Spotlight on tax themes and recent tax developments for banks in Asia
Banking on Tax, Issue 11
There continues to be many tax developments across Asia. Outlined below are just a few of the themes and more recent tax developments that affect banks and other financial institutions throughout the region.
Tax reform – a feature of the Asian tax landscape
The Japanese Government confirmed on 1 October 2013 that the Japanese consumption tax (JCT) rate will increase from 5 per cent to 8 per cent from 1 April 2014. The Government indicated that it expects to announce in August 2014 whether the second planned increase to 10 per cent tentatively scheduled for October 2015 will proceed.
The Japanese Government also released an outline of 2014 tax reform proposals which seek to stimulate business investment. Key proposals include:
- Introduction of a tax regime to promote venture capital investment: companies acquiring shares of a company through an investment limited partnership will be allowed to deduct part of the reserve for losses on such an investment
- Introduction of a tax regime to promote business reorganisation: qualifying companies will be allowed a partial deduction for the loss reserve on investments that relates to losses suffered from a decline in price of specified shares or debts
- Repeal of the special reconstruction corporate tax one year ahead of schedule: a 10 per cent surtax was to be applicable for three years from the fiscal year beginning on or after 1 April 2012. The early repeal will reduce the corporate effective tax rate from 38 per cent to 36 per cent.
Important regulatory reforms
In late September, the Chinese government officially launched the China (Shanghai) Pilot Free Trade Zone (FTZ) and related Administrative Committee. Among its many objectives is to open up the financial services sector in China. The Chinese government is expected to use the Shanghai FTZ to introduce policy reforms related to the internationalisation of the renminbi, the introduction of market interest rates and the facilitation of cross-border trade and investment flows (including changes to the foreign exchange administration system).
While some tax concessions have been announced, the thrust is regulatory reform, not tax advantages. Several domestic and foreign banks have been approved to set up branches or sub-branches and others are considering this. The scope of financial services conducted in the Shanghai FTZ will be influenced by the continuing dialogue between industry and the FTZ administrators.
India’s central bank announced on 6 November 2013 that it will permit foreign banks to convert their local operations from a branch structure to a local subsidiary. The announced rules provide “Near National Treatment” to a wholly owned subsidiary of a foreign bank. This will allow for opening of more branch outlets across India, an ability to raise rupee-based, non-equity capital and the possibility of acquiring private sector banks in India. However, a higher regulatory burden will be faced by foreign banks with a local subsidiary, including having to earmark 40 per cent of their lending to the "priority sector" (e.g. agriculture) and to commit more capital to India. Foreign banks will need to assess the strategic and business advantages of a local subsidiary, including tax considerations.
Regulatory developments increasingly have an impact on tax
Monetary Authority of Singapore (MAS) Notice 643, which deals with related-party transactions (RPTs) entered into by banks, highlights an overlap between regulatory compliance and tax. The guiding principle in MAS Notice 643 is that related parties must not derive inappropriate benefits from RPTs “that are reflected in the books of the bank in Singapore, in relation to its operations in Singapore”. The notice requires all RPTs to be conducted on an arm’s length basis – i.e. (a) conducted free of conflicts of interest and (b) on no more favourable terms and conditions than similar transactions with non-related parties under similar circumstances. The expectation is that banks will identify all related parties and “assess all existing exposures” as well as implement new policies and procedures to meet the requirements set out in the notice. While MAS Notice 643 does not seek to introduce a new or distinct arm’s length pricing standard to that required by the Inland Tax Authority of Singapore, existing transfer pricing policies and documentation will need to be reviewed and compared to the standard required by the notice. MAS Notice 643 will commence on 1 July 2014, but further consultation on it is anticipated.
Transfer pricing – a key tax challenge
Across Asia, transfer pricing developments include new rules and requirements and often aggressive tax audit positions being taken by tax authorities. For example, in Indonesia, SE-11/PJ/2013 (issued on 26 March 2013) states that “banking and insurance” will be one of the targeted industries for tax audits in 2013. The same tax circular notes that taxpayers, who have “high incompliance [sic] in relation to its related party transactions, especially those that have significant offshore related party transactions” will be chosen for tax audit. PER-22 (effective 1 July 2013) provides guidelines for transfer pricing audits for taxpayers with special relationships and “required forms and documents” are to be submitted within seven days from the date of a request. Details of the net operating profit of group companies in the supply chain may be requested. The combined effect of SE-11/PJ/2013 and PER-22 is to reinforce the importance of preparing transfer pricing documentation in Indonesia to mitigate transfer pricing audit risk in Indonesia.
A trend towards indirect taxes
In the recent Malaysian Budget 2014, the Finance Minister announced the introduction of a Goods and Service Tax (GST) for Malaysia, effective from 1 April 2015, at the rate of 6 per cent, which will replace the current sales tax and service tax. Businesses have about 17 months to prepare for the Malaysian GST.
Financial services are to be treated as an exempt supply, although fee-based supplies such as loan-processing fees will be treated as taxable supplies. Life insurance/reinsurance will also be treated as exempt supplies. GST guidance has previously been released for insurance, funds management, hire purchase, credit leasing and money lending activities. GST guidance for the banking industry has not yet been released. The Malaysian Government’s intention is to introduce a Fixed Input Tax Credit (FITR) mechanism for financial services. This is similar to the mechanism used in Singapore. It is understood that the GST guidance for banking and the FITR mechanism should be released by the end of this year.