Malaysian Perspectives 1 Lembaga Hasil Dalam Negeri Malaysia

Malaysian Perspectives

1Lembaga Hasil Dalam Negeri MalaysiaLembaga Hasil Dalam Negeri Malaysia

PRESENTATION CONTENTS Tax Treaties

Needs/Objectives Status Problems

Taxation of Multinational Transfer Pricing Advance Pricing Arrangement Thin Capitalisation Mutual Agreement Procedure


DOUBLE TAXATION AGREEMENT


Need for Tax Treaties Taxation laws are national Markets extend beyond boundaries Development of comprehensive international

system of taxation An appropriate international climate


Need for Tax Treaties To ensure tax incentives benefit investors and

not the treasury of the home country Unilateral approach not fully adequate to

mitigate effects of double taxation


Need for Tax TreatiesDiversity in Tax Systems Differences in legal and tax history Fiscal policy Revenue needs Level of compliance and enforcement in different

countries


The objectives of DTA Allocation of taxing-rights Negotiation on the special withholding tax rate

and tax sparing provisions for inbound and outbound investments

Elimination of double taxation Prevention of tax avoidance and fiscal evasion


Nature of Tax Treaties Dual in nature Entered into between Governments for

allocation of fiscal jurisdiction Incorporated into domestic law


The Principles of a Double Taxation Agreement

A DTA is primarily one that provides relief in respect of income that has suffered double taxation

A DTA cannot impose a new or further tax than what the domestic law provides

A DTA generally restricts the tax jurisdiction of the Contracting Countries

A DTA generally prevails over the domestic law


Mechanisms to Avoid Double Taxation By allocating taxing rights only to the country of

source By allocating taxing rights only to the country of

residence Where income is taxed by both states, the country of

residence shall grant double taxation relief In cases involving dual residence, by allocating the

taxpayer’s residence to one country by operation of a “tie-breaker” provision


Objectives of Malaysian Tax Treaties To create a favorable economic climate by

encouraging the flow of foreign investments into Malaysia by:(i) providing relief for double taxation

(ii) preventing fiscal evasion through cooperation between treaty partners

To give full effect to Malaysia’s special tax incentives for taxpayers of capital exporting countries


Authority to Conclude Tax TreatiesSection 132(1) and 65A(1) of the Income Tax Act 1967 and Petroleum (Income Tax) Act 1967 empower the Minister of Finance to make provisions, by order (done by notification in the Malaysian Government Gazette), for the granting of relief in respect of double taxation


Procedures for Bringing the Treaty Into Force

NEGOTIATIONS

INITIAL

NOTES OF DISCUSSION

CABINET PAPER

GAZETTE

OFFICIAL SIGNING

TABLE TO PARLIAMEN

T

LETTER TO THE OTHERCOMPETENT AUTHORITY

REPLY FROM THE OTHERCOMPETENT AUTHORITY

RATIFICATION/ ENTRY INTO FORCE

13

Lembaga Hasil Dalam Negeri MalaysiaLembaga Hasil Dalam Negeri Malaysia

Tax TreatiesTax Treaties Status as at 10 August 2009

Effective 64 countries Under Negotiations 19 countriesGazetted 4 countriesConcluded 6 countriesUnder Negotiation 9 countries Re-negotiation 7 countries


EUROPE

ALBANIAAUSTRIABELGIUMCROATIACZECH REPUBLIC

DENMARKFINLAND FRANCE GERMANYHUNGARYIRELANDITALYLUXEMBOURG MALTANETHERLANDSNORWAYPOLANDROMANIASPAINSWEDENSWITZERLAND UNITED KINGDOM

BANGLADESHCHINAINDIAINDONESIAJAPANMONGOLIAMYANMARPAKISTANPHILIPPINES SINGAPORESOUTH KOREA SRI LANKATHAILANDVIETNAM

ASIA

MAURITIUSNAMIBIASEYCHELLESSOUTH AFRICASUDAN

AFRICA

AMERICA

CANADACHILEU.S.A.ARGENTINA

KYRGYZRUSSIA UZBEKISTAN

CIS

AUSTRALIA & PACIFIC

BAHRAINEGYPTIRANJORDANKUWAITLEBANONMOROCCOQATARSAUDI ARABIASYRIAU.A.E.TURKEY

MIDDLE EAST

AUSTRALIAFIJINEW ZEALAND PAPUA NEW GUINEA

64 Countries


Problems in Tax Treaties Exchange of Information

Domestic Interest Bank Secrecy Labuan Offshore Activities

Fees for Technical Services Tax Sparing Exclusion of Labuan Offshore Activities


17

Four countries on OECD tax haven blacklist

Thu Apr 2, 2009 4:20pm EDT

PARIS (Reuters) - The OECD has placed

Costa Rica, Malaysia, the Philippines and Uruguay on its blacklist of non-cooperative tax havens, as part of efforts agreed at the Group of 20 summit to crack down on tax evasion.


18

Malaysia off the OECD blacklist

Wednesday April 8, 2009

Malaysia and three other countries, which had been blacklisted by the Organisation for Economic Cooperation and Development (OECD), are now off the list after they agreed to adopt the OECD’s regulations.


TAXATION 0F MULTINATIONALS

Transfer Pricing


What is Transfer Price ? Transfer price is the price charged for the acquisition or

supply of property or services between associated enterprises. (e.g. entities in a group of Multinational Enterprise).

It applies both to cross border and local transactions Ideally the transfer price should not differ from

prevailing market price.


Why is Transfer Pricing Important?Transfer price will determine:The revenue of each associated enterpriseTax base in each jurisdiction MNE operatesTransfer pricing policies can be used for income

tax avoidance


Past Practices TP Guidelines issued in 2003 – no legislative force

but rely on general anti-avoidance provision under S140 of ITA

Transfer pricing audits carried out by Special Audits Unit under Compliance Dept. Unit also oversees TP audits carried out at large IRBM branches


TP cases centred in KL, some in Penang & JB. Branch audit teams aided by HQ team.

TP training started in late 1990s/2000. Instructors mainly from OECD and tax administrations in OECD countries, IBFD, JICA.

Past Practices


Recent Developments New regulations in Income Tax Act on TP and

APA effective 1 Jan 2009 Restructuring of IRBM includes new

Multinational Tax Department to focus on transfer pricing


1 March 2009 - Multinational Tax Dept. Policies on TP, APA, TC TP audits Compliance monitoring APA

Recent Developments


Wef 1.1.2009 Section 140A, ITA1967 (Transfer Pricing

Legislation) Section 138C, ITA 1967 (Advance Pricing

Legislation) Income Tax Rules 2009

Transfer Pricing Rules, Thin Capitalisation Rules and Advance Pricing Arrangement Rules effective from 1.3.2009

26

Regulations


Legislation

Section 140A: Applies to transactions between associated

persons Acquisition or supply of property or services Taxpayer to determine & apply arm’s length

price


Legislation Section 140A (3):Empowers DGIR to substitute the price on certain

transactions if he has reason to believe they were not entered into on an arm’s length basis


Legislation S 140A(5):Transactions between:

Persons one of whom has control over the other

Individuals who are relatives of each other Persons both of whom are controlled by some

other person


Malaysian TP Guidelines Accept Arm’s Length Principle Endorse OECD methods Describe application of TP methods Prefer traditional methods over transactional

profit methods Specify documentation requirements


Malaysian TP Guidelines New Guidelines also address in greater detail:

Intangibles Intra-group services Cost contribution arrangement Interest on financial assistance


Disclosure of Related Party Transactions

Form C requires disclosure of related party transactions on: Sales of goods Purchases of goods Other payments made Loans granted Loans obtained Other income received


TP Audit: Selection Focus on high risk areas:

Consistently low profit margins – GP and NP (below industry average)

Continuous losses Constantly fluctuating profit patterns Significant intra-group payments Transactions with related parties located in

tax havens


TP Audits by Type of Industry

Lembaga Hasil Dalam Negeri MalaysiaLembaga Hasil Dalam Negeri Malaysia 34

TP Audits by Methodology

0

5

10

15

20

25

30

35

CUP Resale Price

Cost Plus TNMM Profit Split


TP Audits by Type of Transaction


TP Audits: Countries in Related Transactions


TP Documentation Submitted upon request No obligation to submit with Return Forms Case selection – based on information disclosed

in annual returns pertaining to related party transactions


Issues/ChallengesTP DocumentationNon-contemporaneous. Documents prepared

upon request to justify position rather than comply with ALP

Records not kept at premises Cost allocation from HQ Agreements & contracts Delays


TP DocumentationLack of current data to use as comparables in

preparation of contemporaneous documentationCompliance cost on taxpayerAlthough awareness has improved, quality of TP

documentation not always satisfactory

40

Issues/Challenges


Comparables Local data source – limited publicly available

data Info on gross margin, detailed P&L, segmental

accounts almost unavailable Almost all info in publicly available databases

on public listed companies only; mostly investment holding companies which do not reflect principal activities

41

Issues/Challenges


Comparables Data not up to-date: hinders preparation of

contemporaneous doc IRBM accepts only local comparables Exclusion/inclusion of loss making companies in

comparable set

42

Issues/Challenges


Vague characterization of taxpayer’s business Intra group services – substance over form Time taken to settle TP audit cases – line of

reporting in MNE group (functional, regional, global office) contribute to delay

43

Issues/Challenges


Taxpayer awareness/understanding of TP issues Compliance by previously audited taxpayers –

not always guaranteed Disputes Knowledge & skills of TP auditors Shortage of TP auditors

44

Issues/Challenges



Advance Pricing Arrangement


Definition of APA Definition as Per Income Tax (Advance Pricing

Arrangement) Rules 2009 APA refers to “an arrangement between Director

General/Competent Authority/ies and the person that determine in advance an appropriate set of criteria to ascertain the transfer prices of specified associated persons dealing over a specified period of time”


Scope of an APA Parties to the APA Transactions covered Agreed TPM Duration of the APA Critical Assumptions Other terms and conditions


Relevant Legislations Section 138C, Income Tax Act 1967

Application of APA by person who carries out x-border transactions with associated persons

Income Tax (Advance Pricing) Rules 2009


Types of APA Unilateral APA

Arrangement between IRBM and taxpayer Bilateral or Multilateral APA

Arrangement between one or more competent authorities and tax payers

Concluded through the Mutual Arrangement Procedure (MAP) Article

Note : other competent authorities may dispute a unilateral APA


Benefits of an APA Provide certainty on appropriate TPM and tax

treatments of associated international transactions More effective and efficient in resolving tax issues Reduces level of disputes and litigation Minimize the possibility of double taxation

(bilateral APA and MAPA)


APA Coverage Request for pre-file meeting 12 months prior to

1st day of covered period Period covered: 3 – 5 years of assessment Provides for roll back if TP methodology is

relevant & facts and circumstances are the same


APA & MAP Concluded 1st MAP on March 2007 Two MAPs in progress 5 unilateral APA applications Few more unilateral APA, 1 bilateral pending

submission.



Thin Capitalisation


What is Thin Capitalisation Assets are funded by a high level of financial

assistance and relatively little fixed capital Ratio – financial assistance >

fixed capital


Relevant Legislations

Prior to 1.1.2009 - no legislation

- Internal Circular (Technical Circular 2/1997)

Wef 1.1.2009- Section 140A(4) of the Income Tax Act

1967 - Income Tax (Thin Capitalisation) Rules 2009


Restriction of Interest and Other Related Costs

Restrict deduction of interest and other related costs if financial assistance : fixed capital

3>1 weighted annual average interest bearing


Non Application of Subsection 140A(4) Financial assistance to fixed capital ratio does not

exceed 3:1 If financial assistance to fixed capital ratio > 3:1 is

reasonable ratio of comparable companies The person is a financial institution


Future Plans Increase TP awareness amongst taxpayers Increase TP resources in IRBM Improve expertise to deal with new and more

complex issues , better knowledge on industries Review Return Form/disclosure requirements

on cross-border transactions to further improve selection


TP penalty regime including non-compliance to documentation requirements

Safe harbour provisions Implement Thin Capitalisation Rules E-commerce

Future Plans



Mutual Agreement Procedure


The MAP article in DTA allows the competent authorities from the governments of the contracting states to interact with the intent to resolve international tax disputes.

These disputes involve cases of double taxation (juridical and economic) as well as inconsistencies in the interpretation and application of a DTA.

What is a Mutual Agreement Procedure (MAP)?


Transfer pricing Expense allocation of permanent

establishments Characterization of income

MAP - Common Cases


Relation to domestic appeal procedures Best effort only Taxpayer input minimal in many countries Secrecy Possibility of trade off between cases Slowness Advance agreement and arbitration as

alternatives

MAP - Problems


Conflicting time limits Mutual agreement procedure can

be lengthy Taxpayer participation may be limited Little published guidance for taxpayers and their

advisers about how MAP works Practical difficulties over suspending collection or

accrual of interest pending resolution of MAP

MAP - Problems


Thank You
