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Country developments

South East Asia Panel. Country developments. www.taxand.com. Indonesian Scenario. Permana Adi Saputra Taxand Indonesia. www.taxand.com. Tax Challenges in an Age of Scrutiny. Tax Challenges in an Age of Scrutiny. Tax Avoidance, Tax Audit, and Tax Incentives. www.taxand.com.

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Country developments

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  1. South East Asia Panel Country developments www.taxand.com

  2. Indonesian Scenario Permana Adi SaputraTaxand Indonesia www.taxand.com

  3. Tax Challenges in an Age of Scrutiny

  4. Tax Challenges in an Age of Scrutiny

  5. Tax Avoidance, Tax Audit, and Tax Incentives www.taxand.com

  6. How Tax Avoidance is Tackled Transfer pricing Thin capitalization Regulation regarding the application of ALP (Per 43/PJ/2010 as amended by Per 32/PJ/2011) Exchange of Information Indonesian Tax Office has an authority to re-determine debt as capital Treaty shopping Controlled Foreign Company Indonesia has signed 61 tax treaties, including the new tax treaty with Hong Kong that will be effective in Indonesia on 1 January 2013 DGT issued a DGT-form to provide certainty in applying the tax treaty (Per 61/PJ/2009 and amended with Per 24/PJ/2010) Determination of dividend of an Indonesian tax payer in relation to its shareholding in a foreign company. (Article 18 par. 2 Income Tax law No. 36/2008 and Minister of Finance Regulation No. 256/PMK.03/2008)

  7. Challenges and Issues in Audit Process • Tax audit is focused on certain industries: • Mining, palm oil, mass media, chemical, automotive, construction, wholesaler, bank and insurance, real estate, consultancy, processing industry • Individual tax payers are also the focus of tax audit: • Tax consultant, lawyer, notary, and tax payer who has relation with a company which is being or has been audited • Tax audit can be made in the last 5 years, however the tax payer must keep documentation for 10 years • Duration of audit process • Normal audit is 8 months, transfer pricing is 24 months, and gathering / examination of preliminary evidence for a tax criminal case has practically no time limit • Verification is the new audit procedure in Indonesia Tax revenue target for 2012 is IDR13.30 trillion (US$1.46 billion)

  8. Tax Incentives to Encourage Investment • Tax facility for certain industries in certain locations • Tax holiday for new capital investment in pioneering industrial sectors • Accelerated depreciation • Loss compensation of not more than 10 years • 10% dividend tax rate • Reduction in net income by 30% of the investment value • Industries: base metal, oil refinery and base organic chemical, machinery, renewable energy, telecommunication equipment • Corporate income tax holiday for 5 to 10 years after the start of commercial production; 50% income tax reduction for two years after the end of the tax holiday period; a maximum dividend tax rate of 10% If the taxpayer already has a tax facility, the tax payer can not propose to get tax holiday

  9. Indonesia’s New Transfer Pricing Regime www.taxand.com

  10. Authority in Making Adjustments • Article 18(3) of Income Tax Law No. 36/2008 regarding related-party transactions states as follows: • The Director General of Taxes shall be authorized to re-determine the amount of income and deduction as well as determine debts as capital to calculate the amount of taxable income for Taxpayer possessing special relationship with another Taxpayer, in accordance with the Arm’s Length Principle by using the Comparable Uncontrolled Price method, Resale Price Method, Cost Plus Method or other methods

  11. Definition of Related Party • Based on Article 18 (4) part a, b, c of Income Tax Law No. 36/2008, special relationship between tax payers exists under the following circumstances: • Taxpayer has capital participation directly or indirectly, a minimum of 25% (twenty five percent) at another Taxpayer (one or more Taxpayers); or • Taxpayer controls another Taxpayer or two or more Taxpayers are under the common control directly or indirectly; or • There is family relation both biologically and by marriage in vertical and / or horizontal lineage of the first degree

  12. Related Party Transactions

  13. Related Party Transactions • Transfer Pricing Documentation is required for the following: • Transactions between a tax payer or Permanent Establishment in Indonesia, and a taxpayer outside Indonesia • Transactions between two tax payers or Permanent Establishment in Indonesia that are subject to different tax rates due to, among others: • Imposition of final and non-final income tax in certain business sector • Imposition of sales tax on luxury goods • Transactions conducted with a taxpayer-contractor under an Oil & Gas Cooperation Contract

  14. Safe Harbor • Transfer Pricing Documentation is not required for related party transactions with total value not exceeding IDR10 billion (approximately US$1.1 million) in one fiscal year for each counterparty • Note: Transactions below the threshold limit • Must still be disclosed in the Corporate Income Tax Return • Must still comply with the arm’s length principle • May still be the subject of a tax audit

  15. Selection of Transfer Pricing Methods • The hierarchical application of Transfer Pricing methods has been replaced with the ‘most appropriate method’ approach • Transactional Net Margin Method (TNMM) is no longer the last-resort method and can be appropriately applied if one of the transaction parties performs either special contribution or complex / closely linked transactions

  16. Intangible Assets • Intangibles are assets which generally have long useful life, have no physical form, are used in business operation, and are not for resale • Intangible assets can be classified as: • Trade Intangibles(e.g. patent, know-how) • Marketing Intangibles(e.g. trademark, trade name)

  17. Obligation to Submit TP Documentation • Submission of Transfer Pricing Documentation along with the Corporate Income Tax Return (four months after fiscal year-end with two months extension) is required • No specific penalty shall apply in case of failure to comply with the above

  18. Transfer Pricing Penalties No specific Transfer Pricing penalties The following penalties apply in case of non-payment of tax or tax underpayment arising from Transfer Pricing adjustments • Administrative sanction in the form of interest at 2% per month for a maximum of 24 months on the amount of tax underpayment in the Tax Assessment Letter (SKPKB)

  19. Mutual Agreement Procedure (MAP) • The Indonesian Tax Authority issued in 2010 the regulation regarding procedure in applying for a MAP • MAP application can be processed simultaneously with the filing of objection or appeal

  20. Advance Pricing Agreement (APA) • The Indonesian Tax Authority issued in 2010 the regulation regarding procedure in applying for an APA • Important provisions in the APA regulation: • Validity Period is three (3) years • Submit of annual compliance report is required • Tax payer’s documents and information during the APA process shall remain private and confidential

  21. Thank you

  22. Philippines Scenario Euney Marie J. Mata-PerezTaxand Philippines www.taxand.com

  23. How Tax Avoidance is Tackled

  24. Overview • Exchange of Information Regulations • No consolidated rules on anti-tax avoidance • Source of rules: • Legislation • Regulations issued by the Commissioner of Internal Revenue • Court decisions • Revenue driven

  25. Access of Taxpayers Information • Exchange of Information Regulations • RA 10021: exchange of Information Act of 2009 • Prior to RA 10021: authority of the CIR to inquire into taxpayer’s bank deposits is limited to two grounds:(1) determining estate of a decedent, and (2) when taxpayer files an application for compromise. (Exceptions to Bank Secrecy Act) • New ground: a taxpayer subject of request for supply of tax information from a foreign tax authority pursuant to an international convention or agreement

  26. Prior Tax Treaty Relief Application • New Tax Treaty Relief Procedures • Filing of Tax Treaty Relief Applications (TTRA) is mandatory before a transaction • Before the occurrence of the first taxable event • Failure of observe the period shall have the effect of disqualifying the TTRA • But the BIR does necessarily act on the application, so doubt on interpretation remains

  27. Additional Disclosure Requirements - FS • New Additional FS Disclosures • Disclosure on information on taxes, duties and license fees paid or accrued during the year in the audited financial statements (2010) • Some implications: • Entail additional administrative burden • Premature or untimely disclosure of assessments and pending cases

  28. Additional Disclosure Requirements - ITR • Supplemental Information Return • Additional attachment to ITRs of individuals • Additional disclosures to the ITRS: • Requiring information on passive and tax exempt income • Includes final taxes withheld on each type of income • Basis for exemptions clearly indicated • Difficult to comply and implement

  29. Promulgation of Allocation Rules • Allocation of costs and expenses amongst income earnings of banks and financial institutions • Rules on the allocation of costs and expenses among the income earnings of banks and financial institutions • Prescribed methods: • Specific identification • Allocation based on gross income earnings

  30. Review/Reversal of Previous Interpretations Upstream mergers Further control in a tax-exempt transfer to gain control no longer tax exempt • Refusal to issue rulings that these are exempt • VAT on tax-free transfers

  31. Taxpayer Monitoring • Requiring withholding agents to apply for TIN on behalf of non-resident aliens not engaged in trade or business in the Philippines • Benchmarking • Matching • Improvement of data capturing • Machine readable returns • Additional disclosures

  32. Challenges/Issues in Audit Procedures www.taxand.com

  33. Audit Challenges • Over-riding • Persistent call for the Commissioner of Internal Revenue to meet increasing targets • New Interpretations on Prescription • Technicalities on VAT refunds (Aichi case) • Failure to indicate details of the transaction in the required return is tantamount to a non-filing of return (10 years)

  34. Audit Challenges • Authority to receive assessment notices • No case or regulations address the issue on the authority of a corporation’s employee to receive assessment notices for purposes of due process • Stricter rules on evidence • Due process • Assessment of tax-exempt entities who are making profits

  35. Incentives to Encourage Investments www.taxand.com

  36. Incentive Laws No new laws Existing laws • RA 7916, Special Economic Zone Act of 1995 (PEZA) • EO 226, Omnibus Investments Code (BOI) • RA 7227, Bases Conversion & Dev. Act (BCDA) • Tourism Act • 180 other laws

  37. General Incentives

  38. Others Inclusion in the Investments Priorities Plan Amendment to the Negative List • Relaxation of nationality restriction • Generally, foreign ownership in all forms of gambling is limited to 40% • 2011 list added an exception: except those covered by investment agreements with PAGCOR operating in ecozones administered by PEZA

  39. Recent Developments Harmonization of Incentives Proposed reduction of VAT from 12% to 10% • House Bill 4935 • Creation of an Investment Promotion Action Center at the Board of Investments • Various Senate Bills – for harmonization • DOF Version • Limited scope and period of incentives

  40. Thank you

  41. Thailand Scenario Chinapat VisuttipatTaxand Thailand www.taxand.com

  42. How Tax Avoidance is Tackled

  43. Overview • No specific rules on anti-tax avoidance • Source of rules: • Tax competition in the region Tax Legislations Civil and Commercial Code Court Decisions

  44. Integrating System Among Three Tax Authorities • Integration with E-filing • Bank transactions and records • Reconciliation via online data of tax filings The Revenue Department The Customs Department The Excise Department

  45. Transactions in Focus of Tax Authorities • Cross-border transactions among related parties • Complicate and unexplainable transactions • Import of goods with separation of license • Royalties transactions • Management and consultingservices • Cost allocation and reimbursable expenses

  46. Anti-avoidance Tools Under Consideration • Transfer pricing • Thin capitalization • Treaty shopping • Controlled foreign company • General anti-avoidance rules

  47. Challenges and Issues in Audit Procedures www.taxand.com

  48. Challenges in Audit Process • When taxpayers are the winner in game • Nike’s case (customs issues on license fee) • Halliburton’s case (taxpoint on profit remittance) • What if they lost the game • Pizza Hut’s case (royalties taxed on marketing) • ABB’s case (withholding tax on subsidy fund) • SGS’s case (VAT 0% on export of service) • Time / cost and opportunity to play in the game of tax audit

  49. Issues in Audit Process • Tax refund or not refund • Personnel in audit process: Put the right man on the right job • Share premium is not a safe-habor • Oxychem’s case (tax on deemed subsidy) • NEC’s case (tax on deemed subsidy)

  50. Incentives to Encourage Investments www.taxand.com

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