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Ideas & Insights Newsletter Tax

Introduction to Withholding Tax and Imported Services Tax – Implications of Digital Services (PART 3)

Introduction to Withholding Tax and Imported Services Tax - Implications of Digital Services (PART 3)

Key Takeaway

  • Withholding Tax on Foreign Service Providers
  • Service Tax on Digital Services
Part 3 of this article will focus on digital service tax and service tax issues on imported services for e-Commerce transactions, under the Service Tax Act 2018.

What is Imported Service?

“Imported taxable service” means any taxable service acquired by any person in Malaysia from any person who is outside Malaysia (Section 2 of Service Tax Act 2018)

What is Digital Service?

“Digital service” means any service that is delivered or subscribed over the internet or other electronic network and which cannot be obtained without the use of information technology and where the delivery of the service is essentially automated;”.
Digital Service
With effect from 1 January 2019, regardless if you are either a Service Tax-registered person or Non-Service Tax-registered person, you are required to file a return and pay the service tax in respect of all taxable services that you procure from overseas suppliers, if such taxable services fall under Group G and I of Service Tax Regulations 2018.

Types of Digital Service

  • Software, Application & Video Games
  • Music, e-book and film
  • Advertisement and online platform
  • Search engines and social networks
  • Database and hosting
  • Internet Based Telecommunication
  • Online Training
  • Others (such as subscriptions to online newpapers and journals etc.)
Categories
Ideas & Insights Newsletter Tax

Introduction to Withholding Tax and Imported Services Tax – Implications of Digital Services (PART 2)

Introduction to Withholding Tax and Imported Services Tax - Implications of Digital Services (PART 2)

Key Takeaway

  • Withholding Tax on Foreign Service Providers
  • Service Tax on Digital Services
Part 2 of this article will focus on withholding tax issues around ‘royalties’ (Section 109, Income Tax Act 1967) and ‘services’ (Section 109B, Income Tax Act 1967) for e-Commerce transactions.

What is e-Commerce?

Any commercial transactions conducted electronically including the provision of information, promotion, marketing, supply, order or delivery of goods and services (even though payment and delivery relating to such transactions may be conducted offline).

Withholding tax implications

To determine the nature for payment of e-commerce services (i.e Royalties or Services?)
e-commerce

Example of payments under e-commerce transactions

Online advertising on Facebook, online payment such as Paypal, payment for cloud computing service, payment for subscription to content aggregators etc.

Important

Payment made may fall under Sec 109 instead of Sec 109B and penalty will be imposed due to non- compliance with withholding tax rules.
Categories
Ideas & Insights Newsletter Tax

Introduction to Withholding Tax and Imported Services Tax – Implications of Digital Services (PART 1)

Introduction to Withholding Tax and Imported Services Tax - Implications of Digital Services (PART 1)

Key Takeaway

  • Withholding Tax on Foreign Service Providers
  • Service Tax on Digital Services
In this present age, business cannot avoid but to rely on digital services to reach out to their customers and suppliers in order to operate or enhance their business functions. The reliance on digital services to conducting a business is accelerated particularly so with the Movement Control Order (MCO) being implemented in Malaysia which limits the ability of businesses to continue doing business, the ‘traditional’ way. Some of the most common digital services relied on by businesses would include software applications, digital advertising, payment gateways and cloud storage, which are generally dominated by foreign service providers such as Google, Microsoft and Facebook.

Such digital services would obviously involve payments for the use of such digital services to the service providers and therefore, you have to be aware of the tax implications behind the use of digital service, namely:

  1. Withholding tax under the Income Tax Act 1967; and
  2. Digital service tax or imported services tax under the Service Tax Act 2018.

This series of short articles intend to provide some general guidance on the tax implications of payments for such services to service providers who are not residing in Malaysia.
You also need to take note that in some cases, both service tax and withholding tax can apply on the same service, as per the illustration as below:-
Payment Made to Non-Malaysian Resident Business
Categories
Ideas & Insights Newsletter Tax

Employers Responsibility under the Income Tax Act

Employers Responsibility under the Income Tax Act

Key Takeaway

  • To inform IRBM any new employee within 30 days.
  • To inform IRBM the cessation/retirement/death of an employee.
  • To inform IRBM within 30 days before the date of employee intending to leave Malaysia.

Notification of Commencement / Cessation of Employment of an Employee

Pursuant to Section 83 of the Income Tax Act 1967 (ITA 1967), we wish to remind all employers of their responsibility to inform the Inland Revenue Board of Malaysia (IRBM), via prescribed forms (as below), on the following:

Table 1:

Employer’s responsibilities
Subsection

Penalty/Fine

Form
To inform IRBM if there is a new employee.
Subsection 83(2) ITA 1967
Failure to notify will result in the employer being charged under paragraph 120(1) (c) and / or subsection 107(4)
To inform IRBM if there are any cessation/retirement/death of an employee*
Subsection 83(3) ITA 1967
Failure to notify will result in the employer being charged under paragraph 120(1) (c) and / or subsection 107(4)
To inform to IRBM not more than 30 days before the date of an employee intending to leave Malaysia
Subsection 83(4) ITA 1967
Failure to notify will result in the employer being charged under paragraph 120(1) (c) and / or subsection 107(4)
Please take note that while Section 83 of the ITA 1967 provides that the law applies in the situation where the employer commences, or about to cease to employ an individual who is or is likely to be chargeable to tax in respect of income in respect of gains or profits from the employment, the IRBM has recently adopted the practise of applying such requirements to ALL employees who have commenced employment, or cease to be employed by the employer.

All applications should be made by the employer to IRBM by the following methods:
  1. e-SPC at IRBM official website; or
  2. Form which can be downloaded from IRBM official website (please refer to TABLE 1 above).

Failure to comply with the above may result in, upon conviction of an offence under Section 120 of the ITA 1967, the employers being liable to a fine of not less than RM200 and not more than RM20,000 or to imprisonment for a term not exceeding six months or to both.
Categories
Advisory Ideas & Insights Newsletter

Smart Automation Grant (SAG)

Smart Automation Grant (SAG)

Key Takeaway

  • The qualified company will be eligible for Smart Automation Grant given on matching basis (1:1) up to RM1 Million per company.
The Smart Automation Grant was introduced in the National Economic Recovery Plan or Pelan Jana Semula Ekonomi Negara (PENJANA) in June 2020. The main objectives of the Smart Automation Grant is to assist Small and Medium Enterprises (SMEs) and Mid-Tier Companies (MTCs) to automise and digitalise operations, production and trade channels.

SAG will be given on a matching basis (1:1) based on eligible expenditures, up to a maximum grant of Ringgit Malaysia One Million (RM1,000,000) per company.

Who Is Eligible For Smart Automation Grant

1. Incorporated under the Companies Act 1965/2016;
2. Effective equity of the company must be at least 51% owned by Malaysians;
3. The company possess a valid Business Licence from the Local Authority;
4. Must be in operation for at least 12 months;
5. Must engage in manufacturing activity in compliance with the Industrial Co- ordination Act, 1975 or service activities which are regulated by specific acts/regulations or governed by relevant ministries/agencies;
6. Eligible for Small and Medium Enterprises (SMEs) and Mid-tier Companies (MTCs). Definition of SMEs and MTCs as below:

Manufacturing

Services
SME
  • Sales turnover not exceeding RM50 million; or
  • Employees not exceeding 200
  • Sales turnover not exceeding RM20 million; or
  • Employees not exceeding 75

MTC

  • Sales turnover from RM50 million to RM500 million
  • Sales turnover from RM20 million to RM500 million.
7. Must meet at least one of the Committed Deliverables as below:-
  • Reduction of Unskilled Workers
  • Reduction in Man Hours
  • Increase in Production Volume
  • Quality Improvement – Reduction in Defect Rate
  • Increase in Services Delivery
  • Reduction of Man Hours in Delivering Services
8. Eligible expenditures are the automation machine, equipment or software that are used directly in the overall value chain of manufacturing and services activities

What Is The Project Duration Under This Matching Grant?

  1. Project must be completed within 12 months from the date of the Approval Letter issued by Authority;
  2. Any unutilised grant amount after 12 months will be withdrawn by Authority;
  3. Any request for extension is required to be made at least 2 months before the project end date and is subjected to the approval of the Authority Committee.

Effective Date Of Application

Application must be submitted to MIDA between 4th December 2020 to 31 December 2021.
Categories
Ideas & Insights Newsletter Tax

Special Tax Incentive For Company Relocating into Malaysia

Special Tax Incentive For Company Relocating into Malaysia

Special Tax Incentive For Company Relocating into Malaysia

Listed below are the tax incentives offered to new and existing foreign companies relocating their business
into Malaysia:-

Type of Company
Eligible Capital Expenditure (RM)

Incentive

Incentive

Duration

1. New company
i. RM300 million to
RM500 million.
Special tax rate
0%
10 years
ii. RM500 million and above.
Special tax rate
0%

15 years

2. Existing company
Relocating overseas facilities into Malaysia with capital investment above RM300 million
Investment tax allowance (ITA)
100%
5 years and is offset against 100% statutory income of the activity.

Eligibility Criteria

Definition of new company
a) Company relocating manufacturing facility for eligible activities from another country to Malaysia; or
b) Company establishing new operation in Malaysia; and
c) Do not have existing manufacturing operation in Malaysia.
Definition of existing company
Foreign or locally owned company that has existing manufacturing operation in Malaysia and is relocating its manufacturing operations from outside Malaysia for new business segment.

The products from the new business segment are not part of the expansion project for existing products.
Conditions for this incentive
a) To incur the capital expenditure (excludes land cost) within 3 years from the date of the first capital expenditure incurred;
b) To incur the first capital expenditure within 1 year from the approval date; and
c) Company will be subjected to conditions related to the Employment and Vendor Development Program
Promoted manufacturing activities
Manufacturing activities EXCEPT manufacturing activities as below:-
Non Products / Activities Industries
All products for iron & steel considered sensitive except products listed in the Promoted Activities / Products Under the PIA 1986 under the category of Manufacture of Iron and Steel, and Manufacture of Non- Ferrous Metal and their Products
Iron & Steel
Weapon and ammunitions Machinery & Equipment
Electricals products supplied to generate power for consumption of TNB and Petronas such as general cables, wire harness, distribution boards, control panels, switching apparatus, transformers Electrical
Liquor and alcoholic beverages Beverages & Tobacco
Tobacco and tobacco products including cigarette Beverages & Tobacco
Palm Oil milling and refining Palm Oil
Production of food products that only involve mixing, blending and cooking. Example: sauces, paste, premix food products Food Manufacturing
Beverages Beverages & Tobacco
Sugar Food Manufacturing
Pineapple Canning Food Manufacturing
Paper-based packaging materials from waste paper except for coated duplex board Paper, Printing & Publishing
Wood-based products including furniture, plywood, sawn timber and others Wood & Wood Products
Printing and Publishing Paper, Printing & Publishing
Remanufacturing/ reconditioning/ reassembly of motor vehicles and related components Automotive / Motor vehicle
Non-EEV Automotive / Motor vehicle
Drones and rocket Aerospace related products for Military/Defense application (Non-commercial segment) Aerospace for Military/Defense Application
Recycling of any types of waste All
Refinery of crude petroleum oil Petroleum
Passengers car tires Rubber
General plastic products such as plastic bags, bottles Plastic
Gloves All
Manufacturing of construction material except for following products:
  • Industrial Building System (IBS)
  • Panels
  • Boards
  • Tiles
  • Blocks or similar articles of natural and synthetic fiber agglomerated with cement plaster or other mineral binding substance
Construction
Textiles products except for following activities:
  • Natural or man-made fibres
  • Yarn of natural or man-made fibres
  • Woven fabrics
  • Knitted fabrics
  • Non-woven fabrics
  • Finishing of fabrics such as bleaching, dyeing and printing
  • Specialised Apparel
  • Technical or functional textiles and textile products
Textile
Company Taxes In Malaysia
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Categories
Ideas & Insights Newsletter Tax

Special Deduction For Renovation And Refurbishment Expenses

Special Deduction For Renovation And Refurbishment Expenses

Key Takeaway

  • Special tax deduction for costs of renovation and refurbishment of business premise.

The Income Tax (Costs of Renovation and Refurbishment of Business Premise) Rules 2020 P.U (A) 381-2020 has been gazetted on 15 December 2020.

 

With effective from Year of Assessment 2020, a special tax deduction is given for the costs of renovation and refurbishment of business premise incurred by a person from 1 March 2020 until 31 December 2021, which is certified by the external auditor.

 

The total amount of deduction allowed is subject to a maximum amount of RM300,000.

“Costs of renovation and refurbishment of business premise” means the costs of renovation and refurbishment of business premise incurred for the purposes specified in the First Schedule of the Rules as below:

General Electrical Installation

Lighting

Gas System

Water System

Kitchen Fittings

Sanitary Fittings

Door, Gate, Window, Grill & Roller Shutter

Fixed Partitions

Flooring (Including Carpets)

Wall Covering (Including Paint Work)

False Ceiling and Cornices

Ornamental Features or Decorations Excluding Fine Art

Canopy or Awning

Fitting Room or Changing Room

Recreational Room for Employee

Air-Conditional System

Childern Play Area

Reception Area

  1. General electrical installation
  2. Lighting
  3. Gas System
  4. Water System
  5. Kitchen fittings
  6. Sanitary fittings
  7. Door, gate, window, grill and roller shutter
  8. Fixed partitions
  9. Flooring (including carpets)
  10. Wall covering (including paint work)
  11. False ceiling and cornices
  12. Ornamental features or decorations excluding fine art
  13. Canopy or awning
  14. Fitting room or changing room
  15. Recreational room for employee
  16. Air-conditional system
  17. Children play area
  18. Reception area
  19. Surau
However, the above deduction shall not include the following cost:-
  1. Designer fee
  2. Professional fee
  3. Purchase of antique (purchase of an object or work of art which, represents a previous era in human society, is collectable item due to its age, rarity, craftsmanship or other unique features and appreciates in value over time).
Take note that these Rules shall not apply to a person who has made a claim in relation to the costs of renovation and refurbishment of business premise under:-
  1. any allowable expenses under subsection 33(1) of the Income Tax Act 1967 (ITA 1967);
  2. any capital allowance under Schedule 2 of the ITA 1967; or
  3. any capital allowance under Schedule 3 of the Act.

Our comments

  • Businesses can take this opportunity to renovate or refurbish their business premises during the incentive period.
  • Businesses that have already renovated or refurbished their business premises may need to review their tax position for Year of Assessment (YA) 2020 and also to review the tax estimation for YA 2021.
Categories
Ideas & Insights Newsletter Transfer Pricing

Transfer Pricing Requirements And New Penalties in Malaysia

Transfer Pricing Requirements And New Penalties in Malaysia

Key Takeaway

  • TP Documentation is to be prepared annually
  • Changes in Form C disclosure items for related party transactions and interest expenses paid to related companies
  • CbyC Rules are applicable for companies with consolidated revenue of more than RM3 billion
  • New penalty rates have been introduced in addition to TP Audit Framework
This is a summary of the Transfer Pricing Requirements in Malaysia.

TP Guidelines (“TPG”)

The 2012 TPG superseded the Guidelines previously issued in year 2003, and was intended to provide detailed guidance to taxpayers on how to comply with the requirements of the law under Section140A of Income Tax Act 1967 and the TP Rules 2012. The 2012 TPG is applicable to:
  • Controlled transactions between associated persons, where at least one party is assessable or chargeable to tax in Malaysia; and
  • Applies to both cross-border transactions and domestic related party transactions. The TPG need not be applied to domestic controlled transactions if it can be proven that any TP adjustments will not alter the total tax payable by both parties.

The 2012 TPG was updated on 15 July 2017 with one new chapter on Commodity Transactions (Chapter X) and an updated version of three existing chapters as follows:
  • Chapter II – The Arm’s Length Principle
  • Chapter VIII – Intangibles
  • Chapter XI – Documentation
The guidelines reinforces that companies involved in related party transactions in Malaysia must prepare a TP documentation for the relevant year of assessment.
  • Companies with gross income more than RM25 million, and the total amount of related party transactions more than RM15 million; OR
  • Companies with financial assistance by related parties more than RM50 million.

Companies who fall below this threshold may opt to prepare a limited scope TP documentation instead of a full scope TP documentation. A full scope report may consists of the following:
  1. Organizational structure
  2. Nature of business/industry and market conditions
  3. Controlled transactions
  4. Pricing policies
  5. Assumption, strategies and information regarding factors that influenced the setting of pricing policies
  6. Comparability, functional and risk analysis
  7. Selection of the transfer pricing method
  8. Application of the transfer pricing method
  9. Financial information
  10. Other relevant/supporting documents

A simplified TP documentation consists of items (a), (c) and (d) above. Taxpayer is allowed to apply any method other than the five methods described in the TPG provided it results in arm’s length outcomes. While the TP documentation has to be prepared, it does not need to be submitted unless requested by the tax authorities.

Tax Return Form

Effective from year of assessment 2014, the income tax return form includes a disclosure on whether TP documentation has been prepared. From FY 2019 onwards, the income tax return form was amended again to include additional disclosures as follows:

  1. Disclosure on whether tax payers carry out controlled transactions under Section 139 and 140A. Tax payer is to disclose all type of transactions they are involved in with a related party and the amount. Tax payer would also have to declare if TP documentation have been prepared.
  2. Disclosure of whether the taxpayer is subject to interest restriction under Section 140C.
    In 2019, the tax authorities introduced Restriction on deductibility of interest under Section 140C of the Income Tax Act 1967, in effect from 1 July 2019 onwards. They also released the Restriction on Deductibility of Interest Rules 2019 and the Guidelines aimed at restricting the deduction of interest expense in relation to cross border transaction. The Rules are applicable to:
    • companies who have been granted any financial assistance in a controlled transaction;
    • the total amount of any interest expense for all such financial assistance exceeds RM500,000 in the basis period.

The maximum amount of interest that is deductible is 20% of the Tax EBITDA. The balance is allowed to be carried forward.

Income Tax (Country-by-Country Reporting) Rules 2016 (“CbyCR Rules”)

In 2017, the tax authorities issued the CbyCR Rules followed by the Labuan CbyCR Regulation, effective from 1 January 2017 and is applicable to MNE Groups with total consolidated group revenue of at least RM 3 billion. The rules state that the ultimate parent (reporting entity) would have to complete the CbyC Report and submit it to the tax authorities on or before 12 months from the last day of the reporting FY (i.e. 31 December 2018 if the tax payer’s year end is 31 December 2017).

There is also a requirement to notify the tax authorities if the tax payer is a reporting entity or a non- reporting entity in Malaysia entity on or before the last day of the reporting FY (i.e. 31 December 2017 if the tax payer’s year end is 31 December 2017). They also need to declare in the form C if CbyC is relevant to them and if notification has been submitted.
Type of entity
Details
Reporting entity
The reporting entity shall notify the Director General in writing if it is the ultimate holding entity. Notification will have to include details of all Malaysian and foreign non-reporting constituent entities.
Non-reporting entity
The Malaysian subsidiary does not have to submit the CbyCR but they shall notify the Director General in writing of the identity and tax residence of the reporting entity. There are two types of notification for non-reporting entity as follows:
a. Notification for non-reporting entities whose reporting entity is in Malaysia
b. Notification for non-reporting entities whose reporting entity is outside Malaysia

TP Audit Framework 2019

For Companies who fail to comply, penalties will be imposed under subsection 113(2) of Income Tax Act 1967 (“ITA”) and the TP Audit Framework 2019. The rates from the framework are as follows, divided between normal cases and voluntary disclosure cases (“VD”):
Condition Penalty rate
Normal case VD
Understatement or omission of income 100%
Taxpayer did not prepare TP documentation 50% N/A
Taxpayer has prepared and submitted the TP documentation with the VD but not in accordance to the requirements;

OR;

Taxpayer has prepared a comprehensive and good quality TP documentation but failed to submit within 30 days upon request
30% 20%
Taxpayer has prepared and submitted a comprehensive and good quality TP documentation with the VD in accordance to the requirements;

OR;

Taxpayer has prepared a comprehensive and good quality TP documentation and submitted within 30 days upon request.
0% 0%

TP Penalties and Power to Disregard Structures

Failure to furnish contemporaneous TP documentation

With the introduction of Section 113B of the ITA, any person who fails to furnishing a contemporaneous TPD shall be liable to the following:
  1. Fine of not less than RM20,000 and not more than RM100,000; or
  2. Imprisonment for a term not exceeding six (6) months; or
  3. Both.
The new section also empowers the Director General to impose a penalty as stated in (a) if taxpayer is not prosecuted for failure to furnish TP contemporaneous documentation. Taxpayers can appeal on the decision with the Special Commissioners of Income Tax but the burden of proof is on the taxpayers.

5% surcharge on TP adjustments

Under Section 140A (3C), the Director General may impose a surcharge of not more than 5% of the total transfer pricing adjustments regardless if there is any additional taxes payable by the taxpayers. Any surcharge imposed shall be treated as collection tax and would not be treated as a tax payable under any other provision within the ITA.

Power to disregard structure in controlled transactions

Under S140A (3A) and (3B), the Director General will be empowered to disregard any related party transaction structure adopted by the company if he is of the opinion that:
  1. The economic substance of that transaction differs from its form; or
  2. The commercial reality of that transaction differs from the arrangement which would have been adopted by an independent party.
In these circumstances, the Director General will be allowed to make adjustments to the structure of that transaction to reflect the structure that would have been adopted if the transaction was carried out with an independent party dealing at arm’s length.

Failure to comply (after adjustments have ben issued)

Penalties will be imposed under subsection 113(2) and the TP Audit Framework 2019. The rates can range from 30% to 100% depending on whether the TP documentation is prepared contemporaneously in accordance with the requirements and submitted within 14 days.

Illustration on Penalties

1. AB Sdn Bhd was requested to submit contemporaneous TPD.
2. AB Sdn Bhd submitted later than 30 days.
3. Audit findings resulted in adjustment of RM100,000.
4. Adjustments gave rise to RM25,000 additional tax payable.
Current penalty regime (RM)
Proposed penalty regime (RM)
Fine between RM20k and RM100k. (assumed at minimum penalty amount)
20,000
5% surcharge x 100,000
5,000
Additional tax payable
25,000
25,000
Penalty on additional tax (assumed at 35%)
8,750
8,750
Total (Approximately 75% addition)
33,750
58,750
Categories
Ideas & Insights Newsletter Tax

Re-Alert : Transfer Pricing Audit Framework & Requirements in Malaysia

Re-Alert : Transfer Pricing Audit Framework & Requirements in Malaysia

Key Takeaway

  • TP Documentation is to be prepared annually
  • Changes in Form C disclosure items for related party transactions and interest expenses paid to related companies
  • CbyC Rules are applicable for companies with consolidated revenue of more than RM3 billion
  • New penalty rates have been introduced in addition to TP Audit Framework
This is a summary of the Transfer Pricing Requirements in Malaysia.

TP Guidelines (“TPG”)

The 2012 TPG superseded the Guidelines previously issued in year 2003, and was intended to provide detailed guidance to taxpayers on how to comply with the requirements of the law under Section140A of Income Tax Act 1967 and the TP Rules 2012. The 2012 TPG is applicable to:
  • Controlled transactions between associated persons, where at least one party is assessable or chargeable to tax in Malaysia; and
  • Applies to both cross-border transactions and domestic related party transactions. The TPG need not be applied to domestic controlled transactions if it can be proven that any TP adjustments will not alter the total tax payable by both parties.

The 2012 TPG was updated on 15 July 2017 with one new chapter on Commodity Transactions (Chapter X) and an updated version of three existing chapters as follows:
  • Chapter II – The Arm’s Length Principle
  • Chapter VIII – Intangibles
  • Chapter XI – Documentation
The guidelines reinforces that companies involved in related party transactions in Malaysia must prepare a TP documentation for the relevant year of assessment.
  • Companies with gross income more than RM25 million, and the total amount of related party transactions more than RM15 million; OR
  • Companies with financial assistance by related parties more than RM50 million.

Companies who fall below this threshold may opt to prepare a limited scope TP documentation instead of a full scope TP documentation. A full scope report may consists of the following:
  1. Organizational structure
  2. Nature of business/industry and market conditions
  3. Controlled transactions
  4. Pricing policies
  5. Assumption, strategies and information regarding factors that influenced the setting of pricing policies
  6. Comparability, functional and risk analysis
  7. Selection of the transfer pricing method
  8. Application of the transfer pricing method
  9. Financial information
  10. Other relevant/supporting documents

A simplified TP documentation consists of items (a), (c) and (d) above. Taxpayer is allowed to apply any method other than the five methods described in the TPG provided it results in arm’s length outcomes. While the TP documentation has to be prepared, it does not need to be submitted unless requested by the tax authorities.

Tax Return Form

Effective from year of assessment 2014, the income tax return form includes a disclosure on whether TP documentation has been prepared. From FY 2019 onwards, the income tax return form was amended again to include additional disclosures as follows:

  1. Disclosure on whether tax payers carry out controlled transactions under Section 139 and 140A Tax payer is to disclose all type of transactions they are involved in with a related party and the amount. Tax payer would also have to declare if TP documentation have been prepared.
  2. Disclosure of whether the taxpayer is subject to interest restriction under Section 140C.

    In 2019, the tax authorities introduced Restriction on deductibility of interest under Section 140C of the Income Tax Act 1967, in effect from 1 July 2019 onwards. They also released the Restriction on Deductibility of Interest Rules 2019 and the Guidelines aimed at restricting the deduction of interest expense in relation to cross border transaction. The Rules are applicable to:
    • companies who have been granted any financial assistance in a controlled transaction;
    • the total amount of any interest expense for all such financial assistance exceeds RM500,000 in the basis period.

The maximum amount of interest that is deductible is 20% of the Tax EBITDA. The balance is allowed to be carried forward.

Income Tax (Country-by-Country Reporting) Rules 2016 (“CbyCR Rules”)

In 2017, the tax authorities issued the CbyCR Rules followed by the Labuan CbyCR Regulation, effective from 1 January 2017 and is applicable to MNE Groups with total consolidated group revenue of at least RM 3 billion. The rules state that the ultimate parent (reporting entity) would have to complete the CbyC Report and submit it to the tax authorities on or before 12 months from the last day of the reporting FY (i.e. 31 December 2018 if the tax payer’s year end is 31 December 2017).

There is also a requirement to notify the tax authorities if the tax payer is a reporting entity or a non- reporting entity in Malaysia entity on or before the last day of the reporting FY (i.e. 31 December 2017 if the tax payer’s year end is 31 December 2017). They also need to declare in the form C if CbyC is relevant to them and if notification has been submitted.
Type of entity
Details
Reporting entity
The reporting entity shall notify the Director General in writing if it is the ultimate holding entity. Notification will have to include details of all Malaysian and foreign non-reporting constituent entities.
Non-reporting entity
The Malaysian subsidiary does not have to submit the CbyCR but they shall notify the Director General in writing of the identity and tax residence of the reporting entity. There are two types of notification for non-reporting entity as follows:
a. Notification for non-reporting entities whose reporting entity is in Malaysia
b. Notification for non-reporting entities whose reporting entity is outside Malaysia

TP Audit Framework 2019

For Companies who fail to comply, penalties will be imposed under subsection 113(2) of Income Tax Act 1967 (“ITA”) and the TP Audit Framework 2019. The rates from the framework are as follows, divided between normal cases and voluntary disclosure cases (“VD”):
Condition Penalty rate
Normal case VD
Understatement or omission of income 100%
Taxpayer did not prepare TP documentation 50% N/A
Taxpayer has prepared and submitted the TP documentation with the VD
but not in accordance to the requirements;

OR;

Taxpayer has prepared a comprehensive and good quality TP
documentation but failed to submit within 30 days upon request
30% 20%
Taxpayer has prepared and submitted a comprehensive and good quality
TP documentation with the VD in accordance to the requirements;

OR;

Taxpayer has prepared a comprehensive and good quality TP
documentation and submitted within 30 days upon request.
0% 0%

TP Penalties and Power to Disregard Structures

With effect from 1 January 2021, the following penalties will come into effect.

Failure to furnish contemporaneous TP documentation

With the introduction of Section 113B of the ITA, any person who fails to furnishing a contemporaneous TPD shall be liable to the following:
  1. Fine of not less than RM20,000 and not more than RM100,000; or
  2. Imprisonment for a term not exceeding six (6) months; or
  3. Both.
The new section also empowers the Director General to impose a penalty as stated in (a) if taxpayer is not prosecuted for failure to furnish TP contemporaneous documentation. Taxpayers can appeal on the decision with the Special Commissioners of Income Tax but the burden of proof is on the taxpayers.

5% surcharge on TP adjustments

Under Section 140A (3C), the Director General may impose a surcharge of not more than 5% of the total transfer pricing adjustments regardless if there is any additional taxes payable by the taxpayers. Any surcharge imposed shall be treated as collection tax and would not be treated as a tax payable under any other provision within the ITA.

Power to disregard structure in controlled transactions

Under S140A (3A) and (3B), the Director General will be empowered to disregard any related party transaction structure adopted by the company if he is of the opinion that:
  1. The economic substance of that transaction differs from its form; or
  2. The commercial reality of that transaction differs from the arrangement which would have been adopted by an independent party.
In these circumstances, the Director General will be allowed to make adjustments to the structure of that transaction to reflect the structure that would have been adopted if the transaction was carried out with an independent party dealing at arm’s length.

Illustration on Penalties

1. AB Sdn Bhd was requested to submit contemporaneous TPD.
2. AB Sdn Bhd submitted later than 30 days.
3. Audit findings resulted in adjustment of RM100,000.
4. Adjustments gave rise to RM25,000 additional tax payable.
Current penalty regime (RM)
Proposed penalty regime (RM)
Fine between RM20k and RM100k. (assumed at minimum penalty amount)
20,000
5% surcharge x 100,000
5,000
Additional tax payable
25,000
25,000
Penalty on additional tax (assumed at 35%)
8,750
8,750
Total (Approximately 75% addition)
33,750
58,750
Categories
Advisory Ideas & Insights Newsletter

Amendment to the Malaysian Anti- Corruption Commission Act – the New Corporate Liability Offence For Corruption

Amendment to the Malaysian Anti- Corruption Commission Act - the New Corporate Liability Offence For Corruption

Key Takeaway

  • Pooling of resources and cost savings as compare to an entity itself alone to engage consultancy to implement the procedures
  • Encouraging positive behaviour and assuring best practice and internal control throughout the organization
  • Promote strong brand reputation
  • More resilient to risk of fraud, corruption and contingency loss
In 2019, the Malaysian Anti-Corruption Commission has amended the Malaysian Anti-Corruption Commission Act (“MACC Act”). Under the Act, Section 17 A introduces the implementation of the corporate liability provision involving commercial organisations and came into force on 1st June 2020. A commercial organisation includes a company, limited liability partnership or partnership which is formed under Malaysian law, or a company or partnership which carries on a business or a part of a business in Malaysia.

The provision under Section 17A MACC Act 2009 stipulates a corporate liability principle where a commercial organisation can be considered guilty if any of its employees and/or associates commit corruption for the benefit of the organisation. The commercial organisation is also considered guilty regardless whether the upper management or its representatives are aware about the corruption acts committed by its employees or associates.

If a commercial organisation is found guilty under Section 17A, the penalty under Section 17A (2) is:
  1. a fine of not less than 10 times the value of the bribe or RM 1 million, whichever is higher, or
  2. imprisonment for up to 20 years, or
  3. both
However, a commercial organisation can defend itself if it can demonstrate that the organisation implemented ‘Adequate Procedure’ in its operation. The commercial organization has to prove its establishment of appropriate internal management procedures to prevent its related personnel from being involved in corruption and bribery acts.

In order to assist the commercial organization to have further understanding of the mentioned Adequate Procedure, the Prime Minister’s Department has issued Guidelines on Adequate Procedures pursuant to Section 17A.

In essence, the Guidelines on Adequate Procedures outline five guiding principles, represented by the acronym ‘T.R.U.S.T’.
  1. Top Level Commitment.
  2. Risk Assessment.
  3. Undertake Control Measures.
  4. Systematic Review, Monitoring and Enforcement.
  5. Training and Communication.
Due to this amendment, the potential for commercial organisations and its directors, partners or managers to be prosecuted for bribery committed by their employees, agents and other associated parties will increase drastically. It is therefore crucial for commercial organisations to implement the relevant procedures to prevent bribery from being committed.