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

Transcription

1 EY Tax Alert Vol Issue no July 2018 Malaysian developments Accelerated Capital Allowance (ACA) for Information and Communication Technology (ICT) equipment Update to Public Ruling No. 7/2017 Disposal of Plant or Machinery Part I Other than Controlled Sales Changes to MSC Malaysia Bill of Guarantee No. 5 Financial incentives, to comply with BEPS Action 5 New stamping application process through Digital Franking System 2.0 Overseas developments Australia issues guidance on foreign companies central management and control test of Australian residence Indian High Court rules on principles for admissibility of transfer pricing appeals by High Courts Malaysian developments Accelerated Capital Allowance (ACA) for Information and Communication Technology (ICT) equipment In Budget 2018, it was proposed that expenditure incurred on the purchase of ICT equipment be allowed initial allowance (IA) of 20% and annual allowance (AA) of 20%, effective from the year of assessment (YA) To legislate this, the Income Tax (Accelerated Capital Allowance) (Information and Communication Technology Equipment) Rules 2018 [P.U.(A) 156] were gazetted on 5 July The list of qualifying equipment is specified in the Schedule to the Rules. It is noted, however, that the proposal for expenditure incurred on consultation fees, licensing and incidental fees for the development of customized software be allowed capital allowance claims at the rate of IA: 20% and AA: 20% with effect from YA 2018, has not been legislated as yet (see Special Tax Alert: Highlights of 2018 Budget Part I). EY Tax Alert Vol. 21 Issue no July

2 Update to Public Ruling No. 7/2017 Disposal of Plant or Machinery Part I Other than Controlled Sales Public Ruling (PR) No. 7/2017, captioned Disposal of Plant or Machinery Part I Other than Controlled Sales, was published by the IRB on 12 December The PR explains the tax treatment of the disposal of plant or machinery in circumstances other than a controlled sale (see Tax Alert No. 25/2017). Broadly, the PR discusses the determination of the disposal value of an asset in different scenarios, pursuant to Paragraph 62 of Schedule 3 of the ITA. The PR was updated on 7 June 2018 to include a new Example 9 in Paragraph 7.4. This new example illustrates the determination of the disposal value of a non-commercial motor vehicle, in the case where the cost of the car is less than RM150,000 and the instalment payments [i.e. total qualifying expenditure (QE)] incurred on the car had not exceeded RM100,000 when the car was disposed. The purpose of the new example is to illustrate that the disposal price in such an instance does not need to be adjusted/restricted as was done in Example 8, where the instalment payments on the car had exceeded RM100,000. Changes to MSC Malaysia Bill of Guarantee No. 5 Financial incentives, to comply with BEPS Action 5 The Government is committed to the Organisation for Economic Cooperation and Development (OECD) s Base Erosion and Profit Shifting (BEPS) initiatives (see Tax Alert No. 14/2018). Further information on the new criteria / conditions will be released in due course. In the meantime, in order to adhere to the timelines under the aforesaid international standards and to ease the transition into the new regime, the following has been announced: 1. No new approvals will be granted for applications for MSC Malaysia status starting from 1 July 2018, including applications for extension of income tax exemption period or applications to add new MSC Malaysia Qualifying Activities. 2. Existing MSC Malaysia status companies with tax incentives will be given the option: a. To grandfather, i.e. to continue to enjoy, the income tax exemption granted for IP income and/or non-ip income under their existing MSC Malaysia Status Conditions of Grant until 30 June 2021; or b. Subject to the new legislation and guidelines coming into force, to move into the new regime and to be subjected to the new criteria / conditions However, for MSC Malaysia status companies which have been granted approval on or after 17 October 2017 for non-ip income, if these companies would like to opt for grandfathering, the grandfathering period will end on 31 December New approvals and extensions of the income tax exemption period for current MSC-status companies will only be considered once the new legislation and guidelines come into force, which is targeted to be by 31 December In this regard, the financial incentives under the MSC Malaysia Bill of Guarantee No. 5 (BOG 5) are being reviewed and will be amended to adhere to the minimum standards under BEPS Action 5. 2

3 New stamping application process through Digital Franking System 2.0 The Inland Revenue Board (IRB) has recently implemented the new process of stamping applications through the Digital Franking System (DFS) 2.0, which will replace DFS 1.0 which has been in place since The application for stamping under DFS 2.0 can be done via three methods, as outlined below: i. Computer applications (Windows) ii. Mobile applications (Mobile apps) iii. Self-service counter at IRB offices The guidelines for each method are available in the link below: ia_ _newstampingapplicationproce SSDIGITALFRANKINGSYSTEMS.pdf With the new system, the PDS 1 Form (i.e. the form which is to be completed when filing for stamp duty in Malaysia) no longer needs to be completed manually, as the form is now made available online. The PDS 1 Form which has been completed online will be processed, and a digital output of the Quick Response Code (QR Code) will be generated by the system. The QR Code can then be printed and handed together with the instrument to the duty officer at the counter to be reviewed and to determine the amount of stamp duty payable. This new process was implemented at the IRB s stamp duty counter located at the Cyberjaya Satellite Office on 29 June 2018, and is expected to be extended to all the IRB s stamp offices nationwide by 30 August Overseas developments Australia issues guidance on foreign companies central management and control test of Australian residence On 21 June 2018, the Australian Taxation Office (ATO) issued three guidance documents regarding whether foreign companies are Australian residents under Australia s central management and control (CMAC) test of corporate residency: Final Tax Ruling TR 2018/5 Income tax: central management and control test of residency (ruling) Draft Practical Compliance Guideline PCG 2018/D3 (Draft PCG) to accompany the ruling: Identifying where a company s central management and control are located A Compendium on TR 2018/5 This guidance impacts: Foreign operating companies and foreign intermediary holding companies controlled by Australian groups (i.e. outbounds) Foreign holding companies of foreign controlled Australian groups (i.e. inbounds), including those involved in fund management International businesses should assess the Australian residency status of their companies or foreign collective investment vehicles (CIVs) to identify any risks and remedial action which may be required. A change in residency status could give rise to significant tax implications, including: Australian exposures to income tax and capital gains tax on transactions Ineligibility to apply non-assessable non-exempt income (NANE) status to dividends Impacting membership of tax consolidated groups 3

4 Deductibility of interest expenditures arising from funds lent to foreign equity-fund subsidiaries Liability of foreign CIVs with an Australian investment manager to Australian income tax Ruling The ruling largely follows the earlier draft TR2017/D2, despite submissions by professional bodies, including EY. In this respect, where boards of foreign companies merely rubberstamp or mechanically implement decisions which are made by Australian controllers, parent companies, etc. without due consideration, the foreign companies run a significant risk of being treated as Australian residents, because their CMAC is in Australia. The ruling is far less concessional than earlier ATO interpretations and looks to multiple recent judicial authorities. For example, it indicates that a foreign company s day-to-day conduct and management of a company s activities and operations are not ordinarily an act of (the company s) central management and control. Nor is the management of day-to-day activities under the authority and supervision of higher-level managers or controllers. Draft PCG The Draft PCG sets out how to identify the circumstances where foreign incorporated companies that are influenced or controlled by Australian controllers, directors, etc. will be treated as Australian residents. The Draft PCG contains practical guidance on the matters covered by the ruling. It discusses a range of issues and provides various illustrative examples, including: Establishing where a company s CMAC is located (this will not necessarily be limited to board minutes, and relevant evidence may include contemporaneous s and correspondence as well as oral evidence and statements by those involved in the company s decisions) Identifying high-level decision-making of a company and the relevance of a company s activities, including where decisions are made in more than one place, with examples of small and large investments, businesses and special purpose vehicles Determining whether a person is merely influential or is the real decision-maker Instances where the exercise of CMAC vs. dayto-day management of a company s operations may or may not exhibit an exercise of CMAC The Draft PCG also outlines transitional and ongoing compliance approaches. When finalized, the Draft PCG is proposed to apply from 21 June Submissions on the draft PCG are due by 20 July Transitional compliance approach and resetting foreign companies residency The Draft PCG outlines the proposed ATO transitional compliance approach. The Commissioner will not apply his resources to disturb a foreign incorporated company s status as a nonresident during the transitional period if it meets certain criteria. These are quite specific, including that the foreign company is an ordinary company and is not a foreign hybrid. The transitional period is to end on 13 December 2018 six months from the issuance date of TR 2018/5. Ongoing compliance approach The Draft PCG provides the Commissioner s acknowledgement that unplanned or unintended circumstances may arise from time to time which may cause the location of the CMAC to be questioned. 4

5 The Draft PCG outlines that the Commissioner will not normally apply his resources to disturb a foreign incorporated company s status as a non-resident merely because part of the company s CMAC is exercised in Australia, i.e. where directors regularly participate in board meetings from Australia using modern communications technology and certain criteria are satisfied on an ongoing basis. Next steps for investment managers of foreign CIVs Australian fund management firms will often be associated with foreign CIVs which have arrangements with Australian investment managers. Australian investment managers associated with foreign CIVs will want to undertake an immediate prudential review of the governance and operations of the foreign CIVs, to confirm that they will be adequately protected under the Draft PCG. Some relevant examples in the draft PCG are helpful, but further clarification is needed. Next steps for outbound investing businesses with foreign subsidiaries Australian outbound businesses (whether foreignowned or Australian-owned) with significant or mature operations/businesses and/or subsidiaries in foreign jurisdictions will want to undertake an immediate prudential review to identify whether: They could be classified as Australian residents under the ruling or the Draft PCG Improved documentation of decision-making is needed They can benefit from the Commissioner s transitional compliance approach, to adjust directorial, management and documentation issues to reduce the risk of Australian resident status Some businesses might consider that, for certain foreign subsidiaries which are not currently undertaking significant business or profitable activities, there are currently few tax risks even if they were treated as Australian residents. However, any future transaction which might crystallize significant increased value in the foreign subsidiary, or involve significant financing or capital injection, or joint ventures, may result in a taxable event and a dividend from the foreign subsidiary that would not be treated as NANE income for Australian tax purposes. Accordingly, the risk of inaction needs to be carefully understood and documented, given the potential for significant tax costs. Integrating a prudential review with year-end financial reporting processes These issues are particularly timely given the financial year-end for 30 June balancing companies. A prudential review should be integrated into yearend tax accounting, risk management and assurance processes, to identify the actions needed before the expiry of the Commissioner s transitional period. Indian High Court rules on principles for admissibility of transfer pricing appeals by High Courts The decision of the Honorable Karnataka High Court (HC), pronounced on 25 June 2018 in the case of Softbrands India Private Limited (Taxpayer), is discussed below. The ruling sets forth some significant principles relating to admissibility of appeals by HCs which involve transfer pricing (TP) issues. Under the Indian income tax law (ITL), an appeal against an order of an Income Tax Appellate Tribunal (Tribunal), which is the second-level appellate forum in the hierarchy of appellate authorities, can be made to the jurisdictional HC. However, a HC can only admit an appeal if it is satisfied that the case involves a substantial 5

6 question of law. In this case, the issue before the HC was whether comparability issues in TP as decided by the Tribunal, give rise to any substantial question of law for the HC to admit and thereafter adjudicate an appeal. The HC ruled that the Tribunal is the final factfinding authority and the jurisdiction to consider the factual nature of issues is the Tribunal. As long as there is a no unreasonableness in the order of the Tribunal in the findings of the fact, the same does not qualify to be a substantial question of law. The HC held that it cannot be expected to undertake the fact-finding exercise and lightly consider appeals against the findings of a Tribunal, without putting to strict scrutiny the existence of a substantial question of law. The HC also held that the substantial question of law generally arises regarding issues such as interpretation of tax treaties, interplay between provisions of the ITL and tax treaties, and issues involving Base Erosion and Profit Shifting (BEPS) principles, among others. On the other hand, issues pertaining to the selection of comparable data and criteria for comparability while undertaking an economic analysis in a TP study do not give rise to any substantial question of law. Background The Taxpayer is an Indian affiliate of a multinational group which is engaged in the provision of software development services to its associated enterprises. The Taxpayer was subject to a TP adjustment based on a TP audit conducted by the Tax Authority. The TP adjustment was made largely by the Tax Authority adopting a different set of comparable data as well as different criteria for the selection of comparable data compared to what was used by the Taxpayer in its TP documentation. The Taxpayer obtained partial relief at the first-appellate level before the Commissioner of Income Tax (Appeals), an administrative appellate authority under the hierarchy of appellate authorities. An appeal against the order of the first appellate authority was filed before the Tribunal, the second level appellate authority, by the Taxpayer as well as by the Tax Authority. The Tribunal ruled in favor of the Taxpayer by upholding the Taxpayer s selection of comparable data and rejecting the approach adopted by the Tax Authority. The Tax Authority thereafter filed an appeal before the jurisdictional HC against the order of the Tribunal. The key questions raised before the HC were: (a) whether the Tribunal was right in law in rejecting a few comparables; and (b) whether the Tribunal was right in determining the threshold for comparability filters for the selection of such comparables. However, before addressing the questions, the HC sought to address the threshold issue of whether the questions in appeal come up to the level of substantial question of law, for the HC to accept the appeal. Ruling of the HC Grounds for admissibility of appeal before the HC Under section 260A of the ITL, as well as under the Code of Civil Procedures, 1908, an appeal can be made to the HC from every order passed by a subordinate court, if the HC is satisfied that the case involves a substantial question of law. Therefore, the HC held that unless the findings of the Tribunal are unreasonable and unsustainable and exhibit a total lack of reasoning by the Tribunal to the relevant facts of the case and evidence before the Tribunal, there can be no substantial question of law. The HC has power to not only formulate the substantial question of law but also to frame additional substantial question of law at a later stage, if such a substantial question of law is involved in the appeal before it. What is a substantial question of law? The HC, while referring to leading case laws on the topic, quoted with approval certain observations which indicate factors for determining whether an appeal involves a substantial question of law. A question of law having a material bearing on the decision of the case will be a substantial question of law, if it is not covered by any specific provisions of law or settled legal principles emerging from 6

7 binding precedent, and involves a debatable legal issue. A substantial question of law will also arise in a contrary situation where the legal position is clear, either on account of express provisions of law or binding precedent, but the court below has either ignored or acted contrary to such legal principle when deciding the matter. Could TP matters be considered as those giving rise to a substantial question of law? The HC observed that the entire exercise of making TP adjustments on the basis of the comparability analysis is a matter of estimation by the Taxpayer as well as the Tax Authority. Further, the Tribunal, being the final fact-finding authority, adjudicates on the TP issues based on relevant material/facts produced. The HC also noted that the Tribunal is expected to act fairly, reasonably and rationally to avoid unsupportable decisions. In this case, the HC noted that the dispute was with respect to the pairing and matching of comparable companies as identified by the Taxpayer vis-à-vis the Tax Authority for determination of the arm slength price (ALP). Also, the arguments before the HC pertained to appropriate application of filters to be used for comparability analysis. The HC observed that the order of the Tribunal was not unreasonable either in the analysis of the application of filters or in the adoption of the most appropriate method for determining the ALP. Accordingly, based on the principles emanating from the judicial precedents referred to, the HC held that the same does not qualify to be a substantial question of law. Further, considering that the Tribunal is the final fact-finding body, the HC considered it appropriate not to entertain an appeal in the absence of involvement of a substantial question of law. Accordingly, the HC opined that it cannot be expected to undertake the fact-finding exercise which would drag in a whirlpool of domestic litigations, thereby defeating the very purpose and purport of section 260A (relating to appeals to the HC ) of the ITL. Moreover, the HC held that the substantial question of law could generally be with respect to interpretation of provisions of tax treaties, interpretation of provisions of the ITL, the overriding effect of the tax treaties over the ITL, questions pertaining to treaty shopping, or interpretation of BEPS guidance/recommendations, etc. Accordingly, in such cases, the HC could embark upon the exercise of framing and answering such substantial questions of law. On the other hand, the appeals as in the given case, which are primarily to decide whether the comparables have been correctly chosen or not and whether quantitative filters have been appropriately applied or not, do not give rise to any substantial question of law. The HC also observed that a Court cannot be expected to undertake an exercise of comparability which is essentially a fact-finding exercise, because the Court has neither sufficient information nor technical expertise to undertake any such fact-finding. Implications One of the key TP challenges faced by taxpayers in India relates to the time-consuming nature of the appeal process because of the number of tiers of appellate authorities and the inventory of cases at each level. HCs in the past have generally shown a fair degree of flexibility in admitting appeals involving TP matters, including those involving comparability issues, even though the provisions of the ITL permitted appeals to an HC only on matters involving a substantial question of law. This approach of the HCs may generally be attributed to the nascent stage of the TP law and the evolving nature of TP issues. However, this resulted in a proliferation of appeals involving TP matters and created a significant back log of cases at the HC level. The HC s ruling in this case could result in the Courts applying more scrutiny to appeals involving TP matters, to ensure that they involve a substantial question of law or the questions are appropriately re-framed to address only substantial questions of law. This is likely to impact appeals by either the taxpayer or the Tax Authority against an 7

8 order of a Tribunal and could therefore reduce the time involved for reaching finality on a TP controversy under the domestic tax law appeal process where the issues in dispute largely involve factual matters. The ruling sets forth important principles for taxpayers to consider when deciding their strategies for TP controversy management in India. Taxpayers who are subject to a TP adjustment should consider strengthening their defense strategy on factual matters before the Tribunal as well as evaluating alternative options for dispute resolution such as use of MAP and APAs. 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 31 July th month revision of tax estimates for companies with January year-end 31 July th month revision of tax estimates for companies with October year-end 31 July 2018 Statutory deadline for filing of 2017 tax returns for companies with December year-end 15 August 2018 Due date for monthly instalments 31 August th month revision of tax estimates for companies with February year-end 31 August th month revision of tax estimates for companies with November year-end 31 August 2018 Statutory deadline for filing of 2018 tax returns for companies with January 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: