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A Walk Around Recent Tax, Compliance Changes In Malaysia

Adeline Wong and Istee Cheah, 2 May 2018

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Lawyers at a member firm of Baker & McKenzie International, consider a range of issues confronting private client advisors and clients in, and related to, Malaysia. (The country goes to the polls on 9 May.)

One of the largest and emerging economies in Asia-Pacific is Malaysia, a country that also faces various tax challenges and developments. Like many other jurisdictions, Malaysia  is wrestling with issues around tax compliance and the proper balance of legitimate financial privacy versus secrecy, particularly in light of the AEOI [automatic exchange of information] and CRS [Common Reporting Standard] developments. The Federal Territory of Labuan, an offshore location to the east of Malaysia, continues to evolve to meet international tax standards. Malaysia, as with so many countries, feels the long reach of the US in the form of the Foreign Account Taxation Compliance Act, which can make life tough for expat Americans.

For wealth advisors and managers in the country and its neighbouring countries including Singapore, there's much to consider. Wong & Partners, a member firm of Baker & McKenzie International in Malaysia, has provided a detailed commentary on the latest developments in Malaysia which are relevant to the wealth planning space. The authors are Adeline Wong (Partner), Istee Cheah (Associate) and Sarah Sheah (Associate). Adeline heads the Tax, Trade and Wealth Management Practice Group in Wong & Partners.

The editors of this news service are pleased to share these views with readers and invite responses. To do so, email tom.burroughes@wealthbriefing.com


1. Recent updates in the Automatic Exchange of Information (AEOI) and Common Reporting Standards (CRS) sphere in Malaysia.

1.1 Reporting Financial Institutions would not be required to report certain dormant accounts to the IRB.

Pursuant to the Income Tax (Automatic Exchange of Financial Account Information) (Amendment) Rules 2017 (2017 Amendment Rules), the Income Tax (Automatic Exchange of Financial Account Information) Rules 2016 (AEOI Rules) was amended to include an expanded scope of "Excluded Account". (1)

In light of this, Reporting Financial Institutions (2) are not required to identify and report certain dormant accounts to the IRB, and this includes:

(a) a depository account which is a dormant account, with a balance that does not exceed USD 1,000, and where no transaction has been initiated by the account holder for the past 3 years; and

(b) a securities account which is a dormant account (3).  

1.2 Reporting Financial Institutions have an extended period of until 31 July 2018 to submit their first reporting of 2017.

Under the AEOI Rules, Reporting Financial Institutions are required to report information of non-resident account holders of Reportable Jurisdictions, to the IRB by way of an information return via the IRB's IT platform on or before 30 June of the year following the calendar year to which the return relates. Accordingly, the first reporting in respect of financial account information for the year 2017 will be required to be made to the IRB by 30 June 2018.

1.2.1 Preexisting individual accounts
Pursuant to the 2017 Amendment Rules, the reporting deadlines in respect of preexisting individual accounts were extended to 31 July 2018 for High Value Accounts (4)  and to 31 July 2019 for Low Value Accounts (5).

This would mean that:
(a) Preexisting Individual Accounts that are High Value Accounts as of 30 June 2017 must be reviewed by 30 June 2018 and if identified as a Reportable Account, then the account must be reported to the IRB by 31 July 2018; and

(b) Preexisting Individual Accounts that are Low Value Accounts as of 30 June 2017 must be reviewed by 30 June 2019 and if identified as a Reportable Account, then the account must be reported to the IRB by 31 July 2019.

1.2.2 Other Reportable Accounts
Notwithstanding that the AEOI Rules stipulate that the deadline for the first reporting for the year 2017 falls on 30 June 2018, the IRB has provided an administrative concession under its Common Reporting Standard Guidance Notes dated 5 February 2018 in respect of the compliance requirements for the AEOI Rules (CRS Guidance Notes) by extending the reporting deadline for all accounts (not only Preexisting Individual Accounts) (i) for the year 2017, to 31 July 2018; and (ii) for the year 2018, to 31 July 2019.

1.3 The Inland Revenue Board of Malaysia (IRBM) published the List of Reportable Jurisdictions and List of Participating Jurisdiction.
1.3.1 List of Reportable Jurisdiction

The IRBM published the first List of Reportable Jurisdictions on 15 January 2018, and subsequently updated the list on 16 April 2018, which now includes a total of 34 jurisdictions. The IRBM has announced that the updated List of Reportable Jurisdictions as of 30 June 2018 will form the final list for the reporting to IRB in 2018. This would mean that, Reporting Financial Institutions are required to report the 2017 financial account information of non-resident account holders of the jurisdictions that are listed in this final list, in 2018.

It is expected that this list will be updated further on 15 January 2019 and on 30 June 2019, and this updated List of Reportable Jurisdictions will form the final list for reporting to IRB in 2019. From 2020 onwards, the List of Reportable Jurisdictions will be updated every 15 January and 31 May of each year.

List of Reportable Jurisdictions (as of 16 April 2018)


Australia    Ireland    Portugal
Belgium    Japan    San Marino
Bulgaria    Jersey    Seychelles
Colombia    Korea    Slovak Republic
Cook Island    Luxembourg    Slovenia
Denmark    Malta    South Africa
Germany    Mauritius    Spain
Guernsey    Mexico    Sweden
Greece    Netherlands    Singapore
India    New Zealand    United Kingdom
Isle of Man    Norway    
Italy    Pakistan   

 


1.3.2 List of Participating Jurisdictions
Reporting Financial Institutions are required to treat professionally managed Investment Entities which are not Participating Jurisdiction Financial Institutions (6) as Passive NFEs, and report on the Controlling Persons (7) of the Passive NFE. On 2 January 2018, the IRB published the List of Participating Jurisdictions consisting of 101 jurisdictions, which can be found here.

This list will be updated from time to time, and under the Guidance Notes, it is anticipated that the IRB will be updating this List of Participating Jurisdictions on 15 January of every year.

1.4 Labuan Financial Institutions subject to same due diligence and reporting requirements.

Pursuant to the new Section 21(b) of the Labuan Business Activity Tax Act 2010, the Minister of Finance is empowered to make regulations for the purposes of implementing or facilitating the operation of mutual administrative assistance in tax matter. On 5 February 2018, the Labuan Business Activity Tax (Automatic Exchange of Financial Account Information) Regulations 2018 ("Labuan AEOI Regulations") was gazetted and are deemed to come into operation as of 1 July 2017.

Under the Labuan AEOI Regulations, any Labuan entity which is a Financial Institution, is deemed a Reporting Financial Institution. As such, any Labuan Reporting Financial Institution would be required to comply with similar due diligence and reporting requirements as the non-Labuan Reporting Financial Institutions.

2. 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"). Accordingly, Malaysia has been included in the US Department of Treasury's list of jurisdictions that are treated as having an IGA in effect with the US.

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 remains on the US Department of Treasury's IGA list and continues to be treated as if it has an IGA in effect.

The IRBM announced that the deadline for the submission of the reportable information to the IRBM for the years 2014 to 2018 has been tentatively deferred to 30 June 2019.


3. Rumours of the introduction of inheritance tax
There were concerns prior to the announcement of the Malaysian Budget 2018 that inheritance tax would be introduced. However, the Ministry of Finance had, at that time, denied the rumours and, in fact, no such announcement was made by the Prime Minister of Malaysia during the announcement of the Malaysian Budget 2018.

Since then, there have been no news reports nor other indication that the Malaysian Government will be introducing inheritance tax.

4. Labuan Development Blueprint 2030
Labuan Corporation, the local authority of Labuan, has prepared a Labuan Development Blueprint which sets out a holistic and comprehensive plan to generate the growth and wealth of Labuan based on economic drivers. A copy of the Labuan Development Blueprint 2030 may be accessed here. (INSERT LINK)

As part of the Labuan Development Blueprint, there are plans to modernise Labuan tax framework. It is intended for the Labuan tax framework, in particular the tax incentives offered within the Labuan regime, to be refined and rationalised to ensure sustainability and compliance with prevailing international tax standards and fiscal practices.
To date, there has been no indication, beyond the Blueprint, as to when or how the modernisation of the Labuan tax framework will be implemented.

5. New requirement to submit statistical returns submission on assets management by Labuan foundations on a quarterly basis.

As part of the continuous efforts of the Labuan Financial Services Authority ("Labuan FSA") to improve statistical data collection for assessing and monitoring industry performance in the Labuan International Business and Financial Centre, the Labuan FSA introduced the "Assets Management by Labuan Foundation", which is a new reporting requirement imposed on Labuan foundations pursuant to Section 28B of the Labuan Financial Services Authority Act 1996.

Labuan foundations are now required to submit, to the Labuan FSA, certain information regarding its business activities, in the format as prescribed by the Labuan FSA. The information that is required to be submitted includes details regarding the endowment of assets to the foundation, the distribution of assets by the foundation and the foundation's investment, amongst others.

The "Assets Management by Labuan Foundation" reporting is required to be made on a quarterly basis, i.e., every 31 March, 30 June, 30 September and 31 December, and the first reporting was for the period ending 30 September 2017 which was due by 23 October 2017. Thereafter, the reporting is required to be submitted to the Industry Reporting Unit of Labuan FSA within 15 calendar days after the closing of each reporting period.

6. Increase in retention sum in respect of real property gains tax (RPGT) where disposer is not a citizen and not a permanent resident.
Prior to the introduction of the new Section 21B(1A) of the Real Property Gains Tax Act 1976, the acquirer in a disposal of a real property or shares in a real property company has a duty to retain the whole of that money or a sum not exceeding 3 per cent of the total value of the consideration, whichever is lower, and to remit the withheld sum to the IRB within 60 days of the date of disposal (regardless of whether the disposer had retained such sum).

The new Section 21B(1A) has increased the retention sum to 7 per cent. With effect from 1 January 2018, where the disposer of a real property or shares in a real property company is not a citizen and not a permanent resident, the acquirer is required to withhold and remit to the IRB at least 7 per cent of the total value of the consideration.

Footnotes
 1, Under the AEOI Rules, "Excluded Accounts" are accounts that are outside the scope of "Financial Accounts". Every Reporting Financial Institution which is not a Non-Reporting Financial Institution has the obligation to identify the Reportable Account from the Financial Account by applying the due diligence procedures as specified in the CRS.
2,  "Reporting Financial Institution" is defined as a Financial Institution that is resident in Malaysia (excluding any branch of that Financial Institution that is located outside of Malaysia) and any branch of a Financial Institution that is not resident in Malaysia if that branch is located in Malaysia. "Financial Institution" is defined under Section VIII of the CRS.
 3, Under Rule 26.10 of the Rules of Bursa Malaysia Depository Sdn. Bhd., a securities account is a "dormant account" where (a) there are no deposited securities in the depositor's securities account ("Nil Balance"); and (b) there have not been any debit or credit entries in the depositor's securities account for 36 months from the date of the Nil Balance.
4,  Under the AEOI Rules, “High Value Account” means a preexisting 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.
 5, Under the AEOI Rules, “Low Value Account” means a preexisting 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.
 6, Under the CRS, "Participating Jurisdiction Financial Institution" means (i) any Financial Institution that is resident in a Participating Jurisdiction, but excludes any branch of that Financial Institution that is located outside such Participating Jurisdiction; and (ii) any branch of a Financial Institution that is not resident in a Participating Jurisdiction, if that branch is located in such Participating Jurisdiction.
 7, Under the CRS, "Controlling Persons" means the natural persons who exercise control over an Entity.

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