The Corporate Tax Planning Law Review: Malaysia
As the global pandemic continued its stretch into 2021, which proved to be filled with great challenges, the Malaysian government allocated its largest budget to spur the economy and support its recovery. From a tax perspective, certain measures were proposed to increase the government's tax revenues while extending incentives to companies for recovery. In the short term, various tax relief meas ures were implemented and incentives extended to mitigate the impact of the pandemic on businesses and individuals affected by the outbreak and lockdown. For example, companies are allowed to carry forward their losses for 10 years instead of the previous seven years, and the incentive period for reinvestment allowance (RA), which had expired, was given a further extension of two years. However, in an effort to increase the government's revenue collection and compliance, the government expanded the revenue authorities' power to acquire financial information from financial institutions without alerting the taxpayer after a court judgment has been obtained against the taxpayer. To increase the country's tax base, the government also removed the exemption given to foreign income received in Malaysia by Malaysian residents and introduced withholding tax obligations for payments made to agents. These reforms suggest that scrutinising foreign activities of taxpayers and the prevention of tax leakages will be at the forefront of the Inland Revenue Board's (IRB) priorities in the foreseeable future.
On an international front, Malaysia remains committed to implementing the OECD Base Erosion and Profit Shifting (BEPS) Action Plan following Malaysia's entry into the OECD Inclusive Framework on BEPS as an associate member in 2017.2 Malaysia has recently deposited its instrument of ratification of the OECD Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, better known as the Multilateral Instrument (MLI), which will modify the terms of its existing double taxation agreements (DTAs).
i Entity selection and business operations
The most common forms of business entities are companies (private or public), partnerships, limited liability partnerships (LLPs) and sole proprietorships. For foreign enterprises, business activities can also be carried out through a local branch as opposed to an incorporated local subsidiary.
Under the Malaysian Income Tax Act 1967 (the ITA), most of the business entities above are taxable given the non-exhaustive definition of 'a taxable person' under the ITA.3 However, Malaysia offers a multitude of tax exemptions under the ITA and the Promotion of Investments Act 1986 (the PIA), which exempt either the entirety of the income of an entity from tax or income in respect of specific business activities. Tax incentives are also offered in the form of allowances or increased tax deductions.
The Malaysian government has recently embarked on a comprehensive review and revamp of the existing tax incentive framework to increase its competitiveness, transparency and attractiveness. To make room for the review to be completed, existing tax incentives that expire in 2020 – including those relating to aerospace, ship building and repairing; BioNexus status; and economic development corridors – have been extended to 2022. Other proposed tax incentives for 2022 include:
- relaxing conditions for the renewal of principal hub incentives relating to the number of high-value jobs, annual operating expenditure and number of key posts;
- a new Global Trading Centre tax incentive, giving eligible taxpayers a concessionary tax rate of 10 per cent for five years and an additional five years on renewal;
- special incentives granted to eligible manufacturers for relocating their business operations to Malaysia;
- extension of tax deduction up to 300,000 ringgit for the cost of renovating and refurbishing business premises; and
- new tax incentives for activities under the Digital Ecosystem Acceleration Scheme (a reduced tax rate of zero per cent to 10 per cent and investment tax allowance of 100 per cent on capital expenditure for qualifying activities).
For multinational businesses considering establishing a presence in Malaysia, entity selection plays a pivotal role as it will affect the rate of tax payable and tax incentives available.
Sole proprietorships and partnerships
Sole proprietorships and partnerships are not recognised as 'persons' for income tax purposes. Consequently, the profits and losses of a proprietorship or partnership flow through to the business owners, who are taxed on their individual income at the graduated rates of tax for individuals.4 In a partnership, each partner is assessed on their share of the partnership income.5
Companies are generally taxed at the corporate rate of 24 per cent.6 For 2022, a special one-time 'prosperity tax' at a rate of 33 per cent will be imposed for every ringgit on chargeable income exceeding 100 million ringgit.7 For a company that is resident and incorporated in Malaysia that has a paid-up ordinary share capital of 2.5 million ringgit or less and with gross income of not more than 50 million ringgit, income tax is chargeable at a rate of 17 per cent for the first 600,000 ringgit and 24 per cent for every ringgit thereafter.8
Locally incorporated and resident companies can enjoy significant tax incentives, most notably in the form of pioneer status and investment tax allowance under the PIA.9 Companies that are granted pioneer status by participating in a promoted activity or producing a promoted product are generally allowed tax exemption on 70 per cent of their statutory income for five years.10 Investment tax allowance, however, is normally granted on 60 per cent of the capital expenditure incurred for a promoted activity or in the production of a promoted product for a period of five years, to be utilised against 70 per cent of the statutory income.11
RA is also available on 60 per cent of the capital expenditure incurred on a factory, plant or machinery used in Malaysia for the expansion, modernisation or diversification of a company's business.12 As all three incentives are mutually exclusive, it might be more advantageous for businesses that qualify for both investment tax allowance and RA to apply for RA, as it can be enjoyed for a longer period of 15 years.13
Local branches of non-resident entities are generally treated as non-residents for income tax purposes unless it can be established that the management and control of their affairs or businesses are exercised in Malaysia.14 Branches are taxable at a rate of 24 per cent15 on income accruing in or derived from Malaysia, which is the same as the tax rate imposed on local incorporated companies.
Given their non-resident status, tax incentives under the ITA and the PIA are generally unavailable to local branches. Thus, from a tax perspective, it might be more tax efficient for foreign enterprises to carry on their business activities in Malaysia by incorporating a local subsidiary rather than by registering a branch.
In a bid to attract investors and promote the Federal Territory of Labuan as an international offshore financial centre, preferential tax rates are provided under the Labuan Business Activity Tax Act 1990 (the LBATA) for companies incorporated under the Labuan Companies Act 1990 undertaking Labuan trading activities such as banking, insurance, trading, management, licensing and shipping operations.16 Before 1 January 2019, Labuan entities could choose between paying tax at a rate of 3 per cent17 or a flat rate of 20,000 ringgit per year. However, legislative amendments have now removed the tax ceiling of 20,000 ringgit.18
Profits of Labuan companies undertaking Labuan non-trading activity such as the holding of investments in securities, stock, shares, loans, deposits or any other properties situated in Labuan on its own behalf are not chargeable to tax.19 However, royalty and other income derived by Labuan companies from an intellectual property right will still be chargeable to tax under the ITA if such income is receivable as consideration for the commercial exploitation of the right.20
Limited liability partnerships
Unlike conventional partnerships, LLPs are recognised as taxable persons for income tax purposes and are taxed at a rate of 24 per cent.21 Where an LLP has a capital contribution of 2.5 million ringgit or less and gross income of not more than 50 million ringgit, the LLP will enjoy a reduced tax rate of 17 per cent for the first 600,000 ringgit of its income and 24 per cent for the remainder.22 Significantly, profits paid or distributed to partners in an LLP are exempt from tax23 and no withholding tax is applicable.
Real estate investment trusts
Real estate investment trusts (REITs) enjoy tax exemption on their income where 90 per cent or more of their total income for the year of assessment is distributed to the unit holders.24 A REIT must be approved by the Securities Commission as a REIT or property trust fund and listed on Bursa Malaysia, the Malaysian stock exchange.25
Domestic income tax
Malaysia's income tax system is territorial in nature. Income tax is levied on any person's income accruing in or derived from Malaysia,26 including business gains or profits, employment income, interests, rents and royalties.27 However, income of a resident company carrying on the business of air or sea transport, banking or insurance is taxable on a worldwide basis.28 In respect of dividends, Malaysia operates on a single-tier system whereby income tax imposed on a company is a final tax and dividends are tax exempt in the hands of shareholders.
Non-resident businesses are taxed on income accruing in or derived from Malaysia if they have permanent establishments in Malaysia. Recent amendments to Section 12 of the ITA have amended the definition of 'place of business' in the ITA to mirror the definition of 'permanent establishment' that is commonly found in all DTAs.29
Previously, foreign-source income was not subject to income tax in Malaysia under Malaysia's territorial tax system. In other words, the income of a person derived from sources outside Malaysia and received in Malaysia was tax exempt. However, beginning from 1 January 2022, the Malaysian government has removed the exemption for foreign-source income received by residents in Malaysia; such exemption is applicable only for foreign-source income received by non-residents.30
Nonetheless, for the smooth implementation of this initiative, the Malaysian government provided a tax exemption to resident taxpayers for all foreign-source income (except for business partnerships) from 1 January 2022 to 31 December 2026. Companies and LLPs are also given a tax exemption on foreign-source dividend income.31 It is highlighted that tax on foreign-source income is limited to income received in Malaysia from outside Malaysia.32 Hence, it is arguable that the taxability of foreign-source income would require actual remittance of such income into Malaysia.
Earnings stripping rules (ESRs) have been introduced in Malaysia by virtue of Section 140C of the ITA and the Income Tax (Restriction on Deductibility of Interest) Rules 2019 to restrict the deductibility of interest expenses on financial assistance between related persons. The ESRs apply where the total interest expense exceeds 500,000 ringgit in a year.33 The maximum amount of deduction in respect of any interest is 20 per cent of the taxpayer's tax earnings before interest, taxes, depreciation and amortisation.34 Nevertheless, taxpayers may carry forward any excess interest expense indefinitely and deduct the expenditure in future years of assessments, provided that the company's shareholders remain substantially the same.35
On the face of the legislation, the ESRs appear to apply to both cross-border and domestic related-party financial assistance. However, based on guidelines issued by the IRB, the application of the ESR is limited to cross-border transactions – namely where interest is paid to:
- related parties outside Malaysia;
- related parties outside Malaysia that operate through a permanent establishment in Malaysia; and
- third parties outside Malaysia where financial assistance is guaranteed by the entity's holding company or any other enterprises under the same multinational enterprise (MNE) group, regardless of the tax residence country of the guarantor.36
ii Common ownership: group structures and intercompany transactions
Ownership structure of related parties
Unlike countries such as Australia and the United States, Malaysia does not allow income tax consolidation where wholly owned or majority-owned companies are treated as a single entity for income tax purposes. The ITA does, however, offer group relief for related companies37 incorporated and resident in Malaysia in respect of the transfer or surrender of losses.38
Under Section 44A of the ITA, a company (the 'surrendering company') could surrender not more than 70 per cent of its adjusted loss in a year of assessment to one or more related companies (the 'claimant company'), with no time limitation. However, from 2019 onwards, group relief is available only to new companies. Losses can be surrendered only immediately after 12 months from the date the company first commences operation and only for three consecutive years of assessment.39 If the surrendering and claimant companies are owned indirectly by a third company (that is also resident and incorporated in Malaysia) through medium-sized companies, those medium-sized companies must now also be resident and incorporated in Malaysia from the year of assessment 2022 onwards.
Although group relief is certainly advantageous, businesses should be aware that where a surrendering company furnishes an incorrect return in respect of the amount of loss surrendered, the company may be liable to a penalty equal to the amount of tax that had been undercharged on the claimant company in consequence of the incorrect information.40
Domestic intercompany transactions
In Malaysia, transactions between related domestic companies are subject to the same legislative provisions and rules that govern international intercompany transactions, which are discussed below. Even though there might be no erosion of the Malaysian tax base, given that both companies are taxable in Malaysia, pricing manipulation could alter the tax incidence of the related entities by shifting profits between loss-making and profit-making companies. Thus, domestic groups of companies are required to maintain proper transfer pricing documentation in respect of their domestic intercompany transactions, especially where there are differences in the tax incentives enjoyed by the related companies or where different tax rates are applicable to them.
Nevertheless, tax benefits are available in the form of exemptions on stamp duty or real property gains tax (RPGT). Relief from stamp duty is available for reconstructions or amalgamations of companies41 or for the transfer of property between associated companies,42 subject, of course, to the fulfilment of certain conditions. Similarly, RPGT relief may be granted where real property is transferred between companies in the same group to bring about greater efficiency in operation or transferred between companies in any scheme of reorganisation, reconstruction or amalgamation.43
International intercompany transactions
Apart from the ESR as described above, Malaysia has implemented transfer pricing legislation in an effort to counter BEPS. Cross-border related-party transactions are subject to the transfer pricing provisions in the ITA as well as the Income Tax (Transfer Pricing) Rules 2012. Businesses must ensure that their intercompany transactions are priced at arm's length in accordance with traditional transactional methods (comparable uncontrolled price method, resale price method or cost plus method) or, if impractical, transactional profit methods (the profit split method or the transactional net margin method).44 Section 140A of the ITA empowers the IRB to substitute the price in respect of a related-party transaction to reflect an arm's-length price of the transaction. In addition, the IRB can also disregard any transaction structure where the economic substance of that transaction differs from its form, or where the arrangement would not have been adopted by independent persons behaving in a commercially rational manner. On top of that, the IRB may now also impose a surcharge of 5 per cent on any transfer pricing adjustment made.
Companies are also required to maintain contemporaneous transfer pricing documentation setting out, among other things, the organisational structure of the business; the nature of the business; the controlled transaction; selection of the transfer pricing method; and comparability, functional and risk analyses.45 Beginning 1 January 2021, the failure to provide the contemporaneous transfer pricing documentation on request of the IRB is an offence and could result in a fine of between 20,000 and 100,000 ringgit.46 Given that the IRB has seven years to raise an additional assessment,47 businesses should ensure that their documentation is in order.
In respect of withholding taxes, tax must be withheld on the payment of interest derived from Malaysia to non-residents at a rate of 15 per cent. The rate could be lower depending on the existence and terms of a DTA between Malaysia and the home country of the non-resident. No withholding tax applies to payment of dividends.
Although the Malaysian government has removed the tax exemption given to foreign-source income, it was announced that an exemption will still be given to foreign-source dividend income received by companies and LLPs. This exemption will be subject to conditions outlined in guidelines issued by the IRB. However, at the time of writing, these guidelines have yet to be released.
iii Third-party transactions
Sales of shares or assets for cash
In general, income tax is not chargeable on income from the sale of shares unless the seller is involved in the business of trading shares. Similarly, there are largely no income tax consequences for the sale of assets as they are not the stock in trade of a business unless the sale involves capital assets for which capital allowances have been granted and the disposal value exceeds the tax written-down value of the assets.48
Unlike countries such as the United Kingdom, Malaysia also has no capital gains tax, with the exception of RPGT, which is applicable only to gains from the sale or disposal of real property or shares in a real property company (RPC). An RPC is a controlled company in which real property or shares in another RPC make up at least 75 per cent of its total tangible assets. For companies, RPGT is imposed at a rate of 30 per cent for disposals within three years of the date of acquisition of the real property or RPC shares, 20 per cent for disposals in the fourth year, 15 per cent for disposals in the fifth year, and 10 per cent for disposals in the sixth year and thereafter.49
The sale of shares or assets will, however, attract stamp duty. Stamp duty on the share transfer instrument is payable at an ad valorem rate, calculated on the price or value of the shares on the date of transfer, whichever is greater. Three ringgit is payable for each 1,000 ringgit or fractional part of 1,000 ringgit.50 Similarly, ad valorem stamp duty is payable on the transfer instrument of any asset.51
Tax-free or tax-deferred transactions
RPGT relief is available where an asset is distributed by a liquidator of a company and the liquidation of the company was made under a scheme of reorganisation, reconstruction or amalgamation.52
Under the ITA, withholding tax is imposed on selected cross-border payments to non-residents, including interests,53 royalties,54 contract payments in respect of services rendered in Malaysia55 and special classes of income.56
Notably, recent legislative amendments have widened the scope of special classes of income under Section 4A(ii) of the ITA, which provided that income in respect of 'technical advice, assistance or services' rendered by non-residents is subject to tax. The amendments have removed the phrases 'technical' and 'technical management or administration'.57 Consequently, now, any amount paid in consideration of any advice given or assistance or services rendered in connection with any scientific, industrial or commercial undertaking, venture, project or scheme is subject to income tax. 'Technicality' is no longer required for a service to be taxed under this provision.
In effect, taxes now have to be withheld and paid for payments made to offshore service providers for any services provided in Malaysia.
iv Indirect taxes
Malaysia's goods and services tax (GST) was replaced with a sales and services tax (SST) beginning on 1 September 2018.58 Unlike GST, the scope of SST is much narrower and the number of items exempted from SST is far greater than that under the GST system.
Sales tax is charged on taxable goods that are manufactured in Malaysia by a registered manufacturer and sold, used or disposed of by them or imported into Malaysia.59 Manufactured goods that are exported are not subject to sales tax. Unlike under the GST regime, there is no system of input tax or output tax.
Service tax is imposed on specific prescribed services provided in Malaysia by a registered person carrying on their business60 at a rate of 6 per cent.61 Services subject to service tax include the operation of hotels and restaurants, betting and gaming, professional and consultancy services, and IT services.62 Unlike under the GST regime, any service tax incurred is not recoverable and is thus a business cost, albeit deductible for income tax purposes. From 1 January 2019 onwards, registered service tax companies enjoy exemptions on specific business-to-business service tax.63 It has been announced that from 1 January 2022 to 30 September 2022, a special voluntary disclosure programme will be introduced for indirect taxes, and taxpayers that participate in this programme will enjoy a remission of penalty and indirect tax at 100 per cent and 30 per cent, respectively, in Phase 1 of the programme (January to June), and 50 per cent and 15 per cent, respectively, in Phase 2 (July to September).64 To increase the country's tax base, the government has also removed the exemption of sales tax for low-value goods not exceeding 500 ringgit sold online (from 1 January 2023) and will begin imposing service tax on delivery services (from 1 July 2022).
International developments and local responses
i OECD-G20 BEPS initiative
Malaysia has been proactive in implementing various recommendations of the OECD on BEPS, beginning with the introduction of transfer pricing legislation in 2012, followed by legislation on country-by-country reporting and the Common Reporting Standard for the automatic exchange of information in 2016.
The Income Tax (Country-by-Country Reporting) Rules 2016 are consistent with the OECD's recommendations outlined in Action 13 of its BEPS initiative. These rules apply to multinational corporation (MNC) groups whose ultimate holding company is incorporated and resident in Malaysia, who have total consolidated group revenue of at least 3 billion ringgit in the financial year preceding the reporting financial year and whose constituent entities have cross-border transactions with their other constituent entities.65 An MNC group must include in its report aggregate information on, among other things, revenue, income tax paid, number of employees, and tangible assets for each jurisdiction the group operates in and must identify each constituent entity of the group.66
In addition to compulsory reporting by MNCs, Malaysia has enacted the Income Tax (Automatic Exchange of Financial Account Information) Rules 2016 compelling Malaysian financial institutions to collect and report to the IRB financial information of non-residents. The IRB in turn will exchange this information with participating foreign tax authorities in the non-residents' home countries, thus reducing opportunities for offshore tax evasion. As of 19 January 2021, there are 108 reportable jurisdictions, including Australia, China, Switzerland and the United Kingdom.67
Most recently, Malaysia has begun to address its tax incentives that have been identified by the Forum on Harmful Tax Practices for evaluation, in accordance with BEPS Action 5. For example, with effect from 1 January 2019, the LBATA has been amended to remove ring-fencing on Labuan business activity.68 Labuan business activity was previously ring-fenced by excluding transactions between a Labuan entity and a resident (Malaysian natural person or business) and transactions in Malaysian currency.
ii EU proposals on taxation of the digital economy
Malaysia has chosen to address the taxation of the digital economy by introducing a tax on digital services, making it the second South East Asian nation, after Singapore, to establish such a tax. The digital tax came into force on 1 January 2020. Foreign service providers (FSPs) of digital services are now required to register with the Royal Malaysian Customs Department and charge and remit 6 per cent service tax on digital services provided to consumers in Malaysia.69 'Digital service' has been given a broad definition under the Service Tax Act 201870 and has been interpreted by Customs to include the provision of software, applications and music; live streaming services; digital advertising; and online training.71 Hence, FSPs such as Netflix and Spotify are required to register and remit service tax.
FSPs are liable to be registered if the value of the digital services provided by them to Malaysian consumers exceeds 500,000 ringgit over a 12-month period.72 Digital services provided locally are also subject to service tax at 6 per cent.73
iii Tax treaties
As at 21 June 2019, Malaysia had entered into DTAs with 75 countries.74 These DTAs are recognised and given legal effect under the ITA.75 Notably, Section 132 of the ITA provides that the arrangements under the DTAs shall have effect notwithstanding anything in any written law.
Notable typical or model provisions
Although Malaysia is not a member of the OECD, most of Malaysia's DTAs largely mirror the provisions of the OECD Model Tax Convention on Income and on Capital, including the definition of 'permanent establishment'. Given that Malaysia does not impose withholding tax on dividends, Malaysia's DTAs also reflect this tax exempt position. DTAs generally do lower the withholding tax rates set out in the ITA, but rarely significantly. For example, most of Malaysia's DTAs prescribe a withholding tax rate for interest payments at 15 per cent (the rate in the ITA) or 10 per cent.76
Recent changes to and outlook for treaty network
On 24 January 2018, Malaysia signed the MLI. Instead of renegotiating each of Malaysia's DTAs individually, the MLI enables signatories such as Malaysia to incorporate treaty-related measures to counter BEPS into its existing DTAs. Accordingly, a new Section 132C of the ITA was subsequently enacted to give effect to Malaysia's international tax obligations under the MLI.77 Malaysia deposited its instrument of ratification with the OECD on 18 February 2021 and the MLI entered into force on 1 June 2021. Key modifications to DTAs introduced by the MLI include:
- the adoption of the principal purpose test, which will deny treaty benefits where it is reasonable to conclude that the principal purpose of a transaction or arrangement is to obtain treaty tax benefits;
- updates to the mutual agreement procedure that, among other things, allow an aggrieved taxpayer to present their dispute to the competent authority of either contracting state; and
- a widening of the scope of permanent establishment.
Currently, 48 of Malaysia's existing DTAs are set to be modified by the MLI.
i Perceived abuses
Malaysian courts have recognised the permissibility of tax mitigation to minimise the incidence of tax; however, transactions or business structures should not fall within the ambit of a tax avoidance scheme under Section 140 of the ITA.78 If the dominant purpose of a transaction has no commercial purpose, that transaction will be disregarded or varied by the IRB.79
In Syarikat Ibraco-Peremba,80 the taxpayer had concocted a series of elaborate transactions to avoid paying income tax on the profits made from the sale of land it developed. The taxpayer was a property development company. Profits arising from the sale of developed properties would be treated as the taxpayer's business income and subject to income tax. On the advice of its tax consultant, the taxpayer first incorporated a subsidiary company and, after selling the land to the subsidiary, entered into a contract with it to develop the land. Upon completion of the project, the taxpayer then sold its shares in the subsidiary company to a related company and the subsidiary company subsequently sold the developed land to third parties. The subsidiary and related companies were then wound up.
The Court of Appeal held that the taxpayer clearly obtained the tax advice for the primary purpose of ordering the transactions in a manner to minimise tax. Although Section 140 does not explicitly state that the IRB has the power to disregard a series of transactions as opposed to a single transaction, in looking at tax avoidance schemes that comprise a number of specific transactions, the genuineness or otherwise of each individual step or transaction need not be looked at from each individual step or transaction but had to be looked at as a whole.
Thus, taxpayers should be ready to demonstrate that any series of transactions that they enter into are not merely for tax-saving purposes.
ii Recent successful tax-efficient transactions
In Ensco Gerudi,81 the taxpayer had been providing offshore drilling services to the petroleum industry in Malaysia for 18 years. The taxpayer, however, does not own any drilling rigs. It would enter into a leasing agreement on a bareboat charter basis with a rig owner within the Ensco Group. One of the rig owners then decided to incorporate a Labuan company to facilitate easier business dealings for the taxpayer. Pursuant to the approvals granted by the Labuan Offshore Financial Services Authority and Bank Negara Malaysia, the taxpayer entered into an agreement with the Labuan company for the leasing of rigs. Unlike previous transactions of the taxpayer to lease the drilling rigs, the payments made to the Labuan company did not attract withholding tax. The IRB, in imposing Section 140 of the ITA, contended that, among other things, the Labuan company had no economic or commercial substance and that the purpose of the transaction was to benefit from the tax incentives provided.
The High Court, in deciding in favour of the taxpayer, held that there was nothing artificial about the payments and that the transactions were within the meaning and scope of the arrangements contemplated by the government in openly offering incentives. The ultimate question was whether the impugned arrangement, when viewed in a commercially and economically realistic way, makes use of the specific provision in a manner that is consistent with Parliament's intention. The High Court recognised that taxpayers have the freedom to structure transactions to their best tax advantage.
Hence, in light of Syarikat Ibraco-Peremba and Ensco Gerudi, businesses should ensure that their business structures and transactions fulfil the requirements of the law and that there are genuine commercial reasons behind the transactions or arrangements.
In respect of transfer pricing, the Special Commissioners of Income Tax (SCIT) have also recently held in P&G Sdn Bhd v. DGIR and SEO Sdn Bhd v. DGIR that the IRB should not have adjusted the taxpayer's profits to the median of the profits from comparable companies when its profits fell within the interquartile range. Applying the OECD Transfer Pricing Guidelines, the SCIT was of the view that such adjustments were invalid given that the taxpayer's profits fell within the arm's-length interquartile range.
Outlook and conclusions
Although the effects of the covid-19 pandemic continue to persist, as can be surmised from the recent legislative developments highlighted above, the Malaysian government remains keen to encourage economic growth and foreign direct investment and has introduced a wide range of tax relief and incentives to continue to benefit businesses in 2022. Nevertheless, recent legislative changes enhancing the power of the IRB in revenue collection and the removal of exemption for foreign-source income suggest an intensified focus on the operations of MNEs in the country and a readiness to penalise taxpayers for non-compliance with tax laws.
In light of this tax environment, MNEs and taxpayers are encouraged to seek legal advice when conducting tax planning, to ensure proper compliance with new legislation and to keep abreast of the latest reforms.
1 Nitin Nadkarni and Jason Tan Jia Xin are partners and Steward Lee is an associate at Lee Hishammuddin Allen & Gledhill.
2 Malaysia's Commitment in International Tax Standard (10 January 2019) Official Portal of Ministry of Finance Malaysia: https://www.mof.gov.my/portal/en/tax/malaysias-commitment-in-international-tax-standard.
3 See Section 2 ITA on the definition of 'person' and Section 3 ITA.
4 See Paragraph 1, Part I, Schedule 1 ITA.
5 See Section 55 ITA.
6 Paragraph 2, Part I, Schedule 1 ITA.
7 Paragraph 2, Part I, Schedule 1 ITA.
8 Paragraph 2A, Part I, Schedule 1 ITA. See also Paragraphs 2B and 2C, Part I, Schedule 1 ITA for exceptions.
9 See Section 2 PIA on the definition of 'company' and Section 3 PIA.
10 Sections 14 and 21B(4) PIA.
11 Section 29A(2) and (5) PIA.
12 See Schedule 7A ITA.
13 Paragraph 2, Schedule 7A ITA.
14 Section 8(1)(b) ITA and Paragraph 5.4, Public Ruling No. 9/2019 on the Residence Status of Companies and Bodies of Persons.
15 Paragraph 2(a), Schedule 1 ITA.
16 Section 2 LBATA.
17 Section 4 LBATA.
18 Section 76 Finance Act 2018 (FA 2018).
19 Section 9(1) LBATA.
20 Section 9(2) LBATA.
21 Paragraph 2(f), Part I, Schedule 1 ITA.
22 Paragraph 2D, Part I, Schedule 1 ITA.
23 Paragraph 12C, Part I, Schedule 6 ITA.
24 Section 61A(1) ITA.
25 Section 61A(2) ITA.
26 Section 3 ITA.
27 Section 4 ITA.
28 Paragraph 28, Part I, Schedule 6 ITA.
29 Section 6 FA 2018.
30 Section 27 Finance Act 2021 (FA 2021).
31 'Govt agrees to exempt tax on foreign source income for resident taxpayers – MoF' (30 December 2021) Official Portal of Ministry of Finance Malaysia: www.mof.gov.my/portal/en/news/press-citations/govt-agrees-to-exempt-tax-on-foreign-source-income-for-resident-taxpayers-mof.
32 Section 3 ITA.
33 Rule 2(1)(a) Income Tax (Restriction on Deductibility of Interest) Rules 2019.
34 Rule 5 Income Tax (Restriction on Deductibility of Interest) Rules 2019.
35 See Rule 6 Income Tax (Restriction on Deductibility of Interest) Rules 2019.
36 Paragraph 4, Restriction on Deductibility of Interest Guidelines, published by the IRB on 5 July 2019.
37 See Section 44A(3) ITA for the determination of related companies and the requirements under Section 44A(7) ITA.
38 Section 44A(1) ITA.
39 Section 44A(1A) ITA and Section 12 FA 2018.
40 Section 44A(9)(b) ITA.
41 Section 15 Stamp Act 1949 (SA).
42 Section 15A SA.
43 Paragraph 17, Schedule 2, RPGT Act 1976 (RPGTA).
44 Section 5 Income Tax (Transfer Pricing) Rules 2012 (TP Rules).
45 Section 4 TP Rules.
46 Section 113B ITA.
47 Section 91(5) ITA.
48 Paragraph 35, Schedule 3 ITA.
49 Part II, Schedule 5 RPGTA.
50 Item 32(b), Schedule 1 SA.
51 See Item 32(a), Schedule 1 SA for the stamp duty rates.
52 Paragraph 17, Schedule 2 RPGTA.
53 Section 109 ITA.
55 Section 107A ITA.
56 Section 109B ITA.
57 Section 5 FA 2018.
58 The GST Act 2014 was repealed by the Goods and Services Tax (Repeal) Act 2018.
59 Section 8 Sales Tax Act 2018.
60 Section 8 Service Tax Act 2018.
61 Service Tax (Rate of Tax) Order 2018.
62 First Schedule, Service Tax Regulations 2018.
63 See Item 3, Service Tax (Persons Exempted from Payment of Tax) Order 2018.
64 See Guideline: VA Programme (Voluntary Disclosure and Amnesty Programme) Indirect Taxes: https://mysst.customs.gov.my/assets/document/Annoucement/GUIDELINE%20VA%20PROGRAM_20211231_merged.pdf.
65 Rules 2 and 5 Income Tax (Country-by-Country Reporting) Rules 2016 (CbCR Rules).
66 Rule 4 CbCR Rules.
67 The IRB Common Reporting Standard List of Participating Jurisdictions.
68 Section 72 FA 2018.
69 See Section 56A Service Tax Act 2018 and the Service Tax (Rate of Digital Services Tax) Order 2019.
70 See Section 2 Service Tax Act 2018.
71 See Paragraph 11, Guide on Digital Services, published by the Royal Malaysian Customs Department on 20 August 2019.
72 See Section 56B Service Tax Act 2018.
73 See Group G, First Schedule, Service Tax Regulations 2018.
74 See Effective Double Taxation Agreements: https://phl.hasil.gov.my/pdf/pdfam/DoubleTaxationAgreementRates.pdf.
75 Section 132 ITA.
76 See Double Taxation Agreements Withholding Tax Rates: https://phl.hasil.gov.my/pdf/pdfam/DTA_WHT_Rates_Feb_2021.pdf.
77 Section 9 Income Tax (Amendment) Act 2018.
78 See Sabah Berjaya Sdn Bhd v. Ketua Pengarah Jabatan Hasil Dalam Negeri  3 MLJ 145.
79 See Syarikat Ibraco-Peremba Sdn Bhd v. Ketua Pengarah Hasil Dalam Negeri (2014) MSTC 30-084, SBP Sdn Bhd v. Director General of Inland Revenue (1988) 1 MSTC 2,053 and Lahad Datu Timber Sdn Bhd v. Director General of Inland Revenue  2 MLJ 97.
80 Syarikat Ibraco-Peremba Sdn Bhd v. Ketua Pengarah Hasil Dalam Negeri (2014) MSTC 30-084.
81 Ensco Gerudi (M) Sdn Bhd v. Ketua Pengarah Hasil Dalam Negeri (Judicial Review Application No. 25-101-05/2013).