EY Tax Alert. Malaysian developments. Vol Issue no May Public Ruling No. 2/2018 Tax Incentive for Returning Expert Programme

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1 EY Tax Alert Vol Issue no May 2018 Malaysian developments Public Ruling No. 2/2018 Tax Incentive for Returning Expert Programme Remission of tax and stamp duty Malaysian developments Public Ruling No. 2/2018 Tax Incentive for Returning Expert Programme Overseas developments Indonesia releases new regulations on tax holidays OECD releases Singapore s peer review report on implementation of Action 14 minimum standard The Inland Revenue Board (IRB) has issued Public Ruling (PR) No. 2/2018: Tax Incentive for Returning Expert Programme, dated 2 May 2018, to provide guidance on the tax incentive granted for the Returning Expert Programme (REP). This new 15-page PR comprises the following 11 paragraphs and sets out 19 examples: 1.0 Objective 2.0 Relevant provisions of the law 3.0 Interpretation 4.0 Returning Expert Programme 5.0 Eligibility requirements for incentive application 6.0 Tax incentives 7.0 Tax computation 8.0 Income tax return form for resident expert worker 9.0 Opt out from REP incentives 10.0 Termination of employment in Malaysia 11.0 Disclaimer Broadly, the PR explains the purpose of the introduction of the REP and the conditions for an individual to be eligible for the incentive. The additional criteria for an individual working overseas and returning to work in Malaysia with a company under the same group are also outlined therein. EY Tax Alert Vol. 21 Issue no May

2 The PR clarifies that the areas of expertise to be considered for the REP are the following fields / industries / areas recognised under the National Key Economic Areas (NKEAs): 1. Oil, Gas and Energy 2. Trading services 3. Financial services 4. Health care 5. Communication and Infrastructure 6. Electronics and Electrical 7. Education 8. Wholesale and Retailing 9. Tourism 10.Agriculture 11.Palm oil and Rubber 12.Greater Kuala Lumpur / Klang Valley The PR also explains the mechanism of the tax incentive, and provides guidance and examples for various scenarios, including the following: When the flat personal income tax rate of 15% under the REP incentive is more advantageous than the scale rates and vice versa; Where the individual derives more than one source of employment income; Where there is a change in employment by the individual during the incentive period; Where the individual has other sources of income other than employment income; Where the individual opts for a joint assessment with his/her spouse pursuant to Section 45(2) of the Income Tax Act 1967 (ITA) The deductibility of certain expenses in ascertaining the individual s chargeable income if the individual is granted the REP tax incentive In addition, the PR provides clarification on the processes in respect of the submission of the Income Tax Return Form (ITRF) in situations where the individual enjoys the REP incentive, or alternatively, where the individual seeks to opt-out of the REP incentive. It further elaborates on the circumstances where the REP incentive is deemed invalid or expired. Remission of tax and stamp duty The Loans Guarantee (Bodies Corporate) (Remission of Tax and Stamp Duty) (No. 3) Order 2018 [P.U.(A) 112] was gazetted on 30 April The Order provides that any tax payable under the ITA and any stamp duty payable under the Stamp Act 1949 in relation to the following, shall be remitted in full: Murabahah Term Financing facility obtained or to be obtained by Perbadanan Tabung Pendidikan Tinggi Nasional amounting to RM3.5 billion; and Guarantee provided or to be provided by the Government of Malaysia in relation to the Murabahah Term Financing Overseas developments Indonesia releases new regulations on tax holidays On 29 March 2018, Indonesia s Minister of Finance (MOF) signed MOF Regulation No. 35 / PMK.010 / 2018 (PMK-35) outlining new regulations on tax holidays as an incentive for companies conducting business in Indonesia. The regulations are effective as of 4 April 2018 and are intended to be more attractive than previous regulations. Corporate taxpayers making new capital investments in pioneer industries can apply for the incentives. Under PMK-35, the definition of pioneer industry has been expanded to cover 17 sectors. The tax holidays provide more certainty as they provide for a 100% corporate tax exemption for years 5 through 20, depending on the amount of new capital investment. This Alert summarizes key aspects of PMK-35. 2

3 Detailed discussion Pioneer industries General overview A corporate taxpayer that makes a new capital investment under the pioneer industry category is eligible for a 100% tax holiday on its corporate income tax. This incentive is available for between 5 and 20 years, depending on the size of the new capital investment: PMK-35 modified the existing list and has expanded the list of pioneer industries from 8 to 17 sectors. A pioneer industry is defined as an industry that has broad connection and/or linkage, provides valueadded and high positive economic consequences to surrounding areas, introduces new technology, and provides strategic value to the national economy. The new list includes: Category New Capital Investment Tax holiday period IDR Approximate US$ equivalent I II III IV V 500 billion to less than 1 trillion 1 trillion to less than 5 trillion 5 trillion to less than 15 trillion 15 trillion to less than 30 trillion 30 trillion and greater 36 million to less than 72 million 72 million to less than 360 million 360 million to less than 1.1 billion 1.1 billion to up to less than 2.1 billion 2.1 billion and greater 5 years 7 years 10 years 15 years 20 years An additional 50% corporate income tax reduction is offered for two years following the expiration of the above tax holiday period. To qualify for the tax holidays: A taxpayer must be an Indonesian legal entity with a new investment in a pioneer industry, with a minimum capital investment of IDR500 billion (US$36 million). It must be a new incentive. The taxpayer must comply with the Indonesian thin-capitalization rules (i.e., 4:1 debt-to-equity ratio). 1. Upstream base metal industry 2. Oil and gas purification and/or refinery industry 3. Petrochemical industry, based on petroleum, natural gas or coal 4. Inorganic base chemical industry 5. Organic base chemical industry 6. Pharmaceutical raw material industry 7. Manufacturing of semiconductors and other main computer components such as semiconductor wafers, backlight for liquid crystal displays (LCDs), electrical drivers or LCDs that are integrated with the computer manufacturing industry 8. Manufacturing of main components for communications equipment such as semiconductors wafers, backlight for LCDs, electrical drivers or LCDs that are integrated with the smartphone manufacturing industry 9. Manufacturing of main components for medical equipment that is integrated with the manufacturing of irradiation, electro-medical or electrotherapy equipment 10.Manufacturing of main components for industrial engines, such as electric motors or internal combustion motors that are integrated with the engine manufacturing industry 11.Manufacturing of main components for engines, such as pistons, cylinder heads or cylinder blocks that are integrated with the vehicle manufacturing industry 12.Manufacturing of robotic components that are integrated with the engine manufacturing industry 13.Manufacturing of main components for ships that are integrated with the ship manufacturing industry 3

4 14.Manufacturing of main components for aircrafts, such as engines, propellers, rotors, or structure components that are integrated with the aircraft manufacturing industry 15.Manufacturing of main components for trains including engines or transmissions that are integrated with the train manufacturing industry 16.Power plant machinery, including the waste-toenergy plant machinery industry 17.Economic infrastructures The new list seems to indicate that the Indonesian Government wants to expand the local economy beyond mere assembly, to value-added manufacturing in many sectors. A taxpayer may still qualify for a particular incentive even if it is engaged in a pioneer industry that is not specifically listed, if approved jointly by the MOF, other relevant Ministries and the Investment Coordinating Board. Procedure for the tax holiday application A taxpayer can submit the application to the Investment Coordinating Board either at the time of the capital investment registration or within one year after the issuance of the capital investment registration. The taxpayer should receive a response from the MOF within five business days of a final decision by the Investment Coordinating Board. Tax audit and annual report requirements Under PMK-35, the tax holiday will start from the fiscal year when the taxpayer reaches the commercial operation stage (COS), i.e., the time when the taxpayer sells its product for the first time, or when the taxpayer uses its own products for further processing. Upon the taxpayer s submission of a COS request, PMK-35 requires the Indonesian Tax Authority to conduct a tax audit to determine whether the taxpayer s COS determination is appropriate. In addition, if the taxpayer fails to satisfy its commitments such as not investing the committed capital amounts or changing the actual activity from the proposed plan, or importing used (instead of new) capital goods for the investment, the Indonesian Tax Authority can recommend that the MOF terminate the tax holiday. In addition, the taxpayer is required to submit an annual report to the Indonesian Tax Authority on: (i) the capital investment realization starting from the issuance of the MOF approval for the tax holiday until the COS; and (ii) the production realization from the COS through the end of a fiscal year when the tax holiday expires. The report should be submitted within 30 days after the fiscal year-end. A taxpayer who obtains a tax holiday is not entitled to apply for another tax incentive but is allowed to apply for another incentive once the tax holiday period expires. OECD releases Singapore s peer review report on implementation of Action 14 minimum standard On 12 March 2018, the Organisation for Economic Co-operation and Development (OECD) released the third batch of peer review reports relating to the implementation of the Base Erosion and Profit Shifting (BEPS) minimum standard under Action 14 on improving tax dispute resolution mechanisms. Singapore was among the assessed jurisdictions in the third batch. Singapore requested that the OECD also provide feedback concerning her adoption of the Action 14 best practices. Therefore, in addition to the peer review report, the OECD has released an accompanying best practices report. Overall, the report concludes that Singapore meets almost all the elements of the Action 14 minimum standard. In the next stage of the peer review process, Singapore s efforts to address any shortcomings identified in the Stage 1 peer review report will be monitored. 4

5 Detailed discussion Background In October 2016, the OECD released the peer review documents (i.e., the Terms of Reference and Assessment Methodology) on Action 14 on Making Dispute Resolution Mechanisms More Effective. The Terms of Reference translated the Action 14 minimum standard into 21 elements and the best practices into 12 items. The Assessment Methodology provided procedures for undertaking a peer review and monitoring, in two stages. In Stage 1, a review is conducted on how a BEPS member implements the minimum standard based on its legal framework for Mutual Agreement Procedure (MAP) and how it applies the framework in practice. In Stage 2, a review is conducted on the measures the BEPS member takes to address any shortcomings identified in Stage 1 of the peer review. Both of these stages are desk-based and are coordinated by the Secretariat of the Forum on Tax Administration (FTA) MAP Forum. In summary, Stage 1 consists of three steps or phases: Obtaining inputs for the Stage 1 peer review Drafting and approval of a Stage 1 peer review report Publication of Stage 1 peer review reports Minimum standard peer review report The report is divided into four parts, namely: Preventing disputes Availability and access to MAP Resolution of MAP cases Implementation of MAP agreements Each part addresses a different component of the minimum standard. The report includes 21 recommendations relating to the minimum standard. In general, the performance of Singapore with regard to MAP has proven to be satisfactory in her respective reports. The report states that overall, Singapore meets almost all of the elements of the Action 14 minimum standard. Preventing disputes Singapore generally meets the Action 14 minimum standard concerning the prevention of disputes. It has an extensive tax treaty network, with 85 tax treaties in place, and has an established MAP program. Of Singapore s 85 tax treaties, 82 contain a provision equivalent to the first sentence of Article 25(3) of the OECD Model Tax Convention (OECD MTC 2015) requiring the competent authority to endeavor to resolve by mutual agreement any difficulties or doubts arising from the interpretation or application of the tax treaty. Input is provided through questionnaires completed by the assessed jurisdiction, peers (i.e., other members of the FTA MAP Forum) and taxpayers. Once the input has been gathered, the Secretariat prepares a draft Stage 1 peer review report of the assessed jurisdiction and sends it to the assessed jurisdiction for its written comments on the draft report. When a peer review report is finalised, it is sent to the FTA MAP Forum for approval and later to the OECD Committee on Fiscal Affairs for adoption and publication. With regard to the other three remaining tax treaties: Singapore recently signed the Multilateral Instrument (MLI) with the view of modifying one tax treaty that differs from the first sentence of Article 25(3) of the OECD MTC 2015 upon its entry into force. For the other two tax treaties, Singapore seeks to update them via bilateral negotiations. In addition, Singapore has implemented a bilateral Advance Pricing Arrangement (APA) program, and guidance on the program is documented in the Singapore Transfer Pricing Guidelines. In general, 5

6 the Inland Revenue of Singapore (IRAS) accepts APAs covering three to five future fiscal years, and roll-backs of bilateral APAs can be provided up to two years prior to the original APA period covered. Since 1 January 2014, four cases have been accepted for bilateral APA roll-backs in Singapore. The report recommends that, in appropriate cases, Singapore should continue to provide roll-backs of bilateral APAs. Peers also confirmed that it is possible to enter into roll-back bilateral APAs with Singapore. Availability and access to MAP The report notes that Singapore meets the Action 14 minimum standard concerning the availability and access of MAP. Singapore has provided access to MAP in all eligible cases (including transfer pricing cases, application of anti-abuse provisions, audit settlements and submission of required information) since 1 January Peers noted that they were not aware of any denial of access to MAP by Singapore in any of the eligible cases. MAP cases that required additional information were not denied access, and taxpayers were afforded opportunities to provide the missing information. In cases where a MAP request does not include sufficient information or documentation, Singapore reported that its competent authority will ask the taxpayer to submit missing information within one month after being asked to do so. Singapore will also generally accept an extension if the taxpayer requests it. Singapore s MAP guidance is publicly available on the IRAS website and reviewed on an annual basis, together with the Singapore Transfer Pricing Guidelines. The report recommends that Singapore includes the following information to improve its MAP guidance: Making MAP available in cases of (i) application of anti-abuse provisions, and (ii) bona fide foreign-initiated self-adjustments The possibility of tax collection suspension during the course of a MAP Clarification to taxpayers of the access to MAP in the case of audit settlements Singapore indicated its intentions to continuously improve the presentation of its MAP guidance. Resolution of MAP cases Singapore generally meets the Action 14 minimum standard concerning the resolution of MAP cases, with the exception of the average time required to solve cases. The Action 14 minimum standard recommends that jurisdictions aim to resolve MAP cases within an average time-frame of 24 months. Singapore s average time to resolve all MAP cases was approximately 47 months in the reporting period. Specifically, the average duration taken to resolve attribution or allocation cases was 55 months and other cases was 35 months. The report further suggests that additional resources may be necessary for Singapore to reduce the time for the resolution of MAP cases. The Singapore competent authority has cited external factors for the delay in finalizing MAP cases, including (i) not receiving sufficient information from taxpayers, (ii) unclear directions provided to taxpayers by the relevant authority, and (iii) delayed response from some treaty partners. Singapore believes that she has adequate resources to cover the MAP function. Peers noted that Singapore s competent authority attempted to resolve MAP cases within a reasonable time-frame, and no impediments leading to unnecessary delays to resolve MAPs were observed within Singapore, other than in one special case. Peers generally reported that Singapore s competent authority has adequate resources to resolve MAP cases. Singapore will work towards improving the time needed to resolve MAP cases. 6

7 Implementation of MAP agreements Singapore meets the Action 14 minimum standard concerning the implementation of MAP agreements. Singapore has a robust framework for the implementation of MAP agreements on a timely basis. Singapore reported that it will implement all MAP agreements, irrespective of whether they relate to upward or downward adjustments to taxpayers positions, on a timely basis. While there was a fouryear domestic time limit for implementing upward adjustments, this was lifted in 2017 with the passing of the Income Tax Amendment Bill. There is also no domestic time limit for implementing downward adjustments of a taxpayer s position. It was reported that Singapore informs taxpayers of any mutual agreement reached within one month of entering into the MAP. Taxpayers subsequently have one month to accept or reject the outcome of the MAP. Once taxpayers provide their approval, the IRAS will: (i) exchange confirmation letters with the foreign competent authority, (ii) provide the taxpayers with a copy of the mutual agreement, and (iii) amend the tax assessment by making relevant adjustments. The IRAS also tracks the implementation of all MAP agreements. In addition, Singapore reported that the IRAS is committed to respond to 80% of the letters, such as mutual agreements, within 15 working days. Peers generally reported that MAP agreements were implemented in Singapore on a timely basis. Best practice peer review report Each assessed jurisdiction can provide information to and request feedback from peers on how it has adopted the 12 best practices contained in the Action 14 final report. All of the jurisdictions in the third batch of the peer review requested that the OECD provide feedback concerning their adoption of the best practices contained in the Action 14 final report, including Singapore. However, for most of the best practices, the peers provided only limited input. The comments provided by peers confirm that they have a good working relationship with Singapore, with two peers commenting on the open, cooperative and productive working relationship with Singapore s competent authority. Next steps Singapore is already working to address deficiencies identified in her peer review and will now move on to Stage 2 of the process, where Singapore s efforts to address any shortcomings identified in the Stage 1 peer review report will be monitored. Under the peer review program methodology, Singapore shall submit an update report to the Forum on Tax Administration s MAP Forum within one year of the OECD Committee on Fiscal Affairs adoption of the Stage 1 peer review report. Implications In a post-beps world, where multinational enterprises (MNEs) face tremendous pressures and scrutiny from tax authorities, the release of Singapore s peer review report represents the continued recognition and importance of the need to achieve tax certainty for cross-border transactions for MNEs. While increased scrutiny is expected to significantly increase the risk of double taxation, the fact that tax authorities may be subject to review by their peers should be seen by MNEs as a positive step to best ensure access to an effective and timely mutual agreement process. Furthermore, the peer review for Singapore provides insights to taxpayers on the availability and efficacy of the MAP. With additional countries continuing to be reviewed, the OECD has made it known that taxpayer input continues to be welcomed on an ongoing basis. With stakeholder feedback in mind, businesses are encouraged to share their views with the OECD on the peer review for Singapore and any other jurisdictions, and to comment on whether the next iteration of the OECD s assessment of a tax administration s MAP performance warrants greater feedback from taxpayers as the primary source. 7

8 Feedback from the international tax community is the logical next step after peer review, which may help to further validate the current results. 8

9 Contact details Principal Tax contacts Yeo Eng Ping Amarjeet Singh Global Compliance and Reporting Simon Yeoh Julian Wong Datuk Goh Chee San (based in Sabah) Janice Wong Julie Thong Lee Li Ming (based in Johor) Liew Ai Leng People Advisory Services Tan Lay Keng Irene Ang Christopher Lim Business Tax Services Amarjeet Singh Asaithamby Perumal Farah Rosley Robert Yoon Wong Chow Yang Transaction Tax Services Yeo Eng Ping Sharon Yong International Tax Services Anil Kumar Puri Transfer Pricing Sockalingam Murugesan Vinay Nichani Hisham Halim Indirect Tax Yeoh Cheng Guan Aaron Bromley Financial Services Bernard Yap

10 Important dates 31 May th month revision of tax estimates for companies with November year-end 31 May th month revision of tax estimates for companies with August year-end 31 May 2018 Statutory deadline for filing of 2017 tax returns for companies with October year-end 15 June 2018 Due date for monthly instalments 30 June th month revision of tax estimates for companies with December year-end 30 June th month revision of tax estimates for companies with September year-end 30 June 2018 Statutory deadline for filing of 2017 tax returns for companies with November year-end EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com Ernst & Young Tax Consultants Sdn. Bhd. All Rights Reserved. APAC no ED None. This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. Publisher: Ernst & Young Tax Consultants Sdn. Bhd. Level 23A Menara Milenium Jalan Damanlela, Pusat Bandar Damansara Kuala Lumpur Tel: Fax: