Taxation can be described as ways that governments finance their expenses by imposing charges on individuals and business organizations. Most governments across the world use taxation to encourage or discourage certain economic decisions.
It can also be described as the power vested in the government, to impose charges on persons and corporations in order to raise revenue for a public purpose. Governments levy taxes for resident individuals and corporations. They also levy taxes on non residents, which involve foreign individuals and corporations. In this case, we are going to discuss types of taxation imposed on foreign companies in Asia (Pender, 2005).
Types of taxation in Asian markets
Foreign enterprises in Asian market are subjected to various types of taxation. Corporate income tax is a form of taxation, which is imposed on organizations. It is charged to companies which derive their income from production, business operations and other sources. In Asian markets, foreign countries are supposed to pay corporate income tax. For instance, in China, foreign investments enterprises incorporated under the People’s Republic of China law and regulations are subjected to corporate tax.
Foreign companies not incorporated in China, but have overall management and controls in China are obliged to pay this tax. In China, the corporate income tax is charged at 25% of taxable income. Foreign companies, which are not incorporated in China, but derive incomes from sources in China are subjected to a withholding tax of 10% on gross income (Pender, 2005). In Australia, foreign enterprises are subjected to corporate income tax with a foreign tax credit.
Corporate income tax in Australia is currently at 30% of the taxable income. In Hong Kong, there is no difference between residents and non residents except in rare cases such as shipping and air transport companies. Foreign companies in Hong Kong are supposed to pay 16.5% of taxable income as corporate tax. Only profits derived from Hong Kong is taxed. Incomes derived from the sale of capital assets are not taxable in Hong Kong.
In India, foreign companies with a total income exceeding Rs.1, 00, 00,000 are charged 41.20% of total income. In Indonesia, foreign enterprises are subjected to reduced tax rate of 12.5% on gross revenue. In Japan, foreign companies are charged a corporate tax of 30% for companies with a capital of more than JPY 100m.
Corporate income tax is charged on the net income of each accounting period. A non resident company is deemed to have tax presence in Korea if it has a fixed business in Korea, where the company is wholly or partly operated in Korea. Foreign companies without domestic place of business in Korea are charged tax at flat rates on gross income. Foreign construction companies with a permanent place of business in Korea but not registered in tax authorities are subjected to withholding tax.
In Korea, corporation tax rate is 11% on income up to 100,000,000 and 22% on income over 200,000,000. In Malaysia, foreign enterprises are subjected to corporate income tax at the rate of 25% of taxable income. Corporate tax in New Zealand is charged at 30% of taxable income to the foreign enterprises.
Foreign companies in Pakistan are charged corporate income tax at the rate of 35% of the taxable income. The rate is applicable to all companies other than those in presumptive tax regime. Presumptive tax rule is applicable to foreign companies involved in exports and companies involved in commercial imports.
The tax deducted at source is deemed to be the final tax liability. Foreign companies engaged in business operations, in Philippines, are subjected to 30% corporation tax. The 2% minimum corporation tax is charged on foreign companies same as Domestic Corporation. Some foreign companies such as offshore banking units are taxed at preferential rates. Foreign companies with investment in Singapore are charged corporation tax at a flat rate of 15% of taxable income.
In the Republic of China, especially in Taiwan all foreign companies are taxed only on income generated from the republic. A representative office is not required to pay tax on stock transfers from foreign headquarters. If a company outside the republic provides service to a company in the republic, the income received by the foreign corporation is subjected to income tax. Foreign companies in Thailand are obliged to a corporate income tax of 30% of taxable income.
In Asian market, foreign based countries are subjected to tax on capital gains. Income tax on capital gains is charged when there is a disposal of assets. In Australia, capital gains tax is levied on gains from disposal of assets, which are deemed to have been acquired after September 1985. A foreign company in Australia is liable to capital gain tax, if the capital gain tax events happen to an asset, which taxable Australian property.
In Australia, there is a relief of double taxation if the gain on proceed is taxed in the country of origin. In Hong Kong, capital gains are not taxed; however, tax is imposed on speculative profits, which may arise, from an adventure in the nature of trade. In India, long term capital gains are subjected to tax at the rate of 22.66 % (Williams, 2011). Listed securities in the stock market transaction tax are not charged.
Capital gains arising from transfer of equity shares in a recognized stock exchange, in India, are exempted from tax. Gains from the transfer of depreciable assets are taxed on a short term capital gain. Short term gains from transfer of shares in a recognized stock exchange, in India, are taxed at 16.995%, provided that such shares are chargeable to securities transaction tax.
In Indonesia, gains from transfer of shares listed in Indonesian stock exchange are not subjected to tax. Capital gains are considered to be an ordinary income, and are included in the taxable income. In Japan, capital gains from the sale of lands and buildings are treated differently from those arising from the sale of securities. Capital gains from the sale of shares and real estates are classified as short term capital gains.
Those from the sale of assets are classified as long term capital gains. Capital gains acquired from the sale of securities are subject to capital gain tax at the rate of 15%. Capital gains from transfer of a real estate are charged tax at the rate of 30%.
In Malaysia, capitals gains are not taxed except the real property gain tax on gains derived from the disposal of areal property. The real property gain tax on the gains derived from disposal of real property depends on the period of ownership. In Pakistan, capital gains from the sale of shares are exempted from tax up to 2010 (Hadnum, 2010).
Capital gains from other sources are subject to capital gain tax. If the disposed asset was held for more than one year, then 75% of the sale proceeds will be used in computation of capital gain.
In Philippine, the net capital gains derived by a non resident company from the sale of shares not traded through a local tax exchange are subject to tax. Capital gains of less than Php100, 000 are taxed at the rate of 5%. Any amount in excess of Php100, 000 is taxed at the rate of 10%. Capital gain tax of 0.5% is levied on the disposition of shares listed in a local stock exchange (Campbell, 2008).
The comptroller of income tax in Singapore treats gains from disposal of shares and properties as revenue gains. These gains are subject to income tax. Foreign countries in Asia are also subject to taxation on dividends. For instance in china, dividends paid by a foreign company is charged 10% withholding tax.
The withholding tax may be reduced through double taxation agreement. Dividends paid from 2008 onwards are subject to withholding tax. Dividends from profits before 2008 are exempted from tax. In Japan, if a foreign company owns less than 25% of shares, then 50% of the dividends have to be included in taxable income.
Dividends paid to non residents are subjected to withholding tax of 20 % (Dhameja, 2008). Foreign companies in New Zealand are subject to 30% tax on dividends paid to shareholders. Tax credits received from dividends can be offset against the receipt income tax liability. A non resident may claim a portion of tax credit depending on double tax agreement. Foreign companies are subject to pay custom duties.
Custom duties are imposed by common wealth countries on imported goods in order to protect domestic industries (Hadnum, 2011). In Asian market, foreign countries importing goods from their country of origin are subject to paying tax. For instance, in Australia the amount of custom duty is determined as par the general agreement on tariffs and trade.
Where goods have no Australian comparison, they attract a reduced rate of custom duty. In People’s Republic of china, goods imported from outside countries are subject to custom duty. Only those goods which qualify for, tax preferential treatments are not subject to custom duty.
Custom duty is imposed on the cost of insurance freight value. This includes packing charges, freight and insurance premiums approved by customs (Musgrave, 2007). The rate of custom duty depends on the imported goods. In Hong Kong, foreign companies are subject to pay custom duty only on wine, liquor, hydrocarbon oil and tobacco. Imported motor vehicles are subjected to first registration tax which is equivalent to custom duty.
In India, custom duty is charged at different on goods imported in the country. The custom duty in India is about 10% of the value of imported commodity. The custom duty on capital goods usually ranges from 12.5% to 20%. Most of the imported goods are also charged an additional duty of 4%.
Customs duties in India are charged depending on the value of imported good (Campbell, 2008). The government of India imposes anti-dumping duty, if foreign companies export goods in India at low prices compared with prices in the local market.
Value added tax is taxation subject to foreign countries in the Asian market. The amount of VAT to be paid is calculated as the difference between output VAT and input VAT. It is mostly charged on companies involved in sales of goods, processing and importation of goods in the Asian market.
In China, the rate of value added tax on companies engaged in production of commodities is 17% of the sales price of the product, and 13% on products which are necessary on a daily basis. In India, value added tax is known as the central value added tax (CENVAT). It is imposed on large manufactured goods at specified rates. It is charged at a rate of 8% on most commodities (Nobes, 2010). Value added credit is allowed against central value added tax on certain inputs and capital goods purchased.
In Indonesia, foreign countries are subject to paying value added tax. It is charged to all VAT-able transactions, and the general rate is usually at a rate of 10% (Bayley, 2006). In Korea value added tax, is imposed at a rate of 10% on the transfer of most goods and services. Some countries in Asian market such as Malaysia do not have value added tax, but they have sales tax. Sales tax in Malaysia is charged on goods manufactured or imported in Malaysia.
In Philippine value added tax, is charged on any person who sells, exchanges or leases goods or render services. The value added tax in this country is levied at a standard rate of 12% since 2006. In Taiwan; companies are subjected to paying value added tax. It is levied on the value added at each level of a process involving the sale of goods or services. In this country, the rate of value added tax is not supposed to be less than 5% or more than 10%.
Property tax is also imposed in most of Asian markets. This is tax levied on property income. Property income earned by foreign companies in China is subjected to tax. The companies are supposed to pay a withholding tax of 10% of the property income. They are also charged an extra 5% business tax (Lymer, 2010). In Indonesia, property tax is levied at a standard rate of 15% on the value of the property income. In New Zealand, property tax is based on the rates established by local and regional councils (Bayley, 2006).
Goods and services tax is also imposed in Asian markets. It is levied on goods sold and services rendered. For example, in Australia goods and services sold are taxed at a rate of 10% of the value. It is collected by registered businesses at each level in the supply chain. It is charged on capital items, trading stock, intangible and tangible goods. Goods and services tax is also imposed on all supplies of goods and services in New Zealand.
The rate of goods and services act is currently at a rate of 12.5% of the value of goods or services. Stamp duty is also levied on companies in Asian markets (Melville, 2009). It is charged by the government on documents such as promissory notes, bills of exchange and documents involved in transfer of shares and real properties.
In China, all companies and people who execute certain documents are subject to stamp duty. The rate applied to stamp duty depends on the subject matter of the contract. For instance, a rate of 0.1% is charged on property leasing contracts. Stamp duty is also imposed in Hong Kong at 0.1% in respect of sale of shares and other securities (Melville, 2010).
Fringe benefit tax is also charged on fringe benefits provided to employees by the employer (Dhameja, 2008). For instance, in India fringe benefit tax is charged at 33.99% of the value of fringe benefit offered by the employer. In New Zealand, companies are supposed to pay fringe benefit tax on fringe benefits provided to employees. Fringe benefit tax in this country is charged at a rate of 49% and 61% on the taxable benefits.
Personal income tax is also charged on foreign individuals in the Asian market. Non resident professionals in foreign companies are subjected to 15% withholding tax in Singapore. Other forms of taxation in Asian markets include royalties. Royalties are charged on payments for the use of trademark, copyright, patent etc. For example, non residents in Singapore are subjected to withholding tax at a rate of 10%. Interest tax is also imposed in Asian markets.
In Singapore, interest tax is charged at 15% on interest income. Excise taxes are also charged to foreign companies in Asia (Bayley, 2011). This form of tax is charged on locally manufactured goods. In Philippine, it is charged on goods manufactured in Philippine for domestic sale or consumption (Hadnum, 2010).
Strategic approaches to reduce tax liability
Foreign companies in Asian market pay a lot of money in the form of taxation. These companies may deploy several strategic approaches to reduce the tax burden. Companies can avoid paying capital gain tax. This tax is charged on the benefit from the disposal of assets. A company can avoid this taxation, by maintaining its assets. Companies may also sell investment losers to reduce capital gain tax, this helps in offsetting the profit.
Proper tax planning may also help organization in reducing the tax burden. This helps in reducing tax on sale of company shares. A company may consider distributing shares to other members, which reduces personal income tax. Foreign companies in Asian market may adopt approaches of utilize the tax incentives offered in this markets (Cullen, 2011).
For instance, in China tax incentives are provided to new high technology enterprises, and companies specializing in research and development. Companies that qualify to be in these categories enjoy a reduced rate of 15% compared to regular corporate tax of 25%.
Singapore and Malaysia also provide incentives directed towards research and development (Musgrave, 2007). This includes tax credit for expenditures in research and development. Companies in these countries may concentrate on these expenditures, to reduce the tax burden. Some countries in Asian markets provide an exemption on import duties on capital goods. In this case, foreign companies may import capital goods to reduce the tax burden.
Companies may also establish their businesses in particular economic zones to avoid paying custom duty and value added tax (Melville, 2009). In Asian market, some goods are exempted from value added tax. Foreign companies in Asian market may specialize in manufacturing these goods to avoid paying tax.
Hiring independent contractors may also help a company in reducing the burden of taxation. Companies may outsource some of their operations to independent contractors. This will help in reducing taxes as there is no need to withhold income taxes from their earnings. The company will also not pay the employer’s share of social securities. Companies use a strategy of maximizing deductions to reduce the burden of taxation (Williams, 2011). This involves keeping excellent records and receipts relying on a tax professional for guidance.
Companies may also reduce tax liability by giving donations to charitable organizations. This will reduce the burden of taxation as donations are tax deductible. Hiring family members is another strategy of reducing the tax burden. This will help companies to shift from high tax rates to low tax rates. Deferring income is an approach that can be adopted by a company, to reduce taxation (Fisher, 2010). For example, postponing receiving money to January instead of receiving it in December may help in reducing taxation.
Most companies maximize their expenditure on machineries and equipments. This involves buying equipments in advance and use the capital deductions allowed in the current year. Paying bills before the end of a financial year is another way to avoid paying tax. Designing a retirement plan and making payments before the end of the year helps in reducing tax.
This will help in income for the year and subsequently reducing tax. Finally, foreign companies in Asian markets use transfer pricing provisions and double taxation approaches to reduce taxes. For instance, foreign information technology companies in India make use of these strategies to reduce taxation burden (James, 2009).
Taxation involves ways used by governments, to finance public expenditures through imposing charges for individuals and corporations. Each country adopts a different taxation policy. Tax is imposed on resident individuals and companies. Many countries also impose taxes on non resident individuals and corporations. In Asian market, different countries adopt different tax policies and principles to levy a tax.
There are different types of tax imposed on individuals and companies in Asia. Corporate and individual tax rates differ from country to country across Asia (James, 2009). Corporate income tax and personal income taxes are main types of taxation in various countries in Asia. There are several foreign based companies across Asia.
These foreign companies are obliged to different types of taxation in this market. Taxation takes a large proportion of profit earned by these companies. In most cases, corporate income tax ranges between 30% and 40% of companies profit. Finally, most of the foreign companies adopt various strategic approaches such as double taxation agreements to reduce the burden of taxation (Fisher, 2010).
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