Taxes in the region are levied mostly at the rate of 30% or lower. Tax losses are deductible and group relief is not available. Tax credits are available but limited to the relevant income. There is a network of treaties, but many have non-OECD provisions. The Mauritius treaties with Singapore and Indonesia offer opportunities in relation to income and royalties. Withholding taxes are mostly of the order of 15-20%. Transfer pricing is not very actively policed. Some countries have rules governing debt/equity ratio. Except for Indonesia and Malaysia all ASEAN countries permit enterprises to be 100% foreign owned. Apart from Malaysia and Singapore, ASEAN countries impose tax on disposals of shares; this problem may be alleviated by treaties or circumvented by disposal of shares in a holding company established elsewhere. A range of investment incentives is available, except in Myanmar.
The ASEAN Free Trade Area (AFTA) is a response to similar areas elsewhere. It is implemented by a scheme of common tariffs and common rules, the end of which will be establishment of free trade within the Area. At least 40% ASEAN content is required for a product to benefit under the scheme. The ASEAN is becoming a “Common Market”. The ASEAN Industrial Co-operative Schemes offer accelerated benefits.
Corporate tax rates in Europe are generally higher than in the ASEAN region, though the trend is lower. VAT rates range from 16-25%. The Netherlands and Belgium have offered advance rulings for many years. Some countries (e.g. the Netherlands) offer favourable rates for foreign employees. Exporters to Europe need to investigate customs storage and bonded warehouses.
Overall tax planning strategy involves push-down of expenditure to investee company. A Dutch holding company, geared-up, may be used to acquire Dutch target companies: “fiscal unity” may be obtained. Holland, France, Italy and Germany levy tax on disposals of local investments. Withholding taxes on royalties, interest and dividends need to be addressed – e.g. through a holding company. UK investors have traditionally utilised Dutch “mixer” companies.
The Dutch holding company is well-known. The “participation privilege” provides for dividend income and capital gains to be free of cost. There is a 1% capital tax on shareholders equity. An acquisition may be made with up to 85% debt.
The Belgian holding company pays tax on 5% of its dividend income, but interests costs are deductible.
The Luxembourg SOPARFI needs to have a 10% interest in the foreign company (25% for capital gains). Interest is deductible against non-exempt income. Liquidation proceeds are not taxed.
Germany imposes no capital tax and allows interest costs.
The new Spanish holding company offers a tax-exempt pass-through, provided the shareholder is not in a “black” jurisdiction.
The UK holding company offers credit against underlying tax but charges tax on capital gains.
The Dutch tax on outgoing dividends may be reduced by borrowing or by interposing an Antilles company (resulting in a 7-10.5% overall tax charge) or a Malaysian company (resulting in a 0% tax rate, but any dividend from a capital gain will be taxed at 28%). The route out of Luxembourg is by way of a further Luxembourg holding company, which is liquidated.
EU Harmonisation Directives provide a single VAT zone and abolish inter-country dividends. The merger and interest & royalty directives are awaited.
The Mauritius route for investment into India is well known. The tax treaty offers freedom from Indian tax on capital gains. A similar benefit is offered by the treaties with Cyprus, Malta and the United Arab Emirates. It seems that Cyprus and Malta will give credit for the new Indian dividend tax; credit is available (though little needed) in Mauritus; the UAE levies no tax.
The NatWest ruling suggested that the Mauritius-India treaty could no longer be used. But the AIG ruling showed that a bona fide use of Mauritius as an investment base was consistent with use of the treaty. The DLT ruling was to similar effect.
Power projects and infrastructure, offshore debt funds and investment in real estate are the principal investments in India made out of Mauritius. Outbound investment from India is being liberalised and will offer new opportunities for the use of Mauritius – notably for investment in European countries.
Investment flowing into China is huge. The Mauritius-China treaty is generous, offering a 5% withholding tax on dividends, 10% on interest and royalties, liberal rules on building sites and permanent establishments and some freedom from tax on capital gains. There is also an Investment Protection and Promotion Agreement. This is most helpful to investors, but a good deal of knowledge, skill and experience is needed to make effective direct investment in China and to take advantage of the various tax incentives available.
Portfolio investment, on the other hand, may find a good base in Mauritius. It may also find a base in Luxembourg – the treaty with China not excluding the 1929 holding company.
A UK company is the right vehicle for a direct investment in the United States. This is because the tax treaty between the United States and the United Kingdom reduces the American withholding tax on dividends from 30% to 5, and there is no UK tax charge when they are received by the UK company. Nor is there any UK tax charge when the UK company itself declares dividends to its shareholders out of its American income – and those shareholders do not have to be in a treaty country or a country in the European Union. So the UK company could for example be owned by a BVI IBC or other zero-tax company: in that case, the use of a UK company will get dividends out of the United States and into an offshore vehicle with only 5% US withholding tax.
In the absence of Richard Edmonds the Chairman assembled a panel of members from Australia and New Zealand. The panel confined itself to inward investment, Terry Dwyer giving an overview of the general liability to tax on capital gains arising from the disposal of Australian assets (with the notable exception of portfolio investments). Michael Dunkel drew attention to the various exemptions from tax on capital gains provided by Australias tax treaties – with Belgium, Philippines, Sweden, Denmark, Switzerland, Ireland and Norway.
John Stephens gave an account of the withholding taxes to which dividends, interest and royalties were subject to in Australia, and Gordon Stewart gave a similar account of withholding taxes in New Zealand.
Dennis Lear described the anti-tax avoidance provisions of Part IVA of the Australian Act, and Gordon Stewart explained the corresponding provisions in New Zealand.
The Financial Park structure has now been completed, telecommunications improved, two first-class hotels established. There are now over 60 fully-staffed banks, 18 trust companies, 12 insurance companies and numerous legal and accounting firms.
The Offshore Limited Partnership Act is the most recent of several enactments, including the Offshore Banking Act, the Insurance Act, the Trust Companies Act, the Offshore Trust Act, the Offshore Companies Act , the Offshore Companies (Amendment) Act and the Offshore Business Tax Act.
The capital of an offshore company must not be in Malaysian currency; an approved local secretary is required but no local director is needed. Information filed with the Companies Registry is not open to public inspection.
Tax is 3% or 20,000 ringgit a year. Non-trading income is not included in the tax base.
An Offshore Securities Industry Act is on its way – providing for a stock exchange and mutual funds.
Netherlands and Sweden have excluded Labuan from the treaty. Switzerland has followed suit. Asian companies have accepted the application of treaties to Labuan. Changes are proposed in amendments to the Labuan Offshore Business Activity Act, introducing a higher rate of tax for companies taking advantage of treaties.
The interposition of a Labuan company by a Cayman Fund investing in Korea offers a significant advantage. A Labuan company selling in China may take advantage of the treaty between Malaysia and the PLC so as to avoid the representative office in the PLC being regarded as a PE. A Labuan company may be used for leasing into Malaysia.
The use of trusts has increased but is by no means extensive. Patriarchs of Chinese and Indian families have traditionally controlled their wealth personally throughout their lifetimes.
Estate tax is imposed by Singapore. The rate is 5-10%. There are some exceptions for residential property and community funds. Philippines has US-style estate tax. Individuals domiciled in Brunei are subject to estate duty.
Some form of forced heirship is found in Singapore, Malaysia, Thailand, Philippines, Indonesia and Brunei. In Malaysia, testamentary dispositions up to one third of the estate are permitted; the rest must pass to heirs, and non-Muslims may not inherit.
Income tax issues affect offshore trusts: there are anti-avoidance provisions in Malaysia and Singapore; Indonesia does not recognise the trust so that its offshore status is obscure – generally treated as an entity if it is independent of the settlor and transparent if not; there is a gift tax in Philippines. There are still some forms of exchange control in Thailand, Philippines and Brunei. Various restrictions on foreign ownership are imposed by all six countries.
Islamic law permits some succession planning: where lifetime gifts are not clawed back, a Muslim settlor may be able to use an offshore trust to overcome forced heirship problems. In practice this should be limited to assets situated elsewhere, and the trust should be supported by the law of the jurisdiction in which it is established.
Many ASEAN investors are unaware of their exposure to estate taxes – e.g. in Hong Kong or the United States, and unaware of forced heirship problems in other countries – e.g. in France.
The offshore trust may be effective succession planning – for foreign assets at least – but the obstacles need careful consideration
Singapores tax system is territorial. The corporate tax rate is 26%. Dividends out of tax-paid profits (including those which have benefited from tax credit) cost no further tax. Royalties carry a 15% withholding tax, management services 26% (with some exceptions).
Pioneer status affords a manufacturer a tax holiday for 5-10 years; dividends paid out of pioneer profits are tax free. Other tax incentives are also available.
Profits from sales made in Singapore have a Singapore source; sales may be arranged so that the seller trades “with” rather than “in” Singapore.
Singapore is used as a base for holding companies e.g. Thai companies investing elsewhere in the region, Taiwanese companies investing in the PRC. Singapore gives unilateral as well as treaty tax credit – including credit for underlying credit where the holding is at least 25%. Capital gains are not taxed, but a tax charge (of 26%) arises on distributions of a capital gain. A Singapore holding company will not generally be tax-effective for interest or royalties.
A non-resident Singapore company can operate as a zero-tax company in respect of foreign-source income; an exempt private company does not need to file accounts (though it must prepare them and be audited).