TAXATION OF BUSINESS TRUST -- PUBLIC RULING (PR) NO. 10/2013

The Inland Revenue Board (IRB) issued the above Public Ruling on 3 July 2013. The salient points in the PR are summarized below:-

Subject	Reference
Features of a Business Trust (BT) ·         Para 4 provides a brief description of the legal form and the mode of operations of a BT.  Among the important features are: -       It is a unit trust scheme where the operation or management of the scheme and the asset or property of the scheme is managed by a trustee, the trustee-manager (TM), who must be a company other than an exempt private company; -       The TM holds legal ownership of the assets of the underlying business and manages the business of the trust as its operator; -       Unit holders of a BT have a beneficial interest in the assets of the BT via their holdings of units of the BT. ·         The Capital Markets and Services (Amendment) Act 2012 (Act A1437) (CMSA) [P.U.(B) 428/2012] and the Business Trust Guidelines issued by the SC on 28.12.2012 provide a legal framework for an offering of BT including Islamic BT in Malaysia. ·         Pursuant to S.2(11) of the Income Tax Act 1967 (ITA), any reference to shares, ordinary share capital, shareholders and dividend in the ITA shall be read as including a reference to units, derivatives of units, unit holders and distributions respectively ·         Para 5 shows the basic structure of a BT diagrammatically and indicates the different functions of a promoter/shareholder and a TM. ·         Para 16 summarises the distinction between a BT and a company in a table form.	Para 4 Para 5 Para 16
Taxation of a BT ·         Residence status – a BT is resident in Malaysia for a YA if the TM is resident in Malaysia.  The TM is resident for the basis year for a YA if – -       The TM (in its capacity as such) carries on business of the BT in Malaysia; and -       The management and control of the business of such BT is exercised in Malaysia. ·         Basis period (bp) – The basis year for a YA or the financial accounting year ending on a day other than 31 December is the bp of a BT for that YA as governed by S21A of ITA. -       Where there is a change of accounting period of a BT, for the purposes of instalment payments of the estimated tax payable under S.107C, ITA, PR No.7/2011 (Notification of Change in Accounting Period of A Company, Trust Body and Co-Operative Society) shall apply. ·         For income tax purposes, a BT is treated as a company [S.2(1) of ITA as amended by the Finance Act 2013].  The amendment comes into operation on 28.12.2012, following the coming into force of the corresponding provisions of the Capital Market and Services (Amendment) Act 2012. ·         Consequently, the provisions of the ITA which apply to a company are also applicable to a BT.  The following matters are specifically discussed: a)    Meaning of BT Group (Para 9) b)    Group relief (Para 10 with Examples 4 & 5)) c)    Control transfer (Para 11) d)    Foreign sourced income and remittances (Para 12 with Example 6) e)    Tax incentives (Para 13)	Para 6 See Examples 1 and 2. Para 7 and Example 3 Para 8
Preferential tax treatment specifically excluded to a BT ·         Pursuant to S2(9), ITA, the following preferential treatments accorded to a company with paid-up capital in respect of ordinary shares of RM2.5 million and less at the beginning of the bp for a YA, are not applicable to a BT: a)  Exemption from submission of estimate of tax payable for the first 2 YA in which it first commences operations [S107C(4A) of ITA]; b)  Preferential tax rate of 20% on the first RM500,000 of chargeable income [Para 2A, Sch. 1 of ITA]; c)  Special allowance for small value assets [Para 19A, Sch. 3 of ITA.]	Para 14 Para14 (a) Para 14 (b) Para 14 (c)
Real property gains tax (RPGT) and stamp duty (SD) on the transfer of business and assets as well as income tax treatment on trade debts taken over by a BT ·         Chargeable gains accruing on the disposal of any chargeable asset to a TM/BT in relation to the initial offering (i.e. initial transfer of real property or shares in real property company from the promoter to the BT) of the BT, which has been registered and approved on or after 1.1.2013 but not later than 31.12.2017, are exempted from RPGT pursuant to the Real Property Gains Tax (Exemption) Order 2013. [P.U.(A) 128/2013] ·         Similarly, all instruments executed by a TM in relation to the transfer of any business, assets, or real property to a BT for the purpose of initial offering of the BT are exempted from SD pursuant to the Stamp Duty (Exemption) (No.7) Order 2013 [P.U.(A) 127/2013].  The exemption is not applicable in the case where loans are transferred to a BT.  ·         Trade debts taken over are to be regarded as capital assets of the BT, and separate records must be kept as no deduction is allowed when such debts are written off while recoveries in respect of such debts are not taxable.	Para 15.1 and Example 7 Para 15.2 Para 15.3
Filing of tax returns ·         The TM is responsible for filing the Income Tax Return Form (Form TN) for each YA, within 7 months from the date following the close of the accounting period which constitutes the bp for that YA.	Para 17

You may write to the Institute at technical@ctim.org.my or secretariat@ctim.org.my in respect of any concern or comments you may have on the Public Ruling No.10/2013.

RULES ON DEDUCTION FOR COST OF ACQUISITION OF FOREIGN OWNED COMPANIES

1. Background – Budget 2013 proposed to reintroduce the incentive of allowing a deduction for the cost of acquisition of foreign owned companies. Previously, the incentive was available to companies which had submitted their applications to Malaysian Investment Development Authority (MIDA) between 21 September 2002 and 31 December 2008. Following the proposal, the Income Tax (Deduction For Cost Of Acquisition Of Foreign Owned Company) Rules 2013 [P.U.(A) 218 of 2013] were gazetted on 4 July 2013:

2 The main features of the above Rules are summarized below:

Subject	Ref. /Notes
Effective date (Rule I) ·         The Rules are deemed to have come into operation on 3 July 2012	Rule 1(2)
Deduction (Rule 6) ·         In ascertaining adjusted income from the business of a locally owned company which has paid cost of acquisition of a foreign owned company for the basis period for a year of assessment (YA), a deduction is allowed of an amount equal to 20% of the cost for that YA and each of the 4 following YA. ·         The acquisition must be completed within 3 years from the date of application to MIDA. ·         The deduction will be withdrawn if the shares acquired are disposed of within 5 years from the date of completion of the acquisition.	Rule 6(1) Rule 6(3) Rule 6(5)
Locally owned company (Rule 3) ·         A locally owned company refers to a company which is: a)   incorporated under the Companies Act 1965 and resident in Malaysia: and b)   carries on the business of manufacturing of products or the provision of selected services approved by the Minister, and i.      if it is not listed on the stock exchange established under S15(2) of the Capital Markets and Services Act 2007 (CMSA), at least 60% of its paid-up capital in respect of ordinary shares is directly owned by Malaysian citizen, or ii.     if it is listed on stock exchange established under S 15(2) of CMSA, at least 60% of its paid-up capital in respect of ordinary shares is directly owned by Malaysian citizen on the first day of the listing and at least 50 % of its ordinary shares are directly owned by Malaysian citizen.
Foreign owned company (Rule 4) ·         A foreign owned company is one which is located outside Malaysia, and: a)   which is established under any written law relating to the establishment of a company outside Malaysia b)   which is wholly owned, directly or indirectly by non-Malaysian citizens; and c)   which owns and uses high technology in manufacturing activity or provision of selected services outside Malaysia.
Application (Rule 5) ·         These Rules apply to a locally owned company which: a)   submits an application for the deduction to MIDA between 3 July 2012 and 31 December 2016, and the application has been approved by the Minister; b)   acquires at least 51% of the ordinary shares of the foreign owned company by way of a cash transaction; c)   uses high technology acquired in the business of the company for the purpose of creating or increasing the demand on the product manufactured in Malaysia or services provided in Malaysia with the objectives of using the said technology for i)    the production or improvement of material, devices, products, produce or processes; or ii)   the improvement of processing or quality of the selected services; and d)   has not been granted any incentives under the Promotion of Investments Act 1986 (PIA) except pioneer status and investment tax allowance as a high technology company.
Ineligibility (Rule 7) The deduction is not available for a locally owned company: - ·         which has:  a)   made a claim for reinvestment allowance under Sch 7A, or investment allowance for service sector under Sch 7B of the ITA; b)   been granted an exemption under s127 of the ITA; or c)   claimed deduction under any Rules made under s154 of the ITA (except for Sch. 3 allowances); or ·         which is a related company of a locally owned company which has obtained approval for deduction under these Rules. A related Company, as defined under S.2 of PIA, means a company- (a)     the operations of which are or can be controlled, either directly or indirectly, by the first mentioned company; (b)     which controls or can control, either directly or indirectly, the operations of the first-mentioned company; or (c)     the operations of which are or can be controlled, either directly or indirectly, by a person or persons who control or can control, either directly or indirectly, the operations of the first mentioned company: Provided that a company shall be deemed to be a related company of another company if- (aa)   at least twenty percent of its issued share capital is beneficially owned, either directly or indirectly, by that other company; or (bb)   at least twenty percent of its issued share capital of that other company is beneficially owned, either directly or indirectly, by the first mentioned company;	Rule 7(1)(a), (b) and (c) Rule 7(1)(d) Rule 7(2)

You may write to the Institute at technical@ctim.org.my or secretariat@ctim.org.my in respect of any concern or comments you may have on the Rules.

Dialogue with SME Corp Malaysia

CTIM was invited to have a dialogue with SME Corp Malaysia on 10 July 2013 to discuss the introduction of a special tax rate to encourage small Malaysian service providers to merge into larger entities. The purpose of this incentive is to pool the resources and enhance competitiveness of the local small entities, in light of the Government’s efforts to further liberalise the services sector.

CTIM representatives provided the management of the Economic and Policy Planning Division of SME Corp Malaysia with feedback on the development of the tax profession, the existing regulatory framework, and information and insight into taxation service practices in Malaysia. The focus of the discussion was the Malaysian Investment Development Authority (MIDA) Guideline to “Encourage Small Malaysian Service Providers to Merge into Larger Entities” (http://www.mida.gov.my/env3/uploads/Forms/GD_ENT03072012.pdf ) dated 3 July 2012.

CTIM offered to provide further input/comments when requested. It was noted that the incentive mentioned will only be available to companies. The relevant gazettes are expected to be released in due course.

Members may view the MIDA Guidelines on MIDA e-Services Portal (MIDA > Home > Forms (Forms & Guidelines) > Services Sector) and CTIM website.

JOINT TAX WORKING GROUP ON FINANCIAL REPORTING STANDARDS (JTWG-FRS)

Please be informed that the Joint Tax Working Group on Financial Reporting Standards (JTWG-FRS) has further reviewed the following Malaysian Financial Reporting Standards (MFRS)/ Financial Reporting Standards (FRS) and has circulated to members for comments the draft Discussion Papers on tax implications related to the implementation of the MFRS/ FRS:

MFRS 117/ FRS 117 Leases (Discussion Paper updated June 2012)

MFRS 119/ FRS 119 Employee Benefits

MFRS 136/ FRS 136 Impairment of Assets

IC 12 Service Concession Arrangements

The JTWG-FRS has now finalised the Discussion Papers and is pleased to issue them for members’ information which can now be downloaded from the Institute’s website at http://www.ctim.org.my/news.asp?menuid=42.

The JTWG-FRS will be having dialogues with Tax Authorities on the tax implications highlighted in the Discussion Papers. Members will be informed of the outcome in due course.

Please be guided accordingly.