Policymakers in the region are working to strike a balance between promoting economic development and raising revenue. Companies need to take a bird’s-eye view of the implications for their businesses

China

Philippines

South Korea

CHINA

In the first half of 2022, China’s economy grew 2.5% year-on-year. To prevent and control the pandemic, some areas took containment measures that greatly affected economic activity in the second quarter. However, since the third quarter, as the pandemic was effectively controlled, the impact of macro-support policies gradually appeared and the economy improved.

Looking back on the past 10 months, China has highlighted three obvious main lines in its tax policy. In terms of turnover tax, the authorities increased tax reductions or refunds for the manufacturing industry and micro,  small and medium-sized enterprises (MSMEs) greatly affected by the pandemic and energy crisis with a sharp drop in value-added tax (VAT) revenue and the rise in export rebates.

In terms of direct taxes, the authorities reinforced collection and management of tax on high-income groups, for a sharp year-on-year rise in revenue from individual income tax. Regional preferential tax policies were also made clearer and more open.

Correspondingly, in terms of supervision, the tax authorities are gradually realising transformation of tax management from invoices to data. The reform of electronic invoicing and extensive application of taxation big data make supervision more accurate and solid.

Tax reduction or refund

Advance payment of VAT by all branches of air and railway transport enterprises was suspended for 2022. VAT paid in advance from February 2022 to the date of the document will be refunded. In the same period, taxpayers were also exempted from VAT on income obtained by providing public transport services.

Additionally, producers and consumers of service industries can enjoy an additional VAT rebate until 31 December 2022. Deferred VAT payment for MSMEs in the manufacturing industry is extended for another six months from the initial three months. From 1 April to the end of the year, small-scale taxpayers are also exempt from VAT.

From 1 April 2022, tax authorities increased policy support for an end-of-period VAT credit refund for small and micro businesses and manufacturing, plus other related industries including: scientific research and technology services; power, heat, gas, and water production and supply; software and information technology services; ecological protection and environmental governance; and transportation, warehousing and postal.

The authorities also expanded the scope of refunding incremental VAT credit for the advanced manufacturing industry to eligible businesses (including privately or individually owned businesses) in full and on a monthly basis, refunding outstanding VAT credit in one lump sum.

The above-mentioned tax reduction and refund policies on turnover tax directly provide cash flow for enterprises, facilitating acceleration of technological transformation and equipment renewal, effectively boosting the confidence of market participants and promoting development of enterprises.

However, the authors note that in the process of applying for tax reductions or refunds on turnover tax, many enterprises have concealed sales revenue, reduced output VAT, and submitted false tax returns, hence attracting attention from and causing inspections by the tax authorities, leading to enterprises to be charged with tax makeup, fines, overdue fines and even criminal liabilities.

Strengthening supervision

In 2019, China revised and implemented the Individual Income Tax Law by introducing anti-tax avoidance clauses for the first time. This law provides a clear legal basis for tax authorities to regulate the tax avoidance behaviour of individuals (especially high-income ones) from aspects of independent transaction principles, rules for controlled foreign enterprises, and general anti-tax avoidance rules.

On 21 December 2021, the State Council’s report on the rectification of problems found, in an  audit of the central budget’s implementation and other financial revenues and expenditures in 2020, issues in tax return policy, individual tax payment of high-income groups, tax avoidance and evasion of individual equity transfers, etc.

The report proposed levying tax on sole proprietorship and partnership enterprises that meet certain conditions on an actual basis, and strengthening supervision over tax avoidance and evasion of individual equity transfers. Since 1 January this year, sole proprietorship or partnership enterprises of an equity investment are subject to taxation on an actual basis.

Before the end of 2021, taking advantage of places or areas with more preferential tax policies, fiscal return and taxation policies on a deemed basis in China has become a widely adopted means of tax avoidance, and it is not uncommon to make use of the asymmetric tax information between different countries to carry out so-called cross-border tax planning. However, in 2022, simple and stringent tax avoidance measures (under individual income tax) will be implemented.

Clearer, more open policies

Since the release of the Overall Plan for the Construction of Hainan Free Trade Port (Hainan Plan) in June 2020, various departments successively issued a number of policies in 2021, with further specific provisions on the implementation of preferential policies such as enterprise income tax, individual income tax, tariff and foreign investment access in the plan.

On 27 September, the relevant departments jointly issued the Supplementary Announcement on Issues Related to the Substantive Operation of Enterprises in Industries Encouraged by Hainan Free Trade Port, hoping to stabilise market expectations, not only promoting high-quality development of market participants in the free-trade port, but also preventing shell companies from enjoying preferential tax policies in violation of regulations, thus preventing industrial and systemic taxation risks.

The supplementary announcement clarifies enterprises or entities that hold posts or employ high-end and urgently needed talent under the preferential policies on individual income tax in the free-trade port, as specified in the Interim Measures of List Management for High-end Talents and Urgently-needed Talent.

The supplementary announcement further enhances judgment standards of the four elements of substantive operation in the Hainan free-trade zone, namely production and operations, personnel, accounts, and assets. Negative provisions to substantive operation were also added, including situations where the enterprises do not have production and operation functions, the registered address is inconsistent with the actual business address, or the business address cannot be contacted.

Clarifying the follow-up regulatory requirements, the supplementary announcement optimises the management mode for market participants with the substantive operation to enjoy preferential policies of the free-trade zone, while establishing a working mechanism for joint verification of substantive operation and dispute resolution. This strengthens joint supervision by departments, risk prevention and control, and protects the rights and interests of legal market participants.

Outlook

The authors believe that in the fourth quarter of 2022 and upcoming 2023, China’s tax policy will continue to develop in the following aspects:

Tax management through data. Tax authorities are developing phase IV of the golden tax system (intelligent tax), which will be completed by the end of this year. In future, the tax authorities will make full use of modern information technologies such as big data and cloud computing to realise the precise supervision transformation from tax management through invoices to tax management through data.

Tax policies related to double carbon target. China announced it would take the shortest time in history to achieve carbon peak by 2030 and carbon neutrality by 2060. Corresponding to these targets, the authors believe that tax policies related to environmental protection, use of new and clean energy, emissions reductions and carbon trading will become new priorities.

Continuation of tax reductions and refunds for manufacturing industry and MSMEs. Tax and fee cuts will always be the main tone of China’s fiscal and taxation policies, including upgrading and supporting the manufacturing industry, tax reductions for MSMEs, and large-scale VAT credit refunds that have been implemented and will continue, and increasing the additional deduction of research and development expenses related to enterprise innovation.

Continuing to strengthen tax inspection in areas with high incidence of taxation violations. While further optimising the taxation environment for doing business, the tax authorities will rely on precise tax supervision to increase the spot-checking ratio of random inspection and public release for industries, regions and people with frequent tax evasion problems as required, and continue strengthening tax inspection.

JINCHENG TONGDA & NEAL (JT&N)
10/F, China World Tower A
No. 1 Jianguo Menwai Avenue,
Chaoyang District

Beijing 100004, China

Tel: +86 10 5706 8585

Email:beijing@jtn.com

www.jtn.com

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PHILIPPINES

Governments worldwide continue to explore ways to capture revenue from the digital economy. Tax regulators are in agreement that tax policy must change to address the challenges of levying and collecting taxes on a largely inscrutable, borderless digital economy. However, countries differ on the most effective way forward – some turning to direct taxes, others to indirect taxes.

Even as governments move to exercise their policy choices, the answer remains up in the air as to whether digital services taxes, expanded consumption taxes, or other more novel approaches, would prove most effective in taxing the digital economy.

The Philippine congress is engaged in lively debate on the mode of capturing tax revenue from the digital economy. Leading the charge is Congressman Joey Salceda, who noted: “The digital economy is growing rapidly, but digital economy taxation is falling flat.” In 2019, digital economy tax collection of the Bureau of Internal Revenue was around PHP45 billion (USD764,220), and remained the same in 2020. “That’s hardly believable given the increase in digital transactions,” he said.

Initial draft legislation attempted to impose income taxes on the revenue of foreign digital economy corporates. But this was eventually abandoned, with more recent proposals focused on amending expanded value-added tax (VAT) rules to make sure that digital goods and services are properly covered by the VAT system.

PROPOSED MEASURES

In August, the Philippines’ House of Representatives Ways and Means Committee approved on first reading House Bill No. 4122 that would impose a 12% VAT on digital transactions. This bill consolidates three bills filed in this 19th congress, all based on a measure previously approved on the third and final reading.

The proposed measure seeks to amend section 105 of the National Internal Revenue Code to include goods that are digital or electronic in nature, and services rendered electronically, within the purview of the VAT. The bill adds a new section that would require non-resident digital service providers to assess, collect and remit VAT on transactions through their platforms.

A digital service provider, or DSP, is defined under the bill to be “a service provider of a digital service or good to a buyer, through operating an online platform for purposes of buying and selling of goods or services or by making transactions for the provision of digital services on behalf of any person”.

Under the bill, a digital service provider may be:

• A third party, such as a seller of goods and services who, through information-based technology or the internet, sells multiple products for its own account, or one who acts as an intermediary between a supplier and buyer of goods and services, such as a merchandiser or retailer, who collects or receives payment for such goods or services from a buyer on behalf of the supplier and receives a commission;
• A platform provider for the promotion that uses the internet to deliver marketing messages to attract buyers;
• A host of online auctions conducted through the internet, where the seller sells the product or service to the person who offers the highest price for it;
• A supplier of digital services to a buyer in exchange for a regular subscription fee over the usage of the said product or service; or
• A supplier of goods or electronic and online services that can be delivered through an information technology infrastructure, such as the internet.

The bill also defines the following terms:

• Buyer is any person who resides or consumes taxable digital services in the Philippines from a digital service provider, either for personal consumption or for trade or business purposes.
• Digital service is any service delivered or subscribed over the internet or other electronic network which cannot be obtained without the use of information technology, and where the delivery of the service may be automated.

This general definition of digital service is enhanced by the enumeration of what it includes, namely: Online licensing of software, updates, add-ons, website filters and firewalls; mobile applications, video games and online games; webcasts and webinars; provision of digital content such as music, files, images, text and information; advertisement platforms such as the provision of online advertising space on an intangible media platform; online platforms such as electronic marketplaces or networks for the sale, display and comparison of prices of trade products or services; search engine services; social networks; database and hosting such as website hosting, online data warehousing, file sharing and cloud storage services; internet-based telecommunications; online training such as the provision of distance teaching, e-learning, online courses and webinars; online newspapers and journal subscriptions; and payment processing services.

The proposed measure requires a non-resident digital service provider to register for VAT if:

• Its gross sales or receipts for the past 12 months before the date of filing the VAT return (excluding those exempt from VAT) have exceeded the threshold of PHP3 million; or
• There are reasonable grounds to believe that gross sales or receipts of the digital service business for the next 12 months from the date of filing the VAT return, will exceed the threshold.

It also requires non-resident digital service providers to designate a representative office or agent (a resident corporation registered under Philippine law) to assist in compliance with the provisions of the tax code.

Note that the bill requires the tax authority to “establish a simplified automated registration system” for non-resident digital service providers, and allows such providers to “issue an electronic invoice or receipt”, subject to rules and regulations that may be issued by the Secretary of Finance on the recommendation of the Commissioner of Internal Revenue.

EXPECTATIONS, UNCERTAINTIES

Similar to legislation in jurisdictions that have been guided by the Organisation for Economic Co-operation and Development’s international VAT guidelines, the current measure bears design features aimed at encouraging compliance. This is evident in provisions on simplified registration and clarification of the tax scope through the definition of terms.

Nonetheless, there remain important questions that would require refinements to the law and/or further details to be included in the rules and regulations implementing the law.

For instance, in applying VAT to a particular transaction, the buyer’s residence or place of consumption would need to be determined. What critical evidence must the supplier obtain to establish the buyer’s residence or place of consumption?

As for the compliance regime, the expectation is that this should be sufficiently simplified to reduce costs for non-resident digital service providers and in turn encourage compliance. It would be crucial for affected entities to understand what this regime looks like in terms of the frequency of filing returns, the information needing inclusion in tax returns, tax payment methods, invoicing details that must be completed, and types of books that must be kept.

It would also be worthwhile not only for the purposes of taxpayer compliance, but also for tax administration, to clarify the effect of non-compliance – whether it is a failure to register, to timely file returns, or to pay the tax. Doing so would reduce uneven implementation of the tax measure.

Lastly, but perhaps most importantly, any uncertainties as to the effect of registration under the proposed measure must be resolved. If the intention is that registration is solely for VAT purposes, this must be definitively provided for in legislation; to give greater assurance to would-be registrants that doing so would not create a permanent establishment for them in the Philippines. The impact of such registration on rules of doing business under Philippine corporate law must also be addressed.

If registration and compliance by non-resident businesses are to be encouraged, there must be increased certainty in the application of the rules.

OCAMPO AND SURALVO
6/F Liberty Center Bldg, 104 HV Dela Costa St

Salcedo Village, Makati City,

Metro Manila – 1227, Philippines

Tel: +632 7625 0765

Email: info@ocamposuralvo.com

www.ocamposuralvo.com

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SOUTH KOREA

Cryptocurrencies are a hugely popular investment option among younger people in South Korea, where it is seen as a solution to difficult economic conditions and a way to make a lot of money fast. Taxation of cryptocurrencies is accordingly a hot political issue.

In this article, the authors provide an up-to-date explanation of how a cryptocurrency is taxed, with the caveat that any explanation of the rules quickly becomes out of date. A few months from now, the position may change again.

At the time of writing, except in the case of domestic corporations, no cryptocurrency-related transaction or event is subject to any form of taxation in the country. The previous Korean administration under former president Moon Jae-in originally announced plans to make certain cryptocurrency transactions taxable as of 1 January 2022, before pushing that date back a year. Currently, in-force law states that certain cryptocurrency transactions for resident individuals will become taxable as of 1 January 2023.

But current President Yoon Suk-Yeol, who took office in May this year, has proposed pushing back the effective taxation date to 2025, and the Ministry of Economy and Finance has accordingly published proposals to this effect.

It is likely that proposals will be approved by the National Assembly in due course, although this approval is not automatic. In seeking to postpone the taxation of cryptocurrencies, it is likely that President Yoon was at least in part motivated by the need to appeal to younger voters.

With these repeated changes to cryptocurrency taxation plans, it is difficult for a tax adviser to keep up-to-date on the latest situation. It will be unsurprising if the plans change yet again, or if taxation is delayed yet further, beyond the envisaged 1 January 2025 start date.

TAX PERSPECTIVE

The precise definition of a cryptocurrency can be debated extensively, not least because there are thousands of different types. Nonetheless, there are some often occurring characteristics common to many of them, key ones being use of blockchain technology, decentralisation and virtual-only existence.

From a tax perspective, there is only one really important distinction, and that is whether a cryptocurrency is indeed a type of currency, as the word cryptocurrency suggests, or a type of asset.

In common with many member countries of the Organisation for Economic Co-operation and Development (OECD), South Korea’s position on this is clear. For tax purposes, it should be treated as an asset. Indeed, a more accurate English translation of the Korean term for a cryptocurrency (가상자산) would be virtual asset.

TAXABLE EVENTS

Once it is understood that cryptocurrencies should be treated as an asset, the taxation treatment becomes clearer, as it basically follows the same South Korean taxation rules that apply to transactions involving other types of assets.

There are several possible events involving cryptocurrencies that might at first glance be potential candidates as taxable events, namely creation (or acquisition), disposal (including transferring from an exchange platform to a personal wallet) and lending.

Creating or acquiring a cryptocurrency is a non-taxable event in South Korea. That is true whether it is created through mining, some other means, or acquired through purchase with money or other non-monetary consideration.

However, the creation or acquisition of a cryptocurrency still has some relevance for tax purposes, since its value at this point in time will be used to calculate the taxable gain when there is disposal.

As with other assets, when a gain is realised on the disposal of a cryptocurrency, that gain is subject to tax. More specifically, a disposal means the cryptocurrency is either transferred, loaned or withdrawn (the latter in the case of non-residents only) in return for consideration.

The gain equals the consideration received for the transfer, less the acquisition price (which includes incidental expenses relating to the creation or acquisition). For a cryptocurrency held earlier than 1 January 2023, the acquisition price will be deemed to be the larger of the market value as of 1 January 2023 or the actual acquisition price. For the latter, for accounting purposes, either the moving average method or the “first in, first out” method should be used, depending on the particular circumstances.

One of the basic principles of Korean tax law is that only items that are expressly mentioned in the tax law can be subject to taxation. In this case, the proposed legislation clarifies that cryptocurrency gains will be categorised as other income, and should be recorded as such on tax returns.

The tax rate and method of payment will differ for residents and non-residents, and for individuals and corporations.

Resident individuals. From January 2023 onwards, worldwide cryptocurrency gains over KRW2.5 million (USD1,750) will be taxed at a flat rate of 22%, with the gain reported annually during the income tax return period (May). Since the tax applies to worldwide gains, it cannot be avoided by holding a cryptocurrency in accounts outside South Korea.

Domestic corporations. Although cryptocurrencies are not specifically mentioned in the existing tax law applying to domestic corporations, it is generally accepted that cryptocurrency gains will be taxed according to general taxation principles. Therefore, in the case of domestic corporations, no specific amendment to the law is required to bring cryptocurrency gains within the scope of taxation.

As with other types of taxable gains, cryptocurrency gains are added to the other annual taxable corporate income with income more than KRW200 million taxed progressively at 22% (for the KRW200 million to KRW20 billion portions of income); 24.2% (for the KRW20 billion to KRW300 billion portions); and 27.5% for any income over KRW300 billion.

The gain is reported on the annual corporation tax return, which is filed within three months of the last day of the business year. As with resident individuals, the tax is applicable to worldwide cryptocurrency gains, so cannot be avoided by holding it in foreign accounts.

Non-resident individuals or foreign corporations without South Korean permanent establishment. As is the case for resident individuals, the currently law at the time of writing states that South Korean-sourced cryptocurrency gains will be taxable as of 1 January 2023. However, although the proposal to push back taxation until 2025 strictly speaking only applies to resident individuals, in practice it will likely also apply to non-resident individuals and foreign corporations.

As of 2023 (or 2025, as the case may be), the position for non-resident individuals or foreign corporations without a South Korean permanent establishment will be as follows: For international tax purposes, cryptocurrency gains with some Korean connection (e.g., a trading platform based in South Korea used for relevant transactions) will be considered South Korean-sourced income, and taxed in the same way as other domestic taxable gains, namely, the lower of either 22% of gain or 11% of transfer price.

However, although non-resident individuals or corporations with cryptocurrency gains will suffer the economic burden of the tax, they will not be responsible for tax filings or payments. As with other types of gains, these will be through withholding taxes, with the virtual asset operator acting as a withholding agent. Having said that, the good news for non-resident individuals or corporations with this sort of gain is that provided they live in a country that has a tax treaty with South Korea they will be able to apply to the virtual asset operator for tax exemption.

This would involve submitting a relatively simple application form along with supporting documents proving their country of residence.

Value-added tax (VAT). No legislative provision expressly mentions the applicability or not of VAT to cryptocurrency transactions. However, the tax authority provided guidance in 2021, suggesting that cryptocurrency transactions are outside the scope of VAT. So, although there is not complete certainty, this appears to be the position for now.

FOOD FOR THOUGHT

The good news for individual (but not corporate) investors is that for the time being at least, cryptocurrency gains are totally untaxed, and this is unlikely to change for at least the next two years.

It remains to be seen whether taxation comes into effect in January 2025, or whether it will be pushed back further, allowing cryptocurrency investors yet another reprieve from taxation.

LEE & KO
Hanjin Building, 63 Namdaemun-ro, Jung-gu

Seoul – 04532, South Korea

Tel: +822 2772 4000

Email: mail@leeko.com

www.leeko.com

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