1. COMPANY CONFIDENTIAL David Dai SPX APAC 税务负责人 新时代下的国际纳税筹划

2. COMPANY CONFIDENTIAL Agenda  Understanding of international tax planning Overview of double taxation Brief Introduction of Double Tax Treaty Projects need your attention Tax payable vs. tax expense in group reporting  Permanent Establishment  Subpart F income  Indirect transfer of Equity  Foreign Branch Option

3. COMPANY CONFIDENTIAL Overview of double taxation  Local sourced income vs. global sourced income  A simple example of double taxation A US company sends a bunch of consultants to China for a few months and it also hires some local assistance for a project lasts 10 months. Would that income be taxed in China? Or in US? Or both?

4. COMPANY CONFIDENTIAL Double tax treaty - types  Double Tax Treaty (“DTT”) on Income and Capital e.g. Sino-Mauritius DTT  Air Transport/Shipping Treaties e.g. Sino-US Air-Transport/Shipping Treaty  Asset Protection Treaties e.g. Investment Promotion and Protection Agreement between China and Mauritius

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7. COMPANY CONFIDENTIAL Tax Treaty Models  Organization for Economic Cooperation & Development (OECD) model Articles 1-2 Scope of convention Articles 3-5 Definitions Articles 6-22Taxation of types of Income Articles 23-30 Special provisions  United Nations (“UN”) Model

8. COMPANY CONFIDENTIAL Overview of double taxation  Why double tax treaty doesn’t always work Loss position High tax rate in overseas countries Domestic rule sets different interpretation Prerequisite for foreign tax credit

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10. COMPANY CONFIDENTIAL Tax payable vs. tax expense  Difference between tax payable and tax expense  Sometimes tax expense is more important  Example: Co. A acquired an asset at 10M years ago which is not allowed for depreciation/deduction for tax purpose. Its tax rate is 20% a DTL of 2M was established. Co. A depreciates the asset for accounting purpose and the NBV now is 8M with a DTL of1.6M. Co. A now disposes the asset for 9M. For tax purpose, there is a tax payable of 1.8M. Realization of DTL and the 1.8M tax payable would be against 1.6M DTL and only 0.2M tax expense.

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14. COMPANY CONFIDENTIAL December 23, 201514 What is Subpart F Income?  The U.S. is one of the few remaining countries that taxes businesses on their worldwide income  Generally, income is not taxed until it is repatriated to the U.S. via dividend payments from foreign subsidiaries – referred to as controlled foreign corporations (“CFCs”)  Certain transactions were determined in 1962 to be abusive – and Subpart F of the Internal Revenue Code was enacted to: Prevent deferral of certain undistributed income such as:  Passive investment income – interest earned by foreign corporate subsidiaries is Subpart F income (e.g. bank interest income)  Intercompany sales across borders – certain sales of product are considered foreign base company sales income (“FBCSI”)

15. COMPANY CONFIDENTIALDecember 23, 201515 Example of Potential Abuse U.S. Corp Sales revenue$1,000 Cost of sales (600) Gross profit$ 400 U.S. Tax @ 35%$ 140 Worldwide Tax Cost U.S. tax$ 140 Foreign tax 0 Total tax$ 140 Typical transaction – no tax avoidance U.S. Corporation Non U.S. Customers U. S. Corporation sells $1,000 of inventory to foreign customers

16. COMPANY CONFIDENTIALDecember 23, 201516 Example of Potential Abuse U.S. Corp Sales revenue$ 700 Cost of sales (600) Gross profit$ 100 U.S. Tax @ 35%$ 35 Foreign Corp Sales revenue$1,000 Cost of sales (700) Gross profit$ 300 Foreign Tax @ 0%$ 0 Worldwide Tax Cost U.S. tax$ 35 Foreign tax 0 Total tax$ 35 Transaction with a tax haven distributor – Target of Subpart F rules U.S. Manufacturer Non U.S. Customers U. S. Corporation sells $700 of inventory to controlled foreign corp. CFC Distributor Tax Haven Country (0% tax) Distributor sells $1,000 of product to foreign customers

17. COMPANY CONFIDENTIALDecember 23, 201517 How is Subpart F Income Taxes & Reported  Subpart F income is included in taxable income of U.S. shareholder in the year earned rather than when it is distributed Income reported in the U.S. results in additional U.S. tax expense Since this is intercompany income the additional tax expense increases our overall effective tax rate  Subpart F income can also include loans from a CFC to U.S. shareholders Subpart F income has a significant impact on MNC’s tax expense

18. COMPANY CONFIDENTIALDecember 23, 201518 Subpart F Income Rules  Passive Income – Generally, does not apply to interest, dividends, rents & royalties received from a related person in the same country – “same country exception” Does not apply to royalties derived from the active conduct of a trade or business received from an unrelated person Look-through Rule – Generally excludes certain passive income received from a related CFC – provision expires at the end of 2011 unless extended by Congress  Foreign Base Company Sales Income Rules- Purchase of personal property –  From a related party and the property is sold to any person;  From any person and a sale to a related party; or  From any person on behalf of a related person, where The property is manufactured or sold for use/consumption outside the CFC’s country of formation (domicile) (If CFC manufactures or adds significant value then not FBCSI) Sale of personal property to any person on behalf of a related person Goods sold must cross 2 borders to be FBCSI

19. COMPANY CONFIDENTIALDecember 23, 201519 Example of FBC Sales Income General Framework – FBC sales income is earned by a CFC (which does not manufacture the property) if the property crosses two borders after manufacturing and there is a related party on either side of the transaction. Which transaction creates Subpart F income? China Manufacturer (CFC) Singapore Distributor (CFC) Sale of product to sister CFC Singapore Customer Japan Customer Product sales to unrelated customers

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21. COMPANY CONFIDENTIAL Classic case on indirect transfer 21  Hong Kong company (“HK Co.”) holds 49% equity interest in T Co.  A Co. transferred all its equity interest in HK Co. to another overseas company B Co.  The tax authorities views HK Co. to be disregarded due to lack of substance under Circular 698 and deem the transaction as a transfer of Target company. A Co. HK Co. 100% 49% Mainland China Overseas Hong Kong B Co. Target

22. COMPANY CONFIDENTIAL A further step from 698 – individual seller? 22 Source: EY China Tax & Investment News. Issue No. 2011007 Breakthrough in practice vs. Overriding the Law

23. COMPANY CONFIDENTIAL Foreign Branch Planning Source: 2011 Deloitte Global Services Limited

24. COMPANY CONFIDENTIAL Questions & Answers Thanks!