Asia Pacific. Corporate Tax Report. Brought to you by Connect with us for the latest business updates:

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1 Asia Pacific Corporate Tax Report Brought to you by Connect with us for the latest business updates: Circle us on Google+ Like us on Facebook Join us on LinkedIn Follow us on Twitter

2 TABLE OF CONTENTS Introduction... 3 Regional Trend: Summary of Tax Structure RIKVIN PTE LTD 20 Cecil Street, #14-01, Equity Plaza, Singapore Main Line : (+65) Fax : (+65) info@rikvin.com Website : Rikvin Pte Ltd 2

3 INTRODUCTION The Asia Pacific region is attractive to international investors and companies not only because it offers an abundant supply of natural resources. The region s growing middle class is also opening up opportunities for businesses to provide quality goods and services as well as urbanization solutions. To attract international investments, and stimulate innovation as well as entrepreneurship domestically, many Asian governments have maintained or lowered their corporate tax rates over the years. In this report, we provide an overview of the changes in corporate tax rates (CTRs) in 10 leading Asian economies across rth, Southeast, and South Asia, as well as the Pacific. They include China, Japan, South Korea, Indonesia, Thailand, Malaysia, Hong Kong, Singapore, India and Australia. The period in focus in 2006 to Rikvin Pte Ltd 3

4 THE REGIONAL TREND FROM 2006 TO Australia India Korea, Republic of Thailand China Indonesia Malaysia Regional Average Hong Kong Japan Singapore Headline Corporate Tax Rates Australia China Hong Kong India Indonesia Japan Korea, Republic of Malaysia Singapore Thailand Regional Average Rikvin Pte Ltd 4

5 THE REGIONAL TREND FROM 2006 TO 2013 AVERAGE CORPORATE TAX RATE The average corporate tax rate (ACTR) among these jurisdictions has declined over the years. Between 2006 and 2013, the ACTR has dropped by 3.6 percentage points to 25.5%. Between 2009 and 2013, the ACTR has dropped by approximately 1.7 percentage points. In addition, some of the jurisdictions in the regions have cut their corporate tax rates since the global financial meltdown in In particular, Indonesia, Republic of Korea, Thailand, Malaysia and Singapore have cut their corporate tax rates significantly. As they slash their headline CTRs, they have simultaneously implemented several base broadening measures such as adjusting indirect tax rates. THAILAND Thailand has experienced setbacks since 2006 including a succession of coups as well as the flood which hit it in In a bid to improve the country s competitiveness in the global market and in the lead up to the ASEAN Economic Community (AEC) in 2015, Thailand has sharply cut its CTR - from 30% in , to 20% in To spur local entrepreneurial activity, eligible SMEs were also accorded CTR exemptions and a lower CTR Rikvin Pte Ltd 5

6 JAPAN Following the business community s pressure on the government to improve its tax competitiveness, Japan s CTR was slashed in 2011 from 30% to 25.5%, which, along with local taxes, amounted to 35.6%. It was a significant 4.5 percentage point drop in tax burden on businesses. However, the unfortunate earthquake that struck Japan in the same year rendered the cut futile. The government was forced to implement measures to raise financial resource for rebuilding the battered economy and it resulted in a corporate surtax of 10% for a 3-year period, resulting in an effective corporate tax rate of 38.01%. Japan s public debt, which is about 200% of its GDP, is one of the highest among developed economies. In 2012, the gross public debt was 235% of its GDP. Therefore, Japan s government had no other option but to increase the tax rates, and impose surtax on personal income and withholding tax. In 2015, the effective headline corporate tax rate will be 35.64%. However, there is a widespread anticipation of further tax reduction to combat the effect of a sharp spike in sales tax. CHINA China has registered the second highest decline in CTR among these economies - 8 percentage points since 2006 (from 33% to 25%). It has maintained its rate at 25% with the enactment of Enterprise Income Tax Law in China has also leveled the playground for the domestic and foreign companies by leveling the tax rates and eliminating some of the incentives enjoyed by the foreign enterprises. China went forward with the expansion of VAT system to the entire country, in August this year, and this will significantly expand its tax base Rikvin Pte Ltd 6

7 INDONESIA Indonesia has been slashing its CTR considerably over eight years. Since 2006, the rate has dropped by 8 percentage points but the rate has been maintained at 25% since AUSTRALIA Australia has maintained its CTR at 30% since Henry Review report had recommended a cut of 5 percentage points in the tax rate to raise the competitive profile of Australia. In line with the recommendation the Government initially opted for a 28% target, which was later revised to 29% and then abandoned in the May 2012 Federal Budget. The CTR was to have been reduced from 30% to 29% for small companies in and for all companies in The loss of revenue from the tax cut was to have been funded by the Minerals Resource Rent Tax (MRRT), an extra layer of tax on top of company tax and royalties, levied on coal and iron ore producers. However, the MRRT rate had to be heavily negotiated down to 22.5% from the original proposal of 40%, rendering the CTR reduction impossible. With the new government coming into power, the MRRT, which did not generate as much tax revenue as anticipated, has also been repealed - much to the delight of miners. The new government has also proposed a reduction of 1.5% in CTR from 1 July 2015, but it must be noted that there will be a 1.5% levy on companies earning more than AD 5 million in taxable income. So this tax reduction, when effective, will not benefit large enterprises. INDIA India s CTR is 34% and as one of the economies with strongest traction, it also remains as one of the high tax regimes in the region. It is the only economy which has registered a surge in the tax rate since 2006 (by 0.3%). Despite the longstanding demand among the enterprise community to slash the CTR to 25% in order to be in line with China and ASEAN economies, the headline CTR has remained at 30% since The surcharge has been tweaked over the years in order to appease the business sector. In 2011, the surcharge was cut from 7.5% to 5%, signaling initiatives to phase out the surcharge. However, in 2013, the surcharge was increased from 5% to 10%, thus increasing the overall headline CTR Rikvin Pte Ltd 7

8 SOUTH KOREA South Korea has been slashing its CTR in the last decade and its current rate (24.2% including the local surtax) is 3.3 percentage points lower than its rate in Although the CTR was lowered in 2009, the government has revealed plans to cut the rates further in 2012 to 22%. But it instead maintained the rates for large corporations and introduced another tier of corporations with medium tax base to be subjected to a reduced rate of 22% including surtax. MALAYSIA Malaysia has been consistently dropping the CTR and since 2006, its CTR has decreased by 3 percentage points. It is conscious of the fact that it is facing stiff competition from other jurisdictions i.e. Singapore, Hong Kong, Taiwan and Thailand. The tax rate has been maintained at 25% since However, the business community has been insisting on lowering the rates further down to 20%. Malaysia will soon introduce a Goods and Service Tax (GST) that will widen its tax base. Observers strongly believe that the CTR will be significantly slashed from 2015, barring any contingencies. Malaysia is acting under pressure amidst its dwindling current account surplus and gaping fiscal deficit, therefore widening the tax base and lowering the headline CTR will attract investments and stimulate its economy. HONG KONG It appears that Hong Kong dropped its rate from 17.5% in 2006 to 16.5% in 2008, but actually it returned to the rate it originally had when it was accorded the Special Administrative Region (SAR) status in In 2003, it had to raise its CTR by one percentage point to manage the financial implication of SARS breakout. Hong Kong s CTR is the lowest in the region Rikvin Pte Ltd 8

9 SINGAPORE Singapore has slashed its rate from 20% in 2006 to 17% in 2010 by 3 percentage points. Between 2009 and 2013, it has lowered its CTR by 1 percentage point. Although the headline CTR is 17%, the effective rate on small enterprises and new enterprises is phenomenally low. For new enterprises, the effective CTR on the first three filing years is 0% on taxable income of up to S$100,000 and 8.5% on taxable income of S$ 100,001 up to S$300,000. After the first three tax filing years, enterprises with taxable income of up to S$300,000 will still be eligible for partial exemption and will be charged only 8.5%. Therefore the effective tax rate of Singapore is far more attractive than Hong Kong. Singapore Effective Corporate Tax Rates according to Corporate Structure Individual Shareholding 100% Corporate Shareholding Corporate + Individual Shareholding Owned by An Individual or a Group of Individuals Taxable Income (SGD) Effective Tax Rate 100, % ** 200, % 300, % 400, % 500, % 1,000, % 2,000, % 3,000, % 5,000, % 10,000, % Subsidiary Company Taxable Income (SGD) Effective Tax Rate 100, % 200, % 300, % 400, % 500, % 1,000, % 2,000, % 3,000, % 5,000, % 10,000, % At least 1 individual holding 10% of shares Taxable Income (SGD) Effective Tax Rate 100, % ** 200, % 300, % 400, % 500, % 1,000, % 2,000, % 3,000, % 5,000, % 10,000, % * Maximum headline corporate tax rate is 17% ** For the first three (3) Years of Assessment 2014 Rikvin Pte Ltd 9

10 CONCLUSION Most of the regional economies are moving towards a headline CTR that hovers around 20%. This is in view of a need to simplify tax systems as well as compliance procedures and to improve tax revenue. Many governments are dishing out special incentives for promoting select sectors depending on their indigenous resource availability, growth stage and domestic needs. For example, China, keen on leveling the playing field for their domestic enterprises, as well as to promote enterprise growth, investment and employment, has tweaked other taxes such as VAT. The rates of Hong Kong (SAR) and Singapore have remained consistently well below the regional average of 25.5%. Hong Kong and Singapore are highly-competitive jurisdictions with very attractive tax provisions, including zero tax on capital gains and an extensive network of tax agreements with international treaty partners. These two jurisdictions are also backed by world-class infrastructure and pro-business legislations, thus highly beneficial to cross border investors and enterprises eyeing regional expansion Rikvin Pte Ltd 10

11 SUMMARY OF TAX STRUCTURE Australia China Hong Kong India Indonesia Japan Korea Malaysia Singapore Thailand Headline Corporate Tax Rate 30% 25% 16.5% 34% 25% 38% 24.2% 25% 17% 20% Branch Tax 30% 25% 16.5% 43.28% 20% 38% 24.2% 25% 17% Capital Gains Tax 30% 25% 0% 10% / 15% / 20% 5% / 25% 38% 24.2% / 10 to 22% 0%, 15% or 10% 0% 20% Basis Worldwide Worldwide Territorial Worldwide Worldwide Worldwide Worldwide Territorial Territorial Worldwide Loss Relief Carry Forward Carry Back Indefinite Limited 5 Years Indefinite 8 Year 5 Years 9 Years SME 1 year 10 Years SME 1 year Indefinite Indefinite 1 year 5 Year Tax Consolidation Yes Yes Yes Capital Tax Nil Nil 0.48% to 1.44% MYR 1,000 to MYR 70,000 Social Security Contribution 9.25% Up to 40% 5% 12% 7.24% % 15.67% Varies 1.66% % 16% 5% VAT 10% 17% 0% 4%-5% + 12%-15% + 2% 10% 5% 10% 7% 7% Dividends 30% if un-franked* 10% 0% 16.22%* 20% 20% + surtax 2.1% 20% + surtax 0% 0% 10% Interest 10% 10% 0% 5% or 20% 20% 20% + surtax 2.1% 20% + surtax 15% 15% 15% Royalties 30% 10% 4.95% 10% 20% 20% + surtax 2.1% 20% + surtax 10% 10% 3 or 15% Please see notes in succeeding pages Rikvin Pte Ltd 11

12 * NOTES: AUSTRALIA Depending on the franking credits attributed by the company to the shareholders, dividends are fully or partially franked, or unfranked. Franking is a dividend imputation system whereby some or all of the tax paid by the company is attributed to the shareholders; some companies distribute unfranked dividends. The recipients of franked dividends can offset the franking credits against any taxes payable. Foreign residents receiving unfranked dividends are subjected to a withholding tax of 30%. CHINA The standard corporate tax rate is 25% and small-scale enterprises and new technology enterprises enjoy a special rate of 20% and 15% respectively. The standard VAT rate is 17%. Some foods and essential goods and utilities are charged at 13%. Under the Small-scale Taxpayer Scheme a special lowered rate of 3% is applicable. INDIA Domestic companies are subjected to 30% basic corporate tax rate while the foreign companies are charged a basic rate of 40%. The surcharge on the basic tax for a domestic company as follows: Total income Surcharge Rate Effective Rate Domestic Company Is not more than INR 10 million Nil 30.9% Is in excess of INR 10 million but not exceed INR 100 million 5% 32.44% Is in excess of INR 100 million 10% Foreign Company Is not more than INR 10 million Nil 41.2% Is in excess of INR 10 million but not exceed INR 100 million 2% % Is in excess of INR 100 million 5% 43.26% 2014 Rikvin Pte Ltd 12

13 * NOTES: INDIA (continued) Companies whose tax liability is less than 18.5% of their book profits are subjected to a Minimum Alternate Tax of 18.5%. MAT paid are given a tax credit and this can be carried forward for up to 10 years and set off against tax payable on normal income. A tax credit will be allowed for the MAT paid against tax payable on normal income. The tax credit may be carried forward up to 10 years Dividends distribution tax of 16.22% is charged on incomes distributed. The dividends are tax free in the hands of the shareholders. For the purpose of capital gains tax, gains are treated as long term if the asset is held for more than three years (one year in the case of shares and specified securities). Certain transactions are subjected to Securities Transaction Tax (STT) and if gains made from listed shares are long term in nature or from specified securities are exempted from capital gains tax if they are subjected to STT. If gains from such transactions are not subjected to STT they are charged 10%. Whereas short-term gains from listed shares and specified securities, subjected to STT, are charged 15%. Long term capital gains made from unlisted shares by foreigners are subjected to 10%. Gains derived from transactions involving other long term assets are taxed 20%. INDONESIA The standard corporate tax rate is 25% and companies that have gross revenue of up to IDR 50 billion enjoy a 50% reduction on taxes chargeable on the taxable income for gross revenue up to IDR 4.8 billion. Certain transactions involving lands and buildings fall under a special regime and gains made from such transactions are subjected to a 5% tax on the transaction value. The employer is required to contribute to the general social security scheme, as follows: 3% to 6% of wages for the health scheme; 3.7% of wages to the retirement scheme, 0.24% to 1.74% to the accident compensation fund and 0.3% to the death compensation fund Rikvin Pte Ltd 13

14 * NOTES: JAPAN Japan s corporate income taxes consist of corporation tax (national tax), special local corporate tax (national tax), business tax (local tax), and prefectural and municipal inhabitant taxes (local tax). The corporation tax rate is 25.5% except for small and medium-sized companies and there is 10% surtax on the corporation tax between 1 April 2012 and 31 March But the surtax is expected to be abolished a year ahead of the original schedule. The Net Operating Losses (NOL) carry forward is capped at 80% of the annual taxable income of a company. SMEs with a registered capital of JPY 100 million or less are exempted from this NOL restriction. Other restrictions also apply. KOREA, REPUBLIC OF The corporate tax rate is progressive: Taxable income Rate Up to KRW 200 million 10% Above KRW 200 million up to KRW 20 billion 20% Above KRW 20 billion 22% Minimum Tax payable: Taxable income Rate Up to KRW 10 billion 10% Above KRW 10 billion up to KRW 100 billion 12% Above KRW 100 billion 16% At the time of company registration a capital tax of 0.48% is levied and if the company is registered in Seoul Metropolitan Area the registration tax is 1.44%. Any increase in capital is also subjected to the capital tax. Capital gains derived by a nonresident from Korean sources are taxed at the lesser of 11% of the sales proceeds received or 22% of the gains realized Rikvin Pte Ltd 14

15 * NOTES: MALAYSIA Standard Corporate tax rate is 25%. Resident SMEs are charged 20 % on the first MYR 500,000 of chargeable income and the balance is subjected to 25%. To be entitled to the subsidized rate the company s share capital must be MYR 2.5 million or less and must not be part of a corporate group with any member company exceeding the above capital limitation. Capital gains are tax-exempt but gains made in transactions involving real property are taxed. Gains made in short term - within 2 years from the date of acquisition of the property are subjected to 15%. Whereas if such gains arise from disposals made within 3 and 5 years then a 10% tax is applicable. Gains made from disposal beyond 5 years are exempted. A Labuan territory company may elect to pay a flat tax amount of MYR 20,000 or pay a tax of 3% of its audited profits. A capital duty is payable on incorporation that varies depending on the authorized capital from a minimum of RM 1,000 to a maximum of RM70,000 for an authorized capital exceeding RM100,000,000. SINGAPORE Partial tax exemption is available whereby 75% of the first SGD 10,000 and 50% of the next SGD 290,000 of the chargeable income are exempt from tax. A startup exemption is available in the first three consecutive years for newly set up companies. It allows for a 100% exemption of tax on the first SGD 100,000 and 50% exemption on the next SGD 200,000 chargeable income. THAILAND Companies operating in petroleum sector are subjected to tax ranging from 50% to 60%. Royalties paid to resident companies are charged a withholding tax at the rate of 3% and are given a credit against taxes payable Rikvin Pte Ltd 15