Asian governments bring in more tax incentives for domestic, foreign corporates (Part Four)

Special report: Regional taxation

Korea

The National Assembly approved Korea’s tax reform proposals in September 2001. Most of the proposed changes take effect from January 2002. Below are some of the major tax law changes.

Corporate income tax rates are reduced by one percent effective from the fiscal year commencing on or after January 2002. The tax base of Korean won 100 million or less is now tax at 15 percent (excluding a resident surtax of 10 percent), while any amount above KW100 million is subject to tax at 27 percent (excluding a resident surtax of 10 percent).

The Ministry of Finance and Economy said recently the liberalization of its foreign currency regulations in an attempt to develop a Northeast Asian business hub in Korea. The revisions, which affect the use of multi-netting‚ and the maximum amounts of loans to overseas parties, became effective July 2002.

The government now allows foreign multinational corporations in Korea to use multi-netting when setting their accounts receivable only to multinational companies whose main headquarters were located in Korea. If a multinational company opts to use multi-netting, it must report its use to the Bank of Korea. The banks share this information with tax authorities and the customs duties office so they may more closely monitor the company’s tax status.

Previously, a Korean company pother than a financial institution or an international trading company was allowed to lend funds to overseas parties only up to a maximum of $300,000. The revised regulations allow those companies to make loans up to $10 million. The company must report those loans to the Bank of Korea before the actual loan funding.

In the APA conference held December 2001, the National Tax Service (NTS) stated that it would train more tax officers to challenge domestic as well as foreign corporations on transfer prices with respect to overseas inter-company transactions. The NTS, which has a reputation for being aggressive with transfer pricing issues, recommends that all taxpayers adopt the APA approach to avoid risk of transfer pricing audit.

With the revision of the Corporate Income Tax Act, which took effect from the fiscal year commencing on or after January 2002, the categories of related parties have been expanded. They now include a company of a business group (rather than a large business group as specified in the Fair Trade Act), other associates of the business group, and directors of such associates. As a result, a larger number of transactions will be subject to the scrutiny of the NTS.

Malaysia

The more significant tax proposals presented the 2003 Budget on September 2002 are:

• The government proposed to cut corporate taxes for small- and medium enterprises (with paid-up capital of Malaysian ringgit 2.5 million and below) to 20 percent for chargeable income of up to MYR100,000. The tax rate on the chargeable income over and above MYR100,000 remains at 28 percent.

• To ensure a steady increase in the service sector’s investments, a regional distribution center will be granted full income tax exemption for 10 years, as well as imports and sales duty exemption on goods distribution purposes, subject to certain conditions.

• To attract more international firms to establish in Malaysia, operational headquarters will be exempt from income tax for 10 years.

• It is proposed that payments to non-residents for services performed outside Malaysia are not liable to withholding tax. This will be welcomed by regional treasury centers providing services to Malaysian entities that in the past had attracted withholding tax.

Singapore

An economic review committee (ERC) was set up by the Singapore Government in December 2001 to review various aspects of the Singapore development strategies and to formulate a blueprint to reshape the Singapore economy for the future.

The Minister of Finance in his budget speech in May 2002 adopted many of the key recommendations proposed by the ERC’s sub-committee on taxation. In particular, the minister agreed to cut both corporate and personal income tax rates. Other key changes such as group relief, the scrapping of the imputation system, the rationalization and expansion of various tax incentive schemes, and a shift away from taxes on consumption were also accepted. Some of the key changes adopted by the Singapore Government are: (summarized) Reduction in corporate tax rate. The corporate tax rate would be reduced by 2.5 percent to 22 percent in respect of income earned in 2002 (year of assessment 2003). This will be reduced to 20 percent by year of assessment 2005, although the rate for the year of assessment 2004 was not specified. As a result of the one-off tax rebate announced as part of the off-budget measures on October 2001, the effective tax rates on the first Singapore $10,000 and the next S$90,000 of taxable income will be reduced to 5.5 percent and 11 percent, respectively.

There have been concerns that the lowering of Singapore’s corporate tax rate could have wider implications in the context of anti-deferral or controlled foreign companies (CFC) legislation imposed by some of Singapore’s major trading partners and investor jurisdictions, notably the United States, the United Kingdom and Japan. However, as most CFC legislation looks at the substance of operations carried out by subsidiaries, companies carrying on bona- fide business operations should be unaffected by the reduction in Singapore’s corporate tax rates.

One-tier corporate taxation system. To facilitate Singapore as a holding company location and to reduce the associated tax cost and administrative burden, the existing imputing system is to be scrapped and replaced by a one-tier system under which profits are taxed at the corporate level only. The one-tier corporate taxation system will allow an efficient flow of dividends up through the corporate chain free of procedural and timing constraints that exist under the current imputation system. Dividends are therefore exempt from further tax when paid out to shareholders.

The changes will take effect starting Jan. 1, 2003. Transitional provisions will allow companies to pass on their accumulated franking credits to their shareholders until December 2007. During the five-year transitional period, however, existing exempt dividend balances will be payable without restrictions to all tiers of shareholders. While this may be good news for many companies, for investment holding companies funded by debt, this system results in tax leakage through the inability to deduct funding costs.

Group relief. The group relief system will allow corporate groups to set off the losses or excess capital allowances of one Singapore entity against the profits of another. The corporate groups must consist of a Singapore-incorporated parent company and all its Singapore-incorporated subsidiaries. The "group" is one where a 75-percent ownership relationship exists between the company surrendering the losses and the one receiving them, or both companies are 75-percent owned by another Singapore common parent company. The group relief provisions are effective from the year of assessment 2003 (fiscal year 2002).

Goods and services tax. The goods and services tax (GST) will be increased from the existing three percent to five percent effective January 2003. This is designed to shift from the reliance on direct taxes on income to a broader tax based on consumption, and to balance the revenue loss arising from the cuts in the corporate and personal income tax rates.

Other budgetary changes. To reduce administrative and compliance costs, the government is streamlining certain financial sector incentives, such as the approved fund manager scheme, Asian currency units, and approved securities companies. Manufacturing sector incentives, such as the development and expansion incentive and approved international shipping enterprises scheme, are also streamlined. Some of these incentives are also enhanced to attract innovative activities essential for Singapore to sustain its economic growth for the future. (To be continued)