Asia Tax Bulletin - Autumn 2024

Tax facility for dividends and gains from publicly-listed companies

Based on the announcement of the Ministry of Finance and State Taxation Administration [2024] No. 8, from 1 July 2024 to 31 December 2027, dividends or profits derived by individuals from small and medium-sized companies listed on the National Equities Exchange and Quotations (NEEQ) will (continue) to enjoy the following tax treatment:

• dividends or profits are exempt from individual income tax if the underlying shares are held for more than 1 year;
• only 50% of dividends or profits derived will be included in taxable income if the underlying shares are held for a period of between 1 month and 1 year; and
• dividends or profits are fully taxed at the rate of 20% if the underlying shares are held for less than 1 month.

The holding period is calculated based on the calendar month or year of the date of acquisition to the date before the share transfer, and according to the first in, first out method.

The treatment equally applies to dividends or profits derived by security investment funds from the companies listed on the NEEQ.

Stamp duty exemptions for business restructuring

From 1 January 2024 to 31 December 2027, subject to certain conditions, stamp duties are exempt for accounting records, taxable contracts and transfer of ownership of land-use right, buildings or shares in connection with business restructuring (merger, division, transfer of shares or properties, debt restructuring and so on) of enterprises established within China (Announcement of the Ministry of Finance and State Tax Administration [2024] No.14).

The Announcement replaces the Circular [2003] No. 183 on the same subject, which ceases to apply on the issue date of the Announcement. However, the Announcement sets out the definitions and conditions of the application of the Announcement. Moreover, the applicable period of the Announcement is limited to 31 December 2027.

Import duty reduction for African countries

From 1 December 2024, China will remove import duties for products originating from the 33 least developed African countries that have established diplomatic relationships with China (CTC Announcement [2024] No.9). This zero-tariff treatment is unilateral and applies to all of the products (100%) that are subject to tariff quotas.

Upgrade of equipment for environmental protection and production safety tax credits

Courtesy IBFD it was reported that from 1 January 2024 to 31 December 2027, a tax credit is allowed for the upgrading of equipment used for the purposes of conservation of energy and water, environmental protection or production safety. The tax credit is 10% of the amount invested in upgrading the equipment with digital technology and artificial intelligence (AI), provided that the amount of such investment does not exceed 50% of the original book value recorded at the time of the purchase of the equipment. Credits that are unutilized due to insufficient enterprise income tax payable may be carried forward up to 5 years.

In the case of financial leases, the lessee is entitled to the incentive. While there is already currently a 10% tax credit for investments in energy and water conservation, environmental protection and production safety, this announcement as laid out in Announcement of the Ministry of Finance (MoF) and State Taxation Administration (STA) [2024] No. 9 extends the scope to the upgrade of equipment for these purposes with digital technology and AI.

Equipment eligible for the incentives must be listed in the catalogues published earlier by the MoF and STA respectively, i.e. the Circular of the MoF and STA and National Development Reform Committee [2018] No. 84 and the Circular of the MoF and STA [2017] No. 71.

Digital technology and AI upgrades include data collection, data transmission and storage, data analysis, AI control system, data safety and protection, and other digitalization and AI utilization upgrades approved by the State Council.

The announcement stipulates that costs and expenses related to transportation, installation and tests are not classified as amounts of investment and thus not eligible for the tax credit.

Local governments to receive more tax

The 20th Central Committee of the Communist Party of China convened its third plenary session in Beijing from 15 to 18 July 2024, following which it published its policy plan for economic and social developments in China in the coming 5 years on 21 July 2024.

On tax and fiscal reform, the policy document indicated continuing improvement to the tax structure and adapting it to new forms of business, regulating policies on tax breaks and improving the support mechanisms for key sectors and links. The government will refine the system of direct taxes, improve the personal income tax system, regulate taxation policies on incomes generated from business operations, capital and property, unify tax rates for incomes earned through work, and enhance the reform of the tax collection and administration system.

The central government also plans to expand tax resources to local governments. To balance the financial resources between the central government and local governments and increase the discretionary power of the local governments, the jurisdiction over certain local taxes will be transferred to the local governments. According to the policy document, the urban maintenance and construction tax, education surcharges and local education surcharges may also be consolidated into one single local surtax. While there are no details in the document, according to the fiscal experts involved in advising the central government, this should refer to the reallocation of a part of consumption tax and an increase in the local governments' share of value added tax revenue.

Macau

On 12 July 2024, Macau authorized the signing of a competent authority agreement on the automatic exchange of tax information on financial accounts with China by way of Notice of the Chief Executive No. 39/2024. The notice was published in Official Bulletin No. 30 of 22 July 2024.

Stamp duty internal reorganisation relief

In July 2022, the District Court (DC) held in John Wiley & Sons UK2 LLP and another v. The Collector of Stamp Revenue that the membership interest in a UK LLP is “issued share capital” within the meaning of section 45 of the Stamp Duty Ordinance (SDO), and the appellants (being the transferor and transferee) were “associated bodies corporate” within the meaning thereof and entitled to the stamp duty relief.

The Collector of Stamp Revenue’s (Collector) appealed to the Court of Appeal (COA) and the appeal was heard on 26 April 2024. On 5 July 2024, the COA allowed the Collector’s appeal and held that a UK LLP does not have issued share capital within the meaning of Section 45 and thus the appellants are not entitled to the stamp duty relief under Section 45 of the SDO.

Patent Box tax incentive

Hong Kong has passed the "patent box" tax incentive to provide a concessionary profits tax rate of 5% (instead of the general 16.5% profits tax rate) on qualifying profits sourced in Hong Kong and derived from eligible intellectual properties (IP) created through research and development (R&D) activities. The Inland Revenue (Amendment) (Tax Concessions for Intellectual Property Income) Ordinance 2024 which implements this incentive was gazetted on 5 July 2024. It should be noted that the patent box does not apply to offshore sourced profits, which are either tax exempt or taxable at the general profits tax rate if received in Hong Kong pursuant to the Foreign Source Income rules that took effect on 1 January 2023.

To enjoy the tax concession under the patent box, a taxpayer must meet following requirements:

• The taxpayer is an eligible person;
• The taxpayer derives eligible IP income from an eligible intellectual property; and
• An election is made in respect of the eligible intellectual property.

Eligible person

“Eligible person” means a person who is entitled to derive eligible IP income from an eligible intellectual property. An eligible person can be a person other than the owner of an eligible intellectual property so long as that person has a right to derive income from the property. For example, a licensee who obtains a licence to use an eligible intellectual property from its owner and then sub-licenses the eligible intellectual property to another person for earning a sub-licensing fee falls within the meaning of “eligible person”. The licensee can benefit from the tax concessions provided that it has incurred eligible R&D expenditures in respect of the eligible intellectual property and other conditions of the Regime are satisfied. back to top

Eligible intellectual property

In accordance with the nexus approach adopted by the Organisation for Economic Co-operation and Development (OECD), only income derived from an eligible intellectual property could benefit from the preferential tax treatment based on the nexus ratio under the Regime. Under the nexus approach, eligible intellectual properties that could qualify for preferential tax treatment are limited to patents and other intellectual property assets that are functionally equivalent to patents if those intellectual property assets are both legally protected and subject to similar approval and registration processes. In Hong Kong, a more liberal approach has been taken with a view to enhancing the competitiveness of the Regime. For instance, eligible intellectual properties include applications for patents and plant variety rights, as well as those patents and plant variety rights granted in or outside Hong Kong.

“Eligible intellectual property” is defined in section 1(1) of Schedule 17FD to the Inland Revenue Ordinance (IRO) to mean any of the following intellectual property that is generated from an R&D activity:

• an eligible patent;
• an eligible plant variety right;
• a copyright subsisting in software under the Copyright Ordinance (Cap. 528) or under the law of any place outside Hong Kong.

Qualifying profits comprises income derived from the exhibition or use of an eligible IP asset, which generally covers most royalties and licensing income, a disposal gain of an eligible IP asset, IP income embedded in sales of products or services and insurance, damages or compensation derived in relation to an eligible IP.

Other points worth noting are:

• eligible IPs can be registered in different places around the world while their related profits sourced in Hong Kong can benefit from the patent box tax incentive;
• eligible IPs must be developed by taxpayers themselves. If the R&D process involves acquisition of other IPs, or outsourcing part of the R&D activities, the amount of profits eligible for the concessionary tax rate may be reduced proportionally; and
• enterprises must obtain local registration for their inventions or new plant varieties in order to enjoy the tax incentive (this requirement will only start to be implemented 2 years after the patent box tax incentive comes into operation).

The Amendment Ordinance took effect from 5 July 2024. Taxpayers can apply for the patent box tax incentive starting from the year of assessment 2023/24. The Inland Revenue Department will provide further administrative guidance on its website.

Hotel accommodation tax

On the 3rd of July 2024 the IRD published on its website that the Hong Kong government served a notice to the Legislative Council to move a resolution under the Hotel Accommodation Tax Ordinance (Cap. 348) (HATO) to resume the collection of hotel accommodation tax (HAT).

Under the HATO, the HAT is imposed on hotel and guesthouse accommodation, and is levied on the accommodation charges payable by guests to hotel or guesthouse proprietors at a rate specified in the Schedule to the HATO. Since July 1, 2008, the HAT tax rate has been reduced from 3 per cent to 0 per cent.

In the 2024-25 Budget, the Financial Secretary proposed to resume the collection of the HAT at a rate of 3 per cent with effect from January 1, 2025, as part of the comprehensive fiscal consolidation programme to restore fiscal balance in a few years' time. The HAT will bring an estimated annual revenue of about $1.1 billion to the Government, providing a stable source of revenue without affecting members of the general public. The HAT to be collected only accounts for less than 1 per cent of the spending by overnight visitors in Hong Kong and (according to the government) will not affect visitors' choice of Hong Kong as a travel destination or their spending sentiment in Hong Kong.

International tax developments

On 24 September 2024, Hong Kong SAR signed a tax treaty with Turkey. The treaty will take effect once it has been ratified by both states.

Long term capital gains and other Budget 2024/2025 tax changes

The Finance Minister presented The Finance (No.2) Bill, 2024 (the Bill) to the parliament on 23 July 2024. Both Houses of Parliament have passed the Finance (No. 2) Bill, 2024 and the proposals have passed into law.

With effect from 23 July 2024, the taxation of listed shares has overgone a major change. The period of holding to qualify as long-term capital assets (other than listed shares) has been reduced from 36 months to 24 months. Long-term capital gains arising on transfer of listed securities on stock exchange i.e. where securities transaction tax has been paid, will now be taxable at 12.5% as against the earlier rate of 10%. Similarly, the rate of taxation of short-term capital gains on listed securities has proliferated from 15% to 20%.

The tax rate applicable to non-resident taxpayers on long term capital gains on the sale of unlisted securities will be the same as that for resident taxpayers, i.e. 12.5% for any transfer that takes place on or after 23 July 2024.

The angel tax will be abolished. Section 56(2)(viib) of the Income Tax Act, 1961 provides that, in a closely held company, if the consideration for the issue of shares exceeds the fair market value (FMV) of the shares, the excess amount is subject to tax (popularly known as the "angel tax").

Further, the threshold limit applicable to long-term capital gains on shares and securities listed on a recognized stock exchange will be increased to INR 125,000 (from INR 100,000).

The tax on short-term capital gains on certain financial assets will be increased to 20% (from 15%). Short-term capital gains on all other assets will continue to be taxed at slab rates.

Unlisted debentures and bonds are of the nature of debt instruments and, therefore any capital gains on such bonds will be taxed at the applicable rate, whether short term or long term.

The rates of securities transaction tax on the sale of an option in securities will be increased from 0.0625% to 0.1% of the option premium, and on the sale of futures in securities from 0.0125% to 0.02% of the price at which such "futures" are traded. This will be effective from 1 October 2024.

With a view to bringing parity in distribution of returns as dividend versus buy back, the Budget proposes that the amount distributed by the company on buy back will be taxable as dividend income in the hands of the shareholders. However, a small leeway has been provided whereby the original cost of acquisition will be allowed to be carried forward/set off as a capital loss. From the perspective of high net worth individuals (taxable at the maximum marginal rate of 36% on dividend income), the abolition of buy back tax of 23%, will lead to an increased tax outflow by 13%.

In a major development, the Equalization Levy (EL) of 2% will be abolished. The EL was introduced by Finance Act 2020 on overseas e-commerce operators/platform providing online provision of goods and services.

To attract foreign capital for India’s development needs, it has been proposed to reduce the corporate tax rate on foreign companies from the current 40% to 35%.

In order to reduce pending litigation and disputes, the Budget proposes to increase the monetary limits for filing of appeals and has also announced the “Vivad se Vishwas Scheme 2024” for matters pending in appeal as on July 22, 2024. This reflects the government’s commitment to provide tax certainty and make the overall environment conducive for businesses.

Under India's Black Money Law, a penalty of INR 10 lakhs was previously levied for failing to report specified foreign assets in income tax returns. This particularly affected Indian employees of MNCs receiving ESOPs and individuals investing in foreign shares who unintentionally omitted reporting such assets in their tax filings. As a welcome move, the Budget proposed to raise de-penalize non-reporting of undisclosed foreign assets up to INR 20 lakhs.

On the transfer pricing front, the FM also announced the expansion of the safe harbor rules as well as streamlining of the transfer pricing procedures. The fine print currently doesn’t capture these changes and will perhaps see the light of day through subsequent notifications.

Income exemptions and other relaxations to entities established in the International Financial Services Centre (IFSC) will be extended.

Income of retail funds and exchange traded funds registered in the IFSC, from the transfer of specified capital assets, is proposed to be exempted. Currently, this exemption is available to Category III Alternative Investment Funds (AIFs). Further, specified income of Core Settlement Guarantee Funds set up by recognised clearing corporations in the IFSC will be exempted.

The relaxation to Venture Capital Funds (VCFs) registered under the International Financial Services Centres Authority (IFSCA) Act, 2019 from the requirement of explaining the source of funds of the investor/creditor/lender will be extended. Currently, this relaxation is available to VCFs registered with the Securities and Exchange Board of India.

Specified finance companies located in the IFSC will be exempted from thin capitalization rules applicable to non-resident associated enterprises (AEs). As per the extant rules, interest on funds borrowed from non-resident AEs is restricted to 30% of the earnings before interest, taxes, depreciation and amortisation (EBITDA) of the borrower.
The abovementioned changes will be effective from assessment year 2025/26 (tax year 2024/25).

The customs duty rate structure will be amended for a number of goods. Some of the key rate changes are as follows:

• exemptions for (i) specific cancer medicines; (ii) critical minerals used in sectors such as nuclear/renewable energy, space, defence, telecommunications, etc.; (iii) capital goods for use in the manufacture of solar cells/panels; and
• a reduction of the basic customs duty (BCD) on mobile phones and chargers to 15%; specific seafoods to 5%; and gold and silver to 6%.
  With respect to Goods and Services Tax (GST), the following will be changed:
• no refund of unutilized input tax credit or integrated tax will be allowed in cases of zero-rated supplies of goods, where such goods are subjected to export duty;
• the apportionment of a co-insurance premium by the lead insurer to the co-insurer for insurance services jointly supplied to the insured in co-insurance agreements will be treated as neither a supply of goods nor a supply of services, provided that the lead insurer pays the tax liability on the entire amount of premium paid by the insured; and
• no GST will be levied on extra neutral alcohol (ENA) used in the manufacturing of alcoholic liquor for human consumption.

Pillar Two-related deferred tax assets and liabilities

The Accounting Standards Board of the Institute of Chartered Accountants of India (ICAI) has decided to introduce a temporary exception for non-company entities from the requirements in AS 22 (Accounting for Taxes on Income) to recognise and disclose information about deferred tax assets and liabilities connected to Pillar Two-related income taxes. These amendments are effective for annual reporting periods beginning on or after 1 April 2024.

The amendments introduce:

• a temporary exception to the requirements to recognize and disclose information about deferred tax assets and liabilities related to Pillar Two-associated income taxes; and
• specific disclosure requirements for affected entities regarding(i) disclosure that the entity has applied the exception, (ii) separate disclosure for current tax expenses related to Pillar Two-associated income taxes and (iii) disclosure of known or reasonably estimable information to understand the enterprise's exposure to Pillar Two-associated income taxes (during the periods in which Pillar Two legislation is enacted or substantively enacted but not yet in effect); and
• micro, small and medium-sized enterprises and non-company entities may not apply certain disclosure requirements as specified in the amendment.

As per the ICAI, the reason for introducing this exception is that once the Pillar Two Model Rules are enacted in India, these amendments would be relevant to the non-company entities applying the ICAI's Accounting Standards and Pillar Two Model Rules. Entities also may need time to determine how to apply the principles and requirements in AS 22 to account for deferred taxes related to the top-up tax.

Importance of tax residence certificate for tax treaty benefits

Courtesy Majmudar & Partners it was reported that Tiger Global Eight Holdings (TGH), a Mauritius company, sold a portion of its shares of an Indian company that were acquired prior to April 1, 2017 and claimed capital gains tax exemption under the double taxation avoidance agreement between India and Mauritius (Mauritius DTAA) on the basis of a valid tax residency certificate (TRC).

The Indian tax authorities (ITA) questioned the genuineness of the transaction entered into by TGH and concluded that TGH had no commercial substance in Mauritius. Therefore, TGH was not eligible for the capital gains tax exemption under the Mauritius DTAA. Further the ITA held that a TRC is not “sufficient” evidence of residency and not binding on the ITA, unless such a conclusion is independently reached. Aggrieved, TGH filed an appeal before the Delhi Income-tax Appellate Tribunal (Tribunal).

The Tribunal followed the CBDT circulars no. 682/1994 and 789/2000 and relied on the Supreme Court judgements in the Azadi Bachao and Vodafone cases to rule that a TRC is statutory evidence of an entity’s residential status, and even if it is not considered as conclusive evidence, the onus shifts on the ITA to establish by evidence that except for holding the TRC, the entity is a conduit, created and run for treaty shopping.

The ITA failed to rebut the statutory evidence of the TRC with cogent evidence, and merely on the basis of suspicion and adverse inferences, TGH was held to be engaged in treaty shopping.

On this basis, the Tribunal ruled in favour of TGH.

Eligibility to claim tax treaty benefits based on a TRC has frequently been the subject matter of litigation in India, particularly in the context of capital gains tax, where the right to tax a capital gain is allocated under the terms of an applicable tax treaty to the state in which the taxpayer is resident. Our recommendation is to build commercial substance in the Holdco jurisdiction, in addition to having a valid TRC.

Adoption of the OECD global tax reallocation (Pillars 1 and 2)

India's revenue secretary has said in recent published comments that India will not sign on to the OECD's global corporate tax deal focusing on profitable multinational companies unless India's concerns on withholding tax (WHT) and dispute resolution are addressed, and provided that the international deal will not be at the expense of India's interests.
Malhotra said in a 25 July 2024 interview with Reuters that India cannot agree to the formulation unless its suggestions are accepted and a reasonable solution is provided. He also stated that India is "constructively engaging" with other countries to achieve a conclusion on the OECD's Pillar One plan to address digital taxation by reallocating large multinationals' profits among other countries.

With respect to the implementation of the OECD's Pillar Two in India regarding the 15% global minimum tax, Malhotra said that India has set up a panel for the purpose of framing rules on Pillar Two.

No GST on slump sales

Courtesy Khaitan & Co it was reported that in an important ruling in the Piramal Enterprises Limited’s case under the erstwhile VAT statute, the Bombay High Court (BHC) has reiterated that a business transfer as a going concern is to be treated as a slump sale, and the assets of the business cannot be dissected and subjected to VAT individually. This can be extrapolated to affirm an already held view that there is no GST applicability on a slump sale transaction.

In this case, although the VAT assessment for FY2010-11 concluded that the transaction was on a “going concern” basis and not subject to VAT, in 2017, a demand of INR2,607 crores (approx. US$314 million) was raised on the ground that the transaction included the transfer of a right to use intellectual property for a fixed period, which constituted a “sale” under Indian VAT law as then applicable.

The BHC held that: (i) as the sale was intended as a transfer of the business on a "going concern slump sale” basis, it must be treated as a sale of a single asset, and it was incorrect to dissect the entire transaction into assets and liabilities, contradicting the very nature of a slump sale; (ii) the BTA should be read as a whole and must be interpreted based on the parties’ intentions; and (iii) the allocation of the purchase price in the business transfer agreement for stamp duty purposes should not be misconstrued as redefining the transaction’s character for VAT purposes.

Care should be taken in drafting IP transfer/ license clauses in such transactions, so as to ensure that they do not come across as distinct from the underlying business in any way. The last thing a seller needs is 14 years of tax litigation.

Advertisement services to overseas customers zero rated for GST

The Central Board of Indirect Taxes and Customs (CBIC) has issued a circular clarifying that the place of supply of comprehensive advertising services provided by Indian advertisers to foreign clients must be considered as the location of the recipient of the services. Accordingly, such services will be considered as export of services.

Often, a foreign company hires an Indian advertising company and executes a comprehensive agreement to provide various services targeting the Indian audience. These services include media planning, investment planning, creating and designing content, strategizing for maximum customer reach, the identification of media owners, dealing with media owners and procuring media space.

The circular clarifies that in the case of such transactions for the provision of comprehensive advertising services:

• Indian advertising companies are not intermediaries;
• the foreign client is considered as the recipient of services, even though the advertising is targeted at an Indian audience; and
• the place of supply of such services is outside India and the services qualify as export services.

Further, where the Indian advertising company merely facilitates the provision of advertising services between foreign clients and the Indian advertisers, the place of supply will be considered as the place of the supplier (i.e. in India).

Datacentre services for overseas cloud service providers zero rated for GST

The Central Board of Indirect Taxes and Customs (CBIC) has issued a circular clarifying that the place of supply for data hosting services provided by Indian service providers to foreign cloud computing service providers must be considered as the location of the recipient of services. Accordingly, such services will be considered as export of services.

The circular clarifies that data hosting services do not fit under any of the following criteria for determination of the place of supply of services:

• intermediary services - the services are not intermediary services as the Indian data hosting service provider provides services on a principal-to-principal basis and does not act as a broker or agent for facilitating the supply between cloud computing service providers and their end users/consumers;
• services in relation to goods "made available" – the services cannot be considered in relation to the goods "made available" as the Indian service provider provides services with its own infrastructure and the overseas service providers cannot be considered to own the said infrastructure; and
• immovable property services – the services cannot be considered in relation to immovable property or physical premises as they are comprehensive information technology (IT) services which include operating data centres, uninterrupted power supplies, backup generators, network connectivity and backup facilities.

Considering that data hosting services are not covered under any of the specific categories mentioned above, the place of supply must be determined under the default provision as per section 13(2) of the Integrated Goods and Services Tax Act, 2017. Thus, the location of the recipient of the services will be considered as the place of supply. Where the cloud computing service provider receiving data hosting services is located outside India, the place of supply will be considered to be outside India and the services will qualify as export services.

Indian tax authority cannot question the commercial decisions

The Delhi High Court (HC) has ruled on 11 July 2024 that the Indian company was not a contract manufacturer to its Korean parent and that the arm's length price (ALP) of royalty to the parent company cannot be considered nil.

The taxpayer, an Indian tax resident and a wholly-owned subsidiary of a Korean entity, paid a royalty to its Korean parent for technical know-how and expertise. The taxpayer operated as a licensed manufacturing company and its export sales to associated enterprises (AEs) were made under open market conditions. The Indian tax authority determined that the ALP of the royalty paid should be nil, leading to an addition to the taxpayer's total income as the tax deduction for the royalty payments was denied.

The HC ruled in favour of the taxpayer, ruling that the Indian company was not a "contract manufacturer" for its Korean parent for the following reasons:

• it was engaged in the manufacture of goods as per its own volition and was not dependent on the discretion, control and directives of the Korean parent;
• it was not contractually obliged to manufacture goods on behalf of the parent;
• it did not repatriate the revenue from its sales to the parent; and
• it did not fall under the ambit of a contract manufacturer in terms of the OECD Guidelines.

The taxpayer's operations remained consistent for sales to both AEs and unrelated parties, i.e. as transactions between independent enterprises behaving in a commercially rational manner.

The transfer of technical know-how and the licensing of technology was essential to enable the taxpayer to undertake its activities independently. As a result, its parent cannot be deprived of the right to obtain an arm's length return on the utilization of its patented or proprietary technology and know-how. Therefore, the payment of the royalty to the Korean parent company was not a profit-shifting mechanism.

The Indian tax authority's powers under the domestic tax legislation is restricted to determining the ALP and does not extend to questioning the commercial expediency or genuineness of need for the expenditure incurred by the taxpayer.

US LLC eligible for tax treaty Benefits

Courtesy Majmudar & Partners, it was reported that the Indian tax authorities have denied treaty benefits to fiscally transparent entities such as foreign partnership firms and limited liability corporations (LLCs) on the ground that such entities are not liable to tax in their home country and do not qualify as tax residents of that country. The taxpayers have been claiming treaty benefits by arguing that the members of such firms/LLCs, who are tax residents of the same country, pay taxes in that country on the income earned by the firms/LLCs.

In the recent General Motors USA tax case, this issue arose in the context of a US-based LLC. The Delhi Tribunal has held that as the income of the LLC is clubbed in the hands of its owner who merely discharges the tax that is assessable on the LLC, an LLC is essentially “liable to tax.” Further, the tax residency certificate (TRC) supports this fact and also confirms the status of the taxpayer as a body corporate. The Mumbai Tribunal had, in the Linklaters tax case, allowed the benefit of India-UK treaty to a fiscally transparent partnership firm, i.e., Linklaters.

It will be interesting to see how the courts implement this ruling especially as the Central Board of Direct Taxes has chosen not to adopt Article 3 of the MLI (multilateral convention to implement tax treaty related measures to prevent base erosion and profit shifting), which grants treaty benefits to fiscally transparent entities.

Tax identification number

In 2022, the Minister of Finance (“MoF”) issued Regulation No.PMK-112 to stipulate the use of the 16-digit Tax Identification Numbers (Nomor Pokok Wajib Pajak/NPWPs) for individuals, Corporate, and Government Agencies. The full implementation of this 16-digit NPWPs was initially set at 1 January 2024, but was subsequently postponed to 1 July 2024 through the issuance of PMK-136.

Under the MoF regulations, starting from 1 July 2024:

• Taxpayer uses the Residential Identity Number (Nomor Induk Kependudukan/NIK) and the 16-digit-NPWP as the NPWP in tax administration and other parties’ services;
• Branch taxpayer uses the Identity Number for a separate Place of Business Activities (Nomor Identitas Tempat Kegiatan Usaha/NITKU) as the identity of a place of business activities that is separate from the place of residence or domicile; and
• Any other parties who provide administration services that require an NPWP must only use an NIK and 16-digit-NPWP as an NPWP in the service provided.

In order to provide sufficient time for the parties to prepare a full implementation in their administrative system, the Directorate General of Taxes (“DGT”) issued Regulation No.PER-6 to regulate the gradual implementation of the use of the new identity numbers (i.e. NIK, 16-digit NPWP, and NITKU) in tax administration services starting from 1 July 2024.

Administrative services where the new identity numbers can be used as of 1 July 2024 are:

• Taxpayer registration (e-Registration);
• Taxpayer profile accounts on the DGT Online;
• Information on taxpayer status confirmation (Konfirmasi Status Wajib Pajak/KSWP);
• Issuance of withholding tax slips and reporting of Article 21/26 Montlhy Income Tax Return (e-Bupot 21/26);
• Issuance of withholding tax slips and reporting of Unification Monthly Income Tax Return (e-Bupot Unification);
• Issuance of withholding tax slips and reporting of Article 21/26 and Unification Monthly Income Tax Return of government agencies (e-Bupot Government Agencies); and
• Submission of objections (e-Objection).

The issuance of taxation decisions, decrees, forms, and documents will be gradually adjusted by stating both the 15-digit NPWP and the new identity numbers. PER-6 also confirms that these documents which are issued since 1 July 2024 and that have the 15-digit NPWP will have the same legal force as the ones that have the new identity numbers.

Export duties for metals minerals

Courtesy Hassegaf Hamzah & Partners it was reported that in June 2024, the Minister of Finance (“MOF”) issued an update on the regulation governing export duties through MOF Regulation No. 38 of 2024 on Determination of Exported Goods Subject to Export Duty and Export Duty Rates (“New Regulation”). The New Regulation replaces MOF Regulation No. 39/PMK.010/2022, as lastly amended by MOF Regulation No. 71 of 2023 (“Previous Regulation”).

The two main updates in the New Regulation pertain to the determination of export duties for processed metal mineral products and the extension of the export duties application period for processed metal mineral products. In terms of regulatory framework, the New Regulation supports the implementation of the Ministry of Energy and Mineral Resources (“MEMR”) Regulation No. 6 of 2024, which governs the construction of metal mineral refining facilities in Indonesia (“MEMR Regulation 6/2024”), by detailing the export duties provision for metal mineral products. Moreover, the New Regulation complements MEMR Regulation 6/2024, which allows businesses to export processed metal mineral products using certain HS Codes (Harmonised System) only if their refining facilities have reached the commissioning stage as of 31 May 2024.

The New Regulation changes the provisions for determining export duty rates for processed metal mineral products. Previously, the export duty rates for these products were determined based on the progress of the development stages in the construction of the relevant refining facilities.

Under the previous regulatory framework, businesses in Stage I would be subject to higher export duty rates compared to businesses in Stage II and Stage III. The closer a business was to the completion of construction, the lower the export duty rates it would enjoy.

Under the New Regulation, the MOF has eliminated the determination of export duty rates based on progress of construction. Instead, one export duty rate will apply to businesses whose refining facilities have reached the commissioning stage.

Besides changing the rates determination, the New Regulation also changes the period of application of export duties. Under the Previous Regulation, the application of export duties for processed metal mineral products was scheduled to apply until 31 May 2024. The New Regulation extends this deadline to 31 December 2024, but in line with MEMR Regulation 6/2024, the export duties will only apply to businesses that have reached the commissioning stage. As a result, businesses that have not reached the commissioning stage on 31 May 2024 would not be able to use the export duty rates under the New Regulation and are no longer able to export processed metal mineral products.

The New Regulation simplifies the application of export duty rates by the government and this streamlined approach not only reduces the administrative burden but also ensures a more transparent and predictable regulatory environment for companies. As a result, businesses can better plan their operations and investments, fostering growth and stability in the metal mineral processing industry. Furthermore, this change may encourage more efficient and timely completion of refining facilities, contributing to the overall development of the sector.

New Capital Nusantara tax incentive

On the 6th of March 2023, the Government issued Regulation No.GR-12 to provide facilities for projects in the National Capital to be named “Nusantara” (Ibu Kota Negara bernama Nusantara/”IKN”) followed by the Minister of Finance (MoF) Regulation No.PMK-28 on 16 May 2024. On 12 August 2024, the Government amended GR-12 by issuing GR-29. The IKN contains the following additional tax incentives:

• The addition of facility on special regional levy (retribusi) in addition to facilities on special regional tax and revenue for facilities under the authority of the IKN Authority; and
• The addition of incentives for housing developments to ease the doing of business, including tax incentives, such as:

Tax relief for modest houses (rumah sederhana);

• Exemption on Duty on the Acquisition of Land and Building (L&B) Rights (Bea Perolehan Hak atas Tanah dan Bangunan) – also applies to consumers; and
• L&B Tax relief for a certain period – also applies to consumers.

Financial information

Courtesy Hamzah Assegaf it was reported that the Minister of Finance Regulation No. 47 of 2024 (“Regulation”) introduces new anti-avoidance measures and expands reporting requirements, reflecting a global shift towards greater transparency and cooperation in tax matters.

The Regulation was issued on 18 July 2024, and came into force on 6 August 2024. It is the third amendment to Minister of Finance Regulation No. 70/PMK.03/2017, which regulates access to financial information for tax purposes, including general tax compliance monitoring by the Directorate General of Tax and the exchange of information under the Exchange of Information agreements with tax authorities in other jurisdictions.

Anti-Avoidance Rules

The Regulation introduces a new chapter VA, titled “Anti-Avoidance”. This chapter replaces the previous anti-avoidance provisions, although some of the old provisions have been moved to different sections within the Regulation.

Chapter VA includes a new Article 30A, which stipulates as follows:

• Prohibition on avoidance: Under Article 30A paragraph (1), all parties, including financial institutions and their employees, are strictly prohibited from entering into agreements or taking actions designed to circumvent their obligations under the financial information reporting regulations. Any such agreements or actions will be deemed null and void, and the parties involved will be required to fulfil their original obligations.
• Authority of the Director General of Tax: Under Article 30A paragraph (2), the Director General of Tax has the power to identify agreements or actions aimed at avoiding reporting obligations. The Director General of Tax is also authorised to obtain any financial or other relevant information related to suspected avoidance activities.
• Prohibition on false statements: Under Article 30A paragraph (4), all parties are prohibited from making false statements or concealing information that is required to be reported under the Regulation. A statement is considered false if it is inaccurate or not based on facts.

Oversight by the Director General of Tax

The Director General of Tax has the authority to investigate potential non-compliance with the Regulation, including violations of the new anti-avoidance rules in Article 30A.

If the Director General of Tax suspects a violation, it may request clarification from the relevant party. In this case, the relevant party must provide clarification within 14 days after receipt of the request. After receipt of the clarification, if the Director General of Tax determines a violation has occurred, or if no clarification is provided, a written warning will be issued. The Director General of Tax may follow up the written warning with a tax audit if the party:

• Fails to fulfil its obligations after the warning; or
• Continues the violating activities.

If the Director General of Tax identifies a potential tax crime, it may conduct a pre-investigation (pemeriksaan bukti permulaan), potentially leading to a full tax crime investigation.

Key Takeaways

This regulatory update brings Indonesia’s financial information access rules in line with international standards, promoting greater transparency and cooperation in tax matters. As discussed above, failure to adhere to the Regulation can trigger a tax audit, potentially resulting in additional tax assessments and lengthy proceedings. Therefore, proactive approach is essential, and taxpayers and financial institutions subject to the Regulation must ensure they fully understand and comply with their obligations.

Tax Reform

The Ministry of Finance (MoF) has released its technical explanation regarding the 2024 tax reform laws and regulations, following their promulgation on 30 March 2024 on its official website on 9 July 2024.

The authors of this technical explanation are ministry officials who work in departments involved in drafting and implementing the 2024 tax reform laws and regulations. Although these officials wrote in their personal capacity, the technical explanation is generally considered authoritative in practice.

This technical explanation, which is about 950 pages, is primarily intended to provide an accessible overview of the 2024 tax reform. For example, the technical explanation spends about 65 pages explaining the amendments to the Japanese Global Minimum Tax Laws and Regulations under the 2024 tax reform. In particular, it clarifies which parts of the amendments are intended to incorporate which sections of the additional administrative guidance issued by the OECD through 2023.

Application of CFC legislation

Courtesy IBFD it was reported that the Japanese Supreme Court (SC) has made a decision concerning captive transactions and Japanese CFC legislation in favour of the tax authority in case number Reiwa 4 (2022) Gyôhi 373. The SC ruled that the CFC legislation applied to the case of the taxpayer, and that the insurance revenue of its foreign subsidiary from non-affiliated parties is effectively lower than 50% of its total insurance revenue. The decision is final and can not be appealed.

Japanese car maker, Nissan, indirectly owned 100% of Nissan Global Reinsurance, Ltd (NGRE) in Bermuda. Nissan also indirectly owned 100% of NR Finance Mexico, S.A. de C.V. SOFOM ER (NRFM) in Mexico. Assurant Vida Mexico, S.A. (AVM) was a Mexican insurance company which was not affiliated with Nissan.

Mexican buyers of Nissan cars entered into credit contracts with NRFM, where the buyers borrowed money from NRFM to finance their purchase. In the event of a borrower's death or becoming unemployed, the full amount or at least 6 months' worth of unpaid borrowed amount would be compensated. Buyers paid the insurance fees to NRFM.

NRFM entered into an insurance contract with AVM, where NRFM was the policy holder and AVM was the insurer. NRFM paid insurance fees to AVM, and AVM assumed the risks related to the borrowers' death or unemployment.

AVM entered into a reinsurance contract with NGRE, where AVM was the policy holder and NGRE was the reinsurer. AVM paid reinsurance fees to NGRE, and NGRE assumed 70% of the risk of the insurance between NRFM and AVM.

Article 68-90 of the Japanese Special Taxation Measures Act (STMA) (prior to amendment by Law 4 of 2017) provides that if the business of a foreign affiliate is insurance and the business is mainly done with non-affiliated parties, then the Japanese CFC legislation is not applied. This is clarified under article 39-117 (8)(5) of Enforcement Order of the STMA (prior to amendment by Cabinet Order 159 of 2016), which provides that if 50% or more of the insurer's turnover is from non-affiliated parties (or if the insurance fees are reinsurance fees, this is limited to insurance fees the object of which are assets of non-affiliated parties or liability for damages borne by non-affiliated parties), then the insurance business is deemed to be done with non-affiliated parties and the Japanese CFC legislation is not applied.

From 1 April 2015 to 31 March 2016, NGRE's total insurance revenue was USD 525,214,976, where the insurance revenue from non-affiliates other than AVM was USD 253,183,120 (which is less than 50% of the total insurance revenue), and insurance revenue from AVM was USD 11,493,075 (which, if added to the insurance revenue from other non-affiliated companies, would account for more than 50% of the total insurance revenue).

The main issue was whether the object of the reinsurance contract between AVM and NGRE was assets of a non-affiliated party or liability for damages borne by a non-affiliated party.
The SC decision on 18 July 2024 ruled for the Japanese tax authority. The CFC legislation applied in the case at hand. The SC found that under the reinsurance contract between AVM and NGRE, NGRE assumed the economic disadvantages concerning credit receivables which were assets of NRFM. NRFM is an affiliate of NGRE; therefore, the requirement under article 39-117 (8)(5) of the Enforcement Order of the STMA was not satisfied, i.e. the insurance revenue from non-affiliated parties did not exceed 50% of the total insurance revenues.

Previously, the Tokyo District Court decision on 20 January 2022, case number Reiwa 2 (2020) Gyôu 86, ruled for the Japanese tax authority. However, the Tokyo High Court overturned the district court's decision and ruled for Nissan on 14 September 2022, case number Reiwa 4 (2023) Gyôko 36 (in Japanese).

Global minimum tax

Japan's National Tax Agency (NTA) has released the updated version of the interpretative guidance on the Japanese global minimum tax laws and regulations.
The NTA revised the notice as of 5 August 2024 to update or add interpretive positions related to the Japanese income inclusion rule (IIR) in response to the March amendments to the laws and regulations to incorporate additional administrative guidance released from the OECD.

The update mainly focuses on items related to administrative guidance issued by the OECD in February, July and December 2023. For example, there are updated items regarding the introduction of the so-called Marketable Transferable Tax Credits, Qualified Flow-through Tax Benefits, and the Equity Gain or Loss Inclusion election. In addition, some updates provide more clarification on the operation of the Substance-Based Income Exclusion and the transitional CbCR Safe Harbour. However, items related to the latest administrative guidance of June 2024, such as the allocation of cross-border deferred taxes, are not yet covered in this update.

While the NTA's notice itself is not a legally binding norm, taxpayers may rely on it as the NTA will not take a different interpretive position from it until further notice.

Total Return swap payments

Courtesy Bae Kim & Lee it was reported that if a foreign investor receives payments equivalent to the distribution of dividends from Korean shares as the reference asset in a Total Return Swap Agreement ("TRS Agreement"), such payment should not be taxed as dividend income based on the substance over form principle.

The taxpayer is a Korean corporation engaged in the sales and consignment sales of securities. The taxpayer sells TRS products with reference assets based on Korean shares to foreign financial institutions (the “foreign investors”) and returns to foreign investors all profits derived from such shares, including interest and dividends, under the TRS Agreement. The specific terms of the TRS Agreement are as follows:

• The TRS instrument is an over-the-counter derivative, and the risk buyer bears economic risks and benefits (total returns equivalent to all profits and losses derived from the reference asset, such as capital gains, interest, and dividends, due to price fluctuations of the underlying asset) in relation to the reference asset in exchange for variable profits whereas the risk seller receives a fixed profit in the form of a fee from the buyer.
• When the taxpayer sells TRS products to a foreign investor, it is required to settle or pay the gross variable profits and losses related to the reference assets in accordance with the above sales agreement, and so in order to offset the risk, the taxpayer: (i) directly purchases and holds the underlying assets; or (ii) enters into another TRS agreement with another securities company.
• When the taxpayer purchased shares which were used as the reference assets, the voting rights of such shares were exercised by the taxpayer in accordance with internal standards.

The taxpayer did not withhold on the payments based on the taxpayer’s view that they should be characterized as business income of a foreign investor. However, the tax authorities imposed corporate income tax (withholding tax) based on their finding that the taxpayer was obligated to withhold tax by characterizing the payments as dividend income based on the substance over form principle.

The Tax Tribunal held that the tax imposition issued by the tax authorities, based on their characterization of payments to foreign investors to be dividend income under the substance over form principle, is incorrect based on the following: (i) whereas the taxpayer exercises all rights in connection with the underlyidng shares without any restrictions on the acquisition and disposal of such shares after the execution of the TRS Agreement, the foreign investor cannot exercise any rights as a shareholder as prescribed by the Commercial Act, such as the right to self-interest, voting rights, and various rights to file a lawsuit, and since the foreign investor has only the right to receive the agreed profits (or the obligation to compensate for the loss on transfer) under the TRS Agreement, there is no substantial discrepancy between the name and the title of the taxpayer’s ownership of the underlying shares; and (ii) the foreign investor has sufficient reasons to enter into the TRS Agreement for economically reasonable purposes such as leverage investment, and the TRS Agreement was not likely to have been executed for tax avoidance purposes.

The tax authorities are required to respect the legal relations selected by the parties unless there are special circumstances, as the taxpayer may choose among several legal relations to achieve the same economic purpose when engaging in economic activities (Supreme Court Decision, 2017Du57516, December 22, 2017). However, if the title holder of the property has no ability to control and manage the property, and there is a person who actually controls and manages the property by exercising control over the title holder, and such discrepancy between the title and substance is for purposes of evading taxes, the transaction may be denied and taxed by applying the substance over form principle (see Supreme Court decision, 2008Du8499, January 19, 2012).

Under the TRS Agreement, the taxpayer is obligated to pay the same amount to the foreign investor on the date the dividend is distributed but by taking on the legal formality of profits under the TRS Agreement, the foreign investor does not bear dividend income taxes even though the foreign investor retains the economic benefits equivalent to the above dividend. In this case, if the TRS transaction was entered into solely for the purpose of avoiding the dividend income tax, it would be possible to tax the payment amount as dividend income based on the substance over form principle.

However, investing in Korean shares through a TRS contract provides the advantage of being able to invest in more shares and foreign investors can use TRS contracts to hedge the risks of derivatives by utilizing these characteristics of TRS contracts instead of directly purchasing shares. As such, there is sufficient incentive to enter into the TRS agreement for economically reasonable purposes. In addition, the TRS Agreement is a standardized TRS agreement that does not involve the purchase or transfer the underlying assets between the parties to the derivatives transaction and is not the type of agreement generally used for the purpose of avoiding dividend income tax.

In light of this, the TRS Agreement has a legitimate business or economically reasonable purpose and is not intended to be executed solely for tax avoidance purposes. Therefore, it is not possible to deny and tax the transaction form selected by the taxpayer by applying the substance over form principle. However, it should be noted that since the substance over form principle can be applied in various ways regardless of the transaction structure, the outcome may differ depending on the specific facts and circumstances.

Reform to Inheritance Tax in 2024 Tax Revision Bill

On 25 July 2024, the Ministry of Economy and Finance announced the tax law amendment proposals in the 2024 Tax Revision Bill. The Bill includes a proposal to reform the inheritance tax system and other measures to reduce the tax burden on businesses, investors and households.

Improvements to tax credit system

The Ministry of Economy and Finance has recently released the 2024 Tax Law Amendment Proposal that includes amendments which relate to international tax and/or may have an impact on multinational enterprises (MNEs) with investments or operations in Korea. The Proposal includes amendments to the Tax Preferential Control Act, Corporate Income Tax Act, Inheritance Tax and Gift Tax Act, Law for the Co-ordination of International Tax Affairs, and the Framework Act on National Taxes. The proposed amendments are subject to approval by the National Assembly.

Corporate Taxation

Improvement to the tax credit system through:

• a higher integrated investment tax credit for incremental investments;
• adjustment of the scope of medium-sized companies;
• streamlining when members of a consolidated group can apply the regulations for small or medium-sized companies; and
• expanding the scope of costs eligible for research and development (R&D) tax credit.

Abolishment of the requirement to value shares held by the largest shareholder at a premium.

Individual Taxation

• Abolishment of financial investment income tax.
• Deferment of the taxation on cryptocurrency gains.
• Improvement of the criteria for determining individual tax residency.
• Requirement for submission of treaty exemption applications and payment statements for Korean-sourced personal service income.

International Tax

• Streamlining the criteria for denying excessive interest deductions.
• Streamlining the procedure for tax refund applications relating to transfer pricing adjustments.
• Removal of the deadline for requiring submission or supplementation of documents relating to foreign subsidiaries.

Amendments to the Global Anti-Base Erosion (GloBE) rules as follows:

• transitional undertaxed payments rule (UTPR) safe harbour in respect of the ultimate parent entity jurisdiction with a statutory corporate tax rate of at least 20%;
• transitional filing deadline;
• detailed methodologies for determining consolidated revenue to be prescribed by a Presidential Decree;
• detailed methodologies for determining whether the deferred tax liability accruals have reversed to be prescribed by a Presidential Decree;
• special provision for GloBE loss election;
• improvement of the methodologies for allocating the UTPR top-up tax amount to constituent entities;
• detailed methodologies for determining the status of a flow-through entity as a tax transparent entity or reverse hybrid entity by reference to the owner to be prescribed by a Presidential Decree; and
• improving the application of the transitional country-by-country safe harbour for MNE groups with a joint venture (JV) or members of a JV group.

Administration

Streamlining the tax exemption system for non-resident individuals or foreign corporations investing in government bonds, etc. by:

• simplifying the tax exemption application and tax withholding procedures for investments via overseas investment vehicles; and
• allowing non-resident individuals or foreign corporations to directly submit tax refund applications.

Allowing tax refund applications for underreporting of tax credit.

Tax exemptions for unit trusts

Courtesy Skrine & Co it was reported that the Malaysian Government has introduced two exemption orders under the Income Tax Act 1967 (“ITA”) to provide relief to eligible unit trusts from capital gains tax (“CGT”) and taxes on foreign-sourced income (“FSI”).

The following orders were gazetted on 19 September 2024:

1. Income Tax (Unit Trust) Exemption Order 2024; and
2. Income Tax (Unit Trust in Relation to Income Received in Malaysia from Outside Malaysia) (Exemption) Order 2024.

Income Tax (Unit Trust) Exemption Order 2024

The Income Tax (Unit Trust) Exemption Order 2024 (“CGT-EO”) has effect from 1 January 2024 to 31 December 2028. Under this exemption, unit trusts resident in Malaysia will no longer be subject to income tax on gains or profits arising from the disposal of shares in unlisted companies incorporated in Malaysia. The exemption also applies to gains or profits from shares disposed of under section 15C of the ITA, i.e. shares of a controlled company incorporated outside Malaysia that owns, directly or indirectly, real property situated in Malaysia.

It is crucial to note that the CGT-EO does not apply to unit trusts classified as Real Estate Investment Trusts (“REITs”) or Property Trust Funds (“PTFs”) listed on Bursa Malaysia, thereby limiting its application to traditional unit trusts managed by local management companies.

Any losses incurred from the disposal of shares will be deductible under subsections 65E(5) and 65E(6) of the ITA. This means that a unit trust that incurs a loss from the disposal of a capital asset (such as unlisted shares) can use this loss to offset gains from the disposal of other capital assets in the same year. Additionally, any unutilised losses can be carried forward for up to ten consecutive years and be deducted against future gains of the unit trust. These provisions ensure that while unit trusts are exempt from paying CGT on gains, they can still benefit from tax relief on losses.

In addition, the CGT-EO also stipulates that it does not apply to gains or profits from the disposal of shares that are chargeable as business income under paragraph 4(a) of the ITA. In such cases, normal business income rules will apply. Despite the relief from CGT, unit trusts benefiting from this exemption are required to comply with all existing filing and reporting requirements under the ITA, including the submission of returns and statements of accounts.

Income Tax (Unit Trust in Relation to Income Received in Malaysia from Outside Malaysia) (Exemption) Order 2024

The second order, the Income Tax (Unit Trust in Relation to Income Received in Malaysia from Outside Malaysia) (Exemption) Order 2024 (“FSI-EO”) addresses FSI. The FSI-EO applies from 1 January 2024 until 31 December 2026 and exempts qualifying unit trusts from paying income tax on gross income from all sources of income that is received in Malaysia from outside Malaysia.

The exemption applies to all sources of income defined under section 4 of the ITA, including dividends, interest, and profits from the disposal of assets.

As in the case of the CGT-EO, the FSI-EO does not apply to unit trusts classified as REITs or PTFs listed on Bursa Malaysia. The FSI-EO also does not apply to unit trusts that carries on banking, insurance, sea transport or air transport business.

The exemption under the FSI-EO is also limited to a “qualifying unit trust”, that is, a unit trust resident in Malaysia managed by a management company which is licensed by the Securities Commission Malaysia by which or on whose behalf a unit of a qualifying unit trust:

1. has been or is proposed to be issued, or offered for subscription or purchase, or
2. in respect of which an invitation to subscribe or purchase has been made, and includes any person for the time being exercising the functions of the management company.

Further, to qualify for this exemption:

1. the FSI must have been subject to a tax of a similar character to income tax in the territory where the income arises and the highest rate of such tax must be at least 15%; and
2. the management company of the unit trust must employ an adequate number of employees in Malaysia and incur sufficient operating expenses locally.

Any deductions related to tax-exempted FSI are disregarded when calculating the unit trust’s chargeable income.

The unit trusts benefiting from this FSI relief, as with the CGT exemption, must comply with the reporting requirements under the ITA. They are obligated to submit necessary returns and provide statements of accounts or any other information under the ITA.

These exemption orders are a positive development for Malaysia’s investment sector, particularly for individual unit trust investors. The CGT-EO addresses concerns arising from the introduction of CGT on the disposal of unlisted shares by entities such as companies and trust bodies. While individuals are generally exempt from CGT on such disposals, unit trusts—whose investors are predominantly individuals—were inadvertently affected due to their structure as trust bodies. The CGT-EO ensures that gains from the disposal of unlisted shares by qualifying unit trusts are not subject to income tax, thereby preventing the unintended taxation of individual investors through their unit trust investments.

On the other hand, the FSI-EO provides relief from taxation of FSI received in Malaysia by unit trusts. Following the removal of the blanket tax exemption on FSI from 1 January 2022, unit trusts faced potential taxation on such income. By alleviating the tax burdens related to capital gains and FSI, the Government is ensuring that unit trust investors are not unduly impacted by recent legislative changes while aligning with global tax standards, particularly in light of increasing scrutiny on FSI taxation by international bodies like the OECD.

These exemptions reflect the Malaysian Government’s commitment to enhancing the competitiveness of the domestic investment market while providing clarity and certainty to investors. Unit trusts, which pool funds from a broad base of investors, including individuals, are an important vehicle for wealth accumulation and investment growth. By easing the tax liabilities for these trusts, the Government is helping to foster a more favourable investment climate.

Automation capital allowances for the manufacturing and service sectors

Courtesy IBFD it was reported that the Malaysian Investment Development Authority (MIDA) has issued guidelines for the application of Automation Capital Allowances (CAs) for companies in the manufacturing and services sectors that include a 200% capital allowance on the first MYR 10 million of expenditure incurred from Years of Assessment (YAs) 2023 to 2027.

• Companies are eligible for Automation CAs at 200% on the first MYR 10 million expenditure incurred from YAs 2023 to 2027. The scope of automation includes the adaptation of Industry 4.0 elements.
• Adaptation of Industry 4.0 elements refers to machinery/equipment that adapt at least one of the Industry 4.0 pillars, namely big data analytics, cloud computing, augmented reality, cybersecurity, artificial intelligence, additive manufacturing, system integration, simulation, Internet of things (IoT), autonomous robots and advanced materials.

Participants eligible for the incentive include:

• companies that applied for the incentive starting in 2023; and
• companies approved for Automation CA prior to 2023.

To qualify for the incentive, a company must meet the following criteria:

• being incorporated under the Companies Act 2016 and a Malaysian tax resident; and
• having been engaged in manufacturing/services activities for a period of at least 36 months.

Participants must possess the following documents:

• manufacturing companies: a manufacturing licence (ML) or confirmation letter for exempted from manufacturing licence (whichever is applicable); and
• service companies: a permit/licence/registration/accreditation/certificate/approval letter relating to the company's services activities.

In addition:

• The eligible equipment consists of the automation machinery/equipment, including machinery/equipment with an adaptation of Industry 4.0, which is used directly in the manufacturing/services activities. The equipment should enhance productivity which is to be verified by a relevant authority.
• Companies currently claiming the reinvestment allowance under Schedule 7A, Income Tax Act 1967 may opt to claim the Automation CA incentive, provided that only one of these incentives is claimed in the same year of assessment.
• Application must be received by the MIDA between 1 January 2023 and 31 December 2027.

Will Malaysia re-introduce the GST?

In the recently published OECD Economic Surveys on Malaysia, the OECD has recommended that Malaysia reintroduce the goods and services tax (GST) at a low rate, complemented by well-targeted social transfers to vulnerable households. This approach may generate additional revenue to help Malaysia achieve its 3% deficit target in the short term and finance future spending needs.

The report notes that consumption taxes, such as GST, provide a relatively stable revenue source and are generally less detrimental to economic growth than other taxes, with fewer distortions in employment and investment. The report also highlighted that the GST is simpler to enforce and harder to evade.

The OECD recommends that Malaysia maintain an initial low GST rate to avoid the issues that affected its first implementation in 2015. It also recommends providing well-targeted social transfers to support households that might be impacted by the tax as this is deemed to be more effective than exemptions and reduced rates.

To address climate changes, the OECD recommends that Malaysia introduce a carbon tax to efficiently drive reductions in greenhouse gas emissions.

Other key recommendations made by the OECD in the survey include:

• expanding the tax base of individual income taxes and reducing the thresholds that higher tax rates are applied from; and
• further strengthen the tax administration and enforcement to raise additional tax revenue.

Malaysia initially introduced GST in April 2015 at a standard rate of 6%, replacing the previous sales and services tax regime. However, the GST was abolished in June 2018 due to public opposition. The government subsequently reinstated the sales and services tax (SST 2.0) regime in Malaysia, which had a substantially smaller tax base (but which has been expanded in recent years).

Tax treatment of Hybrid Instruments

Courtesy IBFD it was reported that the Inland Revenue Board (IRB) has recently released guidelines that explain the key characteristics of hybrid instruments and the factors that are considered in classifying these instruments as equity or debt for tax purposes. The guidelines also explain the tax treatment related to the distribution or profit on a hybrid instrument for both the holder and issuer of the instrument.

The key features of the Guidelines on Tax Treatment of Hybrid Instruments (the Guidelines) are as follows:

A "hybrid instrument" refers to a financial instrument that exhibits both equity and debt features. Examples include preference shares, bonds, perpetual loans, and profit-participating loan notes.

It is crucial to assess the real economic value of an instrument by examining its legal rights and obligations, the facts and circumstances of its creation (substance), and a combination of factors listed in the order of priority below:

• the source from which the principal and distributions or profits are repaid, including their order of repayment in the event of liquidation or dissolution;
• the right to enforce payment of distributions or profits and repayment of principal by the instrument holder;
• procedures in the event of default;
• maturity date of the instrument;
• the issuer's ability to obtain loans and make payments under arms' length transactions;
• involvement in management; and
• benefits to the instrument holder.

The accounting treatment of a hybrid instrument should align with prevailing accounting standards. In cases of contradictions with tax principles, the aforementioned factors should guide the classification of the instrument as equity or debt from a tax perspective. Detailed explanations are provided in Appendices A and B of the Guidelines.

The same factors are applicable when determining if an Islamic hybrid instrument is equity or debt, except for the first factor mentioned above.

E-Invoice guidelines

The Inland Revenue Board (IRB) has recently issued the updated e-invoice guidelines (version 3.2.) and the specific e-invoice guidelines (version 2.2.). The updated e-invoice guidelines provide a concession that allows the suppliers to share either the validated e-invoice or a visual representation of the e-invoice with the buyer.

E-Invoice Guidelines (Version 3.2.)

Additional income or expenses where an e-invoice is not required are:

• contract value for the buying or selling of securities or derivatives traded on a stock exchange or derivatives exchange in Malaysia or elsewhere; and
• disposal of shares of a company incorporated in or outside Malaysia and not listed on the stock exchange, except where the disposer is a company, limited liability partnership, trust body or co-operative society.

Taxpayers with an annual turnover or revenue of less than MYR 150,000 are exempted from issuing the e-invoice (including the self-billed e-invoice) and the conditions and criteria will be included in the General Frequently Asked Questions.

For the sharing of e-invoices, the IRB recognizes that there may be practical challenges in sharing validated e-invoices with buyers. Therefore, until further notice, the IRB allows suppliers to share either the validated e-invoice or a visual representation of it with the buyer.

E-invoice information submitted by taxpayers to the MyInvoice portal will be shared with the Royal Malaysian Customs Department. Taxpayers are permitted to adopt any visual representation format for e-invoices as per current practice and are advised to include any additional particulars required under applicable laws, rules, and regulations, such as the Sales Tax Act 2018 and Service Tax Act 2018.

Specific E-Invoice Guidelines (Version 2.2.)

In the recently updated specific e-invoice guidelines, it is clarified that the buyer must issue a self-billed invoice for claims, compensation or benefit payments from an insurance business. In this regard, the consolidation of a self-billed invoice is applicable to individuals who are not conducting a business.

Furthermore, in a recent media release, the IRB has announced a concession that allows taxpayers to issue consolidated e-invoices for all transactions for 6-months from the mandatory date of implementation for e-invoices as follows:

• to allow all activities/industries to issue consolidated e-invoices, including self-billed e-invoices;
• to allow any transaction description to be included in the "Product or Service Description" field; and
• to allow sellers to only issue consolidated e-invoices without issuing an e-invoice for each transaction, whenever requested by the buyer.

Forest City Special Financial Zone

On 20 September 2024, the Deputy Finance Minister introduced the proposed tax incentives for the Forest City Special Financial Zone (SFZ) during the announcement ceremony of the incentives for the SFZ. The Forest City SFZ was officially launched on the same day. The Forest City is located in the Iskandar Special Economic Zone in Johor, Malaysia, just across the border with Singapore. Its attraction is that it is close enough to Singapore in order to benefit from Singapore's infrastructure, but at a substantially lower cost of running an operation (rental, salaries).

The key incentives announced by the Deputy Finance Minister are set out below.

• A 0% tax rate over ten years provided assets under management of at least RM30 million (USD 7.1 million) (renewable provided additional investment requirements will be met) will be offered to family offices under the approved Single-Family Office Scheme to be coordinated by the Securities Commission Malaysia. The scheme is also offered to eligible private asset management companies and is expected to be operational from the first quarter of 2025.
• Global financial business services providers including fintech and foreign payment systems will be taxed at a reduced corporate income tax rate of 5% (instead of the standard tax rate of 24%).
• Companies operating within the SFZ will be eligible for concessionary corporate income tax rates of 0% and 5%, subject to conditions.
• Knowledge workers and Malaysians employed within the SFZ will be eligible for a special individual income tax rate of 15%.
• Banking, insurance, capital market intermediaries and other eligible entities in the financial sector will be granted a special tax deduction on relocation costs, an enhanced industrial building allowance and withholding tax exemptions.

VAT on overseas digital service providers

Courtesy Quisimbing Torres it was reported that on 27 June 2024, the Bicameral Conference Committee approved the final version of the legislative bill that seeks to impose a 12% value-added tax (VAT) on non-resident digital service providers (DSPs). This final version reconciles the conflicting provisions in the respective bills earlier approved by the House of Representative (House Bill No. 4122) and the Senate (Senate Bill No. 2528).

Digital services rendered in the course of trade or business are now expressly covered by the enumeration of transactions subject to VAT. Digital services delivered by non-resident DSPs are considered performed or rendered in the Philippines if the digital service is consumed in the Philippines.

"Digital service" is defined as "any service that is supplied over the Internet or other electronic network with the use of information technology and where the supply of the service is essentially automated.” This specifically includes any of the following:

• Online search engines.
• Online marketplace or e-marketplace.
• Cloud service.
• Online media and advertising.
• Online platform.
• Digital goods.

"DSP" is defined as a resident or non-resident supplier of digital services to a consumer who uses digital services subject to VAT in the Philippines. Specifically, "non-resident DSP" is defined as a DSP that has no physical presence in the Philippines.

Persons engaged in the sale of digital goods or services shall be required to be VAT-registered if their gross sales for the past 12 months, other than VAT-exempts sales, have exceeded the VAT threshold (currently PHP 3 million); or (b) if there are reasonable grounds to believe that their gross sales, other than VAT-exempt sales, will exceed the VAT threshold. The Bureau of Internal Revenue (BIR) shall establish a simplified automated registration system for non- resident DSPs.

As a general rule, a DSP, whether resident or non-resident, shall be liable for assessing, collecting, and remitting VAT on the digital services consumed in the Philippines if the customer is non-VAT registered (i.e., business-to-consumer transaction). Thus, the VAT-registered non-resident DSP is liable for the remittance of VAT to the BIR.

However, if the customer is VAT-registered (i.e., business-to-business transaction), the customer will instead be required to withhold and remit to the BIR the VAT due on the digital services consumed in the Philippines from non-resident DSPs, under the “reverse-charge mechanism” in the bill.

If the DSP is an online marketplace or e-marketplace, it shall be liable to remit to the BIR the VAT on the transactions of non-resident sellers that go through its platform, provided that the DSP controls key aspects of the supply and performs either of the following:

• Sets, either directly or indirectly, any of the terms and conditions under which the supply of goods is made.
• Involved in the ordering or delivery of goods, whether directly or indirectly.
• Online courses, online seminars and online trainings rendered by private educational institutions duly accredited by the DEPED, CHED and TESDA, and those rendered by government educational institutions, as well as the sale of online subscription-based services to DEPED, CHED, TESDA and educational institutions recognized by these government agencies, shall be included in the enumeration of VAT-exempt transactions under the Philippine Tax Code.
• Services of banks, non-bank financial intermediaries performing quasi-banking functions, and other non-bank financial intermediaries, including those rendered through the different digital platforms, will also be exempt from VAT.

However, non-resident DSPs shall not be allowed to claim creditable input tax. A VAT-registered non-resident DSP shall be required to issue a digital sales or commercial invoice for every sale of digital service. The invoice shall indicate the following information:

• Date of the transaction.
• Transaction reference number.
• Identification of the consumer.
• Brief description of the transaction.
• Total amount, with the indication that such amount includes the VAT.
• Breakdown of the sale price by its taxable, VAT-exempt and VAT zero-rated components, and the calculation of VAT on each portion of the sale.

VAT-registered non-resident DSPs shall be exempt from the requirement of maintaining subsidiary sales and purchases journals under the Philippine Tax Code. Payments for services to non-resident suppliers who are not VAT-registered shall be subject to 12% withholding VAT at the time of payment.

The Commissioner of Internal Revenue may suspend the business operations of non-resident DSPs in the Philippines by blocking the digital services performed or rendered in the Philippines. This will be implemented through the Philippine Department of Information and Communications Technology (DICT) and the National Telecommunications Commission (NTC).

The Secretary of Finance may require the withholding of percentage taxes imposed under the Philippine Tax Code. In the context of the forthcoming law, this implies that digital services that are not subject to VAT may still be subjected to the applicable percentage tax under the current provisions of the Tax Code through a subsequent revenue regulation.

Five percent of the incremental revenue from the imposition of VAT on DSPs shall be allocated to and used exclusively for the development of creative industries, as defined under Republic Act No. 11904 (The Philippine Creative Industries Development Act), for the first five years of the effectivity of the law.

Any communication, notice or summons to a non-resident DSP can be made via electronic mail messaging.

Once signed by the president, the law shall take effect 15 days after its publication in the Official Gazette or in a newspaper of general circulation. Thereafter, the Department of Finance, upon recommendation of the BIR and in coordination with the DICT and the NTC, and upon consultation with the stakeholders, shall issue the implementing rules and regulations (IRR) of the law not later than 90 days from the effectivity of the law. Non-resident DSPs shall be subject to VAT after 120 days from the date on which the IRR takes effect.

Philippines ratified Convention Mutual Administrative Assistance Tax Matters

On 3 September 2024, the Senate of the Philippines ratified the multilateral Convention on Mutual Administrative Assistance in Tax Matters, as amended by the 2010 protocol, by way of Resolution No. 139. This move will enable the Philippines to obtain relevant tax information from overseas tax authorities and vice versa overseas tax authorities in member states may obtain relevant information from the Philippines tax authority.

Corporate tax rate reductions

Courtesy IBFD, it was reported that on 10 September 2024, both chambers of Congress approved the reconciled version of the Corporate Recovery and Tax Incentives for Enterprises to Maximize Opportunities for Reinvigorating the Economy (CREATE MORE) Bill. The Bill builds on the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act of 2021, which lowered the standard corporate income tax rate to 25% (from 30%) and introduced amendments to incentives available to registered projects and activities.

The Bill seeks to further lower the income tax rate applicable to enterprises that benefit from the enhanced deductions regime under section 294(C) of the National Internal Revenue Code, as amended, to 20%. It also further amends provisions in respect of incentives in order to, among others, improve these incentives (e.g. by granting additional deductions under the enhanced deductions regime) and resolve ambiguities in the application of VAT zero-rating and exemption on goods and services attributable to registered projects and activities. Further developments will be reported in due course.

Legislation to implement Global Minimum Tax to parliament

The government submitted the Multinational Enterprise (Minimum Tax) Bill and the Income Tax (Amendment) Bill to Parliament on 9 September 2024. The draft legislation aim to implement the multinational enterprise top-up tax (MTT) and the domestic top-up tax (DTT) to ensure that the minimum effective tax rate is 15%. The amendments are set to apply to multinational enterprise (MNE) groups in Singapore from 1 January 2025.

The Ministry of Finance had earlier launched a consultation on the draft bills. This development is in line with the Global Anti-Base Erosion Model Rules (Pillar Two) (the GloBE Rules) of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS), which requires MNE groups to be subject to a minimum effective tax rate of 15%.

The draft legislation applies to MNE groups that have consolidated annual group revenue of at least EUR 750 million in at least 2 of the immediately preceding 4 financial years (hereinafter, in-scope MNE groups). A MNE group is a group that has at least one entity or permanent establishment (PE) located in a different jurisdiction than that of its ultimate parent entity (UPE).

The IIR will be given effect in Singapore by way of the MTT. The MTT is payable for a particular financial year by an entity located in Singapore (chargeable entity), if the chargeable entity at any time in the financial year (i) is a responsible member of an in-scope MNE group; and (ii) holds an ownership interest in another constituent entity that is located in a foreign jurisdiction (or is a stateless entity) that has a top-up amount for the financial year (a relevant entity).

A chargeable entity is a responsible member of a MNE group if it is either the UPE or the intermediate parent entity (IPE) and is either located in Singapore or a jurisdiction with a top-up tax equivalent to the MTT, and in the case of an IPE, no other constituent entity that owns a controlling interest in the IPE is a responsible member. A partially-owned parent entity (POPE) is also a responsible member if certain conditions are met.

The amount of MTT payable by a chargeable entity for a FY is generally the aggregate of the top-up tax for each relevant entity of the chargeable entity for that FY. If the chargeable entity holds an indirect ownership interest in a relevant entity through another responsible member, the amount of MTT payable will be reduced by the proportionate amount of MTT or equivalent top-up tax paid by such other responsible member in respect of that relevant entity.

The amount of top-up tax for a relevant entity is essentially the product of the chargeable entity's inclusion ratio for the relevant entity for the FY and the top-up amount of the relevant entity for that FY. The top-up amount for a relevant entity is the jurisdictional top-up amount for the in-scope MNE group for the jurisdiction apportioned to the relevant entity between all of the constituent entities of the in-scope MNE group that are located in that jurisdiction. The jurisdictional top-up amount for the in-scope MNE group for a jurisdiction for a FY is determined based on (i) excess profits — in determining such excess profit, the proposed Bill provides for substance-based income exclusion based on payroll and tangible assets — and (ii) a de minimis exclusion (where the average aggregate adjusted revenue and the average aggregate GloBE income or loss in a FY and immediately preceding two FYs are less than EUR 10 million and EUR 1 million respectively). The top-up tax percentage is the difference between the minimum rate of 15% and the effective tax rate for the constituent entities of the in-scope MNE group in a jurisdiction for a FY.

Every responsible member of an in-scope MNE group located in Singapore must file a MTT return (including a nil return, where applicable) with the Comptroller for each FY within 15 months after the end of that FY (unless the FY is a transition year) in the prescribed form and manner, and pay the MTT to the Comptroller for that financial year within 1 month after the due date for the MTT return.

The DTT is "intended to be a qualified domestic minimum top-up tax within the meaning of the GloBE Rules", and the provisions relating to the DTT "must be interpreted in a manner that is consistent with [this purpose]" (clauses 37(1) and (4) of the proposed Bill). The DTT is payable if an in-scope MNE group has constituent entities located in Singapore and such constituent entities have a top-up amount for that FY. The top-up amount for an in-scope MNE group for a financial year is generally the total top-up amounts for all its constituent entities located in Singapore. The top-up amount of a constituent entity located in Singapore for a FY is determined in the same manner as that for the MTT, with certain modifications.

The designated local DTT filing entity of an in-scope MNE group in Singapore must file a DTT return (including a nil return, where applicable) with the Comptroller for each financial year within 15 months after the end of that financial year (unless the financial year is a transition year), and pay the DTT to the Comptroller for that financial year within 1 month after the due date for the DTT return.

CFC trust income reporting obligations

Courtesy Lee & Li it was reported that on July 10, 2024, the Taiwan Ministry of Finance (the "MOF") issued a tax ruling (Tai-Cai-Shui-Zhi No. 11304525870; the "Ruling") to provide guidance on controlled foreign corporation (the "CFC") reporting procedures and obligations of onshore and offshore trustees. The Ruling provides supplementary clarifications on matters related to trustees' reporting requirements and obligations on the settlor or the beneficiary's CFC trust income starting from fiscal year 2024.

On January 4, 2024, the MOF issued a tax ruling (Tai-Cai-Shui-Zhi No. 11204665340) to provide guidance and a calculation method for CFC reporting. This ruling pertains to any settlor using shares or capital of a foreign affiliated enterprise registered in a low-tax burden country or jurisdiction (the "Shares of Foreign Enterprise in low-tax burden countries") and places reporting obligations on the trustee by Article 92-1 of the Taiwan Income Tax Act. On this basis, the Ruling further clarifies the trustee's obligations and procedures for reporting the trust income generated from the Shares of Foreign Enterprise in low-tax burden countries under the trust.

Trustee's reporting obligation

The trustee must report trust income to the MOF in accordance with the relevant regulations under the following circumstances:

(1) If the settlor uses Shares of Foreign Enterprise in low-tax burden countries as a trust asset; and

(2) If the settlor or beneficiaries of such trust are subject to relevant CFC tax rulings on the Shares of Foreign Enterprise in low-tax burden countries under the trust (e.g., Article 43-3 of the Income Tax Act and Article 12-1 of the Income Basic Tax Act)

Reporting documents

The trustee should file a trust income report for all trust assets of the same trust (please note that this only applies to the trusts with Shares of Foreign Enterprise in low-tax burden countries). The trustee must report the property inventory of the trust, revenue and expenditure statements, the statement of trust benefits accrued and payable to trust beneficiaries, and other related documents (Articles 6-2, 89-1, and 92-1 of the Income Tax Act). It is important to note that while all trust property must be reported, only trust income for CFC is taxed in advance, while taxation of the remaining trust property is still subject to a “cash basis.” To L&L's understanding, the MOF may announce the CFC filing form for trustee in the near future, and the trustee will be required to use such filing form as the basis for reporting.

Reporting period

The trustee should report the trust income of the settlor or the beneficiary of the trust starting from the fiscal year 2024 and for subsequent years. The reporting period for the trustee to report the trust income for the previous year is by the end of January each year. That is, the trustee should report the trust income for fiscal year 2024 by the end of January 2025. Offshore trustees who cannot file the report themselves may appoint an agent to assist them.

The trustee should apply to the tax authorities for the issuance of a uniform tax ID number to facilitate the reporting of trust income.

Income Basic Tax Rate increase to 15% for Large Multinational Enterprises from 2025

Courtesy IBFD it was reported that on 28 August 2024, the Ministry of Finance (MOF) of Chinese Taipei announced that the income basic tax (alternative minimum tax or AMT) rate applicable to multinational enterprises (MNEs) will be increased to 15% from 1 January 2025 if they meet the global revenue threshold for the OECD Pillar Two global minimum tax (GMT).

Currently, the statutory corporate income tax rate is 20%, and the AMT rate for profit-seeking enterprises is 12%. If a profit-seeking enterprise enjoys tax incentives (e.g. R&D tax credits) or exemptions (e.g. capital gains tax exemption for share transfers) and its effective tax rate (ETR) is lower than 12%, AMT will be imposed when the corporate income tax returns are filed.

In order to comply with international tax developments and appropriately protect its taxing rights, the MOF has taken into consideration the relevant rules of GMT and public opinion to formulate a proposal to increase the AMT rate on enterprises as follows:

• Starting from 2025, the AMT rate will be increased to 15% for MNEs that meet the GMT threshold, i.e. where the annual revenue of the MNE group's consolidated financial statements reaches EUR 750 million in any two of the previous four fiscal years.
• For other profit-seeking enterprises, the AMT rate remains at 12%.

As noted by the MOF in its announcement on 28 August 2024, if a jurisdiction where the ultimate parent company of MNEs is located implements the 15% GMT and Chinese Taipei has no corresponding measure to increase the AMT from 12% to 15%, top-up tax of 3% will be collected by the other jurisdiction that has implemented the GMT and result in a tax revenue loss to Chinese Taipei. The increased tax amount from raising the AMT rate can be included in the numerator (i.e. covered tax) when calculating ETR based on the GMT formulation for entities of large MNEs in Chinese Taipei, and avoiding top-up tax from being collected by other jurisdictions.

Neither the income inclusion rule (IIR) nor qualified domestic minimum top-up tax (QDMTT) of the GMT regime has been introduced. The purpose of increasing the AMT rate is to raise the ETR for MNEs that fall under the GMT regime and ensure any top-up tax will be collected in Chinese Taipei.

Statutorily, the AMT rate can be set between 12% and 15% and the MOF is authorized to make any necessary adjustment without an amendment passed by the Legislation Yuan (Congress).

VAT rate

In line with what seems to have become a tradition, the Thai cabinet has approved in principle a draft royal decree issued under the Revenue Code to extend the reduced value added tax rate of 7% to 30 September 2025, for the sale of goods, the provision of services and imports. The new royal decree is required because the 7% VAT rate is set to expire on 30 September 2024 and the Thai governments since the late 1990's have been extending the 7% rate every year.

Severance payments

The personal income tax exemption amount on severance pay for terminated employees is now increased, following the publishing of the relevant Ministerial Regulations in the Royal Gazette on 17 July 2024.

The Ministerial Regulations, Volume 394 (B.E. 2567), (2024) under the Revenue Code Regarding Revenue Tax Exemption ("Ministerial Regulation") was published in the Royal Gazette on 17 July 2024 and has entered into force from that date. As a result, the personal income tax exemption amount on severance pay for terminated employees has increased to the employee's last 400 days' wages or THB 600,000, whichever is less. The new tax exemption shall be applicable to assessable income received from 1 January 2023.

FATCA – financial information exchange with the USA

Thailand has taken a significant step forward in international tax compliance by fully implementing the Foreign Account Tax Compliance Act (FATCA) agreement with the United States. This development marks a crucial milestone in the ongoing efforts to improve global financial transparency and combat tax evasion.

The Director-General of the Thai Revenue Department, acting as the competent authority for Thailand, has signed a Competent Authority Arrangement (CAA) with their United States counterpart. This arrangement establishes the necessary procedures for the practical implementation of FATCA in Thailand, as agreed upon in the intergovernmental agreement signed in 2016.

The CAA’s signing is a pivotal moment, as it enables Thailand to commence the exchange of financial account information in accordance with the FATCA agreement. Consequently, banks in Thailand and other reporting entities can now fulfill their reporting obligations through the International Data Exchange Service (IDES), a secure online platform designed for the automatic exchange of tax information between participating countries.

This implementation is rooted in Thailand’s commitment to enhancing tax transparency and bolstering the efficiency of tax administration. By joining the global movement towards automatic exchange of financial information, Thailand aims to prevent international tax evasion and create a more transparent financial ecosystem.

To facilitate a smooth transition and ensure compliance, the Thai Revenue Department has announced an extension for the initial reporting deadline. Reporting entities now have until 30 September 2024, to submit the required information via the IDES system without incurring penalties. This extension provides ample time for affected institutions to adapt to the new reporting requirements and resolve any technical issues that may arise during the implementation phase.

Creation of a tax court

The Cabinet has recently approved the draft Act for the Establishment of the Tax Court and the Procedures for Tax Cases (Criminal Tax Case Adjudication). The key aspect of the draft is to grant the Tax Court the authority to adjudicate criminal tax cases. The Criminal Procedure Code or the Act on the Establishment of and Procedure for District Courts will be applied mutatis mutandis to these cases. The draft also amends the notification of court schedules in tax cases, excluding criminal tax cases, and revises the criteria for appeals and petitions in tax cases. This change aims to allow parties to handle their cases in one court, reducing the burden of time and costs for litigants, the court, and judicial personnel. It also enhances the efficiency of tax law enforcement, ensuring the state’s revenue collection and providing more accurate and fair criminal tax case adjudication.

Currently, tax cases are handled by the Central Tax Court, which specializes in tax law, tax accounting, and double taxation agreements. While tax law covers both civil and criminal cases, the specialized court only has jurisdiction over civil cases according to Article 7 of the Act on the Establishment of and Procedure for Tax Court B.E. 2528 (1985). Criminal tax cases are handled by criminal courts, which are not ideally suited for these cases due to the differences in intent and nature of tax-related offenses compared to standard criminal cases. Many pieces of evidence relevant to civil cases are also applicable to criminal cases, making it inconvenient for litigants to present such evidence in separate proceedings. Additionally, penalties may vary across different criminal courts due to their differing authorities.

This proposal has been agreed upon by a cabinet resolution. The next steps will involve consideration by the House of Representatives and the Senate and then require publishing in the Gazette.

The effect of this proposed bill is expected to benefit both juristic persons and individuals, as it would allow tax cases to be addressed in a single proceeding for both civil and criminal aspects.

This consolidation is anticipated to make it easier for the accused to handle their cases and for the examination of witnesses to be more convenient, given that the evidence is often similar for both civil and criminal cases. This amendment is expected to be advantageous for investors.

Key Takeaways:

1. The Thai Cabinet has approved the proposed bill to expand the Tax Court’s authority to include criminal tax cases. The bill will now proceed to the House of Representatives and the Senate for consideration.
2. The consolidation of civil and criminal tax cases in one court is expected to benefit both individuals and businesses, making the legal process more efficient and investor-friendly.
3. The new law aims to streamline the legal process, reduce costs, and ensure fairer outcomes in tax-related criminal cases.

New tax incentives

Automotive industry

Courtesy IBFD, it was reported that Thailand's Board of Investment (BOI) has approved an incentives package to promote investment in joint ventures (JVs) between Thai and foreign companies to manufacture automotive parts and components for internal combustion engines, hybrids, and electric vehicles.

Investments in both new projects and existing wholly foreign owned parts manufacturers already enjoying BOI promotion privileges but transforming into qualifying JVs, will be eligible for additional corporate income tax exemption for 2 years on the condition that the tax exemption period does not exceed 8 years in total.

To qualify for the incentives, a JV must invest not less than THB 100 million in the manufacturing of auto parts and be formed between a foreign company and a Thai company that holds not less than 30% of the JV's registered capital.

A Thai company entering the JV must be established for at least 3 years prior to the date of the filing of the application for promotion, and at least 60% of the company's registered capital must be held by Thai citizens.

Applications for investment promotion under this package must be submitted by 31 December 2025.

ESG Funds

The Cabinet has also approved, in principle, a draft Ministerial Regulation proposed by the Ministry of Finance to improve the personal income tax incentives for investing in Thai ESG funds.

The main changes are as follows:

• the minimum period for holding investment units in a Thai ESG fund is reduced from 8 years to 5 years for investment units purchased from 1 January 2024 to 31 December 2026; and
• the maximum tax deduction allowed in a year is increased from THB 100,000 to THB 300,000, but not exceeding 30% of the investor's assessable income.

For investment units purchased between 1 January 2024 and the effective date of the Ministerial Regulation, taxpayers will be entitled to a deduction for the purchase of investment units of 30% of the assessable income for the portion not exceeding THB 300,000, with the minimum holding period being reduced to 5 years.

The investment in Thai ESG funds will not be included with investments in other retirement savings funds, including retirement mutual funds and provident funds, which currently have a combined tax deduction ceiling of not more than THB 500,000.

The Cabinet approved the draft Ministerial Regulation on 30 July 2024.

On The Spot Import Export transactions to be changed

On 28 May, the General Department of Customs (GDC) issued Official Letter No. 2352/TCHQ-PC to summarize various points discussed in the Dialogue Conference between the Ministry of Finance and Korean Business groups. Accordingly, the GDC states that the MoF is in the course of preparing draft amendments to Article 35 of Decree No. 08/2015/ND-CP based on the direction of the Deputy Prime Minister and comments from other Ministries, associations and the community of enterprises. The most notable of these is guidance related to ICEI transactions under tripartite buy-and-sell transactions involving On The Spot Import Export transactions. These arrangements have become quite popular for foreign traders with representative offices in Vietnam, as it allows product to be produced in Vietnam efficiently with VAT and import duty savings.

Based on the recent changes foreign traders may only continue these arrangements provided that they no longer have a local representative or office in Vietnam.

The view of the GDC is that these transactions are permitted to be carried out as stipulated in point c, Clause 1, Article 35 of Decree No. 08/2015/ND-CP, provided that the foreign trader has no presence in Vietnam. With respect to “has no presence in Vietnam”, the foreign trader will meet the condition if it has no (i) representative office; or (ii) branch; or (iii) direct investment (e.g. subsidiary) in Vietnam. ICEI procedures as stipulated in point c, Clause 1, Article 35 of Decree No. 08/2015/ND-CP include: “c) Those traded under a sale or purchase contract between Vietnamese enterprises and overseas organizations or individuals that have no presence in Vietnam, and delivered or received under the designation arrangement between foreign traders and other enterprises in Vietnam.”

Transfer pricing

On the 5th July 2024, the Ministry of Finance released a draft decree which when enacted will amend and supplement parts of the transfer pricing rules contained in Decree 132. The draft decree is a consultation document and has been released to various government departments and the wider business community for them to provide their comments. The decree is scheduled to apply to the corporate income tax return for FY2024 and onwards.

The draft decree:

• Extends the definition of a related party to align with the changes in the Law on Credit Institutions. A charter capital ownership percentage of 20% applies to credit institutions.
• Extends the definition of a related party to include affiliates of credit institutions, which is newly introduced under the Law on Credit Institutions.
• Limits the application of a third-party lender or guarantor to be deemed a related party. Lenders, guarantors, and credit institutions will not be classified as related parties if they do not participate in the "management, control, or capital contribution" of the borrower. This amendment aims to address concerns of taxpayers who purely borrow from commercial banks but were previously captured under EBITDA cap rules.
• Limits the carry forward of non-deductible interest expenses in cases where a taxpayer is no longer subject to EBITDA cap rules once the decree comes into effect due to the change in the related party definition covering third-party lenders or guarantors. Specifically, non-deductible interest expenses due to EBITDA cap rules in the previous years will not be carried forward.

Article 21 extends the responsibility of the State Bank of Vietnam to provide information on related persons of credit institutions and their related party companies upon request from the tax authorities.

Amendments are proposed to Appendix I of the transfer pricing declaration forms to reflect the changes brought into effect by the decree.