2012 imas-pwc fund management budget briefing

2012 IMAS-PwC Fund Management Budget Briefing 28 February 2012

www.pwc.com

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Agenda

1. Vodafone Tax Case in India

2. Budget 2012 – Highlights

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Vodafone Tax Case in India

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Background

• Vodafone International (VIH) acquired shares of CGP Investment (CGP) in 2007

• The transfer of shares in CGP was alleged to have resulted in indirect transfer of controlling interest of HEL.

• India Revenue Authority took the view that the gains from the transfer were sourced in India and hence taxable in India. Vodafone was thus required to withhold tax on payment made to HTIL

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Hutchison International

(HTIL)

CGP Investment (CGP)

Intermediary Holding Cos

Hutchison Essar Ltd. (HEL)

Vodafone Group Plc

Vodafone International

Holding (VIH)

Cay

man

Isl

and

In

dia

M

auri

tiu

s Through downstream subsidiaries

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India Supreme Court Judgement, 20 January 2012

• Tax avoidance

• India-Mauritius tax treaty

• Indirect transfers

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Key Considerations

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Tax Avoidance

- Strategic tax planning to be looked at holistically; factors specified

- Revenue to “look at” a transaction in entirety

- Onus on Revenue Authority to identify the scheme and dominant purpose

- “Colorable” devices and pre-ordained series of transactions for avoiding tax impermissible

- Substance over form principle or piercing the corporate veil test may be invoked

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India-Mauritius Tax Treaty

- “LOB clause” and “look through” provisions not to be read into tax treaty

- Holding companies set up for genuine substantial long term FDI in India cannot be considered to be for tax evasion

- Treaty benefits may be denied if:

• Holding companies interposed to avoid tax without commercial substance

• Transaction involves roundtripping

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Indirect Transfers

- Separate entity principle

- Controlling interest not capital asset independent of the shares

- Indirect transfer of shares not within India tax net

- Unless tax avoidance involved

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Budget 2012 - Highlights

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• Tax Rate and Cash Grant

• Designated Investments and Specified Income

• Gains on Disposal of Equity Investments

• Real Estate Investment Trusts

• Other Key Corporate Tax Changes

• Personal Tax Changes

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Tax Rate and Cash Grant

No change in corporate tax rate

- Remains at 17%

SME cash grant extended

- 5% of revenue, capped at $5,000

- One-off non-taxable grant for YA 2011, extended to YA 2012

- Effectively a rebate for tax-paying companies

- 20% corporate tax rebate not extended

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Applies to fund management companies

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Designated Investments and Specified Income

Tax Incentives for Fund Management Industry

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FUND FUND MANAGER

(Singapore)

Fee

“specified income” from “designated investments”

10% Tax free

“all” income from “designated investments”

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Rationalisation of List of Designated Investments

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Existing List – Page 1 a) stocks and shares of —

(i) any company that is listed on SGX or KLSE; (ii) any company that is listed on any other exchange if the company is —

(A) incorporated in Singapore and resident in Singapore; or (B) incorporated outside Singapore and not resident in Singapore and the stock and shares issued by such companies are denominated in any foreign currency; or

(iii) any company that is not listed on a stock exchange in Singapore or elsewhere if the company is not in the business of trading or holding of Singapore immovable properties (other than the business of property development);

b) securities (other than stocks and shares) denominated in any foreign currency (including bonds, notes, certificates of deposit and treasury bills) issued by foreign governments, foreign banks outside Singapore and companies which are neither incorporated in Singapore nor resident in Singapore; c) futures contracts held in any futures exchange; d) any immovable property situated outside Singapore; e) certificates of deposit, notes and bonds issued by Asian Currency Units in Singapore; f) Asian Dollar Bonds approved under section 13 (1) (v) of the Act; g) deposits in Singapore with any approved bank as defined in section 13 (16) of the Act; h) foreign currency deposits with financial institutions outside Singapore; i) bonds and other securities listed on SGX or KLSE, and other bonds and securities issued by companies which are incorporated in Singapore and resident in Singapore; j) Singapore Government securities; k) foreign exchange transactions;

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Existing List – Page 2 l) interest rate or currency contracts on a forward basis, interest rate or currency options, interest rate or currency swaps, and swaps, forwards and option contracts relating to any designated investment or financial index, with —

(i) a financial sector incentive company which is — (A) a bank licensed under the Banking Act (Cap. 19); (B) a merchant bank approved under section 28 of the Monetary Authority of Singapore Act (Cap. 186); or (C) a holder of a capital markets services licence under the Securities and Futures Act (Cap. 289) to deal in securities or a company exempted under that Act from holding such a licence;

(ii) a person who is neither a resident in Singapore nor a permanent establishment in Singapore; or (iii) a branch office outside Singapore of a company resident in Singapore;

m) units in any unit trust which invests wholly in designated investments; n) qualifying debt securities that are discount securities issued during the period from 17th February 2006 to 31st December 2013 (both dates inclusive); o) securities (including bonds, notes, certificates of deposits and treasury bills, but excluding stocks and shares) issued by supranational bodies; p) loans that are —

(i) granted by the fund to any company incorporated outside Singapore which is neither resident in Singapore nor a permanent establishment in Singapore, where no interest, commission, fee or other payment in respect of the loan is deductible against any income of that company accruing in or derived from Singapore; or (ii) granted by a person other than the fund but traded by the fund;

q) commodity derivatives;

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Existing List – Page 3 r) physical commodities if —

(i) the trading of those physical commodities by the approved person in the basis period for any year of assessment is done in connection with and is incidental to its trading of commodity derivatives (referred to in this paragraph as related commodity derivatives) in that basis period; and (ii) the trade volume of those physical commodities traded by the approved person in that basis period does not exceed 15% of the total trade volume of those physical commodities and related commodity derivatives traded by the approved person in that basis period.

s) units in a registered business trust; t) emission derivatives; u) liquidation claims; v) structured products; and w) investments in prescribed Islamic financing arrangements under section 34B of the Act that are commercial equivalents of any of the other designated investments under this definition.

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Rationalised and Enhanced List – Page 1 a) Stocks and shares of any company, other than an unlisted company that is in the business of trading or holding of

Singapore immovable properties (other than the business of property development); b) Debt securities (which means bonds, notes, commercial papers, treasury bills and certificates of deposits), other

than non-QDS issued by an unlisted company that is in the business of trading or holding of Singapore immovable properties (other than the business of property development)

c) All other securities (not already covered under other sub-paragraphs): (i) Issued by foreign governments in foreign currency; (ii) Listed on any Exchange; (iii) Issued by supranational bodies (iv) Issued by any company, other than those issued by an unlisted company that is in the business of trading or holding of Singapore immovable properties (other than the business of property development);

d) Futures contracts held in any futures exchanges e) Any immovable property situated outside Singapore f) Deposits in Singapore with any approved bank as defined in Section 13(16) of the Act g) Foreign currency deposits with financial institutions outside Singapore h) Foreign exchange transactions; i) Interest rate or currency contracts on a forward basis, interest rate or currency options, interest rate or currency swaps, and any financial derivative relating to any designated investment or financial index, with:

(i) A financial sector incentive company which is: (A) A bank licensed under the Banking Act (Cap. 19) (B) A merchant bank approved under Section 28 of the Monetary Authority of Singapore Act (Cap. 186) (C) A holder of a capital markets services license under the Securities and Futures Act (Cap. 289) to deal in securities or a company exempted under that Act from holding such a license;

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Rationalised and Enhanced List – Page 2 (ii) A person who is neither resident in Singapore nor a permanent establishment in Singapore (iii) A branch office outside Singapore of a company resident in Singapore

j) Units in any unit trust which invests wholly in designated investments k) Loans that are −

(i) granted by the fund to any company incorporated outside Singapore which is neither resident in Singapore nor a permanent establishment in Singapore, where no interest, commission, fee or other payment in respect of the loan is deductible against any income of that company accruing in or derived from Singapore; or ii) granted by a person other than the fund but traded by the fund

l) Commodity derivatives; m) Physical commodities if –

(i) the trading of those physical commodities by the prescribed person in the basis period for any year of assessment is done in connection with and is incidental to its trading of commodity derivatives (referred to in this paragraph as related commodity derivatives) in that basis period; and (ii) the trade volume of those physical commodities traded by the prescribed person in that basis period does not exceed 15% of the total trade volume of those physical commodities and related commodity derivatives traded by the prescribed person in that basis period

n) Units in a registered business trust o) Emission derivatives p) Liquidation claims q) Structured products r) Investments in prescribed Islamic financing arrangements under Section 34B of the ITA that are commercial equivalents of any of the other designated investments under the definition of “designated investment”.

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Rationalised and Enhanced List – Page 3 s) Private trusts that invest wholly in designated investments t) Freight derivatives u) Publicly-traded partnerships that do not carry on a trade, business, profession or vocation in Singapore

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Exclusion List for Exempt Income

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All income and gains from designated investments will be exempt from tax:

Except:

(a) Interest and other payments that fall within section 12(6)

(b) Distributions by REIT listed on SGX

(c) Distributions by trust where the trustee is SG resident or PE

Excluding:

(i) Interest from deposits with approved banks

(ii) Interest and other qualifying payments from QDS

(iii) Fees and compensatory payments from securities lending or repos with qualifying counterparties

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Exclusion List for Exempt Income

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All income and gains from designated investments will be exempt from tax:

Except:

(a) Interest and other payments that fall within section 12(6)

(b) Distributions by REIT listed on SGX

(c) Distributions by trust where the trustee is SG resident or PE

Distributions by trust that enjoys tax exemption under sections 13C, 13G, 13O, 13X

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Gains on disposal of equity investments Existing tax treatment

- Determined on a case-by-case basis

- Refer to badges of trade

Proposed treatment

- Gains from equity investments disposed of on or after 1 June 2012 will not be taxed if:

◦ minimum shareholding of 20%

◦ minimum holding period of 24 months

- Only applicable for sellers which are companies

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Gains on disposal of equity investments

Key issues

- Definition of “equity investments”

- Definition of holding period

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• Details to be released by 1 June 2012

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Real Estate Investment Trusts Existing tax treatment

• For tax transparency treatment, a REIT must distribute 90% of its taxable income in the same financial year income is earned

• Distributions must be made in cash

Proposed treatment

• Distributions can take the form of units in the REIT

• Unit holders who elect to receive their distributions in the form of units will be taxed as if receiving them in cash

• With effect from 1 April 2012

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Other Key Corporate Tax Changes Productivity and Innovation Credit (PIC)

Four key areas of enhancement:

• Training

• Research and development

• Investment in automation equipment

• Cash payout option

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Cash payout:

- Payout rate increased from 30% to 60% from YA 2013 (max $60,000)

- Available on quarterly basis from 1 July 2012

- Scheme extended till YA 2015

- Expenditure cap cannot be combined for these years

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More beneficial option if effective tax rate is lower than 15%

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Cash payout – Example

• Expenditure of $100,000 on IT equipment on 1 Aug 2012

• 10% effective tax rate for FY2012

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Enhanced allowance

= 400% x $100,000

= $400,000

Tax savings

= $400,000 x 10%

= $40,000

Cash payout

= 60% x $100,000

= $60,000

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Other Key Corporate Tax Changes Capital allowance for low value assets

- Currently, one-year write-off for assets of up to $1,000 subject to cap of $30,000 per YA

- Maximum asset value increased to $5,000

- Effective from YA 2013

Renovation & refurbishment expenses

- Cap of $150,000 for each 3-year period doubled to $300,000

- Effective from YA 2013

- Permanent feature of tax system

M&A Allowance Scheme

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Key changes

Assistance for the Elderly

• Employer and employee CPF to increase for the “Over 50’s”:

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• No change to tax-deductible voluntary contribution limits

Age Group

To 31 Aug 2012

From 1 Sept 2012

Employer Employee Employer Employee

Up to 50 16% 20% 16% 20%

50-55 12% 18% 14% (+2%) 18.5% (+0.5%)

55-60 9% 12.5% 10.5% (+1.5%) 13% (+0.5%)

60-65 6.5% 7.5% 7% (+0.5%) 7.5%

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Key changes


• Special Employment Credit (SEC) to provide up to $240 credit to employers for employing older workers in lower-paid positions:

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Monthly income Monthly SEC

S$1,000 S$80

S$1,500 S$120

S$2,000 S$160

S$2,500 S$200

S$3,000 S$240

S$3,500 S$120

S$4,000+ Nil

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Key changes


• Earned Income Relief for the “Over 55’s” doubled:

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Age group Earned Income Relief (YA2012)

Earned Income Relief (YA2013)

Up to 55 years old S$1,000 S$1,000

55-60 S$3,000 S$6,000

60+ S$4,000 S$8,000

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Key changes

Other changes

• SEC also extended to handicapped employees

• Reduction in the Dependency Ratio Ceiling (“DRC”) to reduce the number of foreign workers in Singapore (typically S-Pass and Work Permit holders)

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Conclusion

Government is listening

• Budget 2012 have continued the Government’s focus on growth, productivity and innovation

• Much is expected of Singapore as the centre of the Asian growth engine in these trying times.

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Anuj Kagalwala

Partner - Financial Services Tax

Office: +65 6236 3822

Email: [email protected]

Hui Cheng Tan

Senior Manager - Financial Services Tax

Office: +65 6236 7557

Email: [email protected]

www.pwc.com/sg/fs

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TheThe

Foreign Account TaxCompliance Act

(FATCA)

March 2012

Strictly private &confidential

This document was not intended or written to be used, and it cannot be used, for thepurpose of avoiding US federal, state or local tax penalties.

1 What is FATCA?

Agenda

2 Key concepts

3 What are the obligations of an FFI?

4 Impact to funds and clients

5 Critical timelines

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What is FATCA?

Purpose of FATCA

Prevent and detect offshore tax evasionPrevent and detect offshore tax evasion

• Increased information reporting

• Enforced by withholding tax

Major functions impacted by FATCA

• Client on-boarding

• Tax reporting

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• Tax reporting

• Tax withholding

Governance Regulatory process – Where are we?

Key concepts

• Foreign financial institution

• Financial accounts• Financial accounts

• US person vs Recalcitrant

• US sourced income

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What are the obligations of an FFI?

Non US person

US person

30%

Recalcitrant

FFI

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30%

Impact to funds and clients

Considerations:

• KYC on retailinvestors

• Is the fund QFFI or

Considerations:

• KYC ondistributors –QFFI or NQFFI

Considerations:

• Responsibility towithhold on ABC

• Reporting to

Considerations:

• Is fund aparticipatingFFI?

Retail investors Distributor Fund Manager Administrator

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• Is the fund QFFI orNQFFI?

• Withholding onrecalcitrantinvestors

• Reporting to IRS?

QFFI or NQFFI

• Only deal withQFFIs?

• Will the funds bePFFI?

• Reporting to IRS?

• Reporting toIRS/Fundmanager?

FFI?

• Will my receiptsbe subject towithholding tax?

Impact to funds and clients

• All fund clients that are non-US persons investing into the US markets areaffected – they will be FFIs

• FFIs that invest in the US market directly or indirectly will be required to enter into• FFIs that invest in the US market directly or indirectly will be required to enter intoan FFI agreement with the IRS

• Compliance with FATCA leads to no additional US tax, however plenty of costs

• Non-compliance leads to 30% US withholding on US source income and 30%withholding on sales proceeds/redemptions of US source assets

• US Treasury says FATCA will not cause capital flight out of the US

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• US Treasury also says little tax withholding will occur

• Industry worked furiously to gain regulatory exemption for many fund types (UCITsfunds for example) No exemption is forthcoming.

• Investment manager services should be out of scope for FATCA

Critical timelines

2013 2014 2015 2016 2017

1 Jul 2013 :Agreement with

1 Jul 2014 :Manual

1 Jul 2015 :Electronic

Do

cum

enta

tio

n

Agreement withIRS

Manualreviewsperformed foraccounts >USD 1 million

Electronicreviewsperformed foraccounts < USD1 million

1 Jan 2014 :Withhold onFDAP payments

1 Jan 2017 :Withhold onpassthrupayments

Do

cum

enta

tio

nW

ith

ho

ld

31 Mar 2017 :31 Mar 2016:Partial reporting

31 Mar 2014 :Partial reporting

31 Mar 2015 :

Rep

ort

Full reportingto include grossproceeds

Partial reportingextended toinclude grossincome

Partial reporting

Internalcertifications

Oth

ers

31 Mar 2015 :Partialreporting

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Thank you

For further enquiries, please feel free to contact us :

Julia LeongPartner, Singapore FATCA LeadFinancial Services Industry PracticeTelephone : 6236 7378Email : [email protected]

Irene LiuFATCA Subject Matter ExpertFinancial Services Industry PracticeTelephone : 6236 3365Email : [email protected]

Mark JansenPartner, APAC FATCA LeadFinancial Services Industry PracticeTelephone : 6236 7388Email : [email protected]

Michael BrevettaGlobal FATCA Knowledge ExpertUS Tax PracticeTelephone : 6236 3801Email : [email protected]

© 2012 PricewaterhouseCoopers Services LLP. All rights reserved.

In this document, “PwC” refers to PricewaterhouseCoopers Services LLP which is a member firm of PricewaterhouseCoopers InternationalLimited, each member firm of which is a separate legal entity.

The materials contained in this presentation were assembled in February 2012 and were based on information available at that time.

Term financial institution means any entitythat

The term financial account means

Accepts deposits in the ordinary course of abanking or similar business

A commercial, checking, savings, time, or thriftaccount, or an account which is evidenced by a

Appendix – Financial Account

certificate of deposit, thrift certificate, investmentcertificate, certificate of indebtedness, or othersimilar instrument

Holds, as a substantial portion of its business (asdefined in paragraph (e)(3) of this section),financial assets for the account of others;

An account for the benefit of another person thatholds any financial instrument or contract held forinvestment

Is engaged (or holding itself out as being engaged)primarily (as defined in paragraph (e)(4) of thissection) in the business of investing, reinvesting, ortrading in securities, partnership interests,

Any debt interest or in the case ofPartnership – Equity mean capital or profitsinterest in the partnership

trading in securities, partnership interests,commodities, notional principal contracts,insurance or annuity contracts, or any interest inany of the above

Trust – Equity means either an interest held bya person treated as an owner of all or a portionof the trust or a person holding a beneficialinterest in the trust

Is an insurance company (or the holding companyof an insurance company) that issues or is obligatedto make payments to a financial account

Any amount held by an insurance company underan agreement to pay or credit interest thereon;Cash value insurance contract and annuitycontract issued or maintained by FFI

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This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers Services LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. © 2012 PricewaterhouseCoopers Services LLP. All rights reserved. “PricewaterhouseCoopers” and "PwC" refer to PricewaterhouseCoopers Services LLP or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate legal entity.

2012 imas-pwc fund management budget briefing

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