(Tax update) What Is The Surcharge For Transfer Pricing (TP) Malaysia?

Surcharge 5%

With effect from 1 January 2021, the IRBM may impose a surcharge of up to 5% on any increase in income or reduction of any deduction / loss arising from these adjustments.

A surcharge is imposed on a Transfer Pricing (TP) adjustment made under Section 140A of the Income Tax Act 1967 (ITA) which results in an increase in income or a reduction of any deduction or loss. When any taxpayer does not comply with the arm’s length principles, a surcharge will be imposed on that adjustment regardless of whether the taxpayer is in a loss position or a tax exempt company.

The imposition of surcharge of up to 5% on any transfer pricing adjustment under Section 140A(3C) was released on 18 January 2024 in Frequently Asked Question (FAQ) in IRBM website.

Key Takeaways of the FAQ

Surcharge on incorrect transfer prices

Starting from January 1, 2021, the IRB can impose a surcharge of up to 5% on any transfer pricing adjustments. This applies even if the adjustment doesn’t result in additional tax payable, affecting loss-making or tax-exempt companies.

Application of surcharge

The surcharge applies to tax audits initiated from January 1, 2021, onwards, regardless of the financial year being audited. Only a surcharge will be imposed in cases where transfer pricing adjustments result in additional income, not a penalty for submitting an incorrect return.

Non-appealability of surcharge

The surcharge, which is not a tax, cannot be appealed through legal processes but only to the Director General of Inland Revenue on a case-by-case basis.

Penalties for not furnishing documentation

Failure to provide contemporaneous transfer pricing documentation within 14 days of request can result in penalties ranging from RM20,000 to RM100,000, and potentially a prison term of up to six months.

Mutually Exclusive with Section 113 (2)

The FAQ states that the surcharge is mutually exclusive with the penalty under Section 113(2).

What is the new TP rule in Malaysia?

The documentation must be prepared before the due date for submitting income tax returns and must include the date of completion.

The IRB scrutinizes various aspects like sales/purchase margins, profitability, intragroup services, and intragroup financing. Lack of benchmarks, consistent losses, and insufficient supporting documents are some of the red flags.

Even companies enjoying tax holidays or incurring losses must adhere to transfer pricing rules, as any adjustments by the IRB will attract a surcharge.

Taxpayers are advised to scrutinize their related company transactions to ensure compliance with the arm's length principle to avoid penalties and fines.

Failure to provide contemporaneous transfer pricing documentation within 14 days of request can result in penalties ranging from RM20,000 to RM100,000, and potentially a prison term of up to six months.

The transfer pricing scene in Malaysia is rapidly evolving, and taxpayers are advised to stay informed and compliant to avoid severe penalties and fines.

Sources

IRBM : FAQ on TP 18/1/2024

https://www.hasil.gov.my/media/w0ag5bsp/faq-on-matters-arising-from-subsection-140a-3c-ita-1967.pdf

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(Sec update) Top 5 Crucial Clauses in Shareholders' Agreement

One or more business partners incorporating a company may seem like a straightforward process that does not require any agreement. However, some of the shareholders may want to consider entering a shareholder’s agreement, especially if you are a minority shareholder in the company.

Although the Companies Act 2016 does provide some protection for shareholders, such as oppression of minority shareholders. When shareholders sign a Shareholders Agreement (SHA), the court typically gives it priority, as the SHA reflects the final intent of the parties' relationship nature.

If “Without” an SHA, it may be more challenging to find legal grounds to make a claim, as the protections provided by the company's constitution may be insufficient.

Leverage our 25 years of unparalleled company secretarial experience to uncover the five (5) indispensable clauses that can make or break your Shareholders' Agreement. Don't embark on your business journey without this invaluable knowledge

Top 5 Clauses in Shareholders’ Agreement

We have pointed out the following five common clauses in a Shareholders' Agreement (SHA) that may help to protect your rights as a minority shareholder:

1. Reserved Matters

In the SHA may state the reserved matters that require unanimous voting by the company. This clause is crucial for minority shareholders, providing protection against the majority shareholders' rights (who are likely to win with a majority vote at company meetings).

Examples of reserved matters such as include changes in the company's business, an increase in the company's share capital (which dilutes everyone's ownership), exercising borrowing powers (such as obtaining substantial loans from banks), or creating security interests (such as registering a charge on company assets).

2. Shareholder Obligations

Each Shareholder's obligations in the company can be clearly defined in the SHA. Such as a common clause states, ''Shareholders shall act in the best interests of the company.'' If each shareholder provides different contributions, this clause helps specify individual obligations.

For example, Mr. A is obligated to invest funds in the company; Mr. B has to contribute his/her expertise in certain areas, maybe in terms of knowledge or skills; and Mr. C, with decades of management experience, oversees and implements various company projects.

3. Directors

Companies usually have an odd number of directors to prevent deadlock situations. For some situations, the majority shareholders may appoint directors count tends to favor them in maintaining control at the executive level.

However, minority shareholders should insist on the right to appoint at least one director by adding this clause in the SHA, ensuring representation on the board allows easy oversight of company operations and protects minority shareholder interests.

4. Equity Transfer

To ensure clear provisions when another shareholder wishes to exit the company, this is preventing potential co-ownership with your competitor. It's crucial to explicitly outline (Exit Conditions) such details in the shareholders' agreement.

Another key provision is the purchase price for the existing shareholder's shares. The Shareholders may state the selling price in the SHA as agreed upon among the Shareholders for whoever exits the company in a certain time. Unless the exiting shareholder agrees to give up shares at the initial investment price (often impractical), some valuation mechanism may be necessary. However, valuing a company can be costly.

Specific clauses like pre-emptive rights, tag-along rights, drag-along rights, and drag-with rights exist and may be included in the SHA but may not be necessary, especially for small to medium-sized enterprises.

5. Dispute Situation

Dispute resolution clauses provide shareholders with options to resolve conflicts among them. For instance, a shareholders' agreement may include an arbitration clause, meaning any disputes must be resolved through arbitration rather than litigation in court.

However, as a minority shareholder, caution should be exercised before agreeing to an arbitration clause unless you fully understand its implications.

In conclusion, shareholders' agreements are common and can effectively protect the interests of all involved shareholders, especially minorities. Even if a company did not initially sign such an agreement, there's nothing stopping shareholders from subsequently doing so.

PS : Authored by Hui Ting, our secretary associates in THK, in her personal LinkedIn post

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(Sec update) Unlocking Tax Incentives: Discover Why SDN BHD Companies Qualify, While Enterprises Miss Out!

Why Sdn Bhd ?

In the vibrant tapestry of Malaysia's business landscape, the decision to venture as an entrepreneur or establish a Sendirian Berhad (Sdn Bhd) is a critical crossroads that warrants careful consideration. While entrepreneurship embodies the spirit of innovation and individualism, incorporating an Sdn Bhd unveils a realm of strategic advantages that can significantly propel your business forward.

Let's delve into the compelling reasons why choosing the corporate path might be the catalyst for unlocking your business potential.

What Sets Apart Sdn Bhd and Entrepreneurship in Malaysia?

The fundamental distinction lies in the legal structure.

Sdn Bhd represents a private limited company, offering legal separation from personal assets, while entrepreneurship often involves individuals operating as sole proprietors without such distinction.

Limited Liability: How Does it Differ in Malaysia?

Entrepreneurs in Malaysia face unlimited personal liability, exposing personal assets to business risks. Contrastingly, Sdn Bhd owners benefit from limited liability, creating a protective shield for personal finances.

Tax Implications: How Does the Choice Affect Taxation in Malaysia?

In the realm of taxation in Malaysia, entrepreneurs find themselves grappling with the impact of their choices on personal income tax and corporate tax. While individual business owners are subjected to personal income tax on their profits, the landscape changes for Sdn Bhd companies, where the focus shifts to corporate tax.

This distinction significantly shapes the tax liability, with Sdn Bhd companies potentially benefiting from lower corporate tax rates and access to tax incentives, thereby creating a more advantageous tax environment.

 Tax incentives are benefits that the government offers to certain businesses to encourage investment and development in Malaysia. Some of the tax incentives are:

• Pioneer status (PS) : a full or partial exemption of income tax for a period of five years for businesses that produce or do something new or important.

• Investment tax allowance (ITA) : an extra deduction of capital expenditure for a period of five years for businesses that invest in a new or important project.

Government Grants in Malaysia: A Comparative Analysis for Sdn Bhd, Sole Proprietors, and Partnerships

Private limited companies, commonly referred to as Sdn Bhd, often enjoy more favorable treatment when it comes to government grants and incentives. The Malaysian government frequently tailors these programs to encourage the growth and development of structured businesses.

Sdn Bhd entities generally have access to a broader range of support initiatives, including tax incentives, financial assistance, and industry-specific grants. Conversely, sole proprietors and partnerships may find that their eligibility for government grants is more restricted.

Capital Raising Dynamics: Malaysia's Entrepreneurial Landscape vs Sdn Bhd

Entrepreneurs in Malaysia may find it challenging to raise significant capital individually. Sdn Bhd owners can issue shares, providing a more accessible avenue to attract investors and fund business expansion with financial institution.

Risk Management: Structured Approach vs Personal Liability in Malaysia

Operating as an Sdn Bhd in Malaysia offers a structured approach to risk management, with limited liability safeguarding personal assets. Entrepreneurs, however, bear full personal liability for business risks.

Legal Compliance: Navigating Regulations in Malaysia

Sdn Bhd owners in Malaysia must adhere to complex legal compliance requirements, including audits and regulatory filings. Entrepreneurs, while subject to legal requirements, face a generally simpler compliance landscape.

Key Takeaway

In conclusion, the choice between operating as an Sdn Bhd and pursuing entrepreneurship in Malaysia involves multifaceted considerations. Entrepreneurs and business owners must carefully weigh these factors against their unique circumstances and aspirations, making an informed decision aligned with the dynamic Malaysian business landscape.

PS : Authored by Mohammad Syazwan Bin Ishak, our secretary associates in THK, in his personal LinkedIn post

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(Tax update) Real Property Company (RPC) under Capital Gain Tax (CGT)

What is an RPC?

A Real Property Company (RPC) in the context of Malaysian tax law is typically a company whose primary business is dealing with real property, such as land or buildings. This can include activities like buying, selling, developing, or renting real estate.

Technically speaking, we use 75% of the value of the company’s total tangible assets as benchmark to define RPC .

Tax Treatment of RPCs:

Traditionally, gains or profits from the disposal of shares in Malaysian RPCs were subject to Real Property Gains Tax (RPGT) under Paragraph 34A, Schedule 2 of the Real Property Gain Tax Act 1976.

However, with the introduction of Capital Gains Tax (CGT), there have been amendments to these provisions.

Tax Computation and Formula:

The specific computation and formula for the taxation of RPCs under RPGT would depend on various factors such as the period of holding the property, the nature of the gains (capital or income), and specific exemptions or relief available.

Typically, RPGT is calculated based on the difference between the acquisition cost and the disposal price of the real property or shares in the RPC. The tax rates range from 0% to 30% depending on the factors mentioned above.

Challenges in RPC Tax Computation (Past) and Taxpayer Preferences

Previously, calculating taxes for Real Property Companies (RPCs) in Malaysia was complex due to complicated Real Property Gains Tax (RPGT) rules. Factors like how long the property was held, various exemptions, and the property's market value made the process challenging.

This complexity led many Malaysian taxpayers to consult lawyers instead of tax agents for RPGT issues, believing lawyers were better suited to handle the legal aspects of property taxes.

We HATE RPC companies as most of them trust lawyers than us.

Summary of Income Tax (Exemption) (No.7) Order 2023:

This order provides an exemption from income tax on gains or profits from the disposal of shares in unlisted Malaysian companies between 1 January 2024 and 29 February 2024.

This exemption does not apply to gains or profits taxable as business income under section 4(a) of the Income Tax Act 1967.

For RPC shares, traditionally subject to RPGT, there seems to be a ''2-month tax holiday period'' due to the CGT exemption and the lack of simultaneous reversal of amendments in RPGTA.

Our Comments on RPC Shares

Before CGT, gains from disposal of shares in Malaysia were considered capital gains and not subject to income tax.

With CGT's implementation, RPGT on gains from disposal of RPC shares by companies, LLPs, trust bodies, or co-operative societies (except Labuan entities) is not applicable from 1 January 2024.

However, due to the 2-month CGT exemption on unlisted shares and no simultaneous amendment reversal in RPGTA, there's a temporary ''tax holiday'' for gains from RPC shares disposals.

Past Blog

Capital gain tax https://www.ktp.com.my/blog/malaysias-budget-2024-capital-gain-tax-part1/23nov23

Exemption Period on CGT https://www.ktp.com.my/blog/capital-gain-tax-malaysia-2024/04jan24

{Acc Update} Understanding Profitability Ratios

Understanding your company's financial health is key to success, especially for small and medium enterprises (SMEs) in Malaysia. Our 'Understanding Profitability Ratios: A Practical Guide for Non-Accountants''‘ is designed to simplify financial insights for non-English speakers.

At THK, a leading accounting firm in Malaysia in Southern region, we provide comprehensive services in auditing, taxation, bookkeeping, corporate secretarial, and business advisory. This guide uses straightforward language to explain crucial financial concepts, helping you make informed decisions for your business.

Simplified analytical tools are key to unlocking the mysteries of financial data, offering clear insights into a company's financial story. These tools, especially profitability ratios, are easy to understand and vital for assessing a company's efficiency, stability, and overall financial health.

Simplified Guide to Profitability Ratios:

Join us as we explore four key types of profitability ratios in an easy-to-understand format:

Gross Profit Margin

• What It Means: This ratio shows what a business earns after paying for the direct costs of making its products or providing services (like labor and materials).

• Simple Formula: (Gross Profit / Net Sales) x 100%

• Why It's Important: It helps you understand how well the company is controlling its direct costs.

Operating Expense Ratio

• What It Means: This ratio helps us look at a company's overall costs and how efficiently it handles its everyday operations.

• Simple Formula: (Total Operating Expenses / Net Sales) x 100%

• Why It's Important: It shows how effectively a company is managing its regular expenses compared to its income.

Pre-Tax Profit Margin

• What It Means: This tells us what percentage of sales becomes profit before considering income tax.

• Simple Formula: (Profit Before Tax / Net Sales) x 100%

• Why It's Important: It offers insights into how efficiently a company operates and earns profit before taxes.

Net Profit Margin

• What It Means: This ratio reveals the actual profit a company makes in a year, after taxes are paid.

• Simple Formula: (Profit After Tax / Net Sales) x 100%

• Why It's Important: It gives a clear view of the company's ultimate profitability after tax expenses.

In conclusion, understanding these profit ratios is crucial for the financial well-being of your business. Our firm, KTP, is dedicated to assisting Malaysian SMEs in navigating their financial journey with our expert auditing, taxation, bookkeeping, corporate secretarial, and business advisory services.

Visit our websites at www.ktp.com.my and www.thks.com.my for more insights and professional assistance.

(Aud Update) The Essential Role of Stocktaking in Auditing

Auditor Role In Stocktaking

As the financial year unfolds, auditors across the world engage in a crucial practice: stocktaking.

For many new or transferred clients unfamiliar with this procedure, questions often arise about its importance and necessity.

Stocktaking is not merely a routine task; it is a fundamental aspect of auditing that ensures the accuracy and integrity of a company’s financial statements.

This period of intense activity is not just about counting physical inventory; it’s a process deeply rooted in verifying the existence, condition, and valuation of assets.

ISA 501 Audit Evidence

ISA 501-''Audit Evidence—Specific Considerations for Selected Items,'' is the key standard guiding auditors on stocktake, or inventory counting.

It requires auditors to physically attend inventory counts to verify the existence and condition of inventory, unless it's impractical.

When direct attendance isn't possible, auditors must use alternative methods, like remote verification, to ensure the reliability of the inventory data.

Audit Opinion on Stocktake

If an #auditor is unable to obtain sufficient and appropriate audit evidence regarding the existence and completeness of inventory, whether by attending the stocktake or through alternative procedures, this could result in a limitation of scope in the audit opinion.

In some cases, if the impact is both material and pervasive, a disclaimer of the audit opinion may be necessary.

Happy Stocktaking! Happy New Year.

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{Sec Update} Changes to Beneficial Ownership in the Companies (Amendment) Bill 2023

According to Section 2 of the Companies Act 2016, “Beneficial Owner” means the ultimate owner of the shares and does not include a nominee of any description. To strengthen the corporate rehabilitation framework and enhance corporate transparency on the reporting of beneficial ownership of companies, there are some amendments in 8 key areas related to beneficial ownership, in the Companies Amendment Bill 2023. 

1. Definition of Beneficial Owner of a Company?

It is defined as the ultimate owner of the shares and does not include a nominee of any description and a relation to a company, a person is as provided in Section 60A(1).

Section 60A (1) states that a person is a beneficial owner of a company if he/she is a natural person who ultimately owns or controls over a company, which includes a person who exercises ultimate effective control over a company.

2. Guidelines to Identify a Beneficial Owner of a Company

The Registrar of Companies has issued the guidelines for the purpose of identifying beneficial ownership of a company according to Section 60A (2).  

3. Companies are required to record and lodge beneficial owner information with the
    Companies Commission of Malaysia (CCM)

The companies are required to record the beneficial ownership information (name, nationality, place of residence, date of becoming a beneficial owner etc.) in the Company’s register of beneficial owners upon receipt of the reply slip.

This register of beneficial owners must be kept at the registered office or any other place in Malaysia as notified to the Companies Commission of Malaysia (CCM), as stated in Section 60B (2).

In the event of any changes to the particulars in the register of beneficial owners, the company shall lodge the updated information with the CCM.

4. Access to the Beneficial Owner Information 

The Minister has prescribed any person or class of persons who may access the register of beneficial owners or the information, along with the terms and conditions for accessing the register as stated in Section 60B 9(a & b). 

5. Duty of Company to Issue Notices to Obtain Beneficial Owner Information

A company shall send a written notice requiring any member of the company to inform whether the member is a beneficial owner of the company. If the member is not the beneficial owner of the company, the member needs to indicate the person’s particulars who is the beneficial owner of the company, as stated in Section 60C(1)(a).

6. Duty as a beneficial owner of the company to provide information

A person who is a beneficial owner shall notify the company that he/she is a beneficial owner of the company and provide the details according to Section 60D. 

7. Exempted Companies

The Minister may publish in the Gazette an exemption for any class of companies from beneficial ownership reporting, either unconditionally or subject to the terms and conditions as imposed by the Minister. 

8. Penalties

The Company and every officer who contravenes this section may be liable to a fine not exceeding RM20,000.00 and a further fine of RM500 per day during which the offence continues, as stated in Section 60b(6). 

In Summary

The new BO Guidelines under the Companies Amendment Bill 2023 are wider and enforce a reporting on the beneficial ownership of companies. It was tabled for 1st reading in Parliament on 10 October 2023, and was tabled and passed at the 2nd and 3rd reading in Parliament on 28 November 2023. The Bill is tentatively scheduled to be tabled at Dewan Negara in December 2023.

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{Sec Update} Lessons from the Federal Court's Ruling on Unlicensed Moneylending

Triple Zest Trading & Suppliers Vs Applied Business Technologies Sdn Bhd [2023]

The Federal Court in Malaysia overturned a Court of Appeal decision, ruling that an ''unlicensed moneylender'' cannot recover either interest or the principal loan amount.

Key Facts

• Parties Involved: Triple Zest Trading & Suppliers (TZT) and Applied Business Technologies Sdn Bhd (ABT).

• Loan Amount: RM800,000 with an additional RM800,000 as ''agreed profit''.

• Collateral: Two parcels of land and four undated cheques valued at RM1.6 million.

• Issue: TZT defaulted on the repayment of RM800,000 principal.

Court Decisions

• High Court: Favored ABT, ordering TZT to pay RM1.6 million.

• Court of Appeal: Limited TZT's liability to only the principal loan sum of RM800,000.

• Federal Court: Overturned previous decisions, stating that unlicensed moneylenders like ABT cannot recover either the principal or interest, especially when interest rates are exorbitant (100% in this case).

Legal Reasoning

• The Federal Court deemed the ''agreed profit'' as interest, thus violating the Moneylenders Act 1951.

• It emphasized that the courts should not assist those who engage in illegal moneylending practices.

• The agreement was considered void under the Contracts Act 1950.

Implications for Clients

• Compliance with legal standards: The decision highlights the necessity for all financial transactions, including loans, to be in strict compliance with the Moneylenders Act 1951. Companies and individuals must ensure their lending practices adhere to legal requirements.

• Risks of unlicensed lending: Engaging in unlicensed lending, particularly with exorbitant interest rates, can result in the inability to recover both the loan principal and interest. This case demonstrates the risks associated with such practices.

• Legitimacy of ''friendly loans'': The ruling clarifies that companies and individuals can still offer ''friendly loans.'' However, these loans must not include any interest or additional sums exceeding the principal amount. Loans structured in this manner are legally permissible.

• Prohibition of interest on ''friendly loans'': Any ''friendly loans'' that impose interest or extra charges beyond the principal amount are illegal. The courts will not assist in recovering either the interest or the principal amount in such cases, emphasizing the need for caution and legal adherence in private lending.

• Importance of legitimate agreements: The decision stresses the importance of having legitimate and legally compliant agreements for any financial transaction.

• Seeking legal counsel: Given the complexities and legal implications of loan agreements, it is advisable for clients to seek legal advice before entering into any financial agreements.

Conclusion

This landmark ruling serves as a critical reminder of the importance of complying with financial and legal regulations. It discourages illegal lending practices and promotes the legitimacy and enforceability of loan agreements that adhere to the law. Clients are advised to be vigilant and consult legal experts to ensure their financial dealings are within legal boundaries.

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{Sec Update} Essential Documents after Shareholder's Death : Key Steps & Requirements

Introduction of Shares Transmission

In the corporate realm, the passing of a shareholder introduces a complex and often overlooked challenge—effectively managing their shares posthumously. This article explores the legal process, and emotional considerations involved in this delicate process of handling shares after a shareholder's demise.

This exploration serves not only as a practical guide for those involved but also as a reminder of the importance of proactive succession planning in preserving corporate legacies.

What is the first step a director should take upon the death of a shareholder?

1. Legal representative

• The director should find and establish contact with the legal representative of the deceased shareholder. This individual plays a crucial role in facilitating the proper handling and transmission of shares.

2. Supporting Document

• Ensuring the availability of crucial supporting documents, such as the grant of probate, letter of administration, or Faraid Certificate, is imperative for a seamless share transmission process. These documents are essential for initiating and completing the necessary legal procedures.

The Legal Title of Deceased Shareholders

When a shareholder passes away, who is recognized by the company as having title to their shares, and how can the transmission process carry out?

• The legal representative becomes the sole individual acknowledged by the company as having title to the deceased shareholder's shares.

• The shares can be transmitted to the legal representative upon their request, along with the submission of the grant of probate or letter of administration to the company.

• The legal representative holds the authority to transfer the shares to the designated beneficiary or another appointed individual.

What are the Crucial Supporting Documents for Smooth Share Transmission?

1. Non-Muslim with a Will:

• Requirement: Grant of Probate issued by the High Court.

• Process: Handled by the executor empowered to administer the estate.

2. Non-Muslim without a Will:

• Requirement: Letter of Administration issued by the High Court or Land Administrator.

• Process: Administered by an appointed administrator empowered to handle the estate.

3. Muslim:

• Requirement: Faraid Certificate issued by the Syariah Court.

• Process: Administered by Amanah Raya, empowered to handle the estate.

In conclusion, this article underscores the complexity of managing a deceased shareholder's shares in the corporate realm. Emphasizing the necessity of proactive succession planning, it highlights the crucial supporting documents required for smooth share transmission.

The conclusion emphasizes the director's pivotal role in promptly engaging with the legal representative and ensuring the availability of essential paperwork. This proactive involvement is key to achieving a seamless share transmission process, ultimately safeguarding the company's interests following a shareholder's passing.

{Tax Update} Personal Tax Relief 2023 Malaysia

Personal Relief Year Assessment 2023

Welcome to the latest insights on Personal Tax Relief for the year 2023, brought to you by KTP , Malaysia's trusted authority in auditing and tax services.

As we navigate the complexities of the new tax year, understanding the updated tax reliefs can significantly impact your financial planning. From 'Family and Dependent Care' to 'Lifestyle and Technology' benefits, our comprehensive guide dives deep into the six (6) essential categories of tax deductions available for Malaysian taxpayers.

Whether you're a working professional, a parent, or planning for your future, stay informed with KTP's expert analysis and strategies to maximize your tax savings this year.

{Tax Update} Withholding Tax on Royalties

Latest Development on Royalties

In a significant development impacting cross-border software and intellectual property transactions, the Inland Revenue Board (IRB) has recently issued Practice Note No. 3/2023 dated 5th December 2023.

This document provides essential clarifications on the tax treatment of copyright and software payments made by distributors and resellers to non-residents.

This update highlights the categorization of such payments as royalties, bringing them under the purview of withholding tax as per Section 109 of the ITA, thereby affecting numerous businesses engaged in digital transactions and software distribution.

Key Takeaway of PN 3/2023 Tax Treatment on Copyright and Software Payments by Distributor & Reseller to Non-Resident

• The payments for the use or right to use copyright and software, even when modified, exploited, or distributed, are considered royalties.

• These royalties are subject to withholding tax under section 109 of the Income Tax Act 1967, especially when paid to non-residents who do not have a permanent establishment in Malaysia.

• This applies regardless of the rights granted to the distributor or reseller.

• Reference should be made to Double Taxation Avoidance Agreements for specific cases.

   

Drafted PR on Tax Treatment Regarding Royalties for Payment of Software to a Non-Resident on October 2023

Key points include:

Definition of royalties and service fees:

Royalties are defined as payments for the purchase or use of, or the right to use, an application, including purchases where the intellectual property belongs to the original owner.

Service fees, on the other hand, refer to payments for services provided by the non-resident, such as developing relevant functions for the payer's use.

Withholding tax implications:

Royalty payments to non-residents are subject to withholding tax under section 109 of the Income Tax Act 1967. This is a critical point as failure to comply with withholding tax requirements can result in significant penalties.

Payments considered service fees fall under a different category and are subject to withholding tax under section 109B of the ITA.

Consequences for non-compliance:

If a payer fails to deduct and remit the required withholding tax, the unpaid amount will increase by 10%, becoming a government debt.

Additionally, payments that are not compliant with withholding tax requirements may be disallowed as expenses in the taxpayer's tax computation.

Relief and appeal processes

The ruling also discusses relief and appeal processes in cases where taxpayers believe their software royalties' tax treatment is incorrect. This could involve Double Taxation Avoidance Agreements (DTA) and domestic tax laws.

Consult a tax professional opinion to examine the transaction and understand the potential implications.

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{Tax Update} Malaysia's 2023 Transfer Pricing Rules Update: Navigating New Challenges

Latest Development on Trans Pricing (TP) Rules 2023

The technical update on the changes in Transfer Pricing (TP) ruling in Malaysia from the TP Rules 2012 to TP Rules 2023 highlights several key areas where modifications have been made.

Here's a refined comparison and outline of the changes:

Definition of CTPD (Controlled Transaction Pricing Documentation)

TP Rules 2012: Defined as documentation created during the development or implementation of a controlled transaction and updated for material changes.

TP Rules 2023: Redefined to emphasize documentation prepared before the due date of a tax return in the year a controlled transaction is entered.

Timeline to Furnish the CTPD

TP Rules 2012: No specific timeline for furnishing CTPD upon request.

TP Rules 2023: CTPD must be available within 14 days upon request by the Malaysia Inland Revenue Board (MIRB).

Content of CTPD

TP Rules 2012: Lacked requirements for including MNE Group information, detailed business information, completion date, and applicability indication.

TP Rules 2023: Mandates inclusion of extensive MNE Group information, detailed business information guidance, completion date, and indications of inapplicable information.

Definition of Arm’s Length Range

TP Rules 2012: No definition, but practice often used the 25th to 75th percentile range.

TP Rules 2023: Defined as a range or a single figure between the 37.5th to 62.5th percentiles of the benchmarking data set.

TP Adjustment

TP Rules 2012: Silent on adjustment specifics within or outside the arm’s length range.

TP Rules 2023: Allows MIRB to adjust to the median if outside the range, and to the median or above if within the range under certain conditions.

Selection of the Most Appropriate TP Method

TP Rules 2012: A hierarchy-based selection of TP methods with no power for the Director General to revise the taxpayer's selected method.

TP Rules 2023: Removes the hierarchy of methods and gives the MIRB authority to replace the taxpayer's chosen method if deemed inappropriate.

Key Points to Note for Taxpayers on TP Rules 2023:

Documentation Timeliness:

The new rules emphasize the need for timely preparation and submission of CTPD, which must now be done before the tax return due date and made available within 14 days upon request.

Detailed and Comprehensive Reporting:

There is a heightened requirement for comprehensive and detailed information in the CTPD, including specific business and group information.

Arm's Length Range Precision

The definition of the arm's length range is more precise, potentially affecting the analysis of transfer pricing and the range within which transactions should fall.

TP Adjustment Clarity

The 2023 rules clarify how adjustments should be made, giving the MIRB more authority in adjusting to the median, thereby reducing ambiguity and discretion.

Flexibility in Method Selection

The removal of the method hierarchy suggests a more flexible approach to selecting the most appropriate TP method, while also granting the MIRB the power to intervene if necessary.

These changes indicate a move towards more stringent, precise, and potentially more administratively burdensome TP requirements. Companies dealing with controlled transactions in Malaysia must adapt to these changes to ensure compliance and effective management of transfer pricing risks.

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Malaysia's Budget 2024: Watch The Summary on YouTube

In line with the Budget for 2024, Malaysia is poised for significant changes in its taxation landscape, particularly in the realm of Capital Gains Tax (CGT). The proposed amendments are expected to impact various sectors and types of taxpayers.

Budget 2024 Highlight - YouTube Video

Stay updated with the latest tax developments by watching our key summary of the 2024 Budget on our YouTube channel https://youtu.be/BrYNZNfJ1iE

Here's a summary of the key takeaways:

Budget 2024 Highlights - Past Updates

Individual : https://www.ktp.com.my/.../malaysias-budget-2024.../17oct23

Companies : https://www.ktp.com.my/.../malaysias-budget-2024.../18oct23

Tax Exemptions : https://www.ktp.com.my/.../malaysias-budget-2024.../19oct23

Tax Incentives : https://www.ktp.com.my/.../malaysias-budget-2024.../20oct23

Stamp Duty & Indirect Tax https://www.ktp.com.my/.../malaysias-budget-2024.../23oct23

Payroll (EPF & SOCSO) https://www.ktp.com.my/blog/malaysias-budget-2024-a-glimpse-into-epf-socso-updates/24oct23

Others https://www.ktp.com.my/blog/malaysias-budget-2024-others-important-updates/26oct23

Capital Gain Tax https://www.ktp.com.my/blog/malaysias-budget-2024-capital-gain-tax-part1/23nov23

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Malaysia's Budget 2024: A Glimpse into Capital Gain Tax Updates (Part I)

In line with the Budget for 2024, Malaysia is poised for significant changes in its taxation landscape, particularly in the realm of Capital Gains Tax (CGT). The proposed amendments are expected to impact various sectors and types of taxpayers.

Here's a summary of the key takeaways:

1. Types of Capital Asset

The new proposed CGT focuses on

1.1 Capital assets situated in Malaysia :

• Unlisted shares of companies Incorporated in Malaysia

• Shares in foreign incorporated companies deriving value from real property in Malaysia

1.2 All types of capital assets situated outside Malaysia

2. Eligible Taxpayers

There are 4 categories listed below:

• Company

• Limited Liability Partnership (LLP)

• Cooperative

• Trust Body (including unit trusts)

3. Effective date

1 January 2024

The Ministry of Finance (MOF) has clarified the effective date of capital gains tax (CGT) imposition:

• CGT is to be imposed with effect from 1 January 2024 as indicated in the Finance Bill (No. 2) 2023.

• Notwithstanding the above, the imposition of CGT on gains or profits from disposal of local companies’ unlisted shares will commence from 1 March 2024. This will be implemented through subsidiary legislation.

4. Tax Rate

4.1 Shares acquisition date :

• Before 1 March 2024 * :

The taxpayers may choose either

• 10% on the net gain of the disposal of shares; or

• 2% on the gross sales value.

• From 1 March 2024 *

10% on the net gain of the disposal of shares ;

4.2 All types of capital assets situated outside Malaysia are based on the prevailing income tax rate of the taxpayer.

• Companies, LLP’s and trust bodies: 24%

• Co-operative : 0% to 24%

*See clarification from MOF from Effective date under Point #3 as above

5. Exemptions

Transactions exempted from CGT

• Initial Public Offering (IPO) approved by Bursa Malaysia; and

• Restructuring of shares within the same group.

• Venture capital companies

• Gains from disposal of foreign capital assets from outside Malaysia which meet economic substance requirement (ESR)

• Individual

6. Date of Disposal and Acquisition

There are 2 points in time to determine the date of disposal and acquisition

• With a written agreement: Date of the agreement

• Without a written agreement: Date of completion of the disposal

7. Basis period

Reporting must be done for each disposal transaction.

8. Allowable expenses

Expenses related to the acquisition or disposal of capital assets such as stamp duty, legal fees, broker fees and commission fees. It is important to keep track of these expenses related to the acquisition or disposal of capital assets.

9. Losses

Taxpayers are allowed deductions from the same sources. Any unabsorbed capital losses can be carried forward for a limited period of 10 years.

10. Tax reporting

Submission of the prescribed form through e-filing within 60 days from the date of disposal.

11. Tax payment

Any payment should be made within 60 days from the date of disposal, emphasizing the need for timely compliance.

12. Profits Derived from Foreign Sources

The following conditions apply:

• Exemptions are given on remittances that meet the economic substance requirements;

• Gains from the disposal of shares by a controlled company incorporated outside Malaysia.

13. Deemed to be acquired from Malaysia

Shares in a company will be considered acquired from Malaysia if it owns:

• real estate located in Malaysia; or

• shares in another controlled company; or

• both

where the market value of the real estate or shares or both is more than 75% of the value of its tangible assets.

In conclusion, these proposed changes to Malaysia's Capital Gains Tax system are expected to have a far-reaching impact on businesses, investors, and various taxpayers. Staying informed, seeking professional advice, and ensuring compliance will be key to navigating this evolving tax landscape effectively.

Budget 2024 Highlights - Past Updates

Individual : https://www.ktp.com.my/.../malaysias-budget-2024.../17oct23

Companies : https://www.ktp.com.my/.../malaysias-budget-2024.../18oct23

Tax Exemptions : https://www.ktp.com.my/.../malaysias-budget-2024.../19oct23

Tax Incentives : https://www.ktp.com.my/.../malaysias-budget-2024.../20oct23

Stamp Duty & Indirect Tax https://www.ktp.com.my/.../malaysias-budget-2024.../23oct23

Payroll (EPF & SOCSO) https://www.ktp.com.my/blog/malaysias-budget-2024-a-glimpse-into-epf-socso-updates/24oct23

Others https://www.ktp.com.my/blog/malaysias-budget-2024-others-important-updates/26oct23

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Accounting for Stock In Trade

''Stock in trade,'' often referred to as ''inventory'' in accounting and business terminology, encompasses movable and immovable property and materials used in day-to-day business operations.

Accurate identification and tracking of stock in trade are vital for precise financial reporting, particularly for the balance sheet, as it significantly affects a company's financial health and performance.

Valuation of Stock in Trade

There are two primary methods for valuing stock in trade:

(a) Acquisition Cost

This includes:

i. Direct expenses related to the purchase of goods intended for resale or materials and components used in the production of finished goods.

ii. Other direct expenses explicitly associated with acquiring stock or bringing it to its current condition and location (e.g., customs duties, direct labor, transport, and packaging).

iii. A portion of any overhead expenses properly attributable to manufacturing goods (e.g., office rent, utility charges, stationery, and maintenance services).

(b) Cost Methods

There are three primary cost methods:

i. First-In, First-Out (FIFO): Assumes the earliest items in inventory are the first to be sold or used, and their costs are allocated to the cost of goods sold.

ii. Last-In, First-Out (LIFO): Assumes the most recent items in inventory are the first to be sold or used, and their costs are allocated to the cost of goods sold. Note that LIFO is not allowed under International Financial Reporting Standards (IFRS) and is unacceptable for income tax purposes.

iii. Weighted Average Cost (WAC): Calculates an average cost for the entire inventory based on the total cost of all units in stock and the total number of units in stock.

Summary

In conclusion, properly valuing stock in trade is critical for financial reporting and business performance. Understanding the cost methods can help businesses make informed decisions about their inventory management, financial health, and compliance with accounting standards.

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Capital Expenditure vs Capital Revenue

The Difference between Capital Expenditure and Capital Revenue

Capital expenditure refers to the funds invested in acquiring or enhancing long-term assets, while capital revenue represents income generated from the sale of capital assets or other sources contributing to the capital of a business.

1. Purpose of Funds

Expenditure – Funds invested in long-term assets or development in the business. These expenses are intended to provide long-term benefits to the company.

Revenue – Funds spent on day-to-day operations of the business, covering routine expenses necessary to keep the business running.

2. Nature of Expense

Expenditure – Typically non-recurring in nature.

Revenue – Generally recurring in nature.

3. Designation

Expenditure – Often referred to as Development Expenditure. These investments are aimed at improving the company's capacity or capabilities.

Revenue – Commonly known as Non-Development Expenditure because it does not involve the development or acquisition of new assets.

4. Accounting Treatment

Expenditure – Capitalized on the balance sheet and depreciated over time. The cost is spread out over its useful life through depreciation, which means the expense is recognized gradually over time to match the asset's value consumption.

Revenue – Recorded as income in the profit and loss statement. It contributes to the company's total income for the period in which it is earned.

5. Financial Statements

Expenditure – Affects the balance sheet by increasing assets and the income statement through depreciation.

Revenue – Impacts on the income statement as a source of income.

6. Examples

Expenditure – Plant & Machinery, Buildings

Revenue – Raw Materials

Conclusion

Understanding the distinction between capital expenditure and capital revenue is essential for effective financial management in any business. Capital expenditure involves investments in long-term assets, which impact the balance sheet and long-term strategic planning.

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What are The 2 Types of Shares?

We delve into the world of shares, exploring their intricate definitions, classifications, and the impact they have on financial and accounting practices, with a special focus on International Accounting Standard (IAS) 32.

1. Shares Defined under Accounting Standards

Shares represent units of ownership in a company, but their classification under IAS 32 is vital. Shares are considered equity when there's no contractual obligation to transfer cash or other financial assets. Furthermore, when such shares are subsequently sold or disposed of, they can trigger income tax or real property gain tax (RPGT) implications.

2. Two Types of Shares

Our discussion uncovers two primary types of shares:

• Para 3(b) Shares under IFRS 2 - Shares Based Payment

• Real Property Company (RPC) shares

3. Definition of Para 3(b) shares under IFRS 2 - Shares Based Payment

Para 3(b) shares refer to the exchange of assets for shares in a controlled company.

4. Definition of RPC Shares

RPC shares, on the other hand, pertain to shares in a real property company. A company qualifies as an RPC if it meets two conditions: it's a controlled company and owns real property or RPC shares that collectively account for at least 75% of total tangible assets (TTA).

5. When Shares Qualify as Both Para 3(b) and RPC Shares

Intriguingly, there are instances where shares meet the criteria for both Para 3(b) and RPC shares. In such scenarios, the priority lies with Para 3(b). Consequently, these shares won't be categorized as RPC shares, even if the company transitions into an RPC or already is one during the circumstances described in Para 3(b).

Key Summary

In conclusion, shares are the embodiment of ownership in a company and hold significant importance in financial and accounting contexts. Whether they fall under the umbrella of equity or have tax implications can significantly influence financial reporting and strategic decisions for both investors and companies.

Furthermore, the distinction between Para 3(b) and RPC shares plays a pivotal role in understanding a company's standing concerning real property ownership and associated tax considerations.

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{Tax Update} e-Invoice Guideline 2.1

Latest Development on e-Invoice

The Inland Revenue Board (IRB) has issued updated e-Invoice Guidelines, including:

• e-Invoice Guideline (version 2.1)

• e-Invoice Specific Guideline (version 1.1)

Key updates in the guidelines: e-Invoice Guideline (version 2.1):

• Removed references to non-business transactions between individuals.

• Revised implementation timeline:

  1. 1 August 2024 - Mandatory for taxpayers with an annual turnover/income exceeding RM100 million.

  2. 1 January 2025 - Mandatory for taxpayers with an annual turnover/income between RM25 million and RM100 million.

  3. 1 July 2025 - Mandatory for all other taxpayer categories.

Key updates e-Invoice Specific Guideline (version 1.1):

• Requires service tax amount inclusion in self-billed e-Invoices for imported taxable services.

• Extends the deadline for issuing e-Invoices for foreign income received in Malaysia from the same month to the end of the following month.

Reference to Past Blog on e-Invoice

• e-Invoice Guideline 2.0 https://www.ktp.com.my/blog/tax-update-e-invoice-guideline-2/12oct23

• Transition Challenges and Strategies https://www.ktp.com.my/blog/e-invoicing-malaysia-transition-challenges-and-strategies/17aug23

• The Workflow https://www.ktp.com.my/blog/e-invoicing-malaysia-the-workflow

• Are You Ready https://www.ktp.com.my/blog/e-invoicing-malaysia-are-you-ready/10aug23

• The Coverage https://www.ktp.com.my/blog/e-invoicing-malaysia-coverage/3aug23

• The Timeline https://www.ktp.com.my/blog/e-invoicing-malaysia-timeline/2aug23

Source

Guidelines are accessible on IRB's website: www.hasil.gov.my (Home > e-Invoice)

IRB e-Invoice version 2.0 https://www.hasil.gov.my/media/nofmzbk1/irbm-e-invoice-guideline-version-20.pdf

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