Here is a detailed overview from the law firm of how rules and taxes are changing in Singapore, Malaysia and other parts of Asia.

International law firm Baker McKenzie lists a range of legal and tax developments affecting wealth planners concerning Malaysia and the surrounding market. Authors of the article are Adeline Wong, partner, and Istee Cheah, senior associate, at Wong & Partners, member firm of Baker McKenzie in Malaysia.

This publication is grateful for the chance to share these comments and invites responses from readers. This news service does not necessarily endorse all views of guest contributors. Email the editor at tom.burroughes@wealthbriefing.com

Malaysia
The Malaysian Budget 2019 was unveiled on 2 November 2018 by the Finance Minister, YB Tuan Lim Guan Eng. This is the first budget presented by the new Pakatan Harapan Government, and numerous legislative amendments were introduced as a consequence of the Budget.
 
1.    Introduction of a Special Voluntary Disclosure Programme
The SVDP was unveiled in the Budget as part of the Government's objective to encourage taxpayers to voluntarily disclose undeclared income accurately and settle tax arrears. The SVDP was also introduced in view of Malaysia's participation in the Automatic Exchange of Information with foreign tax authorities whereby the Inland Revenue Board receives information on the bank accounts held by Malaysian tax residents in foreign countries.

Although the launch of a tax amnesty programme is not new to Malaysia, the SVDP this time around purports to be different from the past programmes, where the IRB is now expected to receive information disclosed in good faith. This means that a further review or audit on the disclosure is not expected to be carried out, unless an audit or investigation has already commenced on the taxpayer.  

The SVDP allows any resident or non-resident to voluntarily disclose potential non-compliance on any of the following cases:
(i)    under or undeclared income, over-claimed expenses or expenses claimed which are not allowed to be claimed, and over-claimed reliefs, deductions or rebates;
(ii)    unpaid or under-paid withholding taxes;
(iii)   unreported or under-reported gains on disposal of assets (real properties and shares in real property companies); 
(iv)   unstamped instruments; 
(v)    transfer pricing cases; and
(vi)   cases where audits or investigations have commenced. 

The validity period of the SVDP was recently extended on 7 April 2019 where the special penalty rates are offered as follows:
(i)    10 per cent on the actual amount of tax payable if disclosure is made to the IRB by 30 June 2019 (the deadline was previously 31 March 2019); and
(ii)    15 per cent on the actual amount of tax payable if disclosure is made to the IRB if within the period of 1 July 2019 to 30 September 2019 (the deadline was previously 30 June 2019). 

Disclosures made from 1 October 2019 onwards are subject to a minimum penalty rate of 45 per cent.

2.    Scrutiny on unexplained wealth
It was announced in the Budget that the IRB will scrutinize and investigate unexplained extraordinary wealth displayed through the possession of luxury goods, jewellery, handbags or property.  

The IRB set up a special task force in September 2018 to investigate taxpayers who have showcased extraordinary wealth, yet may have seemingly under-declared their income in their tax filings. Recent news articles have mentioned that the IRB will be monitoring social media and bank accounts of individuals that appear to have unexplained wealth. The IRB has also provided various avenues for anyone to lodge reports of suspected tax evasion or unexplained wealth to the IRB.

Once the relevant taxpayers are identified, the IRB may also issue a special request form for taxpayers to furnish the IRB with additional information on their sources of funds, or may instead request for a special meeting.

3.    Major developments to the Labuan regime
In line with Malaysia's commitment as an associate member of the Organization of Economic Cooperation and Development Inclusive Framework on Base Erosion and Profit Shifting to address tax evasion and harmful tax practices, significant changes to the Labuan regime were announced. 

(a)    No restriction on dealing with Malaysian Ringgit or Malaysian residents
Previously, a Labuan entity may be said to be carrying on a "Labuan business activity" (1) only if that activity is carried on in, from or through Labuan in a foreign currency with a non-resident or another Labuan entity.

The Labuan Activity Tax Act 1990 ("LBATA") was amended on 1 January 2019 ("LBATA Amendments") to remove this restriction. A Labuan entity may carry on a Labuan business activity in Malaysian Ringgit and with a Malaysian resident, so long as such activity does not constitute an offence under any other written law.

(b)    Abolishment of election to pay tax at the flat rate of RM 20,000 per year

A Labuan entity carrying on a "Labuan trading activity" (2) previously enjoyed the ability to elect to pay tax: (i) at the rate of 3 per cent on its net profits (3) per year as reflected in its audited accounts; or (ii) at the flat rate of RM 20,000 per year.

However, following the LBATA Amendments, a Labuan entity performing a Labuan trading activity is automatically subject to tax at the rate of 3 per cent on its net profits as reflected in its audited accounts. Consequently, all Labuan entities are now required to have audited accounts for the purpose of tax filings. That said, a Labuan entity performing a "Labuan non-trading activity" (4) continues to be exempt from tax under the LBATA. There is presently no requirement for such a Labuan entity to maintain audited accounts.

(c)    Income from intellectual property no longer enjoys preferential tax rates under the LBATA

Pursuant to the LBATA Amendments, income derived from royalty, or an intellectual property right (6) if it is receivable as consideration for the commercial exploitation of that right, is now taxed under the Income Tax Act ("ITA") instead of the preferential tax regime of the LBATA. The prevailing corporate income tax rate under the ITA is 24 per cent.

(d)    New economic substance requirements for Labuan entities

The LBATA Amendments paved the way for the introduction of new economic substance requirements for Labuan entities, where all Labuan entities undertaking a "Labuan business activity" are required to have:

(a)    an adequate number of full-time employees in Labuan; and
(b)    an adequate amount of annual operating expenditure in Labuan.

These amendments came into effect on 1 January 2019. 

In line with this, the new Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2018 ("Economic Substance Regulations") seek to specify (i) the minimum number of full-time employees required in Labuan; and (ii) the minimum amount of annual operating expenditure required in Labuan. The minimum requirements vary depending on the type of Labuan entity. For example, a Labuan "holding company" is required to have a minimum of two (2) full-time employees in Labuan and an annual operating expenditure of RM 50,000 in Labuan. A Labuan "leasing company" is required to have a minimum of two (2) full-time employees in Labuan and an annual operating expenditure of RM 100,000 in Labuan.

The Economic Substance Regulations reflect the Malaysian Government's constructive response to the Forum on Harmful Tax Practices' recommendations, and have resulted in the FHTP's latest assessment of some Labuan regimes as not harmful. 

Following an industry briefing with the Labuan Financial Services Authority in relation to issues faced by various industries as a result of the Economic Substance Regulations, the LFSA issued a set of frequently asked questions on 25 January 2019 (7) to further explain some of the requirements under the Economic Substance Requirements. However, many issues and concerns have yet to be fully addressed and we are hopeful that clearer guidance will be issued by the authorities soon.

(e) Restrictions on tax deductions for payments made to Labuan company

Previously, a person was entitled to claim a full tax deduction under Section 33 of the ITA, when ascertaining his/her adjusted income to be taxed under the ITA, in respect of expenses which are wholly and exclusively incurred in the production of gross income. 

With effect from 1 January 2019, the new Income Tax (Deductions Not Allowed for Payment Made to Labuan Company by Resident) Rules 2018 permit the taxpayer a partial tax deduction only under Section 33 of the ITA in respect of certain payments made to a Labuan company. The maximum deductions permitted for interest payments and lease rentals are capped at 67 per cent, whilst the maximum deductions permitted for all other payments are capped at 3 per cent.

4.    Increase of real property gains tax rates
With effect from 1 January 2019, disposals of real property or shares in a real property company (8) after the fifth year (i.e. in the sixth year or thereafter) from the date of acquisition will attract an increased RPGT rate, as follows:

5.    Increased stamp duty rates for properties valued above RM 1,000,000 
Pursuant to changes introduced by the Finance Act 2018, the stamp duty rate imposed on the transfer of property valued at more than RM 1,000,000 has increased from 3 per cent to 4 per cent with effect from 1 January 2019. The previous and prevailing stamp duty rates are as set out below: 

6.    Reduction in income tax rates for small and medium-sized enterprises
Previously, SMEs (i.e., companies with a paid up up-capital of up to RM 2.5 million) were taxed at a rate of 18 per cent on chargeable income up to RM 500,000 with the remaining chargeable income taxed at a rate of 24 per cent. With effect from 1 January 1, 2019, the tax rate for chargeable income up to RM 500,000 is reduced from 18 per cent to 17 per cent.

7.    Recent updates on the Common Reporting Standards and Automatic Exchange of Information in Malaysia

(a)    Updated List of Reportable Jurisdictions 
The IRBM published the first List of Reportable Jurisdictions on 15 January 2018, and subsequently updated the list several times, the latest being on 15 January 2019.  The list now includes 63 jurisdictions. 

This list is expected to be updated again on 30 June 2019, and this updated List of Reportable Jurisdictions will form the final list for reporting to the IRB in 2019. Starting from 2020 onwards, this list will be updated on 15 January and 31 May each year.

 
List of Reportable Jurisdictions (as of 15 January 2019)

(b)    Extended reporting deadline for the year 2018 for all reportable accounts 

Under the Income Tax (Automatic Exchange of Financial Account Information) Rules 2016 ("AEOI Rules"), Reporting Financial Institutions are required to report information of non-resident account holders of Reportable Jurisdictions, to the IRB on or before 30 June of the year following the calendar year to which the return relates.  Accordingly, the reporting in respect of financial account information for the year 2018 should be made to the IRB by 30 June 2019.

However, the Income Tax (Automatic Exchange of Financial Account Information) (Amendment) Rules 2017 ("2017 Amendment Rules") provide that the reporting deadlines in respect of pre-existing individual accounts were extended to 31 July for "High Value Accounts" (9) and to 31 July for "Low Value Accounts" (10) . 

Notwithstanding that the AEOI Rules stipulate that the deadline for the first reporting for the year 2018 falls on 30 June 2019, the IRB has provided an administrative concession under the Common Reporting Standard Guidance Notes (updated on 1 June 2018) in respect of the compliance requirements for the AEOI Rules ("CRS Guidance Notes") by extending the reporting deadline for all accounts (not only Pre-existing Individual Accounts) for the year 2018 to 31 July 2019. The deadline for the reporting for the year 2019 will remain as 31 June 2020. 

8.    Update on the implementation of the Foreign Account Tax Compliance Act ("FATCA")
On 30 June 2014, Malaysia reached an agreement in substance with US to implement the FATCA, based on the Model 1 Intergovernmental Agreement ("IGA"). 

The IGA is, however, still in the process of finalisation and has not been signed by the parties. Notwithstanding this, the US Department of Treasury, through their letter dated 25 April 2017, has agreed that Malaysia will remain on the US Department of Treasury's IGA list and will continue to be treated as if it has an IGA in effect. 

As a result, the IRB announced that the deadline for the submission of the reportable information to the IRB for the years 2014 to 2019 has been tentatively deferred until 30 June 2020.

9.    Other relevant updates

(a)    New "place of business" requirement in the ITA

The Finance Act 2018 had amended the ITA to introduce the concept of a "place of business" where the income of a person from a business that is attributable to a “place of business” in Malaysia shall be deemed to be the gross income of that person derived from Malaysia from the business. This is akin to a "permanent establishment" provision which Malaysia had previously never adopted in its tax legislation. A "place of business" is defined to include the traditional fixed locations where management and certain activities are performed (such as an office, factory, branch, etc.) and also captures certain functions performed by persons in Malaysia. 

(b)    Re-introduction of the sales and service tax regime

On 1 September 2018, the previous goods and services tax ("GST") regime was repealed and replaced by the sales and service tax regime. Under the service tax framework, service tax is imposed at 6 per cent on the provision of taxable services by a registered person in the course or furtherance of a business in Malaysia. Taxable persons refer to those in the First Schedule of the Service Tax Regulations 2018, and includes, amongst others, hotels, food and beverage preparation, consultancy and management services, courier services, information technology services and advertising services. Separately, sales tax is chargeable on the manufacture of taxable goods in Malaysia and the importation of taxable goods into Malaysia, at the rate of 5 per cent or 10 per cent or a specified rate depending on the category of goods.

(c)    Digital currencies and digital tokens are now regulated as securities under Malaysian securities laws
Pursuant to the Capital Markets and Services (Prescription of Securities) (Digital Currency and Digital Token) Order 2019 (the "Prescription Order"), which came into force on 15 January 2019, digital currencies and digital tokens which are not issued or guaranteed by any government body or central bank, and fulfil other specific features, are now prescribed as securities.

This represents a shift in the regulatory regime by the Securities Commission of Malaysia and the Central Bank of Malaysia towards digital currencies and digital tokens, and the exchanges. Prior to this, the SC had only issued cautionary statements warning investors of the risks of investing in digital currencies and digital tokens, and BNM had also reminded members of the public to refer to the list of licensed or approved institutions to carry out the regulated activities before participating in such transactions.

Following the coming into force of the Prescription Order, any person who wishes to make available, offer for subscription or purchase, or issue an invitation to subscribe for or purchase digital currencies and digital tokens will have to seek approval from the SC and register a disclosure document with the SC. Persons who deal in digital currencies and digital tokens as a business (which includes solicitation of investors) will also be subject to the licensing requirements under the Malaysian Capital Markets and Services Act 2007.

Further, digital exchanges will now have to be registered with the SC as a recognised market operator.

Footnotes

1    A "Labuan business activity" is defined as a Labuan trading or a non-trading activity. For the purposes of being a "Labuan business activity", the Labuan entity will have to comply with the new substance requirements. A failure to comply will result in the entity being charged under the Malaysian income tax rate of 24% instead of the preferential Labuan tax rate of 3 per cent.
2      "Labuan trading activity" is defined to include banking, insurance, trading, management, licensing, shipping operations or any other activity which is not a "Labuan non-trading activity"
3      This excludes any income derived from royalty or an intellectual property right if it is receivable as consideration for the commercial exploitation of that right.
4      “Labuan non-trading activity” is defined to mean an activity relating to the holding of investments in securities, stock, shares, loans, deposits or any other properties situated in Labuan by a Labuan entity on its own behalf.
5      An "intellectual property right" means a right arising from any patent, utility, innovation and discovery, copyright, trade mark and service mark, industrial design, layout-design of integrated circuit, secret processes or formulae and know-how, geographical indication and the grant of protection of a plant variety, and other like rights, whether or not registered or registerable.
6      See the Harmful Tax Practices / 2018 Progress Report on Preferential Regimes released by the OECD on 29 January 2019.
7      See the Labuan Financial Services Authority Frequently-Asked Questions issued on 25 January 2019 on the New Labuan Business Activity Tax (Substantial Activity Requirements) 2019. 
8      A real property company is a Malaysian private company that acquires real property or shares or both, whereby the defined value of its real property and shares is not less than 75 per cent of the value of its total tangible assets as at the date of acquisition.
9      Under the AEOI Rules, “High Value Account” means a pre-existing individual account with an aggregate balance or value that exceeds USD 1,000,000 as of 30 June 2017, 31 December 2017 or 31 December of any subsequent year.
10      Under the AEOI Rules, “Low Value Account” means a pre-existing individual account, which is not a High Value Account, with an aggregate balance or value that does not exceed USD 1,000,000 as of 30 June 2017.