Update 15/07/2015 Following meetings between MIPA representatives and Customs on 29 th May 2015 and 10 th July 2015, the details have been updated.

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1 MIPA s Opinion on GST for IP agents (last updated 16/12/2015) The Malaysian Intellectual Property Association (MIPA) is the national society representing the views of IP agents, IP owners and others with an interest in IP. IP agents provide professional services relating to intellectual property, and include patent agents, trade mark agents, and industrial design agents. MIPA received several requests from members about the effect of the Goods and Service Tax (GST) when it came into force on 1 st April 2015, and more specifically on which aspects should GST be charged to their clients. As MIPA was concerned that conflicting advice is being given by GST agents and Customs officers we have reviewed the following documents and drawn our own conclusions accordingly: GST Act 2014 (published 19 th June 2014) GST (Zero-Rated Supply) Order 2014 (13 th October 2014) Customs Guide on Legal Practitioners (3 rd January 2015) Customs General Guide (as at 27 October 2013) Customs Guide on Supply (as at 25 October 2013) Customs Guide on Export (as at 4 th November 2013) Customs Guide on Professional Services (as at 14 th November 2014) Customs Guide on Agents (as at 23 rd January 2015) Customs Special Rules (Last Updated 11 th November 2013) Director General s Decisions to date (Panel Decisions up to 6/2015) Interpretation Acts 1948 and 1967 Relevant extracts therefrom are included in the analysis. Our summary and analysis were sent to Customs for approval, but as there was no response a consultation with around 70 representatives from the IP industry where the analysis was discussed, MIPA endorses the consensus view stated below, unless or until Customs directs otherwise. Update 15/07/2015 Following meetings between MIPA representatives and Customs on 29 th May 2015 and 10 th July 2015, the details have been updated. The main differences compared to the advice issued earlier are: Customs is of the view that MyIPO should be charging GST on official fees but MyIPO has appealed. Customs is of the view that agents should apply GST to MyIPO fees (regardless of whether or not MyIPO charges GST). Customs have confirmed that exported services are zero-rated. We are seeking written confirmation from Customs accordingly. Update 13/12/2015 MIPA received written confirmation from Customs by fax dated 7 th Dec 2015 replying as follows: MyIPO s official fees are not considered to be disbursements, based on DG decision amendment dated 28/10/2015. Therefore GST should be applied thereto for local clients. Exported services are zero-rated Important The update of 13/12/2015 includes two views which are opposite to the current industry consensus view. It should be noted that the amendment dated 28/10/2015 has retrospective effect dating back to 30/04/2015. However, the amendment still does not set out Customs position clearly, and if anything, is opposite to Customs view. In addition, it would be very difficult to collect GST from clients retrospectively, and indeed this is unfair given that (a) the view from Customs is opposite to the logical opinion based on the Act and written information to date; and (b) the aforementioned amendment was certainly not available from Customs website on the date indicated (a printout in November shows no amendment). 1

2 Nevertheless, the confirmation of 07/12/2015 provides written confirmation of Custom s view, and therefore the changes should be implemented as soon as possible. Given the date of the DG decision amendment, it is felt that this cannot be delayed until February for example. It is therefore proposed that the industry consensus viewpoint be amended (as set out in the summary table below) with effect from 1 st January 2016 In the meantime MIPA will write another letter to Customs explaining the difficulty in collecting GST for MyIPO fees, and that given the refund due on over-collection of GST on exported services would far outweigh the non-collection in respect of MyIPO fees, it would be preferable to make the effective change date 1 st January 2016 so that neither the collection nor the refund would be required. In addition we will request clarification on the outstanding points. Executive Summary The consensus view arising from the industry discussion, subsequently supplemented by Customs views, is as follows: GST is exempted for a foreign associates services (imported services) except for when the corresponding IP application is Malaysian (and therefore consumed in Malaysia) or when such fees are not listed separately (without profit element) on an invoice to a client. GST will otherwise be applicable (standard-rated at 6%) to local agent s professional service fees and expenses. The majority of the industry were of the view that GST is applicable (standard-rated at 6%) for a local agent s professional service fees/expenses to foreign clients (also referred to as exported services). However, MIPA sought advice from Customs on this matter as it falls within a grey area and there is a strong contention that GST for an agent s exported services should be zero-rated. Update: Customs has agreed that exported services are zero-rated. MyIPO has verbally informed us that GST is not applicable to their fees, presumably because government official fees are out-of-scope. Update: Customs is of the view that MyIPO should be charging GST on official fees. However, MyIPO has appealed against this view and it may be several months or longer before a decision is issued. Nevertheless, Customs is of the view that agents should apply GST to MyIPO fees (regardless of whether or not MyIPO charges GST) we believe this is just for local clients, as they would be zero-rated for foreign clients (considered to be exported service). Some other points raised: If an IP agent receives a Malaysian bill [e.g. RM100 + RM6 GST], which is to be subsequently invoiced to a client, GST is applicable to the net amount (without GST) [i.e. RM100] not the gross amount (with GST) [i.e. 106] if applicable, to avoid double taxation to the client. Invoices must use prevailing exchange rates when converting to different currencies. Therefore with regard to a foreign associate s fee on an invoice to a local client, if this is marked up when converted to a different currency (e.g. by using a more favourable exchange rate to compensate for potential exchange rate fluctuations) the difference is subject to GST. Update: There was some debate by Customs as to whether this was correct, as some officers felt that if the Principal invoice was zero-rated, the uplift would also be zerorated. This was not answered in their response of 7/12/15 so we will seek further clarification. A tax invoice must be issued within 21 days of the service (to avoid criminal liability).this is a problem as for a foreign IP application, the associate s bill may not arrive for several months after the application is filed. However, the time of supply is when the services are completed, so we are of the view that the 21 day period does not start until the reporting letter is issued to the client. Update: Amendment to DG s Decision 4/2015 dated 10 th July 2015 amends DG s Decision 3/2015 dated 14 th April 2015 such that the tax invoice must be issued within 30 days of payment. 2

3 Detailed Analysis In the examples below we refer to patent applications filed by patent agents, but the same reasoning would apply to other forms of intellectual property and respective agents (i.e. trade marks and industrial designs) mutatis mutandis. The main situations that a patent agent faces are: 1. Malaysian client filing Malaysian patent application 2. Malaysian client filing foreign patent application 3. Foreign client filing Malaysian patent application 4. Foreign client filing foreign patent application. It should be noted that our services relate to intellectual property which is intangible, and in each case there may be different types of fees, i.e. a. official/government fees, b. local Malaysian professional fees/expenses c. foreign agent professional fees/expenses Each situation has been analysed further below, stating the legal basis and including the relevant extracts from the documents. For the avoidance of doubt it should be noted that the Customs Guide on Professional Services does not appear to be relevant to the services of patent agents, as paragraph 1 of this document indicates that they relate to specific sectors only i.e. employment, engineering, architect and surveying services. We also do not believe that the any of the Director General s Decisions to date relate specifically to such services either. 3

4 Summary table for the different situations mentioned, showing classification of GST as either Out of Scope (no GST applicable), exempt (no GST applicable), zero-rated (GST applicable at 0%), or standard-rated (GST applicable at 6%) Key changes compared to the previous industry consensus view are highlighted in yellow (a) Official / government (b) local professional fees / (c) foreign agent professional fees expenses fees / expenses (1) e.g. MyIPO filing fees e.g. local agent service fee for e.g. foreign drafting fee MY client No GST filing Standard-rated GST (6%) filing (Out of Scope) Standard-rated GST (6%) MY application Update: [Tax invoice] Standard-rated GST (6%) wef 1/1/16 (2) e.g. USPTO fees e.g. local agent service fee for e.g. US agent service fee MY client No GST filing No GST filing (exempt) Standard-rated GST (6%) (exempt) foreign application [imported services] [imported services] [Tax invoice] (3) e.g. MyIPO filing fees e.g. local agent service fee for e.g. foreign agent translation fees foreign client No GST filing No GST filing (Out of Scope) Standard-rated GST (6%) (Out of Scope) MY application Update: [exported services] Update: [Tax invoice (Normal Zero-rated (0%) Update: (exempt) invoice)*] [Exported service] Zero-rated (0%) [imported services] [Update: Normal wef 1/1/16 invoice] (4) e.g. USPTO fees e.g. MY agent handling fee e.g. US agent service fee foreign client No GST Zero-rated GST (0%) No GST filing (Out of Scope) (Out of Scope) foreign application Update: Update: [Normal invoice] Zero-rated (0%) Zero-rated (0%) [Exported service] [Exported service] 4

5 1. If a Malaysian client files a Malaysian application they will incur local official/government fees (1a), local professional fees/expenses (1a) and possibly foreign agent professional fees/expenses (1c) (e.g. a foreign draftsman is hired to write a patent application). We believe that when we invoice the client, GST will not be applicable to the local official/government fees (1a) as we have been informed verbally by MyIPO that they do not intend to charge GST thereon, but GST will be applicable to local professional fees/expenses (1b) and the foreign agent professional fees/expenses (1c). According to Customs Guide on Supply, paragraph 29 indicates that the government fees from MyIPO will be Out-of-Scope. Update: Customs takes the view that s64(1)(b) should be read conjunctively i.e. nonapplication of GST is only in relation to a statutory body that performs both regulatory and enforcement functions, and only in relation to those functions. However, continuing this logic would mean that the function would also have to be conjunctive for non-applicability i.e. the regulation and enforcement function would have to be performed simultaneously, which does not make sense (and we are not aware of any body which sets regulations and enforces them at the same time) Therefore its regulatory and enforcement functions in s64(1)(b) should be read as an abbreviation of its regulatory functions and its enforcement functions which would allow the respective functions to be treated separately i.e. non-conjunctively. The use of the plural for functions seems to suggest that this meaning was intended. 5

6 It should be noted that there are several and s in the same section which would not make sense if read conjunctively e.g. Federal Government and State Governments. local authority and statutory body - therefore regulatory and enforcement must also be read nonconjunctively for consistency. It is irrelevant that IP registration is a choice by the applicant. In any case registration of IP is a prerequisite for enforcement so it is not a choice in that sense. MyIPO does actually have the power of enforcement e.g. under section 68 of the Patents Act, which can be in relation to any patent application. It should also be noted that the MyIPO official fees are set by statute (effectively determined by the government), rather than being amendable at any particular time. As a result we believe that MyIPO should not charge GST on their official fees. Nevertheless, Customs is adamant that MyIPO should charge GST, their conjunctive interpretation being based on the original intentions of the Act. MyIPO has appealed against this view but it is likely to be several months or more before a conclusive decision is reached. In any case Customs is of the view that agents should apply GST to MyIPO s official fees based on s.65(3) of the GST Act (below) and the DG s Decision No. 5 of 2015 issued on 30 tth April

7 DG s Decision 5/2015 (30/04/2015) 1) Recovery of expenses may be treated as disbursement or reimbursement and this will depend on whether the expenses are incurred by a principal or an agent acting on behalf of a client. 2) GST treatment on disbursement and reimbursement are as follows: Disbursement Not a supply Not entitled for input tax claim Reimbursement Is a supply Entitled for input tax claim 3) In general, the criteria for disbursement and reimbursement for GST purposes are as follows: Disbursement Incur expenses as an agent acting on behalf of the client. YES agent acts on behalf of a client The client is the recipient of the supply (invoice is in the client s name). NO MyIPO receipt is in agent s name rather than the client they act for The client is the person responsible to pay for the supply. NO agent acting on behalf of client (principal) is person responsible for paying supply The payment is authorised by the client. YES agent acts on behalf of a client The client knew that the supply is made by a third party. YES agent acts on behalf of a client The exact amount is claimed from the client and the agent has no right to alter or add on the value of the supply. YES on basis that agent shows exact official fees on invoice to client The payment is clearly an additional to the supply made to the client Reimbursement Incur expenses as a principal. The client is not the recipient of the supply (invoice is in the principal s name). NO MyIPO receipt is in agent s name (the principal is the end client) The principal is the person responsible to pay for the supply NO agent acting on behalf of client (principal) is person responsible for paying supply The payment is not authorised by the client. The client has no knowledge that the supply is made by a third party. The principal has the right to alter or add on the value of the supply The payment is for the supply made to the client YES on basis that agent shows official fees separately on invoice to client Initially MIPA was of the opinion that agents did not have to apply GST as they fell under s65(2) and out of the 7 points above, 5 indicate that MyIPO s fees are disbursements i.e. agents should not add GST thereto. However there are some discrepancies. An agent s services do not seem to fall into either category for the second and third points. In addition it is not clear what document functions as the invoice under the second point Is it the form sent to MyIPO by the agent? Or the receipt issued by MyIPO? It was noted that if MYIPO could amend the format of their receipts to include the Applicant s name (i.e. the client), then this would change point 2 to a disbursement under the above criteria. Note that this will have the most effect on Agents who are not GST registered as they will be charged GST but will not be able to pass it on to their client. Agents who have the same name as their firm may overcome point 2 but not necessarily point 3 of table above, so MyIPO fees would probably still be reimbursements. However, in the meeting with Customs they indicated that all of the criteria have to be satisfied for the fees to be classified as disbursements, but as this was not clear from the Act 7

8 or the DG decision, MIPA requested clarification thereof, and that the change would be applicable as of the date of the clarification, not retrospective. In light of Customs written response dated 07/12/2015, they have referred to an Amendment dated 28/10/2015 to DG decision 5/2015 (dated 30/04/2015) i.e. the table above, so that it now reads: (wef 28/10/2015) (3) In general, to determine whether it is a disbursement and reimbursement for GST purposes, registered person must fulfilled all the following criteria. However, this amendment STILL does not clarify the position if you fulfil some criteria of a disbursement, and others for a reimbursement. MIPA is of the view that logically the majority should therefore determine the position (which would make MyIPO fees disbursements), but Customs is of the view that all criteria must be fulfilled to be a disbursement (which would make MyIPO fees reimbursements). As Customs have indicated that this is a clarification, it is unfortunately effective as of 30 th April This would mean that agents would have to collect GST on MyIPO sfees from this date. However MIPA is of the view that this is unfair because in light of the logical opinion based on the Act and written information to date, it represents a reversal, not a clarification. In addition it is clear that this amendment was not published on the date listed thereon, as MIPA has a printout from Customs website dated 02/11/2015 which indicates No Amendment. Nevertheless, since Customs has made their view clear in the written response, and they no doubt believe it is effective from 30 th October 2015 if not 30 th April 2015, it is proposed that the industry charges GST on MyIPO fees with effect from 1 st January 2016, and we request that this is the effective date in light of the change so that GST does not have to be retrospectively collected. The basis for applying GST to the foreign fees is as follows (emphasis added): Section 2(1) of the GST Act states imported services means any services by a supplier who belongs in a country other than Malaysia or who carries on business outside Malaysia, to a recipient who belongs in Malaysia, and the services are consumed in Malaysia Section 13(1) of the GST Act indicates that imported services are a taxable supply Therefore in the example of a foreign drafting service, as the application is Malaysian it is a service which is consumed in Malaysia, and accordingly GST applies thereto. This is also in line with paragraphs of Customs General Guide to GST. 8

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10 2. If a Malaysian client files a foreign application they will incur local professional fees/expenses (2b) and foreign agent professional fees/expenses (2c) (the latter may include foreign official/government fees (2a). We believe that when we invoice the client, GST will be applicable to the local fees (2b) but not to the foreign fees (2c/2a). The basis for not applying GST to the foreign fees is as follows (emphasis added): Section 9(1)(a) of the GST Act states that tax should be charged on any supply of goods or services in Malaysia Section 12(4)(b) of the GST Act states that a supply of services shall be deemed as made in another country if the supplier belongs in the other country Section 18(1) of the GST Act states that an exempt supply is a supply of goods or services which shall not be subject to the imposition of tax under section 9 10

11 Therefore as the supply of services is not in Malaysia pursuant to section 12 as required by section 9, the supply is exempt according to section 18 and accordingly GST is not applicable to the foreign fees. This is in line with paragraph 19 of Customs Guide on Legal Practitioners (i.e. the imported service is an exempt disbursement), together with A27, and A30. 11

12 However we are aware that some agents are being informed that such foreign fees are not exempt, which seems to be contrary to the Act and the Guide. One possible explanation for this discrepancy is because paragraphs 96 of Customs General Guide to GST indicates that the recipient of the imported service shall pay GST if the supply is for business purposes and consumed in Malaysia. However, while we agree that such supply is for business purposes, we disagree that the supply is consumed in Malaysia. Intellectual Property Rights are national rights. They can only be utilised in their country of filing. If for example a Malaysian party wishes to sue a US party for patent infringement, a US patent is required, and similarly the US patent would have no effect outside of the US. As stated in paragraph 94 of the same document, consumed in Malaysia; In relation to imported service means any service which is used, utilised or enjoyed in Malaysia. By definition a foreign registered IP right cannot fulfil this requirement. 12

13 Another possible explanation is that the IP practitioner is considered to be the supplier of the services rather than the foreign agent, pursuant to Section 13(1) of the GST Act. However, this point is clarified in Section 65(2) of the GST Act (and the Special Rules section of gst.customs.gov.my wherein the IP practitioner is classified as an Agent who is acting on behalf of the Principal (i.e. the client), such that although the foreign agent provides services to the Principal via the Agent, the supply shall be deemed to be made to the Principal, not the Agent. Special Rules Last Updated : 11/11/ :48 Agents Supply made by or to an agent acting on behalf of a principal shall be deemed to be made by the principal. The principal will have to account for GST on the supplies, whilst the agent needs to account for GST on his agent's fees or commission. Supply made through an agent acting in his own name, the supply shall be treated as a supply made by the agent himself and need to account for GST on the supplies. If an agent acts on behalf of an overseas principal (non-resident), the supply shall be deemed to be made by the agent. The agent is required to register an account for GST separately in the name of non-resident. When goods are imported and supplied by a GST registered agent on behalf of a non-taxable person, the goods shall be deemed to be imported and supplied by the agent. 13

14 Therefore as the supply of services is outside of Malaysia (deemed to be from the foreign associate to the principal) it is exempt from GST. It is noted that this example (i.e. a foreign service supplier providing services to a principal via an agent) is not catered for in Customs Guide on Agents. It is important to note that this assumes that the invoice to the client lists the foreign professional fees/expenses separately from the local professional fees/expenses and the charge to the client is the same as what has been billed to the local agent. If the invoice to the client does not separate out foreign professional fees/expenses from local ones, or otherwise has an element of profit, then Section 65(3) of the GST Act would apply instead and the GST would be applicable to these fees. In the industry consultation the viewpoint that imported services are GST-exempt (when listed separately) was almost unanimously agreed. 14

15 3. If a foreign client files a Malaysian application they will incur local official/government fees (3a), local professional fees/expenses (3b) and possibly foreign agent professional fees/expenses (3c) (e.g. a foreign draftsman is hired to deal with office actions). We believe that when we invoice the client, GST will not be applicable to the local official/government fees (3a) as we have been informed verbally by MyIPO that they do not intend to charge GST thereon, nor the foreign professional fees/expenses (3c) as these are a zero-rated supply. Update: Customs takes the view that s64(1)(b) should be read conjunctively and therefore MyIPO fees should be standard-rated. However, as the invoice is sent to a foreign client (and the service is provided by an agent pursuant to s65(3)), it is considered to be an exported service and therefore zero-rated (see below) However, GST may be applicable to the local professional fees/expenses (3b). Section 17 of the GST Act indicates that no tax shall be charged on a zero-rated supply, which may be determined by the Minister and published in the Gazette. Section 13(a) of Schedule 2 of the GST Zero-Rated Supply Order 2014 indicates that services of lawyers and other similar consultancy services which are supplied under a contract with and directly benefit a person wholly in his business capacity and who in that capacity belongs in a country other than Malaysia are zero-rated. 15

16 Agent services, being consultancy services similar to lawyers, are therefore zero-rated when provided to a foreign company (whereby a contract is formed when instructed on the basis that there will be a charge for acting on such instructions pursuant to Section 26 of the Contracts Act) and accordingly no GST is chargeable thereon. 16

17 This is in line with paragraph 8 of Customs Guide on Export dated 4 November 2013, paragraph 105 of Customs General Guide to GST dated 27 October 2013 and Q1/A1 of Customs Guide on Legal Practitioners dated 3 rd Jan ). 17

18 However we are aware that some agents are being informed that such exported services are not zero-rated, which seems to be contrary to the Act and the Guides. This may depend on if an intangible IP right is classified as goods according to the GST Act, as if this is the case, the exported services may not be considered to be zero-rated. Note that there is a further wrinkle in that when an IP application is filed (submitted), if they are classified as goods, they are not in Malaysia at the time the services are performed (as required by Section 13(a)(ii) of Schedule 2 of the GST Zero-Rated Supply Order 2014), as they are actually created by the service - this suggests that in any case the initial submission would still be zero-rated but subsequent actions may not be. Also consider a trade mark search if the search is negative it appears GST would be zero-rated, whereas if results are returned GST would be applicable. According to Section 2(1) of the GST Act, goods are any form of movable or immovable property, and paragraphs of the General Guide seem to indicate that IP falls within this definition (presumably as movable property, since immovable property tends to refer to buildings etc): However, there are two issues with this firstly the word also in the second sentence of paragraph 95 seems to suggest that the subsequent includes is a typographical error and 18

19 should actually be excludes as per the previous sentence, and secondly this paragraph relates to imported services rather than exported services. Therefore it may be that IP (which is intangible property) is neither movable or immovable property and is therefore not within the definition of goods under the GST Act. It is noted that there appears to be no Tariff Code for any of the IP rights (at tariff.customs.gov.my). However Section 3 of the Interpretation Acts 1948 and 1967 indicates that all property which is not immovable is movable i.e. it is exhaustive, and as IP rights are not damaged when they are transferred, they are considered to be movable property, and therefore apparently within the definition of goods for the purpose of the GST Act. As such, GST should probably be applied to local professional fees/expenses (3b), with the possible exception of when the IP rights are created by the local agent s service (or otherwise do not exist in Malaysia) at the time the services are performed. Nevertheless it is noted that Section 12(b) and 13(b) of Schedule 2 of the GST Zero-Rated Supply Order 2014 separate out land and capital market products from goods. Since the general definition of goods in Section 2(1) of the GST Act already includes land which is immovable property, there was no need to use the term land UNLESS the meaning of goods in the GST Zero-Rated Supply Order has changed and is different from the general definition in the GST Act because it relates to exceptions and not the general position. Therefore if we read land and goods as ejusdem generis GST Zero-Rated Supply Order then it relates to tangible and physical property because land and goods seem to now be given their natural and ordinary meaning, and in the natural and ordinary meaning IP rights are not goods as they are intangible. As such there is a strong contention that IP rights are not goods within the meaning of the Act for the purposes of the GST Zero-Rated Supply Order and accordingly are zero-rated. This would then be the same as how GST operates in Singapore and VAT in the UK in these two countries the tax is not applicable to foreign clients. It will be appreciated that there is considerable uncertainty over this point. However, based on the industry consultation it appears that around 80-90% of IP agents are intending to charge GST on exported services (as they would with service tax), unless or until advised by Customs otherwise. In the circumstances, we intend to seek clarification from Customs by requesting an advance ruling. Update: Customs was of the opinion that s12(b)(ii) applies to IP services, rather than s13(a)(ii), and that the goods referred to in s12(b)(ii) did not refer to IP rights or IP services at all.- In other words the exclusion to the zero-rated order only applied to physical goods, and not intangible IP rights. This means that by default, agents should not apply GST to exported services. This outcome is the same as the UK and other developed countries. 19

20 It is nonetheless noted that IP rights do often relate to goods. However, this is not a direct relationship as required by the Act, and indeed when an agent applies for a patent, trade mark or design, they have no idea if these rights actually relate to any physical goods. Thus the agent s services are not supplied directly in connection with goods in Malaysia as they are merely supplying the service of registering intangible IP rights, which at closest have an indirect connection to goods, but more often than not have no connection to goods. Indeed the IP Acts can be used to illustrate what is meant by directly. For example in the Patents Act a product is an infringement of a process claim if it is made directly by that process. This means that for the product to infringe it must have been made by the same steps as the claimed process (as affirmed by Sanofi-Aventis (Malaysia) Sdn Bhd & Anor v. Fresenius Kabi (Malaysia) Sdn Bhd & Anor, [2011] 1 LNS 610). By analogy, for this caveat to apply to an IP agent s services, the physical goods would have to be a result of the agent s services, and this is simply not the case - an agent supply does not supply services directly in connection with physical products and has no knowledge of the same. In addition, the fact that they would have to ask the applicant what physical goods might be sold in connection with their IP rights further proves that there is only an indirect connection thereto. Reference is also made to the Inland Revenue Authority of Singapore s e-tax Guide on GST: Clarification on Directly in Connection With and Directly Benefit published on 31 March The guide states that The expression in connection with suggests that there is a relationship between two subject matters. The adverb directly is added to emphasize that there should be a clear and direct nexus between the two subject matters that makes the relationship a sufficiently close one. Situations where service is considered to be directly in connection with goods include: i. The supply involves physical work done on the goods in a way that changes or affects the goods. (e.g. installation, alteration, restoration or modification of goods) ii. The supply involves physical contact or interaction with the goods but does not change the goods physically (e.g. warehousing or storage services for goods) iii. The supply establishes the physical attributes (such as quantity, size, or value) of the goods (e.g. provision of testing and certification services for water pipes to ensure safety standards of the goods) iv. The supply affects (or its purpose is to affect) or protects the nature or value (including indemnity against loss) of goods (e.g. the service provided by the insurance company to a company taking up fire insurance for their building in case of a fire protects the value of the building) v. The supply affects, or proposes to affect, the ownership of the goods including any interest in or right over goods or land. (e.g. auctioning services for good) Therefore, it can be inferred that an agent applying for a patent, trade mark or design does not have direct connection with goods as they do not apply to any of the above situations. The Guide also states situations in which a supply is not considered to be "directly in connection with" goods: i. The supply of services does not relate to any specific goods at all (e.g. debt recovery services, accounting and auditing services, market research, and marketing services where activities relate only to the raising of awareness of a particular brand or creating goodwill for the brand. Such activities include publicity campaigns, managing public relations, media releases and advertisements to promote a particular brand name. It is important that in the provision of service, no specific goods or land be identified.) ii. There are no identifiable goods or land for which the services are supplied. (e.g. advisory services on land prices or property markets in general and no specific land or property is identified) iii. There are identifiable goods or land but the services do not fall within any of the situations (i) to (v) described in the above paragraph regarding situations where service is considered to be directly in connection with goods. 20

21 Based on the above situations above, it can be inferred that an agent applying for a patent, trade mark or design does not have direct connection with goods as the supply of service does not relate to any specific goods at all. Several decided case have also discussed the phrase directly in connection with. In Wilson & Horton(1994) 16 NZTC 11,221 (HC) (appealed as (1995) 17 NZTC 12,325 (CA)), the issue was whether the supply of advertising space in a newspaper was directly in connection with the goods advertised. In the High Court, Hillyer J considered that the goods that were the subject of the advertising were at least one step removed from the services supplied by the newspaper proprietor (at 11,224). Therefore, the advertising services were not supplied directly in connection with land or any moveable personal property situated in New Zealand. Hillyer J saw a distinction between the painting of a vessel (which would be directly connected with the vessel) and services supplied to the passengers or crew of the vessel (which would not be directly connected with the vessel). In the present matter, the specific goods applying the patent, trade mark or design is at least one step removed from the services supplied by an agent applying for a patent, trade mark or design. The service provided by the agent is to the owners of the intellectual property and no connection with the specific goods. Specifically, the Canadian Revenue Agency s Goods and Services Tax (GST) and the Harmonized Sales Tax (HST) Memoranda Series dated June 1998 specifically states in Schedule VI, Part V, Section 10 of to the Excise Tax Act that a supply of an invention, patent, trade secret, trade-mark, trade-name, copyright, industrial design or other intellectual property, or any right, licence or privilege to use any such intellectual property made to a nonresident recipient who is not registered at the time the supply is made is zero-rated. Hence, Customs should follow taxation laws that have been well established and treat exports of intellectual property supplies as zero-rated. Moreover, even if Customs had a different opinion it would be almost impossible to determine if physical goods were connected to IP rights. Consider a Malaysian software patent which can be downloaded from a US website. Is it a product available in Malaysia? Does the software fall within the scope of the patent claims? What happens if the scope of the claims change during prosecution of the patent application would the applicant get a GST refund? What if a court invalidates the patent? This is just one relatively simple example. It should be noted that the responsibility for determining the scope ultimately lies with a court and there are currently more than 850,000 IP rights in Malaysia, increasing by more than 40,000 each year we do not think it would be practical or efficient for Customs to ask the courts to determine the scope of every single one. In summary we believe it is clear that an agent s exported services are not supplied directly in connection with (physical) goods (in Malaysia or elsewhere) and therefore these services are zero-rated. Customs has agreed that the agent s service relates to the IP certificate, not the goods, and therefore there is no direct relationship such that exported services are zero-rated, as per their written confirmation of 07/12/2015. As for foreign professional fees/expenses (3c) if applicable, section 65(2) of the GST Act (and indicates that the IP practitioner is classified as an Agent who is acting on behalf of the Principal (i.e. the client), such that although the foreign agent provides services to the Principal via the Agent, the supply shall be deemed to be made to the Principal, not the Agent. 21

22 Therefore as the supply of services is outside of Malaysia (deemed to be from the foreign associate to the foreign client) it is either exempt or more likely out of scope from GST. In either case, no GST is charged. Update: Customs has confirmed such fees are exempt 22

23 4. If a foreign client asks a Malaysian agent to file a foreign application they may incur local professional fees/expenses (4b) and foreign agent professional fees/expenses (4c) (the latter may include foreign official/government fees (4a). We believe that when we invoice the client, GST will be not be applicable to the foreign fees (4a/4c) for the same reasons as set out in point 2 above, neither will it be applicable to the local fees (4b) for the reasons set out in point 3. Section 17 of the GST Act indicates that no tax shall be charged on a zero-rated supply, which may be determined by the Minister and published in the Gazette. Section 13(a) of Schedule 2 of the GST Zero-Rated Supply Order 2014 indicates that services of lawyers and other similar consultancy services which are supplied under a contract with and directly benefit a person wholly in his business capacity and who in that capacity belongs in a country other than Malaysia are zero-rated. Note that for the local professional fees/expenses (4b) the answer is somewhat clearer as in this case if IP falls within the definition of goods, they are certainly not in Malaysia at the time the services are performed as they are foreign rights and are only applicable to the foreign country in question. 23

24 It is also possible that rather than being the foreign agent professional fees/expenses 4(c) are actually Out of Scope rather than being exempt, as per Customs Guide on Supply, paragraph 29, since the supplier is not in Malaysia and the services are not being imported as the recipient is also not in Malaysia. However, in any case, whether the service is exempt, zero-rated or Out of Scope, GST is not chargeable. Update: Customs previously agreed that these fees were Out of Scope. However it appears that based on their letter of 07/12/2015, Customs now considered these to be exported services instead and therefore zero-rated. 24

25 Misc Uplifts and Forex gains According to paragraph 5 of Schedule 3 of the GST Act, invoices must use prevailing exchange rates when converting to different currencies. This is further clarified by recently published DG decision 2015/1 (amended) 2 Foreign Exchange Can businesses use any exchange rate for transaction involving foreign currency? Item 6 is amended by substituting with a new item(iii) as follows (i) Paragraph 5 of 3rd Schedule of the GSTA requires business to convert the foreign exchange into ringgit (a) In the case of a supply including imported services, at the selling rate of exchange prevailing in Malaysia at the time the supply takes place; or (b) In the case of importation of goods, at the rate of exchange determined by DG at the time applicable for the calculation of customs duty or excise duty and valuation. Therefore, for imported goods, irrespective whether the importer is GST registered or not, he must use the exchange rate determined by the DG; (ii) In the case of local supply including imported services or export of goods, where the supplier and the buyer are both making wholly taxable supplies and both are businesses registered for GST (a) the businesses may use any of the following exchange rates published by (aa) Bank Negara Malaysia (BNM) ; (bb) any commercial banks in Malaysia or any other banks registered under BNM; (cc) news agencies e.g. Bloomberg, Reuters, Oanda, ASWJ, XE, Strikeiron; (dd) any foreign central banks e.g. European Central Bank and Federal Reserve Bank of New York, Korean Exchange Bank. (b) The exchange rate from any of the published rates in sub paragraph (ii) (a) above must be (aa) the prevailing exchange rate (selling rate) corresponding to the time of supply; (bb) the monthly average rate of the previous month corresponding to the time of supply; (cc) the month-end average rate corresponding to the time of supply; (dd) the month end selling rate corresponding to the time of supply; (ee) the opening selling rate of the month corresponding to the time of supply; (ff) the average rate of the highest rate plus (+) the lowest rate of the previous month corresponding to the time of supply; or (gg) the hedged exchange rate with banks corresponding to the time of supply; (c) The exchange rate as in sub paragraph (ii) (a) and (b) must be used consistently for internal business reporting and accounting purposes and used for at least one year from the end of the accounting period in which the method was first used. (d) If a GST registered person wants to use an exchange rate other than the rates as in sub paragraph (ii) (a) and (b) above, he must apply in writing to the Director General for his approval. With regard to foreign associate fees (imported services) charged to a local client, and MyIPO fees (out of scope) charged to a foreign client, if either of these are marked up when converted to a different currency (e.g. by using a more favourable exchange rate to compensate for potential exchange rate fluctuations) the difference is subject to GST. For example agent bill = USD1,000 billed to client at RM4,000 but actual exchange rate = 3.5RM:USD, therefore the difference of RM500 is subject to GST. 25

26 Update: Customs thinks that uplifts may follow the principal amount i.e. if exempt the uplift will also be exempt. We do not think this is correct as it seems to go against the spirit of the DG decision. However, they did not answer this question in their reply of 07/12/2015 so MIPA will seek further clarification. 26