SPECIAL DEDUCTION FOR EXPENDITURE ON TREASURY SHARES -- PUBLIC RULING (PR) NO. 9/2013

The Inland Revenue Board (IRB) issued the above Public Ruling on 27 June 2013. The salient points in the PR are summarized below:-

Subject	Reference
Objective ·         The PR explains the tax treatment of cost incurred by companies in acquiring treasury shares (TS) which are offered to employees under an employee share scheme (ESS).	Para 1
Background The PR explains the following as a prelude to the explanation on the special deduction: ·         Employee share scheme – Meaning and general operation of ESS ·         Treasury shares – the following circumstances giving rise to TS are listed in para 5: i)         Repurchase or redemption of companies’ shares which are not cancelled; ii)        Holding company purchases or redeems its own shares and transfers these TS to its subsidiaries to fulfill obligations under ESS; iii)       TS acquired by holding company when TS of subsidiary are transferred to employees of the holding company; iv)       Shares acquired by a Special Purpose Vehicle (SPV) or trust for distribution to employees of the issuing company and its subsidiaries are not qualified as treasury shares.	Para 4 Para 5.1 to 5.3 Para 5.4
Special deduction ·         Prior to the year of assessment (YA) 2013 – The IRB is of the view that cost of acquiring TS is not a deductible expense; ·         From YA 2013 – a special deduction on cost of acquiring TS to fulfil obligations under an ESS by a company having a business source, is allowed under s.34D of the Income Tax Act 1967 (ITA) ·         Cost of TS includes the following: a)   brokerage charges, commission to broker and Central Depository System charges; b)   stamp duty; c)   interest costs to finance the acquisition of TS to fulfil obligations under an ESS.	Para 6.1 Para 6.2 Para 6.3 .
Computation and timing ·        The amount deductible against gross income is computed as follows: Cost of acquiring TS transferred using First-in First-out (FIFO) method       XX Less: Amount payable by the employee for the shares                                 XX Amount allowable for deduction                                                                     XX ·         If there is an excess of the amount payable by an employee over the cost of TS, the excess is credited to an account kept by the company and will be applied to reduce the cost of subsequent TS which will be transferred to its employees. Any such excess is not taxable on the company and no deduction is due to the company (See Example 2). ·         A company is allowed a tax deduction for the cost of TS acquired when – i.      The cost incurred is for TS applied for the benefit of employees; ii.     Employee exercised his rights to acquire TS; iii.    The company has transferred the TS held to the employee; and iv.   The legal and beneficial interest in the TS has been acquired by the employee.  Examples 1, 3, 4, 5 and 6 illustrate the timing of claim and computation of deduction under various scenarios.	Para 7.2 & 7.4 Para 7.6 See Example 2. Para 7.3
Other points to note ·         Non - Application of s.34D: -       when new shares are issued by a company, its holding or subsidiary company to its employees to fulfil its obligations under an ESS; -       when a company offers newly-issued warrants or tradable warrants of its own, its holding or subsidiary company to fulfil its obligations under an ESS. ·         The difference between the purchase cost and the fair value of TS (treatment in accordance with MFRS 2) upon transfer or disposal of these shares represents a gain or loss to the company.  Such gains or losses arising from TS transferred under an ESS are disregarded for tax purposes.  (See Example 7.) ·         Supporting documents for a claim for a deduction under s. 34D, including framework of the ESS, details of cost of the TS based on the FIFO method, and amounts payable by employees for shares transferred to them, must be furnished upon audit by the IRB.	Para 8 Para 9 Para 10

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.

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.

SOME SALIENT POINTS IN PUBLIC RULING NO. 7/2013

1. Unit Trust Funds in Malaysia

i) A unit trust is a form of collective investment constituted under a trust deed. Unit trusts are open ended investments. Each fund has a specified investment objective to determine the management aims and limitations.

ii) A conventional unit trust fund invests in a broadly diversified portfolio of stocks and bonds or other financial instruments and includes a property trust which invests primarily in real properties. Other funds include bond/ fixed income funds, money market funds, fund-of funds, index funds, structured products, feeder funds, umbrella funds, guaranteed funds and capital protected funds.

iii) Islamic unit trust funds /Syariah-based unit trust funds are collective investment schemes that invest in a diversified portfolio of Syariah-compliant securities.

iv) Unit trusts are not separate legal entities. A trustee is the registered legal owner of all assets of the trust fund. The trustee holds the assets on behalf of and for the benefit of the unit holders who are the beneficial owners of the assets of the fund.

2. Regulatory Framework

i) The sole regulatory body of the unit trust industry in Malaysia is the SC which is the supervisory authority for the establishment and operations of unit trusts in Malaysia. Only unit trust funds approved by the SC can be offered for sale to the public.

ii) The Capital Markets and Services Act 2007 (CMSA) and guidelines on unit trust funds issued by the SC are the principal legislations and guidelines governing the unit trust industry and they provide the legal framework for the roles and responsibilities of the fund manager and trustee.

iii) The Guidelines on Unit Trust Funds are issued by the SC under section 377 of the CMSA and form part of the regulatory framework for unit trusts in Malaysia, and should be read together with the securities laws.

iv) A fund manager of a unit trust which carries on an Islamic fund management business under an Islamic window is required to comply with the relevant guidelines as set out by the SC.

3. Structure and key features of Unit Trusts

i) The unit trust arrangement is a tripartite relationship between the investors (unit holders), the trustee and the management company (fund manager) in a unit trust. The trust deed defines the terms and conditions of this relationship and details the way in which the fund operates. The trust deed must be registered with the SC which also approves the appointment of the fund manager and the trustee.

ii) An Islamic unit trust scheme is required to appoint a Syariah adviser as stipulated in the SC’s Guidelines on unit trust fund to ensure that their operations are in accordance with Syariah principles.

iii) Other key features are outlined in paragraph 6 of the Ruling, and include the following:

Subject	Paragraph
Investment activities of conventional unit trusts	6.2
Investment activities of Islamic unit trusts	6.3
Investment restrictions and units	6.4
Non-permissible investments of Syariah-based unit trust fund	6.5
Income of unit trust	6.6
Fees and expenses of unit trusts	6.7

iv) The following is a summary of points made in paragraph 6.6 (Income of unit trust):

· Interest income of a unit trust is charged to tax except for interest specifically exempted under Schedule 6 of the ITA or various Exemption Orders;

· Under S2(7) of the ITA, any gains or profits received by an Islamic fund and expenses incurred, in lieu of interest, in transactions conducted in accordance with Syariah principles, are to be accorded the same treatment as if they were interest.

· The following dividends received by unit trusts are tax exempt:

- Single-tier dividends distributed by a resident company;

- Tax-exempt dividends distributed by companies enjoying tax incentives, from their exempt income accounts.

· An approved unit trust approved by the Minister of Finance, is exempt from tax on its income, and dividends received from that unit trust are also exempt in the hands of a resident individuals [Income Tax (Exemption) (No. 12) Order 1985].

· Rental income of a unit trust which is not considered as a REIT/PTF by the SC is part of the total income of the property trust.

· Other tax exempt income of a unit trust are:

- Gains from the realization of investments of a unit trust;

- Income derived from sources outside Malaysia and received in Malaysia by a resident unit trust (from YA 1998).

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.