General Tax Update 1004 35

1 General tax update for financial institutions in Asia Pacific
General tax update for financial institutions

in Asia Pacific
Regional co-ordinator and editor -
April 2010, issue 35
Charles Kinsley, KPMG China
TAX
Highlights
Australia Legislative Developments

Case Law Update
Other Tax Development
China New Administrative Measures for Representative Offices in China

New Administrative Measures for Non-PRC Resident Enterprises with Permanent
Establishments in China
Clarification on Claiming Foreign Tax Credits in China
Hong Kong Hong Kong Budget Summary 2010-2011

Tax Treaties Update
Agreement in Principle on the Income Tax Agreement between Hong Kong and Japan
India Cases Update
Indonesia USA Indonesia Double Tax Treaty

VAT Law Amendments
Benchmarking Ratio
Japan New Japan Netherlands Tax Treaty

2010 Tax Reform
Korea 2010 Tax Reform Proposal
Malaysia Real Property Gains Tax

Finance Act 2010
Double Taxation Agreements
Labuan Offshore Business Activity Tax (Amendment) Act 2010
Mauritius Tax Ruling and Statement of Practice Update

New Zealand Major Banks Settle Tax Cases with Inland Revenue Department
Tax Working Group
Philippines Legislation development

Other Tax Developments
Singapore Singapore Budget 2010
Taiwan Extension to the Securities Transactions Tax Exemption
2010 KPMG Tax Limited is owned by KPMG, a Hong Kong partnership and the Hong Kong member firm of KPMG International, a Swiss cooperative. All rights reserved.
Australia STop
Tax update
Legislative Developments
On 4 December 2009, the Tax Laws Amendment (2009

Measures No. 5) Bill 2009 (Bill) received Royal Assent.
As noted in Issue 34, the Bill was passed by the Senate on 26
November 2009 and includes provisions to (amongst other
things):
Amend the pay as you go (PAYG) instalment provisions to
address issues arising out of the Tax Laws Amendment
(Taxation of Financial Arrangements) Act 2009
Extend eligibility for exemption from interest withholding tax
to debt issued in Australia by the Commonwealth or
Commonwealth authorities.
On 17 December 2009, the Assistant Treasurer released
Exposure Draft legislation for public consultation, together with
explanatory material, on the proposed changes to the Tax Laws
thin capitalisation rules.
The proposed changes, which were announced in the Federal
Budget 2009-10, will apply to authorised deposit taking
institutions (ADIs) and will clarify how Treasury shares, the
business insurance asset known as excess market value over
net assets (EMVONA) and capitalised software costs, will be
treated under the thin capitalisation provisions.
The proposed amendments in the draft legislation will adjust
some of the impacts of the 2005 adoption of the Australian
equivalent to International Financial Reporting Standards (AIFRS)
on the thin capitalisation position of ADIs. Amendments made in
2008 adjust some of the impact of AIFRS on the thin
capitalisation position of non-ADI entities.
Public consultation was due by 15 January 2010.
On 18 December 2009, the Government released Exposure
Draft legislation entitled Tax Laws Amendment (Foreign Source
Income Deferral) Bill (No.1) 2010 (Exposure Draft) for public
consultation, with proposed amendments that would repeal the
foreign investment fund (FIF) and deemed present entitlement
(DPE) rules.
These proposed changes were first announced by the
Government in the 2009-10 Federal Budget as part of wider
reforms to Australias foreign source income anti-tax-deferral
(attribution) rules.
The Exposure Draft represents the first stage of implementing
the attribution rules reform.
KPMG has published a brief entitled International Tax:
Government releases draft legislation repealing the FIF rules,
which outlines the key features of the Exposure Draft.
On 11 March 2010, the International Tax Agreements
Amendment Bill (No. 1) 2010 (Bill) received Royal Assent. The
Bill was previously introduced into Parliament as the
International Tax Agreements Amendment Bill (No. 2) 2009 and
was passed by the Senate on 25 February 2010.
Broadly, the Bill proposes to (amongst other things) extend the
force of law in Australia to the new Double Tax Agreement
between Australia and New Zealand (Treaty), which was signed
in June 2009 and replaced the existing 1995 treaty and 2005
amending protocol.
In respect of interest income, a nil rate of withholding tax is
applicable in relation to interest income derived by certain
financial institutions. This is on the basis that in relation to
interest paid from New Zealand, the 2 percent New Zealand
approved issuer levy has been paid.
A 10 percent rate of withholding tax will apply in respect of all
other interest income derived from the source country.
In respect of royalties, the general withholding tax rate for
royalties will be reduced from 10 to 5 percent.
Further, amounts derived from leasing industrial, commercial or
scientific equipment will no longer constitute a royalty for the
purposes of the Treaty.
On 10 February 2010, the Tax Laws Amendment (2010
Measures No. 1) Bill 2010 (the Bill) was introduced into the
House of Representatives.
Broadly, the Bill proposes to (amongst other things) amend

the Income Tax Assessment Act 1997 (ITAA 1997) to achieve
the following:
Tax consolidation
The Bill proposes to make various amendments to ITAA 1997 to:

Clarify the operation of certain aspects of the tax
consolidation regime
Improve interaction between the tax consolidation regime
and other parts of the income tax law.

The tax consolidation amendments are extensive and include
both optional and mandatory retrospective start dates often
applying from 1 July 2002.
Tax consolidated groups will need to revisit the tax outcome
arising from formation calculations, as well as the tax cost
setting computations for subsequent joining and exiting entities.
The review of previous tax cost setting computations will firstly
need to consider the mandatory retrospective elements of the
proposed amendments. The use of the optional retrospective
elements should then be considered, including the form and the
deadlines for making such choices and the financial statement
ramifications.
Tax consolidated groups contemplating acquisitions and

disposals going forward will need to understand all the changes
to tax cost setting processes in order to appreciate the tax effect
impact.
KPMG has prepared a Brief which outlines the significant

proposed amendments included in the Bill. We recommend that
any entity that is part of an Australian tax consolidated group
consider the specific amendments in further detail.
Managed Investment Trusts
The Bill proposes to amend ITAA 1997 to allow eligible managed
investment trusts (MIT) to make an irrevocable election to apply
the capital gains tax (CGT) provisions as the primary code for the
taxation of gains and losses on the disposal of certain assets
(primarily shares, units and real property). If an MIT is eligible to
make an election and has not done so, then any gains or losses
on the disposal of eligible assets (excluding land, an interest in
land, or an option to acquire or dispose of such an asset) will be
treated on revenue account.
These amendments, if enacted, will broadly apply in relation to
eligible capital gains tax events that happen on or after the start
of the 2008-09 income year.
KPMG issued a publication entitled Tax in Focus Brief 10TiF-
007: Tax consolidation amendments on 17 February 2010 in
relation to the Bill.
In addition, on 10 February 2010, the Assistant Treasurer issued
a media release announcing a proposal to expand the definition
of an MIT for the purposes of the withholding tax rules to include
both wholesale managed investment schemes and government-
owned managed investment schemes, subject to appropriate
integrity rules. The expanded definition of an MIT ensures a
closer alignment of the withholding tax definition, with the
extended definition of an MIT contained in the capital election
reforms.
The proposed changes to expand the definition of an MIT will
effect certain distributions from MITs made in relation to the

period commencing from 1 July 2010.
Case Law Update
On 26 November 2009, the Federal Court of Australia (FCA)

handed down its decision in Ashwick (Qld) No 127 v
Commissioner of Taxation [2009] FCA 1388, allowing deductions
for the write-off of interest and principal arising from intra-group
loans between numerous taxpayer companies in the Fosters
Group Limited group (the group) during a period of the groups
restructuring.
The factual background to the arrangement is quite complex and
was included in a KPMG brief prepared in respect of the case.
The case considered the deductibility of intra-group bad debts
written off, the deductibility of interest expenses incurred by
borrowing companies within the group, the deductibility of
losses transferred to members of the group, and the application
of anti-avoidance provisions to the scheme identified by the
Commissioner.
The FCA held broadly that:
The bad debts written off were deductible on the basis that
they were incurred in the ordinary course of the intra-group
lending entities business of lending money.
The interest incurred by the borrowing companies were
deductible on the basis that they were necessarily incurred in
the borrowing companys carrying on of a business for the
purpose of gaining or producing assessable income.
The losses arising from the written off bad debts were
available as a tax loss to other members within the group.
Anti-avoidance provisions did not apply, as the steps taken to
provide the members of the financing companies of the
group with loan funds did not constitute a scheme for
these purposes.
The case is of great relevance to taxpayers who have claimed
bad debt deductions or are in the process of considering their
position, particularly given the full coverage of the
Commissioners numerous arguments as to why an entity may
or may not be considered to be in the business of lending money
or why losses of the kind here would be on capital account.
On 28 January 2010, the Commissioner of Taxation lodged an
appeal with the Full Federal Court of Australia against the FCAs
decision.
Other Developments
On 16 December 2009, the Australian Taxation Office (ATO)

released Draft Taxation Ruling TR 2009/D6 and supporting
materials regarding transfer pricing and thin capitalisation issues

relating to intra-group finance guarantees and loans.
The key issue in the draft ruling is determining the arms
length interest rate for international related party debt. In this
respect, the draft ruling says that the arms length interest rate
needs to be determined in regard to the level of debt the
Australian subsidiary would be able to borrow in an arms length
dealing (the arms length debt amount) rather than the actual
level of debt (which is often geared towards the upper level of
the safe harbour thin capitalisation limit). This arms length
interest rate is then applied to the actual amount of the debt the
Australian subsidiary has in order to determine its deductible
interest costs and guarantee fees for the purposes of the
transfer pricing rules.
Notably, the ATO has proposed that the final Ruling on this issue
be applied retrospectively. The closing date for submissions to
the ATO in response to the Draft Ruling was 12 February 2010.
KPMG has issued a Transfer Pricing Update, which provides an
analysis of the ATOs draft ruling and related material.
On 16 December 2009, the Commissioner issued Draft Taxation
Determination 2009/D17 entitled Income tax: treaty shopping
can Part IVA of the Income Tax Assessment Act 1936 (ITAA
1936) apply to arrangements designed to alter the intended
effect of Australias International Tax Agreements network.
Broadly, the Commissioner considers that the anti-avoidance

rules contained in Part IVA of the ITAA 1936 apply to
arrangements designed to alter the intended effect of Australias
International Tax Agreements network. However, it will depend
upon whether a taxpayer has obtained a tax benefit in
connection with the scheme and it could be concluded that the
person, or one of the persons, who entered into or carried out
the scheme or any part of the scheme did so for the purpose of
enabling the relevant taxpayer to obtain a tax benefit in
connection with the scheme.
On 23 December 2009, the ATO released an updated 2010
international dealings schedule for financial services entities
(IDS-FS 2010) and draft instructions.
The IDS-FS 2010 requires disclosures of international dealings

and financial transactions (including related party transactions)
entered into by the taxpayer.
Completion of the IDS-FS 2010 will be optional for the 2009/10
income year. Financial services taxpayers (excluding
superannuation funds) with gross turnover of more than AUD
250 million for the 2008/9 income year and all foreign banks will
be eligible to complete the new form, but will not be required to
do so. Taxpayers who complete the IDS-FS 2010 will not be
required to complete the Schedule 25A and Thin capitalisation
schedules, which would otherwise need to be completed and
lodged with the Australian income tax return.

The ATO indicated that it intends to publish a draft IDS-FS 2011,
in January 2010, to assist in planning for the 2011 income year
and that this will be substantially based on the 2010 schedule. In
this respect, the draft IDS-FS 2011 has yet to be released.
The ATO has proposed that the IDS-FS 2011 will be mandatory
from the 2010/11 income year for financial services taxpayers
(excluding superannuation funds) with a gross turnover in
excess of AUD 250 million in the previous income year and for
all foreign banks.
On 5 January 2010, the Assistant Treasurer released a
consultation paper proposing the high-level design of the
taxation laws to modernise the controlled foreign company
(CFC) rules, including the re-design of Section 23AJ of the
Income Tax Assessment Act 1936 (ITAA 1936) dividend
exemption.
The reform of CFC rules was announced in the 2009-10 Budget
as part of wider reforms to Australias foreign source income
anti-tax deferral (attribution) rules.
Remaining reforms to the transferor trust and anti-roll-up rules
are still being developed.
Public submissions are due by 1 March 2010.
KPMG has published a brief entitled Government releases
consultation paper on CFC reforms, which outlines the key
implications arising from the consultant paper.
On 15 January 2010, the Assistant Treasurer released a report
entitled Australian Financial Centre Forum Report, Australia as
a Financial Centre -Building on our Strengths (the Johnson
Report), commissioned by the Government as part of its aim to
secure Australias future as a leading regional financial services
centre.
The Johnson Report sets out 19 recommendations intended to
substantially boost trade in financial services and further improve
the competitiveness and efficiency of the financial sector if
implemented. Some of the key recommendations and/or issues
highlighted in the Johnson Report include the following:
The introduction of an Investment Manager Regime (IMR)
designed to provide certainty on the tax treatment of the
funds management sector. The IMR would be limited to
entities operating within the financial sector, but its
application would extend to both retail and wholesale funds.
An exemption from Australian tax is proposed for investment
in all foreign assets by non-resident investors using an
independent resident investment advisor, fund manager,
broker, exchange or agent.
A streamlined process for an entity seeking an Offshore
Banking Unit (OBU) and regular updates/reviews in relation to
eligible OBU activities, which can be concessionally taxed at

10 percent (rather than the corporate tax rate of 30 percent).
This recommendation was made to improve the current
concessionally taxed Australian OBU regime, which is under
utilised due to existing unresolved issues in the existing tax
rules.
The removal of interest withholding tax in certain
circumstances to enable easier access to offshore sources of
funding, including financial institutions related party
borrowings, interest paid to foreign banks by their Australian
branches and interest paid on foreign raised funding by
Australian banks (including offshore deposits and deposits in
Australia by non-residents).
The Government has stated that it will provide its response to
the Report later this year, noting that the recommendations will
need to be considered in the context of the upcoming release of
the Australias Future Tax System (Henry) Review and the 2010-
11 Federal Budget.
KPMG has published a Reform in Focus brief entitled Financial
Centre Forum Report (Johnson Report): Australia as a Regional
Financial Centre, which analyses the Reports
recommendations and the key implications for businesses in the
financial services sector.
On 12 February 2010, the Minister for Trade released a
publication by Austrade entitled Islamic Finance, which
provides an overview of the concept of Islamic finance products
and the opportunities available to the Australian Financial
Services marketplace.
As part of the media release on 12 February 2010, the Minister
for Trade outlined the Governments commitment to addressing
taxation and regulatory issues that may inhibit the development
of Islamic Finance products in Australia.
China STop
Tax update
New Administrative Measures for Representative Offices
(ROs) in China
Overseas financial institutions which have established PRC ROs

may be adversely affected by recently introduced rules on the
taxation of ROs. On 20 February 2010, the State Administration of
Taxation (SAT) issued a tax notice, Guoshuifa [2010] No. 18
(Notice 18), to clarify the tax registration and deregistration
procedures, tax filing requirements, and corporate income tax (CIT)
liability calculations of PRC ROs of foreign enterprises. Effective
from 1 January 2010, Notice 18 has also revoked certain old tax
notices relating to administrative measures of ROs.
The key points of Notice 18 are as follows:
ROs are required to accurately account for income and
expenses and file quarterly CIT and business tax (BT) returns
on an actual basis.
ROs that do not meet the above requirements are subject to
PRC taxes on a deemed basis under either the cost plus
method or the actual revenue-based method (depending on
the information that the ROs can accurately account for).
The minimum deemed profit rate is 15 percent (as compared to
the previous 10 percent standard).
ROs that were previously granted a tax exemption will be
reassessed by tax authorities pursuant to principles under
applicable double tax treaties, and authorities will no longer
accept new RO tax exemption applications.
To claim tax treaty relief and CIT exemption, ROs should
comply with the application/filing procedures set out in
Guoshuifa [2009] No.124.
As a result of the implementation of Notice 18, an ROs CIT
liabilities are, generally speaking, likely to be higher than in the
past. Accordingly, foreign enterprises could consider converting
the RO into a wholly owned foreign enterprise to possibly achieve
tax savings going forward. However, regulatory restrictions and
business license requirements will also need to be considered, on

a case-by-case basis, to determine whether this conversion is
feasible.
New Administrative Measures for Non-PRC Resident

Enterprises with Permanent Establishments (PEs) in China
On 20 February 2010, the SAT issued Guoshuifa [2010] No. 19

(Notice 19), to clarify the basis for determining the CIT liability of
foreign enterprises with PEs in the PRC, excluding ROs (which are
dealt with under Notice 18 as discussed above). Notice 19 is
effective from 20 February 2010.
The key points of Notice 19 are as follows:
PEs that can not accurately account for income and expenses
are subject to PRC taxes on attributable profits on a deemed
basis under one of the three specified methods (depending on
the reliability of the financial information prepared by the PE),
namely the actual revenue-based method, cost-plus
method and expenditure gross-up method.
All of the three deemed profit methods stated above must
adopt minimum deemed profit rates, depending on the type of
business engaged by the PE, as follows:
15 to 30 percent for the provision of engineering work,
design or consulting services
30 to 50 percent for the provision of management services
Minimum of 15 percent for the provision of other services
or business activities other than services.
Historically, where the PRC tax authorities have sought to tax
foreign enterprises with PEs in the PRC, the deemed profit
rates adopted ranged from 10 to 40 percent. With the
introduction of Notice 19, the CIT liabilities for non-PRC
resident enterprises based on their deemed profits should
generally increase.
Where the services provided by a foreign enterprise are
rendered partially onshore in the PRC and partially offshore, the
revenue derived should be split between onshore and offshore
portions depending on the place where such services are
actually provided and other factors such as work volume, time
spent and associated costs. To allow for a reasonable
revenue split, the foreign enterprise must provide relevant
documents to the tax authorities for review and assessment.
Foreign enterprises should maintain proper documentation to
support their position.
The PE should submit an assessment form to the tax authorities
for review and assessment of the deemed profit rates used in
calculating the CIT liabilities.
Clarification on the Claiming of Foreign Tax Credits (FTCs) in

China
On 25 December 2009, the SAT and Ministry of Finance jointly

issued a tax notice, Caishui [2009] No. 125 (Notice 125), to clarify
the calculation method for FTCs available to a PRC company
deriving overseas income. Notice 125 affects PRC companies
(such as commercial banks) that have foreign subsidiaries and
overseas branches. The key points of Notice 125 are as follows:
A PRC company that is unable to accurately calculate the
actual tax paid in a foreign country on a country (region) by
country (region) basis will not be permitted to claim any
associated FTC in the current tax year and any subsequent
years.
Tax losses incurred by a PRC companys overseas business
establishment(s), including an overseas branch, should not be
offset against the companys China sourced profits; however,
such losses can be used to offset other taxable income from
the same country in the current and subsequent years.
The PRC company must hold (directly or indirectly) at least 20
percent of the shares in the foreign company[ies], and to
qualify for an FTC claim the foreign holding companies must
not exceed three layers.
Simplified calculation methods may be adopted for calculating
the FTC limit in respect of foreign-sourced income, subject to
satisfying specified conditions and approval from the tax
authorities.
For further information on Notice 125, please refer to Issue 3 of
China Alert. A link to this publication is provided below:
http://www.kpmg.com.hk/en/virtual_library/Tax/china_alert/2010/Is
sue03_1002.pdf
Hong Kong STop
Tax update
Hong Kong Budget Summary 2010-2011
On 24 February 2010, the Financial Secretary, John Tsang Chun-

wah, delivered his Budget Speech to the Legislative Council for
2010-2011. The key announcements relevant for financial
institutions are as follows:
The existing stamp duty concession on exchange traded funds

(ETFs) will be extended to cover ETFs that track an index
comprising no more than 40 percent of Hong Kong stock.
For the offshore funds exemption, the definition of central

management and control will be clarified in order to give
greater certainty in the application of the exemption.
Furthermore, the list of recognised stock exchanges and
futures exchanges, on which the specified transactions may be
carried out, is to be expanded to increase the usefulness of the
exemption. Subsequent to this announcement, paragraph 15
and Appendix B of Departmental Interpretation and Practice
Note No. 43 have been revised to clarify that for the purpose of
determining the location of a companys central management
and control, the mere fact that the majority of the directors of
the management board of the company are resident in Hong
Kong would not of itself adversely affect the application of the
offshore funds exemption.
For a summary of the implications of the proposed measures

announced by the Financial Secretary, please refer to the link
below.
http://www.kpmg.com/CN/en/IssuesAndInsights/ArticlesPublicatio
ns/Documents/hk_budget_summary_2009-10_0902.pdf
Tax Treaties
Hong Kong had recently signed comprehensive double taxation
agreements with Brunei, Indonesia and the Netherlands, which all
incorporate the 2004 OECD standard on exchange of information.
The new treaties will come into force after ratification procedures
are completed.
Under the new tax treaties, the withholding tax on dividends,
interest and royalties is as follows:
Brunei Indonesia The Netherlands
Dividends 0% 5% / 10% (2) 0% / 10% (3)
Interest 5% / 10% (1) 10% 0%
Royalties 5% 5% 3%
Notes:
1 The withholding tax on interest is reduced to 5% where the
recipient is a bank or a financial institution.
2 The withholding tax on dividends is reduced to 5% where
the recipient is a company holding at least 25% of the
share capital of the paying company.
3 The withholding tax on dividends is reduced to nil where
the recipient is a qualifying person holding at least 10% of
the issued share capital of the paying company, or a bank,

insurance company, pension fund, headquarter company
and other qualifying entities.
For a summary of the implications under the new treaties, please
refer to the link below.
http://www.kpmg.com/CN/en/IssuesAndInsights/ArticlesPublicatio
ns/Newsletters/Tax-alert/Documents/tax-alert-1003-06.pdf
Agreement in Principle on the Income Tax Agreement
between Hong Kong and Japan
The Governments of the Hong Kong SAR and Japan have reached
consensus on an agreement for the avoidance of double taxation.
The key provisions of this agreement:
Clarify the scope of taxation on business profits of enterprises
operating in each other's places.
Reduce the withholding tax rates of dividends, interest and
royalties paid to residents of the parties as follows:
The withholding tax rate on dividends is capped at 5
percent for a company of one side holding at least 10
percent of the voting shares of the paying company of the
other side, and 10 percent for other cases.
The withholding tax rate on interest is exempt for
government institutions and capped at 10 percent for
others.
The withholding tax rate for royalties is capped at 5 percent.
Enable both tax authorities to carry out exchange of
information regarding tax matters
Include provisions to prevent abuse of the agreement.
The agreement will be signed after respective governments
complete necessary internal procedures. The agreement will enter
into force after ratification (approval by the Legislative Council in
the case of Hong Kong and approval by the Diet in the case of
Japan).
India STop
Tax update
Cases update
Provision for Non-Performing Assets (NPAs) as per norms

prescribed by the RBI cannot be deducted in computing the
profits liable to tax under the Indian tax law
In Southern Technologies Ltd v JCIT (2010) 320 ITR 577 (SC),
the taxpayer, a non-banking financial company (NBFC) made a
provision towards NPA according to the Prudential Norms issued
by the Reserve Bank of India (RBI) in 1998. The taxpayer claimed
the provision as a deduction under provisions1 of the Income-tax
Act, 1961 (the Act). It also made an alternative claim that the
provision should be allowed as a deduction under the residual
category of expenses under the provisions2 of the Act as a loss on
the value of assets. The tax authorities disallowed the claim on the
basis that the provision made under the RBI norm is not deductible
for tax purposes.
On appeal, the Supreme Court held that the norms prescribed by
the RBI were restricted to disclosure and presentation of the
financial statements and do not relate to computing profits for
business for tax purposes. It also held that the Act only allowed a
deduction for bad debts to the extent they are actually written off
as irrecoverable in the accounts during the year and a provision
towards NPA would not be considered a bad debt. It further held
that the provision for claiming a residual category of expenses is
applicable only to expenditure, and not covered under the specific
provisions of the Act. Since a provision for NPA does not
constitute an expense, it cannot be claimed as a deduction under
the Act, and the Court rejected the taxpayers claim.
In order to determine whether a loss or profit on the
renunciation of share rights is long term or short term, the
crucial date is defined as the date on which such right to
subscribe for additional shares comes into existence, and the
date of renunciation (or transfer) of such right
1
Section 36(1)(vii)
2
Section 37(1)
In Navin Jindal v ACIT, in 2010-TIOL-03-SC-IT, the taxpayer held

shares in a company and was offered the right to subscribe to a
certain number of Partly Convertible Debentures. The taxpayer
renounced his right in favour of a third party for a consideration and
the value of the original shares diminished. The taxpayer, based on
the decision of the earlier Supreme Court decision3, claimed the
diminution in the value of shares as a Short-Term Capital Loss
(STCL). The tax authorities took the view that the loss was in the
nature of a Long-Term Capital Loss (LTCL) and not STCL.
On appeal, the Supreme Court observed that the right to subscribe
for additional shares or debentures comes into existence when the
Company decides to make the rights offer. Prior to that, these
rights, though embedded in the original shareholding, remain
unclear. The right crystallises only after the rights offer is
announced by the Company. The right to subscribe for additional
shares/debentures is a distinct, independent and separate right,
capable of being transferred independent of the existing
shareholding.
For the purposes of the provisions4 of the Act, a computation is an
integral part of chargeability under the Act. It is only when the
company decides to offer a rights issue that the value of the
original shares held by the taxpayer diminishes. Determining
whether the gain or loss on the renunciation of a right to subscribe
is a short-term or long-term gain or loss depends on the critical
date, which is when such right to subscribe for additional shares or
debentures comes into existence, and the date of renunciation (or
transfer) of such right.
Accordingly, the Supreme Court held that the loss on the
renunciation of rights by the taxpayer was in the nature of STCL
based on the period in which the shares were held and up to the
date upon which the rights were renounced by the taxpayer.
Expenses incurred in keeping business alive pursuant to
SEBIs order barring the taxpayer from doing business are
deductible
In KNP Securities Pvt. Ltd. v ACIT, (2010) 1 ITR (Trib) 130
(Mumbai), the taxpayer was in the business of share and securities
brokerage and trading. Various business expenses incurred for the
purpose of this business were treated as allowable deductions in
the prior years. In the year under consideration, the tax authorities
denied the deductions claimed by the taxpayer on the basis that
there were no business activities during the year as a trading
restriction was imposed on the company by the Securities and
Exchange Board of India (SEBI). As a result, the taxpayer was
prohibited from undertaking any new business as stock brokers.
The taxpayer contended that the action of the SEBI had been
challenged before the appropriate authorities.
3
Miss Dhun Dadabhoy Kapadia v. CIT [1967] 63 ITR 651 (SC)
4
Section 48
On appeal, the Mumbai Tribunal observed that the cessation in the

taxpayers business activities was not at the taxpayers will but on
account of the restrictions imposed by the SEBI. Therefore, it
cannot be said that the taxpayer closed/discontinued its business
activities on its own accord. The taxpayer was restricted by the
SEBI not to do any business activities. However, the place of the
taxpayers business was maintained and as all expenses incurred
were connected with the taxpayers business activities and
needed to keep the business in operation, they were therefore
deductible for Indian tax purposes.
Loss due to fluctuation in the rate of foreign exchange
allowed as revenue loss.
In CIT v Goyal M.G.Gases Pvt. Ltd., (2010) 320 ITR 669 (Delhi),
the taxpayer obtained a loan in foreign currency and utilised a part
of the loan to purchase capital equipment, included in the capital
work-in-progress, while the remaining amount was utilised in its
business of money-lending and bill discounting. Due to a
fluctuation of the foreign exchange rate, the taxpayer suffered a
loss and claimed a deduction on the foreign exchange loss
incurred. The tax authorities held that the whole amount borrowed
was on the capital account, and therefore the loss could not be
treated as a revenue loss and was not deductible for Indian tax
purposes.
On appeal, the Delhi High Court held that the taxpayer may have
originally borrowed the amount to import capital goods or set up a
plant. However, at the time the amount was utilised, the use of
the loan amount changed and assumed a new character as stock-
in-trade or circulating capital. Therefore, any loss suffered by the
taxpayer on the foreign exchange fluctuation was a revenue loss
and deductible for Indian tax purposes.
Indonesia STop
Tax update
USA Indonesia Double Tax Treaty Agreement
Our last issue covered the procedures to apply for double tax
treaty agreement benefits under the above double tax treaty

agreements.
Under the new administrative requirements, completion of a
specified form is required (either Form DGT 1 for most entities or
Form DGT 2 for banks). Critically, these forms require
endorsement by the tax authorities in the relevant entitys own
jurisdiction.
However, the Directorate General of Taxation (DGT) has recently
confirmed that US tax residents may continue to use Form 6166
issued by the Internal Revenue Service (IRS) providing it is signed
by Ivy S. McChesney, Field Director, Philadelphia Management
Centre. The signed Form 6166 should be attached to Form DGT 1
or Form DGT 2 and in such cases, the first page of Form DGT 1 or
DGT 2 need not be signed by the IRS. Form 6166 will be valid for
12 months from the date it is issued by the IRS.
VAT Law Amendments
The Tax Bill dealing with the amendment of the VAT Law has been
approved by Parliament and the President and the amendment
applies from 1 April 2010.
Some of the key amendments of interest to Financial Institutions
are summarised below:
Exporting taxable services is subject to VAT at 0 percent.
Currently, there is no clear regulation and therefore, it could be
assumed that exporting services will be subject to 10 percent
VAT. Provisions regarding the limits of activities and types of
taxable services whose export is subject to VAT will be
stipulated by the Minister of Finance Decree.
The transfer of taxable goods in the context of a business
merger, consolidation, expansion, split, or takeover is not
subject to VAT provided that the party making the transfer and
the party receiving the transfer are VAT registered companies.
Currently, the transfer of taxable goods in the context of a
business merger, consolidation, expansion, split, or takeover
are not subject to VAT as long as the VAT paid when acquiring
the assets was not creditable.
The imposition of VAT on the delivery of taxable goods in the
context of a syariah financing will be treated as a transaction
directly between the supplier and the debtor. Currently, as
financial institutions in syariah financing must first buy the good
and then sell it to their customer, VAT may be imposed on both
the transfer of goods from the supplier to the financial
institution and from the financial institution to the customer.
Benchmarking Ratio
In addition of the Directorate General of Taxation (DGT) Circular
Letter number SE-96/PJ/2009 regarding the benchmarking ratio for
various business sectors for the year 2005 to 2007, the DGT
issued another circular letter number SE-11/PJ/2010 on 1st
February 2010 which includes the banking and leasing sectors. A
summary of the key ratios for the banking and leasing sectors is
set out below:
Bank
Ratio 2005 2006 2007
Gross Profit Margin 66.93% 64.14% 63.87%
Operating Profit Margin 32.41% 28.61% 29.02%
Pre Tax Profit Margin 33.46% 28.95% 29.51%
Corporate Tax to Turnover Ratio 10.49% 9.03% 11.12%
Net Profit Margin 22.97% 19.92% 18.40%
Dividend Payout Ratio 36.92% 39.20% 24.57%
Leasing
Ratio 2005 2006 2007
Operating Profit Margin 54.03% 54.30% 54.03%
Pre Tax Profit Margin 56.94% 56.94% 56.94%
Corporate Tax to Turnover Ratio 14.90% 14.90% 14.90%
Net Profit Margin 42.04% 42.04% 42.04%
In order to improve the guidance and oversight of taxpayers by the

Indonesian Tax Officers, these benchmarking ratios can be used as
a supporting tool to assess the reasonableness of financial
performance and fulfillment of tax obligations by taxpayers.
If a taxpayers financial performance is lower than the benchmark,
this does not mean the taxpayer is not performing its tax
obligations properly. Further diagnosis may be required to
determine whether the taxpayer is actually in non-compliance or
whether other factors may have caused the taxpayers
performance indicators to differ from the benchmark.
Japan STop
Tax update
New Japan-Netherlands Tax Treaty
On 18 December 2009, the Japanese Ministry of Finance (MOF)

issued a statement about an agreement in principle on the new tax
treaty between Japan and the Netherlands. The full details of the
new tax treaty will be released after the treaty is signed by both
governments. After the necessary procedures are completed in
both countries (in the case of Japan, approval by the Diet), it will
enter into force, replacing the existing tax treaty signed in 1970
(and slightly amended in 1992).
The outline of the changes announced by the MOF is as follows:
1. Reduction of withholding tax on investment income
Current tax
New tax treaty
treaty
0% (holding ratio: 50% or
5% more)
From (holding or
Subsidiary ratio: 25%
or more) 5% (holding ratio: 10% or
Dividends more)
Other 15% 10%
0% (financial institutions, etc.)

Interest 10%
10% (other than above)
Royalties 10% 0%
2. Other key points

The new tax treaty will allow Japan to tax income derived from
a Tokumei Kumiai, whereas such income is not taxed in Japan
under the current tax treaty.
The new tax treaty will include anti-treaty shopping provisions.
2010 Tax Reform
1. Conditions for Deductibility of Dividends Paid by TMKs

Under the old tax law, dividends paid by a special purpose
company, Tokutei Mokuteki Kaisha (TMK), were deductible for a
fiscal year provided the TMK satisfies certain conditions for that
fiscal year.
One condition a qualifying TMK had to meet was to have more
than 50 percent of specified bonds and preferred equity be issued
in Japan. The amendment has removed the onshore issuance
requirement for specified bonds.
However, an additional condition has been added which requires a
qualifying TMK to have more than 50 percent of specified equity
which has rights to receive distributions of profits or residual
assets from the TMK be issued in Japan.
2. Withholding tax on book-entry and foreign-issued bonds
Interest on Book-Entry Bonds
Under the old tax law, interest on book-entry Japanese
Government Bonds (JGBs) and book-entry Japanese Local
Government Bonds (JLGBs) received by a non-resident individual
or a foreign company (a foreign investor) was exempt from
Japanese income tax and Japanese corporation tax if the
appropriate procedures are followed, including verifying the foreign
investor status. The amendments to these rules include the
following:
1. Book-entry JGBs and JLGBs
The scope of qualified foreign investment trusts eligible for an
exemption on income from book-entry JGBs and JLGBs has
been expanded.
In addition to interest on book-entry JGBs and JLGBs, the
difference between the redemption price and the acquisition
cost of these bonds earned by foreign investors will be exempt
from Japanese income tax and corporation tax.
The difference between the redemption price and the
acquisition cost of specified short-term JGBs received by
foreign companies will be exempt from Japanese corporation
tax, as only the difference between the redemption price and
the issue price of them was exempt under the old tax law.
While QFI (qualified foreign intermediary) status is granted by
the relevant tax office of each bond issuer under the old tax
law, under the 2010 tax reform, this status will be granted by
the relevant tax office of the book-entry transfer institution. The
obligation for a QFI to report transactions for each investor and
to prepare the records for each investor has been eliminated
provided that certain conditions are met.
While a foreign investor was required to submit an application
form for exemption for each bond issuer under the old tax law,
the foreign investor will only need to submit the application
form for each sub-custodian or QFI.

The above amendments are basically applicable for interest on
book-entry JGBs and JLGBs whose calculation periods start on or
after 1 June 2010, and the difference between the redemption
price and the acquisition cost of specified short-term JGBs issued
on or after that date.
2. Book-entry corporate bonds
The following income is also exempt from Japanese income tax
and corporation tax under the 2010 tax reform:
interest on and profits from redemption (the difference
between the redemption price and the acquisition cost) of
book-entry corporate bonds (excluding interest which is
calculated based on the profit of the bond issuer) received by a
foreign investor
profits from redemption of specified short-term bonds (e.g.
electronic CPs) received by a foreign company.
Please note that when interest or profits from redemption are
received by a person having a special relationship with the bond
issuer (e.g. more than 50 percent shareholding relationship), the
exemption will not apply to the income.
In principle, this new rule will be applied to:
book-entry corporate bonds issued on or before 31 March 2013
(provided that the interest calculation period starts on or after 1
June 2010)
specified short-term bonds issued after 1 June 2010.
Interest on Foreign Issued Corporate Bonds
Special provisions for taxation on interest and discounts (the
difference between the maturity value and the issue price) on
corporate bonds issued by Japanese companies outside Japan,
including interest on corporate bonds issued by a foreign company
outside Japan which are attributable to business carried on
through a permanent establishment of the foreign company in
Japan (Foreign Issued Corporate Bonds), will be amended as
follows:
Previously, interest and discounts on Foreign Issued Corporate
Bonds received by a non-resident individual or a foreign
company (a foreign investor) are exempt from Japanese tax if
such foreign investor confirms its foreign investor status
through submitting an application form, etc. Although this rule
has been extended every two years as a temporary measure,
under the 2010 tax reform this rule has become a permanent
rule.
The scope of Foreign Issued Corporate Bonds not covered by

this exemption rule has been amended as follows:
Old tax law New tax law
Foreign Issued Corporate Foreign Issued Corporate

Bonds issued by a foreign Bonds, interest on which
company that is located in a is calculated based on
low tax jurisdiction, has a profits of the bond issuer
permanent establishment in
Foreign Issued Corporate
Japan, and does not meet
Bonds owned by a person
certain other conditions
having a special
relationship with the bond
issuer (e.g. more than 50
percent shareholding
relationship)
Interest on the bonds described above is exempt from

Japanese withholding tax if received by Japanese financial
institutions.
This amendment is applicable to Foreign Issued Corporate
Bonds issued on or after 1 April 2010.
When Foreign Issued Corporate Bonds are issued in
Switzerland and certain conditions are met, it is not necessary
to verify the foreign investors status for an exemption from
Japanese tax on interest on the bonds. This rule has also been
extended every two years. Under the Proposal, this rule will be
extended until 31 March 2012 and then abolished.
Amendments to the related administrative procedures (e.g.
documents to be submitted by bond issuers) have been made.
3. Foreign Partners of Investment Funds
The 2009 tax reform introduced a special provision that allowed a
foreign partner of an Investment Limited Partnership (Toshi Jigyo
Yugen Sekinin Kumiai or Investment LPS) or foreign partnerships
similar to an Investment LPS (Investment Funds) to not be
deemed to have a permanent establishment in Japan, subject to
satisfying certain conditions. Under one of the conditions, the
foreign partner must not be involved in the operation of the
Investment Funds business. Generally, providing a foreign
partner (a limited partner of an Investment Fund) with approval
rights is considered to be participation in the operation of the
Investment Fund business under the current law.
The 2010 tax reform provides an exception for foreign partners
that are allowed approval rights with respect to certain
transactions (e.g. principal trading).
4. Transfer Pricing
The Proposal includes the following amendments in respect of the
Transfer Pricing Rules:
(i) The administrative guidelines will clarify certain points which

especially need to be taken into account when considering
price negotiation processes with foreign affiliates for the
purposes of computing and determining an arms length price
for transfer pricing taxation purposes.
(ii) The scope of documents to be presented or submitted under
the secret comparable rules (*) will be clarified for the
following categories:
(a) Documents detailing transactions with foreign affiliates
(b) Documents detailing the computation of an arms length
price by the corporation with respect to its transactions
with foreign affiliates
(*) Under the secret comparable rules, the Japanese tax
authorities have the authority to presume an arms length
price and to reassess or make a determination with
respect to the companys income in the event the
company fails to present or submit, without delay, its
books and other documents requested by the authorities
that are considered to be necessary for the calculation of
an arms length price.
The amendment in (i) above is aimed at cases where prices are

negotiated as if a foreign affiliate were a third party, where the
foreign affiliate is a 50/50 joint venture company. It is presumed
that clearer guidance will be provided on items to be considered in
such cases.
With respect to (ii) above, a company will be required to promptly
submit various documents in the event of a transfer pricing audit,
including those that detail processes by which prices are
negotiated with foreign affiliates, and those that detail the
companys computation of arms length prices in transactions with
foreign affiliates.
In particular, as provided under (ii)(b) above, mere factual records
and evidence will likely be insufficient. Companies will likely be
required to provide detailed information and documents
substantiating the companies compliance with the Transfer
Pricing Rules, such as justification of the transfer pricing method
selected, or details relating to the comparables analysis
undertaken. Although the proposed rules differ in nature from the
transfer pricing documentation rules in other major OECD
countries (e.g. Contemporaneous Documentation Requirement in
the US), companies will, in both essence and practice, be required
to prepare similar information and documents that are required
under the transfer pricing documentation rules in other major
OECD countries so that they can promptly submit them upon the
Japanese tax authorities request.
Korea STop
Tax update
2010 Tax Reform Proposals
1. Interest income on bonds earned by financial institutions is

subject to withholding tax.
Before the amendment, the interest income on bonds earned by
financial institutions was not subject to withholding tax, while the
interest income on bonds earned by normal corporations was
subject to a withholding tax rate of 14 percent. Under the revised
tax law, interest income earned by all entities, including financial
institutions, is subject to a 14 percent withholding tax. This new
regulation applies to interest income on bonds earned on or after 1
January 2010.
2. Deductibility of stock awards expenses
Prior to the tax laws amendment, only stock option expenses
were deductible for tax purposes provided that the required
conditions under the tax law were satisfied. Under the amended
tax law, the deductible expense related to the stock option has
been extended to include stock awards related expenses whose
treatment is uncertain under existing tax law. After the
introduction of this amendment, financial institutions that provide
various forms of stock awards programmes to employees are
allowed to deduct the relevant expenses for tax purposes without
ambiguity, if the required conditions are satisfied. This revised tax
law will apply from the tax year reported after this revision was
made on 18 February 2010.
3. Definition of internal gain which is not subject to education
tax
Previously, the education tax law did not provide a clear definition
for an internal gain which was excluded from the taxable base for
education tax purposes, thereby causing uncertainty in calculating
the education tax base. Under the revised provision of the
education tax law, internal gains which are excluded from the
taxable base of banking and insurance companies for education tax
purposes are specifically listed in detail. The listed internal gains
include appraisal gain of assets, gains on redemption of bonds

corresponding to bad debt expenses and other internal gains
realised without involving external transactions.
In addition, under the amended education tax law, profits from the
extinctive prescription of dormant deposits5 are excluded from the
taxable base of education tax. Dormant deposits will be separately
managed by the dormant deposit management foundation recently
established.
4. Exemption from Securities Transaction Tax (STT)
Under the current STT law, corporate restructuring efforts, such as
mergers, split-off and contribution in kind, are not subject to STT,
provided they qualify for the specified conditions for corporate
income tax deferral. Under the revised tax law, the types of
corporate restructuring efforts which are not subject to STT have
been extended to include a comprehensive business transfer and
comprehensive transfer (exchange) of shares in a subsidiary with
shares in a holding company in order to support and facilitate a
corporate restructuring. This new provision is effective from 1 July
2010.
Malaysia STop
Tax update
Real Property Gains Tax
Following the reinstatement of the 5 percent Real Property Gains
Tax (RPGT) (please refer to Issue 34 for details) with effect from 1
January 2010, further relaxation has been given on the disposal of
real properties and shares in real property companies which are
held for more than five years. The new exemption order governing
the exemption mechanism on limiting the effective RPGT rate to 5
percent and provisions of the relaxation have been gazetted.
In line with the above development, new RPGT forms were
introduced to enable taxpayers to report their acquisitions or
disposals to the Malaysian Inland Revenue Board (IRB) from 1
January 2010 onwards.
5
In the case of dormant deposits, the bank previously needed to include the dormant deposit in the education taxable base (which is
subject to education tax) after a certain period of time specified under the relevant law (i.e., the extinctive prescription period).
Finance Act 2010

All the proposals in relation to financial institutions from the
Budget 2010 have since been gazetted.
For further information regarding the Budget 2010 proposals,
please refer to Issue 34.
Double Taxation Agreements (DTA)
Malaysia-Venezuela DTA
The DTA between Malaysia and Venezuela which was ratified in
2008 has the following effective dates:
1 January 2009 for income tax and withholding tax
1 January 2010 for petroleum income tax.
Protocols
1. Malaysia-Belgium Protocol
The Protocol amending the Malaysia-Belgium DTA was signed
and has the following withholding tax rates:
Types of payment Rate
Interest 10%
Royalties 7%
Technical Fees 7%
2. Malaysia-Netherlands, Kuwait, Japan Protocols

Malaysia signed Exchange of Information Protocols as part of
its commitment to implementing the internationally agreed tax
standard on transparency and exchange of information with the
following countries:
Netherlands: 4 December 2009
Kuwait: 25 January 2010
Japan: 10 February 2010
Following that, Malaysia recently made its way into the White
List of the Organisation for Economic Co-operation and
Development (OECD) for being internationally compliant to
OECD transparency standards.
To date, the above Protocols have yet to be gazetted.
Labuan Offshore Business Activity Tax (Amendment) Act 2010
The above Act came into operation on 11 February 2010 with
amendments as follows:
Renamed as Labuan Business Activity Tax Act 1990.
Amendments to ensure consistency with other legislation
relating to Labuans financial services and an additional clause
to enable Labuan to adopt OECD standards for the exchange of
information for tax purposes in double taxation agreements.
Mauritius STop
Tax update
Tax Ruling and Statement of Practice Update
Below is a summary of a Tax Ruling and two Statements of
Practice recently issued by the Mauritius Revenue Authority
(MRA).
Tax Ruling on Indian Dividend Distribution Tax
Facts of the case
K Ltd is a Mauritius incorporated company holding a Category 1
Global Business Licence (GBL1). It invests in securities in India,
and the companys percentage holding in Indian companies is less
than 5 percent. K Ltd derives dividend income from Indian
investee companies. Upon payment of dividend, there is a
Dividend Distribution Tax (DDT) payable by the Indian investee
companies to the Indian tax authorities.
Issue raised
Whether K Ltd may claim DDT as credit against the Mauritius tax
payable.
Ruling
The MRA has held that as the DDT is paid out of the
profits/reserves of the company declaring the dividend, it cannot
be considered a withholding tax suffered by the recipient of the
dividend. The DDT should therefore be treated as an underlying
tax. Credit for the DDT can only be claimed provided K Ltds
percentage holding in the investee company is at least 5 percent.
Statement of Practice on Bad Debts
Under the Income Tax Act (the Act), a debt may be deductible for
tax purposes if the debt is proved to have become bad and has
actually been written off as bad debt. However, the Act does not
define the term bad debt. It is left to the taxpayer to decide
whether a debt can be considered bad. The MRA has issued the
following guidelines on what debts may be considered as bad
under the Act:
a loan due by a company in liquidation in respect of which
winding up procedures have started.
small balances below approximately USD 3,000 for banks and
approximately USD 1,000 in other cases regardless of whether
legal action has been initiated.
irrecoverable sums due by a company in liquidation or
receivership or a person in bankruptcy or in the process of
being wound up even if the outcome of recovery action has not
been finalised at the time the debt is written off.
debts owed by persons who are deceased, are untraceable or
have left the country and have no assets.
debts pending before court where there are no chances of
recovery.
loans with or without security or with inadequate security
which does not fall within the categories described above,
provided the taxpayer is able to prove legal action has been
taken to recover the debt.
debts owed on credit cards provided the bank shows that legal
action has been taken to recover the debt.
Statement of Practice on Foreign Tax Credit
Financial institutions deriving foreign sourced income may claim a
tax credit for foreign taxes paid on such foreign source income
against Mauritius income tax. To enable matching foreign sourced
income with foreign tax payable, a credit should be claimed in the
basis period in which the foreign sourced income is declared. The
MRA has issued the following guidelines in order for a claim to be
admissible:
where at the time credit for foreign tax is claimed and the
foreign tax has not been paid, a note to that effect should be
made in the accounts of the company
where tax sparing credit is being claimed, full details with
relevant documents should be submitted to the MRA
where returns are submitted electronically, official receipts and
relevant documentation should be readily available on request
by the MRA
where a tax credit has been claimed in respect of a foreign tax
which has not been paid within a period of 2 years after the
claim is made in the tax return, the tax credit should be clawed
back and treated as additional tax in the year the claw back is
made.
New Zealand STop
Tax update
Major Banks Settle Tax Cases with Inland Revenue
Department (IRD)
Four major banks, Westpac, BNZ, ANZ National, and ASB, have
recently settled their tax avoidance cases with the IRD. The cases
related to structured finance arrangements entered into by the
banks. Westpac and BNZ had each received verdicts in the High
Court finding these arrangements were tax avoidance.
Westpac and BNZ indicated that they would appeal the rulings, but
have now settled with the IRD along with the other major banks
facing similar cases. Deutsche Bank and TSB had previously
settled their cases. The settlements by the four major banks are
believed to be approximately NZ 2.2 billion in total, making these
some of the largest tax settlements ever made with the IRD.
Tax Working Group
The Victoria University of Wellington, in conjunction with the
Treasury and Inland Revenue, ran a Tax Working Group (TWG)
during 2009. The purpose of the group was to consider the
medium-term direction of the current tax system and address
policy challenges facing New Zealand. The group was made up of
individuals from the private sector, academia, policy officials from
Inland Revenue and Treasury, including KPMG Partner Paul Dunne.
The TWG reported back in January 2010, and identified a number
of issues with the current tax system including:
High effective rates of personal tax compared to close
neighbour Australia encourages a brain drain.
A family tax credit regime causes very high marginal tax rates,
providing a disincentive to work and increase income.
New Zealand has a relatively high corporate tax rate by OECD
standards, and there is a strong possibility that Australia will
soon reduce their rate.
New Zealand investment in property is heavily influenced by

tax effects.
Variance between individual, corporate, and trust tax rates
encourages complex structures and distorts investment
choices.
A large proportion of revenue is generated from the taxes
most harmful to growth, which adversely impacts savings,
investment, and productivity.
The TWG suggested a number of potential solutions to address
these issues, including aligning the top individual, trust and
company tax rates, restructuring the social welfare transfers
system to reduce disincentives inherent in the current system, and
finding ways to broaden the tax base and encourage investment
away from property and into investments which will drive
economic growth and productivity.
Government Response
Prime Minister John Key has responded to the TWG report,
agreeing with many aspects of the report.
The Government is considering options to reform the tax system,
particularly around GST, income tax rates, and property.
The Government mooted a proposed 15 percent increase of GST
in order to provide an incentive to save and invest as opposed to
consume. The increase is to be offset by reductions in individual
tax rates, so that taxpayers are not worse off from the changes.
Mr Key has also indicated that while there will be changes to the
way property is taxed, new land taxes and comprehensive capital
gains taxes are not being considered.
Full details of the changes are to be released in the May Budget.
Philippines STop
Tax update
Legislative Developments
On 17 December 2009, Republic Act 9856, entitled An Act

Providing the Legal Framework for Real Estate Investment
Trust and for other Purposes, was enacted into law.
The salient features of Republic Act 9856 are as follows:

A Real Estate Investment Trust (REIT) is a stock corporation
established for the purpose of owning income-generating
real estate assets.
Income-generating real estate is real property which is held
for the purpose of generating a regular stream of income
such as rentals, toll fees, and user fees.
Although designated as a trust, it does not have the same
technical meaning as a trust under existing laws, but is used
for the sole purpose of adopting the internationally accepted
description of the company in accordance with global best
practice.
A REIT must be a public company. It must maintain its
status as a listed company and have at least 1,000 public
shareholders owning at least 50 shares of any class of
shares who in total own at least 1/3 of the outstanding
capital stock of the REIT.
A REIT must have a minimum paid-up capital of P300
million.
Investments in the REIT shall be by way of subscription to,
or purchase of shares of the REIT, and the shares shall only
be offered in accordance with a REIT plan and other
requirements prescribed by the Securities and Exchange
Commission.
Shares must be registered with the Securities and
Exchange Commission and listed in accordance with the
rules of the Philippine Stock Exchange.
A REIT must comply with limitations imposed by law for
foreign ownership of land in the Philippines.
At least 90 percent of its distributable income must be
distributed as dividends annually, no later than the last day
of the 5th month following the close of the fiscal year of the
REIT.
Proceeds from the sale of the REITs assets re-invested by
the REIT within one year from the date of the sale are
excluded from the distributable income.
A REIT may invest only in the following: real estate, real
estate-related assets, managed funds debt securities and
listed shares, and government securities.
Tax Related Provisions
A REIT shall be taxed as a corporation under the Tax Code
on its taxable income.
Taxable income means pertinent items of gross income less
all allowable deductions and dividends distributed by a REIT
out of its distributable income.

A REIT shall not be subject to minimum corporate income
tax.
Income payments to a REIT shall be subject to a lower
creditable withholding tax of 1 percent.
The sale or transfer of real property to REITs shall be
subject to 50 percent of the applicable Documentary Stamp
Tax (DST).
Cash or property dividends shall be subject to a final tax of
10 percent, unless
the dividends are received by a non-resident individual
or a non-resident corporation entitled to a preferential
withholding tax rate of 10 percent or less pursuant to
an applicable tax treaty
the dividends are received by a domestic corporation,
or resident foreign corporation, or an overseas Filipino
investor in which case they are exempt from income
tax or any withholding tax.
In the case of overseas Filipino investors, they are exempt
from dividend tax for seven years from the effective date of
the implementing regulations.
A REIT shall be subject to Value Added Tax (VAT) on its
gross sales from any disposal of real property and on its
gross receipts from rental of such property.
Other Tax Developments
On 3 December 2009, the Bureau of Internal Revenue (BIR)
reiterated in its ruling DA (OSL-037) 728-2009 that transactions
involving a dation in payment (dacion en pago), i.e., a payment
by a third party with respect to a non-performing loan (NPL) on
behalf of a borrower to a Special Purpose Vehicle (SPV) or
transactions qualifying under the Special Purpose Vehicle Law,
are exempt from the following taxes:
a) Documentary stamp tax on the abovementioned transfer of
NPLs and dacion en pago
b) Capital gains tax imposed on the transfer of land and/or
other assets treated as capital assets
c) Creditable withholding income taxes imposed on the
transfer of land and/or building that are treated as ordinary
assets
d) VAT on the transfer of NPLs or gross receipts tax,
whichever is applicable.
On 4 January 2010, BIR Ruling DA (C-001) 01-2010 held that a
credit facility is not considered a loan agreement for purposes
of documentary stamp tax (DST) until and unless the borrower
makes an actual drawdown from the facility. For credit facilities
to be considered loan agreements subject to DST, they must

be evidenced by a credit memo, advice or drawings. There
must be another document to prove that such credit facility has
been converted into a loan agreement, either by the execution
of a formal loan agreement or a promissory note, or even by a
credit/debit memo, advice or drawings to prove that the credit
facility has been availed of by the borrower.
On 26 January 2010, BIR Ruling DA (I-002) 013-2010 held that
interest income received by a non-resident individual from a
depository bank under the expanded foreign currency deposits
system is not subject to the final withholding tax of 7.5
percent.
Singapore STop
Tax update
Singapore Budget 2010
In the recent Budget 2010 speech, the Minister for Finance
announced the following changes to existing tax rules and
incentives relevant to Singapores Financial Services sector:
Enhancement to the Financial Sector Incentive
It has been proposed that the Financial Sector Incentive (Standard
Tier) (FSI-ST) be changed in the following manner with effect
from 1 January 2011:
Remove the Qualifying Base.
Increase the concessionary rate of tax under the FSI-ST award
in tandem from 10 percent to 12 percent as a revenue neutral
change.
Update the list of qualifying activities.
The Monetary Authority of Singapore (MAS) is expected to provide
further details on the proposed changes in April 2010.
Tax incentives for Futures Members of the Singapore
Exchange and Members of the Singapore Commodity
Exchange Limited
The tax incentives for futures members of the Singapore
Exchange and members of the Singapore Commodity Exchange
Limited under Sections 43D and 43K of the Singapore Income Tax
Act (SITA) respectively will be discontinued on 31 December 2010.
From 1 January 2011 onwards, companies engaged in relevant
transactions that wish to enjoy the concessionary tax rate will have
to apply for the FSI-ST scheme and meet the conditions required.
As a transitional measure, existing companies currently enjoying
the tax incentives under Sections 43D and 43K of the SITA may
transit to the FSI-ST scheme. These companies need to inform the
MAS by 31 July 2010 of their intention to transit to the FSI-ST
scheme. Upon transition, the companies will enjoy the FSI-ST
incentives until 31 December 2013. The FSI-ST scheme may be
renewed after 31 December 2013, subject to conditions.
Removal of Approved Start-Up Fund Manager Scheme
The Approved Start-Up Fund Manager Scheme expired on 17
February 2010. No fund manager will be approved under this
scheme after 17 February 2010.
As a transitional measure, existing funds managed by fund
managers which were granted the Approved Start-Up Fund
Manager scheme on or before 17 February 2010 will continue to
enjoy the 12-month grace period from the date the fund was set
up, even if such grace period stretches beyond 17 February 2010.
Taiwan STop
Tax update
Extension to the Securities Transactions Tax Exemption
In order to enhance the capital markets in Taiwan, the Ministry of
Finance (MOF) provided a tax incentive in the Statute of Upgrading
Industries (SUI), waiving the securities transaction tax (STT)
imposed on the sale of financial bonds and corporate bonds in
2002.
This exemption expired on 31 December 2009. From 1 January
2010, the STT, which is 0.1 percent of the transaction price, was
to be imposed on the sale of corporate bonds and financial bonds.
The capital markets and trading markets were severely hit and are
still recovering from the recent economic downturn and financial
crisis in 2008/2009. The MOF considered that immediately
reimposing the STT would have a negative impact on the recovery

of the capital markets as well as the ability of companies to raise
working capital in Taiwan.
In order to improve the liquidity of the capital markets, the MOF
amended the Taiwan Securities Transaction Tax Act on 30
December 2009 to provide a temporary exemption on STT. Under
this new amendment, starting from 1 January 2010 for a period of
seven years, STT payable on the trading of corporate bonds and
financial bonds is exempted pursuant to Article 2-1 of the
Securities Transaction Tax Act.
This exemption is intended for a specific period of time and is to
be revisited upon the expiration of the exemption period by the tax
authority.
kpmg.com/cn
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General tax update for financial institutions in Asia Pacific is issued for the
information of clients and staff of KPMG member firms and should not be used
or relied upon as a substitute for detailed advice or as a basis for formulating
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1 General tax update for financial institutions in Asia Pacific

General tax update for financial institutions

Australia Legislative Developments

China New Administrative Measures for Representative Offices in China

Hong Kong Hong Kong Budget Summary 2010-2011

India Cases Update

Indonesia USA Indonesia Double Tax Treaty

Japan New Japan Netherlands Tax Treaty

Korea 2010 Tax Reform Proposal

Malaysia Real Property Gains Tax

Mauritius Tax Ruling and Statement of Practice Update

Philippines Legislation development

Singapore Singapore Budget 2010

Taiwan Extension to the Securities Transactions Tax Exemption

On 4 December 2009, the Tax Laws Amendment (2009

Broadly, the Bill proposes to (amongst other things) amend

The Bill proposes to make various amendments to ITAA 1997 to:

and other parts of the income tax law.

Tax consolidated groups contemplating acquisitions and

KPMG has prepared a Brief which outlines the significant

effect certain distributions from MITs made in relation to the

Case Law Update

On 26 November 2009, the Federal Court of Australia (FCA)

On 16 December 2009, the Australian Taxation Office (ATO)

materials regarding transfer pricing and thin capitalisation issues

Broadly, the Commissioner considers that the anti-avoidance

The IDS-FS 2010 requires disclosures of international dealings

lodged with the Australian income tax return.

eligible OBU activities, which can be concessionally taxed at

Overseas financial institutions which have established PRC ROs

business license requirements will also need to be considered, on

New Administrative Measures for Non-PRC Resident

On 20 February 2010, the SAT issued Guoshuifa [2010] No. 19

Clarification on the Claiming of Foreign Tax Credits (FTCs) in

On 25 December 2009, the SAT and Ministry of Finance jointly

Hong Kong STop

On 24 February 2010, the Financial Secretary, John Tsang Chun-

The existing stamp duty concession on exchange traded funds

For the offshore funds exemption, the definition of central

For a summary of the implications of the proposed measures

the issued share capital of the paying company, or a bank,

Provision for Non-Performing Assets (NPAs) as per norms

In Navin Jindal v ACIT, in 2010-TIOL-03-SC-IT, the taxpayer held

On appeal, the Mumbai Tribunal observed that the cessation in the

treaty agreement benefits under the above double tax treaty

Ratio 2005 2006 2007

Gross Profit Margin 66.93% 64.14% 63.87%

Operating Profit Margin 32.41% 28.61% 29.02%

Pre Tax Profit Margin 33.46% 28.95% 29.51%

Corporate Tax to Turnover Ratio 10.49% 9.03% 11.12%

Net Profit Margin 22.97% 19.92% 18.40%

Dividend Payout Ratio 36.92% 39.20% 24.57%

Ratio 2005 2006 2007

Operating Profit Margin 54.03% 54.30% 54.03%

Pre Tax Profit Margin 56.94% 56.94% 56.94%

Corporate Tax to Turnover Ratio 14.90% 14.90% 14.90%

Net Profit Margin 42.04% 42.04% 42.04%

In order to improve the guidance and oversight of taxpayers by the

On 18 December 2009, the Japanese Ministry of Finance (MOF)

Other 15% 10%

0% (financial institutions, etc.)

2. Other key points

2010 Tax Reform

1. Conditions for Deductibility of Dividends Paid by TMKs