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.
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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
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
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