In This Edition

We are pleased to present the Winter 2021/22 edition of our firm's Asia Tax Bulletin.

Dear Reader,

Welcome to the Asia Tax Bulletin, winter 2021/22 edition. I would like to make a special note about the recent 'Grey-listing' of Hong Kong and Malaysia by the European Union (EU) – placing Hong Kong and Malaysia on its watchlist for blacklisting, unless they implement a tax reform prior to 2023 to amend the way they tax foreign investment income. In both jurisdictions, foreign investment income is not taxable regardless of whether the income is remitted and regardless of whether the receiving company has any economic substance. This enables investors to use companies without any economic substance to earn foreign investment income without being taxed on the income in these jurisdictions.

The EU requires Hong Kong and Malaysia to amend their tax legislation to either tax the foreign investment income or to introduce economic substance requirements; or other conditions which will make it less convenient to use these jurisdictions predominantly for international taxation planning purposes.

In relation to corporate investors Malaysia withdrew its tax exemption rule for foreign investment income (an exception applies until 2026 to foreign dividend income) with effect from 1 January 2022, meaning that offshore-sourced investment income is now generally subject to income tax in Malaysia if it is remitted to Malaysia. The question is whether this will be sufficient. Hong Kong has yet to take any measures so the international investment community will be watching closely.

If either jurisdiction fails to introduce satisfactory rules during 2022, the EU may decide to put them on its blacklist of tax havens, which may cause certain EU member states to impose punitive measures on the payment of investment income to companies in Hong Kong or Malaysia (e.g., higher withholding tax rates, non-deductibility for corporate income tax), and subsidiaries may be taxable in the hands of the EU-based parent company under controlled foreign company tax provisions in the EU member states. These jurisdictions might become less attractive for investment or as a gateway to Asia to EU investors.

With best wishes,
Pieter de Ridder

JURISDICTION: China (PRC)

Bond Interest Withholding Tax Exemption

At the State Council Executive Meeting on 27 October, it was decided that China will extend its tax exemption on bond interest for foreign investors until the end of 2025. The existing preferential treatment provided in China tax circular Caishui [2018] No. 108 provides a three-year tax exemption on bond interest up to 6 November 2021. This was formalised through the joint issuance by the Ministry of Finance and the State Taxation Administration of circular (Circular [2021] No. 34) on 22 November 2021.

The tax exemption covers both the 10% PRC Corporate Income Tax and 6% Value-added Tax for bond interest earned by foreign institutional investors who typically invest via three main China bond access routes, being: QFII; China Inter-bank Bond Market (CIBM) Direct; and the Bond Connect Scheme. It is anticipated that the extension this time should be in line with what was granted under Circular 108.

The extension of the tax incentive reflects China's strong commitment to attract global investment into the onshore bond market, supporting the continuing internationalisation of its vast corporate bank market.

Cancellation of Local Surtax on VAT on Imports and Inbound Services

For instance, services provided by overseas entities to Chinese entities may be subject to VAT. The Chinese entities, as service recipients, may therefore have to withhold VAT, as well as the local surtax for such transactions.

However, with the issuance of the Urban Maintenance and Construction Tax Law, State Administration of Taxation Announcement (2021) No. 26 and Ministry of Finance and State Administration of Taxation Announcement (2021) No. 28, effective from 1 September 2021, 1) import of goods; or 2) labor, services or intangible assets sold by overseas entities or individuals to domestic entities are no longer subject to the local surtax (i.e., Urban Maintenance and Construction Tax, Education Levy and Local Education Levy) on top of the related VAT paid.

Simplified Procedure for Unilateral Advance Pricing Agreements

The State Taxation Administration (SAT) issued SAT Public Notice [2021] No. 24 implementing the simplified application procedure for unilateral advance pricing agreements (APAs) with effect from 1 September 2021.

The circumstances under which the competent tax authority may deny an application are slightly different from the draft version and are restated below:

  • The enterprise is under special tax adjustment investigation or other tax investigations, and the case is still open.
  • The enterprise has failed to file the annual report form on related-party dealings pursuant to the relevant regulations and has not corrected the failure in a timely fashion.
  • The enterprise fails to prepare, maintain and provide contemporaneous documentation pursuant to the relevant regulations.
  • The information requested has not been provided or does not conform to the requirements of the competent tax authority and the failure is not rectified.
  • The enterprise does not cooperate with the competent tax authority in an on-site evaluation of functions and risks.

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