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TAX nSIGHTS

MALAYSIAN DEVELOPMENTS

Ministry of International Trade & Industry (MITI) Gazette Orders Transfer Pricing and Thin Capitalisation Unabsorbed Losses and Capital Allowances Windfall Profit Levy Public Rulings & Guidelines Other Guidelines/Forms in relation to Tax Incentives Labuan Tax Administration ­ Compliance Matters Double Tax Agreements (DTAs) Stamp Duty Case Law

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A n O ccasiona l S e r i es

4/20 08

Amidst the turmoil of the global financial crisis and weakening economies, Governments have to continue to administer and collect taxes. As such, taxpayers will need to pay attention to managing their tax payments in the context of cash flow difficulties and deteriorating financial positions. The Central Bank, Bank Negara Malaysia, has reacted to the declining economy by lowering interest rates and has indicated that it may react further if conditions worsen. The Government has also reduced the growth forecast for 2009. Monetary and fiscal policies will need to be closely evaluated and monitored in these trying times. In this edition of Tax Insights, various Malaysian tax developments since the 2009 Budget proposals as well as some interesting international developments are covered. It is of interest to note that transfer pricing developments feature both domestically as well as internationally.

INTERNATIONAL DEVELOPMENTS

China India Indonesia Japan Korea Thailand Singapore Spain Sri Lanka OECD TAXAND AWARDS & RECOGNITION TAXAND ­ THAILAND UPCOMING EVENTS

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MALAYSIAN DEVELOPMENTS

Ministry of International Trade & Industry (MITI)

MITI announced several measures to revitalise the economy including the following tax measures: · · To support domestic manufacturers, import duty exemptions will be given on raw materials and intermediate goods used in domestic manufacturing activities Regional Distribution Centres (RDCs) (which currently enjoy a 10 year tax holiday on qualifying income) will be given the flexibility to source raw materials, parts and components from any party for distribution to related and unrelated companies within and outside of Malaysia, and not merely those produced by its related companies for its own brand RDCs and International Procurement Centres (IPCs) will be allowed to increase the proportion of drop-shipment sales to total annual sales turnover to 50% to enjoy the tax exemption on income from drop-shipment sales

·

Earlier, the Minister of Finance also announced a RM7 billion stimulus package. However, this did not incorporate any tax measures.

Gazette Orders

Various Gazette Orders/Rules have been enacted recently and these include the following: Income Tax (Exemption) (No.7) Order 2008 Resident individuals are exempt from income tax in respect of interest received from money deposited with: a) b) c) d) e) f) banks/finance companies licensed under the Banking and Financial Institutions Act, 1989 banks licensed under the Islamic Banking Act, 1983 development financial institutions prescribed under the Development Financial Institutions Act, 2002 Lembaga Tabung Haji Malaysia Building Society Bhd Borneo Housing Finance Bhd

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Income Tax (Exemption) (No.8) Order 2008 Income Tax (Exemption) (No.9) Order 2008

Resident companies are exempt from income tax in respect of income received from the sale of certified emission reductions.

The following resident persons are exempt from tax in respect of statutory income derived from the regulated activity of dealing in non-ringgit sukuk that originates from Malaysia, and is issued or guaranteed by the Government OR is approved by the Securities Commission (SC): a) b) c) a holder of a Capital Markets Services licence under Section 61 of the Capital Markets and Services Act 2007 ("the Act"); a registered person under Section 76(1)(a) of the Act; a registered person under Section 76(2) of the Act, where such dealing is carried on through the proprietory account of such person. Resident persons who fall within the following categories are exempt from tax in respect of statutory income from the regulated activity of dealing in non-ringgit sukuk (that originates from Malaysia, and is issued or guaranteed by the Government OR is approved by the SC): a) a holder of a Capital Markets Services licence under Section 61 of the Capital Markets and Services Act 2007 ("the Act"); b) a registered person under Section 76(1)(a) of the Act; c) a registered person under Section 76(2) of the Act, and 2) Resident persons (as per Schedule 3 of the Act) who undertake the regulated activity of advising on corporate finance in relation to arranging, underwriting and distribution of the non-ringgit sukuk, are exempt from tax on the statutory income arising therefrom.

Income Tax (Exemption) (No.10) Order 2008

1)

Income Tax (Exemption) (No.11) Order 2008

The following persons are exempt from income tax in respect of statutory income in relation to advisory fees relating to the structuring and listing of a foreign corporation or the listing of a foreign investment product on an approved stock exchange: a) b) c) a holder of a Capital Markets Services licence under Section 61 of the Capital Markets and Services Act 2007 ("the Act"); a registered person under Section 76(1)(a) of the Act who carries on the regulated activity of "advising on corporate finance" as specified in Part 1, Schedule 4 of the Act; and a specified person under Schedule 3 of the Act.

It should be noted that the above person must be a member of the due diligence working group established under the "Guidelines of Due Diligence Conduct for Corporate Proposal" issued by the SC pursuant to Section 377 of the Act. Income Tax (Accelerated Capital Allowance) (Bus) Rules 2008 Where a resident person incurs capital expenditure on the purchase of a bus during the years of assessment 2009 to 2011, he shall be entitled to an initial allowance of 20% and an annual allowance of 80%. The types of buses for which the accelerated allowances are available are listed in the Rules, and additionally, the Rules specify that the person must: a) b) c) be the first registered owner of the bus; be in the business of commercial transportation; and be the holder of a public service vehicle licence or a tourism vehicle licence.

The bus must be used for commercial transportation of passengers/tourists and must be locally assembled or constructed, and would not include reconditioned buses. Where the bus is disposed off within a two year period, the allowances will be withdrawn.

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Income Tax (Accelerated Capital Allowance) (Plant & Machinery) Rules 2008

Malaysian incorporated resident companies with a paid up capital in respect of ordinary shares of RM2.5 million and less which incur capital expenditure on plant and machinery in the years of assessment 2009 and 2010 shall be entitled to an initial allowance of 20% and an annual allowance of 80%. It should be noted that where the following applies, the accelerated allowances will not be available: a) b) c) where more than 50% of the paid up capital in respect of the ordinary shares of the company is directly or indirectly owned by a related company where the company owns directly or indirectly more than 50% of the paid up capital in respect of ordinary shares of a related company where another company owns directly or indirectly more than 50% of the paid up capital in respect of ordinary shares of the above mentioned companies

Where the plant and machinery is disposed off within a two year period, the allowances will be withdrawn. Additionally, it should be noted that the accelerated allowance will not be granted if the company has been granted incentives under the Promotion of Investments Act, 1986 (PIA), e.g. pioneer status and investment tax allowance, as well as where the company has claimed reinvestment allowance under the Income Tax Act, 1967 (ITA). Income Tax (Accelerated Capital Allowance) (Information & Communication Technology Equipment) Rules 2008 Income Tax (Accelerated Capital Allowance) (Security Control Equipment and Monitor) Rules 2008 Where a resident person incurs capital expenditure for the years of assessment 2009 to 2013 on specified information and communication technology equipment which is used for business purposes, that person shall be entitled to an initial allowance of 20% and an annual allowance of 80%. Where the equipment is disposed off within a two year period, the allowances will be withdrawn. It should also be noted that the accelerated allowance will not be available to a person who has been granted reinvestment allowance or incentives under the PIA. For the years of assessment 2009 to 2012, the following persons shall be entitled to an initial allowance of 20% and an annual allowance of 80% in respect of the following equipment: a) a resident individual in respect of capital expenditure incurred in relation to the installation of security control equipment (other than Global Positioning Systems (GPS) for vehicle tracking equipment) at any building or permanent structure used for the purposes of his business, OR b) a resident company in respect of capital expenditure incurred for business purposes in relation to the installation of: i) ii) security control equipment (other than GPS or vehicle tracking equipment) for a factory any GPS for vehicle tracking for certain container or cargo lorries used for the company's business

As with the above accelerated allowances, the allowance will not be given to those who have been granted the reinvestment allowance or incentives under the PIA and will be withdrawn where the equipment is disposed off within two years. It should be noted that for companies, the accelerated allowances are not available where such equipment is installed at business premises generally, and is confined only to factory premises. Income Tax (Deduction of PreCommencement of Business Expenses Relating to Employee Recruitment) Rules 2008 A deduction will be given to a resident person in respect of recruitment expenses incurred prior to the commencement of business (to enable that person to commence business). The deduction will only be given in respect of expenses incurred up to one year prior to the commencement of business and the expenses will be deemed to have been incurred on the first day of business. It should be noted that the deduction is limited to recruitment expenses only and not to the salary costs etc. of the employees concerned.

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Income Tax (Deduction for Promotion of Malaysia International Islamic Financial Centre) Rules 2008

For the years of assessment 2008 to 2010, a double deduction shall be allowed for the following expenses incurred by a person for promoting Malaysia as an international Islamic financial centre: a) b) c) d) e) f) g) expenses on market research and feasibility studies; the cost of preparing technical information for a person outside Malaysia relating to the types of services offered; expenses directly incurred for participating in an event other than those expenses covered in (d) below; overseas travel expenses (fares) and accommodation expenses of up to RM300 per day and sustenance costs of up to RM150 per day for the purpose of specified events,; expenses incurred on the cost of maintaining an approved sales office overseas (approved by the Malaysia International Islamic Financial Centre (MIFC) Secretariat; expenses verified by the MIFC Secretariat for participating in approved events other than (c) and (d) above; and expenses on publicity and advertisement in any media outside Malaysia.

The above will only be available to the following persons: a) a person approved by the MIFC Secretariat who establishes, manages and owns a registered private higher educational institution that provides professional courses in Islamic Finance a person licensed, registered or approved by the SC under the Capital Markets and Services Act 2007 a person licensed under the Islamic Banking Act 1983, the Banking and Financial Institutions Act 1989 or the Takaful Act 1984; Bursa Malaysia Berhad and its related companies; or other persons approved by the MIFC Secretariat

b) c) d) e) Stamp Duty (Remission) (No.2) Order 2008

A 50% remission from stamp duty will be granted to a purchaser (Malaysian citizen) in respect of stamp duty chargeable on loan agreements to finance the purchase of one unit of residential property costing not more than RM250,000 provided the Sale and Purchase Agreement is executed between 30 August 2008 and 31 December 2010.

Transfer Pricing and Thin Capitalisation

The 2009 Budget proposals and Finance Bill 2008 seek to introduce transfer pricing and thin capitalisation provisions via the proposed Section 140A of the ITA. The Ministry of Finance is in the process of drafting Transfer Pricing Rules setting out the scope and application of Section 140A. It is hoped that due care will be taken of concerns expressed by the professional bodies and other interested parties, and that the Rules will be issued on a timely basis as the new Section 140A is expected to be effective from 1 January 2009. In the meantime, companies with related party transactions, including borrowings should review these to assess the potential tax impact, and should ensure appropriate documentation is in place. (Please refer to the Upcoming Events below regarding our Transfer Pricing Seminar on 10 February 2009)

the Ministry of Finance has granted a concession whereby this rule will only be applied to dormant companies. In this context, the tax authorities have recently provided the following guidelines as to what is meant by a `dormant company'. A company is deemed dormant if it has no significant accounting transactions in a financial year prior to the significant change in shareholding (i.e. 50% or more). This would entail not having any accounting entries apart from the minimum expenses required to meet statutory requirements, such as expenses in respect of the following: a) b) c) d) e) filing of the company's annual return to the Companies Commission of Malaysia; secretarial fees in relation to filing of the company's annual return; tax filing fees; audit fees; and accounting fees.

Unabsorbed Losses and Capital Allowances

Under the law (Section 44(5A), ITA), a company is not permitted to carry forward unabsorbed losses and capital allowances where there has been a substantial change (more than 50%) in the company's shareholding. However,

A further important development is that in assessing whether a significant change in shareholding has taken place, the Ministry of Finance has decided that one only needs to examine the direct/immediate shareholders and that the need to track the ultimate shareholders is no longer necessary.

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Windfall Profit Levy

The windfall profit levy introduced earlier in the year for oil palm producers and independent power producers has since been repealed for independent power producers. The levy remains for the oil palm producers.

Public Rulings & Guidelines

· Entertainment Expenses

A new Public Ruling on Entertainment Expenses (Public Ruling (PR) No.3/2008) was issued by the Inland Revenue Board (IRB) in October 2008 which is effective for the year of assessment 2008. The PR3/2008 overrides the previous PR 3/2004 and the related Addendum. The PR is largely repetitive of the earlier PR3/2004 with certain additional clarifications on the IRB's interpretation of the deductibility of entertainment expenses as well a flow chart to assess deductibility and a lengthy table setting out examples of expenses which are fully deductible, those which qualify for a deduction at 50% and those which are not deductible. Unfortunately, the IRB's interpretation of the law is doubtful in some areas. It should be noted that the professional bodies were not consulted prior to the issuance of this Ruling. · New Withholding Tax ­ Section 109F

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Perquisites from Employment Benefits-In-Kind

In addition, the rules with respect to Advance Pricing Arrangements are expected to be enacted soon. Details will be reported when the Public Ruling/Rules are issued. · Technical Guidelines on Actuarial Surplus

A new withholding tax was announced in the 2009 Budget and will be enacted via a new provision of the ITA, the proposed Section 109F. It is understood that the tax authorities will be issuing a public ruling on the proposed Section 109F to explain the scope of this section. Section 109F will impose a withholding tax of 10% on payments to non-residents in respect of income falling within Section 4(f) of the ITA. Section 4(f) of the ITA covers income which falls out of the other classes of taxable income covered in Section 4(a) to (e), i.e. business profits, employment income, dividends, interest, royalties, discounts, etc. The application of Section 109F is expected to be confined to casual income that would typically not be recurrent in nature, such as oneoff commission income, introducer's fees, or guarantee fees, etc, which would not comprise business profits, or other taxable income within Section 4(a) to (e) of the non-resident. Section 109F is expected to be effective from 1 January 2009 and details of the Public Ruling will be reported when this is issued. · Other Public Rulings/Rules

Following the introduction of Section 110B of the ITA (via the Finance Act 2007), life insurance companies should no longer be taxed twice on the actuarial surplus transferred from the Life Fund to the Shareholders' Fund. Section 110B allows for the elimination of the incidence of double taxation by providing a set off in respect of the tax suffered on the actuarial surplus against the total tax charged on the Shareholders' Fund. The IRB has released technical guidelines to explain the operation of Section 110B and to provide a formula for the computation of the set-off. The guidelines can be found on the IRB's website: www.hasil.org.my

Other Guidelines/Forms in relation to Tax Incentives

The 2008 Budget proposals introduced tax incentives (pioneer status or investment tax allowance) for medical testing devices. The Malaysian Industrial Development Authority (MIDA) has issued guidelines in relation to this and applications for incentives must be submitted to MIDA before 31 December 2012. The guidelines can be found at MIDA's website: www.mida.gov.my The Ministry of Agriculture (MOA) has issued new application forms for tax incentives for approved food production, Forms MOA 1-1 and MOA 102. The forms can be found at the MOA's website: www.moa.gov.my

It is understood that the IRB will be issuing Public Rulings and/or addendums to existing Public Rulings in relation to the following areas in the near future: Forest Allowances/Charges Interest Expense and Interest Restriction Professional Indemnity Insurance Trade Associations Special Classes of Income Living Accommodation

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Labuan

Election by Labuan Offshore Companies to be taxed under the ITA The IRB has issued guidelines on the tax treatment of Labuan offshore companies (LOCs) which elect to be taxed under the ITA (following the 2008 Budget proposals and the ensuing changes in the ITA and the Labuan Offshore Business Activity Tax Act, 1990). The guidelines set out the relevant definitions, election procedure, compliance requirements, scope of taxation, residence status, etc. LOCs which are considering making such an election should familiarise themselves with the guidelines.

worksheets/computations in the event of a tax audit. In cases of refunds as mentioned above, the relevant IRB worksheet must be completed (i.e. worksheet HK3). · Operational Guidelines

In its continuous efforts to improve its delivery system, the IRB has released operational guidelines on the following: a) b) Instances where income tax credits may be utilised to set off existing liabilities Furnishing tax estimates which are less than the minimum required (i.e. 85% of the previous year's estimate/revised estimate) Factors which will be taken into account in allowing a full or partial remission of increase in taxes.

c)

Tax Administration ­ Compliance Matters

· Tax Filing ­ Preparation of Worksheets ("Helaian Kerja") The guidelines are useful in that they offer guidance into the factors that the IRB will take into account in relation to the above, thereby offering greater transparency to taxpayers. The operational guidelines can be viewed at the IRB's website: www.hasil.org.my.

Since the introduction of self-assessment, taxpayers have been required to complete the Worksheets issued by the IRB in relation to tax return forms. The worksheets are not required to be submitted to the IRB with the tax return forms (except in tax refund cases arising from dividends). The IRB has recently confirmed that it is not mandatory that the taxpayers complete the worksheets issued by the IRB, and are instead free to prepare their own worksheets. However, it is important that taxpayers ensure that they have relevant The salient features of these DTAs are as follows: Chile Withholding tax rates Dividends ­ 15%/5% Interest ­ 15% Royalties ­ 10% Technical Fees ­ 5%

Double Tax Agreements (DTAs)

The following DTAs which Malaysia has entered into have recently come into effect: a) b) Chile Myanmar

Permanent Establishment (will include the following): a) b) building site, installation or assembly project and supervisory activities for more than 6 months the performance of professional services or other activities (of an independent character) through employees or other individuals engaged by an enterprise for a period of more than 183 days (in aggregate) in any 12 month period the performance of professional services or other activities (of an independent character) by an individual present for a period of more than 183 days within any 12 month period an insurance company (except in the case of reinsurance) which collects premiums from or insures risks situated in the other state building site, installation or assembly project and supervisory activities for more than 6 months an insurance company (except in the case of reinsurance) which collects premiums from or insures risks situated in the other state

c)

d)

Myanmar

Dividends ­ 10% Interest ­ 10% Royalties ­ 10% Technical Fees ­ 10%

a) b)

The DTA between Malaysia and Qatar has recently been gazetted but is not effective yet. Details will be reported once this is ratified.

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Stamp Duty

Pursuant to the Stamp Duty (Exemption) (No. 8) Order 2007, companies listed on Bursa Malaysia are exempt from stamp duty arising from mergers and acquisitions (M&A) approved by the SC. The SC has issued a practice note on this exemption to clarify that the following criteria must be complied with to qualify for the exemption: (a) The proposal for the M&A must be approved by the SC between 1 January 2008 to 31 December 2010; (b) The proposal should only involve companies which are financially healthy (refer to Practice Note 4/2001, Practice Note 17/2005 or Amended Practice Note 17/2005 issued by Bursa Malaysia Securities Berhad (Bursa)); (c) At least two listed companies must be involved and the M&A must result in the removal of the listing status of one or more companies from the Official List of Bursa. Upon such that upon completion of the M&A, only one company will be listed on Bursa; and (d) The removal of the additional companies from their listing status pursuant to (c) above must be completed on or before 31 December 2011.

indication that suggested that the payments were capital contribution towards shares. The taxpayer argued that these receipts should be treated as capital receipts. The majority of pre 31 December 1994 members had converted their licences to shares and efforts were actively being made to convert the remaining licences. The taxpayer argued that the true nature and character of the fees and deposits were share capital. The Special Commissioners held that the fees and deposits were revenue receipts as these were payments for the services provided by the taxpayer and there was nothing in the agreements to indicate that the members would be required to convert their licences to shares. Further, the receipts had been categorised as income and not as capital in the taxpayer's financial statements for the years 1990 and 1991. Subsequent events should not affect the nature of a receipt once this has been ascertained. Based on Section 24(1)(b) of the ITA, a debt had arisen to the taxpayer in respect of services and hence the debt was to be treated as gross income. The Special Commissioners distinguished the facts in this case from a situation where a person sells goods which are subsequently returned and the sales proceeds are refunded to the customer. The features of the warranty deposits were not addressed and hence the terms were not disclosed. However, based on the facts, the licence fees and warranty deposits were held to be taxable at the time that these accrued to the taxpayer. Meaning of "Realisation of Investment" In case of PR Berhad v. Ketua Pengarah Hasil Dalam Negeri, the question at hand was whether the proceeds received by the taxpayer upon uplifting of fixed deposits amounted to a realisation of investments for the purpose of Section 60(3)(b)(ii) of the ITA.

Case Law

Capital or Revenue Receipt ­ Licence Fees and Warranty deposits

This section only reports cases that are considered to be of importance to a larger cross section of readers

The issue of whether the receipts of Licence fees and warranty deposits under the Licence Agreements for golf club membership comprised revenue receipts or capital receipts was addressed in case of TPGR Berhad v. Ketua Pengarah Hasil Dalam Negeri. The taxpayer operated a golf club and commenced the sale of club memberships in 1990 based on agreements entered into with the members whereby, each member paid a Licence fee and warranty deposit upon enrolment as members. The Licence fees were recognised as revenue in the taxpayer's financial statements and brought to tax. However, the Warranty deposits received were not bought to tax immediately, as these were intended to be apportioned and recognised as revenue over a period of time. On 31 December 1994, the manner in which memberships were sold changed and from then onwards, members were required to subscribe for shares in the company. Existing members were invited to convert their licences into shares. The IRB issued additional tax assessments to tax the warranty deposits received by the taxpayer on the basis that these receipts were revenue in nature and amounted to consideration paid by the members for the services provided. The IRB contended that at the time the agreements were entered into, there was no provision nor

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The taxpayer, an insurance company, carried on an underwriting general and life insurance business. In computing its income tax liability under Section 60(3) of the ITA, the taxpayer included the proceeds received upon maturity or uplift of the fixed deposits as gross proceeds receivable from the realisation of investments (in arriving at the amount of deductible management expenses, as prescribed by Section 30(3)(b)(ii)). The IRB disagreed with the treatment contending that the maturity or uplifts of fixed deposits did not fall within the meaning of "realisation of investment" for the purpose of Section 60(3) of ITA. The IRB took the view that fixed deposits are a form of investment but with peculiar characteristics in that the issue of realisation of the investment does arise. The Special Commissioners agreed with the IRB and held that although fixed deposits amount to an investment from a commercial angle, there were distinguishing features from other investments, given that no risk was involved. Accordingly, the maturity or uplift of fixed assets would not amount to the realisation of an investment. Withholding Tax ­ Section 4A(ii) In the case of TS Sdn Bhd v. Ketua Pengarah Hasil Dalam Negeri [(2008) MSTC 3707] the issue arose as to whether handling and packaging fees paid to a nonresident fell within the ambit of Section 4A(ii). The taxpayer paid a Singapore company for "handling and packaging" charges including fees for customs export declaration documentation. The "handling and packaging" in this instance involved the Singapore company importing electrical items into Singapore which were subsequently dismantled in Singapore using minimal technical skills. The dismantled components were then packaged for export to Malaysia.

The taxpayer did not withhold tax on the payments to Singapore on the basis that the services performed were not technical and secondly that the services were not "rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking ..." in accordance with Section 4A(ii). Further, the taxpayer argued that as the Singapore company did not have a permanent establishment in Malaysia, based on the Malaysia-Singapore DTA , the income was not taxable here. [It should be noted that the facts of the case arose before the changes to Section 15A of the ITA (i.e. the provision which sets out when Section 4A income is deemed derived from Malaysia) which now requires that services be performed in Malaysia] The Special Commissioners held that the services fell within the ambit of Section 4A(ii) on the basis that Section 4A(ii) was not confined to services of a "technical" nature only and had a wider application. The Special Commissioners also rejected the argument that relief should be afforded under the DTA, agreeing with the IRB's contentious view that once income fell within Section 4A, this could not longer be viewed as `business income' and hence DTA relief was not applicable under the `Business Profits' article of the DTA. The Special Commissioners did however decide that the fees for the customs declaration documents were not subject to withholding tax. The taxpayers in the above cases are appealing to the High Court. Property Developer ­ Basis of Recognition of Income The case of DD Development Sdn Bhd v. Ketua Pengarah Hasil Dalam Negeri [(2008) MSTC 3,726], involved a taxpayer appealing against additional assessments issued by the IRB in relation to its income for earlier years of assessment. The taxpayer (a property development company) used the progressive payment method of recognising its income for tax purposes. The IRB issued additional assessments on two grounds - one was to revise the method of recognition of the income by using the final realised sales figures and applying this retrospectively to the earlier years, and secondly (following a field audit) to treat the project as three distinct projects. Based on the facts of the case, the Special Commissioners ruled in favour of the taxpayer. They held that the IRB was not authorised to reopen the assessments in this case as this would have been contrary to their guidelines and there was no valid basis to warrant the reopening in this case. (Reference was also made in the decision to the minutes of a dialogue between the IRB and the Malaysian Institute of Taxation in relation to the reopening of assessments and the retrospective application of new interpretation of tax principles). Further, as the tax payable under the original assessments had been fully settled and no appeals were lodged, the original assessments were deemed final and conclusive within the meaning of Section 97(1), ITA. Additionally, the Special Commissioners held that based on

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the facts of the case, the project constituted a single project (albeit with different phases) rather than three distinct projects. The Special Commissioners went so far as to point out that the IRB was "so determined and overzealous to recover or recoup as much as possible the amount of tax lost due to the 1999 waiver year notwithstanding that in the course of doing so, they blatantly contravened their own guidelines". Disposal of Real Property ­ Revenue or Capital Gain? In the case of PR Sdn Bhd v. Ketua Pengarah Hasil Dalam Negeri [(2008) MSTC 3716] the question arose as to whether profits from three separate disposals of real property were capital or revenue in nature. The facts of the case involved the taxpayer acquiring eleven pieces of industrial land in 1992 with the intention of building factories for rental. However, due to various reasons, the taxpayer was unable to proceed with its plan of constructing the factories and eventually in 1994, 1995 and 1996, the taxpayer disposed of the land in question and realised profits from the disposals. Prior to disposing the properties, the taxpayer incurred costs such as conversion fees and infrastructure works on the proposed factories. The IRB sought to tax the gain from the disposals as being subject to income tax. The Special Commissioners however held that the gain was capital in nature. There was no intention at the outset to dispose of the properties and there was a clear intention to construct factories for rental, which was also reflected in the accounting treatment of the properties. They noted from the case of Lional Simmons Properties Ltd. (In liquidation) and Others v. CIR 53 TC 461 that "frustration of a plan for investment, which compels realisation, even if foreseen as a possibility cannot give rise to an intention to trade". The frustration of the original plans which resulted in the sale of the properties could not create an intention to trade. Also relying on the judgement of the Supreme Court in the case of Lower Perak Co-Operative Housing Society Bhd. v. Ketua Pengarah Hasil Dalam Negeri (1994) 2 MLJ 713, it was noted that "the nature of the transaction must be determined from the point of view of the taxpayer and a mere sale at a profit is not trading activity ...". It is understood that the IRB is appealing to the High Court against the above two decisions. Recognition of Income from Property Disposal/ Deductibility of Golf Membership Costs for a Property Developer The case of OP Development v. Ketua Pengarah Hasil Dalam Negeri involved two distinct issues. The first involved the timing of recognition of income from the disposal of property, and the second involved the question of whether golf club membership fees incurred by a developer in connection with the sales of property units was deductible.

Issue 1 ­ The taxpayer entered into a sale and purchase agreement for the sale of property on 4 March 1998. The agreement was conditional upon the requirement to obtain Foreign Investment Committee (FIC) approval. FIC approval was granted on 9 May 1998. However, the purchaser was experiencing financial difficulties at the time and negotiated for an extension of time till 30 April 1999 to complete the contract and make the final payment. During that time, it was agreed that the taxpayer would be entitled to rental income from the property as well as interest for the late payment. The purchaser paid the balance of the purchase price on the agreed date. The taxpayer recognised the sale of the property in the1999 financial year on the basis that the contract for the sale of the property was completed in April 1999. The IRB argued that the income should have been recognised in the 1998 financial year, on the basis that the debt arose in that year upon the conditions of the sale and purchase agreement being satisfied, i..e when FIC approval was obtained. The IRB imposed penalties under Section 113(2) of the ITA. (It should be noted that 1999 was a tax waiver year). The Special Commissioners ruled in favour of the IRB on this issue, on the basis that the debt arose in 1998 once the contract was unconditional. Therefore, pursuant to Section 24 of the ITA, the debt should have been recognised as income. As the quantum of the debt was readily ascertained, this was a debt within the meaning of Section 24, regardless of whether this was due or due and payable (as per Section 23). However, on the basis that the taxpayer acted in good faith and not with the intention of taking advantage of the 1999 waiver year, the penalties were waived. (Note that the taxpayer's decision to allow the purchaser to settle the debt late was made in May 1998 while the Government's announcement of the tax waiver was made in October 1998). Issue 2 ­ The taxpayer developed bungalow lots for sale. It acquired 26 golf club memberships at a cost of RM780,000. The memberships were then sold to purchasers of the bungalow units at RM25,000 each as part of the price of the bungalows. Those purchasers who opted not to acquire the golf club memberships were therefore given a reduction of RM25,000 from the purchase price of their units. The taxpayer claimed a tax deduction for the RM780,000 cost of the golf memberships. The IRB contended that the golf club memberships were given away for free and hence this amounted to entertainment which was not deductible. The Special Commissioners ruled in favour of the taxpayer on this issue on the basis that the golf memberships were not given away without consideration as was evidenced by the fact that those purchasers who did not opt for the membership had a RM25,000 reduction in the purchase price for their units. It is understood that the taxpayer is appealing against the findings on Issue 1, while the IRB is appealing against the findings on Issue 2.

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INTERNATIONAL DEVELOPMENTS

China

Thin Capitalisation The authorities in China have recently released the acceptable debt:equity ratios in relation to the thin capitalisation rules under the new Enterprise Income Tax laws which apply to transactions between associated entities. It should be noted that the thin capitalisation rules would not apply where the entities concerned are able to show that the transactions are entered into on an arm's length basis or where the effective tax rate of the borrower does not exceed the effective tax rate of the lending entity (within China). Where the entities concerned are unable to satisfy these requirements, interest will only be deductible in respect of such transactions where the debt:equity ratio does not exceed: a) b) 2:1 in general; or 5:1 in relation to financial services entities.

c)

d) e)

in dealing with comparability, miniscule intra-group transactions should not have an impact on comparability, e.g where related party transactions do not amount to more than 10% ­ 15% of total revenue the importance of a broad comparable set appropriate adjustments should be permitted in respect of material functional and risk profile differences between the taxpayer and the comparables.

The Tribunal relied heavily on the principles established by the Organisation for Economic Cooperation and Development (OECD) as well as US Transfer Pricing Regulations in reaching its decision, which has been seen as a positive step in interpreting the Indian transfer pricing rules in accordance with global views. · Issues concerning interpretation of DTAs

India

There have been some interesting case law developments in India which are summarised below: · Transfer Pricing ­ Sony India Private Limited (Delhi Tribunal)

The case of SET Satellite (Singapore) Pte. Ltd. v. Deputy Director of Income Tax (2008-TIOL-414-HC-MUM-IT) involved a Singapore incorporated company (SC) carrying out marketing activities in India via its dependent agent (DA), an Indian company. SC paid its DA an arm's length fee for the services undertaken by the DA in India. The question arose as to whether the activities of a dependent agent (DA) in India would create a permanent establishment (PE) for SC. SC argued that the arm's length fee paid to DA eliminated any potential tax liability in India. In the absence of a permanent establishment, its business profits could not be taxed in India. On appeal to the High Court, the court ruled in favour of SC upholding the view that under the Singapore-India DTA, the profits of SC could only be taxed in India if it had a PE there. As the DA was paid an arm's length fee for its services, the DA did not create a PE in India for SC and acccordingly, SC would not be taxable in India. In another case involving the concept of PEs (Golf in Dubai LLC v. Director of Income Tax (2008-TIOL-15-ARA-IT), the question arose as to whether a fixed place of business could be deemed to exist as a result of the right to use premises in India to host a golf tournament. The Dubai based company (`the applicant') applied for an advance ruling to seek confirmation that it would not be deemed to have a PE in India as a result of entering into a `venue agreement' with two separate Indian golf clubs (IGC) to host golf tournaments from time to time over a three year period. The applicant submitted that the venue agreements would not give rise to a PE (within the meaning of article 5(1) of the India ­ United Arab Emirates DTA) as there was not a sufficient degree of permanence or regularity to construe that the IGCs created a fixed place of business for the applicant in India. Based on the facts of the case, the Authority for Advance Rulings (AAR) ruled in favour of the applicant. Although the venue agreements could potentially have given rise to a

This case establishes important transfer pricing principles. The facts of the case involve Sony India (SI), a wholly owned subsidiary of Sony Corporation Japan undertaking the business of assembly and distribution of colour televisions, audio products and other electronic goods. In doing so, SI entered into transactions with several associated enterprises (AEs) for imports and exports. SI and the AEs priced their transactions based on prices determined following a transfer pricing analyses which used the transactional net margin method. In arriving at SI's transaction prices, adjustments were made to reflect the fact that SI did not bear the risks associated will a full fledged manufacturer, it did not own the intangibles, etc. SI also received reimbursements of advertising costs based on what in substance constituted a cost sharing arrangement. The tax authorities made an upward transfer pricing adjustment to SI's taxable income against which SI appealed to the Tribunal. Broadly, the Tribunals's decision was favourable to SI. In reaching its decision, the Tribunal reinforced several significant principles which should be addressed when dealing with transfer pricing cases, including the following: a) b) due regard must be given to the substance of the transactions functional comparability is important

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fixed place of business, the AAR found that the hosting of golf tournaments at the IGCs for a week's duration without repetition could not be viewed as carrying out a business through a fixed place of business. An element of regularity would be required to establish that business was being carried out, which was absent in this case.

Thailand

It is understood that the Thai Government has proposed a reduction in the corporate tax rate from the present 30% to 25% in view of the spreading global economic crises.

Singapore

R&D incentives Singapore has recently announced three new R&D tax incentives in its continuous efforts to facilitate R&D activities, including a 150% deduction in respect of qualifying R&D activities undertaken in Singapore (notwithstanding that the R&D may not be related to the taxpayer's business per se) as well as R&D incentives for start up businesses. Transfer Pricing The Inland Revenue Authority of Singapore (IRAS) issued a circular paper for public feed back in October 2008 on "Transfer Pricing Guidelines for Related Party Loans and Related Party Services". The guidelines indicate that, with effect from 1 January 2011, the arm's length principle will be applied with respect to cross-border loans. However, a two year transition period will be given to allow taxpayers with existing loans to plan accordingly. Currently, interest income is not imputed to a lender in respect of interest free loans, but a portion of interest costs attributable to such loans (if any) will be disallowed as a deduction. The Guidelines also clarify that where services are provided between related parties, a 5% mark-up will be accepted in respect of routine support services (e.g. payroll, accounting, etc) provided these services are not also provided to nonrelated parties. Additionally, where services are provided on a cost-pooling basis, with no value-added by a related party, the costs can be passed on with no mark-up. Advance Pricing Arrangements (APAs) The IRAS has also published supplementary administrative guidelines on APAs setting out details of the APA application procedure, the factors to be considered by taxpayers prior to embarking on an APA, the circumstances under which the IRAS may agree to a retrospective APA, etc. This is particularly helpful for taxpayers in assessing the merits of pursuing an APA.

Indonesia

The Indonesian tax authorities have issued a circular setting out their view as to the meaning of "beneficial ownership" for DTA purposes. This was an important question in the case of Indofood International Finance Ltd v. JP Morgan Chase Bank NA which was heard by the U.K Court of Appeal in 2006. In that case, the taxpayer was not entitled to the reduced withholding tax rate provided for in the Indonesia ­ Netherlands DTA as it was held that the taxpayer could not be regarded as the beneficial owner of the interest paid. For Indonesian purposes, based on the above-mentioned circular, the beneficial owner of interest, dividends, royalties, etc. for DTA purposes is the real owner of the income, i.e. the person who has direct entitlement to enjoy the benefits of the income. The OECD has also addressed the issue of beneficial ownership in the context of DTAs and generally holds the view that where there is a conduit company with narrow powers making it merely a fiduciary, it would not meet the beneficial ownership test.

Japan

The Japanese Government has announced several taxrelated measures to address the economic slow down including an increase in the tax credit granted in respect of housing loans as well as a cash benefit (in the form of a coupon) to be given to all individuals to assist them in view of rising costs.

Korea

The Korean Ministry of Finance has announced several proposals which are expected to take effect in 2009, including a gradual reduction in corporate tax rates and the bands of income subject to tax at the higher rate. It is proposed that current corporate tax rates/bands of 13% on income up to KRW100 million and 25% on income in excess, will be revised to 10% on income up to KRW200 million and 20% on income in excess of this by 2010. In addition, the carry forward period for losses will be increased from 5 years to 10 years. Several changes are also proposed in relation to personal income tax, the controlled foreign corporation rules, and incentives are proposed to encourage research and development (R&D). An Advance Ruling Program has also been introduced with effect from 1 October 2008, entitling taxpayers to seek advance rulings in respect of income tax, corporate tax and value added tax (VAT) in relation to `specific transactions'.

Spain

The Spanish Ministry of Finance has also published regulations including new transfer pricing rules on comparability analyses and secondary adjustments, documentation requirements and APAs.

Sri Lanka

The 2009 Budget was announced in November this year. Amongst the various proposals is the introduction of a Nation Building Levy (NBL) which we understand will apply

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to importers, manufacturers and service providers whose turnover for a quarter exceed SLR100,000. In addition, it is understood that the VAT system will be simplified to ease compliance.

how high net worth individuals and their advisors may be encouraged to voluntarily comply with tax reporting obligations.

OECD

2008 Model Tax Convention The OECD has released the 2008 Model Tax Convention incorporating some modifications to the previous model convention and corresponding commentaries. Transfer Pricing A public discussion draft on "Transfer Pricing Aspects of Business Restructurings" has been released for feed back. This takes into account business restructuring including the conversion of full-fledged manufacturers into contract or toll manufacturers, as well as the conversion of full-fledged distributors into limited risk distributors and commissionaire arrangements, etc which give rise to significant transfer pricing issues. (The OECD has asked for comments by 19 February 2009). Tax Havens It is understood that the OECD will release a new blacklist of tax havens/uncooperative jurisdictions by mid 2009. High Net Worth Individuals A discussion paper on cooperative compliance focussing on high net worth individuals has been published. This explores

TAXAND AWARDS & RECOGNITION

We are pleased to announce that TAXAND member firms globally have received several awards this year including the International Tax Review (ITR) Asia Award for "Best Newcomer". The ITR presented TAXAND with the "Best Newcomer Award 2008" at its Asian awards ceremony in Singapore recently. The win means TAXAND has won all three awards available in this category worldwide succeeding in Europe, the Americas and Asia. The award is to recognise best-in-class cross-border advice achieved by entrants to the market within the last five years. TAXAND was chosen for each award by a panel from the ITR's editorial team following initial research into the perspectives of tax executives, in-house counsel, tax advisors and privatepractice lawyers operating in the regions.

TAXAND ­ THAILAND

The TAXAND network continues to expand with the most recent member being HNP Counsellors Limited in Thailand. We now have a presence in twelve territories in Asia Pacific alone and approaching 50 jurisdictions worldwide.

UPCOMING EVENTS

We are pleased to announce that TAXAND MALAYSIA will be running a seminar on 10 February 2009 on "Transfer Pricing: Challenges & Issues". We have a distinguished panel of speakers including speakers from TAXAND member firms in India and Canada who are experts in the area of transfer pricing. Details for the seminar can be found at our website: www.taxand.com.my or please call Ms. Stephanie at 03-2032 2799.

DISCLAIMER:

The information contained in this newsletter is intended only to be a guide. It must not be relied on in, or applied to, specific situations without previously seeking proper professional advice. Even if all reasonable care has been taken in its preparation, TAXAND MALAYSIA Sdn Bhd and all the members of the TAXAND Network do not accept any liability for any errors or omissions that it may contain before being issued, whether caused by negligence or otherwise, or for any losses, however caused, or sustained by any person or entity. Descriptions of, or references or access to, other publications within this publication do not imply endorsement of them.

TAXAND MALAYSIA SDN BHD (745982-X) Suite 13A.05, Level 13A, Wisma Goldhill, 67 Jalan Raja Chulan, 50200 Kuala Lumpur, Malaysia T | 603 2032 2799 F | 603 2032 3799 E | [email protected]

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