Keywords: tax developments, Southeast Asia, China, Japan, Korea, India
We are pleased to present to you the Summer issue of our firm's Asia Tax Bulletin. This is a quarterly publication in which we report on tax developments in Southeast Asia, China, Japan, Korea and India. The style and concept of this publication aim to provide the reader with a per country brief summary of recent tax developments.
Foreign Exchange Convertibility
- On 8 April 2015, the State Administration of Foreign Exchange (SAFE) issued the Circular of the SAFE on Relevant Issues Concerning the Reform of the Administrative Method of the Conversion of Foreign Exchange Funds by Foreign-invested Enterprises/国家外汇管理局关于改革外商投资企业外汇资本金结汇管理方式的通知 (Circular 19), which came into effect on 1 June 2015. Under Circular 19, foreign-invested enterprises (FIEs) across the country, and not just FIEs in designated areas, are able to convert foreign exchange in their capital accounts into RMB at any time and to use funds from their capital accounts for onshore equity investments.
- According to Beijing National Tax Bureau report published on 5 May 2015 on the Chinese tax authorities have concluded the country's first controlled foreign corporation case, including CNY 300 million (about US$49.07 million) in undistributed profits of a Chinese parent company's wholly owned Hong Kong subsidiary in the parent company's taxable income. This may mark a new focus of the Chinese tax authorities. Under China's CFC tax provisions, Chinese companies controlling a foreign subsidiary can be taxed on the profits from the subsidiary on a current basis if the subsidiary is not subject to an effective income tax rate of at least half of China's income tax rate (thus at a rate of 12.5 percent).
Reporting Foreign Participation and Foreign Income by Resident Enterprises
- Following announcement No. 38 on information requirements for foreign income and foreign participation, the State Administration of Taxation (SAT) issued a notice on June 2015 (Shui Zong Han  No. 327) clarifying information requirements for reporting foreign participation and foreign income by resident enterprises.
- Resident enterprises are no longer required to report information on foreign participation and foreign income as required in the Annual Disclosure Forms of Transactions between Related Enterprises of the People's Republic of China of Guo Shui Fa  No. 114 if such information had already been provided prior to the implementation of the announcement No. 38 and there have been no changes in reportable foreign investment since then.
- Resident enterprises must file annual financial statements under article 2(2) of announcement No. 38; they must include the financial statements, relevant explanatory notes to the financial statements and the auditor's report. All financial statements have to be prepared in accordance with Chinese accounting standards.
- In addition, the notice provides instructions on how to complete Item 6 of Profits Distribution by the Controlled Foreign Company (CFC) under "Information Form on CFC".
Amendments to Certain Procedural Rules
The State Administration of Taxation (SAT) issued an announcement on 17 April 2015 (SAT Gong Gao  No. 22) regarding amendments to procedural rules contained in three previously published notices. The announcement became effective on 1 June 2015 and its main content is summarised below:
- Amendment to article 9 of Guo Shui Fa  No. 19. Guo Shui Fa  No. 19 concerns the enterprise income tax of non-resident enterprises on a deemed basis. According to the 2010 notice, a non-resident enterprise is taxed on a deemed profit basis if the income is not determinable on an actual basis. The deemed rate of the profit varies from 15 percent to 30 percent depending on the sector or industry. The amendment provides that non-resident enterprises must be notified to submit a form to the tax authority in order to determine whether a non-resident enterprise has to be assessed on a deemed basis. Non-resident enterprises have to submit the form within 10 days of a transaction.
- Amendment to article 5 of S AT Gong Gao  No. 45. SAT Gong Gao  No. 45 deals with the residency of a foreign company controlled by a Chinese resident enterprise due to the place of effective management. According to the amendment, the tax authority referred to in Gong Gao  No. 45 is the tax bureau of th e main investor of the Chinese resident enterprise controlling the foreign company. This bureau will determine whether a foreign company controlled by a Chinese resident enterprise is considered to have its effective management in China and, thus, to be a Chinese tax resident.
- Amendment to article 7 of SAT Gong Gao  No. 72. SAT Gong Gao  No. 72 concerns the special tax treatment of share transfers by a non-resident enterprise. In the case of special tax treatment, the tax on the gains from such a transfer can be deferred. The amendment provides that a non-resident enterprise has to be notified to file the application of a special tax treatment with the tax authority if it has not done so. If the tax authority, based on the filing and examination, finds out that the special tax treatment is applied without satisfying the relevant requirements, the tax authority is required to make adjustments and apply the general tax treatment, whereby the enterprise income tax is due at the time of the transfer.
Cost Sharing Agreements
- The State Administration of Taxation (SAT) issued an announcement on 16 June 2015 (SAT Gong Gao  No. 45) setting out the administrative rules on cost sharing agreements. The rules apply from the date of issuance.
- Enterprises that have concluded a cost sharing agreement with their related party are required to submit a copy of the agreement within 30 days after the date of conclusion and the form on the transactions of related parties at the time of filing the enterprise income tax return.
- An enterprise that concludes a cost sharing agreement does not need prior approval from the tax authority. However, the tax authority may scrutinise the agreements and make special adjustments if the arm's length principle has not been observed and there is a mismatch between benefits and shared costs. In the case of a mismatch between benefits and shared costs, compensation must be paid by the enterprise. Otherwise, the tax authority is authorised to make special adjustments.
Deed Tax Incentive for Business Restructuring
- The Ministry of Finance (MoF) and the State Administration of Taxation (SAT) jointly issued a notice on 31 March 2015 (Cai Shui  No. 37) concerning the reduction and exemption of deed tax for business restructuring. The notice applies from 1 January 2015 to 31 December 2017.
- The exemption applies to:
- Corporate reorganisations, including the conversion of an unincorporated business to a limited liability company or a company limited by shares, a conversion of a limited liability company to a company limited by shares and vice versa, provided that more than 75 percent of the original investors remain in the new company (the shareholding of each investor does not need to be the same after the reorganisation);
- Transformations of public sector entities to enterprises, provided that more than 50 percent of the investors remain in the new enterprise (the shareholding of each investor does not need to be the same after the reorganisation);
- Mergers of companies, provided that the investors remain in the new company (the shareholding of each investor does not need to be the same after the reorganisation);
- Spin-off of companies, provided that the investors' interests remain the same;
- Conversions of debt to equity; and
- Transfers of company shares by enterprises or individuals.
- For all the aforementioned exemptions, it is required that the real properties of the original investors/ company are transferred to the new entities. Further, in the case of bankruptcy of an enterprise, the deed tax will be reduced by 50 percent if certain requirements for the preservation of personnel and the requirement for transfer of real property are satisfied.
Tianjin Free Trade Zone Launched
- China (Tianjin) Pilot Free Trade Zone ("Tianjin PFTZ") has been officially launched on 21 April 2015. Meanwhile, the State Council released the General Plan of China (Tianjin) Pilot Free Trade Zone. Both zones provide indirect tax deferrals and facilities. Our trade and customs practitioners can assist with questions and implementation.
Policy on Previously Announced Tax Incentives Clarified
- The State Council issued a notice on 10 May 2015 (Guo Fa  No. 25) clarifying the policy on tax incentives announced in an earlier notice, Guo Fa  No. 62.
- According to the notice:
- The national tax incentives stipulated by the state must be fully implemented;
- The tax incentives applicable to a fixed period and issued by a local government or a government department should be implemented within that fixed period. If the incentives do not have a fixed period for their application and need to be adjusted, the local government or department should issue relevant measures for the transitional period. The incentives should continue to apply in the transitional period;
- The tax incentives agreed by a local government or department in a contract with an enterprise remain valid, and the incentives granted will not be revoked; and
- The provision on the removal of special tax incentives contained in Guo Fa  No. 62 is suspended for the time being.
Intercompany Transfers of Shares or Other Assets
- The State Administration of Taxation (SAT) issued a notice on 27 May 2015 (SAT Announcement  No. 40) clarifying the tax treatment of the transfer of shares and other assets from one resident enterprise to another. An earlier notice jointly issued by the Ministry of Finance and the SAT, Cai Shui  No. 109, provided that capital gains on the transfer of shares or other assets need not be recognised where the transferee is wholly owned by the transferor or vice versa, or where both the transfer and transferee are wholly owned by a common resident shareholder. SAT Announcement No. 40 clarifies that the tax deferral and special tax treatment apply in the following four circumstances:
shares or assets by a parent company to a wholly-owned subsidiary
at their net book value in return for payment in the form of
shares. For the purpose of enterprise income tax (EIT), the parent
company is presumed to have increased its capital in the subsidiary
that has received a long-term equity investment from the parent
company. The price of the shares acquired by the parent company is
determined on the basis of the original price of the shares or
- Transfer of shares or assets by a parent company to a wholly-owned subsidiary at their net book value for no consideration. For the purpose of EIT, the parent company is presumed to contribute its capital (paid-in capital) in kind and the subsidiary is presumed to have received a capital contribution
- Transfer of shares or assets by a wholly-owned subsidiary to its parent company at their net book value for no consideration. For the purpose of EIT, the parent company is presumed to either withdraw its capital or receive an investment from its subsidiary. In the latter case, the subsidiary is presumed to make a capital contribution for investment in its parent company. The price of the shares or assets transferred is determined on the basis of the original price of the shares or assets
- Transfer of shares or assets by one subsidiary to another subsidiary at their net book value for no consideration at the discretion of their common parent company that wholly owns both subsidiaries. For the purpose of EIT, the transferor is presumed to decrease the equity of its parent company while the transferee is presumed to receive an equity investment from its parent company
Prior Approval for Special Tax Treatment of Corporate Reorganization Abolished
- On 1 July 2015, the office of the State Administration of Taxation (SAT) issued a statement reiterating that the prior approval for the special tax treatment (tax deferral) of corporate reorganisation is abolished by SAT Gong Gao No. 45. Instead, the taxpayer that has applied for the special tax treatment is required to report on it in its annual enterprise income tax return along with other information which includes the information on other transactions on equity and assets that:
- Are related to the reorganisation; and
- Have taken place in the consecutive 12 months before the reorganisation in determining whether the step transactions should be considered a single reorganisational transaction.
- When the equity or assets to which the special tax treatment have been applied are disposed of, the taxpayers are required to report on the gains or losses arising thereafter and on the tax bases and tax deferred.
- Furthermore, the statement mentions that the filing must take place before the tax deregistration if there is a winding up of a party involved in a merger or spin-off.
- The move from the prior approval to monitoring and examination by the tax administration in the aftermath of reorganisation is said to relieve the taxpayer's administrative burden. However, considering the amount of information that a taxpayer must file with the tax authority afterwards and the risk that the tax authority may reject the application of special tax treatment and make adjustments, it may be arguable whether this move is a real improvement for taxpayers that are qualified for the special tax treatment in a corporate reorganisation.
Special Tax Treatment of Corporate Reorganizations
- The State Administration of Taxation (SAT) issued an announcement on 24 June 2015 (SAT Gong Gao  No. 48) releasing supplementary rules on the special tax treatment (tax deferral) of corporate reorganisations referred to in Cai Shui  No. 59 and Cai Shui  No. 109. The content of these rules are summarised below.
- Parties to a corporate reorganisation
- The parties to a corporate reorganisation are:
- Debtor and creditor in the case of debt restructuring;
- Transferee, transferor and the target enterprise in the case of an equity acquisition;
- Seller and buyer in the case of an asset acquisition;
- Surviving corporation, merged corporation and the shareholders of the merged corporation in the case of a merger; and
- Dividing corporation, divided corporation and the shareholders of the divided corporation.
- An individual could be a transferor in an equity acquisition, a shareholder of a merged corporation or a shareholder of a divided corporation. The individual involved in a corporate reorganisation is taxed according to the individual income tax.
- By special tax treatment of a corporate reorganisation whereby the tax may be deferred, the dominant party is:
- The debtor in a debt restructuring;
- The transferor in an equity acquisition;
- The seller in an asset acquisition;
- The merged corporation in a merger; and
- The divided corporation in a division.
- The year of corporate reorganisation is the year of tax assessment in which the date of a corporate reorganisation falls. The date of a corporate reorganisation is:
- The date the reorganisation agreement is signed or a court decision becomes effective in debt restructuring;
- The date the contract on transfer becomes effective and the procedures of conveyance have been completed in an equity acquisition;
- The date the transfer of contract becomes effective and the alteration for accounting purposes has been done;
- The date the merger contract becomes effective and the alteration in terms of accounting records and business registration has been done; and
- The date the division contract becomes effective and the alteration in terms of accounting records and business registration has been done.
- The dominant party is required to report on the special tax treatment in a corporate organisation by a corporation in a form designated for this purpose when it files the annual enterprise income tax return.
- The report should include the following:
- The type of reorganisation;
- The actual results of the reorganisation;
- The alterations to the tax positions of the parties involved in the reorganisation;
- The alterations to the financial positions of the parties involved in the reorganisation; and
- The involvement of non-resident enterprises in the reorganisation.
- The parties involved in reorganisation are required to report on other transactions on equity and assets that are related to the reorganisation and have taken place for 12 consecutive months before the reorganisation in determining whether the step transactions should be considered a single reorganisational transaction.
- When the equity or assets to which the special tax treatment has been applied are disposed of, the taxpayers are required to report on the gains or losses thereafter and on the tax bases and tax deferred.
Withholding Tax on Interest Derived by Chinese Overseas Bank Branch Clarified
- On 19 June 2015, the State Administration of Taxation (SAT) issued an announcement (SAT Gong Gao  No. 47) clarifying withholding tax on interest derived by an overseas branch of a Chinese bank from (Chinese) domestic entities. According to the announcement, the interest derived by an overseas branch of a Chinese bank from domestic entities is not subject to withholding tax. However, if an overseas bank branch collects interest on behalf of a non-resident enterprise, then the domestic payers of interest have to withhold enterprise income tax when the interest is transferred to the overseas bank branch.
- This tax will apply starting from 19 July 2015, and on that same date, article 2 of Guo Shui Han  No. 955 will cease to apply.
International Tax Developments
- France. A new tax treaty took effect between China and France. The new tax treaty with France contains a 12 months threshold to protect against permanent establishment risks and a 6 months threshold for consultancy and specified technical services rendered in the other country without automatically constituting a taxable presence in that country. The dividend withholding tax rate is 5 percent and the interest withholding tax rate is 10 percent under the new treaty. It took effect on 1 January 2015.
- Hong Kong. On 1 April 2015, Hong Kong and mainland China signed the Fourth Protocol to their Comprehensive Double Tax Arrangement (CDTA). The most important amendment in the Fourth Protocol which will benefit the Hong Kong taxpayers is to provide tax exemption in China for gains derived by Hong Kong tax residents (including "Hong Kong resident investment funds" as defined in the protocol) from disposal of shares listed in the recognised Chinese stock exchanges, provided certain conditions are met. Other amendments are (1) reducing the withholding tax rate for rentals from aircraft leasing and ship chartering to 5 percent; (2) introducing the main purpose test to the Dividends, Interest, Royalties and Capital Gains articles as an additional anti-treaty abuse measure and (3) expanding the scope of information exchange under the CDTA to cover information related to taxes other than income taxes in China. The Fourth Protocol to the China-HK CDTA brings benefits as well as obligations to taxpayers. The exemption from Chinese withholding tax for capital gains and the reduced Chinese withholding tax rate for aircraft and shipping rentals should be welcomed by taxpayers in Hong Kong. On the other hand, the strengthening of the anti-treaty abuse provisions and the expansion of the scope of information exchange under the China-HK CDTA mean taxpayers who wish to enjoy the benefits under the China-HK CDTA are obligated to make legitimate bona fide use of the CDTA and refrain from treaty shopping. Profits from the operation of ships or aircraft on the other side will be exempt from taxes including value added tax and alike. Withholding tax on royalties arising from the leasing of aircraft and ships is reduced to 5 percent. Gains derived by a resident of one side from the alienation of shares in listed companies resident on the other side are only taxable in the first side if the shares are purchased and sold in the same stock exchange. This also applies to an investment fund if the investment fund satisfies certain requirements. An anti-abuse clause is included in the tax agreement through the fourth protocol. The scope of the exchange of information provision has been extended to value added tax, business tax, consumption tax and land value appreciation tax and property tax. The protocol still needs to be ratified by both governments.
- Russia. On 8 May 2015, China and Russia signed an amending protocol to the not yet in force China - Russia Income Tax Treaty (2014). Once effective, the new treaty and protocol will generally replace the 1994 tax treaty.
- Canada. On 11 May 2015, the agreement on cooperation and mutual administrative assistance in customs matters between Canada and China signed on 8 November 2014 entered into force.
- On 1 July 2015, the Chinese National Congress ratified the multilateral Council of Europe - OECD Mutual Assistance Treaty (1988), as amended by the 2010 protocol.
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