BDO Tax Buzz | August 2024

BDO Tax Buzz | August 2024

In this issue of Tax Buzz, we will highlight the key changes and updates on:


INCOME TAX

  • Employers’ responsibilities in relation to Monthly Tax Deduction
  • New guidelines for the application of tax clearance letter for individuals
  • Tax treatment on actual gross profit or loss from a construction contract

 

TRANSFER PRICING

  • FAQ by IRBM on the imposition of transfer pricing surcharge
  • Updated guidelines on advance pricing arrangement and how its application will be processed and administered by the Inland Revenue Board of Malaysia

 

CAPITAL GAINS TAX

  • Exemption of tax on gains arising from the disposal of shares to which section 15C of the Income Tax Act 1967 applies, effective from 1 January 2024 to 29 February 2024.
  • Exemption from tax on gains received in Malaysia from the disposal of foreign capital assets
  • Guidelines on the imposition of capital gains tax on a company from the disposal of unlisted shares in a Malaysian company and shares in a company which section 15C of the Income Tax Act 1967 applies
  • Guidelines on tax treatment on gains from the disposal of foreign capital assets received from outside Malaysia
  • Capital Gain Tax Return Form Filing Programme

 

INCENTIVES

  • Extension of the tax deduction for investments in BioNexus status companies made from 1 January 2023 to 31 December 2024.
  • Five-year tax exemption on statutory income from a qualifying activity for Iskandar Development Region (“IDR”) status companies, based on 100% allowance on qualifying expenditure , starting from first qualifying capital expenditure determined by the Iskandar Regional Development Authority (“IRDA”).
  • Extension of the application period for the tax incentive under the Returning Expert Programme for another four years from 1 January 2024
  • Changes to the tax exemption for companies awarded the Multimedia Super Corridor (MSC) status, which has been rebranded as Malaysia Digital (“MD”) status.
  • Extension of the tax exemption for businesses providing fund management services to a sustainable and responsible investment fund in Malaysia by four years
  • Extension of the tax exemption on for businesses providing shariah-compliant fund management services to business trust, real estate investment trust (“REIT), local investors and foreign investors by four years
  • Public Ruling on the investment tax allowance that can be applied by a company that participates or intends to participate in a business in the manufacturing sector with production in Malaysia

 

SALES TAX

  • Guide on Exemption from Registration Under the Sales Tax Act 2018
  • Guide on Furnishing LVG-02 Return and Payment of Sales Tax on Low Value Goods (“LVG”)
  • Guide on Approved Major Exporter Scheme (“AMES”)
  • Guide on Sales Tax Exemption Under Schedule C, Sales Tax (Persons Exempted from Payment of Tax) Order 2018
  • Guide on Sales Tax Exemption Under Item 33A, 33B, 55, 63, 64 and 65, Schedule A, Sales Tax (Persons Exempted from Payment of Tax) Order 2018
  • Guide on disposal of imported or purchased goods with sales tax exemption of facility of the Sales Tax Act 2018
  • Amendment of the Public Ruling on manufacturing aids and cleanroom equipment.

 

SERVICE TAX

  • Amendments relating to the expansion of the service tax scope and rate
  • Service Tax Policies
  • Updated General Guide on Service Tax Act 2018
  • Service Tax Industry Guides

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KEY UPDATES FROM THIS ISSUE OF TAX BUZZ

Capital Gains Tax ("CGT")

Income Tax (Exemption) (No. 2) Order 2024 [P.U. (A) 57/2024]

The above order, which was gazetted on 23 February 2024, exempts a company, limited liability partnership (“LLP”), trust body or co-operative society from tax on gains arising from the disposal of shares to which section 15C of the Income Tax Act 1967 applies that were made during the period from 1 January 2024 to 29 February 2024. 

Under section 15C, gains arising from the disposal of applicable shares in a controlled company (referred to as the “relevant company”) incorporated outside Malaysia, which owns real property situated in Malaysia or shares of another controlled company or both, are deemed to be derived from Malaysia. Section 15C applies where at the date of acquisition of the shares of the relevant company, the market value of the Malaysian real property or shares in another controlled company or both owned by the relevant company is not less than 75% of the value of its total tangible asset. 

The exemption will not apply if the gain is chargeable to tax as business income under section 4(a) of the Income Tax Act 1967.

Income Tax (Exemption) (No. 3) Order 2024 [P.U. (A) 75/2024] 

P.U. (A) 75/2024 was gazetted on 4 March 2024 and is effective from 1 January 2024 to 31 December 2026. It exempts a company, LLP, trust body or co-operative society from tax on gains received in Malaysia from the disposal of foreign capital assets. The exemption is subject to meeting conditions imposed by the Minister of Finance as specified in the guidelines issued by IRBM (please refer to the Guideline on Tax Treatment on Gains from the Disposal of Foreign Capital Assets Received from Outside Malaysia that is covered later in this Issue), which includes employing an adequate number of employees in Malaysia and incurring an adequate amount of operating expenditure in Malaysia. 

Gains or profits from the disposal of intellectual property rights are disregarded for the purpose of the exemption, provided that the company, LLP, trust body or co-operative society is the owner or licensee of the intellectual property rights. The exemption does not apply to a person carrying on the business of banking, insurance, sea transport or air transport.

Guideline on Capital Gains Tax for Unlisted Shares

On 1 March 2024, IRBM issued the above guideline to explain the imposition of capital gains tax on a company, LLP, trust body or co-operative society in relation to their disposal of the following capital assets:

    a.    unlisted shares in a company incorporated in Malaysia

    b.    shares in a relevant company in which section 15C of the Income Tax Act 1967 applies

Notable statements in the guideline are as follows:

1.    Capital gains tax is imposed on the disposal of shares that are equity in nature which includes:

        a.    no fixed right to receive dividends

        b.    in a liquidation, the right of the shareholder to the residual assets is after other claims have been satisfied

        c.    no maturity date

        d.    carries voting rights


2.    Market value refers to the reasonable or appropriate price for a disposal transaction. Among the criteria for determining a market value that is reasonable and appropriate are:

        a.    existence of acquirer and disposer

        b.    disposer and acquirer are not connected persons

        c.    the disposal transaction is at arm’s length

        d.    no compulsion in the disposal transaction

        e.    both parties have sufficient knowledge

3.    Among the methods that can be used to determine a reasonable and appropriate market value for shares is the net tangible assets method.

4.    Holdings of shares in a real property company as defined under the Real Property Gains Tax Act 1976 are deemed to be holdings of shares in a relevant company.


The guideline can be accessed on IRBM’s Hasil website here.

Guideline on Tax Treatment on Gains from the Disposal of Foreign Capital Assets Received from Outside of Malaysia

The above guideline was issued by IRBM on 27 March 2024, with amendments made on 26 April 2024. It explains the tax treatment on gains from the disposal of foreign capital assets received in Malaysia by a Malaysian tax resident.

Key Points in the Guideline:

Gains from the disposal of foreign capital assets situated outside Malaysia that are subject to tax refers to those that occur on or after 1 January 2024.

Based on the examples in the guideline, a gain from the disposal of foreign capital asset is to be declared in the annual income tax return of the chargeable person of the YA when the gain is received in Malaysia. The gain is included in the computation to determine the person’s chargeable income for that YA.

Tax Exemption Conditions

Further clarification is provided in respect of the conditions for the tax exemption under P.U. (A) 75/2024 given to a company, LLP, trust body or co-operative society on gains received in Malaysia from the disposal of foreign capital assets as follows:

  • Employ an adequate number of employees with the necessary qualifications to carry out the specified economic activities in Malaysia
  • Incur an adequate amount of operating expenditure for carrying out the specified economic activities in Malaysia

Due to different operating methods between industries, the determination of any minimum threshold value for the conditions is based on the facts of each case. Factors that will be considered include:

  • The number of employees considering the type of activity involved, for example whether it is a capital or labour-intensive industry
  • Whether the employee works full-time or part-time
  • Whether office premises have been used to carry out related activities and whether the premises are sufficient for those activities

Only a service director who is employed under a contract of service is considered an employee. A non-service director is not considered as an employee.

Specified Economic Activities

“Specified economic activities” means:

  • For investment holding entity:
    • Holding and managing its equity participation in other entities
    • Making necessary strategic decisions in respect of any assets the entity acquires, holds or disposes of, and managing and bearing principal risks in respect of such assets
  • For entities other than investment holding entity, the business operations carried out in Malaysia

Outsourcing of Specified Economic Activities

Outsourcing of specified economic activities to outsourced entity is allowed provided the following conditions are fulfilled:

  • The specified economic activities are carried out by the outsourced entity in Malaysia
  • There is sufficient monitoring and control implemented by the outsourcing entity over the implementation of specified economic activities by the outsourced entity
  • The outsourced entity is generally expected to charge the outsourcing entity for the specified economic activities carried out subject to the application of transfer pricing rules
  • The number of qualified employees employed and total operating expenses incurred by the outsourced entity is equivalent to the level of specified economic activities carried out by the outsourced entity
  • There is no double counting if the outsourced entity provides services to more than one outsourcing entity


The guideline can be accessed on IRBM’s Hasil website under Legislation > Guidelines > Technical Guidelines.

Incentives

Income Tax (Exemption) (No. 10) (2018) (Amendment) Order 2024 [P.U. (A) 84/2024]

The above amendment order was gazetted on 8 March 2024. It amends the principal order relating to the tax exemption given to companies awarded the Multimedia Super Corridor (“MSC”) status, which has been rebranded as Malaysia Digital status.

The key changes made by the amendment order are:

  • the qualifying company is not eligible for tax exemption on the core income generating activities if a related company has been granted tax exemption in respect of the same activities
  • the qualifying company is allowed to surrender the tax exemption if it fails to comply with the conditions imposed
  • an existing qualifying company and an existing qualifying company which exemption period has ended may add any additional activity which is approved by the Minister as core income generating activities
  • deletion of the condition for the location where the core income generating activities are carried out

The amendment order is deemed to have come into operation on 1 January 2019, except for the amendment relating to the deletion of the location condition, which is effective from 25 March 2022.

Income Tax (Exemption) (No. 5) Order 2021 (Amendment) Order 2024 [P.U. (A) 106/2024]

Gazetted on 5 April 2024, the above amendment order amends the principal order relating to the tax exemption on the business income from providing fund management services to a sustainable and responsible investment (“SRI”) fund in Malaysia by extending the exemption period for another 4 years from YA 2024 to YA 2027.

Income Tax (Exemption) (No. 6) Order 2021 (Amendment) Order 2024 [P.U. (A) 107/2024]

Income Tax (Exemption) (No. 7) Order 2021 (Amendment) Order 2024 [P.U. (A) 108/2024]

Income Tax (Exemption) (No. 8) Order 2021 (Amendment) Order 2024 [P.U. (A) 109/2024]

Gazetted on 5 April 2024, the above amendment orders supersedes the principal orders relating to the tax exemption on the business income from providing shariah-compliant fund management services to business trust, real estate investment trust (“REIT”), local investors and foreign investors by extending the exemption period for another four years from YA 2024 to YA 2027. However, from YA 2024 the exemption is restricted to 60% of the statutory income from such a business.

Public Ruling No. 1/2024: Investment Tax Allowance – Promoted Product Under the Manufacturing Sector

Public Ruling No. 1/2024 was issued by IRBM on 24 January 2024. It explains the investment tax allowance that can be applied by a company which participates or intends to participate in a business in the manufacturing sector in relation to the production in Malaysia of a promoted product under the general list, or under the list for high technology companies, small scale companies, selected industries and reinvestment in particular industries respectively.

The public ruling can be accessed on IRBM’s Hasil website under Legislation > Public Rulings.