Newsletter Archives

China: Data Protection Guidelines

admin — Thu, 24 May 2012 19:40:21 +0000

May 24, 2012

China has set out new data protection guidance with the draft of Personal Data Protection Guidelines for Public and Commercial Service Information Systems. Expected for publication “soon” according to the Ministry of Industry and Information Technology, the changes are not mandatory, though they are expected to have “comply or explain” status.

To date, no comprehensive legal framework regarding this area has been established in China, but the patchwork of local and provincial data protection laws is growing. While the new guidelines will not have the force of law, and China has a different take on right to privacy, it is clear that the furor over recent widespread leaks of personal data (particularly from internal sources) has had an impact. As a best practice, employers should take steps to adhere to the eight principles outlined in the new guidelines.

They cover gathering, processing, transmitting and removing of data. In line with other DP best practice, all data collection in China requires a clear purpose, prior notification, user consent, security, trust and accountability. The collection of personal data (home address, phone numbers etc.) must be limited, and organizations will be required to delete personal information once the purpose for its collection has been met. Authorization from a “relevant, competent authority” must be obtained before personal information is transmitted outside of China.

Please contact Arden Ng or Paul Sutton for more information or assistance with internal policy setting.

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China: Notable Tax Update for Hong Kong and Macau Resident Employees

admin — Thu, 24 May 2012 20:37:44 +0000

May 24, 2012

In welcome news, China’s State Administration of Taxation (SAT) has issued Public Notice 16 to address the double tax problems faced by Hong Kong and Macau tax resident employees working in China.

Effective June 1, 2012, the SAT will now accept special time apportionment treatment on a “physical days present” basis when allocating the source of income between Hong Kong (and Macau) and China. For more information, or assistance with work arrangement changes or tax positioning, please contact Arden Ng or Katie Davies.

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China: Foreigners Now Subject to SAFE Registration for Equity Incentive Plans

admin — Thu, 24 May 2012 19:50:28 +0000

May 24, 2012

China has instituted a new Foreign Exchange Control Rule on Overseas Equity Incentive Plans offered to China employees.

The State Administration of Foreign Exchange ("SAFE") has replaced Circular 78 with Circular 7, which broadens the scope of equity awards that must be registered and changes both the registration process and the compliance requirements. (The new Circular 7 is known officially as the “Circular of the State Administration of Foreign Exchange on Issues of Foreign Exchange Administration of Domestic Individual Participation in Stock Option Incentive Plans of Companies Listed Overseas.”)

Under the old Circular 78, which dates to April 2007, publicly listed companies offering equity compensation to PRC nationals in China were required to obtain SAFE approval for their equity plans and to comply with various ongoing approval and/or reporting requirements, with some variations from city to city. Now, Circular 7, which was issued and made effective in China in February 2012, extends the applicable entities and applicable persons for SAFE registration, reduces the number of supporting documents required for registration, and shortens the timeframe for filing quarterly reports.

Impact of the Change:

Companies which received SAFE approval for their equity plans under Circular 78 will now have to follow the ongoing compliance requirements under Circular 7. This means that overseas-listed companies which grant equity awards to employees of their Chinese subsidiaries, branches, representative offices, partnerships etc. will need to review their current SAFE registration status and adjust their filing schedules to ensure compliance with Circular 7.
In similar fashion, companies that have issued equity awards in China but have yet to comply with the Circular 78 rules will also now have to comply with the requirements of Circular 7.

Circular 7 Key Points:

Covers virtually all types of equity awards, including phantom* shares/awards, in a catch-all category for “other awards” of equity.
Covers awards to all China nationals, as well as Hong Kong, Macau and Taiwan nationals employed by a local China entity. It also includes directors and individual contractors of the China entity. Individuals covered by the scope of Circular 7 henceforth referred to as “covered persons.”
It is as yet unclear whether or not the covered employees outside China need to be directly employed by the China entity, or if someone on an assignment to China would become a covered person.
A local agent is needed to handle the SAFE registration, foreign currency bank account openings, and fund transfers for participants in an equity incentive plan. An overseas agent is required to handle the exercising of options, purchases and sales of equity shares, and transfers of funds. The local registration agent may be a Chinese branch/subsidiary, a representative office or a partnership enterprise.
The local agent must submit SAFE registration documents in Chinese or translated into Chinese, which include the following key items (note others may be required).

o An application letter and SAFE registration form;

o Various documents proving the authenticity of the equity incentive plan;

o An authorization letter or agreement (PoA) between the domestic company and the local agent making the agent solely responsible for SAFE registration matters; and

o A commitment letter from the domestic company stating the employment or labor service relationship between the participants and the domestic company.

The local agent must file quarterly foreign exchange transaction status reports within three working days (previously ten working days) after the end of each quarter.

*Phantom share incentive plans were commonly used to circumvent the registration requirements of Circular 78 of 2007, the predecessor of the new Circular 7. As Circular 7 now covers virtually all types of equity awards, immediate registration is necessary.

Additional Considerations

Circular 7 applications will be subject to the individual interpretation of local SAFE offices, so they will require careful preparation. Some of the self-assessment questions companies with operations in China should answer on this topic are as follows:

Is the company’s equity plan within the scope of Circular 7?
Who are the covered persons in the company’s China entity?
What is the company’s compliance status with SAFE – unregistered, in process of being registered, or registered?
What are the appropriate next steps?
What is the timing for compliance?
What are the penalties or ramifications of non-compliance?

Please contact Arden Ng for further detail on the registration requirements (a whitepaper is available) or for compliance assistance.

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Japan: New Points-Based Immigration System

admin — Thu, 24 May 2012 19:54:21 +0000

May 24, 2012

Facing an aging and shrinking population, Japan has been under pressure to admit more overseas workers. In response, a new points-based immigration system similar to the programs now in place in the UK, Australia and Canada was implemented on May 7, 2012 in this historically immigration-averse economy. Under the new program, expedited processing, expanded spousal benefits, and a shorter path to permanent residence will be offered to qualified applicants.

The process begins early in Japan’s lengthy work authorization process, when a sponsoring employer applying for a Certificate of Eligibility (COE) for a foreign national may choose to have the potential employee evaluated under the new system or the old. Under the new, a potential employee will earn points based on their work experience, professional licenses and other qualifications, as well as expected income in Japan.

According to immigration specialist Fragomen, those earning sufficient points will be granted a COE that is tied to their sponsoring employer, expedited application processing, permission to operate their own business while working for their sponsoring employer, and the ability to be accompanied in Japan by their parents (in addition to a spouse and dependent children). Their spouses will also receive work authorization, unlike dependents of regular work permit holders. They will also qualify for permanent residence after working and living in Japan for five years. The standard permanent residence requirement is ten years of prior residence.

For more specifics on the program, visit the Ministry of Justice, Immigration Bureau website.

Potential employers should note that the decision to evaluate a foreign national under the old or the new point-based system should be made with care, as each will depend on the individual circumstances of employment and applicant qualifications. Seek advice.

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Australia: Pension Update

admin — Thu, 24 May 2012 19:58:21 +0000

May 24, 2012

On March 29, a law was passed that makes changes to the country's mandatory occupational pension (superannuation) system to help raise the level of retirement savings. The new law gradually increases the employer's contribution rate, removes the age limit for making contributions, and introduces a new tax rebate for low-income earners. Those measures are part of the government's "Stronger, Fairer, Simpler" tax reform plan announced in 2010. Beginning July 1, 2013, the following will go into effect:

The mandatory employer contribution rate will gradually increase from 9 percent to 12 percent of payroll by 0.25 percent per year from 2013 to 2015 and by 0.50 percent per year from 2015 to 2019. (Employee contributions remain voluntary.) The government estimates that some 8.4 million employees will benefit from this measure.
The age limit for making contributions (either employer or employee) to a superannuation account will be abolished. The current limit is age 70.

In addition, effective July 1, 2012, workers with annual income of up to A$37,000 (US$38,271) will become eligible for a government tax rebate of up to A$500 (US$517) a year that will be deposited in their superannuation accounts. No worker contribution is required. According to the Australian Tax Office, 57 percent of all individual taxpayers earn less than A$40,000 (US$41,374) per year. This measure will supplement the existing government matching contribution (called co-contribution) of up to A$1,000 (US$1,034) for workers who earn up to A$61,920 (US$64,046) a year and make voluntary contributions to a superannuation account. Source: US Social Security Administration

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Sweden & Belgium: Heightened Scrutiny of Local Activities

admin — Thu, 24 May 2012 20:02:33 +0000

May 24, 2012

The tax authorities in Sweden and Belgium (indeed throughout the EU) have become increasingly sensitive to the local activities of foreign companies. In recent months, they have launched detailed investigations into payroll-only registrations of overseas companies/employers to determine if the activities of employees, along with other commercial dealings, may constitute permanent establishment.

The findings not only have direct impact on an employer’s liabilities related to corporate tax and social security contributions, they also have larger VAT-related implications and likely commercial insurance considerations as well.

It is therefore of paramount importance that clients without a legal entity presence in country have a clear understanding of the activities undertaken by their employeesto ensure that proper registrations are undertaken from the outset. These may include a payroll registration (which may be “with” or “without” a PE registration), or some other form of legal entity that may be appropriate for the activities being undertaken.

If you are concerned about the current validity of your payroll only registrations in country, please contact Advisory and we can arrange to review your commercial activities against the current (and frequently changing) registration requirements.

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Denmark: New Bill Targets "No-Tax" Corporations

admin — Thu, 24 May 2012 20:05:51 +0000

May 24, 2012

A bill targeting "no-tax-corporations" was presented to the Danish Parliament on April 25, 2012. It includes the introduction of a cap on the carryforward of tax losses, the reintroduction of joint and several liability for jointly taxed companies, and the introduction of publicity on corporate tax matters. It also outlines rules affecting the allocation of income to a permanent establishment.

Some of the proposed measures, including the one on PE, would become effective as early as July 1, 2012.

Of particular importance is the pending change for those businesses which are obligated to prepare transfer pricing documentation. This includes companies that have transactions with related parties that are located outside the EU/EEA (in countries without a DTA with Denmark), and companies that had an average operating deficit for the past four years.

As of January 1, 2013, the new Bill empowers the Danish tax authorities to require such companies to obtain an assurance report from an independent auditor who would certify whether he/she found any evidence that proves that the company’s controlled transactions do not comply with the arm’s length* principle. Penalties for failure to comply with the transfer pricing documentation rules are increased.

*If the prices between related entities differ from those contracted with unrelated parties under the same or similar conditions and the difference is not properly documented, the tax authorities may adjust the taxpayer’s income tax base. Typically, when applying the arm’s length standard, countries implement the OECD Transfer Pricing Guidelines.

On a positive note, early in May, the government in Copenhagen announced that high tax revenues had reduced the country’s deficit more than had been forecast.

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Germany: Discretionary Bonus Entitlement

admin — Thu, 24 May 2012 20:08:44 +0000

May 24, 2012

Employers in Germany should be aware of recent case law dealing with bonus entitlements.

A clause dealing with discretionary remuneration and bonuses often found in German employment contracts has been declared unenforceable by the German Federal Labor Court. In a case involving an employee’s right to a discretionary bonus of a month’s pay he had received for twenty years, but which was not outlined in the employment contract, the court ruled that the employee was entitled to the benefit as it was an implied term of the individual employment contract. It had become an expected benefit because it was offered repeatedly.

The issue is of relevance to German employers, who may frequently include clauses such as the one below in employment contracts as a way of providing control over the award of discretionary payments or benefits:

Benefits not provided for in this contract of employment which are awarded by the employer to the employee shall be deemed fully voluntary and subject to revocation at any time. Also, if the employer repeatedly and regularly awards certain payments, no legal entitlement shall be created for the employee with regard to any such payments in the future.

Employers in Germany should be aware that the use of such “catch all” employment contract language may not prevent a binding agreement and entitlement to discretionary payments or benefits. If you would like assistance with contract review, please contact Chris Davies.

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U.K.: Share Scheme Deadlines Approach

admin — Thu, 24 May 2012 20:14:20 +0000

May 24, 2012

Annual returns for all companies operating HMRC approved and unapproved share schemes operated during the tax year to April 5, 2012 are due by July 7, 2012 (or, if earlier, within three months of the date of issue of the form). Form 42 is due by July 6, 2012 for those companies having “reportable events” in relation to any other type of share arrangement during the same period.

Each type of approved scheme has its own return, which must be filed in paper form:

o Form 34 (ShareSave or SAYE)

o Form 35 (Company share option plan or CSOP)

o Form 39 (Share Incentive Plan or SIP)

o Form 40 (Enterprise Management Incentives or EMI).

As you may have gathered from recent communications, HMRC is keenly interested in employee incentive plans. Companies operating incentive plans via an employee benefit trust (EBT) must pay particular attention to disguised remuneration rules in effect since April 2011, as income tax and NIC charges may be triggered when cash or shares are provided through third parties such as employee trusts.

Contact Katie Davies with questions.

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Entity Structuring Checklist

admin — Thu, 24 May 2012 20:30:32 +0000

May 24, 2012

The choice of foreign entity structure always depends on the investor's strategy and the desired degree of independence that the overseas operation is to have from the parent company, but it also depends on the risk/reward profile, local requirements, and general ease of entry.

With markets in flux around the world and tax authorities on high alert for taxable presence, it’s of increasing importance that due consideration be given to the following issues when determining an entity structure:

Expected size of the business in overseas location, turnover and number of employees and/or contractors
The type of activity
Initial share capital requirements
The number of shareholders
The presence of partners
The responsibilities of the management
The revenue model
The tax regime, including planning, accounting, compliance, and risk management concerns:
- Do you know which activities (or thresholds) constitute taxable presence?
- If there is a Permanent Establishment, how much profit should be allocated to it?
- Are there any discriminatory taxes on particular industries or types of investment?
- Are there unusual withholding taxes on fund transfers or sale of goods?
- Can the US parent “check-the-box” for US tax entity classification purposes?
Human Resources/Employee considerations, including items such as the following:
- Hiring locally? Expatriate employees?
- Structure of compensation and required and expected benefits?
- Payroll Options?
Available tax credits and history of unexpected withdrawal of those exemptions.

As always, contact your account representative or Advisory if you would like to discuss country particulars.

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