Tax and GST News – November (1)

1-11 November

Labuan called to align its tax regime with BEPS Action 5, 16 November 2017

The Governor of the Central Bank of Malaysia, Muhammad bin Ibrahim, has called for Labuan to review its international tax framework, following OECD’s work on Action 5 of the Base Erosion and Profit Shifting (BEPS) project, on harmful tax practices.

He discussed proposals from the OECD that tax incentives offered to taxpayers should only be to the extent that substantial economic activities take place within their territory. This will directly affect Labuan International Business and Financial Centre’s business model.

He said by aligning Labuan’s tax framework with the BEPS Action 5 standard would ensure alignment with international best practice and preserve its reputation. The alignment would also ensure that Labuan reviews its tax incentives to ensure they remain relevant and that the tax regime would improve regulation, compliance and prevent tax leakages.

Source: Tax-news, 8 November 2017

No adverse effect from exemption on withholding tax, 16 November 2017

The exemption for withholding tax on foreign firms providing services to Malaysian companies will not have a negative impact on its future revenue, said the Deputy Minister of International Trade and Industry.

The Deputy Minister believes that the Ministry of Finance has factored in economic and financial indicators and held discussions with the necessary stakeholders before issuing the exemption.

The Finance Act 2017 provided that non-resident service providers that provide offshore services will be subject to a 10% withholding tax, which then came into effect 1 January 2017. An exemption order for withholding tax on overseas firms providing services was subsequently issued, thus reverting to the status prior to 1 January 2017.

Source: The Sun Daily, 7 November 2017


Government expects tax revenue to increase in 2018, 08 November 2017

Tax revenue is expected to increase by 6.3% to RM191.57b in 2018, slightly slower than the estimated growth for 2017 of 6.4% to RM180.2b.

Direct tax is expected to increase at a slower rate of 6.7% of RM127.7b in 2018, compared to 9.2% in 2017, which is probably due to a smaller increase in individual income tax and petroleum income tax. Individual income tax is estimated to grow 7.1% in 2018 (9.2% in 2017) while petroleum income tax is estimated to grow 4.6%.

Corporate income tax, however, is expected to grow 6.9% to RM72.46b in 2018 (6.6% in 2017).

Indirect tax, which comprises GST, excise duties, import duty and export duty, is expected to grow 5.6% in 2018. GST is expected to see a 5.5% growth in 2018, excise tax 4.5%, and import and export tax 0.5%.

The government said that moving forward, it will improve its tax revenue collection by enhancing compliance and administration.

Source: The Edge Markets, 6 November 2017


Preparing for earning stripping rules, 08 November 2017

During the Budget 2018 speech, it was announced that earnings stripping rules (ESRs) would replace the existing thin capitalisation rules with effect from 1 January 2019, with the aim of tackling perceived tax leakages arising from excessive interest claims on related party loans.

Thin capitalisation rules were introduced in 2009 but were not implemented.

The ESRs will see interest deduction on related party loans within the same group being limited to a ratio ranging from 10% to 30% of a company’s earnings before interest, taxes, depreciation and amortisation (EBITDA) or earnings before interest and tax (EBIT). This proposal is in line with the fixed ratio” recommendation suggested by the Organisation for Economic Co-operation and Development (OECD).

With this decision, Malaysia joins a group of early adopters which includes the US, the UK, Japan and EU member states and it proves that Malaysia is referring to international developments when shaping its tax policy.

The ESRs will be added to the list of rules that Malaysia already has to limit interest deductions, such as:

  • Interest deductions are generally allowed only against income from the source to which borrowings are applied.
  • Interest deductions are only allowed when the interest is “due to be paid”.
  • Interest paid to related parties must be at arm’s length under Malaysian transfer pricing rules.
  • No interest deductions are available on interest payments made to non-residents if withholding tax rules have not been complied with.

Yeo Eng Ping, Ernst & Young’s ASEAN tax leader opines that the following issues would need to be considered for a successful implementation of ESRs with minimal disruption to business:

  • Interaction with existing interest deduction rules: Which rules will take priority? Are they cumulative?
  • In-country group transactions: Should the rules apply to transactions that do not result in base erosion? For example, are both related parties in Malaysia and subject to the same rate of tax? Where interest deductions are restricted for the payer, will there be automatic corresponding adjustments for the interest recipient to achieve neutrality?
  • Business-friendly fixed ratio: Will the fixed ratio accommodate potential increases in interest rates? What about average gearing ratios that differ for companies at different stages of their life-cycle and in different industries/sectors?
  • EBITDA: Should an average EBITDA be used to smooth volatility in earnings? Will the rules examine the ratio on a group basis or an entity basis?
  • Other OECD recommendations: Should there be special rules for public interest projects? And other selected industries? Can we carry forward disallowed interest expenses?

Yeo believes the implementation date of 1 January 2019 allows policymakers to have sufficient time to formulate a manageable policy. She believes that it is important for policymakers to connect with the business community to obtain meaningful stakeholder feedback to prevent uncertainty and creation of rules that increase the cost of business or do not achieve the desired policy objective.

Source: The Edge Markets, 6 November 2017

Announcement: Scam involving IRB CEO and board members’ name, 08 November 2017

The Inland Revenue Board (IRB) has detected a scam that involving emails purportedly sent by the IRB Chief Executive Officer or the IRB board members.

The emails state that the taxpayers are entitled to a tax refund and requests for bank account details to enable the transaction to tax place. The IRB stresses that it is not its practice to request for taxpayers’ bank account details via email as such information is provided by the taxpayers in the tax return form.

The IRB advises taxpayers to check the authenticity of the emails before following the instructions provided. A common step would be to check the email domain used by the sender. The IRB’s email domain is The IRB also advises taxpayers to call the IRB official hotlines for verification.

Kindly visit the IRB website for further information.

Source: IRB website, 6 November 2017

Special relief more beneficial than 2% income tax cut, 06 November 2017

A special relief would have been more helpful than a 2% tax cut for those with taxable income between RM20,000 to RM70,000, said Dr Veerinderjeet Singh of Axcelasia Taxand Sdn Bhd. A special relief given to those within the income band of RM20,000 to RM70,000 would specifically target the M40 group. Currently, the 2% reduction in tax rate for those earning between RM20,000 to RM70,000 will also benefit the high-income earners as they use the same tax table.

Source: The Malaysian Insight, 6 November 2017

Tourism tax collection more than RM600,000 in September 2017, 02 November 2017

The government has collected a total of RM610,280 nationwide from 1 September 2017 to 30 September 2017, which is its first month of implementation. Penang had the highest collection at RM241,460 (from 292 registered lodgings), followed by Kuala Lumpur with RM185,750 (from 718 registered lodgings) and Johor with RM52,550 (from 554 lodgings).

Source: The Star Online, 1 November 2017


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