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International Tax Developments

International Tax Developments. Malaysian Perspectives. Lembaga 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.

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International Tax Developments

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  1. International Tax Developments Malaysian Perspectives LembagaHasilDalamNegeri Malaysia

  2. PRESENTATION CONTENTS • Tax Treaties • Needs/Objectives • Status • Problems • Taxation of Multinational • Transfer Pricing • Advance Pricing Arrangement • Thin Capitalisation • Mutual Agreement Procedure LembagaHasilDalamNegeri Malaysia

  3. DOUBLE TAXATION AGREEMENT LembagaHasilDalamNegeri Malaysia

  4. Need for Tax Treaties • Taxation laws are national • Markets extend beyond boundaries • Development of comprehensive international system of taxation • An appropriate international climate LembagaHasilDalamNegeri Malaysia

  5. 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 LembagaHasilDalamNegeri Malaysia

  6. Need for Tax Treaties Diversity in Tax Systems • Differences in legal and tax history • Fiscal policy • Revenue needs • Level of compliance and enforcement in different countries LembagaHasilDalamNegeri Malaysia

  7. 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 LembagaHasilDalamNegeri Malaysia

  8. Nature of Tax Treaties • Dual in nature • Entered into between Governments for allocation of fiscal jurisdiction • Incorporated into domestic law LembagaHasilDalamNegeri Malaysia

  9. 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 LembagaHasilDalamNegeri Malaysia

  10. 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 LembagaHasilDalamNegeri Malaysia

  11. 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 LembagaHasilDalamNegeri Malaysia

  12. Authority to Conclude Tax Treaties Section 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 LembagaHasilDalamNegeri Malaysia

  13. Procedures for Bringing the Treaty Into Force LETTER TO THE OTHER COMPETENT AUTHORITY REPLY FROM THE OTHER COMPETENT AUTHORITY NEGOTIATIONS RATIFICATION/ ENTRY INTO FORCE INITIAL GAZETTE TABLE TO PARLIAMENT NOTES OF DISCUSSION CABINET PAPER OFFICIAL SIGNING LembagaHasilDalamNegeri Malaysia

  14. Tax Treaties Tax Treaties Status as at 10 August 2009 • Effective 64 countries • Under Negotiations 19 countries • Gazetted 4 countries • Concluded 6 countries • Under Negotiation 9 countries • Re-negotiation 7 countries LembagaHasilDalamNegeri Malaysia

  15. Effective DTAs ASIA AFRICA EUROPE BANGLADESH CHINA INDIA INDONESIA JAPAN MONGOLIA MYANMAR PAKISTAN PHILIPPINES SINGAPORE SOUTH KOREA SRI LANKA THAILAND VIETNAM MAURITIUS NAMIBIA SEYCHELLES SOUTH AFRICA SUDAN ALBANIA AUSTRIA BELGIUM CROATIA CZECH REPUBLIC DENMARK FINLAND FRANCE GERMANY HUNGARY IRELAND ITALY LUXEMBOURG MALTA NETHERLANDS NORWAY POLAND ROMANIA SPAIN SWEDEN SWITZERLAND UNITED KINGDOM CIS KYRGYZ RUSSIA UZBEKISTAN MIDDLE EAST BAHRAIN EGYPT IRAN JORDAN KUWAIT LEBANON MOROCCO QATAR SAUDI ARABIA SYRIA U.A.E. TURKEY AUSTRALIA & PACIFIC AUSTRALIA FIJI NEW ZEALAND PAPUA NEW GUINEA AMERICA CANADA CHILE U.S.A. ARGENTINA 64 Countries LembagaHasilDalamNegeri Malaysia

  16. 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 LembagaHasilDalamNegeri Malaysia

  17. Thu Apr 2, 2009 4:20pm EDT Four countries on OECD tax haven blacklist 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. LembagaHasilDalamNegeri Malaysia

  18. Wednesday April 8, 2009 Malaysia off the OECD blacklist 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. LembagaHasilDalamNegeri Malaysia

  19. TAXATION 0F MULTINATIONALS Transfer Pricing LembagaHasilDalamNegeri Malaysia

  20. 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. LembagaHasilDalamNegeri Malaysia

  21. Why is Transfer Pricing Important? Transfer price will determine: • The revenue of each associated enterprise • Tax base in each jurisdiction MNE operates • Transfer pricing policies can be used for income tax avoidance LembagaHasilDalamNegeri Malaysia

  22. 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 LembagaHasilDalamNegeri Malaysia

  23. Past Practices • 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. LembagaHasilDalamNegeri Malaysia

  24. 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 LembagaHasilDalamNegeri Malaysia

  25. Recent Developments • 1 March 2009 - Multinational Tax Dept. • Policies on TP, APA, TC • TP audits • Compliance monitoring • APA LembagaHasilDalamNegeri Malaysia

  26. Regulations 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 LembagaHasilDalamNegeri Malaysia

  27. Legislation • Section 140A: • Applies to transactions between associated persons • Acquisition or supply of property or services • Taxpayer to determine & apply arm’s length price LembagaHasilDalamNegeri Malaysia

  28. 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 LembagaHasilDalamNegeri Malaysia

  29. 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 LembagaHasilDalamNegeri Malaysia

  30. 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 LembagaHasilDalamNegeri Malaysia

  31. Malaysian TP Guidelines • New Guidelines also address in greater detail: • Intangibles • Intra-group services • Cost contribution arrangement • Interest on financial assistance LembagaHasilDalamNegeri Malaysia

  32. 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 LembagaHasilDalamNegeri Malaysia

  33. 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 LembagaHasilDalamNegeri Malaysia

  34. TP Audits by Type of Industry LembagaHasilDalamNegeri Malaysia

  35. TP Audits by Methodology LembagaHasilDalamNegeri Malaysia

  36. TP Audits by Type of Transaction LembagaHasilDalamNegeri Malaysia

  37. TP Audits: Countries in Related Transactions LembagaHasilDalamNegeri Malaysia

  38. 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 LembagaHasilDalamNegeri Malaysia

  39. Issues/Challenges TP Documentation • Non-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 LembagaHasilDalamNegeri Malaysia

  40. Issues/Challenges TP Documentation • Lack of current data to use as comparables in preparation of contemporaneous documentation • Compliance cost on taxpayer • Although awareness has improved, quality of TP documentation not always satisfactory LembagaHasilDalamNegeri Malaysia

  41. 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 LembagaHasilDalamNegeri Malaysia

  42. 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 LembagaHasilDalamNegeri Malaysia

  43. 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 LembagaHasilDalamNegeri Malaysia

  44. 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 LembagaHasilDalamNegeri Malaysia

  45. TAXATION 0F MULTINATIONALS Advance Pricing Arrangement LembagaHasilDalamNegeri Malaysia

  46. 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” LembagaHasilDalamNegeri Malaysia

  47. Scope of an APA • Parties to the APA • Transactions covered • Agreed TPM • Duration of the APA • Critical Assumptions • Other terms and conditions LembagaHasilDalamNegeri Malaysia

  48. 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 LembagaHasilDalamNegeri Malaysia

  49. 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 LembagaHasilDalamNegeri Malaysia

  50. 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) LembagaHasilDalamNegeri Malaysia

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