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7 Chapter Tax
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Foreign tax credit
Foreign tax credit (FTC) is a method to adjust the taxes paid twice on international income by deducting the amount of tax paid abroad for foreign source income from the tax amount of the country of residence.
■ Foreign tax credit based on tax treaty (DTR: Double Taxation Agreement)
A Malaysian resident corporation can apply for a deduction of foreign taxes paid to other country which is the tax on foreign source income generated in the Contracting State under the tax treaty.
■ Unilateral tax credit (UTC: Unilateral Tax Credit)
A Malaysian resident corporation who is taxed on foreign source income generated in other country that has not concluded a tax treaty can apply for tax credit of foreign tax amount paid.
However, in order to apply for a foreign tax credit, it is necessary to satisfy all the following three requirements.
· Be a resident of Malaysia in the current year
· Foreign tax amount has already been paid or planned to be paid abroad
· The income is subject to taxation in Malaysia
In case.png)
In Malaysia, foreign tax credits are not stipulated in the Income Tax Law instead in the Royal Decree in the Convention between Malaysia and the countries that have a tax treaty.
, it is stipulated that "in accordance with the treaty on foreign tax credit between foreign country and Malaysia foreign tax credits will be granted in accordance with the provisions of the "double taxation elimination" . In other words, the contents of the foreign tax credit will be greatly influenced by the contents stipulated in the tax treaty. (Note, according to Royal Decree R. D. No. 300 B. E.2539, even if it is a foreign tax paid in a country where no tax treaty has been concluded, either a foreign tax credit or a deduction of the foreign tax amount paid is permitted to be applied.)
In Japan - Tax Convention and foreign tax credits are stipulated in Article 21, paragraphs 2 and 4. With regard to tax deductions, the amount of foreign tax paid by a corporation established in Malaysia outside the country is limited to the corporate income tax amount to be imposed in Malaysia, and other taxes paid are treated as deductible for calculation of taxable income. It is done under the assumption that there is no thing or tax deduction certificate required for deduction. In addition, it is necessary to pay attention to the application of deemed foreign tax credit * as a point to be noted in transactions with Japan.
* A system that allows foreign tax credits to be applied, assuming that the tax reduced or exempted by the tax treaty was paid. -
Transfer price taxation
■Overview of transfer pricing taxation in Malaysia
Transfer pricing is a process in which transactions are carried out between the corporation and its foreign affiliated persons and transactions are carried out at a price different from the existing market enterprise price (ALP: Arm's Length Price). Transfer pricing tax a tax system that is imposed to prevent relocation of income from overseas through transfer price transactions among affiliates.
[Overview of transfer pricing taxation system].png)
In Malaysia, the Internal Revenue Service announced transfer pricing guidelines in July 2003. This was not a "law" but a proper "management guideline". Although there is no legal enforcement, taxpayers have to deal with this in practice because it is the guidelines indicated by the Revenue Department that conduct taxation.
The transfer pricing guidelines are in close agreement with the transfer pricing guidelines by OECD, and since January 1, 2009, the transfer pricing guidelines have been enforced on the basis of Article 140 A of the income tax law.
■ How to calculate intercompany price
It is stipulated by ALP that the international transaction price, which is the basis of income calculation after applying transfer pricing taxation, is based on ALP. For the ALP calculation method, companies will select the most appropriate method, considering the content and form of the transaction, from among the following prescribed methods.
The CUP (Comparative Uncontrolled Price Method) is a method of comparing the amount of consideration for a transaction (third party transaction) conducted between non-related parties under conditions similar to those of foreign affiliated transactions.
The resale price method (RP method: Resale Price Method) is a method of setting the amount obtained by deducting the amount of profit ordinarily obtained from the sales to a third party. The amount obtained will be the ALP for foreign related transactions..png)
The cost basis method (CP method: Cost Plus Method) is a method to determine the ALP for foreign related transactions using the sum of the cost generated from the transaction between the foreign affiliated company and a third party plus the amount of profit which would normally obtained from the transaction.
In calculating ALP, if you cannot use the above method, "Profit division method"
and "trading unit operating profit method" can be used.
Profit splitting method (PS method: Profit Split Method\
It is a method to calculate ALP in which the the total amount of operating income is allocated proportionately based on the contributing centers in realization of the operating profit
The transaction unit operating profit method (TNMM method: Transaction Net Margin Method) is a method of calculating ALP based on the operating margin realized in similar transactions between similar independent companies and third parties.
■ Documentation obligation
In Malaysian tax law, there is no specific obligation to prepare (document) the document which analyzed the details of the transaction at the transfer price transaction. However, in the case of receiving an indication from the tax authorities, there is a risk that the tax investigation etc. will result unfavorably if the taxpayer side does not have solid basis data. So even though, there is no duty for documentation to be established, I think that it is preferable to create and keep a transfer pricing document. Also, the language used at this time can be either English or Malay.
■ Transfer price survey in Malaysia
The transfer pricing survey in Malaysia is conducted in the usual tax investigation. In other words, authorities do not conduct a special investigation called transfer pricing survey. It will start with a hearing from a national tax official, which is an ordinary tax investigation. After submitting the declaration form to the tax office, the tax examination officer reviews the declaration documents and inquires by telephone regarding the document. If you cannot answer properly at the time of this inquiry, you will be asked for rehabilitation and you may be forced to incur estimated tax on a semi-compulsory basis. Moreover, there are cases where you will be asked for additional document, and if further document submission etc. becomes necessary for the verification, beforehand notice will be given, the subject company will be visited by the investigator and the investigation will pursue. In addition, there are factors such as intense fluctuations in gross profit margin and continuing deficit as conditions of corporations that may be subject to survey.
When verifying the transfer pricing in the tax investigation, the Revenue Bureau Circular will mainly verify the following documents.
· Organization chart of group affiliated companies, business contents of each company
· Budget, business plan, future financial forecast
· Contents of transactions, sales and profit / loss with group affiliates
· Functions and risks of each affiliated company
· Reason for transfer pricing method, reason for not adopting other method
· Other documents related to price determination
Penalties due to rehabilitation and surrender
When tax authorities receive an indication about transfer pricing and a correction / additional tax amount occurs, a penalty is given to the incremental tax amount as follows.
■ Prior confirmation system
The advance confirmation system (APA: Advance Pricing Agreement)) is a preliminary confirmation of the validity of pricing to the Revenue Department whether the relevant transaction price is appropriate in overseas related transactions when the corporation decides for the transaction price. In that case, companies can apply for that system. It is introduced and being utilized by companies having transactions between Japan and Malaysia. When making an application, you must conduct actual transactions according to the conditions indicated in the prior confirmation. Since the company agreed on the transaction in advance from the tax authorities, it can prevent the risk of being asked to declare amendment after filing. -
Other International Taxes
In Japan, in addition to the above, tax haven tax system, under capital tax regime etc. are stipulated. Howeverthere are no such special laws and regulations in Malaysia. Overall, Malaysia still has few provisions in the field of international taxation, so we need to pay attention to taxation mainly in Japan side.
However, it will be fully anticipated that international taxation in Malaysia will be strengthened by the thriving investment from foreign countries in Malaysia, so it is necessary to pay attention to it.
■ Tax Haven tax system
The Cayman Islands, Bermuda Islands, Luxembourg, Cyprus, Belize, Singapore and Hong Kong etc. are called tax havens (light tax country), and by generating profits in these countries, it is possible for companies to enjoy a great benefit in terms of taxation. In terms of investing in Malaysia, there are also cases where management is made as a subsidiary company through regional management headquarters (OHQ) instead of direct investment from Japan. By establishing a central office in Tax Haven, it is possible to reserve profits gathered from each subsidiary by utilizing the maximum benefits of taxation system.
However, if this OHQ is being found out by the tax authorities as a "dummy company" the income derived and retained in the OHQ will be taxed in Japan as the site of the head office. The tax haven system (total subsidiary taxation system) stipulated in the Japanese Corporate Tax Law means that a domestic corporation, etc. has a specified foreign subsidiary company (a foreign affiliated company located in a light tax country). The specified foreign subsidiary Etc., the amount corresponding to the ownership ratio of the subsidiary shares owned by the domestic corporation is regarded as the profit of the domestic corporation. It is a system that intends to accumulate taxes together in Japan.
In other words, in Japan, it is a taxation system that taxes overseas retained income in Japan by recognizing "money" in taxation although "accounting revenue "is not recognized.
Companies to which this taxation system applies are owned directly or indirectly by Japanese resident or domestic corporation directly or indirectly that exceed 50% of the shares (together with judgment to exclude voting rights and shares without right to distribute dividends). A company that is a foreign subsidiary, etc. that does not have tax on corporate income, or that the foreign capital investment is 20% or less, is eligible.
Among them, if the company is a domestic corporation or a resident who directly or indirectly owns the shares of the specific foreign company, etc., it shall be subject to the same taxation system for the retained income amount of such foreign subsidiary company.
In other words, a company that is located in Tax Haven, has a shareholding of 10% or more in the same family, and a company whose capital is more than 50% foreign capital.
Moreover, companies that meet the above requirement are not subject to all tax under the tax system, but in order to avoid hindrance to corporate normal foreign investment business activities by conducting a combined taxation, the following application requirements may not be satisfied.
· Business Criteria · · · · · · Business where this system is applicable are businesses except lending business of aircraft etc, provision of rights such as holding shares or bonds, know-how etc.
· Entity standard · · Have fixed facilities such as office, store, factory
- Management control criteria - The fact that they control and operate themselves in the country of residence.
· Unrelated party criteria · The main business is being conducted with non-related persons.
· Country criteria of location · Main business is done in the country where the head office is located.
In certain cases where a specific foreign subsidiary or the like is an entity as independent company and it is deemed that there is sufficient economic rationality to conduct business activities in the country where it is located, it is said that tax avoidance is not the purpose. Therefore, application of the tax haven system is not necessary.
In other words, in order to avoid applying the same taxation system, it is necessary to prepare for the actual situation of local activities in OHQ before being pointed out by tax authorities.
Also, if Malaysia's corporate income tax falls below 20% in the future, Malaysia must grasp that it may be subject to the taxation system.
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