EY Tax Alert Vol. 21 - Issue no. 08 9 April 2018 Malaysian developments Tax audit framework (Amendment 1/2018) Practice Note No. 1/2018: Tax treatment of digital advertising provided by a non-resident GST matters Overseas developments Singapore enacts transfer pricing documentation requirements and publishes updated transfer pricing guidelines Hong Kong passes legislation for twotier profit tax rates regime Malaysian developments Tax audit framework (Amendment 1/2018) The Inland Revenue Board (IRB) has issued on its website the 2018 tax audit framework in Bahasa Malaysia, titled Rangka Kerja Audit Cukai (Pindaan 1/2018). The 22-page 2018 tax audit framework takes effect from 1 April 2018 and replaces the 2017 tax audit framework that was effective from 1 May 2017 (see Tax Alert No. 12/2017). The content of the new tax audit framework is broadly similar to that of the earlier framework. Some of the important changes are as follows: Paragraph 7.1 Preliminary actions of an audit The timeframe to respond to a letter from the IRB requesting documents and/or information is reduced from 21 days to 14 days, from the date of the letter. The 2018 framework also provides that the audit may now be extended to include companies and businesses connected or controlled Note by the taxpayer, without prior notice to the taxpayer. Note Pursuant to Section 139 of the ITA, a person shall be taken to have control of a company (a) if he exercises or is able to exercise or is entitled to acquire control (whether direct or indirect) over the company's affairs and in particular, without prejudice to the generality of the preceding words, if he possesses or is entitled to acquire the greater part of the share capital or voting power in the company; (b) if he possesses or is entitled to acquire either (i) the greater part of the issued share capital of the company; (ii) such part of that capital as would, if the whole of the income of the company were in fact distributed to the members, entitle him to receive the greater part of the amount so distributed; or (iii) such redeemable share capital as would entitle him to receive on its redemption the greater part of the assets which, in the event of a winding up, would be available for distribution among members; or (c) if in the event of a winding up he would be entitled to the greater part of the assets available for distribution among members. EY Tax Alert Vol. 21 Issue no. 08 9 April 2018 1
In the 2017 framework, the audit was extended to companies and businesses with common directors. Paragraph 7.4 Examination of records The 2018 framework does not specifically state that records pertaining to time-barred years of assessments will not be examined (unlike the 2017 framework - see Paragraph 7.4.1). Paragraph 7.6 Voluntary disclosure The 2018 framework clarifies the meaning of commencement of tax audit in determining the taxpayer s entitlement to the concessionary penalty rate of 35% for voluntary disclosure. Paragraph 7.5 Settlement of audit The timeframe to object/settle a tax audit has been reduced as follows: Taxpayer to file an objection if the taxpayer disagrees with the IRB s notification of proposed tax adjustments* Timeframe 18 days (2017 framework: 21 days) Settlement of a tax audit 3 months, i.e. 90 days (2017 framework: 4 months, i.e. 120 days) *If no objection is made within 18 days from the date of notification, the taxpayer shall be deemed to have agreed to the proposed tax adjustments. Practice Note No. 1/2018: Tax treatment of digital advertising provided by a non-resident The IRB has issued a one-page Practice Note No. 1/2018 (PN) dated 16 March 2018, to provide guidance regarding the withholding tax (WHT) treatment of income of a non-resident from the provision of digital advertising services. The PN explains that the tax treatment of payments to non-residents in relation to digital advertising will depend on whether the non-resident has a permanent establishment (where a tax treaty applies), or a business presence (in the case of a non-tax treaty country), in Malaysia. If the non-resident has a permanent establishment (PE) or business presence in Malaysia, the payments received by the nonresident will constitute Malaysian-sourced business income and be subject to tax under Section 4(a) of the ITA. Interestingly, the PN does not then elaborate on what WHT position should be adopted by the payer. If the non-resident does not have a PE or business presence in Malaysia: - and the payment constitutes royalty income, the payment is subject to WHT under Section 109 of the Income Tax Act 1967 (ITA) - and if the payment constitutes services income under Section 4A(ii) of the ITA, the payment received is subject to WHT under Section 109B(1)(b) of the ITA To determine whether WHT under Section 109 or Section 109B(1)(b) of the ITA would apply, the PN provides the following guidance: Royalty income: If the payment is for the purchase or use of (for example) an application (App) by the payer that allows the payer to create his own advertisement campaign 2
Service income under Section 4A(ii) of the ITA: If the payment does not involve the purchase or use of an App. In this case, the payer solely relies on the service provider to deal with all aspects of digital advertising. Editor s note: As income under Section 4A(ii) for services rendered and performed outside Malaysia on or after 6 September 2017 is exempt from withholding tax, taxpayers will need to consider where such digital advertising services are rendered (see Tax Alert No. 25/2017). Further, the IRB has not elaborated on why the use/purchase of an app is relevant to the WHT position. GST matters Malaysian GST marks its third anniversary The Malaysian Goods and Service Tax (GST) is now entering its fourth year since its implementation on 1 April 2015. businesses to fully comply with the GST requirements. The recent launch of the Malaysia GST Compliance Assurance Programme ( MyGCAP ), a voluntary scheme, is further proof of RMCD s commitment to ensure compliance among registered businesses. A business needs to be confident it is reporting correctly each period, through a robust GST risk management framework, both to qualify for accreditation under MyGCAP as well as ensuring no adverse outcomes from a GST audit. Exercises such as health checks, mock-audits, analytics testing of transaction data and refresher GST training, among others, provide an extensive process to evaluate the possible GST risks, remediation steps, as well as recommendations moving forward. Please reach out to EY to discuss the above matters further and how you can address and enhance your GST risk management and reporting. As a relatively new tax, there still exists areas of uncertainty both in interpretation and application. The legislation is regularly refined and broadened, while the Royal Malaysian Customs Department ( RMCD ) guides and public rulings continue to be developed following, in most cases, consultation with business and industry. While most taxpayers have stabilized their GST reporting process to varying degrees, many more continue to face challenges in terms of managing their GST data and overall compliance level. Hence, it is vital for all businesses to keep abreast with GST developments that impact their business, to ensure an optimal level of GST compliance, as well as be vigilant about the accuracy of their GST reporting each and every taxable period. Three years on, the approach from RMCD has shifted considerably. After the initial transition period, the level of audit and investigation activity has increased year on year. This has been further complemented by joint-audit initiatives with IRB. Notwithstanding this, RMCD has taken various initiatives to address the challenges faced by Overseas developments Singapore enacts transfer pricing documentation requirements and publishes updated transfer pricing guidelines On 22 February 2018, the Singapore Government published the Income Tax (Transfer Pricing Documentation) Rules 2018 (TPD Rules) under the Singapore Income Tax Act (SITA) in the Singapore Government Gazette. The TPD Rules are effective as of 23 February 2018 and apply for the basis period for the Year of Assessment (YA) 2019 and thereafter. In addition, on 23 February 2018, the Inland Revenue Authority of Singapore (IRAS) released the fifth edition of the Singapore transfer pricing guidelines (2018 Singapore TP Guidelines). The TPD Rules are now incorporated into the guidelines and the Guidelines provide examples and explanations 3
on certain aspects of the TPD Rules. The 2018 Singapore TP Guidelines also provide clearer guidance on comparability analysis and the transactional profit split method. Mandatory transfer pricing (TP) documentation requirement under section 34F of the SITA Under section 34F of the SITA, a company, firm or trustee of a trust is required to prepare TP documentation if: The gross revenue (derived from trade or business) of the company, firm or trust (taxpayer) in the basis period for a YA exceeds S$10m (US$7.6m) and its related party transactions in the current basis period are not exempt by specific rules; or The company, firm or trustee of the trust was required to prepare TP documentation for a transaction in the previous basis period and its related party transactions in the current basis period are not exempt by specific rules. The TPD Rules supplement the above provisions by providing details on the form and content of the TP documentation, and also set out certain scenarios whereby taxpayers will be exempt from preparing TP documentation as referred to in section 34F of the SITA. Related parties for permanent establishments (PEs) in Singapore While the arm s-length principle has been applicable to PEs under the earlier versions of the TP guidelines, the 2018 Singapore TP Guidelines clarify that when a non-resident person carries on a business in Singapore through a PE, the Singapore PE and other PEs of the non-resident person outside Singapore will constitute separate related entities for the purpose of attribution of profits. Additional guidance on conducting comparability analysis The 2018 Singapore TP Guidelines improve the guidance on conducting comparability analysis. The guidance is in line with the Organisation for Economic Co-operation and Development (OECD) s Transfer Pricing Guidelines published in July 2017 (2017 OECD TP Guidelines), which had factored relevant outcomes of Actions 8 to 10 of the Base Erosion and Profit Shifting project. Emphasis on intercompany agreements The IRAS has provided enhanced guidance on comparability analysis and the importance of intercompany agreements based on the true substance of the contractual terms and conditions. Accordingly, it is recommended that taxpayers prepare contractual agreements as necessary, review the existing contractual agreements, assess whether they reflect the functions performed, assets employed and risks borne by the parties to the agreement and make necessary changes. Additional guidance on transactional profit split method (PSM) The 2018 Singapore TP Guidelines take into consideration the guidance provided by the 2017 OECD TP Guidelines on PSM. While the fundamental concept regarding why a PSM is adopted remains the same, some additional guidance is provided to the common terms used in applying the method. The IRAS has also clarified that the lack of comparables alone is an insufficient reason to use the PSM as this may lead to a non-arm s length outcome of the functions performed. Arm s-length adjustments by the IRAS The IRAS has provided guidance on circumstances under which the IRAS can make transfer pricing adjustments. To aid understanding, it has also included certain examples within the 2018 Singapore TP Guidelines. 4
Understatement of profits or overstatement of deductions will be the main trigger point for the adjustments. It also clarified that these conditions apply equally when there are overstatements of losses. It has been emphasized that, in comparable circumstances, when independent parties enter into substantially different commercial or financial relations than those between the taxpayer and its related party, the IRAS will determine the arm slength price for the actual related party transaction based on the commercial or financial relations of the independent parties. Furthermore, the IRAS will disregard an actual related party transaction or replace it with an alternative transaction only in exceptional circumstances where: The arrangements made in relation to the transaction lack the commercial rationality that would be agreed between independent parties under comparable circumstances The arrangements prevent determination of a price that would be acceptable to both of the parties taking into account their respective perspectives and the options realistically available to them at the time of entering into the transaction Given the above, it becomes even more important that taxpayers revisit their documentation and ensure that it is robust enough to defend the transfer pricing policies and practices applied. It is also recommended that the commercial rationale of the related party arrangements are assessed and documented. Changes to TP documentation The IRAS has clarified that for any documentation prepared for years prior to YA 2019, taxpayers can apply the group level and entity level documentation provided under the 2018 Singapore TP Guidelines or the IRAS e-tax guide on Transfer Pricing Guidelines (Fourth Edition) (2017 Singapore TP Guidelines). The IRAS has provided adequate time for taxpayers to take into account the new requirements beginning in the YA 2019, as well as the transition from the previous Guidelines. The IRAS acknowledges a three-tiered documentation structure consisting of: (a) documentation at the group level; (b) documentation at the entity level; and (c) Countryby-Country Reporting. It also understands that taxpayers may have prepared similar TP documentation (for example OECD Master File and Local File) for the purpose of complying with the requirements of other countries. Such documentation may form part of the Singapore TP documentation. However, for the Singapore TP documentation to be considered compliant with the Singapore requirements, it has to meet all the content requirements outlined in the Second Schedule of the TPD Rules. It is important to note that there are certain minor additional content requirements in the Singapore TP Guidelines as compared to the 2017 OECD TP Guidelines. New surcharge and penalty regime An imposition of the new surcharge and penalty regime will be effective in the YA 2019 if taxpayers do not comply with the arm s-length principle or TP documentation requirements. If a taxpayer s related party transactions are not at arm s-length and the IRAS determines that TP adjustments are required, a 5% surcharge will be imposed on the TP adjustments made. This will apply regardless of whether the TP adjustments result in additional tax liability. If taxpayers do not agree with the IRAS position, an objection may still be filed against the TP adjustments and the applicable surcharge. A separate noncompliance penalty not exceeding S$10,000 (US$7,600) will be imposed on taxpayers. Neither the surcharge nor the penalty are taxdeductible. 5
Guidance on reliance on past TP documentation Overview The IRAS in general expects that taxpayers review and refresh their TP documentation annually. This will result in preparing documentation for each basis period. However, considering the compliance burden, the IRAS allows taxpayers to use the TP documentation that has been prepared previously, i.e., documentation prepared for the past two YAs immediately preceding the year of preparation (for example YA 2017 and YA 2018 documentation for YA 2019 purposes). To be considered as qualifying past documentation, the conditions mentioned under the TPD Rules must be met. Implications Taxpayers should take into account the TPD Rules and the Singapore-specific content requirements when preparing their TP documentation, as failure to comply with the TPD Rules may result in the assessment of penalties. While the TPD Rules provide certain exemptions for taxpayers to prepare TP documentation, taxpayers should nonetheless review their related party transactions to ensure compliance with the arm slength principle under section 34D of the SITA, since the surcharge on transfer pricing adjustments under section 34E of the SITA will still apply. Hong Kong passes legislation for two-tier profit tax rates regime On 21 March 2018, Hong Kong s Legislative Council passed Inland Revenue (Amendment) (No. 7) Bill 2017 (the Bill) which implements the two-tier profit tax rates regime. It is expected to become law (the New Law) on 29 March 2018. The New Law is essentially identical to the Bill. The New Law introduces a two-tier profit tax rates regime effective for fiscal years ending on or after 1 April 2018 as follows: Taxable profits Up to HK$2m (US$250k) Excess of the first HK$2m Tax rates Corporations Unincorporated businesses 8.25% 7.5% 16.5% 15% To primarily benefit small and medium enterprises and startups, and to prevent income splitting, the New Law contains restrictive provisions specifying that a group of connected entities can only elect one of them to be eligible for the two-tier regime for a year of assessment. No double benefits for taxpayers eligible for the preferential half-rate tax regimes The New Law includes a provision to exclude corporations which have elected to be subject to the special half-rate tax regimes for profits derived from their businesses of professional reinsurers, captive insurers, corporate treasury centers, aircraft lessors or aircraft leasing managers. The New Law has also clarified that profits derived from qualifying debt instruments, which are already taxed at 8.25%, will not be included in the first HK$2m threshold under the two-tier regime. Business restructurings to take advantage of the two-tier regime The Government has indicated that business restructurings, including the amalgamation of companies, involving a transfer of business from one company to another, are generally considered as normal commercial activities. As such, tax benefits derived under the two-tier regime as a result of such restructurings will not generally be 6
considered as a tax avoidance arrangement coming into conflict with the New Law. 7
Contact details Principal Tax contacts Yeo Eng Ping eng-ping.yeo@my.ey.com +603 7495 8288 Amarjeet Singh amarjeet.singh@my.ey.com +603 7495 8383 Global Compliance and Reporting Simon Yeoh simon.yeoh@my.ey.com +603 7495 8247 Julian Wong julian.wong@my.ey.com +603 7495 8347 Goh Chee San (based in Sabah) chee-san.goh@my.ey.com +6088 235 733 Janice Wong janice.wong@my.ey.com +603 7495 8223 Julie Thong julie.thong@my.ey.com +603 7495 8415 Lee Li Ming (based in Johor) li-ming.lee@my.ey.com +607 334 1746 Liew Ai Leng ai-leng.liew@my.ey.com +603 7495 8308 People Advisory Services Tan Lay Keng lay-keng.tan@my.ey.com +603 7495 8283 Irene Ang irene.ang@my.ey.com +603 7495 8306 Christopher Lim christopher.lim@my.ey.com +603 7495 8378 Business Tax Services Amarjeet Singh amarjeet.singh@my.ey.com +603 7495 8383 Asaithamby Perumal asaithamby.perumal@my.ey.com +603 7495 8248 Farah Rosley farah.rosley@my.ey.com +603 7495 8254 Robert Yoon robert.yoon@my.ey.com +603 7495 8332 Wong Chow Yang chow-yang.wong@my.ey.com +603 7495 8349 Transaction Tax Services Yeo Eng Ping eng-ping.yeo@my.ey.com +603 7495 8288 Sharon Yong sharon.yong@my.ey.com +603 7495 8478 International Tax Services Anil Kumar Puri anil-kumar.puri@my.ey.com +603 7495 8413 Transfer Pricing Sockalingam Murugesan sockalingam.murugesan@my.ey.com +603 7495 8224 Vinay Nichani vinay.nichani@my.ey.com +603 7495 8433 Hisham Halim hisham.halim@my.ey.com +603 7495 8536 Indirect Tax Yeoh Cheng Guan cheng-guan.yeoh@my.ey.com +603 7495 8408 Aaron Bromley aaron.bromley@my.ey.com +603 7495 8314 Financial Services Bernard Yap bernard.yap@my.ey.com +603 7495 8291 8
Important dates 15 April 2018 Due date for monthly instalments 30 April 2018 6 th month revision of tax estimates for companies with October year-end 30 April 2018 9 th month revision of tax estimates for companies with July year-end 30 April 2018 Statutory deadline for filing of 2017 tax returns for companies with September year-end 15 May 2018 Due date for monthly instalments 31 May 2018 6 th month revision of tax estimates for companies with November year-end 31 May 2018 9 th month revision of tax estimates for companies with August year-end 31 May 2018 Statutory deadline for filing of 2017 tax returns for companies with October year-end 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. 2018 Ernst & Young Tax Consultants Sdn. Bhd. All Rights Reserved. APAC no. 07001268 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 50490 Kuala Lumpur Tel: +603 7495 8000 Fax: +603 2095 7043 9