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A Little Bit From a Lot of Asia

By Laurence E. Lipsher - Email Editor

July

Dear Valued Reader,

While visiting London, I'm writing of taxes and listening to a day-old baseball game on Internet broadband, which is preferable to the multiday test cricket match between England and Bangladesh. At least the World Cup is upon us-a universal sporting event that will be on television no matter where my travels take me.

And wherever I travel there are always changes in tax laws and increases in taxes. There will be a substantial increase in capital gains rates in the U.K. - that's all front page news in the U.K. now. And in China, the VAT threshold is lowering, which will affect the smaller manufacturers and result in higher export prices.

Chinese VAT Regulations

China's State Administration of Taxation (SAT) issued Circular Guoshuihan [2010] No. 138 on April 7, revising and lowering the annual sales volume at which manufacturers and VAT-able service providers lose their ability to be taxed as a small business and become full-fledged VAT payers. Below is a recap of the revised measures.

The threshold of the general taxpayer has been lowered. The annual turnover for manufacturers and VATable service providers is limited to CNY 500,000 as opposed to CNY 1 million previously. For other businesses such as wholesalers and retailers, the annual turnover is more than CNY 800,000 compared with CNY 1.8 million previously. VAT small-scale taxpayers with annual turnover below the prescribed thresholds and newly established companies with VAT-able businesses are also allowed to apply for the VAT general taxpayer status.

The application documentation and recognition procedures have been streamlined with the intention of reducing the burden on taxpayers. Something tells me the manufacturer would prefer the paperwork and lower rates to the higher rate they will now have to pay.

The registration process has been simplified. Under the current policy, applying for the general taxpayer status requires data review and field verification. The new process supposedly will result in simplified field verification procedures and will give provincial tax bureaus more authority in conducting field verification. According to the SAT, this is not only beneficial to the taxpayers but also to the tax authorities for carrying out targeted audit fieldwork.

The relevant application and the recognition timetable have been clarified. Any VAT small-scale taxpayer with annual revenue exceeding the threshold of VAT general taxpayers can apply for the VAT general taxpayer status within 40 working days after the tax filing due date. The tax authorities should complete the recognition of VAT general taxpayer status within 20 working days upon accepting the application.

Vietnam

While taxes seem to be increasing elsewhere, Vietnam announced a personal income tax reduction earlier this year. This does have something to do with the bottom dropping out of their export industry. While export manufacture seems to be on the rebound in China (otherwise, why would they increase the number of manufacturers falling under the full VAT category?), it still is a problem in Vietnam, where little — if any-growth has come about thus far during 2010.

The Ministry of Finance has released a circular providing more instructions on the implementation of the new personal income tax (PIT). As a result, employers or withholding organizations will be allowed to conduct PIT finalization for their employees through a single PIT return that enumerates all income paid to its employees as well as associated annual taxes. A person who earns income from other sources, such as multiple employers or business income, is still required to submit a separate PIT final return that details all income. PIT return submissions are temporarily suspended pending further guidance from the General Department of Taxation. There will be no change to last year's initial dependent registration and no annual reregistration needed for this year onward.

Korea

Before actual discussion about 2010 tax changes, a brief mention of the South Korean economy is important. During the first quarter of the year, economic growth was 8 percent, which was extraordinary for Korea. This is by far the strongest economic performance in the country since 2002.

An April 27 Financial Times article about the South Korean economic recovery summed it up far better than I can ever hope to do.

In 1997, reserves were only a seventh of shortterm external debt, by the third quarter of 2008, Seoul had $240 billion reserves and total external debt of $426 billion. Of that, however, short-term debt was $189 billion, so once reserves dwindled to $200 billion in November, 2008, the central bank set up $50 billion of swap lines with the U.S., Japan and China. That stabilized the won and helped restore the bank's rollover ratio-a measure of external lender's willingness to extend debts-to something close to 100 percent. That, in turn, bolstered big exporters.

South Korea is a high-end electronics and automotive exporter, not a low-end export economy. That high end has benefited most from whatever economic recovery is taking place, while the low-end export economies are still hurting, except, to a certain extent, for China, where quality control seems to separate their low-end exports from other Asian export-based economies.

Although there has been a recovery, the "waffling" back and forth on Korea's tax law changes makes the recovery seem to lag behind somewhat.

Every fall, the Korean Ministry of Strategy and Finance announces its plan for the subsequent year's tax changes, In September 2009, as in the past, the anticipated changes for 2010 were announced, only to be revised by the National Assembly in December, and then temporarily rescinded in early 2010.Well, here we are halfway through 2010, and those twice-changed 2010 tax law changes, which should theoretically change for the third time if the economy is recovering so spectacularly, simply have not yet been made. There were a dozen changes and amendments, of which five are relevant.

-- The top corporation tax rate, which a corporation falls under for taxable income over KRW 200 million, was to have been reduced to 22 percent for 2009 tax year income and then down to 20 percent for 2010 tax year income. But because of declining tax revenue and a huge tax deficit, this has been rescinded "temporarily" and is not due to be implemented until 2012.

-- The maximum individual income tax rate for income over KRW 88 million was to be reduced from 35 percent to 33 percent for 2010, but likewise has been postponed until January 1, 2012.

--  The National Assembly has decided to appoint a national tax ombudsman separate from the Korea National Tax Service (NTS). This separation from the NTS is quite important because an NTS career civil servant serving as ombudsman and making decisions against the NTS is not likely to get a promotion after his term as ombudsman expires.

--  New provisions set up under the National Tax Collection Act now preclude a Korean taxpayer from leaving the country with delinquent taxes of KRW 50 million or more. This is now prescribed by presidential decree, but it has not been enforced yet.

--  There was to be a "green Korea" research and development credit of 25 percent for large corporations and 35 percent for small and medium-size enterprises. Yet because of budget deficits, these amounts have been reduced to 20 percent and 30 percent, respectively.

Fine arts sales are now going to be taxed. The Ministry of Strategy and Finance will impose a 20 percent tax on artwork sold for KRW 60 million or higher, according to the April 13 Korea Times. The seller is responsible for paying this tax, in what appears to be more of a sales tax than a capital gains tax. This was an idea first proposed by the Ministry of Finance in 2008 but successfully fought off by the fine arts industry until now. The tax is scheduled to be imposed starting January 1, 2011, and the government seems determined to keep on schedule, much to the dismay of the arts industry and auction houses. How much will be raised through this tax is anyone's guess.

Call 888.916.7070 or email info@trustmakers.com

By Laurence E. Lipsher

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ABOUT THIS EDITOR:

Laurence E. 'Larry' Lipsher is an American CPA who has specialized in taxation in Asia for 23 of the 42 years he has been working within the accounting profession....

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