Second edition: Incentives in the ASEAN region 2014 - EY

Second edition:

Incentives in the ASEAN region 2014 (Manufacturing and Regional Corporate Support/Headquarter)

Contents Opening 2 Overview of incentives Indonesia 4 Malaysia 8 Myanmar 12 Philippines 16 Singapore 20 Thailand 24 Vietnam 28

BIA team and services 32

Welcome to our second edition of Incentives in the ASEAN region.

Opening Welcome to our second edition of Incentives in the ASEAN region. It has been two years since we launched the inaugural edition of the Incentives in the ASEAN region publication. In these short two years, the environment has certainly not remained static - in fact, changes to the incentives environment have picked up speed and momentum. This is corroborated by the latest World Investment Report from the United Nations Conference on Trade and Development (UNCTAD) which shows a global decline in foreign direct investment (FDI) inflows in 2012 compared to the previous year. However, the ASEAN region saw a rise in FDI inflows by 2%, amounting to US$111b over the same period. It is clear that ASEAN remains a preferred investment location for businesses. According to the latest Southeast Asian Economic Outlook published by the Organisation for Economic Co-operation and Development (OECD), economic growth for the ASEAN nations is projected to be an annual average of 5.5% through 2017. This is the same rate recorded during the pre-crisis period (2000 – 2007). This positive outlook is aligned with the results of the latest World Investment Prospects Survey which identified Indonesia, Thailand, Vietnam, Malaysia, and Philippines as among the top 20 prospective FDI host economies on a global basis. Recent concerns over the economic strength of some developing markets have also clearly not diminished the long-term focus on the ASEAN region as an investment priority. Emerging opportunities in Myanmar have only heightened the spotlight on ASEAN. Since Myanmar’s political reforms began in 2010, and the 2012 launch of its new Foreign Investment Law (FIL) that allows 100% foreign capital in businesses (with conditions), companies have expressed strong interest in Myanmar. Improved government incentives are also available under the 2012 FIL and the Special Economic Zones Law to further encourage foreign investments. The second edition of this publication incorporates the latest developments in Myanmar.

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| Incentives in the ASEAN region 2014

Beyond Myanmar, individual governments in the rest of ASEAN continue to refine their investment regulations and incentive schemes to more effectively compete for FDI. For example, the Philippines’ latest Investment Priorities Plan for 2013 has expanded the number of Ecozones available under the Philippine Economic Zone Authority (PEZA) incentive scheme. Vietnam authorities have also re-introduced previously expired incentives for new manufacturing investments and business expansions in selected industrial parks. Governments have to be attuned to the range of needs of companies looking to do business in their countries in this intensely competitive climate, and the incentives offered may take the form of monetary as well as non-monetary benefits such as tax concessions, grants, or relaxation of certain regulatory environments. These benefits, as well as the rules and procedures for application, however, may not always be transparent to investors.

Tan Bin Eng Partner, ASEAN Business Incentives Advisory

With the targeted realisation date for the ASEAN Economic Community (AEC) of 2015 fast approaching, we anticipate that this will increasingly influence the strategies of multi-national corporations (MNCs) and the levels of investments they sink into the region. The AEC serves to bring about greater economic integration within ASEAN and its objectives include the establishment of free flow of goods, services, investment capital and skilled labour. As ASEAN rushes to meet its commitments under the AEC, more liberalisations are expected, and this should only enhance the overall attractiveness of ASEAN. This second edition of Incentives in the ASEAN region focuses specifically on incentives available for manufacturing and regional headquarter or corporate support activities1 which continue to catch the attention of investors in this region. As can be seen, the incentives landscape is far from static, and businesses should ensure they have an understanding of the latest developments to maximize their return on investments. We hope that this publication will be a good starting point to help you better understand and navigate the available government incentives that may be applicable for your plans in the region.

Adrian Ball Managing Partner – Tax ASEAN Region

March 2014

Please note that each country may have a range of incentives available for other activities, and this edition is by no means an exhaustive list. Our 2013 Asia-Pacific R&D incentives publication provides an overview of the incentives available to companies engaging in R&D activities in the key Asia-Pacific countries.

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Incentives in the ASEAN region 2014 |

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Overview of incentives in

Indonesia

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he presence of tax incentives in Indonesia is relatively short, with the first Tax Allowance incentive introduced in 2007. Since then, the Indonesian government has continued to explore and develop new incentives while refining its existing tax incentives.

A number of statutory incentives were introduced in the 2008 reform of Income Tax Law and reduced corporate tax regimes were made available to certain companies listed on the Indonesian stock exchange, as well as small or medium-scale companies. More recently, the Tax Holiday incentive was established in 2011 with the objective of attracting FDI into Indonesia, in particular manufacturing industries that have extensive interconnections, high value-add, introduces new technology, and is of strategic importance for the nation-wide economy.

Incentive categories and administering body Incentives in Indonesia can be broadly categorised into discretionary and statutory incentives. Discretionary incentives include the Tax Allowance incentive and Tax Holiday incentive, which require approvals from the Ministry of Finance. Administration of these tax incentives is usually carried out together with other relevant government agencies such as the Ministry of Industry and the Indonesia Investment Coordinating Board. Taxpayers who are awarded the Tax Allowance incentive are not eligible for the Tax Holiday, incentive and vice versa. Statutory tax incentives include incentives for listed companies and small or medium scale companies. The conditions and requirements are specifically defined under the Income Tax Law. For listed companies, reduction of the corporate income tax rate by five percentage points is available as long as at least 40% of their paid-up capital is traded on the Indonesian stock exchange. Small or medium-scale companies with a gross turnover of up to IDR50b (USD4.3 m2) are entitled to a

50% reduction of the corporate tax rate on taxable income up to IDR 4.8b (USD0.4 million2). Claims for the benefits under such incentives are made through the annual tax return without the need for a separate application process and approval from the government A new final tax regime was introduced in 2013 and is applicable to business income of certain individual and corporate taxpayers, excluding permanent establishments, with a gross turnover of less than IDR 4.8 b (USD0.4m2) per annum. Such qualifying taxpayers are subject to an income tax of 1% of their monthly gross turnover, with certain exceptions. As the tax represents a final tax liability, such taxpayers will no longer be subject to the “normal” corporate income tax at the year-end. Taxpayers qualifying for a different final tax regime (e.g., construction companies) are not eligible for this 1% final tax. No prior approval from the government is needed, so long as the company is a qualifying taxpayer.

General application process for discretionary incentives Businesses applying for the Tax Allowance or Tax Holiday incentives are required to submit an application to the relevant government agency and/or the Indonesia Investment Coordinating Board, which will evaluate the applicant’s eligibility for the incentive and submit a recommendation to the Directorate General of Taxation or the Minister for Finance for final approval. For the Tax Allowance incentive, the Minister for Finance is required to accept or reject the request within 10 working days from the receipt of a complete and valid request. Submission of the request for the Tax Holiday incentive to the Ministry of Finance must be made within three years from the date of enactment of the Tax Holiday regulation, which is 15 August 2011. There is no requirement under the existing tax regulations for the investment to be made only after approval for the relevant incentives has been obtained. However in practice, we typically see applications for tax incentives being made before the investment or commercial operation commences.

Based on exchange rate of 1USD:11,675IDR as at 14 February 2014.

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Overview of incentives in Indonesia

Key tax incentives The key tax incentives in Indonesia are focused on exportoriented industries, manufacturing industries and sophisticated technology industries. There have not been any tax incentives to promote headquarter activities to-date.

Activity Name of Incentive

The table below provides an overview of key available tax incentives for manufacturing industries available through application with the relevant government agencies and/or the Indonesia Investment Coordinating Board:

Manufacturing Tax Allowance

Tax Holiday (note that based on current regulations, any recommendation for the Tax Holiday from the Minister of Industry or the Head of Capital Investment Board must be submitted to the Minister of Finance for final approval before 15 August 2014)

Corporate tax benefits

• Investment allowance in the form of reduction of net income by 30% of the actual amount invested in land and buildings, and plant and equipment. Following the 2011 amendment, the Tax Allowance can only be utilised when 80% of the investment plan is attained. This allowance may be claimed at a rate of 5% each year over a six-year period.

• Corporate income tax exemption on income derived from qualifying business activities for a period of 5 - 10 years, starting from the commencement of commercial operations followed by a corporate income tax reduction of fifty % for two years.

• Accelerated tax depreciation and amortisation. • Carry-forward of tax loss up to a period of 10 years, subject to certain conditions, as compared to five years for non-incentivised companies. Other tax benefits

• Reduced tax rate of 10% for dividends paid to non-residents.

• None

Non-tax benefits

• None

• None

Scope of coverage of incentive

• Companies investing in certain types of businesses or region (currently 52 categories of business sectors and 77 categories of types of industries in designated areas and provinces, generally outside Java. Please refer to Annex A for examples of the business sectors.)

• Engaged in “pioneer” industries, which currently include basic metals, oil refinery, communication equipment, industrial machinery and renewable resources.

Key assessment parameters

• The investment must be a new investment or an investment for the purpose of expanding a current business, with certain exceptions.

• Have new approved investment plans of at least IDR1t (approximately USD85m2) • Deposit at least 10% of total investment plan in Indonesian banking system without any withdrawal until commercial production begins • Applicable to Indonesian legal entity established after 15 August 2010 (i.e., 12 months before the issuance of the Regulation)

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Based on exchange rate of 1USD:11,675IDR as at 14 February 2014.

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Future outlook

Annex A3 1. Plantations, livestock, hunting, and related activities

15. Electrical equipment industry

2. Forestry and logging

17. Vehicle industry

3. Coal and Lignite mining

18. Other transport equipment industry

4. Geothermal 5. Food industry 6. Textile industry 7. Oil and natural gas refinement and purification

16. Machinery industry

19. Machinery and equipment installation and repair services 20. Power supply, supply of natural gas

8. Chemicals industry

21. Water supply

9. Rubber industry

22. Waste treatment and recycling

10. Cosmetics ingredients industry 11. Pharmaceuticals industry 12. Base metals industry 13. Metal goods industry 14. Electronics industry

While the numbers of business sectors qualifying for the Tax Allowance incentive have been growing from 2007, it can be expected that the government will continue to develop the qualifying list for Tax Allowance incentive to keep up its efforts in attracting inbound investments into Indonesia.

23. Civil building construction 24. Land transportation and pipeline transportation 25. Computer programming activities 26. Real estate

Source: News article on Indonesia Infrastructure Initiative website (http://www.indii.co.id/news_daily_detail.php?id=2780)

Ben Koesmoeljana Partner +62 21 5289 5030 [email protected]

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Malaysia

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he majority of tax incentives were introduced in Malaysia in the early 1990s. Malaysia has developed and offered incentives to attract investments and spur economic activity in key sectors for 24 years. Today, the service sector accounts for the largest share of investments followed by the primary sector and the manufacturing sector. With the continuous expansion of foreign investments to Malaysia, approximately 82% of jobs created are high-skilled employment, generating approximately 41,885 job opportunities in 20134.

Incentive categories and administering body There are two broad categories of incentives in Malaysia: statutory and discretionary. Statutory incentives, such as the Reinvestment Allowance incentive for manufacturing companies that reinvest capital for expansion, modernization or automation purposes, are available under the Income Tax Act, 1967 (Act). In addition to the above, double deductions (200% deduction on qualifying revenue expenditures) such as insurance premium paid for export or import of cargo, R&D expenditure, etc. are also available under the Act. Such incentives do not require prior approval and are submitted to the Inland Revenue Board during the preparation of the annual corporate tax return. Discretionary incentives require applications with the relevant authorities. The principal agency that administers discretionary incentives and promotes key manufacturing and service sectors is the Malaysian Investment Development Authority (MIDA). Companies manufacturing promoted products and providing promoted activities are eligible for pioneer status (tax holiday) or an investment tax allowance (ITA) for qualifying capital expenditure. However, the pioneer status and ITA are generally mutually exclusive, and taxpayers may only apply for one of the incentive.

Discretionary incentives are available for products and activities that the Malaysian government has identified a need to encourage. A list of “promoted products and activities” and their standard qualifying conditions for different manufacturing and service sectors are available at the MIDA website. Based on the latest list published on the MIDA website, the “promoted products and activities” includes manufacture of rubber products, manufacture of palm oil products, petrochemicals, electrical and electronic products and components, medical, scientific and measuring devices or parts, etc., and manufacturing related services such as operational headquarters, regional distribution centres, international procurement centres, etc. There are also incentives available for projects that the Malaysian government considers to be of national and strategic importance, beyond what is currently specified under the statutory and discretionary incentives. This is known as the special incentives scheme, in which companies can negotiate and customise their own incentive package, i.e., income tax exemption, generally, up to 100% for a period up to 10 years or up to 100% allowance on qualifying capital expenditure for a period up to 10 years. There are no standard eligibility criteria for such special incentives, although factors such as investment value, introduction of new technology, development and employment of highly skilled staff (often referred to as knowledge workers), and introduction or increase in level of value-added activities (such as research and development) are typically taken into consideration in the negotiations with the authorities.

Source: 2013 Media Statement on MIDA website (http://www.mida.gov.my/env3/uploads/PerformanceReport/2013Q1/MediaStatement.pdf)

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Overview of incentives in Malaysia

General application processs

Key tax incentives

The application process generally takes between three to six months from preparing the application submission package, clarifying information with the authorities to the tabling of the report to the National Committee of Incentives for approval.

The table below provides an overview of key available tax incentives in Malaysia available through application with the relevant government agencies:

It is important to note that incentive applications should be submitted before the project commences.

Activity

Manufacturing

Available tax incentives

• Pioneer status (PS) 5

Provision of corporate support or headquarter services • Operational HQ (OHQ)

• Investment tax allowance (ITA)

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• International Procurement Centre (IPC) • Regional Distribution Centre (RDC)


• Partial (50% or 70%) / full (100%)income tax exemption for a period of generally up to 10 years (PS)

• Full income tax exemption on qualifying income streams

• An allowance of 60% to 100% of qualifying capital expenditure available for offset against 70% to 100% of statutory income for a period of generally up to 10 years (ITA) Other tax benefits

• Import duty exemptions [A company may also enjoy the import duty exemptions on a standalone basis, i.e. without PS/ITA]

• Expatriates are taxed only on the number of days they are physically in Malaysia

Non-tax benefits

• Approval of expatriate positions

• Approval of expatriate positions • Flexibility on Foreign Exchange Administration rules


• Whether the product or activity is on the “promoted” list

All

• Investment value

• Minimum annual operating expenditure

• Whether new technology is being introduced

• Qualifying services or activities

• Number of knowledge workers

IPC or RDC only

• Level of value-added activities (such as research and development)

• Incremental usage of local ports and airports

• Minimum annual sales turnover

OHQ only • Minimum numbers of senior professional or management personnel • Minimum number of entities being served outside Malaysia • Minimum numbers of qualifying services carried out

Also available for activities beyond manufacturing such as services.

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Future outlook Further to the Malaysian Budget 2014, the Minister has introduced new tax incentives and extension of incentives to encourage more investments to Malaysia. New tax incentives were granted for the use of green technology, research and development of bioeconomy, and extension of hotel incentive were announced during the Budget 2014. The trend towards incentivizing new sectors will continue to play an important role in enhancing and developing the Malaysian economy.

Amarjeet Singh Partner +603 7495 8383 [email protected]


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Myanmar

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ince Myanmar transitioned to a new government in August 2011, the country has been undergoing a series of political, social, and economic reforms. In November 2012, the Myanmar Foreign Investment Law was introduced to provide foreign investors with more exemptions and reliefs to attract inbound investment activities.

Incentive categories and administering body The Myanmar Foreign Investment Law provides for a wide range of tax and non-tax incentives for companies. In addition, further incentives may be available for foreign investors carrying on a business in the Special Economic Zones under the Special Economic Zone Law.

General application process The incentive application process begins with registration to the relevant authorities or ministries for an incorporation of a company under the Myanmar Foreign Investment Law (FIL) which usually takes six months or more. The applicant typically submits the proposal (e.g., project description, investment amount, employment, etc.) to the Myanmar Investment Commission (MIC), whereby the proposal will be accepted or rejected within 15 days subsequent to submission of the proposal. If accepted, the MIC investment permit will be issued within 90 days. After obtaining the issued MIC permit, there will be two applications, i.e., Application for Permit-to-Trade and Application

for incorporation of the Company, which are both required to be submitted to the Directorate of Investment and Company Administration. Accordingly, the Permit-to-Trade and Certificate of Incorporation will be issued within 2 – 3 months after the submission of the applications. For the company incorporated under the Special Economic Zone (SEZ) Law, the investment project is to be submitted to and approved by the Central Body.

Key tax incentives The key available tax incentives in Myanmar are mainly focused on industries in the areas of power, oil and gas, and technology projects. Currently, there have not been any tax incentives to promote headquarter service activities in Myanmar. The table below provides an overview of key tax incentives in Myanmar that are available for manufacturing activities, available through application and approval from the relevant government agencies:


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Overview of incentives in Myanmar

Activity

Manufacturing

Name of Incentive

FIL

SEZ

Tax benefits

• F  ive-year corporation income tax exemption

• C  orporate income tax exemption for the first five years

• 5  0% corporate income tax exemption for export • C  orporate income tax exemption on profit reinvested within one year • C  ustom duty exemption on machinery, equipment, tools, machinery parts during construction or expansion period • T  hree-year custom duty exemption on raw material • L  osses incurred within two consecutive years after the five-year tax holiday can be carried forward for up to three consecutive years from the year of loss • C  ommercial tax exemption on products manufactured for export • D  eductions of income tax paid for expatriates • D  eductions of certain research and development expenditure • A  ccelerated depreciation on certain assets (note that one or more of the above tax benefits can be granted)

Non-tax benefits

• B  e entitled to the right to lease land for 50 years initial lease period with renewal option of 10 years twice • G  uarantee against nationalization

• 5  0% corporate income tax exemption for export sales for the second five years • 5  0% corporate income tax exemption on export profit reinvested for the third five years • C  ustom duty exemption on machinery, vehicle for the first five years • 5  0% custom duty exemption on machinery, vehicle for the second five years • B  e entitled to the right to lease land for 30 years initial lease period with renewal option of 30 years (plus 15 years) or 15 years (plus 15 years) and five years (plus five years) • B  e able to invest in land or building (e.g., rent, buy, sell)


• M  inimum investment amount • U  SD 150,000 for manufacturing activity • U  SD 50,000 for service activity • L  ocal employment • 1  00% unskilled employment • S  killed employment: • At least 25% of entity’s skilled workers within second year • At least 50% of entity’s skilled workers within the fourth year • A  t least 75% of entity’s skilled workers within the sixth year from the commencement date • T  ypes of activities conducted, excluding the following: • Extraction and sale of teak in Myanmar and abroad • Cultivation and conservation of forest plantations, with the exception of village-owned firewood plantations cultivated by the villagers for their personal use

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• Exploration, extraction and sale of petroleum and natural gas and production of products of the same • Exploration, extraction and export of pearls, jade and precious stones • Breeding and production of fish and prawns in fisheries that have been reserved for research by the government • Postal and telecommunications services • Air and railway transport services • Banking and insurance services • Broadcasting and television services • Exploration, extraction and export of metals • Electricity generating services, other than those permitted by law to private and cooperative electricity generating services

• S  pecial Economic Zones, including the following: • Thilawa • Dawei • Kyaukphu • T  ypes of activities should include the following: • Production • Services • Infrastructure construction

Future outlook Prior to the reforms, Myanmar’s economy was isolated from the rest of the world. Recent reforms in the country, in addition to the removal of sanctions by the developed nations, have shifted the economy towards a liberalized marketoriented economy with an introduction of the floating exchange rate regime, an autonomous central bank, and favorable investment policies for investors. The government has been collaborating with the international community to improve the necessary infrastructure, drafting regulatory laws, and promoting opportunities in Myanmar to better facilitate and attract investors. Many opportunities in a variety of sectors remain in the country and investment volume is expected to increase as investors perceive the investment climate in Myanmar to be more stable. 2015 is seen is a pivotal year for Myanmar as the general elections will take place, the Yangon Securities Exchange (YSE) will be launched, and the ASEAN Economic Community (AEC) will commence. Continued stability in the political, social, and economic aspects Myanmar will legitimize the country as an investment destination.

Kasem Kiatsayrikul Partner +66 2 264 0777 ext. 77033 [email protected]

Pathira Lam-ubol Partner +66 2 264 0777 ext. 21015 [email protected]


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Overview of incentives in the

Philippines

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he Philippines has had a long history of using fiscal incentives in pursuit of the country’s industrial, sectoral and regional development strategy. Specifically, the Philippine government has enacted a number of incentive laws to encourage the placement of investments in the country. The major incentive laws are implemented by the Board of Investments (BOI) and the Philippine Economic Zone Authority (PEZA). As a result of the incentive laws in place, investments committed to the BOI and PEZA increased significantly in 2013. Investment commitments approved by BOI increased 18% to P314.30b (USD7.0b6) by the end of October 2013 as compared to the same period in the previous year. Further, according to the BOI, investment commitments from foreign sources more than doubled by 141%, to P51.1 b (USD1.1b6) by the end of October 2013 against P21.2b (USD471.1m6) in the previous year. Data from PEZA also shows that it had an increase of 72% in approved investment commitments amounting to P211b (USD4.7b6) by the end of November 2013, from the same period in 2012.

Incentive categories and administering body Business incentives may be applied for and granted under the various incentive laws, the more popular of which are the Omnibus Investments Code of 1987 and the Special Economic Zone Act of 1995. The Omnibus Investments Code of 1987 is administered by the BOI. It provides for a comprehensive set of incentives for local and foreign enterprises engaged in activities considered by the government as high priority for national development, as set forth in an annual Investment Priorities Plan (IPP). The activities listed in the latest IPP released in late 2013 include agriculture, agri-business and fisheries; creative industries or knowledge-based services; shipbuilding; mass housing; iron and steel; energy; infrastructure; research and development; green projects; motor vehicles; strategic projects; hospital and medical services; and disaster prevention, mitigation and recovery projects.

The Special Economic Zone Act of 1995, on the other hand, is administered by the PEZA and was passed to encourage economic growth through the development of special economic zones in the Philippines called Ecozones. It grants incentives to qualified enterprises that are located in an Ecozone. As of 30 June 2013, there were 289 operating economic zones identified, comprising 18 Agro-Industrial Economic Zones, 187 IT Parks or Centres, 65 Manufacturing Economic Zones, two Medical Tourism Parks and 17 Tourism Economic Zones. Latest data from PEZA also show that there are 107 Economic Zones being developed.

General application process Depending on the incentive law to be invoked, an applicant will file its application with the BOI, PEZA or other incentive administering body, as the case may be. The application will then be evaluated, with the authorities potentially conducting site visits. Depending on the completeness of the documentary requirements submitted by the applicant, the application may take anywhere from 1 – 6 months.

Based on exchange rate of 1USD:PHP45 as at 14 February 2014.

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Overview of incentives in the Philippines

Key tax incentives The table below provides an overview of key available tax incentives in the Philippines, available through application with the relevant government agencies:

Activity

Manufacturing

Provision of corporate support or headquarter activities

Name of Incentive

• PEZA or BOI privileges

• Regional Operating Headquarters (ROHQ)


• Full tax exemption for 4 – 6 years Income Tax Holiday [“ITH”]

• Preferential income tax rate of 10% for the duration that the ROHQ is in operation

• Preferential tax rate of 5% of gross income in lieu of all national and local taxes after ITH period (for PEZA-registered enterprises)

• Preferential tax rate of 15% on remittance of branch profits

• Tax exemption on remittance of branch profits (for PEZA-registered enterprises)

• Exemption from local taxes, fees or charges imposed by a local government unit, except real property tax on land improvements and equipment

• Tax credit on raw materials, supplies and semi-manufactured products used for the manufacture of export products and forming part thereof (For BOI-registered enterprises) Other tax benefits

• Exemption from wharfage dues, export taxes, imposts or fees • Tax and duty free importation of imported spare parts

• 15% withholding tax on compensations, remunerations received by expatriates employed by ROHQ holding managerial or technical positions

Non-tax benefits

• Other non-fiscal benefits such as importation and unrestricted use of consigned equipment, privilege to operate bonded warehouse

• Importation of brand new motor vehicle but subject to payment of taxes and duties


• Type of business conducted

• Type of business activities conducted: qualifying services (e.g. general administration and planning, sourcing or procurement, corporate finance advisory, research and development, etc.) provided to affiliates, branches or subsidiaries

• Technology involved in manufacturing process • Paid-up capital • Job generation

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Future outlook There is presently a move to consolidate all the incentives laws into one law to rationalize the granting and administration of fiscal and non-fiscal incentives awarded by the various incentive bodies. The Philippine government is seeking to create a uniform policy on the issuance of fiscal incentives to avoid redundancies that could lead to revenue leakages. This is the subject of House Bill No. 4935, the proposed Investments and Incentives Code of the Philippines, which is currently pending in the Philippine Senate. The Senate Committee on Ways and Means has begun conducting public hearings on its own version of the fiscal incentive bill, aiming to create one office to serve as the source of all investment information, linking all government agencies to facilitate entry, retention, expansion and diversification of investments. The Senate version also seeks to consolidate all investment promoting agencies into one centralized agency. With the envisaged streamlining of the application and registration process, investors can expect a higher level of efficiency and increased transparency when applying for incentives.

Fidela I. Reyes Partner +632 894 8204 [email protected]


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Singapore

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ver since its independence, the government of Singapore has used fiscal incentives to promote economic development in the country. In order to create a robust and diversified economy, consisting of manufacturing and services sectors, a number of key tax incentives under the Economic Expansion Incentives (Relief from Income Tax) were introduced to attract foreign direct investment in manufacturing and headquarters activities into Singapore.

The success of this targeted approach is evident from the strong flow of investments into Singapore over the past years. According to the UNCTAD World Investment Report 2013, at US$56.7b, Singapore was ranked the eighth largest recipient of FDI globally, which is consistent with its ranking in 2011.

Incentive categories and administering body Incentives in Singapore can be divided into two broad categories: discretionary and statutory incentives. Conditions and requirements for statutory incentives are defined in detail in the ITA. They are available to all taxpayers to claim, typically through their annual tax returns. The administration and compliance of the statutory incentives are typically carried out by the Inland Revenue Authority of Singapore (IRAS), sometimes in collaboration with associated government agencies. The discretionary incentives are administered by various government statutory boards based on industry segmentation. This includes the Monetary Authority of Singapore for the financial sector, the Maritime Port Authority of Singapore for the shipping sector and the Singapore Economic Development Board and International Enterprise Singapore for the rest. The specific conditions, level of support and duration of the incentive(s) are typically based on a negotiated outcome with the designated government statutory board.

General application process For the application of discretionary incentives, the typical engagement process with the authorities can last anywhere between 3 – 6 months, starting from early contact, business plan presentation and review, negotiations, and finally agreement on incentive conditions. Generally, the incentive negotiations should commence before companies embark on the projects.


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Overview of incentives in Singapore

Key tax incentives The table below provides an overview of key tax incentives in Singapore that is available for manufacturing activities and provision of headquarter functions. These are all discretionary incentives that are available through application and negotiations with the relevant government agencies:

Activity

Manufacturing

Provision of corporate support or headquarter services

Name of Incentive

• Pioneer

• Headquarters Programs:

Tax benefits

• Development and Expansion Incentive (DEI)

• Pioneer Service

• Investment Allowance (IA)

• International HQ

Note that the IA and the concessionary tax rate under the Pioneer or DEI are typically mutually exclusive for the same project

• Regional HQ

• 0% up to 15 years (Pioneer) • Not less than 5% (typically 5% or 10%) up to 40 years (DEI)

• Customised incentive packages with lower concessionary tax rates (typically 0%, 5% or 10%) for IHQ

• Typically, additional 30% or 50% allowance on qualifying capital expenditure (IA) against taxable profits

• 15% (up to five years) on qualifying income for RHQ

Non-tax benefits

• None

• None

Scope of coverage of incentive

• Qualifying income7 includes sales, royalties and service fees on qualifying activities under the Pioneeror DEI

• Qualifying income7 includes sales, royalties and service or management fees on qualifying headquarter activities

• IA can be claimed against taxable profits of the company Key assessment parameters

• Incremental headcount

• Incremental headcount

• Incremental total business expenditure

• Profile of headcount

• Incremental fixed asset investment

• Incremental total business expenditure

• Technology involved in manufacturing process

• Types of activities conducted include:

• Other qualitative factors

• Strategic business planning and development • General management and administration • Marketing control, planning and brand management • Intellectual property management • Sourcing, procurement and distribution • Research, development and test bedding of new concepts • Other qualitative factors such as geographical coverage of headquarter functions, type of R&D activities carried out, ownership of intellectual property, etc.

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Future outlook For the past few years, Singapore has largely been focused on helping companies, especially small and medium enterprises (SMEs) transform their operations and improve productivity, with R&D being one of the key components of this theme. As Singapore moves to the next stage of economic growth, it will need to continue to manage the country’s resources and the authorities will be increasingly selective in the types of FDI it looks to attract. Existing incentive programs and introduction of new ones will become more targeted to attract value-added activities and jobs into Singapore as the focus moves into well-paying jobs rather than purely job creation. In addition, with base erosion and profit shifting (BEPS) fundamentally changing in the global tax landscape, Singapore’s tax incentives regime will also come under the spotlight globally. Given the significant level of economic substance required by the authorities in return for any tax incentive award, Singapore’s incentive regime is likely to withstand the test of time. Nevertheless, companies looking to apply for tax incentives for the first time, or companies who have already been awarded tax incentives, should expect greater scrutiny and more stringent assessment or monitoring of economic commitment requirements by the Singapore authorities going forward.

Note that under the DEI as well as the International HQ and Regional HQ programs, only the qualifying income that exceeds the base income would be eligible for the concessionary tax rate. The base income refers to the average corresponding income for the three years immediately preceding the commencement date of the incentive and is subject to the normal corporate tax rate.

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Tan Bin Eng Partner +65 6309 8738 [email protected]


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Thailand

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o stay competitive in the ever-changing business landscape, the Thai government has issued various incentives to attract foreign direct investment intoThailand. Major incentives include the Board of Investment (BOI) incentives for manufacturing companies, and the Regional Operating Headquarter (ROH) for service companies.

Incentive categories and administering body Generally, incentives in Thailand are provided by two organizations: the BOI and the Revenue Department (RD). The BOI provides tax and non-tax benefits mostly to manufacturing companies in certain industries, while the RD offers tax incentives to the ROH - a Thai-incorporated company providing managerial, administrative, and technical services as well as other supporting services to its associated enterprises.

General application process An application process for BOI incentives usually takes 2 – 6 months depending on project size, starting from early contact, business plan presentation and review, and final approval on incentive conditions. For the ROH incentives, eligible companies

will typically self-assess that they have met the assessment criteria and proceed to collate the requisite documents for submission to the RD to register for the ROH status. Approval of the ROH status can be completed within a week upon complete submission of all required documents to the RD.

Key tax incentives The table below provides an overview of key available tax incentives in Thailand for manufacturing and headquarter services, available through application and approval from the relevant government agencies:

Activity

Manufacturing


Name of Incentive

• BOI privileges8

• ROH incentive


• Exemption of corporate income tax for up to 8 years (depending on activity or zone)

• Exemption of corporate income tax on qualifying income for 15 years

• Z  one 1: 3 years • Z  one 2: 3years but extendable to 7 years if located within promoted industrial zones • Z  one 3: 8 years exemption (50% reduced rate for additional 5 years given to companies located in certain provinces in Zone 3.

• 10% reduced corporate income tax rate on certain interest income and royalty income • Tax exemption on certain dividends paid to overseas corporate shareholders and dividends received from associated enterprise

• Double deductions for costs of transportation, electricity, and water supply

8

Also available for other activities beyond manufacturing. Refer to “Key Assessment Parameters” for the list of activities which are eligible for BOI privileges. Incentives in the ASEAN region 2014 |

25

Overview of incentives inThailand

Activity

Manufacturing


Other tax benefits

• Import duty exemption or reduction on machinery and raw material

• Personal income tax rate reduction for qualified expatriates

• Withholding tax exemption on dividend distributed out of BOI profits during the tax exemption period Non-tax benefits

• Opportunity of 100% foreign equity ownership • Permission of land ownership rights for foreign-majority-owned companies • Permission of unlimited number of expatriates hired • Types of activities


• Qualifying services

• A  griculture and agricultural products

• B  usiness management and administration

• M  ining, ceramics, basic metals • L  ight industries

• S  ourcing of raw materials, parts and finished products

• M  etal products, machinery, transport equipment

• R  esearch & development

• E  lectronics industry and electric appliances

• T  echnical assistance

• C  hemicals, paper, plastics

• M  arketing and sales promotion

• S  ervices and public utilities

• R  egional human resources training

• Zone (business location) • Z  one 1: Bangkok, Samut Prakan, Samut Sakhon, Pathum Thani, Nonthaburi and Nakhon Pathom • Z  one 2: Samut Songkhram, Ratchaburi, Kanchanaburi, Suphanburi, Ang Thong, Ayutthaya, Saraburi, Nakhon Nayok, Chachoengsao, Chon Buri, Rayong and Phuket • Z  one 3: All other Thailand provinces not mentioned above • Investment amount • Debt-to-equity ratio

• B  usiness advisory services • I  nvestment feasibility studies and analyses • C  redit management and control • O  ther services, subject to approval, on a caseby-case basis • Minimum number of associated enterprises being serviced by the headquarter company • Minimum paid-up capital • At least 50% of total income must be derived from qualifying services income • Minimum amount of operating expense or capital expenditure paid to Thai recipients • Profile of headcount • Minimum salary for key employees

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Future outlook A recent key trend for Thailand incentives lies in the government’s attempt to attract investments to boost the country’s competitiveness and to meet the ASEAN Economic Community (AEC) commitments that are due in 2015. The BOI launched its investment promotion policies by focusing on the electronics industry, hightechnology manufacturing activities, animation and design, sustainable and renewable energy development and environmentally concerned industries, and special tax incentives are offered to attract investment in these industries. The features of such special tax incentives are generally similar to that under the BOI privilege for Zone 3; however there may be certain variations in the benefits depending on the specific circumstances. In addition, the BOI measures have long been implemented to encourage companies to reduce its energy consumption or boost their renewable energy utilization. The BOI grants additional incentives to support companies investing in reducing environmental impacts or alleviating environmental problems. More recently, there have some discussions in place to introduce more activities-focused incentives emphasizing R&D, environmental protection, and specific industry clusters, to replace the zone-based incentives. Accordingly, it can be anticipated that going forward, one of the key trends for investment incentives in Thailand will continue to revolve around boosting sustainable environmentally friendly projects.

Pathira Lam-ubol Partner +66 2 264 0777 ext. 21015 [email protected]


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Vietnam

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I

n 1986, Vietnam started economic reforms aimed at moving from a planned to a market economy. Since then, there has been tremendous progress on the economic development front, and the country has become one of the fastest growing economies in the world. As part of its efforts to attract investment activities and mobilize capital in Vietnam, incentives were introduced since 2005 under the relevant tax laws and such incentives include full or partial exemption from corporate tax, import duty exemption and land use concessions. As a result of the economic reform initiatives put in place, registered foreign direct investment have increased annually and are expected to reach about US$18 b in 2014.

Incentive categories and administering body Current available incentives are in the form of tax incentives such as reduced corporate tax rates, tax-free periods or tax reductions during the start-up phase, and import duty exemptions as well as non-tax incentives such as the right to rent land. Tax incentives are granted based on the location of the investment (i.e., in difficult or especially difficult social-economic locations, selected industrial zones, economic zones, and high-tech zones) or regulated encouraged sectors (such as high-technology and infrastructure). Before incentives can be availed of, investment projects must first be registered and approved by the relevant licensing authority such as the local People’s Committees or Industrial Management Authorities depending on where the project is located.

General application process In order to avail of tax incentives, the company will need to apply for the Investment Certificate with the relevant licensing authority.

Depending on the business sector that the project relates to or the volume of investment capital involved, there are two routes in which one can apply for the Investment Certificate, being registration route or evaluation route. By law, the registration route will take 15 working days, while the evaluation route will take 45 workings days due to additional information and approval required. However, in practice, the application procedure normally would take much longer than the regulated time-line. In order to apply for the Investment Certificate, the foreign investor has to submit an application dossier with prescribed forms to the licensing authority. Based on information to be provided in the application dossier i.e., business sector that the project will relate to and the location that the project will be located in, the licensing authority will determine the incentive applicable to such project (if any). If all conditions are met and the project is approved, the licensing authority will issue an Investment Certificate to the investor. Depending on the local licensing authority, the Investment Certificate may or may not specifically state the applicable incentive. More often than not, the Investment

Certificate would refer to the relevant tax regulations in which the tax incentive is applicable and the investor will make a self-assessment in its annual corporate tax filing on this basis. As tax incentives are provided under the relevant tax regulations, the investor may enjoy the applicable tax incentive as long as the project meets the requirements under the specified regulations and the Investment Certificate has been obtained in this regard.

Key tax incentives They key available tax incentives in Vietnam are mainly focused on industries in the areas of technology, socialization and agricultural activities or projects which are based in certain specified locations. Currently, headquarter incentives are not incentivized. The table below provides an overview of key available tax incentives for manufacturing industries available through application with the relevant licensing authority:


29

Overview of incentives in Vietnam

Activity Tax incentives9

Manufacturing • Corporate tax exemption for first four years

• Corporate tax exemption for first two years

• 50% corporate tax reduction for next 5 – 9 years

• 50% corporate tax reduction for next four years

• 10% reduced corporate tax rate for remaining incentive period

• 20% reduced corporate tax rate for remaining incentive period

• 10% reduced corporate tax rate for remaining incentive period Or • 20% reduced corporate tax rate for remaining incentive period (from 1 January 2016, the rate is 17%)

Non-tax benefits

• Exemption of import duty on equipment, raw materials, supplies and semi-finished products • Exemption on repatriation of profits

• Exemption from land use fees • Tax concessions or reliefs for individuals

• Able to rent land Coverage of incentive

• No or reduced rent payable

• Income generated from business activities licensed under the Investment Certificate Key evaluation parameters

Specified location

• New investment projects in especially difficult socio-economic conditions, selected Industrial Zones, Economic Zones, High Tech Zone established under the Prime Minister’s decision. At the time of this publication, Economic Zones include the following: • • • • • • • •

Specified sector

 hu Lai C D  ung Quat N  hon Hoi C  han May – Lang Co P  hu Quoc – Nam An Thoi V  ung Ang V  an Phong N  ghi Son

• V  an Don • D  ong Nam Nghe An • D  inh Vu – Cat Hai • N  am Phu Yen • H  on La • D  inh Anh • N  am Can

• New investment projects in high technology, scientific research and technology development, investment in development of specially important infrastructure facilities of the State, production of software products

• New investment projects in areas of difficult socio-economic conditions, including some areas in the following provinces, but not limited to: • • • • • • •

L  ao Cai T  uyen Quang B  ac Giang T  hai Nguyen Y  en Bai K  hanh Hoa B  a Ria Vung Tau • K  hanh Hoa

NA

• New investments operating in the field of socialization (i.e. education – training, occupational training, health care, culture, sport and the environment). Different incentive duration applies if located in difficult or especially difficult socioeconomic conditions. • New manufacturing investments which meet the capital and revenue conditions: • I  nvestment capital requirement with disbursement period of 3-year maximum; • R  evenue requirement (e.g. VND10,000 b/year10) or Employees requirement (e.g. 3,000 full-time)

9

Incentives also available beyond manufacturing. Refer to key evaluation parameters. Equivalent to approximately USD470 million at an exchange rate of 1USD: 21,097VND

10

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• • • • • • • •

Q  uang Ngai T  hanh Hoa B  inh Dinh P  hu Yen P  hu Tho T  hai Nguyen L  ong An T  ay Ninh

• Agriculture forestry, fishery, saltery cooperatives Or • People’s credit fund

Future outlook Recently the Vietnamese government has expressed its ambition to restructure the economy and shift its model of growth to ensure rapid but sustainable development. Its goal is to enhance productivity, product quality, efficiency, and competency on both domestic and international markets to allow Vietnam’s economy to participate in high value-added stages of regional and global production supply chains. In line with these goals, the government recently re-introduced tax incentives for new investment projects and business expansions in selected industrial zones (excludes those located in major cities such as Ho Chi Minh city, Hanoi, Hai Phong, Da Nang, etc.), effective beginning 2014. Going forward, it can be expected that tax incentives and in particular, incentives to encourage the application of new technology or establishment of research and development centres will continue to be an important part of the government’s economic growth plans for the country.

Nhung Tran Partner +84 3 9157868 [email protected]


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Business Incentives Advisory team and services The Business Incentives Advisory (BIA) team in Ernst & Young Solutions LLP is dedicated to assisting clients across all industries in relation to their incentive matters. The BIA team is headed by Tan Bin Eng, who has had extensive experience in the Singapore Civil Service dealing in areas relating to taxation and is a veteran in policy-making and incentive negotiations with the Singapore government. With a network of highly experienced incentive professionals in the ASEAN region, the BIA team will work with you to evaluate the appropriate incentives and advise in your strategising and negotiations in the ASEAN countries to optimise your financial benefits.

Our services include the following: • Evaluation and identification of possible incentive packages based on specific project parameters • Comparative analyses of incentives across jurisdictions for purposes of site location studies or competitive benchmarking

Tan Bin Eng Partner ASEAN Business Incentives Advisory [email protected] +65 6309 8738

• Assisting companies in strategising on approach, negotiations and applications for relevant incentives with the governments in the respective countries • Assisting companies in identifying and maximising their R&D claims • Assisting companies with health-checks e.g. incentive reporting obligations and identification of risk areas in incentive compliance • Assisting companies in areas of process design on incentive maintenance, tracking and reporting obligations

EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. © 2014 EYGM Limited. All Rights Reserved. APAC No. 12000163 ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors forspecific advice.

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Second edition: Incentives in the ASEAN region 2014 - EY

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