Gazette Orders MALAYSIAN DEVELOPMENTS INTERNATIONAL DEVELOPMENTS

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1 TAX nsights An Occasional Series 1/ 2010 MALAYSIAN DEVELOPMENTS Gazette Orders Administrative Matters Public Rulings Guidelines Incentives Indirect Tax Labuan Double Taxation Agreements (DTA) Free Trade Agreements (FTA) INTERNATIONAL DEVELOPMENTS China Hong Kong India Indonesia Ireland Singapore Spain Taiwan United Kingdom United States The first quarter of 2010 has seen several interesting tax developments both in Malaysia and globally. From a Malaysian perspective, the deferment of the passing of the Goods and Services Tax (GST) legislation is significant. The second reading of the GST Bill in Parliament was postponed on the premise that more time is needed to both educate the public and to assess the impact of GST. The on-going uncertainty that has clouded the introduction of GST for several years creates difficulties for businesses which will need to be prepared for GST in the event that this tax is eventually implemented. It is clear that GST would provide the Government with a much needed alternative sustainable source of revenue, but public sentiment needs to be managed. The New Economic Model (Part 1) was also recently released outlining the strategic reform initiatives and policy measures which the Government hopes to realise in the move to achieving developed nation status. We have outlined below some of the key Malaysian and international tax developments which are of interest. MALAYSIAN DEVELOPMENTS Gazette Orders Finance Act 2010 The Finance Act 2010 was gazetted on 14 January 2010 to enact the 2010 Budget proposals. It should be noted that there are a few minor differences between the Finance Bill 2009 and the subsequent Finance Act 2010 as follows: The widening of approved securities/islamic securities in Section 60I of the Income Tax Act, 1967 (ITA) to include securities approved by the Labuan Financial Services Authority (Labuan FSA), (the new name for the previous Labuan Offshore Financial Services Authority). The wording of the new Part XIV to Schedule 1 of the ITA in relation to the 15% tax rate on employment income for knowledge workers in specified regions has been tightened. Income Tax (Deduction for Contribution to Retirement Fund) Rules 2010 This order operates retrospectively from the year of assessment 2003 in respect of contributions made by a company to a retirement fund established under the Retirement Fund Act 2007 in relation to public sector employees seconded to serve in the company. Such contributions will be deductible to the company, provided the employee concerned has been conferred with pensionable status and has been given approval by the Public Services Department to be seconded to the company. The deduction shall not exceed 19% of the actual last drawn monthly salary received by the person before his employment with the company. 1

2 Income Tax (Renovation or Refurbishment Expenditure) Rules 2010 These Rules clarify the types of expenditure which qualify for accelerated capital allowances at the rate of 50% pursuant to paragraph 8B, Schedule 3 of the ITA. There are as follows: General electrical installation Wall coverings Lighting False ceilings and cornices Gas / water systems Recreational rooms for employees Kitchen / sanitary fittings Canopies / awnings Doors, gates, windows, grills and roller shutters Fitting / changing rooms Fixed partitions Childrens play areas Flooring Ornamental features / decorations (fine art is excluded) These rules are effective for the years of assessment 2009 and Income Tax (Exemption) (No.10) Order 2009 Income Tax (Exemption) (No.11) Order 2009 Income Tax (Deduction for Investment in an Approved Forest Plantation Project) Rules 2009 Each of the above Orders/Rules takes effect retrospectively from 21 May 2003 and will only apply to applications for approval for the relevant projects which are made on or before 31 December Briefly, the Orders/Rules provide for the following: Income Tax (Exemption) (No.10) Order 2009 this provides for a ten year tax exemption for new forest plantation projects and a five year exemption for a forest plantation expansion project. The exemption is given to resident companies in respect of statutory income. Income Tax (Exemption) (No.11) Order 2009 this provides for a ten year tax exemption to a resident company that has surrendered its adjusted losses from a forest plantation project to one or more of its related companies ( claimant companies ). The exemption applies from the first year that the company derives statutory income from its forest plantation project. The adjusted loss surrendered shall be allowed as a deduction against the aggregate income of the claimant company pursuant to Section 44(1) of the ITA. The Order also determines the tax treatment of unsurrendered losses. Income Tax (Deduction for Investment in an Approved Forest Plantation Project) Rules 2009 these Rules allow a deduction for the value of investment (in the form of cash or paid-up ordinary shares of the related company) in a forest plantation project on the date the investment is made. If the investment is in the form of ordinary shares, then the shares may not be disposed of for a 5 year period. The above is a brief summary of the Orders/Rules, which contain detailed provisions which would need to be noted by those seeking any of these incentives. Income Tax (Exemption) (No.5) (Revocation) Order 2010 This Order operates retrospectively from the year of assessment This Order revokes the Income Tax (Exemption) (No. 5) Order 1989 which provided an exemption from tax in respect of 70% of the income remitted from a construction project outside Malaysia by a Malaysian resident company. The1989 Order is clearly no longer required in view of Paragraph 28, Schedule 6 of the ITA which exempts foreign sourced income from tax. Real Property Gains Tax Act (Exemption) (No.2) Order 2009 This order clarifies the confusion that arose following the 2010 Budget proposals and amendments to the Real Property Gains Tax Act, 1976 (pursuant to the Finance Act 2010) with respect to real property gains tax (RPGT). Chargeable gains derived from any disposal of real property (including shares in a real property company) on or after 1 January 2010 will be exempted from RPGT, where the disposal is made after 5 years from the date of acquisition of such chargeable assets. Where disposals are made within 5 years from the date of acquisition, the gains will be subject to RPGT at an effective rate of 5%. 2

3 This amendment is effective from 1 January The Real Property Gains Tax (Exemption) (No. 2) Order 2007 and the Real Property Gains Tax (Exemption) Order 2009 are revoked. Service Tax (Rate of Tax) Order 2009 This Order implements the 2010 Budget proposals in relation to service tax on credit cards and charge cards. Effective from 1 January 2010, service tax shall be charged and levied on taxable services relating to credit cards or charge cards. The rate of tax is as follows:- (a) (b) Principal credit or charge card shall be subject to RM50 service tax, on the date of issuance or date of renewal and every 12 months thereafter, and Supplementary credit or charge cards shall be subject to RM25 service tax, on the date of issuance and every 12 months thereafter Administrative Matters Tax Filing Programme for 2010 The following sets out the tax filing deadlines for the year of assessment (YA) 2009: Types of return Deadline Form BE - Resident individuals without business income 30 April 2010 Form B - Resident individuals with business income 30 June 2010 Form M Non-resident Individual 30 April 2010 Form TP Deceased Person s Estate (where there is no business income) Form TF Clubs and associations 30 June 2010 Form TJ Hindu Joint Families (where there is business income) Form P Partnership 30 June 2010 Form E Employers Return 31 March 2010 Form C1 Co-operatives Form TC Unit Trust/Property Trust Form TA Trust Bodies Form TR REITs Form C and Form R CKHT 1A Disposal of real properties CKHT 1B Disposal of shares in real property company CKHT 2A Acquisition of real properties or shares in a real property company CKHT 3 Election not to withhold the 2% of consideration (completed by the disposer) 7 Months from the close of the accounting period 7 Months from the close of the accounting period 60 days from the date of disposal It should be noted that tax agents will not be allowed to use the PDF version of tax return forms with effect from the year of assessment This means that tax agents will either have to complete original return forms or e-file. Further, for refund cases, the Inland Revenue Board (IRB) has clarified that it is not necessary for taxpayers to submit original dividend vouchers together with their return forms. However, a prescribed form referred to as Attachment B1 should be submitted. Grace Period for Submission of Tax Returns For the YA 2009, a 7 day grace period will be given for the filing of Forms BE, B, M, P, TP, TJ and TF where such returns are filed by post and by hand. 3

4 For Forms C, R, C1, TA, TC and TR, where the tax filing due dates fall within the calendar year 2010, a 7 day grace period will also be given where the returns are filed by post and by hand. Therefore, a company with a 30 September 2009 year-end whose tax return is due by 30 April 2010 will be given a grace period till 7 May 2010 to file the YA 2009 tax return. Likewise, a company with a 31 December 2009 year end will be given until 7 August 2010 to file the tax return. The grace period will also apply in respect of the payment of the balance of taxes due. Applications for an extension of time to file tax returns may be made provided applications are received at least 15 days before the submission deadline. The grace period referred to above will not be given to companies who file their returns via e-filing. E-Filing The IRB has announced that the e-filing facility for Forms BE, B, M, P and E have been made available to taxpayers starting from 1 March It should be noted that the IRB encourages taxpayers to file their tax returns early to avoid any technical problems with the e-filing system as a result of excessive use of the e-filing system close to the filing deadlines. Taxpayers who have not previously filed their tax returns via e-filing, must obtain a pin number from the IRB in order to do so. To obtain the pin number taxpayers can either pin@hasil.gov.my or call the toll free line Notice of Installment Payment (CP500) On 8 February 2010, the IRB issued Forms CP500 for the YA The IRB has clarified that the CP500s have been issued based on income other than employment income reported in the income tax returns in the YAs 2008 or Employment income is not included in the installment computations due to the fact that this is subject to the Schedular Tax Deduction scheme. The IRB has also indicated that taxpayers with employment income only can the IRB at callcentre@hasil.gov.my or call the toll free line to cancel the CP500 issued to them. It should be noted that the cancellation should have been done before 30 March Derivation of special classes of income Reimbursement and disbursement of hotel accommodation costs Income derived from the rental of ISO containers by a Malaysian shipping company Income received for the provision of technical services or training in specific areas Income received from an approved MSC status company Previously, special classes of income were deemed derived from Malaysia if the responsibility for the payment lies with the Government or State Government. The addendum clarifies (in line with the change to Section 15A of the ITA) that payments by local authorities would also render the income to be derived from Malaysia Effective 1 January 2009, reimbursements and disbursements in respect of hotel accommodation in Malaysia are not to be included in the computation of gross income for the purposes of withholding tax, i.e such costs will not be subject to withholding tax. Effective 20 October 2001, income derived by a non-resident person from the rental of ISO containers to a Malaysian shipping company is exempted from withholding tax pursuant to the Income Tax (Exemption) (No.24) Order Income received by a non-resident for providing technical services or training in the following areas is not subject to withholding tax: - specific expert areas related to music, choreography, cinematography, etc. as well as traditional arts and crafts production and the performing arts - Islamic finance - Post-graduate courses in information technology, electronics or life sciences - Post-basic nursing or allied healthcare training - Aircraft maintenance engineering courses Income received by a non-resident company for technical advice/services from certain approved MSC status companies is not subject to withholding tax. 4

5 Public Rulings Second Addendum to Public Ruling 4/2005 Withholding Tax on Special Classes of Income This second addendum updates the PR 4/2005 in respect of the following:- Guidelines Grants/Subsidies and Income of Statutory Bodies The IRB has issued guidelines to clarify the tax exemption given in relation to grants and subsidies (received from the Federal or State Governments) as well as the exemption in respect of income of statutory bodies pursuant to the Income Tax (Exemption) (No.4) Order 2003 and Income Tax (Exemption) (No.22) Order The guidelines also incorporate several examples to illustrate the application of these exemption rules. RPGT The IRB issued RPGT guidelines on 2 February 2010 that are effective from 1 January The guidelines clarify the amendments to the RPGT Act, 1976 (RPGTA), and the Real Property Gains Tax (Exemption)(No.2) Order 2009 and indicate how RPGT will apply with effect from 1 January As outlined above, RPGT will only apply in respect of real property (including shares in real property companies) disposed off within 5 years from the date of acquisition. The following are some of the salient features of the guidelines:- The guidelines includes various examples for the computation of RPGT taking into account the exemption formula stated in the RPGT (Exemption) (No.2) Order 2009 and other issues such as exemptions for individuals pursuant to Schedule 4 of the RPGTA. Pursuant to Section 21B of the RPGTA, the acquirer is now required to withhold 2% of the sales consideration or the entire cash amount, whichever is lower and to remit this to the IRB within 60 days from the date of acquisition. For example:- Acquisition Price = RM 100,000 (RM1,000 in cash and RM99,000 in shares) Amount to be withheld, lower of: 2% of the sale consideration = RM2,000; OR Cash amount = RM1,000 Therefore, in this case, the acquirer would need to remit RM 1,000 to the IRB within 60 days from the date of acquisition. If the acquirer fails to do so then a penalty of 10% is applicable on the amount to be remitted. Where the entire sales consideration comprises cash, then the amount to be withheld in this instance would be RM2,000. The guidelines stipulate how loss relief will be given in respect of losses arising from disposals of property within 5 years from the date of acquisition. Losses arising from the disposal of property after the 5 year time-frame will not be available for relief. Clarification is given on the issue of interest expenses incurred in relation to the acquisition of real property. Essentially, such interest expenses will no longer be deductible as related costs of acquisition. The guidelines indicate that taxpayers will be issued a certificate of non-chargeability by the IRB if the IRB is satisfied that no gain has been derived from the disposal of real property. 5

6 Guidance is also provided in relation to the taxing of gains derived from the disposal of shares in real property companies. Other important administrative matters covered by the guidelines relating to the RPGTA are:- - The procedures to be adhered in filing the RPGT returns and in making payments in respect of RPGT - The responsibilities of the disposer and the acquirer in respect of filing RPGT returns and producing supporting documents (Note: The relevant forms, guidelines, etc reported under the Administrative Matters can be obtained from the IRB website at Incentives Promotion of Health Tourism In order to promote health tourism, the Government has announced several tax and non-tax incentives. The tax incentives are as follows:- Tax exemption equivalent to 100% of the qualifying capital expenditure incurred for a period of 5 years for the construction of new hospitals or for expansion, modernisation or refurbishment of existing hospitals. Applications for this incentive must be made to the Malaysia Healthcare Travel Council from 1 January 2010 until 31 December Further, these hospitals must be registered with the Ministry of Health for the promotion of healthcare travel. Expenses incurred by hospitals to attain domestic or internationally recognized certification will be eligible for a double deduction under the Income Tax Act To date, the above incentives have merely been announced but have not been gazetted. Indirect Tax Service Tax on Credit Cards and Charge Cards As reported above, effective 1 January 2010, credit cards and charge cards are subject to service tax. The Royal Malaysian Customs Department (RMC) has issued guidelines to clarify the scope of the tax, the services subject to tax, the date of charge, the payment of tax, etc. The guidelines can be obtained at the RMC website at Service Tax List of Taxable and Non-Taxable Services The RMC has recently issued a revised list of taxable and non-taxable services for service tax purposes covering a range of industries. However, it should be noted that the RMC has indicated that this list is merely an indicative guide and is not to be treated as a conclusive reference tool. (The list can be obtained from the RMC website at Goods and Services Tax Bill 2009 On 14 March 2010, the Second Finance Minister announced that the GST Bill would not be tabled for the second reading at the March Parliamentary session. The key question is whether the second reading of the Bill will take place at the June/July Parliamentary session. The deferral is broadly viewed as a temporary hold up rather than a permanent set-back for the progress of this legislation. 6

7 Labuan Guidelines on Co-location of Labuan Banks The Labuan FSA has recently issued guidelines which permit Labuan Banks to establish an office in other parts of Malaysia aside from Labuan ( co-located office ), subject to numerous conditions including the requirement to have an average total asset base (over 3 years) of at least USD1 billion, the requirement that at least 50% of its loans and deposits should have been made to/received from non-residents, etc. The application for approval to set up the co-located office must be submitted to the Labuan FSA prior to its establishment. New Labuan Legislation New legislation has recently been enacted as follows: Labuan Limited Partnerships And Limited Liability Partnerships Act 2010 Labuan Foundations Act 2010 Labuan Islamic Financial Services And Securities Act 2010 Labuan Financial Services And Securities Act 2010 Additionally, the following existing legislation has been amended, largely to reflect the new terminology for Labuan companies, whereby these are no longer referred to as offshore companies but are now Labuan companies, and to remove references to the term offshore : Labuan Offshore Business Activity Tax Act 1990 Labuan Offshore Financial Services Authority Act 1996 Labuan Offshore Trusts Act 1996 Offshore Companies Act 1990 Double Taxation Agreements (DTA) Malaysia Brunei The DTA between Malaysia and Brunei has been gazetted by the Double Taxation Relief (The Government of His Majesty the Sultan and Yang Di-Pertuan of Brunei Darussalam) Order However, this order has not entered into force as yet. Once the DTA is effective, the withholding tax rates will be as follows: Dividends 10% Royalties 10% Interest 10% Technical fees 10% Belgium Malaysia Belgium and Malaysia have signed an amending protocol to the DTA of 24 October 1973 on 18 December The protocol amends the withholding tax rates as follows: Dividends 10% Royalties 7% 7

8 Interest 10% Technical fees 7% Malaysia Germany On 23 February 2010, Malaysia and Germany signed a new DTA that will replace the existing DTA of 8 April The withholding tax rates under the new DTA are as follows: Dividends 15% Royalties 7% Interest 10% Technical fees 7% It should be noted that the provisions of the earlier DTA did not allow Malaysia to impose any withholding tax on technical fees. The new DTA has obviously changed this position but allows for a lower withholding tax rate than the domestic rate of 10%. Likewise, the withholding tax rate for royalties is also reduced. Malaysia Hong Kong Malaysia and Hong Kong have agreed to negotiate a DTA. In this regard, it is interesting to note that Hong Kong has recently entered into several DTAs notwithstanding that Hong Kong is generally viewed as a low-tax jurisdiction. Malaysia - Senegal On 17 February 2010, Malaysia and Senegal signed a new DTA in Dakar. Details of the treaty are not available as yet. Malaysia OECD White List It is good to note that the OECD has categorized Malaysia as a nation that has substantially met the internationally agreed tax standards for the exchange of information (i.e. Malaysia has been moved into the OECD s white list from the previous grey list ). This reclassification was due to the fact that Malaysia has signed DTAs/protocols to enhance the existing DTAs with the countries listed below, by adopting the exchange of information standards which the OECD has encouraged jurisdictions around the globe to adopt: Australia France Kuwait Senegal United Kingdom Belgium Ireland Netherland Seychelles Brunei Japan San Marino Turkey Free Trade Agreements (FTA) Malaysia has implemented the following FTAs effective 1 January 2010: Full implementation of the ASEAN FTA ASEAN Australia New Zealand FTA ASEAN India FTA It is expected that the implementation of the FTAs would increase the amount of investment and economic development between ASEAN, Australia and India. There is generally an increased interest in FTAs and in the potential benefits arising from these. Therefore, businesses should review the FTAs to determine if there are benefits to be gained when doing business in the respective countries. The other FTAs which Malaysia has either entered into or is currently negotiating are as follows: 8

9 Concluded FTAs or Economic Partnership Agreements Malaysia- Pakistan Malaysia Japan Malaysia New Zealand Under Negotiation Malaysia Australia Malaysia Chile Malaysia India Malaysia Korea Malaysia U.S.A INTERNATIONAL DEVELOPMENTS China Foreign Tax Credit ( FTC ) Regime The ability to claim FTCs in China has recently been clarified via the issuance of a notice on FTCs which has retrospective effect from 1 January The notice is relevant to both resident and non-resident enterprises who may be entitled to FTCs under the domestic Enterprise Income Tax Law in respect of taxes suffered overseas on foreign sourced income. There are detailed rules and comprehensive guidance on several matters including: what constitutes foreign taxes for FTC purposes the computation of taxable foreign sourced income the utilisation of tax sparing credits the ability to carry forward unutilised FTCs for five years the precedence of treaty provisions over domestic laws in the event of a conflict Companies with businesses in China which are potentially entitled to FTCs should ensure that they are familiar with the rules prescribed in the Notice. Non-Resident Enterprises Taxation on a Deemed Profit Basis With effect from 20 February 2010, non-resident enterprises are subject to tax on a deemed profits basis under certain circumstances. A notice issued by the tax authorities on the same date sets out the circumstances under which non-resident enterprises will be taxed on a deemed profit basis as well as the manner in which such deemed profits may be calculated by the tax authorities. Effectively, where non-resident enterprises do not maintain adequate accounting records to support the computation of taxable income, the tax authorities are entitled to compute a deemed profit using the total income method, the cost plus method or the expenses plus method, all of which are explained in the notice. Further, where sales contracts comprise an element of services for which the consideration is not stipulated, a deemed profit may be estimated based on arm s length prices or 10% of the total 9

10 contract value. Likewise, where non-residents provide services both within and outside of China, the fees must be apportioned accordingly and the non-resident must be able to justify the fees attributable to services provided in China. Hong Kong Transfer Pricing Guidelines The Hong Kong Inland Revenue Department has issued a Departmental Interpretation and Practice Note No. 46 in relation to transfer pricing. Transfer pricing has not traditionally been a significant focus area for the Hong Kong tax authorities on the basis that given the comparatively low corporate tax rate in Hong Kong, Hong Kong has been a preferred location to capture profits for tax purposes. Globally, however with increasingly aggressive transfer pricing enforcement, the Practice Note establishes that the Hong Kong tax authorities would seek to apply the OECD transfer pricing principles in Hong Kong with respect to the arm s length rate, comparability analyses, documentary requirements, etc., unless the OECD principles expressly contradict domestic tax laws. It is interesting to note that in the context of treaty countries which make an upward transfer pricing adjustment in their respective jurisdictions, a downward adjustment will not be automatic in Hong Kong and will need to be appropriately justified to the tax authorities. The Practice Note also touches on schemes that are created for the purpose of tax avoidance/evasion or that take advantage of financial secrecy laws. The Practice Note does not provide for Advance Pricing Arrangements nor does it provide for penalties in connection with transfer pricing adjustments. India Case Law Taxability of Income from the Sale of Software Products An Advance Ruling was issued in relation to the interesting question as to whether the proceeds received by a Japanese company (JCo) from the sale of software products to distributors in India was taxable as business profits in India. JCo was involved in the sale of software products which were sold in India through independent third party distributors. The latter would negotiate and procure contracts for JCo, although JCo was not under any obligation to accept the orders for such contracts. Where JCo did accept such orders, it would sell the software to the distributors (at an agreed price), and the latter would on-sell the software products to the end-users at a price agreed with the end-users. JCo did not get involved in the sale between the distributors and the end-users. Thereafter, JCo, the distributors and the end-users entered into tripartite End User License Agreements, giving the end-users a non-exclusive license to use the software for internal purposes. The Authority for Advance Rulings (AAR) had to consider the question of whether the income derived by JCo from the sale to the distributors was taxable in India, either as business profits or as royalties. The AAR decided that the income was not taxable in India for the following reasons: Business profits If JCo were deemed to have a permanent establishment (PE) in India, then any business profits attributable to the PE would be taxable in India. In this present case, the AAR decided that JCo did not have a PE in India. The distributors operated independently and were not controlled by JCo. The price at which the distributors sold the software to the end-users was not determined nor influenced by JCo. Royalties are payments for the use of copyright. Based on the concept of copyright which typically grants an exclusive right to exploit the copyright work itself, the payment in this instance would not constitute a royalty as JCo continued to have the exclusive right to exploit the copyright and the end-users only had a non-exclusive right to use the software (i.e. the copyrighted article, rather than the copyright itself). The term license of itself does not entail a royalty payment, as a royalty would only arise where the payment creates a transfer of rights in relation to copyright. 10

11 Does the Replication of Software amount to a Manufacturing Activity? In a recent case heard by the Supreme Court of India, the question arose as to whether the replication of software from a master copy onto blank discs amounted to manufacturing (for the purposes of claiming tax incentives in India). The taxpayer in this case (Oracle India) imported master copies of software from its parent company (Oracle U.S.A) for which it paid a lump sum consideration as well as a royalty. The taxpayer then duplicated the software onto blank discs for sale and claimed a tax incentive in respect of its duplication activity on the basis that this amounted to manufacturing. The tax authorities denied the incentive claim on the basis that the mere duplication process did not amount to manufacturing for the purposes of the incentive. In the absence of a definition of manufacture in this instance, the Supreme Court took note of the actual process involved in the duplication of software. Although the original article was not transformed, as a result of the duplication exercise, the blank discs were converted into commercial goods/commodities which they previously were not. Based on the facts of the case, the Court held that the duplication activity amounted to manufacturing. India Singapore DTA The AAR issued an advance ruling in the case of Seagate Singapore International Headquarters Private Limited ( SSI ), in connection with the question as to whether a PE would be deemed to exist for SSI in India as a result of arrangements with an independent services provider (ISP) for the delivery of goods belonging to SSI to SSI s customers in India. SSI was involved in the business of the manufacture and sale of hard disk drives ( the goods ). To service its customers in India, SSI entered into an agreement with an ISP in India to stock and deliver the goods on behalf of SSI through the ISP s customs bonded warehouse. The pattern of events typically involved SSI sending a shipment of goods to India when it received a purchase order from its customers. The ISP would clear the goods through customs as the importer of record and store the goods in its bonded warehouse until such time that the goods were to be delivered to the customers. The ISP would deliver the goods accordingly and charge a fee to SSI for the services rendered. SSI contended that it was not taxable in India as it did not have a PE in India. The AAR however, decided that SSI had a fixed place of business in India via the ISP, on the basis that a fixed place of business did not require that the premises be owned or leased by SSI, but that a certain degree of permanence was sufficient. Part of SSI s sales activities were viewed as being carried out from the ISP s bonded warehouse. The question of whether the ISP could constitute an agency PE was disregarded, as the AAR decided that a PE arose from a fixed place of business. Mandatory Permanent Account Number ( PAN ) A new requirement has been introduced into the Indian tax legislation which affects both resident and non-resident payees, i.e. those deriving income from India. The provision (Section 206AA) requires payers to withhold tax at a higher rate if the payee does not have nor provide its Permanent Account Number (PAN) to the payer. This ruling is effective 1 April All documentation exchanged between the parties (and to the tax authorities) must reflect the PAN of the payee. Therefore, Malaysian parties deriving income from India should ensure that they obtain a PAN and that this is quoted on all relevant correspondence to avoid the imposition of withholding tax at higher rates. Indonesia Transfer Pricing Documentation Transfer pricing is increasingly becoming an area of scrutiny by the Indonesian tax authorities, who are looking to ensure that the arm s length rule is being followed and that appropriate transfer pricing documentation is maintained in accordance with Indonesian tax regulations. This includes the requirement for taxpayers to submit three types of related party forms 11

12 together with the corporate income tax returns for the financial year 2009 onwards. These forms address compliance requirements in respect of related party documentation, disclosure of all related party transactions and details of related party transactions with tax haven companies. The Indonesian tax authorities have also issued a circular (Circular Letter SE-96/PJ/2009) which provides an outline of the acceptable benchmarking ratios for certain industries. Ireland Mandatory Reporting of Tax Structures New measures have recently been introduced in Ireland with legislative changes to require promoters of tax structures or taxpayers to report tax schemes to the tax authorities, non-compliance with which will attract penalties. It is understood that privileged legal advice will not be covered by the mandatory reporting provisions. Ireland is not alone in this regard. As set out below, the United Kingdom and the United States have also introduced/tightened reporting requirements in this context. Transfer Pricing Changes have been proposed to introduce a transfer pricing regime which will take effect from 1 January The transfer pricing regime will cover both domestic and international trading transactions between associated entities and will be based on the OECD arm s length principle. Interestingly, the transfer pricing regime will not affect small and medium enterprises (with less than 250 employees, or with a turnover of less than EUR 50 million or assets of less then EUR 43 million (based on consolidated group global figures)) or to contracts where the terms and conditions are agreed before 1 July Singapore Stamp Duty - Sale of Residential Properties In an interesting development, the Inland Revenue Authority of Singapore (IRAS) has introduced a seller s stamp duty (SSD), at the rate of 1% to 3% of the sales consideration of certain residential properties. Sellers of residential properties which are acquired on or after 20 February 2010 and which are disposed of within 1 year of the date of acquisition will be liable to SSD. This ruling will not apply to properties acquired before that date. Further, several transactions including the following are exempted from the SSD: Disposals of properties by foreigners Disposals/transfers of properties by property developers Transfers of properties pursuant to marriages/divorces Certain transfers of HDB flats, Transfers as a result of a scheme of amalgamation/reconstruction 2010 Budget The following summarises some interesting proposals from the Singapore 2010 Budget: Capital expenditure on the construction or purchase of industrial buildings after 22 February 2010 will no longer qualify for industrial building allowances (with some specific exceptions). However, from 1 July 2010 capital expenditure incurred on a qualifying building or structure will be eligible for a new Land Intensification Allowance. For the years of assessment 2011 to 2015, companies incurring qualifying expenditure in relation to research and development activities, acquisition of intellectual property, training, etc, will be entitled to a Productivity and Innovation Credit (PIC) at a rate of 250% for the first SGD 300,000 of qualifying expenditure incurred in these prescribed areas. The balance of the expenditure will be eligible for the PIC at a rate of 150% or 100% depending on the activities undertaken. Qualifying mergers and acquisitions (M&As) executed between 1 April 2010 to 31 March 2015 will qualify for a new M&A allowance equal to the lower of 5% of the acquisition value or SGD 5 million. Additionally, a stamp duty remission up to a maximum of SGD 200,000 will be given in respect of the transfer of shares arising from qualifying M&As. 12

13 Ship management fees derived from the rendering of ship management services to related special purpose vehicles will be exempt from tax subject to certain conditions GST - To ease GST compliance for the maritime sector, with effect from 1 July 2010, services subject to GST zerorating will be expanded to include pleasure and recreational ships that are wholly used for international travel. Casino Tax - Pursuant to the Casino Control (Casino Tax) Regulations 2010, with effect from 5 February 2010, casino tax will be charged on the gross gaming revenue (GGR) of casinos operating in Singapore. A prescribed formula is provided for the computation of GGR and the tax. Spain Transfer Pricing In a transfer pricing case involving the Coca-Cola group, the issue arose as to whether customs valuation or the resale valuation should be applied for determining the value of transactions for transfer pricing purposes. The taxpayer in this case was the Spanish subsidiary of the Coca-Cola group which imported raw materials from group companies located in France and Ireland. The price (inter-company price) at which the raw materials were acquired were fixed by the US parent company of the group and a dispute arose as to whether this was an arm s length price for transfer pricing purposes. The tax authorities sought to use the resale price valuation method, while the taxpayer argued that if the inter-company price was not acceptable, they should be allowed to use the value assessed by the tax authorities for customs duties purposes, which was higher than the resale price value. The Supreme Court ruled in favour of the taxpayer, noting that although the tax authorities were correct in applying the resale price method based on domestic laws, both the customs legislation and the corporate income tax legislation required that the value of transactions be determined at normal prices in a competitive environment and as such it was not acceptable for the tax authorities to value the same transaction using different methods. Taiwan Double Tax Agreement (DTA) Benefits New guidelines on DTAs have been issued which took effect from 7 January These are based on OECD principles and are intended to provide guidance as to the eligibility for tax treaty benefits and to address the issue of substance over form. The guidelines cover some of the following areas: The determination of when a PE will be deemed to exist The documentation required when seeking DTA benefits Transfer pricing documentation for PEs Information exchange and mutual agreement procedures United Kingdom (U.K) Disclosure of Tax Avoidance Schemes The U.K tax authorities have issued guidance notes which take effect from 1 April 2010 in relation to the Disclosure of Tax Avoidance Schemes. The guidance notes are intended to provide clarification and advice on several matters in relation to the disclosure of tax avoidance schemes including the following: When disclosure to the tax authorities is required in respect of arrangements involving income tax, corporation tax, capital gains tax, National Insurance contributions and stamp duty land tax How to make the requisite disclosure The systems that users of tax arrangements (rather than promoters of such arrangements) need to have in place to monitor the need for disclosure 13

14 Budget The U.K Budget proposals were announced on 24 March The following sets out some of the more salient proposals: Financial Institutions will see the implementation of a Bank Payroll tax, which will apply to banks, building societies, U.K branches of foreign banks and certain other financial businesses. A 50% tax will be imposed on payments of bonuses in excess of 25,000 or more paid to certain employees between 9 December 2009 and 5 April The consortium relief rules will be amended to allow European Union and European Economic Area resident companies to qualify for this relief subject to conditions New Controlled Foreign Company rules will be introduced which will focus on the artificial diversion of U.K profits rather than taxing profits that are truly earned in overseas subsidiaries Several anti-avoidance measures have been proposed in relation to transactions in securities, sideways loss relief, group mismatches, etc. Personal tax rates will increase for those in the higher income brackets with the introduction of a 50% tax on income in excess of 150,000 (Further details of the U.K Budget proposals can be found at the HM Revenue and Customs website at United States Reporting of Uncertain Tax Positions The Internal Revenue Service recently announced that it intends to introduce changes to the reporting requirements for certain taxpayers in connection with uncertain tax positions. This requirement will involve reporting such tax positions in future tax returns. The existing rules will be modified to improve tax compliance and administration. It is expected that the reporting requirements will target business taxpayers with more than USD 10 million in total assets. Further, the changes may also require the reporting of financial accounting reserves for contingent tax liabilities. UPCOMING EVENTS: TAXAND Workshops: 26 May 2010: Double Tax Agreements: The Key to Planning Cross-Border Projects A workshop to address and understand withholding tax and planning opportunities in relation to corporate and individual tax issues arising from cross-border payments and cross-border assignments 23 June 2010: Corporate Tax Filing: Getting It Right A workshop to identify the key corporate tax issues to be addressed in ensuring that tax returns are filed accurately to avoid the imposition of penalties. For further details, please visit our website at or seminars@taxand.com.my DISCLAIMER: The information contained in this newsletter is intended only to be a guide. It must not be relied on in, or applied to, specific situations without previously seeking proper professional advice. Even if all reasonable care has been taken in its preparation, Taxand Malaysia Sdn Bhd and all the members of the Taxand Network do not accept any liability for any errors or omissions that it may contain before being issued, whether caused by negligence or otherwise, or for any losses, however caused, or sustained by any person or entity. Descriptions of, or references or access to, other publications within this publication do not imply endorsement of them. TAXAND MALAYSIA SDN BHD ( X) Suite 13A.05, Level 13A, Wisma Goldhill, 67 Jalan Raja Chulan, Kuala Lumpur, Malaysia T F E info@taxand.com.my 14