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Asian Tax Review: To Your Health!

By Laurence E. Lipsher - Email Editor

August

Dear Valued Reader,

This is the year I became far more aware of the costs of medical care than I previously have in my life. Being American, I could not help but read about and view, albeit from afar, the U.S. healthcare debate. I have good, expensive, U.K.-based medical insurance. The cost is offset by the U.S. Social Security benefits I am now receiving as a certifiable old fart. My fear is that the dollar will decline and I will be required to pay more to make up for the shortfall.

Announcements of a new, comprehensive social security/health maintenance program for China funded by taxes have started to come out in the Chinese press. The program will be part of the 12th Five-Year Plan, and it will begin within the next five years. This is necessary for the masses if they are to become consumers to start letting go of some of their savings.

Current tax expenditures in Hong Kong for medical care are on the rise, as with virtually every other location on the planet. On October 2 the South China Morning Post wrote about a proposed tax rebate option being a necessary part of a newly proposed voluntary health insurance scheme in Hong Kong. The government does not favor tax payments going back to those who join the proposed plan. Hong Kong has a really good universal medical care program that is, in essence, free. Yet the costs in Hong Kong, as elsewhere, are climbing fast. A study commissioned in February by the Chinese University of Hong Kong estimated that 80 percent of respondents, if they had medical insurance, would use private facilities rather than public hospitals.

Leung Ka-lau, a member of the Hong Kong Legislative Council from the Medical Constituency, estimated that if only 15 percent of the 12 million annual visits to public facilities were transferred to private hospitals, HKD 450 million would be saved. The problem is that the citizens who are targeted as part of the voluntary health scheme, in essence, don't pay any taxes. Thus, unless the government pays them to choose health insurance and private physicians, they simply will not join. This is a plan that is headed nowhere.

India has a rural medical plan that seems to be working. The Rashtriya Swasthya Bima Yojana, commonly referred to as the RSBY, was launched in April 2008 and covers nearly 2 million rural poor in 27 states. These families, who pay INR 300-600 to belong to the scheme, receive annual medical care coverage of up to INR 30,000. But we're talking about only 2 million people out of more than a billion. The government now wants to bring urban sectors - truck drivers and street vendors - into this cashless system in which payments are made directly by insurance companies, without any paper being filed by those covered. But this is India: What are the loss risks based on fraudulent claims, inflated billings, and needless procedures? While I am skeptical, there are close to 5,000 private hospitals in addition to the 2,000 public hospitals in India, which are underused because of no insurance coverage. Even with fraud, using the tax revenues to improve health standards should be a universal right. Alas, it will not likely happen during my lifetime - even if I live as long as I hope to.

Getting back to Hong Kong, an October 4 op-ed piece in the Morning Post by Mariana Chan, chief officer for policy research and advocacy at the Hong Kong Council of Social Service, proposed a negative income tax, using tax credits as subsidy for those working poor who cannot afford their basic needs. The major source of assistance to low-income families in Hong Kong is the Comprehensive Social Security Assistance Scheme (CSSA). As of July 2010 only 14,887 low-income households were claiming benefits under the program. Yet through this period, Hong Kong had 470,800 low-income households of which 210,500 (45 percent) were working poor, having at least one member of the family being employed. Clearly, the vast majority of the poor have no idea of what subsidies there are to assist them. Chan called for a tax credit scheme to be administered by Hong Kong’s Inland Revenue Department. Since all employees send in salary tax returns (regardless of whether they owe taxes - and these are really simple returns that anyone can do in less than 15 minutes), Chan believes that it is simple enough for the tax bureaucracy to grant payments to the poor, whether or not they pay any taxes. Although the idea is likely to go nowhere, I salute Chan for broaching the issue.

Hong Kong heavily subsidizes inpatients while the bulk of its private general medical practitioners make up the outpatient sector. Consequently, people requiring hospital care and treatment for major illnesses are relatively well covered by the current public healthcare umbrella. Yet Hong Kong has an aging population, and the costs, as medical technology advances, raise questions about care sustainability. Yes, a governmentfunded healthcare reform program does need to address an aging society in which there are now more people over age 65 in Hong Kong than under 5. The government just might have to increase taxes by widening its tax base in order to create an alternative, private insurance "rejuvenation" that covers both the aged and preexisting conditions.

On October 6 Hong Kong Secretary for Food and Health Dr. York Chow announced Hong Kong’s proposed health protection scheme, which would require insurers to report all costs, claims, and expenses to an independent body to be set up to keep the governmentsponsored plan reasonably priced. An HKD 50 billion fund would be set up to assist citizens to enter the new plan. Under the plan, high-risk patients cannot be refused, and guaranteed renewals must be set up for life. Currently, 2.4 million Hong Kongers are covered by private insurers. That’s 30 percent of the population in a city-state where only 10 percent of the population actually uses private medical care. Under the proposed scheme, an additional 300,000-500,000 people would have to enroll to make the scheme feasible. Hospitals (presumably private ones) must offer "package fees," so that patients know, in advance, what their costs would be. People aged 40-64 would pay between HKD 240- 460 per month to be covered by the plan. Those 65 and older would pay between HKD 560-1,250 monthly. Those who join the program during the first year would be given a 30 percent discount as incentive to join. However, the plan fails to mention just how long a new policyholder will be able to maintain that 30 percent discount. The Inland Revenue Department would have an integral part in the program, which would be administered through tax revenues. Thus far, both the insurance industry in Hong Kong and private medical practitioners have objected. It is nice that the government has proposed something. It is unlikely, though, that this plan will go anywhere. Of course, Inland Revenue would be interested in expanding its size and scope of operations to meet the obligations necessary, were this plan to work.

Overtaxed in Korea

According to the August 11 Korea Times, overtaxation, the amount imposed by mistake, reached KRW 2.7 trillion last year. Want to bet there are no refunds made? If you do, you’d be wrong - 90 percent was refunded. Lee Hwa-seon, an official of the tax collection division of the National Tax Service (NTS), which is in charge of tax refunds, stated that "taxpayers are responsible for applying for the refund, not us." Who did receive refunds? Samsung Life Insurance received a corporate tax rebate of about KRW 24.8 billion this past year, as the Seoul Administrative Court ruled that the NTS should cancel what it had imposed, saying the tax agency did not correctly calculate the amount of tax. Korea Exchange Bank received a corporate tax refund of KRW 215 billion as the Tax Tribunal ruled that the NTS should pay back what that lender paid in 2006. Kookmin Bank, the nation’s largest bank, has filed a lawsuit against the NTS for "unfairly" levying corporate tax of KRW 442 billion. This one is still in the courts. NTS simply levies. The taxpayer must request a refund. If you have the legal wherewithal you will get the refund, but patience and perseverance are required, as well as the funds to pay for your legal bills.

South Korea is in the process of easing mortgage lending rules and extending tax breaks to encourage buyers back into the property market. Whether this will have any impact on reviving the economy is unknown. According to The Korea Herald in an October 1 article, only half of last year’s 2009 university graduating classes have found jobs. No jobs mean no income, which means... you get the picture. The tax plan of late August aims to generate KRW 1.9 trillion of additional tax revenue over the next five years, primarily from corporation income tax and individual consumption tax. (For prior coverage, see Tax Notes Int’l, Aug. 30, 2010, p. 656, Doc 2010-18651, or 2010 WTD 163-1.) Yet if corporations are losing money and individuals are not spending, where is that additional tax revenue going to come from?

And then there are the proposed tax changes for foreign corporations, all effective January 1, 2011, as discussed in Loyens-Loeff Singapore’s Autumn 2010 Asia Newsletter:

• To encourage employment, a new, "temporary" credit will replace the old hiring incentive. Next year, a 7 percent tax credit, to a maximum of KRW 10 million for each newly created job, will be available for investments made on or after January 1.
• The Ministry of Strategy and Finance has announced there will be amendments to some hightechnology incentive benefits under the Tax Incentive Limitation and Foreign Investment Promotion Law.
• Likewise, it has been announced that rules for classifying a foreign business entity for tax purposes will be specified under the Corporation Tax Law and Presidential Decree beginning after January 1. In a paragraph similar to the challenging run-on sentences of the late Nobel laureate for literature Jose Saramago, the National Tax Service stated:

A foreign business entity will be treated as a foreign corporation, depending on whether such foreign entity has similar juridical features as those of a Korean domestic corporation. Specific criteria include (i) jurisdiction of incorporation, (ii) liability of its members/shareholders, and (iii) whether it can hold legal title of assets in its own name. A guideline on how to classify major types of foreign business entities under the criteria above will be published separately.

Huh? At least with Saramago, if you read it slowly, you can understand what he was getting at. This one is NTS bureaucratic double talk. Also, as you may have guessed if you have the least bit of cynicism in you, those guidelines have not yet been published.

Corporate Restructurings in China

Readers may already be aware of the State Administration of Taxation's (SAT's) July 26 Bulletin No. 4, which provides enterprise income tax guidelines for corporate restructuring. (For prior coverage, see Doc 2010-17249 or 2010 WTD 152-1.) This is important. It is refreshingly succinct, compared with Korea's public announcements. All I will say is that if you are involved with an entity doing business in China, the world simply is not what it used to be. Beneficial ownership changes of Chinese businesses owned offshore are now liable for capital gains taxation - no exceptions. And if you are buying into a Chinese business and restructuring, then you'd better find out about Bulletin No. 4 - or you are playing with fire. I am not a specialist in transfer pricing in China. Years ago, when I actively represented corporate clients in Chinese tax matters, there was not a transfer pricing "problem" for smaller wholly foreign enterprises, as the number of SAT specialists was so small that they could only delve into matters of corporate entities far larger than those I represented. But now it is quite different. On July 12 Circular 323 was issued by the SAT. (For prior coverage, see Tax Notes Int'l, Aug. 2, 2010, p. 329, Doc 2010-16305, or 2010 WTD 141-8.) The SAT is beginning a nationwide inspection of transfer pricing documentation. Local authorities have been instructed to select for audit for years 2008 and 2009 a minimum of 10 percent of taxpayers who have related-party transactions. While I don't know if this instruction filtered down to all levels of SAT offices, I do know that it has reached the Guangzhou SAT. It is time for some of those smaller businesses - the type that I used to work with - to be concerned about having their transfer pricing documentation in order. From what I hear, it will be more than the minimum of 10 percent who will be audited.

XI and XII Revisited

I mentioned Xi Jinping in my last article. (See Tax Notes Int'l, Oct. 25, p. 253, 2010-21641, or 2010 WTD 205-14.) Assuming no extraordinary circumstances, this is the man who will be the next president of China. Xi Jinping was named vice chair of the Communist Party's Central Military Commission at the conclusion of the annual plenary session of the Communist Party Central Committee on October 18 in Beijing.

Yes, this is a country under one-party rule, but don't think of the Cold War for what this party is like: I know two Chinese billionaires (in U.S. dollars) who are members of the National People's Congress, the highest legislative body in this country. The concept of the wealthy Communist in China is no longer an oxymoron. Labels simply do not apply the way they used to. It's not tax related, so it's not in this article, but if you go to my blog entry for October 22, you will find a biography of Xi. He's going to be a world leader over the coming decade, and while you probably have all heard of Yao Ming, perhaps you should hear - and know - something about Xi Jinping, as well.

I thought we'd have more data as a result of the sessions concluded in Beijing recently. What came out were just a couple of paragraphs of "generalities" and the promise for a detailed report, covering the entire 12th Five-Year Plan before its official inception at the start of 2011. In the banner headline article of China Daily's October 19 issue, National Development and Reform Commission Director Zhang Ping stated that the key to this plan is "shoring up" economic growth with stronger emphasis on social welfare and cheaper housing. Zhang said that there should be additional freeing up of resource prices while raising welfare spending to encourage citizens to spend more; that individual income (and hence, increased consumer expendable renminbi) must be increased over the next five years. The official communiqué, as issued by the Central Committee, also called for "improving basic public services" as a major goal over the next halfdecade - that building a comprehensive service structure in both urban and rural areas would help improve people's lives and promote equal access to public services, including social security reform and development of the public healthcare sector. What this means to me is that civil service in China is going to expand - job creation and higher wages mean boosting a domestic economy while maintaining a healthy export economy. How will this be financed? Through sale of government interest in state-owned enterprises through the stock markets and with an expansion of personnel in the tax bureaucracy and increased tax audits - especially within that sizable gray area of unreported but very taxable income. More about that next time.

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By Laurence E. Lipsher

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