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Can intercompany loans be interest free?

(Tax Update) Interest-Free Loans – Are You at Risk?

Dear Valued Clients,

Are you providing interest-free loans between your companies? If so, it's time to take a closer look! The Malaysian Inland Revenue Board (IRB) has ramped up its scrutiny on these transactions, and they’re not playing around.

What’s Happening?

The IRB is closely examining interest-free loans between related parties, including those from directors to their companies. Even if no interest is charged, the IRB considers these loans as generating ''deemed interest income,'' which is taxable.

This could result in an unexpected tax bill, plus a 5% surcharge tax penalty for what the IRB views as unpaid interest.

Why Now?

Although the rules have been in place for years, the IRB is now strictly enforcing them. Under Section 140B of the Income Tax Act 1967 and Public Ruling No. 8/2015 Loan or Advances to Director by a Company, the IRB has the power to retroactively tax interest income on these loans, with a look-back period of up to seven years.

This means you could be liable for back taxes on past transactions.

Legal and Compliance Risks

If you haven't been reporting these loans or justifying their interest-free nature, you could face penalties. The IRB argues that interest-free loans violate the arm's length principle—meaning they're not conducted on terms that independent parties would agree to.

There is also no guarantee that a company making a payment under such a loan will receive a corresponding tax deduction. Deductions are only allowed if the payment meets the 'wholly and exclusively for the production of income' rule.

But it doesn't stop at loans.

The IRB’s scrutiny also covers other financial arrangements such as cash advances, payments on behalf of related parties, long-outstanding trade debts, financial support, and guarantee fees. It’s essential to determine whether these are genuine loans or could be seen as equity instruments.

IRB’s Active Enforcement

The IRB is actively enforcing these rules, sending letters to taxpayers requesting explanations for their interest-free loan arrangements.

If the IRB isn't satisfied with your explanations or documentation, you could face hefty fines and back taxes.

What Should You Do? Best Practices to Follow

To protect your business from these risks, it’s crucial to:

Keep Proper Documentation

Always have loan agreements in place and maintain clear records justifying any interest-free loans.
Review Your Financial Arrangements

Conduct a thorough review of all transactions to ensure they are properly classified and reported.
Seek Professional Guidance

Engage with tax professionals to help navigate these complex rules and ensure your compliance with all tax regulations.

Transfer Pricing and Tax Evasion

Remember, transfer pricing—pricing transactions between related entities to minimize taxes—is a primary method of tax avoidance that the IRB is targeting. Make sure your transactions are compliant with Malaysian laws to avoid being flagged for tax evasion.

Conclusion

With the IRB’s increased scrutiny, it’s more important than ever to ensure your financial practices are in line with current tax laws. Don’t wait until it’s too late—take action now to review your interest-free loans and related transactions to avoid any surprises.

Stay informed, stay compliant, and reach out to us at KTP if you need any assistance navigating these changes.

Thank you for reading our weekly newsletter!

Best regards,

KTP Team

Credit : 'Interest-Free Loans Blitz Is Now Haunting Taxpayers,' as reported by Thannees.com.''

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(Tax Update) MIDA Reinvestment Incentive Eligibility

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(Tax Update) MIDA Reinvestment Incentive Eligibility

Dear KTP Clients,

As a licensed tax agent with years of experience, I’ve seen how the right tax incentives can make a significant difference for businesses in Malaysia.

Recently, a client of ours, the boss of a well-established manufacturing company producing automotive spare parts, approached me with a question that I believe many of you in similar industries might be asking: “Am I eligible for the new reinvestment incentive under the New Industrial Master Plan 2030 (NIMP 2030)?”

Let’s walk through the scenario.

This particular company has been in operation for over 10 years, a solid track record in the industry. Previously, they claimed Pioneer Status, a tax incentive that many companies in the manufacturing sector have benefited from.

Now, as they consider expanding their operations to meet increasing demand, the question of eligibility for the new reinvestment incentive arises.

The Incentive: What’s on the Table?

Under the NIMP 2030, the government has introduced a tiered Investment Tax Allowance (ITA) aimed at encouraging businesses to reinvest in high-growth, high-value activities.

The incentive is split into two tiers:

✅ Tier 1: Offers an ITA of 100% of qualifying capital expenditure (QCE), which can be set off against 100% of statutory income (SI).

✅ Tier 2: Provides an ITA of 60% of QCE, set off against 70% of SI.

Both tiers come with a 5-year incentive period, a substantial benefit for companies looking to expand or diversify their operations.

Are You Eligible?

Here’s where it gets interesting. To qualify for this incentive, your company must meet several criteria:

✅ Operational History

Your company must be a resident manufacturing company incorporated under the Companies Act 2016 and must have been in operation for at least 36 months. Given that your company has been running for over 10 years, this criterion is clearly met.

✅ Previous Incentives

If your company has previously claimed a tax incentive, such as Pioneer Status under the Promotion of Investment Act 1986, the incentive period for that must have ended. With your Pioneer Status period now behind you, this opens the door to new opportunities like the NIMP 2030 incentive.

✅ Project Type

The incentive applies if your company is undertaking an expansion (increasing production capacity or market share) or diversification (introducing new products) project within the manufacturing sector.

✅ Timing

This is crucial. The company must submit the incentive application to MIDA before the commencement of the proposed project. In this context, ‘commencement’ is specifically defined as the issuance of the first sales invoice related to the proposed project.

If you’re planning an expansion or diversification project, I strongly recommend that you prepare your application as soon as possible to ensure it is submitted to MIDA before you issue the first sales invoice for the project.

Past blog

15 August 2024 New Tax Incentive Under the Industrial Master Plan 2030

https://www.ktp.com.my/blog/reinvestment-incentive-under-the-industrial-master-plan/15aug2024

Note: The information provided in this newsletter is for general guidance only and should not be considered as professional advice. Always consult with a tax professional before making any business decisions.

PS : Authored by Mr Koh Teck Peng, the Group Principal, in his personal LinkedIn post https://bit.ly/3YT8GgA

What are allowable expenses in Hungry Ghost praying expenses?

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(Tax Update) Tax Deductible for Hungry Ghost Praying Expenses

In Malaysia, many businesses observe the Hungry Ghost Month by holding prayer sessions, which may include offerings and ceremonies.

Understanding the tax implications of these expenses is crucial, especially given the cultural significance of this period. Most taxpayer

Here’s a detailed explanation of how these expenses can be categorized and which are tax-deductible.

1. Tax Deductible Expenses (Section 33, Income Tax Act 1967)

Under Section 33(1) of the Income Tax Act 1967, expenses that are ''wholly and exclusively incurred in the production of income'' are deductible. For businesses, this includes expenses that are directly related to operations and maintaining employee morale or customer relations.

a) Staff Refreshments

Expenses for food, drinks, and other refreshments provided during the prayer sessions can be classified as staff refreshments. These expenses are generally deductible under Section 33(1) if they are part of the company’s customary practice to foster goodwill and maintain good working relationships with employees.

The deductibility is further supported by Public Ruling No. 1/2003 on ''Perquisites From Employment,'' which clarifies that reasonable staff welfare expenses, such as refreshments during events, are allowable.

b) Expenses for Staff Welfare

Related expenses, such as venue setup and basic offerings that are part of the staff’s well-being during the prayer ceremony, can also be considered deductible under the same section. These are seen as necessary for maintaining a harmonious workplace, thus directly contributing to the production of income.

2. Non-Deductible Expenses (Section 39, Income Tax Act 1967)

Under Section 39(1) of the Income Tax Act 1967, certain expenses are specifically disallowed as deductions, even if they are related to business activities.

a) Ceremonial Items

Expenses incurred for ceremonial items such as papercraft, incense papers, and other related materials used during prayers fall under this category. These items are considered non-business expenses, primarily personal or cultural, and therefore, do not qualify for a deduction under Section 39(1).

b) Excessive Expenditure

If the expenses for refreshments or other related items are deemed excessive or extravagant, they could also be disallowed under Section 39(1) as they may not be seen as wholly and exclusively for business purposes.

3. Other Relevant Sections and Public Rulings

Beyond Sections 33 and 39, Public Ruling No. 3/2013 on ''Entertainment Expenses'' provides additional insights. It clarifies that expenses on food and beverages for employees during work-related events are generally allowable, provided they are reasonable and not excessive.

Summary

In conclusion, when it comes to tax-deductible expenses during the Hungry Ghost Month:

Expenses for food, drinks, and related items provided during prayers can be tax-deductible under Section 33(1) and can be categorized as staff refreshments or staff welfare.
Expenses for papercraft, incense papers, and similar items are not deductible under Section 39(1).

Businesses should ensure that these expenses are reasonable, directly related to the production of income, and properly documented to support their tax filings. For further guidance, consulting with a licensed tax agent is advisable to ensure compliance with the Income Tax Act 1967 and related public rulings.

(Tax Update) Consolidated Self-Billed for Import of Goods or Services

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(Tax Update) Consolidated Self-Billed for Import of Goods or Services

According to the Inland Revenue Board of Malaysia (IRBM) letter dated 12 August 2024, addressed to the Chartered Tax Institute of Malaysia (CTIM), the following key issues were clarified regarding the implementation of consolidated self-billed e-invoices for the import of goods or services:

Timing During Relaxation Period

Even during the six-month interim relaxation period, taxpayers must issue consolidated self-billed e-invoices monthly, within seven days after the end of the month.

Importation of Goods

For goods cleared by customs in August 2024, self-billed e-invoices must be issued as follows:

Individual e-invoice: By 30 September 2024.
Consolidated e-invoice: By 7 October 2024.

Importation of Services:

For services either paid for or invoiced in August 2024:

Individual e-invoice: By 30 September 2024.
Consolidated e-invoice: By 7 October 2024.

Clarifications

No e-invoice is required if goods/services were paid for or invoiced before the mandatory implementation date.

Further Action

IRBM will provide more details in upcoming FAQs to clarify the e-invoice requirements.

This should provide a clear and concise understanding of the recent e-invoicing updates.