Singapore

3 Chapter How to Utilize Regional Headquarters

    • Method of Consolidating Profit by Dividend and Making it as Reinvestment Base

      In this chapter, we will explain how to utilize the actual regional headquarters and the taxation at the same time  by comparing these two cases, first where direct investment is made from Japan and second, where the regional headquarter is established.

       

      A business is made up of a series of value added activities ​​such as returning profits by investment  and turning the profits obtained into funds for reinvestment. You can generate further profits by setting up new business with the profits obtained from the existing one and repeating reinvestment to expand existing business. Therefore, by placing an investment through establishing a new company in a country where there is low tax rate, the amount of tax on the profit to be acquired by the new established company is suppressed, and that amount can be re-invested.

      In this way, how to reduce the tax burden to secure reinvestment resources will be an important issue to the organizations in the Asian region.

       

    • Return of Profits by Dividends

       
       
       A method of returning profits earned by overseas subsidiaries through dividends is common. In this case, the country that received the dividend will  treat it as normal income and thus, income tax will be levied. On the other hand, on the side of the country paying dividends, , income tax will be paid on the income generated from the operation of the company. 
       

      Some countries such as Singapore and Hong Kong have a preferential tax requirements  compared to other countries. In these countries, tax cost can be reduced by using tax difference or tax credit.

      In addition, for those countries that have   tax treaty  between other countries, in choosing a certain tax to be applied in a specific transaction it is possible to select between  the existing domestic law and the tax treaty, whichever is favorable to the company (preservation and closure).

    • Taxation on dividend income received

      In Singapore and Hong Kong, we are strengthening the reduction of the tax rate in order to attract companies. We also offer incentives such as tax exemption for  dividend income received. The requirements for each tax on dividends including Japan are as follows:

       

      ■ In case of receiving dividends in Japan

      In Japan, dividend income is being taxed. In the case of a corporation, dividend income is included in the normal taxable income under the Corporation Tax Law and therefore subject to corporate tax. Since this dividend is paid out from after-tax profits, meaning the dividend paid is the residual value of the corporate income less income tax paid from this income, and the dividend received by the headquarter in Japan will also be subject to income tax, double taxation may occur. In order to avoid this international double taxation, the tax system was revised in  2009, and a foreign subsidiary dividend income tax-exclusion system was introduced. As a result of this amendment, 95% of the amount of the dividend received is now exempted  (Article 23 paragraph 2 of the Corporation Tax Law) in calculating the income tax amount to be paid in Japan.

      In other words, for dividend received from overseas subsidiaries, the amount calculated by multiplying 5% in the dividend amount received will be the taxable income. Tax payable will be computed by multiplying the amount of taxable income by the corporate tax rate. 

      [Example of Calculation: Dividend from Subsidiary is 100]

       

      (1) Dividend income earned = 100

      (2) Foreign subsidiary company non-taxable income = 100 × 95% = 95

      (3) Taxable Income (1) - (2) = 100 - 95 = 5

      (4) Payment amount in Japan = 5 × 40% * = 2

      ※ For convenience of calculation, suppose Japan's effective corporate tax rate is still the same as 40%.

       

      【When sending a dividend from a foreign subsidiary to a Japanese parent company】
       
       

      ■ When Receiving Dividends in Singapore and Hong Kong

      [In the case of Singapore]

      In principle, in Singapore income from foreign source is being taxed in the fiscal year remitted to Singapore. However, if the maximum corporate tax rate of the withholding country is 15% or more and the  foreign income is taxed base on that tax rate, the tax exemption will be applied.

      For example, if the controlled company is located in India, Indonesia, Vietnam and the withholding tax rate in each country is 40%, 25%, 25%, respectively, the above requirements will be applied and thus, tax exemption on such income will occur.

       

      [In the case of Hong Kong]

      In Hong Kong,  income from foreign sources is tax exempt.

    • Withholding tax withholding tax in dividend paying countries

      ■ The difference between the case of returning the income from Japanese subsidiary company directly to home office in Japan and the case of reflowing or reinvesting the income through regional head quarter’s supervision

      As mentioned above, rather than returning the income of subsidiaries  directly to Japan, reinvesting it will lead to tax reduction and efficiency of investment.

      In doing so, before paying dividends to regional headquarters, tax withholding is imposed in accordance with tax laws of the country where the controlled company is located. However, in cases where countries where the headquarters and the subsidiary company are located have signed a tax treaty, it is possible to choose between  the domestic law to be applied and the tax rate stipulated in the tax treaty, whichever is more advantageous on the part of the tax payer.

      Taking Thai, Indonesia and Vietnam as  examples, when returning profits from a subsidiary located in each country directly to the parent company in Japan, 10% in Thailand, 20% in Indonesia, tax exempt and necessary withholding tax rate in Vietnam are to be applied according to  the domestic law. There is an obligation to pay dividend tax amount in each country.

      However, each country has concluded a tax treaty with Japan stating that the tax rate to be applied for payment of dividends are:10% in Thailand, 10% in Indonesia, Vietnam is tax exempt.
       
       
       
       
       
       

      Let's assume that Indonesia will send a dividend of 100 to Japan and consider the final takeover amount in Japan.

      First of all, the dividend payment will be subject to withholding tax in Indonesia before remitting to Japan. Regarding the tax rate, 10% will be taxed as shown in the table above, so 90 will be sent to Japan. That is 100 subtracted by 10. When the home office received the   dividends in Japan, it will be taxed as well. As mentioned above, amount of income tax payable in Japan  is obtained by multiplying 5% in the dividend amount to get the taxable income and multiplying the computed taxable income by the corporate tax rate of 40%, so in this case 5% of 100 multiplying by  40%, so 2 is the taxable amount.

      In other words,  88%, calculated by subtracting 2 from the dividend sent, of the total dividends declared is the net proceed that will be received by the home office in Japan. 

       
       
       
       

      Also in other countries, the same amount will be used to calculate the proceeds.

      However, with regards to regional headquarters in Singapore and Hong Kong, the receipt of dividends are not being taxed. The proceeds amount will be computed by just simply dividing the amount of dividends received by the tax rate prescribed in the respective tax treaties that was subtracted from the total dividend declared  in each country..

       
       
       

      In this case, you have to be careful about the corporate tax rate of each country. When establishing a regional headquarters in a low tax rate country, it is necessary to consider the tax haven system countermeasure tax. Especially, Singapore and Hong Kong which has corporate tax rates of 17% and 16.5%, respectively, it is necessary to be aware that these countries fall under the definition of a low tax rate country with a tax burden of 20% or less.
       

    • When you further reflow from the regional headquarters to the Japanese headquarters

      In the case of returning the income to the Japanese headquarters without considering the reinvestment, the dividend declared by the controlled company and will be returned to the controlling company is being taxed based on the tax treaty concluded between Japan and the country of the subsidiary  or the domestic laws of country of subsidiary.

      The tax treaty relating to dividends between Japan and Singapore and Japan and Hong Kong and the withholding tax rate of domestic law for Singapore and Hong Kong are as follows:

       

       
       
       
       

      Between Singapore to Japan and Hong Kong to Japan, as stated above, domestic law must be applied because the tax rate stipulated by domestic law is more advantageous to the tax payer than tax treaty between the countries. For example, in the case of Singapore and Hong Kong, the withholding tax is imposed on the paying country only, therefore the dividend to the Japanese parent company is to be taxed only by 2% (5% × 40% (corporate tax rate)). 

       
       
       
       

    • Utilization as a financial company (loan function)

      The regional headquarters can be utilized as a finance company of the parent company located in Japan. By doing so, subsidiaries  lend funds within the group of companies they belong. It is easier to manage the funds as compared with borrowing from outside creditors , and you can keep the tax on the interest low as well.

      As  first step, we will set up a regional headquarters in low-tax countries such as Singapore and Hong Kong, and  make the operating company located in  the country with high tax rate the controlled company. The controlled company in the high tax rate country may borrows funds from the regional headquarters in the low tax rate country and pays interest.

      As a result, the taxable income of the controlled company in the high tax rate country will be decrease by deducting the interest payment, and the tax payable in the interest income of regional headquarters in the low tax rate country will be reduce.

      In this way, in order to utilize the regional headquarters as a finance company, it is necessary to consider that there are substantial financial structure such as tax free or low tax rate on interest and  few restrictions are being implemented with regards to  fund transfers.

      However, as the number of group of subsidiaries increases and the number of loans within the group also increases, cash management becomes complicated, so it is necessary to pay attention to the fact that optimal allocation of funds within the group must be considered.

      【Image of utilization as a finance company】
       
       

       

       

       

       

       

       

       

       

       

       

       

       

    • Tax on receipt interest

       

       

      Singapore and Hong Kong have incentives such as tax exemption on dividends as well as low tax rate with regard to interest income. The requirements for each tax incentives including Japan are as follows.

       

      ■ When receiving interest in Japan

      For Japan, ordinary income tax is being imposed on interest income. However, if the income is subject to foreign tax credit, it is possible to deduct  withholding tax paid from source the source country. For example, when paying interest from Indonesia to Japan, the tax to be paid in Indonesia is based on the tax rate set by the tax treaty which is 10%  withholding tax. With fact that the tax rate in Japan is 40%, deducting 10% as tax credit from the normal tax rate, therefore the tax to be paid in the interest income received will only be based on  30% tax rate.

       

      　　　　　　【When transferring interest from Indonesia to Japan】

       

       

       
       
       

      ■ Receiving in Singapore, Hong Kong

      [In the case of Singapore]

      In general, in Singapore foreign source income received  is subject to tax payment. Therefore, interest received from overseas subsidiaries is subject to tax. However, income from foreign source may be subject to tax exemption complying the following requirements: 

      · Income  attributable to those from  overseas branch that was already subject to tax payment in the source country

      · The highest corporate tax rate of the source country is 15% or more

      · Received after June 1, 2003

       

      [In the case of Hong Kong]

      Interest received from overseas subsidiaries of a head quarter located in Hong Kong will be tax exempt.

      From these points of view, Singapore and Hong Kong are low-tax countries and financial infrastructure is also substantial, making Singapore and Hong Kong the best country for setting up regional headquarters with the role of finance company.

      Furthermore, in order to utilize reduction of tax burden through receipt and payment of interest, it is necessary to thoroughly consider transfer pricing taxation system and other  capital taxation system.

    • Example of utilization of efficiency by consolidating settlement functions

      Currently, there are cases where many Japanese companies enter overseas market and establish multiple subsidiaries as bases of production and sales. However, as the number of subsidiaries increases, the number of transactions increases, making settlement complicated and difficult. Therefore, if a company whose headquarter is located in Japan develops several subsidiaries in Asia, by concentrating in the settlement function in the regional headquarters, it is possible to increase the efficiency of enormous transactions occurring at multiple sites and to mitigate foreign exchange rate risks.

       

    • Efficient use of settlement, utilization to reduce foreign exchange risk

      If there are production bases and sales networks in several countries in the Asian region, and there is a mechanism to mutually complement the raw materials and parts among the group of companies, regional headquarters will make enormous transactions more efficient and currency risk mitigation will be seek. In that case, we will mediate all transactions (mutual procurement of parts and raw materials) among group of companies within the Asian region, and perform offsetting settlement.

       

      Reduction of Foreign Exchange Risk by Three-Base Transactions

      In the case where there is a flow of transactions from a group of companies based in Vietnam to a group of companies based in Indonesia, direct transactions are usually made between the two bases, this time  the regional headquarters between the two bases will be utilized. The question is, how about in the  case of  dealing with three bases?

      When trading is done between Indonesia and Vietnam, if a regional headquarters based in Singapore is set up between the two countries, usually foreign exchange risk will arise  because the two subsidiaries in the two bases use their own currency. However, by placing a regional headquarters in between the two countries and  transactions will be offset in the regional headquarters, it is possible to reduce foreign exchange risk. In this case, the regional headquarters will be used  as a settlement base and actual product flow will be done between the two countries.  Hence, there will be risk that the distribution route will change.

      If all these enormous transactions are carried out separately among the operating subsidiaries of each country,  concerns that profitability will decline due to the substantial amount of money spent on  banking fees alone, as well as the risk of foreign exchange fluctuations may exist. Therefore, by establishing regional headquarters as an overseas holding company, it is possible to do such intermediary transactions.

       

      From this point of view, Singapore and Hong Kong, where financial infrastructure is well established, are often selected as the founding country of the regional headquarters to consolidate settlement functions.

       

      [Improvement in Efficiency of Settlement Functions Using Regional Headquarters]

      【地域統括会社を活用した決済機能の効率化】
       
       
       
       

    • Example of reviewing supply chain functions and risks

      Supply chain in general is the series of processes in a company such as research and development in the manufacturing industry, procurement of raw materials, manufacture, delivery, marketing, sales, after-sales service and so on.

      As the overseas establishment of production bases of Japanese companies has progressed, the number of cases where supply chains are conducted  in multiple countries that belong to one group of companies is increasing. As a result, while taking advantage of the benefits of regional headquarters, it is also necessary to pay attention to certain risks such as inventory risk and complex distribution. So, I would like to consider the case of reducing the effective tax rate on the profit arising from a series of supply chains among subsidiaries and the risks associated with it.

       

    • Reduction of effective tax rate and associated risk

      For example, when setting up production bases in Indonesia, Vietnam, etc., we will transfer intangible assets such as patent rights, trademark rights and sales know-how to target regional headquarters. We will also transfer the functions of research and development activities and value of the brand value created  associated with the formation, maintenance and development of intangible fixed assets.

       

      Each subsidiary with  high tax rate pays  royalty,  the consideration for the use of intangible assets received from the regional headquarters.

      Royalties paid are being deducted as expense in high-rate countries and royalties recieved are being taxed in low-tax countries, so you can reduce the necessary tax expense for the entire group.

      However, since payment of royalties is subject to withholding taxes, the country where the regional headquarters holding the intangible asset and the country where the managed company paying royalties are located will have to decide if it will pay taxes on royalty based on the tax treaty, if it has preferential tax rate 

      In addition, when the controlled company engaged on sales activities , the regional headquarters, as the party that entrust the subsidiary to do sales activities on its behalf will pay sales commission to the subsidiary, which act is the sales agent. This will transfer the risks (inventory risks and accounts receivable collection risk) related to sales of the regional headquarters, a consignor in a low tax rate country, to the controlled company. The commission fee is deducted in the high tax rate country and commission  fee and product sales profit will be taxed in the low tax rate country, so the necessary tax expense for the entire group can be kept down.

       

      　　　　　　　　　　　　　　【When receiving royalties in a low tax rate country】
       
       
       
       

    • Taxation on royalties

      When the regional headquarter transfers technology etc. to the supervising company, the regional headquarter will receive royalties as consideration. As mentioned earlier, royalty is the usage fee for brands and know-how.

      Likewise, royalties are taxable as well as dividends and interests.

       

      ■ Receiving Royalties in Japan

      Corporate tax is imposed on company that received  royalties in Japan.. However, if you are subject to foreign tax credits, you can deduct the  amount of withholding tax paid for from the source country. For example,  royalties were paid from Indonesia to Japan, the tax rate stipulated by the tax treaty of 10% is withheld in Indonesia, so in Japan, we subtract 10% from the usual corporate tax rate of 30%. Therefore, the company in Japan will pay tax based on tax rate of 20% upon receiving the royalty.

       

      【When Sending Royalties from Indonesia to Japan】

       

       

       
       

      ■ Receiving Royalties in Singapore or Hong Kong

      [In the case of Singapore]

      In  case a company located in Singapore received royalties from outside the country, the corporate tax rate of 17% is generally imposed. However, for Regional Headquarters, a reduced tax rate of 15% applies.

       

      [In the case of Hong Kong]

      Royalties received by a company located in Hong Kong from overseas subsidiaries will be tax exempt.

    • Withholding tax on royalty paying countries

      ■ The difference between the case of returning royalties from a Japanese  subsidiary directly to Japan and the case of reflowing or reinvesting through the regional supervision

      Even in the payment of royalties, just like in the payment of dividends and interests, the tax rate to be imposed is either the tax rate stipulated in the tax treaty of the two countries involved or the domestic tax rate whichever is more advantageous to the tax payer. Taking Thailand, Indonesia and Vietnam as  examples, when paying royalties from a subsidiary located in one of the three countries enumerated directly to the parent company in Japan, the domestic law sets the withholding tax rate of 15% in Thailand, 20% in Indonesia and 10% in Vietnam. A subsidiary is required  to pay necessary amount of  tax on royalty  in each country. However, if Japan has  tax treaty with either one of the three countries, in principle you can choose one of the tax rates as stipulated in the tax treaty or domestic law. The tax rate is as follows.

       
       
       
       
       

      ■ VAT on Payment of Royalties

      VAT is not imposed in both countries of the home office and subsidiary  when royalty is paid. However, when paying royalties to Japan, Thailand is imposed  VAT payment as an import of services.

       

    • Taxation on management fee

      When the regional headquarters provides services to the supervising company, the headquarters will receive management fee as a consideration.

      Management support agreement falls under  the provision of such services and payment of VAT and other necessary taxes is required to be paid on the management fee received.

       

      ■ Receiving Management Fee in Japan

      If  a home office located in Japan received a  management fee, the usual corporate tax rate will be imposed on that management fee.

       

      ■ Receiving Management Fee in Singapore and Hong Kong

      [In the case of Singapore]

      In the case of a company located in Singapore receiving management fees from overseas, in general, the corporate tax rate of 17% is  being imposed. However, for Regional Headquarters, a reduced tax rate of 15% applies.

       

      [In the case of Hong Kong]

      For a company located in Hong Kong, management fee received from overseas will be tax exempt.

       

      ■ VAT at the time of payment of management fee

      When paying  the management fee to the regional headquarters, the subsidiary paying the management fee must pay attention to the VAT that may be imposed by the country that it is located.

      The tax rates of VAT being imposed in Thailand, Indonesia and Vietnam are as follows:

       

      [Case of Thailand]

      In Thailand, management fee is subject to 7% VAT.

       

      [In the case of Indonesia]

      Management fee in Indonesia is also subject to 10% VAT. However, this tax rate is subject for revision by the Cabinet Order to 5 and 15%. 

      [In the case of Vietnam]

      In Vietnam, for services like management instruction fee, 5% withholding tax or  corporate is being imposed to foreign policyholder or non-resident corporation. Also, 5% VAT is being imposed. .

       

      Depending on the country and the existing tax treaty, withholding tax, VAT and other necessary taxes may be imposed

       

      ■ Reasons Why Singapore and Hong Kong are Gaining Attention as a Central Management Base

      Although Singapore and Hong Kong are sometimes called low-tax countries, they are often selected as the founding country for regional headquarters. But in addition to the tax benefits,  the fact that the two countries is said to have easier access to neighboring countries is another factor that attracts attention to the invetors.

      On the other hand, you also need to be aware of the need to consider the transfer pricing taxation, tax haven countermeasure  and PE taxation.