32 nd Annual Asia Pacific Tax Conference 10 & 11 November 2016 JW Marriott Hong Kong

Transcription

1 32 nd Annual Asia Pacific Tax Conference 10 & 11 November 2016 JW Marriott Hong Kong 2016 Asia Pacific Tax Update Malaysia 1. Highlights of Budget 2017 The Prime Minister and Minister of Finance, YAB Dato' Sri Mohd Najib Tun Haji Abdul Razak unveiled the Malaysian Budget for the year 2017 ("Budget") on 21 October Following the Budget announcement, the draft Finance Bill 2016 ("Finance Bill") which contained the proposed amendments to incorporate the Budget proposals into the existing legislations was tabled before Parliament on 25 October Corporate Income Tax Decrease in Corporate Income Tax Rates for small and medium enterprises ("SME") For the purposes of corporate income tax, a SME is a company with paid up capital of up to RM 2.5 million or a limited liability partnership with a total contribution of capital up to RM 2.5 million. Presently, SMEs in Malaysia are taxed at 19% on chargeable income up to RM 500,000 with the remaining chargeable income taxed at 24%. It is proposed that with effect from the year of assessment ("YA") 2017, the corporate income tax rate for the chargeable income up to RM 500,000 will be reduced by 1%, from 19% to 18% to ensure that SMEs remain competitive. The Finance Bill has included proposed amendments to Schedule 1 under the Malaysian Income Tax Act 1967 ("MITA") to this effect Decrease in Corporate Income Tax Rates based on Percentage Increase in Chargeable Income w w w.bakermckenzie.com For further information please contact Adeline Wong Tel: Adeline.Wong@WongPartners.com Joyce Khoo Tel: Joyce.Khoo@WongPartners.com Ong Syn Joe Tel: SynJoe.Ong@WongPartners.com Currently, companies are taxed at a flat tax rate of 24%. It is proposed that for YAs 2017 and 2018, corporate income tax rates would be reduced based on percentage increase in the chargeable income of a company compared to the chargeable income for the immediate preceding YA, as set out in the table below: Percentage Increase In Chargeable Income Compared To The Immediate Preceding YA Percentage Reduction Corporate Income Tax Rate on Additional Chargeable Income After Reduction Less than 5% NIL 24% 5% % 1% 23%

2 10% % 2% 22% 15% % 3% 21% 20% and above 4% 20% 2 Baker & McKenzie 32nd Annual Asia Pacific Tax Conference It should be highlighted that the Finance Bill has not included any proposed amendments to this effect Industrial Building Allowance ("IBA") For Buildings Rented Out Presently, owners of certain buildings (i.e. licensed private hospital, building used for research, building used for warehouse, building used for approved service project, airports, motor racing circuit, schools, hotels, etc.) are prevented from claiming IBA on their industrial buildings which are solely or partly used for the purpose of letting out. The Finance Bill has proposed that where part of the building used for the purposes of letting of property is not more than 10% of the floor area of the whole building, the whole building qualifies as "industrial building" and is allowed to claim IBA. Where part of the building let out is more than 10% of the floor area of the whole building, such part of the building shall not be treated as "industrial building" and IBA is only claimable on the expenditure incurred on the floor area on the part of the building that is not let out. 1.2 Goods and Services Tax ("GST") Streamlining of GST Treatment In Free Zones Presently, there are different GST treatment for free commercial zone 1 (FCZ) and free industrial zone (FIZ), 2 which are both regarded free zone under the Free Zones Act Special treatment applies to FCZ under the Goods and Services Act 2014 ("GST Act") whereby FCZ is not regarded as part of Malaysia for the purposes of GST, and as such, GST is not imposed on importation of goods into a FCZ. GST is, however, imposed on goods imported into a FCZ if it is to be consumed within the zone, other than such goods for the purpose of commercial or retail trade activities. Free industrial zone is, on the other hand, regarded as part of Malaysia. Subject to special rules or reliefs granted by the Minister of Finance by way of a gazetted order, GST is levied on importation of goods into FIZ, the supply of goods made within FIZ, the removal of goods between FIZ and between FIZ and FCZ. For the purposes of streamlining the GST treatment in the free zones, it is proposed that with effect from 1 January 2017, "Malaysia" excludes free zone (consisting of FIZ and FCZ) for the purposes of GST. 1 "Free commercial zone" refers to an area declared as a free commercial zone by the Minister of Finance under subsection 3(1) of the Free Zones Act "Free industrial zone" refers to an area declared as a free commercial zone by the Minister of Finance under subsection 3(1) of the Free Zones Act 1990.

3 3 Baker & McKenzie 32nd Annual Asia Pacific Tax Conference Based on the proposed amendment under the Finance Bill, no GST shall be due and payable upon any importation of goods into a free zone except for goods imported to be used or consumed in the free zone, other than goods for the purpose of commercial, manufacturing or retail trade activities approved under the Free Zones Act In addition, no GST shall be charged on any supply of taxable goods made within or between a free zone. Further, the Finance Bill also proposes that the payment of GST be suspended on any goods removed from a free zone through Malaysia to another free zone, to a designated area or to a warehouse under the Warehousing Scheme Streamlining of GST Treatment Under The Warehousing Scheme Currently, the Warehousing Scheme under the GST Act allows GST to be suspended on goods imported and deposited into an approved warehouse. Approved warehouses under this scheme include Public Bonded Warehouse, Private Bonded Warehouse, Duty Free Shops and Inland Clearance Depot. Under this scheme, imported goods deposited into the warehouse and supplied within and between these warehouses are not subject to GST whereas removal of goods from the warehouses is subject to the imposition of GST. To streamline the GST treatment between imported goods and goods from Principal Customs Area ("PCA") and to facilitate GST administration under the Warehousing Scheme, it is proposed that with effect from 1 January 2017, no GST shall be charged on goods from PCA (which consists of the Licensed Manufacturing Warehouse, Excise Warehouse and FIZs) that have been imported and deposited into and supplied within and between warehouses under the Warehousing Scheme. Further, based on the Finance Bill, GST would be due and payable upon all goods removed from a warehouse as if the removal were importation into Malaysia, unless the goods are removed for export, for deposit to another warehouse, to a free zone or (iv) to a designated area with the approval of the proper officer of customs GST Treatment on Designated Areas ("DA") According to the new proposed amendments on the existing section 156(a) of the GST Act, all goods including any goods under any lease agreement removed from a DA to another DA through Malaysia or from a DA to Malaysia are taxable. In addition, the Finance Bill also proposes an insertion of a new paragraph which effectively suspends any payment of tax under section 156(a) of the GST Act on any goods removed from a DA through Malaysia to another DA, to a free zone or to a warehouse unless the Minister of Finance directs otherwise Introduction of New GST Provisions As An Aggressive Move Towards GST Audit The Finance Bill has proposed two new sections in the GST Act to enable to Minister of Finance to prescribe any registered person to provide information on all supply made and payment received by him to the Director General of Customs and Excise ("DG") using a prescribed device. The new section 34A gives power to the DG to approve any person to:

4 install, configure and integrate the prescribed device; provide the services for the support and maintenance of the prescribed device as scheduled or upon being notified of the failure of the prescribed device to function or operate in normal condition; or carry out inspection in the case of any sign of interference, destruction, damage, manipulation of data stored or obstruction of the lawful use of the prescribed device. The registered person is also required under section 34A to allow such installation, configuration, integration or inspection of such device at his business premises and to make all effort to ensure that the device is not tempered or obstructed by any person or any other device. Further, the registered person is also under an obligation to notify the DG of any failure of functionality and operation of the prescribed device, failure of which constitute an offence under the GST Act. The new section 34B imposes a duty on any person who has access to any information on the device not to give, publish or disclose information of the prescribed device unless disclosure is required or authorized by the GST Act or by any courts. The new insertion appears to enable the Royal Malaysian Customs Department ("Customs") to have greater access to data over taxpayers' GST collection. However, the exact application of the new provisions remain to be seen and we foresee further clarifications from the authorities in this regard Changes To The Late Payment Penalty Rate The Finance Bill has introduced amendments to the rate of penalty imposed in the event any tax due and payable is not paid wholly or partly by any taxable person. The proposed rates are shown in the table below: Late Payment Period (Days) Current Rates Proposed Rate First 30 5% 10% additional 10% additional 15% more than 60 additional 10% additional 15% The Finance Bill also introduced new rates of penalty imposed in the event any tax due and payable is not paid wholly or partly by any person other than a taxable person. The proposed rates are shown in the table below: Late Payment Period (Days) Proposed Rate First 30 10% additional 15% more than 60 additional 15% 4 Baker & McKenzie 32nd Annual Asia Pacific Tax Conference

5 1.3 Tax Incentives Extension of Income Tax Incentive for New Four and Five Star Hotels Presently, income tax incentives are granted to hotel operators who undertake investments in new 4 and 5 star hotels. The incentives are as shown in the table below: Incentives Peninsular Malaysia East Malaysia Pioneer Incentive; or Status An exemption of 70% of statutory income for a period of 5 years An exemption of 100% of statutory income for a period of 5 years Investment Allowance Tax An allowance of 60% on the qualifying capital expenditure incurred within a period of 5 years. This allowance can be set-off against up to 70% of statutory income for each YA An allowance of 100% on the qualifying capital expenditure incurred within a period of 5 years. This allowance can be set-off against up to 100% of statutory income for each YA 5 Baker & McKenzie 32nd Annual Asia Pacific Tax Conference These incentives may only be granted for applications received by the Malaysian Investment Development Authority by 31 December In the Malaysian Government's efforts to promote tourism in Malaysia, it is proposed that the application period for Pioneer Status and Investment Tax Allowance for any investments in new four or five star hotels in both Peninsular and East Malaysia be extended for another two (2) years from 1 January 2017 to 31 December Extension of Tax Incentive for Anchor Companies Under the Vendor Development Programme ("VDP") At present, anchor companies that develop local vendors under the VDP and who have signed the Memorandum of Understanding ("MOU") with the Ministry of International Trade and Industry ("MITI"), are entitled to double deduction for the following operating expenses: costs of product development, R&D, innovation and quality improvement; costs of obtaining ISO/ Kaizen/ 5s certifications, evaluation programme and business process reengineering for the purpose of increasing vendor capabilities; and costs of vendor skills training, capacity building, lean management system and financial management system. The double deductions are subject to the following conditions: the qualifying operating expenses must be certified by MITI before the anchor companies claim the deduction; the qualifying operating expenses shall be capped at RM 300,000 per year; and the deduction is only given for three (3) YAs. The incentive is offered to anchor companies that have signed the MOU with MITI from 1 January 2014 to 31 December 2016.

6 To further encourage the development of competitive local vendors by anchor companies, it is proposed that the current incentives be extended for another 4 years. This incentive will be granted to anchor companies that have signed the MOU with MITI from 1 January 2017 to 31 December Expansion of Scope of Halal Products Eligible For Incentives for Halal Industry Players Halal Industry Players operating in Halal Parks promoted by the Halal Development Corporation ("HDC") currently receive the following tax incentives: full income tax exemption on qualifying capital expenditure for a period of 10 years; or income tax exemption on increase of export sales for a period of five years; import duty exemption on raw materials used for the development and production of promoted halal products; and double deduction on expenses incurred in obtaining international quality standards certification, Sanitation Standard Operating Procedures and compliance with regulations for the purposes of exporting the products, such as Food and Traceability from farm to fork. The qualifying halal produces include specialty processed food, pharmaceuticals, cosmetic and personal care, livestock and meat products and halal ingredients. To further enhance the competitiveness of Malaysia's halal industry, it is proposed that existing incentives be extended to include production of nutraceutical and probiotic products by the Halal Industry Players in Halal Parks. These incentives will take effect for applications received by HDC from 22 October 2016 onwards Extension of Income Tax and Stamp Duty Exemption for Islamic Banking and Takaful Businesses Currently, the International Currency Business Unit which operates Islamic banking and takaful activities transacted in foreign currencies are given: full tax exemption on income received by Islamic banks licensed under the Islamic Financial Services Act 2013 and financial institutions licensed under the Financial Services Act 2013 operating Islamic banking business transacted in foreign currencies including transactions with Malaysian residents; full tax exemption on income received by takaful companies and takaful unit licensed under the Islamic Financial Services Act 2013 and Financial Services Act 2013 operating takaful business transacted in foreign currencies including transactions with Malaysian residents; and full stamp duty exemptions on instruments executed pertaining to Islamic banking and takaful activities transacted in foreign currencies. The exemptions in (a) and (b) are only available till YA 2016, while the exemption in (c) expires on 31 December Baker & McKenzie 32nd Annual Asia Pacific Tax Conference

7 To further promote the Islamic financial markets, it is proposed that the three (3) exemptions outlined above be extended for another four (4) years, i.e., with respect to (a) and (b), for YAs 2017 to 2020, and with respect to (c), until 31 December Implementation of the Base Erosion and Profit Shifting ("BEPS") Initiatives In conjunction with Malaysia's commitment in implementing the BEPS initiatives as well as the Organisation for Economic Co-operation and Development's ("OECD") Automatic Exchange of Information for Tax Purposes ("AEOI") and Common Reporting System ("CRS"), the Finance Bill has proposed the introduction of three new penalty provisions relating to non-compliance with BEPS, AEOI and CRS rules which have yet to be put in place: The proposed section 112A provides that any person who makes default in furnishing a country-by-country report ("CbCR") would be guilty of an offence and shall, on conviction, be liable to a fine between RM 20,000 and RM 100,000 and/or imprisonment for a term up to 6 months. The proposed section 113A provides that any person who makes an incorrect return, information return or report by omitting the information required or gives any incorrect information required to be provided in accordance with any rules made under paragraph 154(1)(c) to implement or facilitate mutual administrative assistance arrangement under section 132B, on behalf of himself or another person, would be guilty of an offence and will, on conviction, be liable to a fine between RM 20,000 and RM 100,000 and/or imprisonment for a term up to 6 months. The proposed section 119B provides that any failure to comply with any rules made under paragraph 154(1)(c) to implement or facilitate mutual administrative assistance arrangement under section 132B would be guilty of an offence and will, on conviction, be liable to a fine between RM 20,000 and RM 100,000 and/or imprisonment for a term up to 6 months. 1.5 Establishment of Collection Intelligence Arrangement ("CIA") The Malaysian Government has announced that it will establish the CIA under the Ministry of Finance, which will comprise the Inland Revenue Board ("IRB"), Customs and Companies Commission of Malaysia. It is envisaged that these bodies will share data amongst each other to enhance efficiency in tax enforcement, collection and compliance. This is a clear indication to taxpayers that there will be a structured mechanism for the relevant authorities to share data and a potential increase in tax, GST and customs audits for companies. 1.6 Establishment of E-Commerce Ecosystem - Digital Hub and Digital Free Zone Under the Budget, the Prime Minister indicated commitments in implementing programmes to establish an e-commerce ecosystem in Malaysia. 7 Baker & McKenzie 32nd Annual Asia Pacific Tax Conference

8 Amongst the efforts in setting up an e-commerce ecosystem include the introduction of new locations to be categorized as the Malaysia Digital Hub. Further, it is also announced that the government of Malaysia will introduce the first Digital Free Zone in the world. The Digital Free Zone will merge physical and virtual zones, with additional online and digital services to facilitate international e-commerce and invigorate internet-based innovation. There are, however, no indication of the timeline relating to the introduction of the Digital Hub and Digital Free Zone, as well as the exact scope of benefits which will be made available to industry players in the digital sphere, once the Digital Hub and Digital Free Zone are established. 1.7 Other key amendments under the Finance Bill Expansion of the definition of royalty under the MITA Under the MITA, royalty now includes any sums paid as consideration for, or derived from (a) (b) (c) (d) (e) (f) (g) "the use of, or the right to use in respect of any copyrights, software, artistic or scientific works, patents, designs or models, plans, secret processes or formulae, trademarks or other like property or rights; the use of, or the right to use tapes for radio or television broadcasting, motion picture films, films or video tapes or other means of reproduction where such films or tapes have been or are to be used or reproduced in Malaysia or other like property or rights; the use of, or the right to use know-how or information concerning technical, industrial, commercial or scientific knowledge, experience or skill; the reception of, or the right to receive, visual images or sounds, or both, transmitted to the public by satellite; or cable, fibre optic or similar technology; the use of, or the right to use, visual images or sounds, or both, in connection with television broadcasting or radio broadcasting, transmitted by satellite; or cable, fibre optic or similar technology; the use of, or the right to use, some or all of the part of the radiofrequency spectrum specified in a relevant licence; a total or partial forbearance in respect of the use of, or the granting of the right to use, any such property or right as is mentioned in paragraph (a) or (b) or any such knowledge, experience or skill as is mentioned in paragraph (c); the reception of, or the granting of the right to receive, any such visual images or sounds as are mentioned in paragraph (d); the use of, or the granting of the right to use, any such visual images or sounds as are mentioned in paragraph (e); or 8 Baker & McKenzie 32nd Annual Asia Pacific Tax Conference

9 (h) (iv) the use of, or the granting of the right to use, some or all such part of the spectrum specified in a spectrum licence as is mentioned in paragraph (f); or the alienation of any property, know-how or information mentioned in paragraph (a), (b) or (c) of this definition;. 9 Baker & McKenzie 32nd Annual Asia Pacific Tax Conference Withholding Tax on Certain Income Regardless of Place of Performance of Service The Finance Bill has proposed the deletion of the proviso "this section shall apply to the amount attributable to services which are performed in Malaysia" to section 15A of the MITA. Such proposal would mean that gross income in respect of: amounts paid in consideration of services rendered by a person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any plant, machinery or other apparatus purchased from,such person; and amounts paid in consideration of technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme will be deemed to be derived from Malaysia, irrespective of whether these services were performed in Malaysia. When the payments for these types of services are made by a resident to a non-resident of Malaysia and the payments are deemed to be derived from Malaysia, withholding tax of 10% applies Removal and Limitation of Scope of Certain Types of Income Currently Exempted Under the Finance Bill, it is proposed that the exemption for the following types of income will be removed: income derived by non-resident from trading in Malaysia through consignees in any kind of commodity produced outside Malaysia; and income derived from non-resident in respect of interest derived from Malaysia on an approved loan. Further, there are proposals to amend the existing exemption on interest paid or credited to any company not resident in Malaysia in respect of securities issued by the government of Malaysia or Islamic securities or debentures issued in Ringgit Malaysia approved by the Securities Commission ("SC"), such that the exemption will no longer apply to such interest paid or credit to a (non-resident) company in the same group of companies. In addition, it is further proposed that the scope of the income tax exemption on interest paid or credited in respect of Islamic securities originating from Malaysia issued in currency other than Ringgit Malaysia and approved by SC or the Labuan Offshore Financial Services Authority be limited, such that the exemption would not apply to interest paid or credited to a company in the same group, a bank licensed under the Financial Services Act 2013, an

10 Islamic bank licensed under the Islamic Financial Services Act 2013 or a development financial institution under the Development Financial Institutions Act GST Audit Framework Customs has issued the GST Audit Framework ("Framework") on 20 June 2016 which outlines how GST audits will be conducted, the scope of power given to Customs, the responsibilities of the audited person and the appeal procedures in a GST audit. As a general observation, the procedures and conduct of a GST audit as outlined in Framework are largely similar to the conduct of an income tax audit. Among the key takeaways from the Framework is the introduction of an Audit Exit Conference. Following the completion of the audit process, a round table discussion ( RTD ) will be held for Customs to provide information and advice to the auditee to rectify any mistakes or non-compliance with the GST Act. Any underpaid GST detected or any offences committed under the GST Act will also be communicated to the auditee during the RTD session. Where Customs has detected any deficiencies in the GST paid, a bill of demand ("BOD") will be issued to the auditee for the underpaid GST, and the deficiency is required to be paid within 14 days from the date of the BOD. An auditee can appeal against the decision of the audit officer. The appeal application will be made to the DG to review the decision, within 30 days from the date of the decision by the audit officer. If the auditee is aggrieved with the decision of the DG, then the auditee may appeal against the DG's decision to the GST Appeal Tribunal within 30 days from the date of the decision of the DG. 3. Update on Involvement in BEPS Action Plan and AEOI 3.1 CbCR On January 2016, Malaysia has signed the Multilateral Competent Authority Agreement and subsequently in August 2016, Malaysia signed the Convention on Mutual Administrative Assistance in Tax Matters. The Malaysian tax authorities, the IRB has also indicated that Malaysia will adopt the CbCR rules, and that such new rules will be implemented from 1 January 2017, and it is anticipated that the first filing will take place by 31 December However, to date, apart from the introduction of new legislative provisions under the MITA which relate to the imposition of penalties in the event of non-compliance, there has not been any local legislative instrument introduced for the purposes of implementation of the CbCR. The IRB has also not provided any detailed or specific guidelines to assist the taxpayers in preparation for the implementation of the CbCR, apart from indicating that the local Malaysian CbCR rules would mirror the initiatives proposed under Action 13 of the OECD s BEPS Report closely. 3.2 AEOI and CRS Updates In Malaysia In relation to the IRB's plan and progress in implementing the AEOI, the Director of the International Affairs and Exchange of Information Division of the IRB ("Director") has shared that the AEOI framework will be adopted into the domestic laws in Malaysia in the form of a set of rules ("AEOI 10 Baker & McKenzie 32nd Annual Asia Pacific Tax Conference

11 11 Baker & McKenzie 32nd Annual Asia Pacific Tax Conference Rules"). The AEOI Rules are in the final drafting stage, and have been submitted for review by the Attorney General's Chambers. According to the Director, the Rule will be largely based on the OECD's Standard for Automatic Exchange of Financial Account Information in Tax Matters. The IRB will also be publishing a Guidance Note on the AEOI, following the release of the AEOI Rules. The Director has confirmed that the IRB plans to follow its existing commitment of collecting information for the implementation of the AEOI starting 1 January The first exchange of information will likely take place on 1 September Proposal on New Tax on Online Businesses There have been various announcements by the Ministry of Finance ( MOF ) on the intention of the Malaysian government to introduce a new tax targeting at online businesses, as follows: On 17 May 2016, there are comments by the Treasury secretary-general of the MOF on the intention to tax online businesses in very general terms. It was indicated that the IRB has been tasked with evaluating the current tax system. On 23 May 2016, a media statement was published by the IRB clarifying that there are no special provisions for the taxation of online businesses, and the intention is to treat income tax for online businesses in the same way as income tax for offline or conventional businesses. On 9 August 2016, the Finance Minister II commented that the idea to start taxing online businesses is limited to major companies such as platform providers. In line with the IRB's focus on online businesses, a special digital economy committee has been set up within the IRB to evaluate the current tax regime and put forward recommendations. To date, there has not been any consultation sessions announced or draft guidelines / regulations published by the IRB which provide further guidance or clarifications in relation to the proposed "tax on online businesses". 5. Recent Malaysia Tax Cases There are a number of tax cases relating especially to the determination of "royalty" payments, which were recently handed down by the Malaysian courts. The facts and decisions of these cases are summarized as follows: Case Facts Issue / Decision / Status Mudah.my Sdn. Bhd. vs Ketua Pengarah Hasil Dalam Negeri (unreported) The Taxpayer, which is the applicant, is a company in the business of providing online or web classified advertisement services. Primary Issues: The Taxpayer purchases analytic results online to whether the purchase of access codes to online databases and software through online means is a royalty payment subject to withholding tax; and whether payments for technical services and management services to

12 Ketua Pengarah Hasil Dalam Negeri v Thomson Reuters Global Resources (2016) MSTC Baker & McKenzie 32nd Annual Asia Pacific Tax Conference determine the target market of its business. To this end, the Taxpayer makes online purchases of access codes to database websites and other various softwares. The IRB invoked Section 109B of the MITA to bring to withholding tax three transactions, which are - payments for software; payments for technical services to residents and nonresidents; and payment of management and technical fees to Singaporean companies. The Taxpayer has a local subsidiary, Thomson Reuters Malaysia Sdn. Bhd ("TRM"). Through a distribution agreement, TRM markets and sells the Taxpayer products in Malaysia. The agreement requires TRM to pay the Taxpayer 98% of the revenue derived from Decision: residents and nonresidents should be subject to withholding tax. The High Court ( HC ) agreed with the Taxpayer that a payment for the right to use or operate a copyrighted software or programme (e.g., CDroms softwares, DVD movies) is not a royalty payment, but is rather payment for the sale of a product. The HC determined that all impugned transactions involving purchases of online products were not subject to withholding tax under Section 109B of the ITA. The payments made by the Taxpayer were for access to the site or database and should not be characterised as royalties. Latest status: The HC's decision was overturned by the Court of Appeal on an administrative law ground, i.e., that there had not been a decision made by the IRB, and as such, there could not be a judicial review on the decision. Primary Issue: Decision: whether a distribution fee paid by an entity to another related entity is a royalty subject to withholding tax. Relying on the judgments Damco Logistics Malaysia Sdn. Bhd. v Ketua Pengarah Hasil Dalam Negeri, the HC

13 Ketua Pengarah Hasil Dalam Negeri v Alcatel- Lucent (2015) MSTC the sale of the Taxpayer's products in the form of a distribution fee. The Taxpayer had inadvertently subjected the said distribution fee to withholding tax in Malaysia. Thus, it applied for a refund. The IRB rejected the Taxpayer's application for a refund on the basis that it was a royalty. The second respondent, a nonresident company, operated a global network for voice, data and video communication. By way of a service agreement, the second respondent allowed the first respondent usage of its network in return for payments at a fixed rate. The first respondent did not withhold tax under Section 109 of the MITA on the basis that the services performed were outside Malaysia. The IRB considered the payment to be royalty and subjected the payment to withholding tax. The IRB issued a letter dated 14 April 2008 stating its decision which was based on Section 109 of the MITA. However, the IRB also sought to rely on Section 109A of the MITA in Appendix 1 to the letter. Primary Issue: Decision: found that there was "no transfer, grant or the use of know-how or propriety rights in consideration of the distribution fee." Thus, the distribution fee was not a royalty payment. Further, the HC agreed with the Taxpayer that the income received from TRM was business profits and chargeable to tax in Switzerland only. whether the IRB can seek to rely on two different sections of the MITA when making a decision. The Court of Appeal held it was clear that the IRB had made a decision arbitrarily in the exercise of his statutory power to the detriment of the first respondent by seeking to rely on two different sections of the MITA for its decision. 13 Baker & McKenzie 32nd Annual Asia Pacific Tax Conference

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