MustaphaKhoo Group of Companies Greetings from the Managing Partner

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1 Nineth Edition, Jan 11 Dec 11 MK Newsletter Special Interest Articles: Leasing Opportunities in Labuan Page 2 Public Ruling 2/2011 Page 3 Public Ruling 8/2011 Page 6 & 7 MustaphaKhoo Group of Companies Greetings from the Managing Partner As Year 2011 draws to a close, it is time for us to reflect and ponder on the achievements and make the assessments and decisions on how we are to improve further in this competitive new marketplace and an ever changing world. As we bid farewell to 2011, we know that especially in the professional services profession, there is still unfinished business. For some, the end of the year may be the lull before the storm with financial reporting in the horizon especially for publicly listed companies with the introduction of the new accounting standards among others. With Japan being hit by the tsunami earthquake disaster, Middle East experiencing a political revolution, Thailand with its extensive floods and not forgetting the euro zone debt crisis which seems to go on and on, market players are losing confidence as well as patience with the once leading countries in the global economic race. Many are instead switching their focus towards emerging markets, which will see much emphasis in Malaysia, as one of the emerging markets, is comparatively looking more attractive to both domestic and international investors alike. The world is certainly not at a standstill with challenges and opportunities at every turn. While Malaysia has been spared so far, it still faces its own set of challenges namely in escaping the middle income trap and transforming itself into a High Income Nation by the year 2020 via the Malaysian government s Economic Transformation Programme (ETP) together with the Digital Master Plan and the various initiatives to encourage and foster a green economy. It is often said that the future augurs well for those who are nimble and able to anticipate the changes in the economic and political landscape. Those who do not heed the winds of change and act accordingly will be left in the dust. Opportunity abounds in good and bad times, as one renowned business philosopher quoted it is the set of the sail which determines which direction a business will proceed and not the direction of the wind. Wishing for a better wind to blow is called naive at best. Business leaders and professionals should all take heed and adept in order to survive and prosper. Having said all that, I warmly welcome you to our bulletin for the entire year Stephen Khoo Page 1 of 8

2 Leasing Opportunities in Labuan Many organizations from the oil and gas industry, airlines, shipping companies and corporations with high value assets both foreign and Malaysian based are reaping the benefit of structuring leasing arrangements via Labuan. This is due to the fact that Labuan offers a number of operational benefits for setting up a lease structure which includes having a favorable tax regime in place as well as stable and reliable a regulatory environment. Leasing is the business of letting or sub letting property for the use of such property by the hirer. The property may include any plant, piece of machinery, vessels, aircraft or other big ticket equipment. Companies that are eligible for leasing includes: Labuan Companies registered under the Labuan Companies Act 1990; and Special Purpose Vehicles (SPV) to facilitate leasing transactions. The diagram below illustrates the concept of a leasing operation carried out by a Labuan Company: Owner of Vessels/ Aircraft/Assets Sell or lease Leased to Labuan Company 3% tax on net audited profits or RM 20,000 or approximately USD6,700 on flat tax Malaysian Party Non Malaysian Party Licence fee payable No Licence fee payable ADVANTAGES The advantage of setting up a Labuan Company includes the following: Leasing activities can be carried out with Malaysian residents as well as non resident Malaysian entities. A licence fee of RM 40,000 per year is only applicable for leasing arrangements with Malaysian residents No licence fee is payable if the Labuan Company is only carrying out leasing activity with non Malaysian residents Favourable tax regime for Labuan Company 3% of the net audited profit or RM20,000 flat rate for per year of assessment. This option can be exercised every year. No withholding tax on dividends, interest and lease payments from the Labuan Company. No exchange control restrictions on Labuan lessor. The Labuan Company has access to around 70 Double Taxation Agreements signed by Malaysia. The Labuan Company is under a one stop regulator (the Labuan Financial Services Authority or Labuan FSA) for licensing and establishment. If you are keen to set up your business opportunity in Labuan, we can assist you in the following areas: o Secfin Management (KL) Sdn Bhd Setting up a Labuan Company o MK Dyna Tax Services Sdn Bhd Tax advisory Services o Mustapha Khoo & Co Audit and Assurance Services For further information, please us at mksk@streamyx.com Page 2 of 8

3 Public Ruling No. 2/2011 Taxation Of Malaysian Employees Seconded Overseas Public Ruling (PR) No. 2/2011 was issued by the Malaysian Inland Revenue Board (MIRB) to explain and clarify the tax treatment of employment income derived by employees from Malaysia who are seconded overseas to perform duties outside Malaysia with effect from year of assessment (YA) Determining Incidental Duties Under Section 13(2) of the Income Tax Act, 1967 (the Act), employment income arising from duties performed outside Malaysia which are incidental to the employment income derived in Malaysia will be deemed to be derived in Malaysia and be accordingly subject to Malaysian income tax. Factors and circumstances Duties performed overseas may be considered to be incidental to the employment in Malaysia if : Exercise of employment in Malaysia The employee exercised his employment with the employer in Malaysia prior to being seconded overseas Nature of duties overseas The duties performed overseas are connected with or are part and parcel of the employee's regular duties in Malaysia Purpose of overseas duties Temporary nature of overseas duties Place where the duties are directed and controlled Duties performed in Malaysia and outside Malaysia are carried out within the same employer employee relationship and to further the employer in Malaysia Upon completion of duties, the employee will resume work with his employer in Malaysia Direction and control of the employee's duties overseas lies with the employer in Malaysia Payment for the services performed Commercial reality The company in Malaysia that enjoys the benefit from the duties overseas bears the cost of the employee's remuneration during the duration of the overseas secondment An employer in Malaysia bears the risk and enjoys the economic benefits from the performance of the employee's overseas duties Page 3 of 8

4 Public Ruling No. 2/2011 Income from Letting of Real Property PR No. 4/2011 explains the tax treatments pertaining to the treatment of income derived from the letting of real property which supersedes the earlier PR 1/2004 on rental income issued on 30 th June In PR 2/2011, the letting of real property is deemed to be a business source the rental income received from the said source is charged under paragraph 4(a) of the Act only if there is maintenance and support services provided in relation to the real property ie rental property Maintenance and support services include doing all things necessary (cleaning services or repairs ) for the maintenance of the real property such as structural elements of the building, stairways, fire escapes, entrances and exits, lobbies, corridors, lifts, escalators, compounds, drains, water tanks, sewers, pipes, wires, cables or other fixtures and fittings; and doing all things for the maintenance and management of the exterior parts of the real property such as playing fields, recreational areas, driveways, car parks, open spaces, landscape areas, wall and fences, exterior lighting or other external fixtures and fittings. The services must be provided by the person who lets out or owns the real property or by another person hired by such person. If a person only provides security services or other services, it is not considered to be providing maintenance services or support services comprehensively Commencement Date of Letting of Real Property Rental income treated as business source Date when the real property is made available for letting i.e. when it is ready to be occupied by tenants Rental Income Treated as non business source Date the real property is rented out for the first time Tax Treatment Rental from several real properties can be grouped as one source irrespective of whether a business source under Section 4(a) of the Act or non business source under paragraph 4(d) of the Act. However, rental as a business source has to be segregated from the other business sources. Special Treatment for Letting of Building to an Approved Multimedia Super Corridor (MSC) Status Company Effective from YA 2008, the letting of a building in the Cyberjaya Flagship Zone to an approved MSC status company is treated as the carrying on of a business and income received is subject to tax under Section 4(a) of the Act in accordance to the Income Tax (Industrial Building Allowance)(Approved MSC Status Company) Rules Page 4 of 8

5 Public Ruling No. 2/2011 Con t Income from Letting of Real Property Expenses Relating to Income from Letting of Real Property Generally, all expenses which are wholly and exclusively incurred in the production of gross income is allowed as a deduction from the business income of letting of real property subject to tax under Section4 (a) of the Act. Expenses which are allowed a deduction from income of letting of property under Section 4(d) is the direct expenses deductible under Section 33(1) of the Act such as assessment and quit rent, interest on loan, fire insurance premium, expense on rent collection, expense on rent renewal and expenses on repair. Initial expense (such as costs incurred on first tenant) is not allowed as a deduction against income from the letting of real property whether assessed under Section 4(a) or 4(d) as the expense is incurred to create a source of income and not incurred in the production of gross income. Expenses incurred when property is not rented out can be allowed if: The period the real property is not rented out occurs after it has been let out and is ready to be rented out. The absence of tenants for a period of 2 years of the termination of tenancy Legal injunction or other official sanction; or Other circumstances beyond the control of the person who lets out the real property Provided that the real property is maintained in good condition and is ready to be let out. Rental Income Received in Advance Rental income received in advance is treated as gross income for the basis period in which it is received. Any expense incurred in relation to that rental income after that basis period is allowable in the basis period in which the rental income is assessed and an amendment to the original tax computation may be made. Capital Allowance For rental income assessed under Section 4(a), capital allowances can be claimed pursuant to Schedule 3 of the Act. Where an industrial building is rented out, industrial building allowances can be claimed by the owner of the building notwithstanding that the letting is of a non business source. Page 5 of 8

6 Public Ruling No. 8/2011 Tax Treatment for Foreign Nationals Working in Malaysia This Public Ruling (PR) provides guidance on the tax treatment of employment income derived by foreign nationals in the course of exercising employment in Malaysia. Key points of the abovementioned PR include: i. Tax Treatment of Foreign Nationals Working in Malaysia Generally, income from employment is taxed in the country where the services are actually performed, irrespective of the place where the contract is entered into or where the remuneration is paid. In this respect, a foreign national working in Malaysia is liable to tax in Malaysia in respect of his employment income derived from Malaysia. An employment income is deemed derived from Malaysia if it arises for any period during which: the employment is exercised in Malaysia; leave is attributable to the exercise of employment in Malaysia; or the employee performs outside Malaysia duties incidental to the exercise of employment in Malaysia (Note 1 ). Note 1 : Refer to PR No. 1/2011 Taxation of Malaysian Employees Seconded Overseas. The tax rates which are applicable to foreign nationals would depend on their tax residency status, determined by reference to their physical presence in Malaysia in a basis year for a year of assessment [ YA ]. While residents qualify for reliefs and taxed at scale rate of between 1% to 26%, non residents are subject to tax, currently at a flat rate of 26% without any reliefs. Income from short term employment of a non resident individual is exempt from tax if the employment is exercised in Malaysia: for a period or periods which together do not exceed 60 days in a basis year for a YA; for a continuous period not exceeding 60 days which overlaps the basis years for 2 successive years of assessment; or for a continuous period which overlaps the basis years for 2 successive years of assessment and for a period or periods which together with the continuous period do not exceed 60 days. The exemption period of 60 days refers to the period of employment in Malaysia which may be under the same or different employers. Page 6 of 8

7 Public Ruling No. 8/2011 con t Tax Treatment for Foreign Nationals Working in Malaysia ii. Tax Treatment of Foreign Nationals from Treaty Countries Seconded to Malaysia When an employment income of an individual is taxed in Malaysia and also in his home country having a tax treaty with Malaysia, the Malaysian tax law provides for a relief in the form of a bilateral credit to that individual who is resident in Malaysia under Section 132 of the Income Tax Act 1967 [ the Act ]. The computation of this credit is as follows: Foreign income (statutory income) (Note 2) X Malaysian tax payable before bilateral credit Total income Or Foreign tax charged in respect of the foreign income charged to tax twice, whichever is the lower Note 2: With effect from the YA 2007, foreign income for the purposes of claiming bilateral credit includes income derived from Malaysia and charged to foreign tax. iii. Tax treatment of Foreign Nationals from Non Treaty Countries Seconded to Malaysia Pursuant to Paragraph 15 of Schedule 7 of the Act, unilateral credit may be allowed for foreign tax if an employee pays Malaysian tax and foreign tax in respect of any foreign income from an employment exercised outside Malaysia, whether or not he was resident in the basis year for the YA for which Malaysian tax was paid. Therefore, where an employment is exercised in Malaysia, such unilateral credit will not be applicable though the income derived from Malaysia may also be liable to foreign tax. iv. Tax Treatment of Foreign Nationals Participating in the Malaysian Technical Co operation Programme Payment received by a non citizen and non resident in Malaysiafrom participating in the Malaysian Technical Cooperation Programme [ MTCP ] is exempt from tax under the Income Tax (Exemption) Order 2008 (effective YA 2007). MTCP means a technical co operation programme approved by the Economic Planning Unit, Prime Minister s Department of Malaysia with the objective to share development experiences and expertise with other developing countries. Currently, this is administered by MTCP Unit, Ministry of Foreign Affairs. v. Filing of Income Tax Return Forms Foreign nationals deriving income from Malaysia are required to file an Income Tax Form (i.e. Form M for nonresident; Form B or Form B for resident) for a YA on or before 30th April of the following year. vi) Effective Date The above PR takes effect with effect from the YA 2011 and subsequent years of assessment. Page 7 of 8

8 MK Newsletter MustaphaKhoo s Staff Events MUSTAPHAKHOO GROUP OF COMPANIES 30-3, 30-4, 32-3 & 32-4, JALAN KUCHAI MAJU 10, KUCHAI ENTREPRENEURS PARK, OFF JALAN KUCHAI LAMA, KUALA LUMPUR, MALAYSIA East Coast Trip releasing turtles to the sea Chinese New Year PHONE: FAX: mksk@streamyx.com mkdynatx@streamyx.com CNY Tossing for prosperity Lo Sang East Coast Trip Building sand castle competition We re on the Web! See us at: Overseas Visitors X mas Nite We can DO IT AS A TEAM Contact and Feedback KUALA LUMPUR OFFICE SEREMBAN OFFICE PJ OFFICE 30-3, 30-4, 32-3 & 32-4, Jalan Kuchai Maju 10, Kuchai Entrepreneurs Park Off Jalan Kuchai Lama Kuala Lumpur No. 24, Jalan Campbell Seremban Negeri Sembilan 23B, Jalan SS21/60 Damansara Utama Petaling Jaya Selangor Tel : Fax : mksk@streamyx.com mkdynatx@streamyx.com Tel : Fax : sksk88@streamyx.com Tel : Fax : mkpj@streamyx.com Important Disclaimer : This MK Newsletter is provided for general information only. Recent law development may result in different opinions and views. Readers are reminded to seek professional advice relevant to their case. Whilst every effort has been made to ensure the accuracy of the information, MustaphaKhoo Group of Companies accepts no responsibility for any errors or omissions or any consequences of loss or action taken based on any information in this newsletter. Page 8 of 8