EY Tax Alert. Malaysian developments. Vol Issue no September 2018

Transcription

1 EY Tax Alert Vol Issue no September 2018 Malaysian developments Case law on whether a property development constitutes a real property company pursuant to Paragraph 34A of Schedule 2 of the RPGTA Overseas developments UK Government s guidance on preparing for No Deal on Brexit outlines indirect tax implications Poland publishes legislation on Innovation Box Malaysian developments Case law on whether a property development constitutes a real property company pursuant to Paragraph 34A of Schedule 2 of the RPGTA In Ketua Pengarah Hasil Dalam Negeri v Continental Choice Sdn Bhd & Anor (2018) MSTC , the High Court (HC) overturned the decision of the Special Commissioners of Income Tax (SC) (see Tax Alert No. 23/2017) and delivered a judgment in favour of the Inland Revenue Board (IRB). The HC concurred with the SC that the HC precedent in Binastra Holdings Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri (2002) MSTC 3897 (Binastra) was correctly relied on by the SC as the decision was binding on them. The HC however stated that the Binastra judgment was not binding on another HC and so the HC could proceed to make its own decision. On that note, the HC disagreed with the SC s position in adopting a purposive interpretation of Paragraph 34A of Schedule 2 of the Real Property Gains Tax Act (RPGTA) and thus holding that a property development company would not be a real property company (RPC). The HC held that the law as laid out in Paragraph 34A must be given a strict interpretation as the words are clear and unambiguous. The HC therefore held that the shares disposed by the taxpayers were chargeable assets and the gains were subject to real property gains tax (RPGT). An overview of the case and discussion of the issues are set out below. EY Tax Alert Vol. 21 Issue no September

2 Overview The chronology of events are as follows: 7 January September 2004 Bioford Development Sdn Bhd (Bioford) was incorporated Bioford purchased property from Mishika (M) Sdn Bhd and Maharta Sdn Bhd, for a consideration of RM14.5 million. After the purchase of the property, the defined value of Bioford s real property exceeded 75% of its total tangible assets. Based on the above, the IRB found that Bioford was a real property company within the ambit of Paragraph 34A(6) of Schedule 2 of the RPGTA, commencing from the date of the said purchase of property by Bioford. 19 February June 2011 The IRB issued a Notice of Assessment to CB Ventures Sdn Bhd, stating the RPGT payable. The IRB issued a Notice of Assessment to Continental Choice Sdn Bhd, stating the RPGT payable. As the taxpayers did not agree with the assessments, they filed notices of appeal to the SC. The SC held in favour of the taxpayer. The IRB appealed the SC s decision, to the HC. The issues for the HC s determination were as follows. Whether the SC was correct in deciding that: 1. the HC decision in Binastra was still good law despite being reversed by the Court of Appeal (CA); and 2. the CA decision could not be applied in this case since there was no written judgment 18 October August 2005 The taxpayers (Continental Choice Sdn Bhd and CB Ventures Sdn Bhd) acquired 56,025 units of shares in Bioford. Continental Choice Sdn Bhd and CB Ventures Sdn Bhd disposed of their shares to Chean Ah Wah and Chean Chuan Fatt respectively. Thereafter, the taxpayers filed the relevant forms (including RPGT form, as well as supporting documents such as Sale & Purchase Agreement (property), Sale & Purchase Agreement (shares), computation and relevant bills) vide their solicitors, to err on the side of caution, despite being of the view that the gains from the sale of the shares were not subject to RPGT. Upon request by the IRB, the taxpayers also supplied additional documents, including Forms 24 and other supporting documents. The HC affirmed the SC s judgment that the HC s decision in Binastra remained good law, and a binding precedent to the SC, as the doctrine of judicial precedent only applied in circumstances where there was a written judgment produced by a higher court. In this case, the CA s judgment in Binastra was not binding on the Court, as there was no ratio decidendi or legal principles extracted from the CA s judgment. Notwithstanding the above, the HC also found that the HC s decision in Binastra was not binding on another HC of a similar jurisdiction. Therefore, the HC in this instance could proceed to make its own judgment. Whether the SC was correct in deciding that: 3. Paragraph 34A of Schedule 2 of the RPGTA must be given a purposive, rather than literal, interpretation; 4. Bioford is not a RPC within the ambit of Paragraph 34A; and 2

3 5. the gains made by the Respondents from the disposal of its shares in Bioford are not subject to RPGT The HC disagreed with the SC s position in adopting a purposive interpretation of Paragraph 34A, and was of the view that the literal approach should instead be adopted. The HC referred to the Federal Court decision in Palm Oil Research and Development Board Malaysia & Anor v. Premium Vegetable Oils Sdn Bhd [2004] 2 CLJ 265, where it was stated that The correct approach to be adopted by a court when interpreting a taxing statute is First, the words are to be given their ordinary meaning. They are not to be given some other meaning simply because their object is to frustrate legitimate tax avoidance devices. Secondly, one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption so to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.. Thirdly, the object of the construction of a statue being to ascertain the will of the legislature, it may be presumed that neither injustice nor absurdity was intended, if therefore a literal interpretation would produce such a result, and the language admits of an interpretation which would avoid it, then such an interpretation may be adopted. Fourthly, the history of an enactment and the reasons which led to its being passed may be used as an aid to its construction. In this case, the HC found that as the law set out in Paragraph 34(6) was unambiguous, the words could be given their ordinary meaning, and the test to determine whether or not Bioford was a RPC was clear. The intention of the taxpayers in acquiring the shares of Bioford and the primary business of Bioford, were not relevant considerations in determining whether Bioford was a RPC. Furthermore, no injustice or absurdities would arise from construing Paragraph 34A in its ordinary and natural meaning. In addition, in line with the fourth approach, the HC was of the view that the purposive approach (which was taken by the SC), was only to be adopted in a situation where the provision in the taxing statute does not provide plain and unambiguous language. The intention behind the introduction of a provision may be used to aid its interpretation in cases of ambiguity. However, in this case, it would not be applicable, as the test of a RPC in Paragraph 34A was so clearly worded that there was no ambiguity. In conclusion, based on the facts of the case, the HC held that Bioford was a RPC pursuant to Paragraph 34A of Schedule 2 of the RPGTA, and hence the gains from the disposal of its shares were subject to RPGT. Overseas developments UK Government s guidance on preparing for No Deal on Brexit outlines indirect tax implications On 23 August 2018, the United Kingdom (UK) Government published its first batch of technical notices setting out some of its unilateral actions and recommended steps for businesses in a No Deal scenario on Brexit. This scenario would be one where the UK leaves the European Union (EU) on 29 March 2019 without an agreed EU Withdrawal Agreement and without a framework in place for a future relationship between the UK and the EU. However, in such a scenario, the Government does expect that some agreements can still be reached with the EU given the number of interdependencies between the UK and the EU s respective contingency plans. This Alert focuses on the notices explaining how the UK Government intends to operate its customs and 3

4 value added tax (VAT) border from 29 March 2019 absent a deal. The steps announced in these notices will help reduce some friction in the event of a No Deal scenario mostly for companies that import to the UK. In particular, allowing for VAT to be dealt with in VAT returns rather than to be paid at the border will reduce cash flow impacts, particularly for smaller firms; and a selective approach to customs checks will help reduce the risk of delays and costs at the border. While helpful, these notices can only cover some of the impact businesses face in a No Deal scenario and of course, only cover the UK perspective. UK customs waving through a shipment will have limited effect if that shipment is stopped on the EU side and there are delays on that side. The Government is right to challenge the EU to reciprocate some of these arrangements to avoid the most damaging friction, not least for EU-based firms, should a deal not happen. The notices published represent about a third of the total notices the Government intends to publish by the end of September. Some of the critical issues to reaching a full agreement between the UK and the EU, such as the border between Northern Ireland and the Republic of Ireland are the subject of current negotiations and in the notices, the UK Government simply reiterates that it will be working on a solution to the Irish border issue with the EU. Customs and trade Customs function development All trade between the UK and the EU will require customs declarations as well as safety and security declarations. It is clear that businesses will need to develop and expand their customs knowledge, particularly businesses that have no experience in imports and exports outside the EU. All current trade of goods between the EU and UK will need to be classified as per the existing HM Revenue & Customs (HMRC) customs tariff. No immediate changes will be made to the existing commodity codes in use, but import licenses or supporting documentation may be required. This allows businesses confidence in the requirements that need to be met and provides the ability to evaluate their existing master data against the requirements. Businesses need to evaluate between both their customers and suppliers which Incoterms best fit for trade bearing in mind these contractual decisions will now directly impact who will act as the importer or exporter along with all the requisite administration, duty costs and compliance. The UK Government invites businesses to consider using customs special procedures which could allow reliefs of suspensions of duties for goods traded with the EU. These come with controls requirements and potential IT demands to be met that typically have three-six month lead times to be met, meaning businesses need to make those evaluations now if they want to be effective in March. Future tariff impacts The UK intends to continue offering unilateral preferences to developing countries and to transition all existing EU free trade agreements (EU FTAs). By omission this means exporters using FTAs may lose the preferential treatment. The Most Favored Nation rates will be applicable for trade between the EU and the UK, however, the UK may choose to apply new duty rates that differ to the EU. Export controls Dual use items primarily require no license to move between the UK and EU currently. If the UK leaves the EU without a deal, licenses issued in the country of export would be required for trade of these goods. Existing export licenses for dual use goods issued in the UK would no longer be valid if 4

5 exporting from an EU Member State, a new EU license would be needed and vice versa if exporting from the UK using an EU license. Other points UK excise goods moving under the Excise Movement and Control System (EMCS) will now only be allowed for domestic movements. Businesses importing from the EU will need to make use of a registered consignor to enter goods into suspension and subsequently EMCS in a no-deal scenario. For businesses producing and processing organic foods, UK businesses would only be able to export to the EU if they were certified by an organic control body recognized and approved by the EU to operate in the UK, however UK control bodies are not permitted to make these applications until the UK becomes a third country and approval can take up to nine months. The UK Government will work with the EU for a solution. The UK Government has applied to re-join the Common Transit Convention which will facilitate cross border movement and which will be a critical tool especially with goods movements to Ireland. In respect of trade remedies, the UK will review all existing measures applied by the EU and is developing a new system called the Trade Remedies Authority for businesses to raise complaints for investigation after Brexit. VAT The Government has confirmed the continuation of a VAT system after the UK leaves the EU and that the VAT rules relating to UK domestic transactions will continue to apply to businesses as they do now. The technical notice highlights the VAT changes that businesses will need to prepare for when: Importing goods from the EU Exporting goods to the EU Supplying services to the EU UK businesses importing goods from the EU Accounting for import VAT on goods imported into the UK Postponed accounting will be introduced for import VAT on goods brought into the UK. This means that UK VAT registered businesses that import goods to the UK will be able to account for import VAT on their VAT return, rather than paying import VAT on (or soon after) the time that the goods arrive at the UK border. This will result in significant cash flow savings for business as the import VAT will be offset in the VAT return, rather than being paid and then recovered. Postponed accounting will apply both to imports from the EU and non-eu countries. Customs declarations and the payment of any other duties will still be required. VAT on goods entering the UK as parcels sent by overseas businesses If the UK leaves the EU without an agreement then Low Value Consignment Relief will no longer apply to any parcels arriving in the UK, and all goods entering the UK as parcels sent by overseas businesses will be liable for VAT (unless they are already relieved from VAT under domestic rules). For parcels valued up to and including 135, a technology-based solution will allow VAT to be collected from the overseas business selling the goods into the UK. Overseas businesses will charge VAT at the point of purchase and will be expected to register with HMRC and account for VAT. On goods worth more than 135 sent as parcels, VAT will continue to be collected from UK recipients in line with current procedures for parcels from non-eu countries. VAT on vehicles imported into the UK Businesses should continue to notify HMRC about vehicles brought into the UK from abroad as they do now, using the Notification of Vehicle Arrival 5

6 Procedures (NOVA) system which will continue to be used for this purpose. Import VAT will be due on vehicles brought into the UK from EU Member States. Certain reliefs will also be available as with current imports of vehicles from non-eu countries. Businesses will need to continue to use NOVA to verify that VAT is correctly paid on imported vehicles. UK businesses exporting goods to the EU UK businesses exporting goods to EU consumers Distance selling arrangements will no longer apply to UK businesses and UK businesses will be able to zero rate sales of goods to EU consumers. EU Member States will treat goods entering from the UK as imports with associated import VAT and customs duties due when the goods arrive into the EU. UK businesses exporting goods to EU businesses VAT-registered UK businesses will continue to be able to zero-rate sales of goods to EU businesses. EC sales lists will not be required. There will be a need for evidence to prove that goods have left the UK, to support the zero-rating of the supply. UK businesses supplying services into the EU Place of supply rules for UK businesses supplying services into the EU The main VAT place of supply rules will remain the same for UK businesses. The rules around place of supply will continue to apply in broadly the same way that they do now, subject to the points below. For UK businesses supplying digital services to non-business customers in the EU the place of supply will continue to be where the customer resides. VAT on services will be due in the EU Member State where the customer is resident. For UK businesses supplying insurance and financial services, input VAT deduction rules for financial services supplied to the EU may be changed. We will provide an update once more information is available. Other points UK businesses selling their own goods in an EU Member State to customers in that country will be required to register for VAT in that EU Member States where sales are made in order to account for the VAT due in that country. The technical notice recognizes that the impact on the Travel Operators Margin Scheme is still not clear. HMRC has been engaging with the travel industry and will continue to work with businesses to minimize any impact. Businesses that sell digital services to consumers in the EU will be able to register for the Mini One Stop Shop (MOSS) non-union scheme. Businesses that want to continue to use the MOSS system will need to register for the VAT MOSS non-union scheme in an EU Member State. This can only be done after the date the UK leaves the EU. The non-union MOSS scheme requires businesses to register by the 10 th day of the month following a sale. UK businesses will need to use the existing VAT refund processes for non-eu businesses. This varies across the EU and businesses will need to make themselves aware of the processes in the individual countries where they incur costs and want to claim a refund. UK businesses will be able to continue to use the EU VAT number validation service to check the validity of EU business VAT registration numbers but UK registration numbers will not be a part of it. HMRC is developing a service so that UK VAT numbers can continue to be validated. 6

7 Next steps The UK Government has repeated that it believes a No Deal scenario remains unlikely given the mutual interests of the UK and the EU in securing a negotiated outcome. Negotiations covering both the future UK/EU relationship and remaining points on the Withdrawal Agreement will continue on a regular basis in the coming weeks. The next meeting of the EU Council is set for October 2018 and the UK s technical notices and any responses to them will be part of the background to the negotiations leading up to that meeting. Businesses will hope for more certainty as to the way forward to emerge from these negotiations, preferably at the earliest opportunity. Poland publishes legislation on Innovation Box On 24 August 2018, the Polish Minister of Finance published the much anticipated draft legislation introducing the Innovation Box regime (IBR) into the Polish tax system. The IBR is aimed at incentivizing innovative research and development (R&D) activities by taxing profits from qualifying intellectual property rights (qualifying IP) at a preferential 5% tax rate. The incentive is based on the Organisation for Economic Co-operation and Development (OECD) recommendations regarding the modified nexus approach, which intends to link the relief to the proportion of R&D in Poland. The preferential 5% tax rate will apply to the qualified income obtained from the qualifying IP created, developed or improved by a taxpayer as part of his R&D activity. The new IBR is a further addition to Poland s existing tax landscape to encourage investment in innovation activities in Poland. At present, Poland already offers an R&D incentive, which allows for a double deduction for tax purposes of certain qualifying costs incurred in relation to a taxpayer s R&D activities. While the existing R&D incentive refers to the cost side of the taxpayer s activities, the proposed Innovation Box relief will apply to income earned from the qualifying IP developed as a result of the taxpayer s R&D activities. Poland has already established itself as a popular destination for Shared Services Centers and R&D activities of many international groups. This is due inter alia to the availability of skilled workforce and cost competitiveness. Therefore, it is expected that for many multinational groups benefitting from the nexus-based incentive in Poland this will be a welcomed development. The proposed relief is to enter into force on 1 January What IP qualifies? Qualifying IP rights include: Patents Extensions of patent protection Protected utility models Registered industrial designs Registered topographies of integrated circuits Extensions of patent protection for medicinal products and plant protection products Registered medicinal and veterinary products admitted to trading Registered new varieties of plants and animal breeds Rights to computer program protected under national or international law. What income qualifies? The new provision contains a list of the types of income from qualifying IP rights that are in scope of the proposed relief: Fees and royalties under license agreement for qualifying IP Income from sale of qualifying IP Income from the qualified IP embedded in the sale price of products and services 7

8 Compensation for infringement of rights arising from qualifying IP obtained in litigation, including court proceeding or arbitration Calculation of the tax base The amount that will be subject to the preferential 5% tax rate i.e., the qualified income amount, corresponds to the amount calculated as the income obtained from the qualifying IP right multiplied by the ratio established in accordance with the following formula based on the OECD recommendations: (a + b) x 1.3 a + b + x + d Where the individual letters stand for costs actually incurred by the taxpayer in respect of: a. R&D activity carried out directly by the taxpayer related to the qualifying IP right b. acquisition of R&D results related to the qualifying IP right from an entity unrelated to the taxpayer, other than those mentioned in point d c. acquisition of R&D results related to the qualifying IP right from an entity related to the taxpayer, other than those mentioned in point d d. the acquisition by a taxable person of the qualifying IP right In the case when the value of the ratio calculated in accordance with the above formula is greater than 1, it is assumed to be 1. result of R&D activity carried out by the respective taxpayer. Documentation requirements Taxpayers intending to benefit from the preferential taxation will have certain additional documentation requirements. These taxpayers will be obliged to keep accounting records, based on which it will be possible to distinguish each qualifying IP right and determine the revenues, tax deductible costs, and income (loss) attributable to each of the qualifying IP rights. In certain cases, an alternative approach may be available to taxpayers who earn income from more than one qualified IP right and it is not possible to determine the income streams and costs applicable to each of the qualifying IP rights. Under this alternative approach, it may be possible to determine the income applicable to all qualifying IP. Similarly, it may be possible to track income and costs to the same type of products or services, or the same group/family of products or services, in which the qualifying IP asset was used. Next steps Companies operating in the field of innovation and technology, and especially multinationals with an R&D presence in Poland, should become familiar with the current IBR proposals and consider their application to the company s operations. Based on the above formula, the more R&D activity that is performed by the taxpayer himself or outsourced to unrelated parties, the higher the amount of the relief the taxpayer will be entitled to claim under the new IBR. The above results from the nexus approach formulated in accordance with the OECD recommendations, according to which revenues related to IP can be taxed on a favorable basis to the extent that specific IP-generating income is the 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 Koh Leh Kien Mark Liow (based in Penang) People Advisory Services Tan Lay Keng Irene Ang Christopher Lim Business Tax Services Amarjeet Singh Farah Rosley Robert Yoon Wong Chow Yang Transaction Tax Services Yeo Eng Ping Sharon Yong International Tax Services Anil Kumar Puri Asaithamby Perumal Transfer Pricing Sockalingam Murugesan Vinay Nichani Hisham Halim Indirect Tax Yeoh Cheng Guan Aaron Bromley Financial Services Bernard Yap

10 Important dates 15 September 2018 Due date for monthly instalments 30 September th month revision of tax estimates for companies with March year-end 30 September th month revision of tax estimates for companies with December year-end 30 September 2018 Statutory deadline for filing of 2018 tax returns for companies with February year-end 15 October 2018 Due date for monthly instalments 31 October th month revision of tax estimates for companies with April year-end 31 October th month revision of tax estimates for companies with January year-end 31 October 2018 Statutory deadline for filing of 2018 tax returns for companies with March 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: