On 16 November 2020, the Finance Bill 2020 had its first reading in the Malaysian Parliament’s Dewan Rakyat. In tandem with the Budget 2021, the Finance Bill 2020 seeks to give legal effect to the proposals and amendments to the Malaysian tax legislations.
This post outlines the proposed changes to the law and its reciprocal effects as a result of the Finance Bill 2020.
1. Income Tax Act 1967 – Corporate Income Tax
A. Tax Rebate for Small and Medium Enterprises and Limited Liability Partnership
Under the PENJANA scheme, the government had introduced an initiative for both Small and Medium Enterprises (“SME”) and Limited Liability Partnership (“LLP”) whereby a tax rebate of RM20,000 is given on the tax payable for the 3 Years of Assessment (“YA”).
The amount of rebate given shall be equal to the amount of operating and/or capital expenditure or RM20,000, whichever is lower, against the tax liability of the company. If the tax liability is lower, the excess rebate shall not be repaid back or to be treated as credit to set off the tax liability for subsequent YAs. In other words, it’s a permanent loss.
A SME / LLP for the purposes of obtaining this rebate is an entity which:
- has a paid-up capital of RM2.5mil or less at the beginning of the basis period for a year of assessment;
- has a gross income from source or sources consisting of a business not exceeding RM50 mil; and
- which has commenced operation on or after 1 July 2020 but not later than 31 December 2021.
In the event that the SME / LLP is unable to fulfill any of the above conditions, in addition to subsequent conditions as may be prescribed, the SME / LLP will not be eligible to claim the rebate for that YA and subsequent YAs.
B. Additional condition for the purposes of claiming deduction of expenses incurred in relation to research and development activities
C. New tax treatment for new incentives
The Finance Bill proposed the addition of a new section whereby certain persons carrying out an Approved Incentive Scheme (“AIS”) activities will be taxed at a preferential rate of 20% for 7 YAs.
It was mentioned during the Budget 2021 speech that AIS activities include:
- Global Trading Centre;
- Companies relocating to Malaysia;
- Companies manufacturing pharmaceutical products; and
- Principal Hub.
D. New Section 103B – tax payable notwithstanding institution of proceedings
Under Section 103(2), the service of an assessment by the IRB is made payable on the date that is stated on the assessment when it is served, regardless of whether or not the taxpayer is appealing the said decision or otherwise. In other words, “pay first talk later”. This applies where the taxpayer is appealing the assessment to the Special Commissioners of Income Tax (SCIT), the prescribed relief in the Income Tax Act 1967.
The aforementioned approach may cause problems to taxpayer when faced with the impossibility of payment of the additional taxes within a very short period of time (commonly 30 days within the date of assessment). An alternate relief mechanism taxpayers often plead to the High Court for a stay order vide a judicial review application. The effect of such order, if granted, is that the taxpayer is allowed to withhold payment of the assessment until the disposal of the case, or as prayed.
The introduction of this section appears to frustrate such circumstances. Section 103B makes tax payable under the Income Tax Act payable notwithstanding the “institution of any proceedings under any other written law”. The words “other written law” would be referring to the Rules of Court 2012 where the roots of judicial review are entrenched in.
E. Definition of the word “plant”
Presently, there is no statutory definition of the word “plant” within the Income Tax Act.
Our Malaysian Courts have therefore been applying, inter alia, the definition in Yarmouth v France that a plant “includes whatever apparatus is used by a business man for carrying on his business” in the context of the industry operating by that taxpayer.
The word “plant” is proposed to be defined as “an apparatus used by a person for carrying on his business but does not include a building, an intangible asset, or any asset used and that functions as a place within which a business is carried on”.
The effect of such a definition is that it negatives cases such as Tropiland (car park building), CIMB (database) and Infra Quest (telecommunication tower) for the purposes of claiming capital allowance.
However, of particular contention, is the effect on PU orders gazetted pursuant to Schedule 3. For example, the PU(A) 274 – Income Tax (Capital Allowance) (Development Cost for Customised Computer Software) Rules 2019 provides for the initial and annual allowance for customized software under Schedule 3 of the Income Tax Act. The new definition will have a residual effect on subsidiary legislation and thereby making certain PU orders redundant as subsidiary legislation cannot override the principle legislation.
F. Extension of period to claim Reinvestment Allowance
For companies which had exhausted their period to claim Reinvestment Allowance in 2019 or prior YAs, the proposed amendment allows the taxpayer to claim an additional period of 3 YAs, up to YA 2022.
For companies who will exhaust their period to claim Reinvestment Allowance in 2020 or 2021, the proposed amendment allows them to claim an additional 1 / 2 years respectively, up to YA 2022.
G. Definition of related companies
Currently, a company may surrender 70% of its business loss for the year to a related company. A related company, for the purposes of surrendering business loss, is where:
i) the surrendering and claimant company owns 70% (either directly or indirectly through a third company) of the other’s share capital; and
ii) the surrendering and claimant company is owned (directly or indirectly) by a third party company.
Where the situation falls under (ii), it is proposed that the third party company ought to be a Malaysian resident company.
2. Income Tax Act 1967 – Transfer Pricing
A. Penalty for failure to maintain contemporaneous transfer pricing documentation
The proposed Section 113B makes it an offence where a company fails to furnish contemporaneous transfer pricing documentation.
The penalty for an infringement of this section is a fine not less than twenty thousand ringgit and not more than one hundred thousand ringgit or imprisonment for a term not exceeding six months or to both.
B. Surcharge on transfer pricing adjustment
Under the current transfer pricing regulation regime, a penalty is only imposed where an adjustment made results in additional tax payable. If it doesn’t, then no penalty may be imposed.
Vide Section 140(A) (3C), the amendment proposes a 5% surcharge be levied on transfer pricing adjustment made, regardless of whether or not such adjustment results in additional tax payable.
C. Power of the Director General to disregard structures in controlled transactions
Section 140A(3A) seeks to incorporate the powers of the Director General made under Income Tax (Transfer Pricing) Rules 2012 which empowers the Director General to make adjustments deems fit if he is of the view that:
(a) the economic substance of that transaction differs from its form; or
(b) the arrangement, viewed in totality, differs from those which would have been adopted by independent persons behaving in a commercially rational manner.
The Director General may make adjustments to such transactions as if they were carried out at arm’s length.
3. Real Property Gains Tax Act 1976
A. Remission of Tax Penalty
B. Revision of the retention rate by the acquirer
C. Real Property Gains Tax for Societies
4. Stamp Act 1949
A. Digitalisation of the stamping process
The Act as it stands does not recognise digital stamping as a mode of stamping. It is proposed that the following incorporate digital stamping as a valid stamp.
B. Remission of Stamp Duty
5. Labuan Business Activities Act 1990
A. Change in definition of “chargeable income”
B. Control and management for non-trading Labuan entities
A Labuan company must satisfy the substance requirement (i.e. number of employees and operating expenditure) to enjoy a preferential tax rate under the Act.
However, there is an added requirement for Labuan entities carrying out non-trading activities, i.e. a pure equity holding company, that must meet the control and management test which is to be prescribed by the Minister.
C. Election to be taxed under the Income Tax Act 1967