Result(s):

Total record found: 168 article(s)
2021 Luxembourg Corporate Taxation Overview
  • Volume 25, Number 1
  • Belt & Road Column(s)
Description

Although Luxembourg is one of the world’s smallest sovereign states, it has been successful in attracting worldwide-based investors, banks, multinational corporations, state-owned enterprises, sovereign wealth funds, and high net worth individuals seeking to establish or expand their business across borders.

 

The well-known Luxembourg “SOPARFI”, a vehicle used by many for bridging investors and investments, has been and still is an unquestionable success, with thousands of such companies being formed for investing in all types of assets.

 

Thanks to its stable financial ecosystem as well as the flexible and pioneer approach of European regulations, Luxembourg is also a recognised leader within the world’s financial industry. For example, with more than EUR5 trillion assets under management, Luxembourg is the second largest fund domicile in the world and the global leader as far as cross-border fund distribution is concerned. It also is a long-established fund domicile for investment flows into and out of China.

 

Luxembourg has earned its reputation as an ideal hub for Chinese outbound activities and has bridged the gaps between Europe and the East. In fact, the many advantages it offers have established Luxembourg as a de facto gateway for China to access the European Union (increasingly since the inception of the Belt and Road initiative). Luxembourg is also home to a growing number of funds managed by China-based investment managers as well as hosting the European headquarters of seven of the largest Chinese financial institutions.

 

Additionally, in past 10 years, Luxembourg has progressively gained recognition as a key hub for cross-border renminbi business in the Eurozone. It is the leading European centre for renminbi payments, deposits, and loans; renminbi investment funds; the listing of dim sum bonds; and access to data and information on the Chinese domestic green securities listed and traded on the Shanghai Stock Exchange or traded on the Chinese Interbank Bond Market.

 

In this paper, we try to provide an overview of Luxembourg’s taxation system and unveil some of the reasons why such a small country could end up being so successful among investors around the world. We focus on the essentials of taxation without further highlights on the fund industry, which could itself be the topic of a separate paper.

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Tax Residency and Permanent Establishment issues during the COVID-19 Disruption Period and in the New Reality
  • Volume 25, Number 1
  • PRC & International Technical Column(s)
Description

Tax residency and permanent establishment (“PE”) are two of the most important and fundamental concepts in international taxation. Many jurisdictions, including mainland China, adopt residence-based taxation, under which a tax resident enterprise is taxed on its worldwide income while a non-resident enterprise would be subject to income tax if it: 1) has a PE in that jurisdiction and has profits attributable to that PE; or 2) derives profits having a source from that jurisdiction even if it does not have a PE there.

 

The location of board members and senior executives is one of the key factors in determining the tax residency of an entity. Therefore, travel restrictions imposed by countries around the world as a result of the COVID-19 pandemic have caused unexpected tax residency issuesCOVID-19 disruption may also give rise to PE exposures. For instance, employees may travel to and be stranded in a jurisdiction other than their usual work location during the pandemic. Another example is that employees or agents may temporarily conclude contracts at their homes for and on behalf of their non-resident employers/principals because of the COVID-19 pandemic. In response, the Organisation for Economic Co-operation and Development (“OECD”) issued guidance on 3 April 2020 to provide its recommendations on these matters and other related cross-border issues in the tax treaty context. An updated guidance was issued by the OECD on 21 January 2021. The OECD guidance reflects the OECD’s views and the approach that would generally be taken by its member states, despite the fact that it is not legally binding.

 

Many jurisdictions have also issued similar guidance. For instance, in mainland China, the Chinese State Taxation Administration (“STA”) issued a Q&A notice entitled “疫情防控期间税收协定执行热点问题解答” (literally means “COVID-19 disruption period guidance on permanent establishment and tax residence”) on 14 August 2020 providing views on tax treaty enforcement during the COVID-19 disruption period, which act as supplementary provisions to Guoshuifa [2010] No. 75 (“Circular 75”) on tax treaty interpretations, to clarify how the tax residency and PE rules will be applied in mainland China during the COVID-19 disruption period.

 

This article aims to discuss: 1) how the guidance issued by the OECD and the STA may provide relief to situations such as those faced by Hong Kong tax resident enterprises with employees present in mainland China for an extended period of time because of COVID-19 travel restrictions; and 2) how the employment arrangement of their employees should be revisited to mitigate the PE risk in mainland China in view of the new reality (i.e. new working arrangements of employees) in the post-COVID-19 era.

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Indian Tax Implications of Holding a US Individual Retirement Account
  • Volume 25, Number 1
  • PRC & International Technical Column(s)
Description

Many taxpayers of Indian origin work in the United States and contribute to US individual retirement accounts (“IRAs”). Some of these taxpayers may eventually return to India either to retire or to pursue new work there. Many US citizens of non-Indian origin also work and live in India as expatriates. When they become tax residents of India, these taxpayers are subject to Indian income tax on their worldwide income, including income from their US IRAs. This article identifies and examines provisions of the Indian Income Tax Act 1961 and the double taxation avoidance treaty between the US and India that are relevant to IRAs held by tax residents of India and then applies these provisions to a concrete numerical illustration.

Keywords: Individual Retirement Account; Indian Income Tax; Cross-Border Taxation

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Hong Kong’s Enhanced Research and Development Tax Deduction Regime
  • Volume 25, Number 1
  • HK Technical Column(s)
Description

Before the enactment of the Inland Revenue (Amendment)(No.7) Ordinance 2018 in relation to the enhanced tax deduction for research and development (“R&D”) expenditure, section 16B of the Inland Revenue Ordinance (“IRO”) provided 100 per cent tax deduction for expenditure on R&D with respect to 1) payments to approved research institutes or 2) expenditure incurred in-house by the taxpayers themselves. Moreover, capital expenditure on machinery and equipment for the purposes of R&D also qualifies for 100 per cent deduction in the year it was incurred.

 

During his 2018/19 Budget Speech, Mr. Paul Chan, the Financial Secretary of Hong Kong, highlighted the importance of innovation and technology for the Hong Kong economy:

 

“To shine in the fierce innovation and technology race amidst keen competition, Hong Kong must optimise its resources by focusing on developing its areas of strength, namely biotechnology, artificial intelligence, smart city and financial technologies (Fintech), and forge ahead according to the eight major directions set out by the Chief Executive.”

 

In line with the Government’s policy in respect of innovation and technology, the Inland Revenue (Amendment)(No.7) Ordinance 2018 was enacted on 2 November 2018 to encourage more enterprises to conduct R&D activities in Hong Kong by providing more enhanced tax deduction for expenditure incurred by taxpayers on qualifying R&D activities. Under the amendment, taxpayers are able to enjoy a 300 per cent tax deduction for “Type B expenditure” on the first HK$2 million spent on a qualifying R&D activity and a 200 per cent tax deduction on expenditure after the first HK$2 million, with no cap on the deductible amount. “Type A expenditure” will continue to qualify for 100 per cent tax deduction. The new deduction applies retrospectively to expenditure incurred on or after 1 April 2018. The definitions of Type B and Type A expenditure are presented below.

 

Following the enactment of the new law, Departmental Interpretation and Practice Note (“DIPN”) No. 55 was issued by the Inland Revenue Department (IRD) in April 2019 to set out in detail its views and practices on the amended section 16B and Schedule 45 in the IRO.

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The Changing Role of Hong Kong Taxation in Fiscal Policy in the Last Thirty Years and its Prospective Future
  • Volume 25, Number 1
  • HK Technical Column(s)
Description

Traditionally, tax is the major source of revenue for a government. In the last 30 years, it has been seen that the Hong Kong Government regards the collection of tax not merely as a means of raising revenue but also as one of the major tools to regulate the economy or achieve certain objectives designated by the government. In this paper, the authors will take readers from the origin of the major types of tax (rates, stamp duty, and income tax), through their development over the last 170 years (with an emphasis on the past 30 years), to the current position. The authors will speculate on how the Hong Kong Government may make use of taxation to achieve its goals in the coming years.

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A Review of Recent Board of Review Cases (July 2021)
  • Volume 25, Number 1
  • HK Technical Column(s)
Description

There are eight cases reported in Volume 35 of the Board of Review Decisions, which was published in February 2021.  There are five profits tax cases and one salaries tax case, and two cases concerning administrative issues.  Two of these cases were further appealed to the court.  One profits tax case, D7/19, involves the profits of two companies, amounting to over $1.8 billion.  Leave to appeal directly to the Count of Appeal was granted in October 2020.  All sections in this article refer to the provisions under the Inland Revenue Ordinance.

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Rethink Transfer Pricing under BEPS 2.0: Business Ethics of MNEs through the Lens of Adam Smith
  • Volume 24, Number 2
  • PRC & International Technical Column(s)
Description

Given the upcoming Base Erosion and Profit Shifting (“BEPS”) 2.0 rules, the recent transfer pricing (“TP”) landscape for multinational enterprises (“MNEs”) has reshaped international tax systems. Today’s globalised and digitalised market has further muddled the geographical borders. In addressing such a diverse business environment, Adam Smith’s business ethics appeal to MNEs to embed themselves into each community’s societal and cultural norms. These ethical requirements transform MNEs’ business practices as their foreign subsidiaries become socially responsible in their respective local communities. In view of the new BEPS rules, MNEs need to re-evaluate their TP policies as their subsidiaries create additional social value locally.

Keywords: transfer pricing, business ethics, BEPS 2.0, Adam Smith, social responsibility, cross-border transaction

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Pillar Two of BEPS 2.0 – The Proposed Rules and Issues for Consideration by Multinational Groups
  • Volume 24, Number 2
  • PRC & International Technical Column(s)
Description

This article provides an update on BEPS 2.0 developments, focusing on Pillar Two, including a summary of the proposed rules and a discussion of the various issues that organisations may wish to consider. The article will not go into the background on BEPS 2.0, which has been well covered in Martin Richter and Zakariya Modan’s article in the previous issue of this journal.

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Will Multinational Companies Be Able to Guaranty a Profit to their Limited Risk Subsidiaries In 2020?
  • Volume 24, Number 2
  • PRC & International Technical Column(s)
Description

Many multinational enterprises (“MNEs”) are structured with an entrepreneur and one or a few limited risk affiliates. The latter may be manufacturers, distributors, or service providers. These MNEs generally use the transactional net margin method (“TNMM”) in transfer pricing to set the remuneration of their affiliates. In transfer pricing, the TNMM 1) compares the net profit margin of a taxpayer arising from a non-arm’s length transaction with the net profit margins realised by arm’s length parties from similar transactions and 2) examines the net profit margin relative to an appropriate base, such as costs, sales, or assets.

In many developing countries in Asia, entities will only carry out single simple functions. For example, many manufacturers in China and Vietnam are either toll manufacturers or contract manufacturers. These manufacturers will only carry out the manufacturing functions under contracts for the principal, generally the entrepreneur in the supply chain. Other single function entities include pure distribution entities and entities which provide contract R&D services.

It is the view of the tax authorities in these developing countries that the single simple functions are limited risk functions and may not be compensated with a high profit margin. By the same token, these functions should not bear any losses. For example, in China, pursuant to Article 28 of Public Notice Number 6 (2017) issued by the State Taxation Administration, enterprises in China which are carrying out a single contract manufacturing function, single distributing function, or single contract R&D function for an overseas related party should maintain a reasonable profitability level. In the event these enterprises incur losses, even if they have not met the required threshold for preparation of a Local File in accordance with Public Notice Number 42 (2016), they would be required to prepare and submit a Local File to the tax authority. In general, explanations of the losses incurred by these enterprises, such as a wrong strategic decision of the overseas principal leading to the insufficient utilisation of production capacity, the slow movement of inventory, or the failure of R&D efforts, would not be accepted by the tax authority. Transfer pricing adjustments could be imposed.

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增值稅專用發票電子化對企業運營的影響探討
  • Volume 24, Number 2
  • PRC & International Technical Column(s)
Description

傳統的紙質增值稅專用發票(以下簡稱“專票”),對企業的管理一直存在較大的挑戰。自從國務院總理李克強在2019年11月27日的國務院常務會議上宣佈,力爭在2020年底前實現專票電子化,企業家和財務人員一直密切留意其進展情況。2020年8月31日,隨著國家稅務總局宣佈在寧波市開展增值稅電子專票試點,顯示專票電子化工作應在穩步推進之中,預計能夠實現2020年底在全國範圍內以試點的形式的推廣適用。

中國從1994年開始實施增值稅暫行條例,其核心是採用增值稅抵扣制度,專票作為最重要的抵扣憑證,在普遍的企業財務管理制度中,專票的重要性等同于現金。考慮到專票的重要性,為了預防、打擊涉稅犯罪行為,國家稅務總局自1994年開始研製防偽稅控系統,並在2000年基本實現了專票管理的電子化。
但是,在企業端,長期以來紙質專票仍然是財務管理的核心憑證。隨著社會經濟的發展,企業的規模越大、層級越多、業態越多,稅務合規管理的難度越大。雖然與專票相關的法規制度也在不斷完善,但受限於紙質專票的物理特質,企業管理成本仍然較高。

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