How to mitigate your taxes

PricewaterhouseCoopers partner Rod Houng-Lee explains some of the recent regional changes in tax law.
As the saying goes, only death and taxes are certain. But you can mitigate the pain of taxes by knowing what's new. Rod Houng-Lee, a partner at PricewaterhouseCoopers, offers his thoughts on global and regional tax planning.

Can you explain some of the recent tax developments in the Asia-Pacific region?

Recent tax reform in the Asia-Pacific region has mainly focused on increasing the level of foreign investment, encouraging innovation and development of high or new technology, promoting the financial industry and simplifying the tax system.

While tax reform is taking place in a number of territories in the region, the introduction of the long-awaited new Corporate Income Tax (CIT) law in China in particular, poses significant challenges to foreign investors. I will talk about this in more details after briefly going through some of the recent tax developments of the other territories.

We see that there is a trend in recent years within the region to lower the corporate income tax rate with an aim of attracting foreign investment. For example, Singapore has lowered its corporate income tax rate by two percentage points to 18%. Malaysia has lowered its corporate income tax rate by one percentage point to 27% and there will be a further reduction in the next two years to 25%. Hong Kong is going to reduce its rate by one percentage point to 16.5%. In Thailand, reduced corporate tax rates are available for enterprises satisfying certain criteria. Korea has just announced it will reduce its top corporate tax rate from 25% to 22% in June this year, and that the goal is to reduce it to 20% within five years. Taiwan and Vietnam are also planning or considering a reduction in their corporate tax rates. It is natural that countries within the region will attempt to follow each other to lower their tax rates in order to maintain their competitiveness within the region.

But while governments reduce corporate rates, donÆt they often increase other taxes?

Yes, the reduction in the corporate tax rate is, in some cases, accompanied by an increase in the indirect tax rate. For example, the goods and services tax (GST) rate in Singapore has increased by 2% as a result of the reduction in the corporate tax rate. Malaysia has been talking about introducing a GST although its implementation has been postponed and the revised implementation schedule has not been announced. Hong Kong also had a public consultation on having a GST but the idea was put on hold because of a lack of public support.

Are there other changes afoot?

In addition to reducing their corporate tax rate, many territories in the region have also stepped up their efforts to expand their treaty network to make themselves a better place for foreign investment. For example, China, Hong Kong, India, Japan and Singapore are among those which have either concluded new tax treaties or revised or initiated re-negotiation of existing treaties in the past 12 months.

With respect to the development of new or high technology, countries such as Japan and Singapore have recently offered new tax incentives for research and development activities in form of tax credit, generous tax deduction and other means.

In order to secure the position as the regional financial centre in Asia, various territories have introduced tax measures with an aim of promoting the financial industry. For example, in March 2006, Hong Kong passed legislation that offers tax exemption for profits derived by non-resident funds (or so-called ôoffshore fundsö) from certain transactions if certain conditions are met. Singapore has also introduced various tax incentives, such as tax exemption or concessionary tax rates for the financial industry, including the Islamic financing sector in recent years. Other countries that provide similar tax incentives include Japan, Malaysia, Thailand and Vietnam.

And what about China?

Going back to the reform of the CIT regime in China, the reform aims at establishing an income tax regime with a wide tax base and a simplified tax system with more stringent administration. The new CIT law was passed by ChinaÆs top legislature in March 2007 and became effective on January 1, 2008. The new law instigates the consolidation and unification of two separate enterprise income tax regimes for domestic-invested enterprises and foreign-invested enterprises into a single regime û a change that was imperative after ChinaÆs accession to the World Trade Organisation (WTO) as it provides a level tax playing field for domestic and foreign invested enterprises.

It also represents a fundamental change in ChinaÆs tax incentive policy to a ôpredominantly industry-oriented, limited geography-basedö basis. This should help shaping and directing the future development of the country. The new law also adopts a few well-known international tax concepts/rules such as the concept of ôtax resident enterprisesö, ôthin-capitalisationö rules and CFC rules to make the China tax system more compatible with the international tax practice.

Similar to China, the tax system in Vietnam is experiencing a period of significant change after becoming a WTO member in January 2007. Proposals to amend the Corporate Income Tax law with effect from 2009 are currently under discussion with the taxpayer community. As in China, whilst the changing tax landscape in Vietnam poses challenges for the investors, many companies are keen to invest or expand their operations in the country.

What are the biggest challenges that have arisen because of these new laws?

With the significant tax reform that is taking place, the biggest challenge perhaps comes from the interpretation of these new laws and regulations so as to ensure compliance and, more importantly, to grasp the tax planning opportunities that are available. Take China as an example, the CIT law only provides a framework of general tax provisions, many implementation and application details are being deliberately left to the detailed implementation regulations and supplementary circulars that were or are to be issued subsequently. Foreign investors who are interested in investing or expanding their operations in China, or any of the other rapidly developing territories in Asia, such as Vietnam, have to be watchful of the latest regulatory developments in order to be able to take appropriate and timely actions.
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