IRB move affects inter-company loans

1 Sept 2008: Straight Talk: IRB move affects inter-company loans -- By Toh Lye Huat 02:44PM (02-09-2008)

A recent move by the Inland Revenue Board (IRB) to deem as interest income all interest-free loans provided by Malaysian Bulk Carriers Bhd (Maybulk) to its wholly owned subsidiaries has raised concern among companies with inter-company loan deals. The development is likely to see many of them restructuring their funding requirements.

For investment holding companies, especially those with wholly owned subsidiaries enjoying certain tax reliefs, the IRB's move means that there could be tax assessment of inter-company loans.

In arriving at the decision following a field audit, the IRB has also raised a tax assessment of RM58.4 million on the deemed interest income for Maybulk, covering the financial years 2003 to 2005.

On Aug 15, Maybulk, in announcing the IRB's decision, said it would contest the assessment. The shipping firm views it as a significant departure from the IRB's past practices in respect of interest-free loans to wholly owned subsidiaries. Maybulk says it considers the assessment incorrect under Malaysian income tax law and that it does not agree with the assessment because it views the loans as part of its equity to finance the acquisition of vessels by the group. Under the income tax laws, tax exemption is given to Malaysian-registered vessels in the shipping business.

The IRB's recent decision has caught many companies by surprise. The Income Tax Act is silent on this issue, with no specific provision to impute interest income for holding companies that extend interest-free loans to their wholly owned subsidiaries.

In the event that both the holding company and its wholly owned subsidiary are profitable and pay tax, the total amount that the IRB would collect from both would be the same, whether the inter-company loans are free of interest or not.

There will be a difference in tax payment if the holding company extends interest-free loans to subsidiaries that are enjoying tax reliefs such as pioneer status or tax holidays. In cases where such interest-free loans are not accepted by the IRB, it can impute tax on the deemed interest income.

As the Income Tax Act is silent on such matters, the IRB can apply the anti-avoidance provision under the Act if it disagrees with such transactions.

The provision empowers the tax authority to act if, in its opinion, it has proof that the holding company has altered the incidence of tax with a view to reducing the tax payable. In such instances, the IRB can disregard the transaction and make any necessary adjustment it deems fit.

The dispute between IRB and Maybulk has got some corporations worried because of the potential impact on the bottom line, cash flow and investor confidence. The IRB's move can be seen as a warning that this tax assessment will also be extended to other companies.

If that happens, there will be a lot of backdated tax that these companies will have to pay, and that could have a material effect on them. Cash flow could also be hit if they need to pay the taxes and any bond issues that they may have could also be downgraded because of the impact on the earnings.

Start-ups that need financial support from their holding companies could see their development affected due to financing issues.

Interest-free loans given to wholly owned subsidiaries should be seen as a form of temporary relief for companies within a group. When the subsidiaries do well, they will become good taxpayers. However, there must be sound commercial justification in extending these loans. In the case of Maybulk, there could be some commercial reasons for giving interest-free loans to its subsidiaries.

With the huge amounts involved in such matters, many corporations may want to contest the issue in court.

Instead of interest-free loans, companies may also opt for capital injection for their units, for example, through redeemable convertible preference shares. Loans, though, give the lender greater flexibility as they can be recalled anytime.

The IRB, as a corporatised entity, is under pressure to achieve its tax collection target. With the economy slowing down, many companies are expected to post lower earnings than projected earlier, and this will have an impact on IRB's tax collection.

In implementing regulations, the authorities should ensure a business's viability and sustainability.

Since the Act is silent on tax assessment for inter-company loans, it would be better for the IRB to come out with a public ruling that will provide a clear interpretation and give time to the companies to adjust or restructure their capital needs.

****************************************

--- Article Information ---

This article was emailed from http://www.theedgedaily.com/cms.

Article's URL: http://www.theedgedaily.com/cms/content.jsp?id=com.tms.cms.article.Article_21cdd71c-cb73c03a-98350a00-f13d1157

Remission Of Increase in Tax

REMISSION OF INCREASE IN TAX


1. Tax shall be increased if:

1.1 The tax payable / debt due to the government is not paid within the stipulated period;

1.2 The difference between the actual tax payable and the estimate /revised estimate of tax payable is more than 30% of the actual tax payable.


2. A taxpayer with valid reason(s) to support his appeal against the increase intax imposed, may appeal in writing to the Collections Branch / Collections Unitof the LHDNM branch which handles the taxpayer’s income tax file.


3. LHDNM will consider the appeal according to the merit and facts of each case.


4. Remission of increase in tax due to late payment may be considered under the folllowing circumstances:

4.1 Full remission:

• It is proven that payment is made within the stipulated period;

• Extension of time for payment has been granted;

• Increase in tax was wrongly imposed;

• Tax has been fully discharged;

• It is proven that the notice of assessment was sent to a wrong address or not to the last known address.

4.2 Partial remission:

• Tax credit is used to pay outstanding tax — remission of increase in tax on the amount of outstanding tax set off;

• Tax is reduced — remission of increase in tax on the amount of taxreduced.


5. Remission of increase in tax imposed under subsection 107C(10) (paragraph1.2 above) may be considered if it can be proven that the increase in company’s profit is only known after the 9th month revision in estimate, provided that the difference in estimate is paid not later than the due date for final installment payment.


INLAND REVENUE BOARD OF MALAYSIA
2nd September 2008

Utilisation of Companies' Income Tax Credit As Set Off

UTILISATION OF COMPANIES’ INCOME TAX CREDIT AS SET OFF


1. The policy of LHDNM is to refund tax credit.


2. Tax credit for a year of assessment arises:

2.1 When there is excess payment as at the date the assessment is raised
(when the assessment is deemed or formal assessment is raised);

2.2 After tax discharge;

2.3 Due to tax credit under section 110 of the Income Tax Act (ITA) 1967 /section 51 of Finance Act 2007.


3. Installment payments under section 107C of ITA 1967 for the current year of assessment and advance payments in respect of investigation or audit cases shall not be taken as tax credit.


4. A tax credit shall first be used to settle tax liabilities in accordance with the following procedure:

4.1 Settle all outstanding tax / tax balances pursuant to ITA 1967, Finance Act 2007 and the Real Property Gains Tax Act 1976;

4.2 Settle all increases in tax imposed on assessments raised pursuant to ITA 1967, Finance Act 2007 and the Real Property Gains Tax Act 1976;

4.3 Settle overdue and unpaid current year’s estimated tax installments undersection 107C of ITA 1967.


5. Instead of a refund, a company may apply to the Collections Branch /Collections Unit of the relevant LHDNM branch to utilise its tax credit balance after taking into account paragraph 4 above, to set off:

5.1 Non-overdue estimated tax installments for the current year and subsequent year(s) of assessment;

5.2 Tax of other companies within the same group.

6. On the utilisation of tax credit among companies within the same group (excluding associated companies), the following are to be noted:

6.1. Documents to be furnished together with the application letter—

6.1.1 Organisational structure that illustrates the inter-company relationship between the surrendering company and recipient company within the same group;

6.1.2 For A Local Company

i. A copy of the Board of Directors resolution pertaining to the transfer of tax credit, sealed (under company’s common seal) and fully signed (signed in manuscript) by the company’sdirectors (refer to Appendix 1); and

ii. A certified true copy of Form 49 [section 141(6) of the Companies Act 1965] by the Company’s Secretary with his name and full address stated (refer to Appendix 2).

6.1.3 For A Foreign Company

i. Deed of Assignment; or

ii. Board of Directors resolution as stated in paragraph 6.1.2 (i)above.

6.2 The date of utilisation of tax credit to set off the tax of another companywithin the same group is the date on which the application is receivedtogether with complete documents as specified above.

7. The company shall not claim for refund of the tax credit after it has been usedas set off.

LEMBAGA HASIL DALAM NEGERI MALAYSIA
2nd September 2008

APPENDIX 1

(NAME OF COMPANY)

(INCORPORATED IN MALAYSIA)

DIRECTOR’S RESOLUTION IN WRITING MADE PURSUANT TO ARTICLE

(NUMBER) OF THIS COMPANY’S ARTICLE OF ASSOCIATION

It is hereby RESOLVED:

1. THAT the Director General of Inland Revenue, Malaysia, be and hereby authorised to transfer/refund to the account of (NAME AND ADDRESS OFRECIPIENT), an amount of RM (AMOUNT IN FIGURES) (Ringgit Malaysia:AMOUNT IN WORDS), from the tax credit available in the company’s account with the Inland Revenue Board of Malaysia.


2. THAT the Inland Revenue Board of Malaysia shall be and is hereby indemnified against all persons whatsoever for the payment made in pursuance of the above resolution.


3. THAT the common seal of the company be and is hereby authorised to beaffixed on the resolution.


4. THAT this resolution be communicated to the Director General of Inland Revenue.


BOARD OF DIRECTORS
A: Signature
Name of Director
Identity Card /Passport No.

APPENDIX 2

FORM 49

Companies Act, 1965

Company No. ................................................

RETURN GIVING PARTICULARS IN REGISTER OF DIRECTORS, MANAGERS AND SECRETARIES AND CHANGES OF PARTICULARS

...................................................(NAME OF COMPANY) DIRECTORS

[form 49]

Furnishing of CP 204 less than the minimum amount specified under S 107C(3) of ITA 1967

FURNISHING OF ESTIMATE OF TAX PAYABLE LESS THAN THE MINIMUM
AMOUNT SPECIFIED UNDER SUBSECTION 107C(3) OF THE INCOME TAX ACT
1967

1. Subsection 107C(3) provides that the estimate of tax payable for a year ofassessment must be at least 85% of the revised estimate of tax payable orestimate of tax payable if no revised estimate is furnished for the precedingyear.


2. Taxpayers having difficulty in complying with the provision mentioned abovemay apply in writing to the following address:

Lembaga Hasil Dalam Negeri Malaysia
Pusat Pemprosesan
Aras 10-18, Menara C,
Persiaran MPAJ
Jalan Pandan Utama,
Pandan Indah
Karung Berkunci 11018
50990 Kuala Lumpur


3. Applicants must state the reasons for not complying with the provision ofsubseksyen 107C(3) and provide documents to substantiate the reasonsstated.


4. Factors which may be considered in approving an application:

4.1 Cessation of business

4.2 Income has been significantly reduced or no longer received

Example:
• Income-generating assets have been sold
• No new projects
• Loss of major clients or contracts
• Increase in operating costs resulting in significant reduction of profitmargin
• Disturbance to business operation due to fire or natural disaster

4.3 Companies under winding-up

4.4 Companies taken over by way of mergers and acquisitions

4.5 Companies having substantial carried forward losses / capitalallowances

4.6 Change in accounting period resulting in shorter basis period

4.7 Companies have been granted tax incentives such as pioneer status orinvestment tax allowance

LEMBAGA HASIL DALAM NEGERI MALAYSIA 2nd September 2008