India And Hong Kong Finalize Double Tax Avoidance Agreement After Years Of Negotiation

India and the Hong Kong Special Administrative Region (HKSAR) of China recently entered into a double tax avoidance agreement (DTAA). After years of negotiation, the bilateral DTAA was approved on November 10, 2017.

When it comes into force, the India-Hong Kong DTAA will hold important tax implications for international businesses operating in both countries. The agreement will also benefit trading companies that do not have a permanent presence in India but service to an India-based entity.

What is DTAA?

Non-resident Indians (NRIs) and foreign nationals doing business in India make profits in India as well as in other countries of operation. Such businesses often have to pay tax twice on the same source of earned income or profit in India.

As a general principle, international businesses in other countries are taxed on their territorial income, which is the income generated within the territory of that country. India, on the other hand, imposes a corporate income tax on the worldwide income of business enterprises that have a permanent presence in India. As a result, India-based multinational companies deriving income from other countries face double taxation on their earned income.

A DTAA creates a fair and certain tax environment for business activities carried out between two countries. It prevents international businesses from paying tax in the country where the income or profits are generated. Or, in some cases, it allows the country to deduct tax at source, and offers businesses a foreign tax credit to reflect that the tax has already been paid.

The methodology for double taxation avoidance, however, varies from country to country.

India’s DTAA with Hong Kong

India has over 86 DTAAs in force with various countries, which provide tax relief on transactions carried out between India and those countries. Each DTAA specifies the agreed rates of tax and the jurisdiction on the specified types of income involved.

The India-Hong Kong DTAA offers similar provisions. The DTAA will give protection against double taxation to over 1,500 Indian companies and businesses that have a presence in Hong Kong as well as to Hong Kong-based companies providing services in India. It will provide clarity to businesses regarding tax rates and tax jurisdictions, as they will now be taxed in only one of the signatory countries. This will allow investors to be more confident about their investment decisions.

Aside from tax relief, there are several other benefits that the India-Hong Kong DTAA will offer to the concerned businesses. These include:

  • Lower withholding tax (tax deducted at source or TDS) rates, which can be as high as 40 percent in the absence of a DTAA;
  • Lower dividend distribution tax (DDT), which is an additional tax levied on foreign investors besides the corporate income tax; and
  • In certain circumstances, credits for taxes paid on the double-taxed income that can be encashed at a later date.

Other details regarding the DTAA are yet to be announced.

Chris Devonshire-Elllis of Dezan Shira & Associates comments: “Hong Kong has a very well established Indian diaspora that has been there for decades and has much wealth and business influence within the territory. It is a very positive sign that the DTAA has been agreed as businesses in both India and Hong Kong have finally been given better financial incentives work together and increase trade and prosperity in both their respective areas”.

 

Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region.

 

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

China Adjusted Its Value-Added Tax (VAT) Again: This Is What You Need To Know

China’s value-added tax (VAT) reform is the largest tax overhaul in the country since 1994. The reform began as a Shanghai-based pilot program – a popular method for incubating reforms in the country – in 2012 before expanding to other cities and nationwide to all sectors in 2016.

In short, the reform replaced the Business Tax (BT) – which previously coexisted alongside VAT, and applied to a select number of industries – with the VAT. After VAT reform, authorities treated the sale of goods and services alike, eliminating the disproportionate taxation of services and simplifying China’s tax system

Nevertheless, authorities have continued to amend the reform.

In August 2017, the State Council announced plans to enhance the non-standardized tax rate structure, simplify the tax compliance system, and push forward VAT legislation. Prior to this, in July 2017, China’s State Administration of Taxation (SAT) simplified the VAT system from four to three tiers: VAT rates were simplified to three brackets – six, 11, 17 percent, with the 13 percent bracket removed.

The nature of VAT reform will remain fluid as the authorities continue to simplify and streamline VAT in the country. In the meantime, the demands of the VAT system remain onerous, particularly for foreign investors who are unfamiliar with the tax system in China. In this article, we explain the basics for calculating VAT in China.

Taxpayer categories

Under the VAT, taxpayers fall into one of two categories based on their annual taxable sales amount: general taxpayers or small-scale taxpayers.

Taxpayers with annual taxable sales exceeding the annual sales ceiling set for small-scale taxpayers must apply for general taxpayer status. A company must obtain VAT general taxpayer status in order to issue fapiao, which is a key requirement for conducting business. The sales ceilings are:

  • RMB 500,000 (US $75,400) for industrial taxpayers (i.e., enterprises primarily engaged in the manufacture of goods or provision of taxable services);
  • RMB 800,000 (US $120,570) for commercial taxpayers (i.e., enterprises engaged in the wholesale or retail of goods) ; and,
  • RMB 5 million (US$754,000) for VAT reform taxpayers.

Small-scale taxpayers are subject to a lower three percent uniform VAT rate; general taxpayers are subject to rates ranging from six to 17 percent. However, small-scale taxpayers cannot credit input VAT from output VAT, nor are they entitled to VAT export exemptions and refunds.

Taxpayers who have annual taxable sales below the ceiling, as well as taxpayers who have recently established a new business, can voluntarily apply for general taxpayer recognition, provided they are capable of setting up legitimate, valid, and accurate bookkeeping.

Tax specialists at Dezan Shira & Associates note that local tax authorities may use unwritten requirements to assess the type and number of VAT fapiao available to the taxpayers. These “soft” requirements may include factors such as registered capital, office size, and number of employees.

Calculating VAT

Taxpayers may use two methods for calculating VAT payable: the general calculation method and the simplified calculation method. Generally, the former applies to general taxpayers and the latter applies to small-scale taxpayers.

General calculation method

VAT payable under the general calculation method is the current output VAT deducted by the current input VAT:

  • VAT payable = Current output VAT – Current input VAT

Output VAT refers to the VAT amount calculated according to the sales volume of the taxable services provided and the applicable VAT rate:

  •  Output VAT = Sales volume x VAT rate

Sales volume refers to the entire price and other charges obtained by the taxpayer from providing taxable services. Where the taxpayer’s pricing combines sales volume with output VAT, the taxpayer should use the below formula to calculate the sales volume:

  •  Sales volume = Tax-inclusive sales volume / (1 + VAT rate)

Input VAT refers to the VAT paid, or borne by the taxpayer, when purchasing goods, or receiving processing, repair and replacement services, as well as taxable services. Input VAT that taxpayers can deduct from output VAT includes the VAT amount specified on:

  • special VAT invoice (including goods transportation industry VAT special invoices) obtained from the seller;
  • A Customs Import VAT Special Payment Document obtained from Customs; or,
  • A tax payment certificate obtained from the tax authority or Chinese agent for taxable services provided by foreign entities or individuals (in this case, the written contract, proof of payment and bill or invoice issued by the foreign entity are also required).

Tax specialists at Dezan Shira & Associates provided the following example: A design company purchases RMB 600 worth of design services from a supplier, and then provides RMB 1,000 worth of design services to a customer. The VAT rate for design services is 6 percent; the VAT payable is RMB1,000 x 6% – RMB600 x 6% = RMB 24.

If the current output VAT amount is less than the current input VAT amount, taxpayers forward the outstanding portion to the next filing period. However, taxpayers should note that certain input VAT items cannot be deducted from output VAT, including non-VAT taxable items, VAT-exempt items, and items that adopt the simplified calculation method.

If a taxpayer provides taxable services that are subject to different rates, the taxpayer should account the sales volume for each tax rate separately or else the highest tax rate will apply.

Where an overseas entity or individual provides taxable services in China and does not have an operating entity in China, the tax withholding party should calculate the amount of tax to be withheld using the below formula:

  • Amount of tax to be withheld = Price paid by the service recipient / (1 + VAT rate) x VAT rate

Simplified calculation method

Under the simplified calculation method, no input VAT is deductible and a uniform 3 percent levying rate applies:

  • VAT payable = Sales volume x VAT levying rate (3%)

Zero-rated VAT and VAT exempt services

The export of taxable services are zero-rated or VAT exempt. Both zero-rated and VAT exempt services are exempt from output VAT.

What is the difference between zero-rated and exempted VAT? Under zero-rated VAT, the input VAT attributable to the export of services can be credited from VAT payable and/or refunded. Under the exemption system, the input VAT attributable to export of services cannot be credited or refunded.

According to relevant regulations, VAT zero-rating takes precedence over VAT exemption when a pilot service is eligible for both VAT zero-rating and VAT exemption. A provider of zero-rated VAT services may opt to pay VAT or apply for VAT exemption instead by filing a relevant declaration; however, these taxpayers cannot elect for a VAT zero-rating in the subsequent 36 months.

Since the procedures for obtaining a tax refund for zero-rated VAT services are complex, taxpayers who have little input VAT deductible often opt for VAT exemption.

Zero-rated VAT calculation methods and treatments

For zero-rated VAT services, the exemption, credit and refund method applies to the provision of zero-rated services by taxpayers who adopt the general calculation method, while the exemption and refund method applies to foreign trade enterprises that provide both zero-rated and other services. These methods are as follows:

  • The exemption, credit and refund method: VAT is exempted, and the corresponding amount of input VAT is used to offset the amount of VAT payable – any surplus is refunded.
  • The exemption and refund method: VAT is exempted, and the corresponding input VAT on purchased taxable services is refunded.

Special VAT invoice cannot be issued for zero-rated services. Providers of zero-rated taxable services should submit the following materials in order to qualify for the treatment:

  • An application form for recognition of export tax refund (exemption) eligibility and electronic data generated by the export tax refund (exemption) reporting system;
  • The relevant business licenses and permits for international transportation services;
  • The time charter and wet lease for international transportation services as well as the relevant contract or agreement for lessees leasing transportation tools via voyage charter;
  • The Technology Export Contract Registration Certificate for R&D and design services;
  • The certification qualification, the Foreign Trade Operator Filing Registration Form, and the PRC Customs Goods Import and Export Consignor Consignee Customs Registration Certificate for zero-rated VAT services providers that engage in export of goods but have not undergone export tax refund (exemption).

Following the recognition of the sales revenue from the provision of zero-rated VAT services, the service providers should file VAT returns and apply for refunds with the tax authority within the VAT filing period in the subsequent month (or quarter).

The service provider should collect all relevant certificates and apply for a refund between the subsequent month (or quarter) following revenue recognition and April 30 of the following year, or they will no longer be entitled to obtain the refund (exemption).

Among other materials, international transportation service providers should provide original copies of the cargo, passenger manifests, or other vouchers reflecting the service revenue. R&D and design service providers should provide the relevant Technology Export Contract Registration Certificate and R&D or design agreement signed with the overseas entity.

Obtaining VAT exemption

To obtain exemption for exported services, a written cross-border service contract must be signed with the service recipient. In addition, the entire income from the service must be obtained from overseas. Companies that utilize intercompany arrangements should note that no exemption can be applied if a local branch or company pays for the service.

Taxpayers providing VAT exempt exported services should conduct separate accounting for the sales volume of the exported services and calculate non-deductible input VAT. No special VAT invoice should be issued for VAT-exempt income.

To apply for exemption, taxpayers should conduct filing with the tax authority and submit materials, including the service agreement (translated into Chinese from any foreign language), proof that the service took place overseas, proof that the service recipient is located overseas, and any proof that the transport involves foreign destinations.

 

Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region.

 

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

Loophole In New Global Tax Evasion Crackdown: Why An International Effort May Be Blunted

A major new global transparency measure aimed at curbing cross-border tax evasion by requiring countries to share information on the wealth of each other’s nationals could be undermined by the abuse of  residency- and citizenship-for-sale schemes.

Tax justice campaigners say that some of these schemes are already being marketed as a means of circumventing the Organisation for Economic Co-operation and Development’s ground-breaking Common Reporting Standard, just as it gets under way.  In September, nearly 50 countries began implementing the CRS – the automatic annual exchange of financial data between tax authorities – with just over 50 more expected to do so late next year.

The CRS, agreed in 2014, is the latest and most ambitious transparency measure to be introduced in the wake of international concern over financial crime and massive data leaks revealing the scale of inter-jurisdictional tax avoidance and evasion, the most recent being the so-called Paradise Papers.

In 2012 research by former McKinsey chief economist James Henry showed that the global rich held at least $21 trillion in offshore tax havens.  It is a serious problem for many developing countries. According to the OECD, in 2012 more than 25% of all Latin American and almost 33% of all Middle Eastern and African household wealth was held abroad.  Yet while the case for the CRS, which the OECD developed with the G20, is strong, there are concerns over its effectiveness.

One is that many rich countries will not share data with poor ones because they do not have required confidentiality provisions – an issue the OECD is addressing. It says it is helping developing world CRS participants to build up their technical capacities and ensuring that developed members have legitimate reasons for not exchanging information with them.

The second is America’s decision to opt out of the initiative. Three years ago, Washington adopted its own transparency scheme called the Foreign Account Tax Compliance Act that requires international financial institutions to disclose information about US nationals. But it will only reciprocate through bilateral agreements with other jurisdictions, and even then the information provided is limited.

Now another CRS weakness is being highlighted. It appears that investors could circumvent the measure through residency and citizenship schemes offered by offshore jurisdictions.  Such schemes have expanded significantly in recent years. In 2014, the global rich spent an estimated $2 billion acquiring nationalities, according to a recent report in Fortune magazine.

Campaigners say the CRS might be evaded as follows. An investor purchases residency or citizenship in a tax haven, submitting their local – rather than home country – address to their offshore bank.  The bank, unless it has reason to suspect the fraud, then forwards the account holder’s details to domestic tax officials. Because the address given is local, the information will not be sent to their counterparts in the investor’s home country.

With the global clampdown on tax evasion – the UK alone netted £29 billion from tax evasion investigations last year – small offshore centres in particular are seeing their revenues decline and may regard residency- and citizenship-for-sale schemes as a way of compensating for that loss. For the moment, it seems that only some are pitching these programmes as a means of getting around the CRS.

Francis Weyzig, a senior policy advisor at Oxfam’s Dutch branch, Oxfam Novib, told Alaco, “Selling secrecy is no longer a sustainable business for many of the smaller jurisdictions because it is coming under pressure from global transparency measures. So they now have to sell something else. [For some] it is something to get around the CRS because that is the big new market.”

John Christensen, the chair of the advocacy group the Tax Justice Network, told Alaco that he understands that residency – and citizenship-for-sale schemes for offshore tax havens are being actively marketed by some law firms and banks as a means of circumventing the CRS. “Here we see a loophole as wide as a barn door,” he said.

Christensen points out, however, that tax authorities in first-world countries could intervene if they suspected one of their nationals was attempting to withhold details about their finances. He said officials might request relevant tax-related information from their counterparts, or the courts, in the offshore jurisdiction, although building a case for such a move may prove challenging.  ”That requires some kind of smoking gun, and that has always been the weakness of the tax information-on-request models,” he noted.

Journalist Oliver Bullough, who has researched the sale of citizenship and residency, suggested that the CRS loophole is of much more concern for developing-world authorities because many have neither the human nor the technological resources to detect – and then investigate – whether one of their nationals is withholding information about their offshore assets.

The OECD’s director for Tax Policy and Administration, Pascal Saint-Amans, told Alaco that the organisation is investigating this and other CRS weaknesses. He said a number of moves are being considered to deal with the problem, one of which would require offshore centres to notify the home country of those who purchase residency or citizenship. He pointed out, though, that finding a solution is complicated by the number of high tax jurisdictions that also market such schemes.

The OECD appears to be on the case. But with the CRS still in its infancy, it has to act quickly to ensure the credibility and integrity of a measure that has the potential to bolster significantly the cause of global tax transparency.

 

Yigal Chazan is an Associate at Alaco, a London-based business intelligence consultancy.

 

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

Malaysia’s 2018 Budget Proposal: Tax Incentives At The Forefront

On October 27, 2017, Malaysia’s Prime Minister Najib Abdul Razak tabled the country’s much anticipated 2018 budget. The new budget is in line with the government’s agenda to achieve Transformasi Nasional 2050 (TN50) or National Transformation 2050; TN50 is a 30 year-plan,first introduced in the budget 2017,that aims to make Malaysia one of the world’s top 20 countries by 2050.

Termed as a generous and people friendly budget, the proposed allocation for 2018 stands at RM280.25 billion (US$66.3 billion) – a rise of 7.5 percent from 2017. The Malaysian government has proposed several tax incentives for investors and venture capital firms in the 2018 budget. In this article, we look at the salient features of the budget and their implications for businesses.

Corporate tax and tax incentives

Capital allowance for ICT equipment and software

The budget pays attention to the upgrade of information and communication technology (ICT) equipment and communications systems, which is crucial for a strong digital infrastructure for businesses. Currently, expenditure incurred on the purchase of ICT equipment and software packages is eligible for the accelerated capital allowance (ACA), which effectively allows a full capital allowance claim in the year of acquisition. The budget 2018 proposes capital allowance claim at the rate of 20 percent initial allowance and 20 percent annual allowance on the following expenditure:

  • Expenditure incurred on the purchase of ICT equipment and computer software packages, with effect from the assessment year (AY) 2017; and
  • Development of customized software comprising of consultation fees, licensing fees and incidental fees related to software development. This proposal is effective from AY 2018.

Tax incentives for Malaysia’s capital market

To promote Malaysia’s capital market and make it internationally more competitive, the budget proposes a three-year exemption on stamp duty for exchange-traded funds (ETFs) and structured warrants (SW). It will be applicable on ETF and SW executed from January 1, 2018, to December 31, 2020.

Besides, the budget offers tax relief for venture capital companies equivalent to the amount of initial investment; tax deductions for angel investors in venture capital projects; income tax deductions for environmentally and socially responsible Islamic bond issuers; and income tax exemptions for fund managers of conventional socially responsible funds.

Implementation of Earning Stripping Rules

The budget proposes replacement of the thin capitalization rules by the Earning Stripping Rules (ESR), a new method introduced by the Organization for Economic Cooperation and Development (OECD). Under the ESR, the interest deduction on loans between related companies within the same group will be limited to a ratio to be determined by the Malaysian Inland Revenue Board (MIRB), ranging between 10 percent and 30 percent of the company’s profit before tax. The ESR rules will be effective from January 1, 2019.

Other tax incentives

The Principle Hub Incentive: To increase Malaysia’s competitiveness as a global operations center for multinational companies, the budget has extended the application period for principal hub tax incentive to December 31, 2020. The principal hub incentive was initially launched in 2015 to provide income tax exemptions for companies which set up global operation centers in Malaysia. Currently, this incentive is available for applications made to the Malaysian Investment Development Authority (MIDA) by April 30, 2018.

Extension of incentives for new four- and five-star hotels: To expand tourism, the budget has extended the tax incentive for investment in four- and five-star hotels for a further two years, while the tax incentive for tour operators has been extended to 2020. For medical tourism too, the investment tax allowance has been extended.

Personal income tax

To increase the disposable income of the middle-income group and to address the rising cost of living in Malaysia the budget proposes to cut individual income tax rates by two percentage points for those earning between RM 20,000 (US$4,730) to RM 70,000 (US$16,552) a year.

The five percent rate on income up to RM 35,000 (US$8,276) will be reduced to three percent; the 10 percent rate on income up to RM50,000 (US$11,823) will be lowered to eight percent, and the 16 percent rate on income up to RM70,000 will be cut to 14 percent.

Goods and services tax relief

In an attempt to lower the cost of business, the budget proposes an exemption from the goods and services tax (GST) on services provided by the local authorities beginning next year. The exemption will come into effect from April 1 or October 1, next year, as opted by the respective local governments. Local authorities will not, however, be exempted from GST on the acquisition of commercial buildings or land, petroleum, and on the importation of motor cars.

In addition to that, all reading materials, including magazines, comics, journals and periodical publications will be zero-rated from January 1, 2018. Further, there will be a total exemption from GST for handling services provided by operators at all ports in the country for the period between January 1, 2018, and December 31, 2020.

The GST appeal tribunal and customs appeal tribunal will be merged into a single customs appeal tribunal, to enable taxpayers to submit their appeals on both customs and GST matters from January 1, 2019.

Support for businesses

Fourth industrial revolution

For business communities, the budget focuses on building capacity and capability to ensure Malaysian corporates are well placed to ride the fourth industrial revolution.

In view of rapid technology development, the Malaysian government has taken several measures to help companies transform into industry 4 (the fourth industrial revolution) with an emphasis upon digital application, big data analytics, robotics and automation applications.

The government in its budget proposes that the ACA and an automation equipment allowance be provided on the first RM10 million (US$2.4 million) qualifying capital expenditure incurred in AY 2018 to AY 2020. This incentive would apply to applications received by the Malaysian Investment Development Authority (MIDA) from January 1, 2018, to December 31, 2020.

An increase in loans for small businesses

Realizing the significant contribution of the small and medium-sized enterprises (SMEs) in the nation’s growth and labor market, the Government has allocated RM200 million (US$47.3 million) for training programs, grants and soft loans for SMEs.

The budget proposes an allocation of about RM0.5 billion (US$118.2 million) into Tekun, a financial services agency that provides financing facilities for small enterprises, and RM200 million (US$47.3 million) into Amanah Ikhtiar Malaysia (AIM). The fund has benefited over 400,000 borrowers, of which the budget states to be majority women and good paymasters.

Other initiatives

Among other initiatives include a grant of RM245 million (US$58 million) under the domestic investment strategic fund, to upgrade smart manufacturing facilities. The Digital Free Trade Zone (DFTZ), first announced in Budget 2017, featured once again in Budget 2018. The initial phase of the DFTZ will enable 1,500 SMEs to participate in the economy, attract RM700 million (US$165.5 million) worth of investment and create 2,500 job opportunities. Additionally, the budget reduces the required minimum level of venture capital investment in a start-up business from 70 percent to 50 percent for the period 2018-2022.

 

 

Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region.

 

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

Thailand Modernizes Customs: These Are The Key Changes For Importers and Exporters

In May 2017, the government of Thailand published a new Customs Act B.E. 2560 (2017) in the country’s National Gazette, repealing the outdated and controversial Customs Act B.E. 2469 (1926). The new Act, scheduled to come into force from November 13, 2017, will herald a new era in customs and excise control in Thailand. With an aim to modernize Thailand’s customs law, the revised Act will significantly ease customs procedure and bring transparency in the country’s customs law. The changes will remove ambiguities present in the existing law and bring it closer to the international best practices in line with Thailand’s current free trade agreements. The agents and businesses involved in importing, exporting and the manufacturing of excisable goods in Thailand will greatly benefit from the new law.

Among the most notable changes introduced in the new act are a reduction in incentives and rewards to whistleblowers, clarification of customs offenses and reduction of statutory penalties, elimination of liability presumptions, and the imposition of deadlines for post-clearance audits and appeals, among others. In this article, we take a closer look at the key changes introduced in the new Customs Act, 2017.

Reduction in incentives and rewards

One of the significant changes introduced by the new law is the reduction in incentives and reward amount. The repelled law allowed Thai customs to reward officials and third-party whistleblowers for reporting instances of customs evasion and customs avoidance. Though helpful in identifying avoidance and evasion, the excessively generous rewards system facilitated wrongdoings in customs procedure and introduced biased audits and investigations. Under the new law, the commission paid to a customs officer and a whistleblower will be limited to Baht 5 million (US$150,875) per case, thereby eliminating any possibility of bias or wrongdoing.

Clarification of customs offenses and relaxation of penalties for evasion offenses

Under the previous law, customs offenses – smuggling, evasion and non-compliance in respect of restricted or prohibited goods, and the related criminal penalties were classified together under one section of the Act. This often failed to account for the considerable differences in the range of wrongdoing by an offender and charged penalties that were significantly out of proportion to the alleged wrongdoing.

The new Act makes the distinction in degree of customs offenses clearer. It also prescribes new methods for calculating the related penalties for evasion offenses – between 0.5 to 4 times the amounts of duty evaded only. Previously, such fines were calculated as four times the combined price of the good plus duty. The penalty rate for smuggling offenses, however, continues to remain at four times the duty-paid value of the goods, while non-compliance offenses are punishable at up to Baht 500,000 (US$ 5087)

Presumed liability

The new act also brings in a significant change to the principle of presumed liability for directors and officers. The previous act did not clearly define managing director, managing partner, and the person responsible for the operation of a juristic person.

Timeframe for customs post-clearance audit

The new Act allows customs officers to enter a company’s premises and carry out a post-clearance audit relating to imports and exports for up to five years from the date of import or export. The time period is in line with the record retention requirements under the Customs Act, as well as with the international practices.

Time limits for duty evaluation

Often customs officers in Thailand evaluate import and export duties too far back in time, causing trouble for companies that lose or misplace the required documents in the long time-gap. The new law attempts to resolve this matter by introducing a time limit for duty evaluation by officers.

Under the law, officers must evaluate duty within three years from the date of submission of an import or export entry clearance form. In exceptional cases wherein the customs officer cannot assess the duty within the stipulated time period, the Director-General of the customs department may extend the deadline by a maximum of two years. However, if the director believes that a taxpayer intended to avoid paying the duty, the officer may get an additional five years at the end of the extension period above, to assess the duty.

Appeal consideration period

The Act necessitates the Board of Appeal, an internal appellate review panel within the customs department, to conclude appeal cases within 180 days from the date of receipt of the appeal and other supporting documents.  In case the Board of Appeal does not finish reviewing the appeal within the specified deadline, the importer or exporter involved in the customs process may bring the case to the courts.

Duty refund

Under the new Act of 2017, the importers or exporters may claim a duty refund within three years from the date of shipment as opposed to the previous refund period of two years.

Import license

The previous law required importers to have their import license at the time of import, that is, the time the vessel carrying the shipment enters the port. The new Act changes the time of import for restricted goods to the time when the goods are taken out of customs control.

 

Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region.

 

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

Why Lebanon Should Think Twice Before Postponing Painful Fiscal Reforms

The government may postpone painful fiscal reforms, but it should be wary of relying on future oil and gas wealth to address its public finances.

Having recently resolved longstanding political stalemates, Lebanon must now address a looming public debt crisis threatening the economy. While far-reaching budgetary reforms are likely to face parliamentary opposition and fuel unrest, this may be the only option as promising offshore oil and gas deposits are not expected to come on stream for some time.

A renewed focus on the economy comes as Lebanon’s political process begins to gather momentum after years of impasse. In May next year, the country is due to hold parliamentary elections for the first time in almost a decade.  The 82-year-old former Christian army chief Michel Aoun is about to mark one year as President, a role that was previously vacant for over two years.

Now that they have achieved a degree of political stability, politicians are finally in a position to tackle the country’s parlous public finances. The Lebanese state’s total debt currently amounts to one-and-a-half times the value of its annual economic output.  Each year the government spends almost half of its tax take servicing this debt.

According to Lebanon’s energy ministry, seismic surveys estimate that the country possesses 850 million barrels of oil and 96 trillion cubic feet of gas in offshore deposits. Such reserves would, if exploited, serve to significantly reduce the country’s debts and provide a major boost to the economy. On September 19 parliament passed an oil tax law, and bids for the first licensing round of two offshore blocks were submitted on October 12 by an international consortium involving Total, Eni and Novatek.  Final development agreements for the two blocks are set for January 2018.

Efforts to restore Lebanon’s political process received a major boost on June 16 when parliament ratified a new electoral law, paving the way for long-awaited parliamentary elections. The law’s ratification was hugely significant for a country whose Christian, Sunni and Shia politicians struggle to remain united in the face of the sectarian conflict which continues in neighbouring Syria. The breakthrough came a matter of months after another deadlock was broken with the appointment last October of a new President, albeit in controversial circumstances.  Aoun took up the position after striking a contentious alliance with Shiite militant group Hezbollah.

National assembly elections have not been held since June 2009 because the country’s political parties, which represent 11 different religious factions in parliament, disagreed over the rules of a new electoral law.  Ratification, alongside the appointment of Aoun to the Presidency, is a sign that the government may at last begin to tackle a large backlog of parliamentary bills which have accumulated during the period of political paralysis.

The priority is to pass the annual state budget, something the Lebanese parliament has not achieved since 2005.  This is badly needed to address the increasingly unsustainable public debt levels and resuscitate the economy.  Economic growth has been anaemic since the conflict in Syria broke out six years ago.

Failure to agree on annual budgets forces the government each year to re-enact the 2005 budget’s framework, with much additional funding chaotically provided for “exceptional” circumstances.  The process has led to unaccounted increases in government spending and a spiralling in the ratio of government debt to GDP, which stood at 149% by the end of 2016, according to the World Bank. The IMF forecasts that this figure is set to rise to 165% in 2022, higher than that of Greece.

In May the cabinet of Prime Minister Saad Hariri approved a draft budget for 2017, which proposed a raft of new revenue generating measures. It is due to be debated shortly in parliament, where the budgetary process has been derailed in the past because economic policies are so politicised.

Even if the budget is passed it could prove difficult to implement, as its fiscal reforms are expected to be unpopular.  A recent proposal to increase corporation tax and VAT in order to fund civil service salary increases was met with public protests in Beirut.

Although the tax take in Lebanon is seen by economists as insufficient, the Lebanese public are very sensitive to tax increases for two reasons: their own living standards have deteriorated in the past six years; and they resent the misuse of funds by corrupt public officials. All of which suggests that the government might allow public debt to rise even further, testing the confidence of sovereign bond investors, in the hope that future revenues from oil and gas deposits will solve the debt crisis.

In 2013 the Lebanese energy ministry launched a prequalification round for development of the country’s oil and gas deposits, but the process stalled because parties could not agree on licensing conditions.  With the election of Aoun last year, the process has now been revived.

While Bank Audi, a leading bank in Lebanon, estimates that the energy fields are worth over $600 billion, many are sceptical about their value, as it cannot be accurately assessed until exploration begins. Nevertheless, some commentators suggest that much like its neighbours in the Gulf, the government could in future years call upon Lebanon’s natural resources to keep the country afloat.

The development of oil and gas deposits would also be popular with the Lebanese public because, depending on how soon they could be exploited, they may obviate the need for austerity measures and end the chronic electricity shortages that leave some parts of the country without power for as much as 18 hours a day.

However, the exploration process is unlikely to be swift.  The October 12 licensing round received only the Total-Eni-Novatek consortium’s bid, which was for just two of the five offshore blocks on offer. And of the two blocks, one includes territory disputed by Israel. So if Lebanon puts off bold fiscal reforms, it could have to wait too long for oil and gas revenues to keep it solvent.

 

Matthew Bailey is an analyst at Alaco, a London-based business intelligence consultancy.

 

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

Hong Kong: The Country With the Simplest Tax System in APAC

Only two countries from Asia-Pacific (APAC) figure in the bottom 10 of the 2017 Financial Complexity Index constructed by the Netherlands-based TMF Group. The index has been designed to study the complexity of accounting and tax compliance frameworks globally. The bottom 10 represents countries with the least complex systems.

The Group had selected 94 countries for the analysis, 20 of which were from APAC. Among the two which made the bottom 10 from the region were Hong Kong and Cambodia. Since the report only highlighted the former, we’ll take a closer look into this jurisdiction below along with its standing in the World Bank’s Doing Business report.

Hong Kong

Hong Kong is the fourth best place for doing business in the world and the second best in Asia. Singapore is the best place of doing business from APAC, ranking second in the world according to the Doing Business report.

Though we’ve highlighted ‘paying taxes’ as the parameter in which the country has done the best – it ranks third in the world – there are other criteria in which it has the same ranking, including ‘protecting minority investors’ and ‘starting a business’ among others. Given the focus on tax systems, the aforementioned parameter was the most relevant, thus finding a place on the table above.

Better tax system

Though Hong Kong takes second place to Singapore as a place of doing business in APAC, it has the simpler of the two tax systems according to the Complexity Index. This is, in a limited way, corroborated by the Doing Business report as well, which ranks Singapore 8th in the world in ‘paying taxes’.

The country does not levy any sales or value-added tax. It asks for only three taxes – salary, corporate income, and property.

A feature highlighted by the report which makes the tax system in Hong Kong attractive is that taxes are levied on a territorial basis. This implies that if an entity has global operations, it has to pay taxes only on income from its Hong Kong offices. This feature is available to all entities and is not affected by the residential status of taxpayers.

There are a few regulatory requirements that entities need to adhere to though. The report cited the requirement of keeping accounting records for seven years. There is a provision of heavy fines for directors if bookkeeping requirements are not met.

However, this is not a big ask for doing business in one of the most important financial centers in APAC. This simple system also justifies the “One country, two systems” philosophy. While China is on the list among the 10 countries with the most complex tax systems, Hone Kong leads the region with the simplest system.

The Tax Systems In These Three Nations In The Americas Rank Amongst Top 10 Globally

For the 2017 Financial Complexity Index, the Netherlands-based TMF Group has chosen 24 countries from the Americas in a total of 94 jurisdictions.

The region is home to the two most friendly and easy to comply with tax and accounting systems in the world – Cayman Islands and British Virgin Islands. Along with Curacao, these three figure in the bottom 10 of the Financial Complexity Index, i.e. among the simplest frameworks in the world.

Let’s look at what makes the tax structures in the Cayman and British Virgin Islands the simplest in the world.

Cayman Islands

In an earlier series in which we had looked at the ten most complex tax systems in the world, we had introduced the outline of the parameters used by the TFM Group for creating the Index. These four parameters are:

  • Compliance
  • Reporting
  • Bookkeeping
  • Tax

The tax system in Cayman Islands ranks the least complex in the world on two of these criteria – compliance and bookkeeping. While Greece, with a score of 78%, has the most complex system in the world when it comes to compliance, and the global average is 60%, Cayman Islands scores 32% on this parameter.

Meanwhile, Mexico tops the world in terms of complexity in the bookkeeping parameter with a score of 84%, Cayman Islands is the least complex with a score of just 27%; the global average is 51%.

As we have seen in the opening article of this series, Cayman Islands does not levy any income, capital gains, profits, or estate tax and there are no restrictions on foreign exchange movement.

Further, companies incorporated in this geography are not required to adhere to a specific accounting standard; they just need to maintain books of accounts according to any accounting system they deem fit.

The Complexity Report stated that the territory has not made announcements about any forthcoming changes to its tax and accounting framework. Given that the system is adored by businesses, there seems to be little reason to tinker with it.

British Virgin Islands

The British Virgin Islands (BVI) allows registered firms and their partners to make use of any accounting standards used in countries where they do business. The territory does not levy several taxes like profits, sales, income, and value-added, among others.

Alike Cayman Islands, BVI also does not impose any restrictions on foreign exchange. Further, it also does not intend to change the existing system, and given its simplicity, it does not need to.

Why Is the Tax and Accounting Framework So Attractive In These EMEA Countries?

The Europe, Middle East, & Africa (EMEA) region is well represented in the Financial Complexity Index for 2017, with 50 of 94 total countries from the geography. The Index, prepared by the Netherlands-based TMF Group, ranks countries on the basis of the complexity of their accounting and tax compliance frameworks.

Four countries from EMEA had made it to the top 10 list of most complex jurisdictions. Interestingly, the region has dominated the top 10 simplest list as well, with half of these countries belonging to the region. The five nations are: the United Arab Emirates (UAE), Jersey, Kosovo, Switzerland, and Qatar.

After viewing the top ten countries with the least complicated tax and accounting frameworks in the previous article, the following is a closer look at the top two systems from the region. In order to add another dimension to the analysis, we have also included each countries ranking in the World Bank’s Doing Business report.

Please keep in mind that the lower a nation is ranked in the Complexity Index, the simpler its tax and accounting system.

United Arab Emirates

We’ve already undertaken an overview of the factors which make the UAE the simplest jurisdiction in EMEA.

Apart from it being a nil-tax country, the UAE is a notable international financial center and is in a convenient time zone, the Complexity Index report noted.

The UAE is also a good place to do business, ranking 26th in the world according to the Doing Business report. On the ‘paying taxes’ parameter, the country is the best in the world and ranks within the top 10 on ‘protecting minority investors.’

However, the Complexity Index report was not positive about the simplicity of the country’s tax system going forward. It noted that VAT will be implemented from the beginning of 2018, making accounting more complex because of tax compliance necessities.

Time will tell if its superior ranking takes a hit because of this measure.

Jersey

Jersey is not ranked by the World Bank in its Doing Business report, thus restricting us to the assessment of only its tax and accounting structure based on the observations made by the TMF Group.

The Group notes that though accounts are maintained and annual accounts are required to be made and ratified by directors or trustees, the laws allow for flexibility in the format of accounts and details included. The only direction provided is to apply the adopted accounting standard consistently. Further, private companies are generally exempt from audits.

The Group does not anticipate any changes to those sections of the Jersey Company and Trust law which impacts the accounting requirements.

The 10 Countries With the Most Friendly Tax and Accounting Systems In The World

In a world of increasing complexity, there are few business destinations which can attract firms to set up shop with claims of truly easy tax and accounting systems, policies, and procedures.

In a previous series, we had studied the financial system of the world’s most complex tax and accounting jurisdictions. In this one, we’ll look at diametrically opposite countries.

The study over the complexity of tax and accounting systems was carried out by the Netherlands-headquartered TMF Group in its Financial Complexity Index for 2017. The TMF Group had shortlisted 94 countries for its study, 50 of which were from the Europe, Middle East, & Africa (EMEA) region, 24 were from the Americas, and 20 were from Asia-Pacific (APAC). The table below shows the top ten least complex jurisdictions.

Let’s take a brief overview of the world’s top three countries with the friendliest tax and accounting systems.

Cayman Islands

The Cayman Islands have emerged as the easiest jurisdiction in terms of tax and accounting compliance. A “stable economic and political climate and sound legal framework” makes for an attractive business destination, the report observes.

The country does not levy any income, capital gains, profits, or estate tax. Its strict bank secrecy laws are an attractive selling point as a place for business, and no restrictions on foreign exchange transactions enhances its appeal.

British Virgin Islands

The British Virgin Islands (BVI), ranked second according to the Complexity Index report with “The country’s central location and favorable commercial environment makes the BVI very attractive for international investors.”

One of the most appealing aspects of the BVI is that a company incorporated there, along with its partner firms, can adopt any accounting standard from the countries in which they function.

BVI does not levy any profit, sales, income, capital gains, or value-added taxes. Alike the Cayman Islands, there are no restrictions on foreign currency movements.

United Arab Emirates

While the Complexity Index report says that the United Arab Emirates (UAE) is “among the least complex nations in the world,” a little complexity does creep in due to the differences amongst the over 35 free zones in the emirate.

However, given that the UAE is a no-tax jurisdiction, and does not place any limits on repatriation of capital or profits, it significantly drives down accounting complexity and continues to attract businesses.

After this brief overview, let’s look at the top two simplest jurisdictions of each region in detail, starting with EMEA.

Complying With Tax Systems in These Three APAC Countries Is Demanding

The TMF Group has chosen 20 countries from the Asia-Pacific (APAC) region for its Financial Complexity Index for 2017.

We’ll take a closer look at the top three systems from the region in this article and also add another dimension to the analysis by looking at the overall and parameter specific performance of these countries in the World Bank’s Doing Business report.

Vietnam

Vietnam has emerged as the country with the most complex tax and accounting system from APAC. Citing foreign nationals, the report says that its regulations on business are “unnecessary and overly burdensome,” due to multiple licensing requirements.

One of the aspects which make the tax system cumbersome is the increased goals for tax auditing in order to combat tax evasion, which has resulted in higher frequencies of investigations. Apart from regular filings, firms are required to prepare monthly, quarterly, semi-annual and yearly reports.

Further, accounting documents need to be stored for a decade and though English can be used, Vietnamese is mandatory to comply with accounting requirements.

It is little wonder that ‘paying taxes’ is the parameter Vietnam fares the worst on, ranking 167th among 190 nations according to the Doing Business report.

The Complexity Index report mentioned that the government has been revising the Vietnam Accounting Standard and System (VAS) to be in line with the IFRS, among other probable improvements.

The country has been making efforts to diversify its economy and attract foreign investment. An improvement in the tax system will be crucial in doing that.

India and China

We’re jointly looking at the cases of India and China because of the similar problems that they face.

According to the Doing Business report, both fare poorly on ‘dealing with construction permits’ and ‘paying taxes’. In fact, India is the sixth worst in the world when it comes to the former parameter.

While China’s system is burdensome due to the mandatory usage of Chinese language and the usage of the renminbi as the denominated currency, the tax system in India is multi-layered and requires cross-border compliance, with multiple entities administering multiple rates.

Companies in China need to employ the services of a registered tax specialist as VAT invoice purchases can only be done by such an entity. Further, movement of foreign currency is heavily regulated by the State Administration of Foreign Exchange. Annual reports need to be submitted to multiple ministries and authorities.

On the other hand, doing business in India means adhering to the Foreign Exchange Management Act (FEMA), the Income Tax Act, and the tax laws of all states and union territories depending on the size and scope of the business.

For the future, the report noted that China is trying to simplify its VAT rate, and the digitization of the tax compliance system is expected to simplify a lot of administrative hassles currently faced.

Meanwhile, India has already taken a major step to reduce the multiplicity of taxes by introducing the Goods and Services Tax (GST). This ‘one nation, one tax regime’ system is scheduled to come into effect from July 1, 2017.

Given the expected growth of Asia in general and the importance of India and China in particular, it is vital for these countries to simplify doing business in order to entice foreign companies towards their shores.

The Three South American Nations with the Most Challenging Tax Systems In The Region

24 countries from the Americas were chosen for TMF Group’s Financial Complexity Index for 2017.

We’ll look in depth at the top three systems from the region in this article and have added another dimension to the analysis by looking at the overall and parameter specific performance in the World Bank’s Doing Business report of these countries.

Brazil

We’ve already seen some challenges on the tax and accounting front that the country imposes on entities operating within their framework in the second article of this series. These mostly relate to the multi-level and multi-rate tax system making it difficult for even well-intentioned companies to ensure full compliance.

Brazil is not an easy place to do business either. The country ranks a low 123 among 190 nations evaluated for the Doing Business survey. And supporting the TMF Group’s assessment on a complex tax structure is the country’s rank of the ‘paying taxes’ parameter in the Doing Business survey, where it ranks 181 – placing it among the bottom 10.

As far as future developments in its tax system are concerned, the Complexity Index report observes that it could become even more complex in the short-term referring to the move to a more controlled automatic tax reporting system. But it remains positive about the longer-term implications of some initiatives like eSocial.

Colombia

A major reason which makes Colombia’s tax system difficult is the wording of its tax rules, which allows for different interpretations, according to the 2017 Financial Complexity Index report. The report also noted that though Colombia transitioned to IFRS in 2016, some differences between accounting and tax books remain.

Further, requirement of adherence to strict rules like keeping commercial documents for 20 years and tax ones for five years add to the complexity of the system.

Among the three countries from the Americas in the top 10 most complex global tax and accounting systems, Colombia is the best place to do business, ranking 53 among 190 nations. In fact, the country is the second best in the world on the ‘getting credit’ parameter. However, ‘enforcing contracts’ and ‘paying taxes’ remain challenging areas for the country and both are detrimental to conducting business.

The Complexity Index report outlines that the country is continuing to undertake tax reforms. Starting this year, the number of declarations required to be submitted have been reduced. Further improvements will make the country stand out, especially in Latin America.

Argentina

Double-taxation issues plague Argentina due to tax collection being spread across multiple jurisdictions of the national, provincial, and municipal governments.

The Complexity Index report highlighted that even though several firms have moved to the IFRS regime, companies which are regulated by entities other than the National Value Commission (CNV), like financial institutions and insurance companies, are not permitted to apply the standards.

Meanwhile, according to the Doing Business report, ‘paying taxes’ is the parameter that the country has fared quite poorly in, ranking 178th among 190 countries.

The Complexity Index report anticipates reforms to the tax system, specifically regarding possible reductions in taxes on salaries and banking.