Worldwide: Asia Specific

This article has been prepared by professionals in the member firms of Deloitte Touche Tohmatsu.

Effective 2 April 2005, the minimum salary level required to qualify for the temporary business (long stay) sub-class 457 visas, was raised. The sub-class 457 visas are one of the most common visas held by temporary employees working for Australian companies. The minimum salary required to qualify for the visa, comprising the cash base salary and excluding all allowances and non-salary benefits, is to be increased to A$50,775 for IT professionals and to A$39,100 for all others professionals.

The increase will not affect current sub-class 457 visa holders, but will apply when current holders renew their visas or apply for a new visa with another sponsor after 2 April 2005.

Significant changes to the taxation of employee shares or rights in the context of cross-border employment situations were recently proposed. Of note:

• Income from employee shares and rights is to be treated as income arising from employment. Accordingly, it is to be sourced based on where the services related to the award are rendered. The relevant employment period is to be calculated, in general, from the date of the award to the time the award ceases to be at risk of forfeiture.

• The new rules are also apply in cases where the relevant shares or rights were awarded prior to the individual's arrival in Australia, but forfeiture conditions continue to apply to the employee's shares or rights after their arrival in Australia. Previously, shares or rights awarded prior to an employee's arrival in Australia were not subject to Australia's employee share scheme rules but instead subject to the capital gains tax regime.
• The exemption from tax which, subject to certain criteria, applies to foreign service income derived by Australian residents, is to be extended to income derived from employee shares or rights that relate to foreign service.
• Income derived from employee shares or rights related to an individual's foreign service and subject to foreign tax, is to be eligible for a foreign tax credit.
• The potential double taxation of employee shares or rights under the Australian Foreign Investment Fund ("FIF") Rules is to be avoided by aligning the method of reducing the FIF income with the valuation rules in the employee share scheme provisions.
• The potential double taxation of employee shares or rights on departure from Australia under Australia's CGT deemed disposal rules and employee share scheme provisions is to be avoided by taking certain employee shares or rights out of the scope of the deemed disposal rules.

The proposed amendments will apply to employee shares or rights acquired on or after the date of royal assent. The amendment will also apply to employee shares or rights acquired before royal assent if:

• the individual holding the shares or rights was not an Australian tax resident immediately before royal assent; and
• the individual holding the shares or rights becomes an Australian tax resident on or after royal assent.

The amendments to clarify the CGT treatment will apply to CGT events happening on or after the date of royal assent.

The amendments to the FIF provisions will apply to years of income ending after the date of royal assent.

The Tax Office recently issued a final ruling concerning the interest withholding tax exemption for interest paid by Australian residents to UK and US financial institutions.

The withholding tax exemption, introduced as part of Australia's renegotiated tax treaties with the UK and the US, broadly provides that interest paid by an Australian resident is exempt from withholding tax if:

• the recipient of the interest is a UK or US resident "financial institution";
• the recipient of the interest is "unrelated to, and dealing wholly independently with" the payer of the interest; and
• the recipient is beneficially entitled to the interest. A "financial institution" for this purpose is a bank or other enterprise that substantially derives its profits by "raising debt finance" in the financial markets or by taking deposits at interest and using those funds in carrying on a business of "providing finance".

The Tax Office previously released a draft ruling concerning its interpretation of the terms contained in the treaties. Please refer to the October edition of this newsletter in this regard. Of note in the final ruling:

• Bank

• is authorised or licensed to carry on a banking business (i.e., to take deposits and make advances) where they are resident; and

• in cases where there the relevant capital adequacy requirements is higher in their place of residence, to distinguish banks from other categories of deposit taking institutions, such higher capital adequacy requirements are to be satisfied.

• "raising debt finance in the financial markets"

• the interest payment is made to a UK or US resident company;
• a related company within the corporate group raises debt finance in the financial markets;
• the related company "regularly provides finance to the public as a financier"; and The ruling permits an enterprise that uses an SPV to raise debt finance in the financial markets to qualify for the exemption
• funding is provided by the related company for on-lending on normal commercial terms to the group company.

Secondly, it permits an enterprise that uses an SPV to raise debt finance in the financial markets to qualify for the exemption provided that the SPV:

• is established for the sole or principal purpose of acquiring the debt finance in the financial markets on behalf of the enterprise; and
• is, in substance, merely a conduit for the financing transaction between the enterprise and the financial markets such that the full economic effect of the financing arrangement flows through the enterprise.

Parties must deal with each other wholly independently. An arm's length test is to be applied. Whether a transaction is at arms' length will ultimately be determined by reference to the facts of each particular case and the outcome that might be expected to arise between independent parties in comparable circumstances.

Back-to-back loans

Back-to-back loans, are explicitly excluded by Article 11(4) of the relevant tax treaties from the benefit of the interest withholding exemption.

The Ministry of Finance and the State Administration of Taxation (SAT) recently issued guidance concerning the individual income tax (IIT) treatment of stock options. Of note:

• The guidance defines various terms including, stock options, specified price, grant day, exercise and purchase day.

• In general, no tax will arise on grant of stock options.
• In general, the difference between the actual purchase price paid for the options and the fair market value on the purchase day (closing price of the stock on that day), is to be treated as taxable "salary and compensation" for IIT purposes.
• If an employee transfers the stock options before exercise, the net income derived from the transfer is also to be treated as taxable "salary and compensation".
• Gains derived by an employee from the sale of the shares in Chinese listed enterprises are temporarily exempt from IIT, whilst gains derived from the sale of shares in overseas listed enterprises are subject to IIT.
• Dividends received by an employee on shares owned under the stock option plan are, in general, subject to IIT.
• The taxable income from stock options should be apportioned where an employee earns offshore income, on the basis of the months that the employee is outside China. Administrative requirements

• The enterprise that grants the stock options in China must also act as the withholding agent for such income. If an employee receives stock options from two or more enterprises or if there is no withholding agent, the relevant employees must themselves report the income and pay any IIT due. The enterprise that grants the stock options in China must also act as the withholding agent for such income.

• Enterprises that offer stock option plans must submit the following information to the tax authorities:

• the stock option plan
• the stock option agreement
• the notice of the grant of stock options (prior to implementation of the stock option plan)
• the notice of exercise of the options
• the notice of any adjustment prior to employees exercising the stock options

• When filing the relevant returns both the employer (as withholding agent) and the employee are required to submit information concerning the stock options including:

• type
• quantity
• grant price
• exercise price
• market price
• transfer price

The Belgian tax authorities recently issued a circular concerning the tax treaty concluded between Hong Kong and Belgium. Particularly significant are the tax authorities' comments concerning the elimination of double tax in relation to dividends received by Belgian resident companies from Hong Kong resident companies.

Under the tax treaty, Belgium exempts dividends paid by Hong Kong resident companies in accordance with Belgian domestic law. Belgian domestic law provides that Belgian companies are entitled to a tax deduction equal to 95% of the amount of net dividends received provided that the "participation" test AND the "taxation" tests are met.

The "participation" test requires that the Belgian shareholder holds:

• at least 10% of the capital of the subsidiary for at least one year, or
• shares whose acquisition value was at least Euro 1.2m, on the date of distribution. The "taxation" test excludes the following dividends from the exemption:
• Dividends distributed by a company that is either not subject to corporate income tax, or not subject to a foreign tax that is similar to Belgian corporate tax.
• Dividends distributed by a company that is resident in a country where the common tax regime is considerably more favourable than the Belgian regime.
• Dividend distributed by companies that are subject in their country of residence to a tax regime that deviates from the common tax regime. This exclusion refers to countries that adopt a regime for finance, treasury or other companies that differs from the tax regime applicable to ordinary companies in that country.

Hong Kong operates a "territorial" tax regime under which only profits derived in Hong Kong are subject to tax in Hong Kong. Profits derived outside Hong Kong are not subject to tax. In addition, the maximum tax rate for companies in Hong Kong is 17.5% (substantially less than the Belgian tax rate of 33.99%). Accordingly, it is possible for dividends paid from Hong Kong to fall foul of the "taxation" test.

The Belgian tax authorities confirmed that they do not consider the Hong Kong tax regime to be more favourable than the Belgian tax regime. Further, they do not consider that the tax regime operating in Hong Kong for companies deriving offshore income deviates from the "common tax regime", as it is in fact the rule for all companies operating in Hong Kong. Accordingly, dividends distributed from Hong Kong, will be eligible for the 95% dividend received exemption.

The tax authorities recently revised the practice note concerning the salaries tax implications of employee share option benefits. The practice note does not address the treatment of other equity awards, such as restricted share plans. Of note:

• Notional exercise on permanent departure from Hong Kong

• Sourcing of share option gains

• Other matters

The recent budget announcement included a proposal to introduce an FBT on the value of fringe benefits provided or deemed to have been provided by an employer to his employees. Provisions introducing FBT have been included in the Finance Bill. It is to apply from assessment year 2006/07 onward. Of note:

• FBT is to be payable by every employer at the rate of 30%, or 33.66% to the extent that the surcharge and education CESS apply. The tax is not deductible.
• Fringe benefits include:

• any privilege, service, facility or amenity, excluding perquisites in respect of which tax is paid or payable by employees, or any benefit or amenity in the nature of free or subsidised transport or any such allowance provided for journeys from residence to the place of work and vice versa;
• reimbursements;
• free or concessional ticket for private journeys; and
• contributions to an approved superannuation fund.

• The fringe benefit is to be deemed to have been provided when the employer has incurred an expense, or made any payment.

• The Finance bill also provides the method of valuing benefits for the purpose of determining applicable FBT.

Effective 1 April 2005, the Central Board of Direct taxes amended the rules concerning the valuation of perquisites. The following benefits are no longer to be treated as perquisites:

• the provision of motor cars;
• benefits provided by any undertaking engaged in the carriage of passengers or goods;
• travel, tour, accommodation or any other expense paid or otherwise borne by the employer;
• free meals provided by the employer;
• gifts;
• expenses, charged to a credit card (including an add-on card) provided by the employer; and
• club benefits.

The value of accommodation for the purposes of calculating the relevant perquisite provided is to be determined as follows:

• The rules relating to valuation of other perquisites are to remain unchanged.

The National Tax Service ("NTS") recently launched a broad series of tax investigations into a number of foreign investment funds and investment banks. The targeted funds and banks are reported to include LoneStar and the Carlyle Group. The tax audits were instigated following public criticism of the large untaxed gains derived by foreign funds on the sale of certain investments in Korea: the gains were not subject to tax due to exemptions available under relevant tax treaties. It is expected that the large-scale tax audits will impact foreign investment into Korea.

The NTS recently established a committee to review and respond to taxpayer's written questions. The committee comprises a chairman (the Commissioner of the National Tax Consultation Center) and 10 external members, consisting of certified public accountants, lawyers and certified tax advisors.

The committee will focus on:

• questions that require prompt advice,
• difficult and complicated questions which may take longer than 14 days to resolve, and
• ambiguous questions that may require interpretation of the tax laws.

The committee is also expected to coordinate responses from different departments to prevent inconsistent responses to questions raised.

• The Ministry of Finance and Economy recently ruled that gains derived from foreign currency deposits and foreign currency forward transactions are to be treated as interest income where such foreign currency deposits and foreign currency forward transactions are managed as one integrated transaction. The ruling is based on the definition of interest contained in the tax law which extends to include money received as compensation for use of money. Such integrated accounts provide financial institutions with opportunities to utilise the monies deposited and the relevant gain comprises compensation paid to deposit holders for the use of that money by the financial institutions.

• The National Tax Tribunal ruled that money lent by domestic companies to foreign related parties at an arm's length rate, such as LIBOR+x%, would not be subject to deemed interest calculations, even though the applicable rate was lower than the interest rate notified by the NTS Commissioner. Under the domestic tax law, loans provided to related parties at an interest rate lower than the rate notified by the Commissioner of NTS (currently 9%) are regarded as "unfair loans": deemed interest income arises. However, in relation to international transactions the Law on Coordination of International Taxation requires an arm's length interest rate criterion to apply.

Effective retrospectively from 1 October 2002, the following types of income derived by non-residents from multi-super corridor status* ("MSC status") companies are to be exempt from tax in Malaysia:

• Technical advice / services income;
• Licensing fees in relation to development of technology; and
• Interest on loans utilised for development of technology.

Accordingly, such payments by MSC status companies to non-residents are now to be exempt from applicable withholding taxes.

*"MSC status companies" are companies engaged in regional IT activities, located in the MSC area and have been awarded special status by the government.

Mauritius recently released its 2005 budget. Of note:

• Personal relief and allowances are to be increased as follows:

• Customs duty on a large number of daily-use and hi-tech commodities including motor vehicles is to be reduced or abolished.

Others

• The Financial Services Development Act is to be amended so as to permit management companies to provide both administration and management services to non-Mauritian entities.
• A new Securities Act is to be introduced to provide a regulatory framework for collective investment schemes.

The Ministry of Finance recently met with CPA representatives to discuss relaxation of the transfer pricing disclosure requirements. The relaxed requirements only apply to the disclosures required in respect of the 2004 taxable year. Of note:

Application The following corporate taxpayers are required to complete the disclosure forms and attach them to their annual tax returns:

• Public companies

• Taiwan branches, subsidiaries or investee entities of a foreign head office, parent or investor respectively;

• Taiwan companies with offshore branches, subsidiaries or investee entities; or

• Companies that enjoy tax incentives amounting to more than NT$ 500,000 (US$ 16,000) annually. Tax incentives include investment tax credits, income tax holidays and operational headquarters tax incentives.

Corporate taxpayers that have the following reportable transactions are required to disclose details of their transactions and the relevant counter-parties:

Taxpayers are:

• not required to specify the transfer pricing methodologies adopted if they have not conducted a transfer pricing analysis for the taxable year 2004;
• no longer required to submit their worldwide structure; and
• required to separately disclose each transaction with the same related party if the annual aggregate of such transactions exceeds 10% of the total value of such transactions.

This article is intended as a general guide only, and the application of its contents to specific situations will depend on the particular circumstances involved. Accordingly, we recommend that readers seek appropriate professional advice regarding any particular problems that they encounter. This bulletin should not be relied on as a substitute for such advice. While all reasonable attempts have been made to ensure that the information contained in this bulletin is accurate, Deloitte Touche Tohmatsu accepts no responsibility for any errors or omissions it may contain, whether caused by negligence or otherwise, or for any losses, however caused, sustained by any person that relies on it.

Copyright ©2005, Deloitte Touche Tohmatsu. All rights reserved.
Deloitte Touche Tohmatsu is a Swiss Verein, and each of its national practices is a separate and independent legal entity.

About Deloitte
Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, its member firms, and their respective subsidiaries and affiliates. Deloitte Touche Tohmatsu is an organization of member firms around the world devoted to excellence in providing professional services and advice, focused on client service through a global strategy executed locally in nearly 150 countries. With access to the deep intellectual capital of 120,000 people worldwide, Deloitte delivers services in four professional areas—audit, tax, consulting, and financial advisory services—and serves more than one-half of the world’s largest companies, as well as large national enterprises, public institutions, locally important clients, and successful, fast-growing global growth companies. Services are not provided by the Deloitte Touche Tohmatsu Verein, and, for regulatory and other reasons, certain member firms do not provide services in all four professional areas.

As a Swiss Verein (association), neither Deloitte Touche Tohmatsu nor any of its member firms has any liability for each other’s acts or omissions. Each of the member firms is a separate and independent legal entity operating under the names “Deloitte,” “Deloitte & Touche,” “Deloitte Touche Tohmatsu,” or other related names.