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Budget Round-up

By Editorial
March 1, 2019

Governments across the world are apt to use national budgets as an opportunity to make changes to a country’s tax regime in order to raise additional tax revenue, encourage higher investment and personal consumption, or tackle tax avoidance. For multinational enterprises with operations across several jurisdictions at once, keeping track of this almost constant churn of national tax rules is no simple task, especially against the backdrop of coordinated anti-avoidance measures under the OECD’s base erosion and profit shifting project. This feature therefore provides a round-up of national budget developments that have taken place this year.


Hong Kong – promoting the SAR’s marine finance sector

To promote the development of Hong Kong's marine insurance sector, on February 27, 2019, Financial Secretary, Paul Chan announced in his 2019/20 Budget speech that the Government will offer a 50 percent profits tax concession to eligible insurance businesses.

Chan also announced that the Government has commissioned the Hong Kong Maritime and Port Board to set up a dedicated task force to study tax and other measures, with a view to attracting ship finance companies to establish a presence in Hong Kong and developing Hong Kong as a ship leasing center in the Asia-Pacific region. This study is expected to be completed in the second half of this year.

Other tax measures announced in the Budget included:

  • A reduction in profits tax (corporate tax) for 2018-19 by 75 percent, subject to a ceiling of HKD20,000 (USD2,550). The reduction will be reflected in the final tax payable for 2018-19;
  • A reduction in salaries tax and tax under personal assessment by 75 percent for 2018-19, subject to a ceiling of HKD20,000; and
  • The waiving of property rates – a tax based on the annual rental value of a property –for the four quarters of 2019-20, subject to a ceiling of HKD1,500 per quarter for each ratable property. This proposal is estimated to benefit the owners of 3.29 million properties.

India – helping the middle class

Arguably the most notable feature of India’s 2019-20 Budget, delivered on February 1, 2019, was a series of tax relief measures for those on low and middle incomes.

Presenting his first Budget since assuming the post, Finance Minister Shri Piyush Goyal announced to parliament rise in the personal income tax exempt threshold to INR500,000 (USD7,040), as well as an increase in the standard deduction from INR40,000 to INR50,000. Further the Budget proposes an increase to the tax deducted at source (TDS) threshold from INR10,000 to INR40,000 on interest earned on bank and post office deposits, and the TDS threshold for deduction of tax on rent from INR180,000 to INR240,000.

The Budget also proposes to increase the benefit of rollover of capital gains under Section 54 of the Income Tax Act from investment in one residential house to two residential houses for a taxpayer having capital gains up to INR20m.

Finally, the Budget proposes that those with gross income of up to INR650,000 "may not be required to pay any income tax if they make investments in provident funds, specified savings, insurance, etc."

Pakistan – ‘mini budget’ supports economic growth and investment

On January 23, 2019, Pakistan's Finance Minister, Asad Umar announced before parliament a raft of tax measures intended to support the country's economy and attract investment.

The salient measures include:

  • Continued reductions in the corporate income tax rate (currently 29 percent) of one percent per year until it reaches 25 percent in 2022;
  • Abolition of the tax on undistributed profits;
  • A reduction in the tax on income from loans to small businesses and the agriculture sector from 35 to 20 percent; and
  • A change to biannual frequency, rather than monthly, for small businesses submitting withholding statements.

Umar also announced that the Government would bring forward the repeal of the four percent "Super Tax" on the non-banking sector. A brief released by the Government stated that this would take place from 2020, but local media reported the Minister as stating that it would be repealed from July 1, 2019.

The Budget also included tax relief for companies investing in plant and machinery for greenfield projects, and a five-year income tax exemption for industrial undertakings manufacturing renewable energy equipment from March 1, 2019, to June 30, 2023.

Malaysia – corporate tax reforms and changes in Labuan

In January 2019, Malaysia published in its Official Gazette the Finance Act 2018 (Act 812), providing for broad changes to the corporate tax regime.

The most significant changes in the bill include a corporate tax rate cut for those businesses with income of up to MYR500,000 (USD122,750), from 18 percent to 17 percent. The remaining chargeable income is subject to an income tax rate of 24 percent, which remains unchanged in the Act.

Further, the Government has legislated to begin consolidating existing tax rules and incentives. This includes the introduction of a new seven-year limit on the carry forward of business losses, as well as changes to unabsorbed capital allowances, unabsorbed reinvestment allowances, and pioneer losses. The Budget also set out plans to review group relief rules.

The Budget also announced changes in Labuan, the offshore international financial center. While the corporate tax rate of three percent will be maintained, the election to instead pay a flat tax amount of MYR20,000 under the Labuan Business Activity Tax Act 1990 has been repealed.

Lastly, imported services will be subject to service tax. Prior to the amendments, service tax was chargeable only on services provided by service providers located in Malaysia. Services imported by businesses (B2B) are taxable from January 1, 2019. The Budget announced the Government's intention to introduce such taxation on consumers from January 1, 2020.


Isle of Man – luring workers to the island

The Isle of Man released its 2019 Budget on February 19, 2019, which included proposals to offer tax breaks to former residents who move back to the island to work after university.

The Budget also proposes an increase for the third consecutive year to the personal income tax allowance, up GBP750 (USD1,000) to GBP14,000, saving taxpayers GBP150 on average.

The territory also plans to introduce a National Insurance Holiday Scheme for employees who move to the island for work and Manx students who return to the island to work after completing their UK university courses. The scheme will be open to anyone who has not been tax resident in the Isle of Man for the immediate last five tax years, and who takes up both residence and full time, permanent employment with a gross salary of GBP21,000 or more, on or after April 6, 2019. Eligible residents will apply for a refund on the National Insurance contributions for their first year of living or returning to the Isle of Man, with refunds capped at GBP4,000.

Spain – parliament rejects 2019 Budget; elections called

On February 13, 2019, the Spanish parliament rejected the Government's 2019 Budget bill, casting doubt over whether key tax proposals, including a digital services tax and a financial transactions tax, will be introduced.

Among the corporate tax measures included in the draft Budget bill was a reduction in the participation exemption on domestic dividends and capital gains for Spanish companies meeting certain holding requirements from 100 to 95 percent. The Budget also included a 15 percent minimum tax for corporate groups subject to the headline 25 percent corporate tax and with revenues in excess of EUR20m (USD22.75m) in the prior year.

Following parliament's rejection of the Budget, the Spanish President called for fresh elections, which are due to be held on April 28, 2019. As a result, it now seems unlikely that parliament will have sufficient time to debate and approve the 2019 Budget and other proposed tax measures. Significantly, this means that proposed digital services and financial transactions taxes are unlikely to be legislated for this side of the election.

Under the proposed digital turnover tax, a three percent levy would be imposed on companies with total revenues of EUR750m and with sales from digital services of at least EUR3m in Spain. Revenues from the sale of online advertising, intermediary services, and the sale of user data are included in the scope of the tax.

The digital services tax is expected to raise around EUR2bn in additional tax revenue annually.

Meanwhile, the Spanish FTT would be imposed at rate of 0.2 percent on trades of shares in Spanish companies with a market capitalization of at least EUR1bn. This is expected to raise an additional EUR850m in tax revenue per year.

Lithuania – personal tax reforms confirmed

The Lithuanian Government recently published a summary of the 2019 Budget, which confirms the introduction of reforms to the personal income tax regime.

Under the changes, effective from January 1, 2019, personal income not exceeding 120 average wages (AWs) is taxed at 20 percent, with the excess taxed at 27 percent. However, the 120 AWs threshold will be reduced to 84 AWs in 2020, and to 60 AWs in 2021. In 2018, the average monthly wage was EUR926.70.

Non-employment income (excluding individual income and income from distributed profits) exceeding 120 AWs is taxed at 20 percent, also effective from January 1, 2019.

As a result of the reforms, some social security contributions have been merged into personal income tax.

Prior to 2019, personal income was generally taxed at a flat rate of 15 percent.

Poland – a lower corporate tax rate and an IP box

On January 16, 2019, the Polish Ministry of Finance announced that the 2019 Budget law, which includes corporate tax measures, has been approved by the lower house of parliament, the Sejm.

Under changes effective January 1, 2019, small firms with revenues up to EUR1.2m (USD1.36m) will pay a reduced rate of nine percent. Previously, companies with revenues up to EUR1.2m paid corporate tax at 15 percent. The headline rate remains set at 19 percent.

The reforms also introduce a preferential corporate tax rate of five percent on qualifying intellectual property income, including patents and designs. IP income would have to be linked with research and development expenditure in order to qualify for the preferential tax rate. The IP box regime follows the OECD modified nexus approach to special IP tax regimes agreed by countries under Action 5 of the OECD's base erosion and profit shifting project.

A consultation on various aspects of the new IP box regime, including how to calculate eligible income and transitional provisions, concluded on January 15, 2019.


South Africa – tax tweaks and carbon tax confirmation

South Africa's 2019 Budget, released on February 20, 2019, included few tax announcements except confirmation of the introduction of the new carbon tax from June and a hike to the tax-exempt threshold for individual taxpayers.

The tax-free threshold will rise to ZAR79,000 (USD5,640) from ZAR78,150 but tax thresholds will not be adjusted, generating an extra ZAR12.8 billion for the Government. The eligible income bands for the employment tax incentive will be increased from March 1, 2019.

Other announcements include that white bread flour, cake flour, and sanitary pads will be zero rated for VAT purposes from April 1, 2019.

There will also be a below-inflation increase in fuel tax, and an increase to excise duties on alcohol and tobacco.

Finally, it was announced in the Budget that the large business unit will be relaunched from April 2019.

The carbon tax will be implemented in stages, with the first phase taking place from June 1, 2019, to December 31, 2022, and the second phase from 2023 to 2030.

To provide time for businesses to reduce emissions through investments in energy efficiency, renewables, and other low carbon measures, the design of the carbon tax provides significant tax-free emissions allowances ranging from 60 to 95 percent for the first phase. These include a basic tax-free allowance of 60 percent for all activities, a 10 percent process and fugitive emissions allowance, a maximum 10 percent allowance for companies that use carbon offsets to reduce their tax liability, a performance allowance of up to five percent for companies that reduce the emissions intensity of their activities, and a maximum 10 percent allowance for trade-exposed sectors. This will result in a carbon tax rate ranging from ZAR6 (USD0.43) to ZAR48 per ton of CO2 equivalent emitted. It is intended that the effective carbon tax rate will increase over time.

Botswana – inheritance and transfer tax relief

Announced on February 4, 2019, by Finance Minister O.K. Matambo, Botswana's 2019 Budget included proposals to amend the taxation of transfers of assets. This will involve amendments the capital transfer tax act, which governs the taxation of transfers of assets between generations, including as gifts during life.

Specifically, the Budget proposes the removal of the threshold below which property, such as household goods and personal belongings, that are bequeathed are exempt from tax. The threshold for exemption from tax on gifts will rise from BWP5,000 (USD466) to BWP25,000.

The Transfer Duty Act, which governs the tax chargeable on immovable property transfers in general, will be aligned with the capital transfer tax act, to ensure that transfers presently exempt from transfer duty are also exempt from capital transfer tax. New tax relief will be introduced for first-time home buyers, and the exempt threshold for transfer duty will rise from BWP200,000 to BWP500,000. A bill to bring about these changes is expected to be tabled next month.

The territory's finance minister also outlined recent measures intended to align Botswana's tax regime with international standards. These have included a review of the Botswana International Financial Services Center tax regime, which led to the amendment of the Income Tax Act by Parliament in December 2018, and the introduction of a thin capitalization regime and transfer pricing rules.

Gambia – excise tax reforms

The Gambian Budget for 2019 contained a number of minor tax and excise reforms.

The following changes apply as of January 1, 2019:

  • The excise tariff for new cars was increased from 20 percent to 25 percent;
  • The tax on commercial rents was increased from 10 percent to 15 percent;
  • The excise tax rates on spirits, beer, and wine were increased;
  • The fee for the acquisition and replacement of a Taxpayer Identification Number was abolished;
  • To ensure the proper enforcement of capital gains tax, village chiefs must not effect land transfers without the prior payment of capital gains tax by the seller; and
  • An amendment to the VAT Act to ensure that payments of royalties to the Government are not subject to VAT.


Tags: tax | business | investment | services | carbon tax | Hong Kong | Finance | Tax | Isle of Man | Botswana | Malaysia | tax reform | insurance | budget | Africa | Labuan | Pakistan | South Africa | Spain | India | energy



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