COMPANY CONFIDENTIAL David Dai SPX APAC 税务负责人新时代下的国际纳税筹划

COMPANY CONFIDENTIAL

David Dai SPX APAC 税务负责人

新时代下的国际纳税筹划


Agenda

Understanding of international tax planning• Overview of double taxation • Brief Introduction of Double Tax Treaty• Projects need your attention• Tax payable vs. tax expense in group reporting

Permanent Establishment Subpart F income Indirect transfer of Equity Foreign Branch Option


Overview of double taxation

Local sourced income vs. global sourced income A simple example of double taxation

A US company sends a bunch of consultants to China for a few months and it also hires some local assistance for a project lasts 10 months.

Would that income be taxed in China? Or in US? Or both?


Double tax treaty - types

Double Tax Treaty (“DTT”) on Income and Capital

e.g. Sino-Mauritius DTT

Air Transport/Shipping Treaties

e.g. Sino-US Air-Transport/Shipping Treaty

Asset Protection Treaties

e.g. Investment Promotion and Protection Agreement between China and Mauritius

COMPANY CONFIDENTIAL April 21, 2023 5



Tax Treaty Models

Organization for Economic Cooperation & Development (OECD) model

Articles 1-2 Scope of convention

Articles 3-5 Definitions

Articles 6-22 Taxation of types of Income

Articles 23-30 Special provisions

United Nations (“UN”) Model


Overview of double taxation

Why double tax treaty doesn’t always work• Loss position• High tax rate in overseas countries • Domestic rule sets different interpretation• Prerequisite for foreign tax credit



Tax payable vs. tax expense

Difference between tax payable and tax expense Sometimes tax expense is more important

Example:

Co. A acquired an asset at 10M years ago which is not allowed for depreciation/deduction for tax purpose. Its tax rate is 20% a DTL of 2M was established.

Co. A depreciates the asset for accounting purpose and the NBV now is 8M with a DTL of1.6M.

Co. A now disposes the asset for 9M. For tax purpose, there is a tax payable of 1.8M.

Realization of DTL and the 1.8M tax payable would be against 1.6M DTL and only 0.2M tax expense.





What is Subpart F Income?

The U.S. is one of the few remaining countries that taxes businesses on their worldwide income

Generally, income is not taxed until it is repatriated to the U.S. via dividend payments from foreign subsidiaries – referred to as controlled foreign corporations (“CFCs”)

Certain transactions were determined in 1962 to be abusive – and Subpart F of the Internal Revenue Code was enacted to:

• Prevent deferral of certain undistributed income such as:

Passive investment income – interest earned by foreign corporate subsidiaries is Subpart F income (e.g. bank interest income)

Intercompany sales across borders – certain sales of product are considered foreign base company sales income (“FBCSI”)


Example of Potential Abuse

U.S. Corp

Sales revenue $1,000Cost of sales (600)Gross profit $ 400

U.S. Tax @ 35% $ 140

Worldwide Tax CostU.S. tax $ 140Foreign tax 0

Total tax $ 140

Typical transaction – no tax avoidance

U.S. Corporation

Non U.S. Customers

U. S. Corporation sells $1,000 of inventory to foreign customers


Example of Potential Abuse

U.S. Corp

Sales revenue $ 700Cost of sales (600)Gross profit $ 100

U.S. Tax @ 35% $ 35

Foreign CorpSales revenue $1,000Cost of sales (700)Gross profit $ 300

Foreign Tax @ 0% $ 0

Worldwide Tax CostU.S. tax $ 35Foreign tax 0

Total tax $ 35

Transaction with a tax haven distributor – Target of Subpart F rules

U.S. Manufacturer

Non U.S. Customers

U. S. Corporation sells $700 of inventory to controlled foreign corp.

CFC DistributorTax Haven

Country (0% tax)

Distributor sells $1,000 of product to foreign customers


How is Subpart F Income Taxes & Reported

Subpart F income is included in taxable income of U.S. shareholder in the year earned rather than when it is distributed

• Income reported in the U.S. results in additional U.S. tax expense

• Since this is intercompany income the additional tax expense increases our overall effective tax rate

Subpart F income can also include loans from a CFC to U.S. shareholders

Subpart F income has a significant impact on MNC’s tax expense


Subpart F Income Rules Passive Income –

• Generally, does not apply to interest, dividends, rents & royalties received from a related person in the same country – “same country exception”

• Does not apply to royalties derived from the active conduct of a trade or business received from an unrelated person

• Look-through Rule – Generally excludes certain passive income received from a related CFC – provision expires at the end of 2011 unless extended by Congress

Foreign Base Company Sales Income Rules-

• Purchase of personal property – From a related party and the property is sold to any person; From any person and a sale to a related party; or From any person on behalf of a related person, where

• The property is manufactured or sold for use/consumption outside the CFC’s country of formation (domicile) (If CFC manufactures or adds significant value then not FBCSI)

• Sale of personal property to any person on behalf of a related person

Goods sold must cross 2 borders to be FBCSI


Example of FBC Sales Income

General Framework – FBC sales income is earned by a CFC (which does not manufacture the property) if the property crosses two borders after manufacturing and there is a related party on either side of the transaction.

Which transaction creates Subpart F income?

China Manufacturer

(CFC)

Singapore Distributor(CFC)

Sale of product to sister CFC

Singapore Customer

Japan Customer

Product sales to unrelated customers



Classic case on indirect transfer

21

Hong Kong company (“HK Co.”) holds

49% equity interest in T Co.

A Co. transferred all its equity interest

in HK Co. to another overseas

company B Co.

The tax authorities views HK Co. to be

disregarded due to lack of substance

under Circular 698 and deem the

transaction as a transfer of Target

company.

A Co.

HK Co.

100%

49%Mainland China

Overseas

Hong Kong

B Co.

Target


A further step from 698 – individual seller?

22

Source: EY China Tax & Investment News. Issue No. 2011007

Breakthrough in practice vs. Overriding the Law


Foreign Branch Planning

Source: 2011 Deloitte Global Services Limited


Questions & Answers

Thanks!

Documents

COMPANY CONFIDENTIAL David Dai SPX APAC 税务负责人 新时代下的国际纳税筹划

COMPANY CONFIDENTIAL David Dai SPX APAC 税务负责人新时代下的国际纳税筹划