2. Lorenz & Partners Legal, Tax and Business Consultants © Lorenz & Partners Page 1 of 20 29 September 2010 International Taxation and Double Taxation Agreements International Taxation and Double Taxation Agreements Mr. Michael Lorenz German Attorney at Law, Registered Foreign Lawyer in Hong Kong and Vietnam 29 September 2010

3. Lorenz & Partners Legal, Tax and Business Consultants © Lorenz & Partners Page 2 of 20 29 September 2010 About Lorenz & Partners - International firm of business lawyers headquartered in Bangkok since 1995 - The firm is specialised in legal, tax and business consultation for foreign companies investing in Southeast Asia. - We maintain offices in: Bangkok, Berlin, Hong Kong, Ho Chi Minh City and Taipei. - Our services, e.g.: International Commercial Law Mergers & Acquisitions, Joint Ventures International Tax Planning Labour Law Issues Management support

4. Lorenz & Partners Legal, Tax and Business Consultants © Lorenz & Partners Page 3 of 20 29 September 2010 Overview General International Tax Law Avoidance of Double Taxation Charateristics in Vietnam

5. Lorenz & Partners Legal, Tax and Business Consultants © Lorenz & Partners Page 4 of 20 29 September 2010 General What are taxes? Why are they raised? Different kinds of taxes

6. Lorenz & Partners Legal, Tax and Business Consultants © Lorenz & Partners Page 5 of 20 29 September 2010 What is a tax? A tax is a cash benefit without an individual consideration. Generally those taxes are imposed by a public community in order to generate revenue. Taxes can be inflicted on everyone that realizes the tax-related circumstances.

7. Lorenz & Partners Legal, Tax and Business Consultants © Lorenz & Partners Page 6 of 20 29 September 2010 Why are they raised Taxes are generally the main income source of a country and the main instrument for funding of its territorially defined state and other (supranational) tasks. Only few countries only raise a few or no taxes at all to their citizen (UAE etc.). In return, the state is able to use this income, for example in order to provide infrastructure or to support the health or the social system. So in the end, the (taxpaying) population benefits from the generated revenue.

8. Lorenz & Partners Legal, Tax and Business Consultants © Lorenz & Partners Page 7 of 20 29 September 2010 Different kinds of taxes Taxes can be classified in different tax brackets. Mainly, they are divided into: 1.Classification by economic purpose Transaction Taxes such as the VAT or – internationally – the Foreign Contractors Tax, customs duties etc. Excise Taxes such as electricity tax 2. Classification by object of taxation Excise tax, that build on the effort for a particular asset or behavior Consumption tax, such as tobacco tax

9. Lorenz & Partners Legal, Tax and Business Consultants © Lorenz & Partners Page 8 of 20 29 September 2010 International Tax Law Basic Principle Definitions World income principle Territoriality principle

10. Lorenz & Partners Legal, Tax and Business Consultants © Lorenz & Partners Page 9 of 20 29 September 2010 Basic Principle International tax law deals with the complexity of problems occuring in cross border cases, which are of particular importance regarding the taxation of natural persons, business partnerships and incorporate companies. Without legal regulations improper double taxation would be found, and would restrain international trade and investments.

11. Lorenz & Partners Legal, Tax and Business Consultants © Lorenz & Partners Page 10 of 20 29 September 2010 Definition Unlimited Tax Liability: Resident taxpayer is subjected to income tax with the whole income by state of residence. Limited Tax Liability: Non-resident taxpayer is subjected to income tax with the income earned in the state of source. World income: Income achieved worldwide

12. Lorenz & Partners Legal, Tax and Business Consultants © Lorenz & Partners Page 11 of 20 29 September 2010 Worldwide Income Principle, (i.e. Germany, Vietnam) Model case: Vietnam Resident Non-resident Unlimited tax liability in Vietnam for worldwide income Limited tax liability in Vietnam Unlimited tax liability in country of residence Double Taxation

13. Lorenz & Partners Legal, Tax and Business Consultants © Lorenz & Partners Page 12 of 20 29 September 2010 Territoriality Principle (i.e. Hong Kong, Singapore, Switzerland) Model Case: Income generated in Hong Kong Resident Non-resident Tax liability in Hong Kong Tax liability in Hong Kong Unlimited tax liability in country of residence Double Taxation

14. Lorenz & Partners Legal, Tax and Business Consultants © Lorenz & Partners Page 13 of 20 29 September 2010 Avoidance of Double Taxation Definition Unilateral measures Double Taxation Agreements („DTA“)

15. Lorenz & Partners Legal, Tax and Business Consultants © Lorenz & Partners Page 14 of 20 29 September 2010 Definition Double Taxation occurs in transactions, in which income, that has already been taxed according to national tax law, is taxed again. As tax law should be as less disortive as possible, transboundary double taxation should be eliminated. A cross-border double taxation should be avoided as this might affect investment decisions of companies.

16. Lorenz & Partners Legal, Tax and Business Consultants © Lorenz & Partners Page 15 of 20 29 September 2010 Unilateral Measures Unilaterally, double taxation is avoided if one state waives its right of taxation.

17. Lorenz & Partners Legal, Tax and Business Consultants © Lorenz & Partners Page 16 of 20 29 September 2010 Double Taxation Agreements On a bilateral basis, the prevention of double taxation is achieved by the conclusion of DTA. A DTA is a contract under international law between two countries which regulates the extent a contracting party is entitled to its taxation jurisdiction. The Organisation for Economic Co-operation and Development („OECD“) publishes and updates a model tax convention which serves as a template for bilateral negotiations regarding tax coordination and cooperation. This model is accompanied by a set of commentaries which reflect OECD-level interpretation of the content of the model convention provisions. Most DTAs are modelled in accordance to the OECD Convention.

18. Lorenz & Partners Legal, Tax and Business Consultants © Lorenz & Partners Page 17 of 20 29 September 2010 Generally, there are two standard methods in bilateral agreements to avoid double taxation Credit Method Exemption Method Income taxed in one state is not taxed in the other state again. Income tax paid in one state is offsetted on the income tax payable in the other state.

19. Lorenz & Partners Legal, Tax and Business Consultants © Lorenz & Partners Page 18 of 20 29 September 2010 Characteristics in Vietnam DTAs of Vietnam Foreign Contractors Tax ASEAN

20. Lorenz & Partners Legal, Tax and Business Consultants © Lorenz & Partners Page 19 of 20 29 September 2010 DTAs of Vietnam Vietnam concluded DTAs with the following states: Austria, Belgium, Brazil, Australia, Algeria, Belgium, Bulgaria, Belarus, Bangladesh, Brunei, China, Czech Republic, Canada, Cuba, Denmark, Egypt, France, Finland, Germany, Hungary, India, Italy, Indonesia, Iceland, Japan, Korea, South Korea, Rep.Laos, Luxembourg, Malaysia, Mongolia, Netherlands, Norway, Poland, Philippines, Pakistan, Russia, Romania, Sweden, Singapore, Switzerland, Spain, Seychelles, Srilanka, Thailand, Taiwan, UK, Uzbekistan,Ukraine. A DTA has also been concluded with Myanmar, but this has never been implemented in the Myanmar law and is therefore in fact not in force. There is no DTA with the USA so far.

21. Lorenz & Partners Legal, Tax and Business Consultants © Lorenz & Partners Page 20 of 20 29 September 2010 Foreign Contractors Tax The Foreign Contractors Tax is deducted by the Vietnamese customer in case of supplying services or services associated with goods from a Foreign Contractor or Foreign Sub-Contractor being supplied in or outside Vietnam and which are consumed in Vietnam. The term Foreign Contractor means any foreign business organisation with or without a permanent establishment in Vietnam, and all foreign business individuals doing business in Vietnam. The Foreign Contractors Tax consists of two elements, namely the collection of a value-added tax element and a corporate tax element for corporations or a personal income tax element for individual.

22. Lorenz & Partners Legal, Tax and Business Consultants © Lorenz & Partners Page 21 of 20 29 September 2010 The Foreign Contractors Act also has effects on double taxation issues. Those shall be displayed using the example of DTA Germany-Vietnam: The Foreign Contractors Tax is raised as a source tax, i.e. the tax obligation of the Foreign Contractor is to be deducted by the Vietnamese party from any payment made to a foreign contractor. In accordance with the protocol to the DTA Vietnam, the Foreign Contractor Tax is deemed a profit tax. Corporate income Tax in Vietnam can now, under certain circumstances, be offset against German tax.

23. Lorenz & Partners Legal, Tax and Business Consultants © Lorenz & Partners Page 22 of 20 29 September 2010 ASEAN Vietnam is a member of ASEAN since 1995 and took over the position of ASEAN Chairman for 2010. ASEAN is aiming to create an ASEAN Economic Community (AEC) by 2015. The foundation of the AEC is the ASEAN Free Trade Area(AFTA), a common external preferential tariff scheme to promote the free flow of goods within ASEAN.

24. Lorenz & Partners Legal, Tax and Business Consultants © Lorenz & Partners Page 23 of 20 29 September 2010 The primary goals of AFTA seek to: Increase ASEAN's competitive edge as a production base in the world market through the elimination, within ASEAN, of tariffs and non-tariff barriers Attract more direct foreign investments to ASEAN ASEAN has also concluded free trade agreements with other countries, such as the PR China, Korea, Japan, Australia, New Zealand and most recently India. ASEAN is currently negotiating a free trade agreement with the European Union. An FTA with the USA is not planned yet.

25. Lorenz & Partners Legal, Tax and Business Consultants © Lorenz & Partners Page 24 of 20 29 September 2010 Thank you for your attention! Any questions? Lorenz & Partners 22nd Floor, Sathorn City Tower 175 South Sathorn Rd., Sathorn Bangkok 10120, Thailand Tel.: +66 (0) 2 287 1882 Fax: +66 (0) 2 287 1871 e-mail: info@lorenz.co.th