International Bar Association Tax Committee National Reporters Recent Developments in Taxation Malaysia Irene Yong Shearn Delamore & Co. irene.yong@shearndelamore.com [Draft covers developments in the period since June 2016]
1. RECENT HIGHLIGHTS 1.1 Foreign Account Tax Compliance Act ( FATCA ) Agreement in principle was reached with the US on the Malaysia-US Intergovernmental Agreement on FATCA ( IGA ) on 30 June 2014 but the IGA is yet to be signed. A draft of the Guidance Notes on the IGA was issued by the Inland Revenue Board ( IRB ) and revised as at 11 September 2015. Under the IGA, Reporting Malaysia-based Financial Institutions must identify and report US Reportable Accounts, as well as, payments made to certain Nonparticipating Financial Institutions (all capitalised terms as defined under the IGA), such information to be submitted to the IRB by 30 June of the year following the end of the relevant reporting year. Pending the execution of the IGA, the requirement to submit the information for 2014, 2015 and 2016 has been deferred (tentatively) to 30 June 2018. 1.2 Common Reporting Standard (CRS) Pursuant to the Income Tax (Automatic Exchange of Financial Account Information) Rules 2016, which came into operation on 1 January 2017, Financial Institutions ( FIs ) which are resident in Malaysia (excluding branches located outside Malaysia) and any branch of an FI that is not resident in Malaysia if that branch is located in Malaysia, must report information regarding certain accounts of non-residents and follow related due diligence procedures, consistent with, amongst others, the Organisation for Economic Co-operation and Development s ( OECD s ) Common Reporting Standard. An information return is to be furnished to the IRB in respect of calendar year 2017 and subsequent calendar years by 30 June annually, commencing June 2018. 1.3 Country-by-Country Reporting ( CBCR ) The Income Tax (Country-by-Country Reporting) Rules 2016 ( Rules ) came into operation on 1 January 2017 and apply to a multinational corporation group ( MNC Group ) where: (a) any of its constituent entities have any cross-border transactions with its other constituent entities; (b) the total consolidated group revenue in the financial year preceding the reporting financial year is at least RM3 billion (approximately US$700 million); (c) its ultimate holding company is incorporated under the Companies Act 1965 or under any written law and resident in Malaysia; and (d) its constituent entities are incorporated or registered under the Companies Act 1965 or under any written law or under the laws of a territory outside Malaysia and resident in Malaysia. Pursuant thereto, CBCRs are to be filed annually within 12 months after the last day of the reporting financial year by the ultimate holding company or surrogate holding company, each as defined, of the MNC Group that is resident in Malaysia. The CBCR 2
must contain aggregate information relating to the amount of revenue, profit or loss before income tax, income tax paid or accrued, stated capital, accumulated earnings, number of employees and tangible assets other than cash/cash equivalents with regard to each jurisdiction in which the MNC Group operates, and identification of each constituent entity of the MNC Group setting out the jurisdiction of tax residence, nature of the main business activity etc. 1.4 New penalty provisions for non-compliance With effect from 17 January 2017, failure to furnish a CBCR may be tantamount to an offence under a new Section 112A of the Income Tax Act 1967 ( ITA ), and the person may be liable to a fine of not less than RM20,000/- (approximately US$4600) and not more than RM100,000/- (approximately US$23000) or to imprisonment for a maximum term of 6 months or both. The accused bears the burden of proving that the CBCR has been furnished. Similar sanctions apply from 17 January 2017 under Sections 113A and 119B of the ITA respectively: (a) for making an incorrect return, information return or report or for giving any incorrect information relating to the foregoing, unless the person satisfies the court that the incorrect return, information etc was made/given in good faith; or (b) for non-compliance with the rules made on mutual administrative assistance. Where a person has been convicted for any of the offences under Sections 112A or 119B of the ITA, the court may further order that the relevant provisions of the rules be complied with, within a specified period. 1.5 Withholding Tax 1.5.1 Widening of Scope of Withholding tax Royalty as defined, which is paid or credited to any non-resident is one of the classes of income subject to withholding tax, where it is derived/deemed derived from Malaysia. With effect from 17 January 2017, this definition has been broadened to include, amongst others, any sums paid as consideration for, or derived from: the use of or the right to use any software; the reception of or the right to receive, visual images, sound or both, transmitted to the public by satellite or cable, fibre optic or similar technology; the use of or the right to use, any visual images, sounds or both, in connection with television or radio broadcasting transmitted by satellite or cable, fibre optic or similar technology. 3
Remuneration or other income for services performed or rendered in Malaysia by a public entertainer are subject to withholding tax on payments made to a non-resident. With effect from 17 January 2017, the definition of public entertainer has been broadened and currently includes comperes, models, lecturers, speakers, sportspersons, artistes and any individual who uses his intellectual, artistic, musical, personal or physical skills in connection with any purpose through live, print, electronic, satellite, cable, fibre optic and other medium. 1.5.2 Derivation of Special Classes of Income Amounts paid in consideration of technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme which are performed outside Malaysia would be subject to withholding tax, with effect from 17 January 2017. Previously, only technical advice, assistance or services performed within Malaysia were subject to withholding tax. This has widened the scope of withholding tax. 1.6 Free Zones and Goods and Services Tax ( GST ) GST was implemented in Malaysia with effect from 1 April 2015, replacing the previous sales tax and service tax regime (since abolished). Certain areas in Malaysia have been designated as free zones under the Free Zones Act 1990 whereby a free zone is deemed to be a place outside Malaysia. Accordingly, goods may be brought into, produced, manufactured or provided in a free zone without payment of any customs duty and excise duty. For GST purposes, Malaysia excludes free zones and generally, no GST applies to the importation of goods into a free zone. With effect from 1 January 2017, no GST shall be charged on any supply of taxable goods made within or between free zones. However, GST is chargeable if goods are removed from one free zone to another through Malaysia or from a free zone to Malaysia. 1.7 Case Law Developments 1.7.1. United Malacca Berhad ( UMB ) UMB, a Malaysian company carrying on the business of cultivation of oil palm and investment holding appealed before the Special Commissioners of Income Tax ( SCIT ) following the position taken by the IRB that the late payment charges received by UMB on the additional compensation for the compulsory acquisition of UMB s lands paid to UMB, as well as the retrenchment benefits which were reimbursed to UMB, should be subject to tax under the ITA. Penalties were also imposed by the IRB. The SCIT allowed the UMB s tax appeal in full. IRB lodged an appeal to the High Court. The High Court dismissed the IRB s appeal and affirmed the SCIT s decision and, in addition, granted costs to UMB. There is no further appeal to the Court of Appeal. 4
1.7.2 Maximum Vista Sdn Bhd ( MVSB ) The IRB disallowed the deduction of the annual discount expenses incurred by MVSB, a Malaysian investment holding company, on certain bonds issued by MVSB against the dividends received by MVSB. The SCIT, by a majority, allowed MVSB s tax appeal on the deductibility of the discount expenses on approximately 99.7% of MVSB s claim. The IRB then lodged an appeal to the High Court and MVSB also cross-appealed on the 0.3%. The case was concluded with a settlement. 1.7.3 Bandar Nusajaya Development Sdn Bhd The taxpayer was involved in developing Iskandar Malaysia and took a loan from its holding company at 5% interest rate + 7% premium rate. Rates were later revised down. From years of assessment 2003 to 2005, the taxpayer claimed tax deductions on the premium amount of RM222 million against business income (of RM40 million) and nonbusiness interest income (of RM181 million). When rates were revised, the taxpayer brought to tax RM40 million under Section 30(4) of the ITA but did not add back the rest. The IRB brought to tax RM181 million and raised a notice of additional assessment for RM50 million in additional taxes and imposed penalties of RM22 million for the year of assessment 2006 (collectively the Sum ). In 2014, the taxpayer filed a judicial review application before the High Court. Subsequently, the case was heard before the apex court, i.e. Federal Court, in which the taxpayer lost. It was thereafter reported in the press that the Federal Court had held that the taxpayer should have followed the appeal procedure and have the case heard before the SCIT by filing a notice of appeal (i.e. Form Q) under Section 99 of the ITA instead of filing a judicial review application. The Federal Court ordered the taxpayer to pay the Sum to the IRB. This seems to suggest that judicial review is not an alternative or automatic substitute for the Form Q procedure. 2. FUTURE DEVELOPMENTS 2.1 Tourism Tax Recently, the Tourism Tax Bill 2017 was tabled and passed in the Malaysian Parliament to levy a tourism tax on tourists who stay at accommodation premises (as per Section 2(1) of the Tourism Industry Act 1992), regardless of whether he is a Malaysian national or otherwise. The rate of the tourism tax is yet to be fixed. The operator of the accommodation premises is required to register with the Royal Malaysian Customs Department and collect the tax. 1793325_1 5