This edition of the Asia Tax Bulletin is filled with many tax developments, especially in the ASEAN countries and China. China issued a draft of a new VAT law and a Consumption tax law and issued clarifications on the recently amended individual income tax law.

Indonesia came out with draft proposals for a radical reform of the way individuals are taxed, which will give exciting opportunities to individuals resident in Indonesia. It also came out with tax measures to tax foreign digital companies.

Japan introduced an increase of its consumption tax and Korea launched a task force to monitor taxation of digital companies. Malaysia is also now going to tax foreign digital businesses as of 2020. Malaysia issued its annual government budget in October 2019.

The Philippines Board of Internal Revenue issued transfer pricing audit guidelines and Taiwan proposes a reduction of the retained earnings tax provided that substantial investments are made in Taiwan by the Taiwanese business. Finally, as regards Vietnamese taxation, the Hanoi tax department issued clarifications on a host of matters which are highlighted in this edition.

CHINA (PRC)

Draft Value Added Tax Law Released for Public Consultation

The Ministry of Finance (MoF) and the State Taxation Administration (SAT) released the draft Value Added Tax (VAT) Law (the draft VAT Law), which is now open to public consultation. Any comments should be submitted to the MoF before 26 December 2019. The draft VAT Law contains nine chapters and 47 articles. The main content is set out below.

TAXPAYERS AND WITHHOLDING AGENTS

  • Taxpayers are entities or individuals that are engaged in taxable transactions that do not exceed the tax threshold of CNY 300,000 per quarter. Recipients of imported goods are VAT taxpayers.
  • Entities and individuals engaged in taxable transactions that do not exceed the above tax threshold are not considered VAT taxpayers; however, they may opt to register as VAT taxpayers to pay VAT.
  • In the case of taxable transactions carried out within the territory of China by foreign entities or individuals, the purchaser will be withholding agent.

VAT TAX RATES AND VAT COLLECTION RATE

  • The draft VAT Law provides the following rates:
    • 13% for the supply of goods, processing, repairs and repairs services, leasing services of tangible movable property and imported goods;
    • 9% for the supply of transportation services, postal services, basic telecommunications, construction, leasing services of real estate, granting land use rights, sales or import of agricultural products and other goods;
    • 6% for distribution services, intangible assets and financial goods; and
    • 3% collection rate for small-scale VAT taxpayer rate (i.e. VAT at a low rate and no input tax credit granted).

TAXABLE AMOUNT

  • The draft VAT Law clarifies that the taxable amount is the consideration for taxable transactions, including all monetary or nonmonetary economic benefits. In the case of "mixed sales", the applicable tax rate for main business should apply.

VAT EXEMPTIONS

  • Supplies such as contraceptive pills or classic books and entities such as hospitals, museums or welfare institutions are exempt from VAT. The State Council may formulate special preferential VAT policies and report them to the Standing Committee of the National People's Congress in accordance with the needs of national economic and social development, or due to emergencies or any other reasons that have a significant impact on taxpayers' business activities.

FILING PERIODS

  • Depending on the circumstances, filing periods could be 10 or 15 days, a month, a quarter or half year.

TAX ADMINISTRATION

  • VAT is collected by the tax authorities. However, VAT on imported goods will be collected by the customs services. To facilitate a smooth transition, the current tax treatment may continue to apply up to five years after the implementation of the new law where it is necessary to do so.

Draft Consumption Tax Law

The Ministry of Finance (MoF) and the State Taxation Administration (SAT) have released the draft Consumption Tax Law (the draft law) for public consultation. Any comments should be submitted to the MoF or SAT before 2 January 2020. The draft law contains 23 articles.

TAXPAYERS

  • Entities and individuals engaged in the production, commissioned processing or importing of taxable consumption goods in(to) China are subject to consumption tax. The consumption tax is levied on the production, wholesale or retail sale of taxable goods, or on the goods that are not sold but are for the taxpayer's own use.

TAX RATES

  • The State Council can adjust the tax rates and report the adjustments to the Standing Committee of the National People's Congress. A taxpayer supplying different taxable goods subject to different tax rates has to calculate the sales proceeds and sales amount separately. If no such separate calculation is made, or if different taxable goods subject to different tax rates are sold in one package, the highest rate will apply.

DEDUCTIONS AND EXEMPTIONS

  • Consumption tax imposed on taxable goods used for the production of taxable consumption goods can be deducted from the consumption tax payable on goods produced or sold, e.g. consumption tax paid on tobacco products used for the production of cigarettes or cigars, or on petroleum for the production of petrol or diesel oil.
  • Export of taxable goods is exempt from consumption tax, unless it is provided otherwise by the State Council.
  • The State Council is authorised to stipulate exemptions or reductions of consumption tax and report them to the Standing Committee of the National People's Congress.

TAX ADMINISTRATION

  • Consumption tax will be collected by the tax authorities or, with respect to imported taxable consumer goods, by the customs service on behalf of the tax authorities. The State Council will issue the implementation rules in accordance with the draft law.

Gains on Transfer of Listed Shares and on Hong Kong Securities Investment Funds Trading

On 4 December 2019, the Ministry of Finance, State Taxation Administration and Securities Regulatory Committee jointly issued Circular [2019] No. 93 (the Circular) continuing the exemption from individual income tax for gains derived by Chinese individual investors from the transfer of shares listed on the Hong Kong Stock Exchange and from trading of Hong Kong securities investment funds through the recognised investment fund mechanism between Hong Kong and Shanghai and the same mechanism between Hong Kong and Shenzhen.

The previous exemptions were laid down in Circular [2017] No. 78 and Circular No. 154, respectively, which provided for an applicable period ending on 4 December 2019. Under the Circular, the exemptions have been extended until 31 December 2022.

INPUT VAT REFUND ON PURCHASE OF EQUIPMENT USED BY R&D INSTITUTIONS

On 25 November 2019, the Ministry of Finance (MoF), the Ministry of Commerce and the State Taxation Administration (SAT) released a circular (Circular [2019] No. 91) concerning the refund of input VAT on the purchase of equipment used by domestic research and development (R&D) institutions or foreign-invested R&D centres. The circular applies from 1 January 2019 to 31 December 2020.

The domestic R&D institutions that are eligible for the full refund of input VAT include the R&D or technology institutions designated and approved by the MoF, Customs Service, the Ministry of Science and Technology and the SAT, universities and designated platforms of small and medium-sized enterprises.

Foreign-invested R&D centres are also eligible for the refund if all the following conditions are satisfied:

  • for foreign-invested R&D centres established on or before 30 September 2009:
    • the invested amount is at least USD 5 million where the R&D centre is a separate entity with legal personality or a department of a company or branch and the R&D expenses exceed CNY 10 million on an annual basis;
    • staff engaged in R&D exceeds 90; and
    • the cumulative value of the equipment purchased is more than CNY 10 million; and
  • for foreign-invested R&D centres established on or after 1 October 2009:
    • the invested amount is at least USD 8 million where the R&D centre is a separate entity with legal personality or a department of a company or branch and the R&D expenses exceed CNY 10 million on an annual basis;
    • staff engaged in R&D exceeds 150; and
    • the cumulative value of the equipment purchased is more than CNY 20 million.

A foreign-invested R&D centre must be recognised as such by the competent department of commerce. A guideline for approval of foreign-invested R&D centres and a list of eligible equipment are attached to the circular. The previous circular on the same subject, Circular [2016] No. 121, was abolished on 11 November 2019.

Changes to Individual Income Tax

At a meeting of the State Council on 20 November 2019, it was decided that individual taxpayers whose annual comprehensive income is less than CNY 120,000 or whose tax payable after an annual tax settlement is mino, will be exempt from the annual tax settlement in the following two years. Moreover, from 1 January 2019 to 31 December 2023, only 50% of the employment income derived by crew working on a cross-ocean ship will be included in the tax base for individual income tax purposes if they sail on a ship for more than 183 days in a tax year.

The Ministry of Finance and the State Taxation Administration are expected to publish a circular to implement the decisions in the short term.

Downloads – Asia Tax Bulletin - Winter 2019/20

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This article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein. Please also read the JSM legal publications Disclaimer.