Malaysia – Tax Update: Post-Budget 2019 — Legislative Developments

5 April, 2019

 

In this article, sharon lau foong yee outlines key amendments to tax legislation since the unveiling of budget 2019.

 

 

Pursuant to the tabling of Budget 2019 by Finance Minister YB Lim Guan Eng on 2 November 2018 with the theme: “A Resurgent Malaysia, A Dynamic Economy, A Prosperous Society”, several Acts of Parliament (“Acts”) have been passed to bring into effect various proposed legislative amendments.

The Acts that have been passed and published to date are as follows:

 

1.     Finance Act 2018 [Act 812];

2.     Sales Tax (Amendment) Act 2018 [Act A1578];

3.     Service Tax (Amendment) Act 2018 [Act A1579];

4.     Labuan Business Activity Tax (Amendment) Act 2018 [Act A1577].          

 

Some key changes are outlined below.

Amendments to the Labuan Business Activity Tax Act 1990 (“LBATA”)

“Labuan business activity” is redefined as any Labuan trading/non-trading activity carried on in, from or through Labuan that is not a statutory offence. It is no longer a requirement that the activity be carried out in foreign currency nor “by a Labuan entity with non-resident or with another Labuan entity”.

The ministerial power under subsection 2A(2) of the LBATA to approve the carrying out of a designated Labuan business activity in Malaysian currency or with residents is removed.
Section 2B of the LBATA is amended to stipulate that the Labuan business activity carried out by a Labuan entity must have such number of full-time employees and operating expenditure as the Minister may prescribe[1].

The amendment to section 4 of the LBATA makes clear that any income derived from royalty and any “intellectual property right” as defined under the new subsection 4(5) of the LBATA where it is receivable as consideration for the commercial exploitation of that right is subject to tax under the Income Tax Act 1967 (“ITA”), instead of the 3% tax rate under the LBATA.

With section 7 of the LBATA deleted and section 8 of the LBATA amended, a Labuan entity can no longer elect to be subject to a flat rate tax of RM20,000. For a Labuan entity which does not have a basis period, the Director General may now direct the period/periods to be included in that basis period for that year of assessment (“YA”).

Amendment to section 8A meant that a rebate for any zakat which is paid in the basis period for that YA to a Labuan Islamic religious authority is not available to a Labuan entity charged to tax under section 8 of the LBATA.

Amendments to the LBATA came into operation on 1 January 2019. 
 
Amendments to the Sales Tax Act 2018

Section 41A of the Act empowers the Minister to, by way of regulations, prescribe the amount of sales tax to be deducted in respect of taxable goods[2] purchased by any registered manufacturer, condition for deduction, and the form and manner of such deduction. If the registered manufacturer defaults in complying with any conditions of such deduction, the sales tax will become due and payable on the day of default.

Causing or attempting deduction of sales tax in excess of the amount properly deductible is an offence under section 88A. Upon conviction, the person shall be liable to a fine up to RM50,000 or imprisonment up to three years or both, and a penalty two times the amount in excess of the amount properly deductible.

These amendments to the Sales Tax Act 2018 came into operation on 1 January 2019.

Amendments to the Service Tax Act 2018 

A new definition covering “imported taxable service” which means “any taxable service acquired by any person in Malaysia from any person who is outside Malaysia” was introduced.
Amendment to section 7 extends the scope of service tax to any imported taxable service. Subsection 9(1)(d) stipulates that the value of such imported service “shall be as prescribed”[3]. Subsection 11(1)(b) of the Service Tax Act 2018 provides that service tax for imported taxable service shall be due at the time when the payment is made or invoice is received for the service, whichever is earlier.

Following amendments to section 24, all records of imported taxable services shall be kept by the taxable person. A non-taxable person carrying on his business who acquires any imported taxable service shall also be subject to the same duty to keep records imposed under section 24. Failure to comply with section 24 is an offence.

Section 26A of the Act requires any person (other than a taxable person) who in carrying on his business acquires any taxable imported service to declare and pay to the Director General any service tax due and payable by him within the timeframe prescribed in section 26A. Non-compliance or furnishing an incorrect declaration is an offence with prescribed penalty rates to be imposed where no prosecution had been instituted.

These amendments to the Service Tax Act 2018 came into operation on 1 January 2019.

Amendments to the Stamp Act 1949 (“SA”)

“Banker” in section 2 of the SA is redefined as any person licensed under the Financial Services Act 2013/Islamic Financial Services Act 2013 to carry on a banking/Islamic banking business respectively, or a development financial institution prescribed under the Development Financial Institutions Act 2002.

“Small and medium enterprise” under section 2 of the SA is redefined as follows:
  

No.	Type of Activity	Criteria
1.	Manufacturing	Sales turnover not exceeding RM 50,000,000; or A maximum of 200 full-time employees.
2.	Services and other sectors	Sales turnover not exceeding RM 20,000,000; or A maximum of 75 full-time employees.

 
Amendment to subsection 9(1) of the SA allows the collector to authorise “any person” to compound for the payment of duty on unstamped instrument subject to the condition that the instrument be drawn or drawn up and issued on a form to be supplied or adopted by the person.

For stamp duty relief in case of reconstructions or amalgamations of companies under section 15 of the SA, all previous references to “nominal share capital” were substituted with “issued share capital”.

Following the deletion of subsection 15(2) of the SA, a company which has issued any unissued share capital in connection to a reconstruction/amalgamation shall no longer be treated “as if it had increased its nominal share capital”. New subsection 15(6A) requires each company that is party to the instrument for which section 15 exemption had been granted to notify the collector within 30 days on the occurrence of any circumstances as stipulated under subsection 15(5). Subsection 15(5)(b) and (c) of the SA were amended to extend the period in which the companies have to remain as the beneficial owner of the shares, from two years to three years, to obtain exemption under this section.

Subsection 15A(2) of the SA introduced two additional requirements to be satisfied to be relieved of stamp duty under paragraph (a)/(b) of Item 32 of Schedule 1 for transfer of property between associated companies:

      i.        transfer is to achieve greater operational efficiency; and

     ii.        transferee company is incorporated in Malaysia.

Amendment to subsection 15A(4)(c) requires the company to show to the collector that the instrument was not executed in pursuance to an arrangement under which the transferor and transferee were to cease to be associated by reason of change in the percentage of the issued share capital of the transferee in the beneficial ownership of the transferor or a third company “within the period of three years from the date of the conveyance or transfer”.

New subsections 15A(5)-(7) were enacted. Where it is found that any declaration or evidence in support of a granted claim for exemption is untrue, the exemption shall be revoked and duty chargeable with interest thereon at 6% per annum from the date on which the conveyance or transfer ought to be stamped with the proper amount of duty.

The collector may require a statutory declaration from an advocate and solicitor or an advocate where a claim for exemption is made under section 15A. There is also a duty to inform the collector within 30 days from the date of occurrence of any of the circumstances in subsection 15A(4) under which exemption should not be granted, notwithstanding that the claim for exemption had been allowed.

“Constitution of a company”[4] will be subject to a stamp duty of RM200. “Articles of Association of a company” (Item 10) and “Memorandum of association of a company” (Item 53), previously subject to RM100 stamp duty respectively, were deleted.

These amendments came into operation on 28 December 2018.

For conveyance, assignment, transfer or absolute bill of sale on sale of any property (except stock, shares, marketable securities and accounts receivables or book debts of the kind mentioned in paragraph (c) of Item 32 of Schedule 1), a stamp duty of RM3 is chargeable on any amount that is in excess of RM50,000 “but not exceeding RM1,000,000”. A new sub-item 32(a)(iv) introduces a stamp duty of RM4 on any amount that is in excess of RM1 million. These amendments to sub-item 32(a) came into operation on 1 January 2019.
 
Amendments to the Real Property Gains Tax Act 1976 (“RPGTA”)

New paragraph 2A of Schedule 2 of the RPGTA stipulates that where a disposal is subject to tax under Part I of Schedule 5 (tax rates applicable to individuals who are either citizens or permanent residents), for the purposes of Schedule 2, references to 1 January 1970 shall be construed as references to 1 January 2000.

Schedule 2 of the RPGTA is amended in subparagraph 12(2)(c) such that where the donor and recipient of a gift are husband and wife, parent and child, or grandparent and grandchild, the recipient shall be deemed to acquire the asset at an acquisition price equal to that paid by the donor plus the permitted expenses incurred by the donor even if the gift is made after five years from the date of acquisition by the donor. Previously this deeming provision only applies where the gift is “made within five years after the date of acquisition by the donor”.

The date of “1 January 1970” in subparagraph 13(2) of Schedule 3 is amended to “1 January 2000” such that where a part of the land attaching to a private residence that is disposed of without the residence was acquired by the disposer prior to 1 January 2000, and the land was either acquired by the disposer with residence, or without the residence with total area of more than one acre, the deemed acquisition price of the part disposed of is the market value of the land as at 1 January 2000.

Amendments to Schedule 5 of the RPGTA effected the following change in tax rates:
  

Category of Disposal	New Rate of tax	Previous rate of tax
Disposal in the sixth year after the date of acquisition of the chargeable asset or thereafter	5%	Nil.
Disposal by a company in the sixth year after the date of acquisition of the chargeable asset or thereafter	10%	5%
Disposal by a foreigner who is not a permanent resident in the sixth year after the date of acquisition of the chargeable asset or thereafter	10%	5%

 
Amendments to the RPGTA came into operation on 1 January 2019.

Amendments to the Income Tax Act 1967 (“ITA”)

“Research” and “scientific research” are replaced with the phrase “research and development”. Subsection 2(1) of the ITA defines “research and development” as any study that involves novelty or technical risk in the field of science or technology. Relevant parts of sections 34 and 34A of the ITA were consequently amended to incorporate this change.

The word “technical” is removed from section 4A(ii), and Paragraph (ii) of Part V of Schedule 1 of the ITA so that a non-resident’s income derived from Malaysia in the form of amounts paid in consideration of “any advice given, or assistance or services rendered” in connection with the management/administration of any scientific, industrial or commercial undertaking, venture, project or scheme is chargeable to income tax at 10%. This amendment re-affirms the Revenue’s interpretation that withholding tax applies to both technical and non-technical services. Subsection 109B(1)(b) of the ITA on deductions is also correspondingly amended to remove the word “technical”.

Subsection 12(3) of the ITA stipulates that any business income of a person that is attributable to a “place of business” in Malaysia shall be deemed as the person’s gross income derived from Malaysia. Subsection 12(4) is inserted to elaborate on what “place of business” includes, and a person shall be deemed to have a place of business in Malaysia if that person carries on supervisory activities in connection to construction or installation or assembly project, or has another person acting on his behalf who inter aliaconcludes contract, maintains stock of goods, or regularly fills orders on his behalf.

These amendments to the ITA came into operation on 28 December 2018.

On the ascertainment of total income under the ITA, subsection 44(5F) stipulates that adjusted losses as ascertained under either subsection 44(4)/44(5) of the ITA shall only be deductible from aggregate income for a period of seven consecutive years[5]. Any amount which is not deductible at the end of that period shall be disregarded.

Special provision relating to section 43 and 44 of the ITA states that adjusted losses ascertained under subsection 44(4) or 44(5) of ITA 1967 for YA 2018/YA 2017 and the preceding years of assessment (“YAs”), which have not been deducted pursuant to subsection 43(2), may be included for deduction under subsection 43(2) from YA 2019 until the end of YA 2025, after which any such amounts not so deducted shall be disregarded.

Subsection 44A(1) of the ITA imposes a time limit such that a company is allowed to surrender not more than 75% of its adjusted loss “for the basis period[6] for three consecutive years of assessment”.  Further, Section 44A shall not be applicable to a company for a basis period for a YA the period during which the company has unutilised investment tax allowance or adjusted loss from a pioneer business under the Promotion of Investments Act 1986.

“Ordinary shares” now means any share other than a share which carries only a right to any dividend which is of a fixed amount or at a fixed rate per cent of the “value”, instead of “nominal value”, of the shares. “Residual profits” means profits of the claimant or surrendering company after deducting any dividend which is of a fixed amount or at a fixed rate per cent of the “value” of the shares of that company, instead of “nominal value”.

Special provision relating to section 44A of the ITA provides that a company may surrender its adjusted loss for the basis period as follows: for a surrendering company which first commenced operation in YA 2015, for YA 2019; if it first commenced operation in YA 2016, for YAs 2019 and 2020; if it first commenced business in YA 2017, for YAs 2019, 2020, and 2021 in relation to a surrendering company which first commences operation in YA 2017. This special provision has effect for YAs 2019, 2020, and 2021.

Subsection 49(1) of the ITA is amended such that an individual resident for the basis year for the YA is allowed the following deductions:

      i.        not exceeding RM3,000 for any insurance premium paid by the individual;

     ii.        not exceeding RM4,000 for contribution made by an employee/self-employed to approved scheme other than a private retirement scheme; or

    iii.        not exceeding RM4,000 for contribution under any written law relating to widow, widower and orphan’s pension.

Previously, the aggregate deduction allowed under subsection 49(1) of the ITA was capped at RM6,000. Following the amendment to subsection 49(1A), the aggregate deduction under subsection 49(1) of the ITA is capped at RM7,000.

For insurance business of an insurer, “inward re-insurance”, “inward re-insurance contract”, “offshore insurance”, “offshore insurance policies”, are removed from section 60 of the ITA. Section 60B of the ITA which regulates chargeable income, reduced rate and exempt dividend of offshore insurance business carried out by the insurer is deleted.

The subject matter of section 60A of the ITA is no longer “inward re-insurance”, but simply “re-insurance”. Section 60A of the ITA shall apply to an insurer who has an adequate number of full-time employees and has incurred an adequate amount of annual operating expenditure in Malaysia as prescribed by the Minister. The income tax rate for re-insurance business of an insurer is changed from 5% to 8%.

A takaful operator who has an adequate number of full-time employees and has incurred an adequate amount of annual operating expenditure in Malaysia as prescribed by the Minister will be subject to section 60AA.

“Inward”, “inward re-takaful”, “inward re-takaful contract”, “offshore fund”, “offshore takaful business”, “offshore takaful”, are deleted from section 60AA of the ITA. Income tax rate applicable to a re-takaful business of a takaful operator, being a company resident for the basis year for a YA, is now 8% instead of 5%.

Schedule 1 of the ITA is amended as follows:

      I.        Income tax rate under paragraph 2A for a YA on the chargeable income of a company resident and incorporated in Malaysia with a paid-up capital in respect of ordinary shares of RM2.5 million less at the beginning of the basis period for a YA is 17% instead of 18% for every ringgit of the first RM500,000;

     II.        Income tax rate under paragraph 2D for a YA on the chargeable income of a limited liability partnership resident in Malaysia which has a total contribution of capital (whether in cash or in kind) of RM2.5 million and less at the beginning of the basis period for a YA is 17% instead of 18% for every ringgit of the first RM500,000; and

    III.        Income tax on the chargeable income of a foreign fund management company in relation to the source consisting of the provision of fund management services to foreign investors is 10% for YAs 2019 and 2020, and 24% for the subsequent YAs.

Paragraphs 37B and 37D of Schedule 3 of the ITA are amended to replace “research” with “research and development”.

For reinvestment allowance, Schedule 7A of the ITA is amended in paragraph 4 by deleting the words “until the person has received the whole of the allowance or allowances to which it is so entitled” to reflect that reinvestment allowance can no longer be carried forward indefinitely and that it is no longer the case that the person is allowed to recoup the full extent of reinvestment allowances. Any reinvestment allowances which has not been given to a person under paragraph 4 in Schedule 7A shall only be given to that person for a period of seven consecutive YAs immediately following the first YA. The amount which has not been given to that person at the end of that period shall be disregarded for subsequent YAs.

Special provision relating to paragraph 4B of Schedule 7A provides that any reinvestment allowances which has not been made to a person prior to YA 2018 shall only be made to that person for a period of seven consecutive YAs immediately following YA 2018. The amount which has not been made to that person at the end of that period shall be disregarded for subsequent YAs.

Similar amendments were introduced for investment allowance for the service sector. The words “until the company has received the whole of the allowance or allowances to which it is so entitled” in paragraph 5 of Schedule 7B are deleted.

New paragraph 5A of Schedule 7B provides that any investment allowance for the service sector which has not been given to a person under paragraph 5 in Schedule 7B shall only be given to that person for a period of seven consecutive YAs immediately following the basis period for the YA in which the period of approval for the allowance ends. The amount which has not been given to that person at the end of that period shall be disregarded for subsequent YAs.

Special provision relating to paragraph 5A of Schedule 7B provides that any investment allowance for the service sector which had not been given to a person for any YA prior to YA 2018 shall only be given to that person for a period of seven consecutive YAs immediately following YA 2018. The amount which has not been given to that person at the end of that period shall be disregarded for subsequent YAs.

The above amendments to the ITA have effect from YA 2019 and subsequent YAs.

Effective from 1 January 2019, “Labuan company” means “a Labuan entity as provided under subsection 2B(1) of the LBATA”. This widens the reach of the ITA to Labuan entities.

A new section 140C of the ITA states that in a “controlled transaction”, any interest expense in excess of the maximum amount determined under any rules made under the ITA is not deductible from the gross income of that source. “Interest expense” is defined to include payments economically equivalent to interest but excluding expenses incurred in connection with the raising of finance.

A new subsection 39(1)(r) provides that in ascertaining the adjusted income of any person, no deduction from the gross income from any source for the basis period for a YA shall be allowed in respect of any payment made by a resident to any Labuan company subject to any rules that may be mentioned by the Minister of Finance.

Persons mentioned in Subsection 140A(5)(c) of the ITA is referred as “third person”.

Subsection 140A(5A) of the ITA defines “control” for subsection 140A(5) as a person who owns shares of another person, or a third person who owns shares of both persons, where the percentage of the share capital held in either situation is 20% or more, and:

      i.        the business operations of that person depends on proprietary rights provided by the other person or third person;

     ii.        the business activities of that person are specified by the other person, or

    iii.        one or more of the directors or members of the board of directors of a person are appointed by the other person or a third person.

Section 140C of the ITA stipulates that no deduction from the gross income from any business source for that period shall be allowed in respect of any interest expense in connection with or on any financial assistance in a controlled transaction granted directly or indirectly to that person which is in excess of the maximum amount of interest as determined under any rules made under the ITA.

Paragraph 154(1)(ed) of the ITA allows the Minister to make rules to implement and facilitate the newly inserted Section 140C of the ITA.

Tax exemption under paragraph 35A of Schedule 6 of the ITA is not applicable to interest paid or credited to a unit trust that is a wholesale fund which is a money market fund.

These amendments came into operation from 1 January 2019.

For YAs 2019 and 2020, instead of RM6,000, a maximum of RM8,000 deposited into Skim Simpanan Pendidikan Nasional account in that basis year by the individual for his child is claimable as personal deduction under subsection 46(1)(k) of the ITA.
  

 

 

For further information, please contact:

 

Lau Foong Yee (Sharon), Shearn Delamore & Co​

sharon.lau@shearndelamore.com