01 Sep 2009

Assessable Income in Australia

by Darren

Under Australian taxation law the term ``Assessable income'' means ordinary income and statutory income. However, those income types will not be assessable income if the amount is excluded by the law. "Ordinary income'' in the legislation is defined as "income according to ordinary concepts" This loose definition means that case law has evolved to identify various factors that indicate whether an amount is income according to ordinary concepts. Generally, an amount of ordinary income will include revenue generated from the sale of inventory, revenue generated form the provision of services and salaries and wages. "Statutory income" is included in assessable income by a specific provision of the tax law. An example of statutory income is a royalty which is not ordinary income but which is included in assessable income under section 15-12 of the tax law (ITAA97). Exempt income is not included in the calculation of assessable income. Examples of exempt income include any type of income generated by a charitable, religious, scientific and public educational institutions. Generally, GST is disregarded when working out assessable income A full list of income types under Australian law classified as Taxable or Non-Taxable can be found in the attached file. Australian_Income_List.pdf Each type of income needs to be analyzed to determine whether it is ordinary, statutory, capital gain or exempt. Once you have identified this then the sum of the ordinary statutory and gains are your total assessable income.
29 Aug 2009

Income sourced within China - Individuals

by Darren

In China your status of residency is important in dealing with source of income in China. For individuals the core types of income generated are wages and salaries. If you have lived in China for less than 365 days (non-resident) you are only taxed on the employment income earned during the actual working period. If you are a resident then you are taxed on all income earned in China. Finally if you have lived greater than 5 years in China then you are taxed on all income earned worldwide. Chinese tax laws deem certain types of income to be sourced in China irrespective of where the payment or location of enterprise making the payment is located. These include:
  • income derived from providing services whilst employed in or fulfilling contracts within the territory of China
  • income derived from leasing properties used by a lessee within China
  • income derived form assigning buildings or land-use rights or other properties within China
  • interest, dividends or bonuses paid within China
The deeming of such income as sourced in China allows the authorities to tax such income for both residents and non-residents receiving that income.
28 Aug 2009

Accessing Double Tax Agreements

by Darren

We are now going to look at who can benefit from the concessions offered in double tax agreements DTA apply to persons who are residents of one or both of the countries involved in the agreement. The definition of person under the DTA generally includes an individual, company and any other body of persons such as partnerships and trusts. Resident is based upon a specific article in the agreement as well as the definitions in the domestic laws. We have seen in earlier blogs the definition of resident in Australia, Singapore, USA, Japan, Hong Kong and China. As we can see from the definitions of residence there is the potential that a person can be a dual resident, i.e. a resident of both countries in the agreement. If the agreement was not in place then both countries would tax that individual on all income earned - double tax. The rules in the DTA vary depending on the actual agreement however, there is a tie-breaker provision that determines which country the taxpayer is resident. In general in the case of a company it will be the place where key management and commercial decisions are made. However, looking at the USA Australia DTA if there is a dual resident situation for companies then the company in question is deemed not entitled to the benefits of the DTA rather than apply the rule place of management. For an Individual firstly the agreements look at where the individual has his/ her permanent home, if this is not determinable then secondly look at where the individual has a habitual abode. Finally if the individual has a habitual abode in both countries then the agreements look at where the individual is a national.
27 Aug 2009

Income sourced within Hong Kong

by Darren

In Hong Kong there is no general income tax that requires the aggregation of all income from all sources for which tax rates are applied. There are 3 general forms of Taxation property tax, profits tax and salaries tax. Section 14 of the Internal Revenue Ordinance (Tax Law) requires 2 conditions to be met in order for tax to be charged on profits or salary:
  • A person is carrying on a business, trade or profession in Hong Kong
  • Income is derived from Hong Kong
What is important here is understanding whether the profits or income arise in or derived from Hong Kong. If your business can prove that the profits didn't arise in Hong Kong then they will not be subject to taxation. If you have incorporated your company Hong Kong, your registered office or business premises are in Hong Kong then you will be treated as having carried on a trade, profession or business in Hong Kong. Income that the business earns from sales to Hong Kong companies, individuals in Hong Kong would be subject to tax in Hong Kong. However, if your business makes sales or trades with a company in another country like Australia then the income from such sales would not be subject to Hong Kong tax. This is because under common law the source of income from trading is generally where the sales contact is entered into. As a general guide the following types of income would be deemed to be Hong Kong sourced: Employment income from a contract entered into in Hong Kong. Sales to a Hong Kong business or individual Interest earned on a bank account held with in Hong Kong Royalty or license fee income received by a Hong Kong company who is the owner or has an interest in the intellectual property Over the next few weeks we will examine the taxation of Hong Kong profits in more detail
25 Aug 2009

Income sourced within Japan

by Darren

The concept of source in Japan is dependent upon whether the company is domestic or foreign. A domestic Japanese company calculates its taxable income which is gross revenue less costs, expenses and losses. Japanese income tax is applied on the companies worldwide income. Tax credits are available for any taxes paid in foreign jurisdictions. Foreign companies are only taxed on income from business activities through the use of a permanent establishment in Japan. Japanese tax is imposed only on the profits that are allocated or attributed to the permanent establishment. If a foreign company has Japan sourced profits which are not attributed to the PE then these are not taxed in Japan. A Permanent Establishment (PE) can be through a branch, construction activity or agency relationship. A branch would need to have a fixed place of establishment in Japan such as an office or factory. An office for the purpose of holding inventory, conducting market research or providing information is not included in the PE Definition. A construction PE includes installations and constructions within Japan for a period of greater than 1 year. Agency PE is where your business has an agent in Japan who is authorized to conclude contracts and regularly exercises authority on behalf of your company. Note authorization to purchase on behalf of the company does not constitute a PE. Examples of income sourced in Japan would include: Interest income from a bank in Japan Dividends from shares listed one the Tokyo Stock Exchange Sale of goods or provision of services within Japan Salary and bonus received from employment contracts entered into in Japan
22 Aug 2009

US sourced Income

by Darren

The US has a comprehensive set of rules to specify the geographical source of different types of income. The main reason for having these rules is: 1. To determine whether US corporations are entitled to credits for foreign taxes paid 2. Whether a foreign corporation is subject to US taxes. The basic rules for identifying the source of income are as follows: Interest - where the payor or debtor resides. Dividends - where the corporate payor resides. Personal Services - where the person provides the services Rent - where the property is located Gains from Real Estate - where the property is located Royalties - where the intangible property is used. Inventory profit - if purchased for sale where the contract is entered into. If manufactured 50% where it was manufactured and 50% where the title of goods passes. Generally the source rules are quite similar across countries. However, did you notice that dividends source are different between USA and Australia. An Australian company earning income from the US and subsequently paying a dividend. That dividend will be subject to tax in the US where as a US company earning income in Australia and paying a dividend, those dividends are generally subject to US taxation as well. Is this fair to the Australian government? Should the US receive all tax money? We will need to examine the double tax agreement between the US and Australia to really understand the impact of this. I will look at double tax agreements late spring so stay tuned. In the coming weeks we will look into the details of how specific types of income are treated under US tax laws from a non-resident perspective.
21 Aug 2009

Double Tax Treaties

by Darren

A Double Tax Agreement (DTA) is an agreement between 2 countries in order to avoid double taxation which can result from international transactions, allocate the tax imposed the income between the governments and prevent tax evasion on international transactions. Governments are generally interested in the activities of foreigners within their country as well as the activities of their residents in foreign jurisdictions. There are 2 scenarios for which double taxation can occur: 1. Two governments assert their domestic tax laws to impose tax on income generated by the taxpayer. For example a US citizen is taxed on their worldwide income and earns income in Hong Kong. Hong Kong imposes a tax on any income sourced within Hong Kong and the US charges tax on all income earned by US citizens. 2. A taxpayer can be classified as a dual resident and as such would be taxable on their worldwide income in both countries. For examplee a company is incorporated in USA and has its place of effective management in Australia. Under US law the residence definition is US incorporated companies while in Australia the residence definition is different such that if the place of effective management is within Australia then that company is a resident of Australia. So how does the DTA provide relief from double taxation? 1. The country of residence can offer an exemption from tax on any foreign sourced income. In this case foreign income will not be declared in the annual tax filings and will not be taxed. In certain circumstances foreign income is generally exempt from Singapore tax assuming taxes have been paid on the income prior to repatriating the income into Singapore. 2. The country of residence will tax the foreign income of the taxpayer but in return will allow a credit (not deduction) for any foreign taxes paid. This is deducted after the final amount of tax payable has been calculated. For example: Assume domestic income is $750,000, foreign sourced income is $500,000, total allowable deductions amount to $250,000, foreign taxes paid on foreign Income is $80,000 and tax rate is 30%. The Net Taxable Income is $1,000,000 (750,000 + 500,000 - 250,000). Tax payable on $1,000,000 is $300,000. A credit is then available to the tax payer for the $80,000 paid in foreign taxes resulting in net tax payable of $220,000. Note depending on the country there are rules which limit the amount of the credit available. 3. Offering a tax deduction for the amount of foreign taxes paid. In this situation the foreign tax is deducted from the total income to calculate the net income then tax payable. The reduction on net tax payable is less than in the case of a tax credit. Using the same details as 2 above the calculation is Net income 1,250,000 less allowable deductions $ 250,000 less foreign taxes paid $80,000 resulting in a Net Taxable Income of $920,000. Tax payable on this is $920,000 x 30% = $276,000. The additional tax paid under option 3 is $56,000. Generally Option 2 is the most widely chosen method bu governments to relief the issue of double taxation. In addition to relief through credits and deductions DTA's offer reduced withholding tax rates on certain types of income, namely dividends, inetrest and royalties. Treaties can reduce tax rates to 5%, 10% 15% or even make them tax free.
20 Aug 2009

Singapore sourced Income

by Darren

In Singapore taxation is on a territorial basis. This means that gains or profits that are accrued in or derived from Singapore are subject to tax. In general income not sourced in Singapore by a non-resident is not subject to Singaporean tax. To determine whether the income is sourced in Singapore we ask 2 questions: What is the originating cause of the income? Is the originating cause in the taxing jurisdiction? For example lets look at sales of a company. Lets assume a US company based in Delaware made a sale to a Singaporean company. The originating cause of the income was a sale within Singapore. The taxing jurisdiction will be Singapore and not the USA because the income was derived in Singapore The Singapore Tax legislation has a number of provisions that deem certain income to be sourced in Singapore:
  • Trading operations carried on partly in Singapore
  • Employment exercised in Singapore
  • Interest, commission or fee, etc paid to a non-resident in connection with any loan or indebtedness
  • Royalty, payment for use or right to use moveable property
  • Payment for know-how and technical assistance
  • Fees for management or assistance in the management of any trade, business or profession
  • Rent for use of a movable property

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