Asia Pacific Tax Guide
Asia Pacific economies have emerged as a preferred investment destination and prudent tax policies were largely instrumental for this development. Despite the rising uncertainty and risk aversion, the sentiments on Asia Pacific is generally cautiously optimistic, as these economies excluding Japan are not under debt constraints like their western counterparts.
However, it must noted that the region is comprised of economies with diverse stages of development. Therefore, taxation policies towards various components of tax – personal income, business income, consumption, capital gains etc – also varies significantly. Post financial crisis, the region is witnessing a trend towards robust tax administration and shift towards fiscal consolidation – a move away from the fiscal stimulus scenario that was prevalent during the crisis.
The lowering of corporate tax rates is the most widely-adopted strategy among governments to augment long-term growth. Lowered corporate tax attracts investments, creates jobs, widens the tax base and thus contributes to long-term growth. Along with potential economic growth, an attractively low corporate tax rate is a key factor that makes a country stand out to investors and the business community. Since 2008, governments across the board are trying to attract foreign investment inflow by cutting headline corporate tax rates.
Amid the prevailing global uncertainty, Asia Pacific holds a lot of traction for investors and corporations. The region is stable owing to prudent fiscal policies adopted by governments. This in turn results in low public debt. Asia Pacific is growing in importance and tax is an important consideration, therefore corporations and entrepreneurs need to familiarize themselves with the prevailing tax landscape in the region in order to make informed decision.
This report provides an overview of the headline corporate tax rates in key economies of the region i.e. Australia, China, Malaysia, Hong Kong, Indonesia, New Zealand, Japan and Singapore. The objective of this report is to provide you with an overview of the tax regime in some of the key economies of the region without making policy recommendations or judgments.
The report is merely a comparison of the headline tax rates of the countries and limited to comparing the taxes at the federal level only. The report does not delve into the idiosyncrasies regarding treatment of depreciation, losses, bad debts etc or other specific allowances, subsidies or reliefs extended to the taxpayers.
Among the Asia Pacific economies, Hong Kong has the lowest headline corporate tax rate at 16.5% and Japan has the highest effective rate of 38.01%. However, Singapore’s effective tax rate is the most competitive with the partial tax exemption scheme. For instance, a company with a chargeable income of S$300,000 will have an effective tax rate of 8.36% only, which is less than half of the headline tax rate. The table below provides a snapshot of the headline corporate tax rates of said APAC countries as of 2012.
|Country||Corporate Tax||Dividend Tax||Capital Gains Tax|
|China||25%||0% – 25%||25%|
|Japan||28.05%||0% – 28.05%||28%|
|Korea||24.2%||0% – 24.2%||24.2%|
|New Zealand||28%||0% – 28%||0%|
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[wc_accordion_section title=”Australia”]A reduction in the corporate tax rate to 29% (from the current rate of 30%) was initially proposed to apply from the 2012/13 income year for small business taxpayers, and from the 2013/14 income year for all other companies. However, the government did not proceed with the reductions to the company tax rate.
The Business Tax Working Group (BTWG) was set up to review long term corporate tax reform options including reducing the corporate tax rate or moving to a business expenditure tax system, particularly an allowance for corporate equity. However, in October 2012, the BTWG concluded that corporate tax rate cuts are unachievable under given terms of reference (it required that any recommended business tax reductions must be offset by budget savings (tax increases) from business taxation or business programs to keep the reform revenue neutral).
Yet, BTWG reaffirmed its commitment to cut the corporate tax rate by at least 2 – 3% over time, to attract significant additional investments, provided all other factors and national priorities remained favorable. The present minority government is focused on delivering a budget surplus, therefore, any significant concessions to the business community remains far fetched.
Australian resident companies are subjected to tax on all of their worldwide income unless exempted. Foreign corporations are subjected to local corporate tax on the portion of the income that is earned within Australian territories. For income tax purposes, an Australian resident company is an entity that is incorporated in Australia, has its central management in Australia or has Australian residents control its voting power.
Resident corporations are subjected to 30% tax on their income and non-resident companies are also charged the same rate on their Australian-sourced income, provided they are not protected by any treaty arrangement.
As a resource-rich nation, there are some taxes that are unique to Australia. Petroleum Resource Rent Tax (PRRT) applies to companies that are engaged in petroleum-related activities. The PRRT of 40% is applicable to project profits from the extraction of non-renewable petroleum resources. This tax is now extended to onshore projects as well. Mining Resources Rent Tax (MRRT) of 30% is applicable to iron ore and coal production companies.
Capital gains (CG) are also subject to tax in Australia. Capital losses are deductible only from taxable capital gains; they are not deductible from ordinary income. However, ordinary or trading losses are deductible from net taxable capital gains. Foreign residents are subject to CGT if an asset is “taxable Australian property” such as the business assets of Australian branches of non-residents and direct and indirect interests in Australian real property. Australian tax residents (excluding temporary residents) are liable for taxes on worldwide capital gains (subject to double tax reliefs).
Capital gains of an Australian resident company realized by disposing its shares in a foreign company, may be eligible for a partial reduction, subject to minimum shareholding (at least 10%) and holding period conditions. This reduction is proportional to the active foreign business assets.
Dividends are franked with an imputation credit equivalent to the corporate tax paid by the distributor. The nature of the recipient determines the treatment of the credit. A resident corporate recipient of franked dividends is entitled to a tax offset, equal to the amount of the franking credit that may be used against its own tax payable. Any excess tax offset that the recipient company is entitled to can be converted into tax losses that can be carried forward indefinitely for deductions in subsequent years.
The imputation credit can be offset against personal tax assessed in the same year. Refunds of tax credit are not available for non-residents. Individual investors must include in their assessible income the actual amount of the dividend received plus the amount of company tax paid on that dividend (referred to as the “grossed up dividend”). However, to ensure the same dividend is not taxed twice, (once in the company’s hands and then in the investor’s hands) the investor receives a tax offset (imputation credit) for the tax paid by the company.[/wc_accordion_section]
[wc_accordion_section title=”China”]A unified China Enterprise Income Tax Law was passed in 2008 and it applies to both domestic enterprises and business operations with foreign investments. Under the unified law, there is no difference in the treatment of domestic enterprises and foreign investment enterprises.
China-incorporated companies and those that are controlled and managed from China are considered as resident companies for the purpose of taxation. Non-resident companies are charged only on the China-sourced income. However, if the companies have a permanent establishment in China, income generated overseas that can be effectively associated with the China establishment becomes taxable.
In 2008, China cut its headline enterprise tax rate from 33% to 25%. Corporate residents of China are taxed on their worldwide income, including income from business operations, investment and other sources.
A foreign tax credit is allowed for income taxes paid in other countries and capped at the corresponding local tax payable for the same income in China.
It must be noted that a reduced tax rate ranging from 10% to 20% is applicable for qualifying companies operating in specialized and key sectors. Tax holidays are also available for newly-incorporated qualifying companies operating in select geographical regions.
Capital gains are subject to tax as normal income gains. Capital gains of non-resident corporations are subjected to 10% withholding tax. Capital gains realized from events involving real properties are subjected to real property tax in addition to corporate tax.
Dividends distributed by Foreign Investment Entities (FIEs) are subject to withholding tax at a rate of 10% when remitted from China. This may be reduced in the case of treaty arrangements. Otherwise, dividends distributed to tax residents are generally exempt from tax. For this purpose, resident companies are qualified if one tax resident has made a direct investment in the other tax resident. Dividends attributable to publicly-traded shares are also treated as tax-exempt investment income if the holding period of the shares is longer than 12 months.
Remittance of after tax profits or dividends to investors in Foreign Investment Entities must be accompanied by written resolutions of the board of directors, audited financial statements and a tax clearance certificate issued by the tax authorities.[/wc_accordion_section]
[wc_accordion_section title=”Hong Kong”]Hong Kong follows a territorial tax policy and the profits tax is levied on the Hong Kong-sourced profits of businesses carried on in Hong Kong. However, determination of the source is a little complex process. In determining the source of profits, Hong Kong generally adopts the “operations test,” which involves identifying activities that are most important in generating the profits and the place at which these activities are carried out. To obtain certainty concerning this and other tax issues, taxpayers may apply to the Inland Revenue for advance rulings on the tax implications of a transaction. This is a paid service.
Profits tax (Corporate Tax) is levied at a rate of 16.5% where the company is carrying on business in Hong Kong and the relevant income is earned in or derived from Hong Kong.
Non-residents engaging in Specified Transactions, (broadly defined to cover most types of transactions typically carried out by investment funds, such as transactions involving securities, futures and currency contracts, commodities and the making of deposits other than by money-lending businesses) are exempt from tax.
Capital gains are not taxable in Hong Kong. Capital losses cannot be deducted for profits tax purposes. However, gains on the disposal of assets may be subject to profits tax if the disposal constitutes a transaction in the nature of trade.
Hong Kong does not impose withholding tax on dividends paid to domestic or foreign shareholders. Dividends received from foreign companies are not taxable in Hong Kong.[/wc_accordion_section]
[wc_accordion_section title=”Indonesia”]Resident companies in Indonesia are taxed on worldwide income. Non-resident companies are taxed only on income sourced in Indonesia, including income attributable to a permanent establishment in the country. A company is a resident if it is established or domiciled in Indonesia.
Indonesia’s corporate tax rate is 25%. Companies with gross revenue of up to IDR 50 billion are entitled to 50% reduction on the taxes charged on the first IDR 4.8 billion gross chargeable revenue. Losses may be carried forward for 5 years following the year the loss was incurred.
The tax rate is 20% for listed companies that have at least 40% of their paid-up capital traded on the stock exchange.
A credit is allowed for tax that is paid overseas on income accruing to an Indonesian company, provided it does not exceed the allowable foreign tax credit, which is computed on a country-by-country basis.
Dividends paid by a domestic corporate taxpayer to a resident company are subject to a 15% withholding tax, which represents an advance payment of tax liability. Tax exemption may apply if the dividends are paid from retained earnings and if the recipient holds at least a 25% share in the payer company. Dividends exempted from tax are not subject to the 15% withholding tax.
Capital gains are taxable as ordinary income. Capital losses, on the other hand, are tax deductible. Gains from certain transactions are taxed under a special regime (e.g. gains from the disposal of land and/or buildings are subject to a 5% tax of the final transaction value).
A 0.1% final withholding tax is imposed on proceeds of sales of publicly-listed shares through the Indonesian stock exchange. An additional tax at a rate of 0.5% of the share value is levied on sales of founder shares associated with a public offering. Capital gains derived by non-residents are subject to 20% taxes.[/wc_accordion_section]
[wc_accordion_section title=”Japan”]A company having its principal or main office in Japan is considered to be resident. A resident corporation is taxed on worldwide income while a foreign corporation is generally taxed only on certain Japanese-sourced income.
Japan’s headline corporate tax rate was proposed to be reduced from 30% to 25.5% for tax years beginning on or after 1 April 2012. This applies to ordinary corporations with share capital exceeding JPY100 million. However, following the March 2011 natural disaster, 10% surtax was levied for 3 years for fiscal years beginning or after 1 April 2012. Therefore, the national corporate tax rate will be 28.05% for those 3 years, and 25.5% thereafter.
Likewise, the reduced tax for SMEs has also been revised. The first JPY8 million of taxable income is cut from 18% to 15%. However, the 10% surtax for the 3 year fiscal period applies as well for SMEs, resulting in 16.5% corporate tax for the first JPY 8 million of income.
In addition to the federal tax, corporations are charged a local enterprise tax and inhabitant’s tax. Following the reduction in the national standard corporation tax rate and the new surtax, the effective tax rate for corporations, including the local enterprise tax and inhabitant’s tax, is approximately 38%, down slightly from the initial rate of 41%.
Dividends received by a resident corporation from another resident corporation are excluded from taxable income provided the recipient holds 25% or more of the shares of the company that is paying the dividend for at least 6 months before the dividend determination. Dividends distributed by a domestic corporation are subject to a 20% withholding tax. Otherwise only 50% of the dividend received is exempted from tax.
Subject to similar shareholding conditions, a foreign dividend exemption system exempts 95% of dividends received by a Japanese company. Under certain tax treaties, the minimum holding interest can be lower than 25%, subject to certain conditions. No credit for withholding tax or underlying tax on the foreign dividends is available.
Capital gains are taxable as ordinary income; while capital losses are generally deductible. A special surplus tax is imposed on capital gains from the sale of land located in Japan, but this tax is currently suspended for sales conducted through 31 December 2013.[/wc_accordion_section]
[wc_accordion_section title=”Korea”]A corporation is deemed as resident in Korea if its headquarters or place of effective management is located in Korea. Residents are taxed on worldwide income while non-residents are taxed only on Korean-sourced income.
The corporate tax is scaled in Korea. With effect from 2012, the tax rate is 10% on the first KRW 200 million of taxable income, 20% on taxable income in the KRW 200 million – 20 billion bracket and 24.2% of taxable income above that threshold.
Losses may be carried forward for up to 10 years. SMEs may be allowed to carry losses back for 1 year.
Capital gains or losses are subject to corporate income tax. Capital gains derived by a non-resident from Korean sources are taxed at 11% of the sales proceeds received or 22% of the gains realized.
Dividends are taxable at normal tax rates. The dividends received deduction (DRD) is available for dividend income received by a Korean resident company from another Korean company.
The DRD ratio ranges from 30 – 100%, depending on whether the parent company is a qualified holding company under Korean law and the ownership percentage of the parent. Dividends received from foreign company is subject to normal corporate tax rates but is entitled to indirect foreign tax credit for taxes paid by the foreign company in its country of residence.[/wc_accordion_section]
[wc_accordion_section title=”Malaysia”]Malaysia has a territorial tax policy whereby resident and non-resident companies are subject to tax on the locally-generated income only. Regardless of the place of incorporation, a company is resident in Malaysia if its management and control is exercised in Malaysia.
Qualifying resident companies that have paid-up ordinary capital of RM 2,500,000 or less are taxed at a rate of 20% on their first RM 500,000 of chargeable income. The balance is taxed at 25%. However, the reduced rate is not applicable if the company controls or is controlled directly or indirectly by another company that has paid-up ordinary capital of more than RM 2,500,000.
Companies engaged in petroleum-related activities are taxed at 38%.
Malaysia is focused on developing into a service-based economy by 2015. Hence, most of its tax incentives are targeted towards the development of the services sector.
Foreign tax credit is allowed for income taxes paid in other countries and capped at the corresponding local tax payable for the same income in Malaysia. In the absence of any treaty arrangement, the credit is limited to 50% of the foreign tax paid.
Capital gains are generally not subject to income tax in Malaysia. Capital gains realized from disposal of real estate situated in Malaysia or disposal of shares in companies dealing in real estate are subject to real property gains tax.
Effective from 1 January 2012, gains from the disposal of residential and commercial properties are taxed between 0% and 10% depending on the holding period of real properties.
From the assessment year 2008, Malaysian companies have transitioned to the single-tier system (STS) and phased out the imputation system. Corporations in Malaysia have until 31 December 2013 to adopt the STS. Dividends received under the imputation system are taxable with credit available for underlying corporate tax paid. Dividends paid by companies using the STS are not taxable. Under this system, dividends paid, credited or distributed by a company are exempt from tax in the hands of the shareholders.[/wc_accordion_section]
[wc_accordion_section title=”New Zealand”]A company is resident if it is incorporated in New Zealand, if its head office or center of management is in New Zealand or if control of the company by its directors is exercised in New Zealand. Resident companies are taxed on worldwide income while non-resident companies are taxed only on New Zealand-source income. A flat rate of 28% is applicable.
Losses may be carried forward indefinitely, subject to a 49% continuity of ultimate share ownership requirement. Losses may be offset against the profits of other group companies as well, where the companies are at least 66% commonly-owned at all relevant times. It is generally possible to carry forward part-year losses. Losses may not be carried back to previous tax years.
Dividends are generally taxable and imputation credit may be attached. If credit is attached, the maximum credit is based on the current corporate income tax rate. On the reduction of the corporate income tax rate to 28%, the maximum credit is 28/72, but transitional provisions allow companies to continue to apply credits that have arisen from tax paid at the 30% rate up to a maximum ratio of 30/70 until 31 March 2013. Foreign sourced dividends received by resident companies are generally exempt from income tax, subject to some exceptions.
There is no capital gains tax in New Zealand. However, certain gains arising from the disposal of personal property that are related to a business and property purchased with the intention of resale will be taxable. Gains on the sale and transfer of land may be taxable in certain cases.[/wc_accordion_section]
[wc_accordion_section title=”Singapore”]A company is resident in Singapore for tax purposes if its management and control are exercised in Singapore. Singapore taxes on a territorial basis. Tax is imposed on all income accrued in or derived from Singapore and all foreign income remitted or deemed remitted to Singapore, subject to certain exceptions.
Prevailing corporate tax rate is 17%. However, 75% of the first S$10,000 of chargeable income and 50% of the next S$290,000 of chargeable income are exempt. Therefore, for qualifying companies, the effective tax rate on the first S$300,000 is 8.36%. A private exempt company may be exempt from tax on the first SGD 100,000 and on 50% of the next SGD 200,000 of chargeable income for its first 3 consecutive years of assessment. Therefore, a startup with a annual taxable profit of S$100,000 will have an effective tax rate of 0% and a startup with S$300,000 will have an effective tax rate of 5.67%. This reinforces the strong attraction that the country holds for investors and corporations.
Losses may be carried forward indefinitely, subject to compliance with a shareholding test. Losses may be carried back for 1 year, subject to a cap of S$100,000 and compliance with the shareholding test.
Foreign income remittances in the form of dividends, branch profits and services income to resident companies are exempt from tax provided the income is received from a foreign jurisdiction with a headline tax of at least 15% in the year the income is received or deemed to be received in Singapore, and the income has been subject to tax in the foreign jurisdiction. The Comptroller of Income Tax must also be satisfied that the tax exemption would be beneficial to the person residing in Singapore.
Single-tier taxation is adopted in Singapore. Under the single-tier system, tax paid by a company on its chargeable income is the final tax. Dividends received by the shareholders are not subjected to tax; nor are capital gains.[/wc_accordion_section]
All Asia Pacific economies are focused on maintaining an enterprise-friendly tax regime amidst the growing economic uncertainty. Countries such as Korea, Malaysia, Indonesia and Singapore are keen on stimulating SME growth and have rolled out measures to reduce the tax burden on them. Singapore scores well not only in terms of the effective tax rate but also in terms of political stability, strength of the local currency, free market concept, economic strength and infrastructural prowess. It is only natural that Singapore invariably holds the top-most rank in several of the economic surveys that gauge the enterprise environment in the region.
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