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MALAYSIA’S PARTICIPATION IN FORUM OF HARMFUL TAX PRACTICES (FHTP) THE ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT (OECD) TAXATION INITIATIVES

In order to address the issue of base erosion and profit shifting, the Organization of Economic Cooperation and Development (OECD) and the G20 countries introduced Base Erosion and Profit Shifting (BEPS) Action Plan as international taxation standard. The plan consists of 15 actions to address BEPS issues.

Malaysia in principal has committed to implement and to adhere to this standard. Under this commitment, Malaysia officially joined the OECD Inclusive Framework (IF) on BEPS as Associate Members. The IF emphasizes on the 4 minimum standards, namely:

No Action Plan Minimum Standard Description
1. Action 5 Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance Identification of no or low preferential corporate tax rate (preferential regimes) that can be categorised as harmful tax practices. It focuses on improving transparency through the exchange of information on tax matters and requirement of substantial activities for any preferential regimes.
2. Action 6 Preventing the Granting of Treaty Benefits in Inappropriate Circumstances Measures to avoid treaty shopping activities to enjoy benefits under the DTAA by taxpayers.
3. Action 13 Guidance on Transfer Pricing Documentation and Country-by-Country Reporting Obligation to submit Country-by-Country Reporting by multinational companies with subsidiaries or branches for cross-border transactions.
4. Action 14 Making Dispute Resolution Mechanisms More Effective To ensure any tax-related disputes under the DTAA be resolved between treaty partners effectively.

Forum on Harmful Tax Practices (FHTP)

FHTP has identified jurisdictions which provide preferential regimes for mobile geographical services activities related to intellectual property (IP) and non-intellectual property (Non-IP). Malaysian incentives that have been identified for FHTP evaluation are as follows:

A. IP Incentives:

  1. Principal Hub;
  2. Pioneer Status (High Technology);
  3. Biotechnology Industry (BioNexus); and
  4. MSC Malaysia

 

B. Non - IP Incentives:

  1. Biotechnology Industry (BioNexus);
  2. MSC Malaysia;
  3. Principal Hub;
  4. Pioneer Status (Contract R&D);
  5. Treasury Management Centre;
  6. Economic Development Regions:
    • Iskandar Malaysia (IM);
    • East Coast Economic Region (ECER);
    • Sabah Development Corridor (SDC);
  7. Approved Services Project;
  8. Green Technology Services;
  9. Labuan Financial Services;
  10. Labuan Leasing Services;
  11. Foreign Fund Management;
  12. Inward re-insurance and offshore insurance; and
  13. Malaysian International Trading Company.
  14. The International Currency Business Unit (ICBU).

 

Tax incentives are evaluated based on the following criteria:

IP Incentives Non-IP Incentives

1. Nexus Approach

Only R&D expenditures incurred in Malaysia are eligible for Income tax exemption.

2. Transparency

Incentives that comply with FHTP's requirement must be gazetted by 31st December 2018.

1. Ring Fencing

No distinction on tax treatment including transaction and currency restrictions between residents and non-residents.

2. Transparency

Incentives that comply with FHTP's requirement must be gazetted by 31st December 2018.

3. Substantial Activities

Substantial activities requirements under FHTP are as follows:

  1. adequate investment amount or annual business operating expenses incurred in Malaysia; and
  2. adequate number of full-time job employment in Malaysia.

The core income generating activities for the incentives that have been identified for FHTP evaluation are as follows:

Incentives Under Review Core Income Generating Activities
Principal Hub A locally incorporated company that uses Malaysia as a base for conducting its regional or global businesses and operations to manage, control, and support its key functions including management of risks, decision making, strategic business activities, trading, finance, management and human resource.
MSC Malaysia

MSC Malaysia Status may be given to Applicants that offer an internationally recognised standard of higher education, information technology, engineering, the sciences and other related fields that will contribute to the development of human resources for the MSC Malaysia.

All Applicants must have all of the following activities in order to qualify for the MSC Malaysia incentives, depending on whether they are companies, institutions of higher education or faculties and depending on the location of their business or activities, namely:

• Applicable courses must only be related to multimedia, information technology and communication fields.

• Grant either Diploma or Degree courses in multimedia, information technology and related fields for a training period covering a minimum period of 2 years and above.

• Establish a multimedia faculty or a qualified faculty conducting multimedia courses, programmes and related activities.

• Comply with Malaysian Qualifications Agency guidelines.

Biotechnology Industry (BioNexus)

BioNexus status is a special status awarded to qualified international and domestic biotechnology companies undertaking value-added biotechnology or life sciences activities.

“Life sciences” mean any of several branches of science, such as biology, medicine, anthropology or ecology, that deal with living organisms and their organisation, life processes, and relationships to each other and their environment.

A project eligible for consideration must be within the purview of the National Biotechnology Policy (NBP) and falls into the following 3 focus areas:

  1. Agricultural Biotechnology
  2. Healthcare Biotechnology; and
  3. Industrial Biotechnology

Qualifying Activities :

  1. Project must have a biotechnology and/ or life sciences element in the activity.
  2. Companies merely undertaking repackaging, distributing or trading of biotechnology products and consultancy do not qualify for BioNexus Status.
  3. The proposed project must be commercially viable and ready for commercialization.
  4. The proposed project must be undertaken in Malaysia.
Pioneer Status (High Technology) The company is engaged in promoted activities as listed in the List of Promoted Activities and Products - High Technology Companies under the Promotion of Investments Act, 1986.
Pioneer Status (Contract R&D); Contract R&D Company means a company which provides R&D services in Malaysia only to a company other than its related company.
Economic Development Regions:

• Iskandar Malaysia (IM);

IDR status company means a company which provides services in the following qualifying activities:
  1. Creative industries and related services;
  2. Educational Services;
  3. Health Care and related services;
  4. Logistic Services;
  5. Tourism; and
  6. Global Business Services.
Economic Development Regions:

• East Coast Economic Region (ECER);

ECER qualifying company means a company which undertakes manufacturing activities, cultivation activities and provides services in the following qualifying activities:
  1. Agriculture;
  2. Agriculture related services
  3. Information, communication and technology;
  4. Education and training;
  5. Manufacturing;
  6. Manufacturing related services;
  7. Oil, Gas and Petrochemical;
  8. Hotel;
  9. Tourism; and
  10. Culture and Heritage
EEconomic Development Regions::

• Sabah Development Corridor (SDC);

SDC qualifying company means a company which undertakes manufacturing activities and provides services in the following qualifying activities:
  1. Creative;
  2. Shipping;
  3. Hotel and Resort;
  4. Manufacturing downstream livestock products and animal;
  5. Manufacturing downstream activities of palm oil products;
  6. Manufacturing downstream activities of medium and heavy industries;
  7. Education hub; and
  8. Marine downstream activities.
Green Technology Services The qualifying company means a company which undertakes the following qualifying activities including green technology project or services activities related to renewable energy, energy efficiency, green building / data center, waste management, electric vehicle and other supporting services.
Labuan Financial Services Labuan financial business means :
  1. building credit business;
  2. credit token business;
  3. development finance business;
  4. leasing business;
  5. factoring business;
  6. money-broking business; or
  7. Labuan Islamic financial business
Labuan Leasing Services “leasing business” means the business of letting or sub-letting property on hire for the purpose of the use of such property by the hirer regardless whether the letting is with or without an option to purchase the property, including charters of ships, and for the purpose of this definition, “property” includes any plant, machinery, equipment or other chattel attached or to be attached to the earth and “charters of ships” means bareboat charters only and does not include the transportation of passengers or cargo by sea or the charter of ships on a voyage or time charter.
Reinsurance Insurance broking business means the business of soliciting, negotiating or procuring a policy with an insurer, or the renewal or continuance of the policy by a person, for a policy owner other than for himself and includes reinsurance broking for an insurer.

Timelines for Implementing Tax Incentives Gazette under FHTP

a. IP Incentives

Action Date
1. Legislation process to amend existing IP incentives. To be gazetted latest by 31 December 2018.
2. Cut-off date for new entrants to an existing IP incentives.

Effective 1st July 2018, IP incentives are subject to Nexus Approach criteria. No new approval will be granted for existing IP incentives that do not comply with Nexus Approach criteria.

Nexus Approach terms of reference can be found through:
https://www.oecd-ilibrary.org/docserver/9789264283954-en.pdf?expires=1528445154&id=id&accname=guest&checksum=BCE5668395E0A9DEDA783979F2B4F6AA

3. Cut-off date to enjoy benefits from the existing IP incentives approved on or before 30 th June 2018 that do not comply with FHTP criteria (grandfathering). Grandfathering will be allowed until 30th June 2021 to the existing companies which currently enjoy the existing IP incentives except for IP assets acquired from related parties after 16 October 2017. Tax payers need to distinguish IP assets from related and non-related parties.

b. Non-IP Incentives

Amendments to legislation related to Non-IP incentives are to be gazetted latest by 31st December 2018. Grandfathering will be allowed to the existing companies which currently enjoy Non-IP incentive, as follows:

  1. incentive approved on or before 16th October 2017
    - grandfathering period is up to 30th June 2021;

    or

    - grandfathering is not allowed for new assets and new activities from existing entrants;
  2. incentive approved after 16th October 2017
    - grandfathering period is up to the date of gazette or 31st December 2018 whichever earlier.

c. Incentive Termination Notification

The International Currency Business Unit (ICBU) from year of assessment 2017 until year of assessment 2020. Legislation reference is as follows

http://www.federalgazette.agc.gov.my/outputp/pua_20181005_PUA%20251.pdf

d. Cross Border Transaction

Company performs cross-border transactions within 90 days from date of approval or certificate of income tax exemption with related companies is required to submit the Annex C form to the promotional agency issuing relevant incentive approval letter.

The Ministry of Finance together with Inland Revenue Board of Malaysia and related ministries/agencies are currently reviewing Malaysian tax incentives in order to meet criteria set under FHTP.

For enquiries:

International Tax Policy Section (I)
Tax Division
Level 6, Centre Block
Ministry of Finance, Malaysia
03-8882 3345 / 03-8882 3348

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