Day: October 11, 2023

The Inland Revenue Board of Malaysia (HASiL) has published the following draft Public Ruling (PR) on its website to solicit feedback from the public before finalising it: –

Draft PR on Tax Treatment Regarding Royalties for Payment of Software to a Non-Resident.

This public consultation’s primary objective is to gather stakeholders’ input and opinions on this draft PR.

It is important to note that HASiL has stated that all received views and comments may be disclosed publicly and will be taken into consideration. This public consultation for the draft PR is open for comments and should be submitted to [email protected] on or before 12 October 2023.

Something about this draft Public Ruling (PR)

This document is a public ruling issued by the Inland Revenue Board of Malaysia regarding the tax treatment of royalties for software payment to a non-resident.

It explains the distinction between royalties and service fees for software payments, discusses withholding tax requirements, and outlines the consequences of not deducting and remitting tax.

The ruling also covers relief and appeal processes, double taxation avoidance agreements, and withholding tax exemptions on royalties.

This draft Public Ruling (PR) explains the difference between royalty payments and service fees for non-residents’ software payments.

A royalty payment for software payments to non-residents is defined as a payment for the purchase or the use of, or the right to use, an application by the payer for its use. This includes any purchase of applications and contents as long as the intellectual property belongs to the original owner.

Regardless of whether it can be modified or otherwise, such a purchase still falls under the definition of royalty.

On the other hand, a service fee for software payments to non-residents is defined as a payment that does not involve the purchase or use of an application but is merely a provision of service by the non-resident.

The provision of service means the service provider develops relevant functions to be used by the payer. The income derived from such service falls under special classes of income and is subject to withholding tax under section 109B of the Income Tax Act 1967 (ITA).

Do you know what are the consequences of not deducting and remitting withholding tax on software payments?

Suppose a payer fails to deduct and remit any amount of withholding tax due to the Director General of Inland Revenue (DGIR) under subsection 109(1) of the ITA. In that case, that amount which he fails to pay shall be increased by 10% of the withholding tax he fails to pay, and the total sum shall be a debt due from him to the Government and shall be payable to the DGIR.

For example, if a company fails to deduct and remit tax of RM5,000 due and payable on a payment of RM50,000 chargeable to tax on royalty payments to a non-resident company, that sum which the company failed to pay shall be increased by RM500 (10% of RM5,000).

The total sum of RM5,500 shall be a debt due to the Government.

Furthermore, where the payment in respect of royalty income is subject to withholding tax under section 109 of the ITA and the payer fails to deduct and remit the tax to the DGIR in accordance with subsection 109(1) of the ITA, such payment will be disallowed as an expense in the computation of the adjusted income from any source of the payer.

However, if the payer subsequently pays the withholding tax together with the increased amount, that royalty payment made to the non-resident can be subsequently allowed as a deduction.

Do you know how a taxpayer can apply for relief or appeal a decision regarding the tax treatment of software royalties?

The tax treatment of software royalties is governed by the domestic tax laws of the country and any applicable Double Taxation Avoidance Agreement (DTA).

If taxpayers believe that their software royalties’ tax treatment is incorrect, they can apply for relief or appeal the decision.

Under the DTA provision, if the same income is taxed in both countries (Malaysia and a treaty country), the taxpayer (non-resident) may claim tax relief, known as bilateral credit, in the country where he is resident.

However, if the withholding tax is borne by the payer (Malaysian resident) instead of the non-resident, then the non-resident cannot claim the bilateral credit.

If Malaysia has not entered into a DTA or there is a limited DTA with a particular country, the domestic tax laws of Malaysia shall prevail.

In such cases, the taxpayer may need to consult with a tax professional or legal advisor to understand their options for relief or appeal.

It’s also important to note that the tax treatment of software payments can depend on the specific facts of each case.

Therefore, taxpayers should ensure they have accurate and complete information about their software payments when applying for relief or appealing a decision.

The Inland Revenue Board of Malaysia (HASiL) has uploaded the following draft Public Ruling (PR) on its website, inviting the public to provide their comments and feedback before the finalisation:

Draft PR on Deceased Individuals – Part 1: Introduction.

This public consultation’s primary aim is to gather stakeholders’ input regarding matters covered in this preliminary PR.

It’s essential to be aware that, as per HASiL’s guidelines, all received opinions and comments may be shared with the public and will be considered. The opportunity for public feedback on the draft PR was open for comments and had a deadline for submission on or before 27 September 2023, which has since passed.

This public ruling provides information on the estate administration and liabilities of a deceased individual.

It covers topics such as sources of income before death, the process of notifying the IRBM of the death, settling outstanding taxes, determining the validity of a will, responsibilities of the executor, taxation on the income received from the estate, distribution of the deceased’s estate, and the period of administration.

Do you Know

What are the different sources of income for individuals before their death that are considered when administering their estate?

The different sources of income for individuals before their death that are considered when administering their estate include:

1. Business Income: This includes income from sole proprietorship, partnership, limited liability partnership, and private limited company. If the individual dies, the sole proprietorship business is automatically considered dissolved. If a husband owns a sole proprietorship business and dies, the sole proprietorship business is taken over by the wife.
2. Employment Income: This includes wages, salaries, allowances, leave pay, fees, commissions, bonuses, rewards, perquisites, or allowances concerning the possession or carrying on of any employment. When an employee dies, no remuneration is received due to the termination of the employment relationship between the employee and the employer.
3. Interest Income: Interest income is the return or payment for using funds belonging to one party by another. If the lending individual dies, there are no longer any returns or profit sharing from the borrower.
4. Pension Income: A pension is a payment made by a former employer to a retired employee. After the death of a pensioner, the husband or wife usually receives the pensioner’s pension.
5. Rental Income: Rental income is earned by individuals when the property they own is rented to others. After the owner’s death, the property shall pass to the entitled heirs.
6. Commission Income: Individuals receive commission income from a payer company or other individuals after carrying out specific transactions or services as agents, distributors, or dealers. When an individual who acts as an agent, distributor, or dealer dies, no more commission will be received as no more transactions or services are being carried out.
7. Dividend Income: The company distributes its profits to its shareholders in the form of dividends when the company makes a profit. When a shareholder individual dies, the shares are transferred to the new shareholder or returned to the original company.
8. Annuity Income: An annuity is a series of payments that an individual receives periodically as one of his or her sources of income. Annuity income is usually paid under a contract, agreement, or will. When the recipient dies, he or she receives no further annuity payments.

What is the process for notifying the Inland Revenue Board of Malaysia about the death of an individual and settling any outstanding taxes?

When an individual dies, their death should be reported to the agency responsible for certifying the death, either the nearby hospital or the police.

The National Registration Department will record the death information and issue the death certificate.

Once the death certificate is available, the closest heirs of the deceased should report or notify the Inland Revenue Board of Malaysia (IRBM) of the death as soon as possible.

When reporting the death of the deceased to the IRBM, the closest heirs of the deceased should provide a copy of the death certificate and the Grant of Probate or the Letter of Administration.

The heirs can visit the IRBM office that handles the deceased’s tax file or an IRBM office in their area to report this death.

The executor is responsible for submitting the Income Tax Return Form (ITRF) for the deceased for the year in which the deceased died. This is because the ITRF for the year of death must be submitted to the IRBM no later than 30th April of the following year for those who receive employment income or no later than 30th June for those receiving business income.

The executor must also check with the IRBM to determine the outstanding taxes the deceased owes for the years preceding his death. If the deceased did not pay any outstanding taxes during his lifetime, the executor must pay these outstanding taxes in full, including any penalty amounts imposed.

The executor of a deceased individual shall not distribute any of the assets of the deceased’s estate if the executor knows any outstanding tax liabilities of the deceased that must be paid to the IRBM unless the executor has made provisions to pay the deceased’s tax liabilities as provided under subsection 74(5) of the Income Tax Act.

If the executor fails to pay the deceased’s outstanding tax, the executor may be subject to civil action as provided under section 106 of the Income Tax Act.

How is the distribution of a deceased individual’s estate to eligible beneficiaries governed in Malaysia, and what are the taxation implications for the trustee or beneficiaries?

In Malaysia, the distribution of a deceased individual’s estate to eligible beneficiaries is governed by several legal provisions.

These include the Distribution Act 1958 (Act 300), the Parsee Intestate Succession Ordinance of Straits Settlements, and the Law of Faraid.

The Distribution Act 1958 does not apply to followers of the Majusi religion and Islam. Followers of the Majusi religion are governed by the Parsee Intestate Succession Ordinance of the Straits Settlements, while followers of Islam are subject to the Law of Faraid.

The administration period of the deceased’s estate by the executor ends when the estate is fully wound up or after the estate is fully distributed, which means all the liabilities of the deceased have been settled.

The period of administration by the executor is important because if it is not yet completed, the income received from the estate sources is considered estate income and will be subject to taxation on the deceased’s executor.

If the administration has been completed, any income received from its sources will be considered beneficiary income and subject to taxation on the beneficiary to whom the estate is distributed.

If the will of the deceased provides for the establishment of a trust, the income received from the sources of the estate is considered the income of the trust, and it will be subject to taxation on the trustee or eligible beneficiaries.

The Malaysian Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) is an international treaty that modifies and updates existing double taxation agreements (DTAs) between Malaysia and various other countries.

The primary purpose of the MLI is to ensure that these DTAs are in line with international standards for preventing tax base erosion and profit shifting by multinational enterprises.

The MLI is part of a broader global effort to address tax avoidance practices and to promote greater transparency and fairness in international taxation.

It was developed as part of the Base Erosion and Profit Shifting (BEPS) project initiated by the Organisation for Economic Co-operation and Development (OECD).

Key aspects and objectives of the MLI include:

1. Prevention of Treaty Abuse: The MLI includes provisions to prevent the misuse of tax treaties for the purpose of avoiding taxes. This includes measures to counteract treaty shopping, where businesses exploit the differences in tax treaties between countries to reduce their tax liabilities.
2. Hybrid Mismatches: The MLI addresses issues related to hybrid mismatches that can lead to double non-taxation or double deduction. It seeks to align the treatment of these mismatches with international standards.
3. Improving Dispute Resolution: The MLI aims to enhance the effectiveness of dispute resolution mechanisms, making it easier for taxpayers to resolve disputes related to the interpretation or application of tax treaties.
4. Transparency and Exchange of Information: It promotes greater transparency and facilitates the exchange of information between tax authorities to prevent tax evasion and enhance compliance with tax laws.
5. Implementation and Modification: The MLI provides a framework for implementing these measures in existing DTAs while allowing countries to tailor the specific provisions to their preferences.

Overall, the MLI is part of Malaysia’s commitment to international efforts to combat tax avoidance and improve the integrity of its tax treaty network. It ensures that Malaysia’s DTAs are consistent with modern international tax standards and helps to protect its tax base from erosion.

The Inland Revenue Board of Malaysia (HASiL) has published the Synthesized Texts (ST) of Malaysia’s Double Taxation Agreements (DTAs) with Albania, Bosnia and Herzegovina, Chile, China, Croatia, Denmark, Egypt, Finland, France, and Hong Kong, including any adjustments introduced by the Multilateral Convention to Implement Tax Treaty Related Measures for the Prevention of Base Erosion and Profit Shifting (MLI) to become effective on their respective dates.

It outlines the taxation rules for various types of income, discusses the elimination of double taxation, and includes provisions related to non-discrimination, mutual agreement procedures, exchange of information, and termination of the agreement.

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Malaysia’s Special Tax Incentive (Relocation) benefits companies that want to relocate their operations to the country.

It provides a special tax rate for new companies based on their capital investment and income tax exemption for existing companies that relocate their overseas facilities to Malaysia.

Non-citizen individuals holding key positions in these companies also receive special income tax treatment.

Eligible applicants can apply online through the MIDA website, but certain activities and products are not eligible for the incentive.

What benefits are offered by the Special Tax Incentive (Relocation) in Malaysia?

The Special Tax Incentive (Relocation) in Malaysia offers several benefits to both new and existing companies in the manufacturing sector.

For new companies

A 0% special tax rate is offered for 10 years for investments in the manufacturing sector with capital investment (excluding land) between RM300 million and RM500 million.

If the capital investment exceeds RM500 million, the 0% special tax rate is extended to 15 years.

For existing companies

An income tax exemption equivalent to the Investment Tax Allowance (ITA) of 100% on the qualifying capital investment (excluding land) above RM300 million incurred within 5 years is offered.

This allowance can be offset against 100% of statutory income for each assessment year.

In addition, non-citizen individuals holding key positions (C-Suite) in companies that have been granted the Special Tax Incentive (Relocation) are eligible for a flat tax rate of 15% for 5 consecutive years.

However, this is limited to a maximum of five individuals per company, and they must be residents of Malaysia, hold a key position, receive a basic monthly salary of not less than RM25,000, and be a Malaysian tax resident for each year of assessment throughout the five consecutive years of assessment.

Who is eligible to apply for this tax incentive?

The Special Tax Incentive (Relocation) in Malaysia is available to companies that meet the following criteria:

1. The company must be incorporated under the Companies Act 2016 and resident in Malaysia.
2. Under the incentive, the company fulfils the definition of a ‘new company’ or ‘existing company’.
3. The company is to undertake manufacturing activities other than the manufacturing activities listed in Appendix A.
4. New companies must incur the first qualifying capital expenditure within one year from the date of the approval letter, and the minimum qualifying capital expenditure (excluding land) is to be completed within three years from the date of the first capital expenditure.
5. Existing companies must incur the first qualifying capital expenditure, which can be backdated up to three years but shall not be earlier than 1 July 2020 and the minimum qualifying capital expenditure of RM300 million to be completed within three years from the date of the first capital expenditure.
6. The company is required to have a paid-up capital of RM 2.5 million and above.
7. New companies can be companies relocating manufacturing facilities for eligible activities from any country to Malaysia or establishing a new operation in Malaysia and not having an existing manufacturing operation in Malaysia.
8. Existing companies can be foreign or locally owned companies with an existing manufacturing operation in Malaysia and relocate their manufacturing operations outside Malaysia for a new business segment. The products from the new business segment are not expansion projects for existing products.

How can companies apply for the incentive, and what are the restrictions on eligible activities and products?

Companies can apply for the Special Tax Incentive (Relocation) in Malaysia online through the Invest Malaysia portal at https://investmalaysia.mida.gov.my.

Applications received by MIDA from 1 July 2020 until 31 December 2024 are eligible to be considered for this incentive.

However, applications with incomplete information will not be accepted and will be returned to the applicant company.

The company must undertake manufacturing activities other than the manufacturing activities listed in Appendix A.

An existing company approved this incentive has to keep separate accounts for the product(s) /activity(ies) approved with the tax incentive and product(s)/activity(ies) without tax incentive or to set up new entities to carry out the project.

For new companies, the capital expenditures incurred before the approval letter date will not be included as the qualifying minimum capital investment. In this event, the subsequent capital expenditures incurred within one year from the approval letter’s date will be considered the first qualifying capital expenditures.

For existing companies, the first qualifying capital expenditure can be backdated up to three years but shall not be earlier than 1 July 2020.

The application to determine the effective date shall be submitted within 24 months from the date of the approval letter.

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