at 10% on the gross income.

For CIT purposes, the deemed profit rate is determined to be at least 15% according to circular Guo Shui Fa [2010] No.19. This is 3 times higher than the current deemed profit rate of 5% applicable to non-resident international transportation companies under the existing circular (Guo Shui Han [2008] No.952), which has been abolished by Announcement 37.

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TAX LETTER ASIA

#3 September 2014

Hong Kong Tax Information Exchange Agreement with Denmark, the Faroes, Greenland, Iceland, Norway and Sweden and Double Tax Agreement signed with South Korea Claus Schuermann Partner Unit 1004, 10/F Kinwick Centre 32 Hollywood Road, Central Hong Kong T: +852 2528 1229 [email protected]. hk

On 22 August 2014, Hong Kong has signed Tax Information Exchange Agreements (“TIEA”) with Denmark, the Faroes, Greenland, Iceland, Norway and Sweden after the legal framework was put in place in 2013 and the first TIEA was signed with the US earlier this year. The agreements demonstrate Hong Kong’s continued commitment to fulfil its international obligations on promoting tax transparency. On 8 July 2014, Hong Kong signed its 30th Double Tax Agreement (“DTA”) with South Korea which will most likely become effective on 1 April 2015. Both the TIEA and a DTA allow the Exchange of Information between two jurisdictions, however a DTA’s main focus is on the prevention of double tax. Hong Kong’s tax residents investing into South Korea will therefore benefit from the reduced withholding tax rates. The domestic withholding tax rate for dividends, interest and royalties is 20%. Due to the signed DTA the interest and royalty withholding tax rates are both capped at 10%. Dividend withholding tax rates are capped at 15% or 10% in cases where the beneficial owner holds at least 25% of the company paying the dividends.

India Income Tax Appellate Tribunal, Hyderabad: no service PE for supervisory services in India Sapna Gupta Head of Indo German Desk 1 H Vandhna, 11 Tolstoy Marg New Delhi 110001 India T: +91 11 4710 3388 [email protected]

The Income Tax Appellate Tribunal (“ ITAT”) in the case of “GFA Anlagenbau GmbH vs. DDIT” has held that supervisory services rendered by an assessee through deputation of foreign technicians in India, do not constitute a Permanent Establishment (“PE”) in India and are taxable as “FEE for Technical Services” (“FTS”) under the provisions of DTA. It has been held, that merely undertaking supervisory activities does not trigger specific PE clause as per article 5 (2) of the DTA as supervisory activities have to be provided in connection with building, construction or assembly project of the assessee under such clause. Further, mere provisions of accommodation, temporary office facilities is also not to be considered as “fixed place of business” in India as per Article 5 (1) of the DTAA. GFA Anlagenbau GmbH entered into agreement with various Indian companies for supervision, erection, ramp up, commissioning, demonstration of performance, performance guarantee test, etc. of various “plant and machinery”. Its role was limited to such services only as the plant was supplied by another German company. The assessee had deputed foreign technicians at the work sites and offered its receipts for such services as FTS under the DTAA for many years. The ITAT noted the specific PE clause as per Article 5 (2) (i) which provides that PE includes a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities continue for a period exceeding six months. The ITAT thus held that supervisory activities by themselves cannot constitute a PE as they are to be in connection with a building,

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TAX LETTER ASIA

#3 September 2014

construction or assembly activity of the non-resident which is not the case here as the assessee provides only supervisory services.

Thailand Military Government maintains reduced Tax Rates Till Morstadt Partner 27/F, Bangkok City Tower 179 South Sathorn Rd. Sathorn, Bangkok 10120 Thailand T: +66 2287 1882 [email protected]

Since the coup d´état, the military government has undertaken efforts to fight against corruption and other endemic problems. The general economic and fiscal policies have not been on target yet, and major changes seem unlikely at the moment. Under the previous government, the corporate income tax rate had been reduced from originally 30% to 20%, the maximum tax rate on personal income from 37% to 35%. The reduction was temporarily limited until the end of 2014. However, it has been informally announced that these reductions will be extended for at least another year (until the end of 2015). This shows that the military government plans to maintain the business-friendly policies of the previous government in order to consolidate the local economy as well as to attract new foreign investments, which had dropped significantly during the first months of this year, due to the anti-government protests. Significant changes to the Thai tax law are therefore not to be expected in the near future.

Vietnam New regulations on deductible expenses Wolfram Gruenkorn Partner 6-8 Doan Van Bo Street District 4, Ho Chi Minh City Vietnam T: +84 862 618 231 [email protected]

On 18 June 2014, Ministry of Finance has issued Circular No. 78/2014/TT-BTC (Circular 78) replacing Circular No. 123/2012/TT-BTC guiding on Law on Corporate Income Tax. Circular 78 is effective from 2 August 2014. Some new regulations on deductible expenses should be noted: »

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Each payment for a deductible expense of more than VND 20 million (approx. EUR 720) must be made via bank transfer. The non-cash vouchers have to be filed. The expenses for purchasing assets being instruments, tools, recyclable packaging, etc. which are not allowed for depreciation may be gradually allocated to expenses over a maximum period of 3 years (previously 2 years). Enterprises are allowed to establish consumption levels for raw materials, supplies, fuel, power and goods for production or business activities. Under the former regulation, enterprise must inform the tax authority on the consumption level. Circular 78 does not require this procedure any more. Enterprises are not forced to present non-cash payment vouchers when purchasing goods and services (e.g. agricultural products) for which invoices are not required. In these cases it is sufficient to prepare a list of purchases of goods and services. Enterprises can use e-ticket, decision on business trips and non-cash payment vouchers as sufficient evidence for the expense in case enterprises cannot retrieve the boarding pass for the airplane when purchasing air tickets for employees’ business trips. www.wts-alliance.com

TAX LETTER ASIA

#3 September 2014

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Business advantages and rights to use the brand are not considered as deductible expenses when enterprises make the capital contribution with these. Expenses arising from loan interest during the investment period shall be added to the investment cost.

Editorial team wts consulting (Hong Kong) Limited www.wts.com.hk • [email protected]

Disclaimer The above information is intended for general information on the stated subjects and is not exhaustive treatment of any subject. Thus, the content of this Tax Letter is not intended to replace professional tax advice on the covered subjects. WTS Alliance cannot take responsibility for the topicality, completeness or quality of the information provided. None of the information contained in this Tax Letter is meant to replace a personal consultation. Liability claims regarding damage caused by the use or disuse of any information provided, including any kind of information which is incomplete or incorrect, will therefore be rejected. If you wish to receive the advice of WTS Alliance, please make contact with one of our advisors. All copyright is strictly reserved by WTS Alliance.

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