Public Ruling No. 6/2012 on Reinvestment Allowance

Please be informed that the Inland Revenue Board (IRB) has uploaded a new Public Ruling No.6/2012: Reinvestment Allowance, issued on 12 October 2012, replacing the Public Ruling No.2/2008 dated 3 April 2008.

The objective of this Public Ruling (PR) is to assist taxpayers in ascertaining their entitlement to Reinvestment Allowance (RA) under Schedule 7A of the Income Tax Act 1967 (ITA) and to provide clarification in relation to:

i. projects that qualify for RA;

ii. expenditure that qualifies for RA;

iii. period of eligibility for RA; and

iv. computation of RA.

Below is a summary of the changes made to PR (No.2/2008)

Changes In This Ruling
Para.	Item (Effective date)	Reference
4.2	Amendment to paragraphs 1, 1A and 1C of Schedule 7A of the ITA 1967 (Year of assessment (YA) 2009)	Budget 2009 (New)
5.3.3	Percentage of statutory income to be utilized for deduction of RA (YA 2012)	Budget 2012 (New)
6.1.1 & 6.1.4	Meaning of “qualifying project” prior to and from YA 2009 (YA 2009)	Budget 2009 (New)
6.3.1	Meaning of “manufacturing” (YA 2009)
6.3.4 & 6.3.5	Concession to allow RA if the first claim made was prior to YA 2009
7.2.1	Meaning of “factory” prior to YA 2012	Budget 2012 (New)
7.2.2	Meaning of “factory” from YA 2012 onwards
8.3	Concept of “qualifying period”	Clarification (New)
9.2.2	Disposal of asset (YA 2009)	Budget 2009 (New)
9.2.3	Concession for assets acquired prior to YA 2009
9.4	Control transfer (from 9.1.2009)
10.4	Change from “period” to “basis period” (YA 2011)	Budget 2011 and 2012 (New)
10.5	Retrospective application of paragraphs 7(b), (d) and (e) (YA 2011)	Budget 2012 (New)
10.7	Non-application with other incentives	Clarification (New)
11.8 & 11.9	RA for business of rearing chicken and ducks (YA 2009)	Budget 2009 (New)

In addition, this PR also includes the following appendices:

Appendix A List of incentives mutually exclusive to RA

Appendix B Computation of Process Efficiency (PE) Ratio

Appendix C List of Non-qualifying activities for RA under Paragraph 9(ii) of Schedule 7A of ITA

Some salient points of this PR are as follows:-

· Paragraph 4 states that with effect from YA 2009, a company or a person has to be in operation for not less than 36 months (instead of 12 months previously), to be eligible for RA. However, where the first claim for RA has been made prior to YA 2009, a concession is given to the claimant to continue claiming RA even though the period of operation may be less than 36 months.

· Paragraph 2 of Schedule 7A of ITA stipulates that RA shall be given for 15 consecutive YAs (eligible period) beginning from the YA in which the first RA claim was made. Paragraph 8 of this PR illustrates how the eligible period is determined. If the qualifying expenditure was first incurred before YA 1998, the eligible period began from YA1998. Where the eligible period has commenced, and the claimant wishes to enjoy a mutually exclusive incentive during the eligible period, then the eligible period will lapse and the claimant will enjoy RA for the balance of the eligible period.

· Paragraph 10 deals with non-application of Schedule 7A of ITA. Paragraph 10.5.2 further provides that, other than for paragraph 7(a), (b), (d) and (e), where a company is affected as a result of the retrospective application of the legislation, the company has to amend the tax computation by withdrawing the RA claimed. Where a penalty has been imposed, an appeal for waiver of the penalty would be considered favorably by the IRB.

· Paragraph 12 indicates the procedures for claiming RA. The original copy of the claim form LHDN/BT/RA/2007 is to be kept by the claimant together with all relevant documents relating to the claim.

We would be pleased if you could let us have your feedback and/or enquiry, so that we may raise it to the IRB.

Members may view the Public Ruling at the CTIM website and the IRB website.

Service Tax (Amendment) Regulations 2012 [P.U.(A) 244/2012]

The above amends Group G in the Second Schedule of the Service Tax Regulations 1975 [P.U. (A) 52/1975] under the heading “Taxable Service” by substituting for item “q” with the following item:


“q”. Provision of hire-and-drive car or hire-car services with or without chauffeur in Peninsular Malaysia licensed under the Land Public Transport Act 2010 and the Commercial Vehicles Licensing Board Act 1987 for Sabah and Sarawak excluding provision of hire-and-drive car as defined under the Tourism Vehicles Licensing Act 1999 as operated by tourism operators registered under the Tourism Industry Act 1992.

The amendment is deemed to have come into operation on 31 January 2011. This is because vehicles licensing for Peninsular Malaysia will be governed by Land Public Transport Act 2010 with effect from 31 January 2011. However, vehicles licensing for Sabah and Sarawak continue to come under the Commercial Vehicles Licensing Board Act 1987.

The provision also clarifies that position of hire-and-drive car operated by tourism operators registered under the Tourism Industry Act 1992, as not a taxable service and thus excluded from service tax.

Guidelines On Treatment of Single Tier Dividend included in Actuarial Surplus That Is Transferred to Shareholders’ Funds

The Inland Revenue Board (IRB) issued the Guidelines On Treatment Of Single Tier Dividend Included In Actuarial Surplus That Is Transferred To Shareholders’ Funds on 27 July, 2012 to clarify the treatment of the subject matter.

Actuarial Surplus (AS) is the surplus balance of the Life Fund (LF) at the end of an accounting period, for the purpose of distribution between shareholders and policy holders. It consists of all incomes received by the LF, including dividend income. The portion of AS transferred to shareholders’ fund (SF) is subject to income tax, without regard for the category of income included therein. This leads to single tier dividends included in the AS being subjected to income tax.

To give effect to the exemption accorded to single tier dividend, single tier dividends included in the AS that is transferred from the LF to SF should be exempted from income tax. The method of computing the exemption of single tier dividend income from AS transferred to SF is provided by the Guidelines as follows:

Determination of the amount of single tier dividend to be exempted:

The amount of AS transferred from the LF to the SF consists of AS for the current year as well as prior years.  To exclude single-tier dividend from AS transferred to SH, the net single-tier dividends should be taken into account.

(i)        To determine the amount of net single tier dividend:

A	x	C   =	D
B

Where       D = net single-tier dividend income

A = AS for the current year

B = total of AS for the current year and AS at the beginning of the year.

C = portion of income from single tier dividend

(ii)     To calculate the amount of net single tier dividend income that is transferred to SF:

E	x	D   =	G
F

Where       G = amount of single tier dividend income transferred to SF

E = AS transferred

F = total of AS transferred and bonus allocated to policyholders

D = net single tier dividend income

Computation of AS transferred to SF that is subject to income tax:

(a)    Calculation of AS from the Life Fund	RM
Gross premium	XX
Deduct: Reinsurance	(XX)
Net Premium	XX
Deduct: Claims/ policy benefits paid and payable upon death/ maturity/ surrender/ cash bonus & etc.	(XX)
	XX
Deduct/ Add: (Increase)/ decrease in reserves (determined by actuary)	(XX)
Agency expenses and commissions	(XX)
Management expenses	(XX)
	XX
Net investment income	XX
Net income from other operations	XX
Surplus before tax	XX
Deduct: Tax	(XX)
Surplus for the year/ Actuarial Surplus (AS)	XX  (A)

(b)  Computation of AS that is transferred to shareholders’ fund	RM
AS not appropriated at the beginning of the year	XX   (B)
Add: AS in the current year	XX   (B)
Deduct: Bonus distributed to Policyholders	(XX)   (F)
Deduct/Add:  Transferred (to)/ from income statement (AS transferred to shareholders’ fund)	(XX)   (E) & (F)
Surplus not appropriated at the end of the year	XX

(c) Computation of net income from investment (consisting of single tier dividends):	RM
Interest	XX
Dividends                         XX  Single tier dividends        XX (C)	XX
Rent	XX
Deduct: Investment expenses	(XX)
Net investment	XX

(d) Computation of AS transferred to SF that is subject to income tax	RM
AS transferred	XX   (E)
Deduct: Amount of single tier dividend income transferred to shareholders’ fund	(XX)  (G)
Income subject to income tax (E – G)	XX

The computation of the amount deducted in respect of net single tier dividend income and the supporting documents must be prepared and shown in the tax computation by the company.  Relevant supporting documents must be kept for the purpose of audit by the IRB.

An example of the computation of the amount of AS transferred to SF which is subject to income tax is shown in the Guidelines.

Members may also view the Guidelines from the IRB website.

Limited Liability Partnership (LLP)

The Finance (No.2) Bill 2012 (the Bill) proposes to amend the definition of ‘person’ in the Income Tax Act, 1967 (ITA) to include an LLP. An LLP is defined in the Bill as “a limited liability partnership registered under section 11 of the Limited Liability Partnerships Act 2012 (LLP Act) or a foreign limited liability partnership registered under section 45 of the LLP Act.

An LLP is a hybrid of a corporation and a partnership. The following are some salient features of an LLP as provided in the LLP Act:

1. Legal status (Section 3)

An LLP is a body corporate which has a legal personality separate from that of its partners and has perpetual succession; and its existence, rights and liabilities are not affected by any change in its partners.

It has unlimited capacity and is capable of -

· Suing and being sued;

· Acquiring, owning, holding and developing or disposing of properties;

· Doing and suffering such other acts and things as bodies corporate may lawfully do and suffer.



2. Formation & Registration (Sections 6, 10-12, 45)

Any two or more persons (individuals or bodies corporate) associated for carrying on any lawful business with a view to profit may form an LLP in accordance with the terms of the LLP agreement.

Application for registration is made to the Registrar of LLP, who is also the Chief Executive Officer of the Companies Commission of Malaysia (CCM). Upon application and payment of the prescribed fee, the Registrar may issue to that LLP a certificate of registration, or he may refuse to register the LLP for specified reasons [section 12(1)]. The name of an LLP shall end with the words “Perkongsian Liabiliti Terhad” or “PLT”.



3. Liability of Partners (Sections 21-23)

A partner is not personally liable for an obligation of the LLP (arising in contract, tort or otherwise) solely by reason of being a partner of the LLP. This does not absolve him from liabilities to a 3rd party arising from his wrongful act or omission in the course of business of the LLP or with its authority. An LLP is liable to the same extent as the partner and the liabilities shall be borne out of the property of the LLP.

Every partner of an LLP is regarded as the agent of the LLP and the LLP is bound by anything done by a partner in dealing with a third party, unless

(i) the partner is acting without authority, and

(ii) the third party with whom the partner is dealing

(a) knows that the partner has no authority or

(b) does not know that he is a partner of the LLP.



4. Cessation of Partnership Interest (Section 24)

A partner of an LLP may cease to be a partner –

· in accordance with the LLP agreement; or

· in the absence of such an agreement, by that partner giving 30 days’ notice of his/her intention to retire as partner to the other partners.



5. Appointment of Compliance Officer (Sections 27 and 46)

An LLP shall appoint at least one compliance officer from amongst its partners, or persons qualified to act as secretaries under the Companies Act, 1965 who is a citizen or permanent resident of Malaysia and ordinarily resides in Malaysia.

The compliance officer is responsible for complying with the requirements to:

· Register any changes in the registered particulars of the LLP;

· Keep and maintain documents which must be kept at the registered office of the LLP;

· Ensure that the name and registration number of the LLP is displayed outside its registered office.



6. Partners’ Annual Declaration and Accounts (Sections 46, 68-69)

A declaration by any 2 partners, stating their opinion on whether or not it appears that the LLP will be able to pay its debts as they become due in the normal course of business, must be lodged with the Registrar within 90 days of the end of the financial year.

An LLP must keep such accounting and other records as is sufficient to explain its financial position and enable accounts to be prepared which give a true and fair view of the state of affairs of the LLP.



7. Dissolution and Striking Off (Sections 47-51)

An LLP may be dissolved:

· By way of Court Order; or

· Where the LLP has ceased to operate and has discharged all debts and liabilities, by making an application to the Registrar (by a partner) for voluntary dissolution after compliance with requirements set out in section 50(3).

The Registrar may serve notice on the LLP to strike off its name from the register for reasons specified in section 51(1), which includes the circumstance that the LLP is not carrying on business or is not in operation, or it has contravened the LLP Act.

A foreign LLP shall lodge with the Registrar of LLP a notice of the fact that it has ceased to have a place of business or to carry on business in Malaysia within 7 days after the date of cessation.



8. LLP for Professional Practice (Section 8)

An LLP may be formed for the purpose of carrying on a professional practice, which partners must consist of natural persons practising the same profession and no one else, and have in force professional indemnity insurance approved by the registrar, or approved by the registrar in consultation with the relevant governing body of the profession.

Professional Indemnity Insurance (PII)

Pursuant to Rule 16 of the CTIM Rules And Regulations (On Professional Conduct And Ethics) revised on 23 February 2012, the Institute has adopted the Recommended Practice Guidance Note No. 2 --- Professional Indemnity Insurance (PII) as recommended by the Public Practice Committee. The Institute has secured a proposal from Marsh Insurance Brokers (Malaysia) Sdn Bhd (MARSH) for CTIM tax practitioners to be covered by PII. The Proposal and the QBE PII policy from the insurer, QBE Insurance (Malaysia) Berhad, are attached for your attention.

The Institute recommends that all CTIM tax practitioners should have PII coverage.

Please note that the CTIM is not involved in the PII contract between the contracting parties and is only providing a service to our members by arranging a PII cover specifically for tax practitioners for their use. Members are free to obtain their PII insurance from any other insurer (if any) in the market.

Please be guided accordingly.

2013 Budget --- The President’s Message

Dear Members

The 2013 Budget was announced on 28 September 2012. It was a Budget focussed on both long-term growth of the economy and the lower-income groups.

Having reviewed the Budget proposals and the Finance (No.2) Bill 2012 (The Bill), I wish to highlight to you a few important areas which may impact taxpayers and they are summarised as follows:

Limited Liability Partnership (LLP)

CTIM, together with the other professional bodies, has been actively involved in the past year, submitting our suggestions on the tax treatment of LLP. Our proposals were to offer the taxpayers an irrevocable choice of taxing LLP either as a partnership or a company.

The 2013 Budget has stipulated that it will be taxed as a corporate entity. The Institute will issue a separate e-CTIM highlighting the key features of an LLP as stated in the Limited Liability Partnerships Act 2012 (Act 743).

Issues on this subject that remain unresolved are:
(i) the real property gains tax and stamp duty implications on the transfer of assets and liabilities upon the conversion into an LLP
(ii) Tax treatment on the transfer of the balance sheet items such as stock-in-trade, debtors, creditors, etc.

The Finance (No.2) Bill 2012 is silent on these areas and there will be tax costs associated with such transfer. If the authority wishes to encourage the conversion of partnerships and companies to LLPs, then I believe tax neutrality should be maintained at the point of the transfer. In this respect, CTIM will take up these issues from the income tax, real property gains tax and stamp duty angles with the Ministry of Finance (MOF).


Business Trust (BT)

Business trust is a new business vehicle established under Capital Market and Services Act 2007 (CMSA). It adopts the unit trust structure as a basis for its business and is governed by Section 256K to 256ZP of CMSA. The introduction of the BT will broaden the range of investment products and vehicles in the Malaysia capital market.

Since this is a new business vehicle in Malaysia, CTIM will shortly send a separate e-CTIM outlining the basic information and operation of a BT. You may also visit the Securities Commission website to search for further information.


Withholding Tax (WHT) – New Section 109H – Appeal by Payer

The Bill now allows the payer to appeal on the Sections 109, 109B and 109F withholding taxes. However, the right of appeal will be denied to the payer if

(i) An appeal has been filed with the Special Commissioners of Income Tax by the non-resident recipient, to whom the payer was liable to make the payment; or
(ii) Such payment to the non-resident is disallowed as a deduction under S.39 of the Income Tax Act 1967 (ITA), or
(iii) The amount due has not been paid to the Director General of Inland Revenue

An issue will arise here if the payer legitimately believes (and has legal ground to do so) that the payer does not need to withhold the taxes but in a later tax audit, the tax auditors take a different position and disallow the payment to the non-resident under S. 39 and further demand the payment of the withholding tax. In such an event, under the proposed changes in the Bill, the payer will be denied the right to appeal.

This position is completely contrary to the basic principle that a taxpayer cannot be denied his right of appeal.

Again, this is a matter that needs to be brought to the attention of MOF



Change in Tax Treatment of Interest Income

The treatment of interest as a business income under S.4(a) has now become extremely restrictive under the New Section 4B. The Bill seeks to confine interest income as business source if the amended S.24(5) applies, i.e. interest arising from a business of lending money and the business is licensed under any written law.

A strict interpretation appears to exclude interest income e.g. overdue interest payment from trade debtors, etc. as business income. The decisions in the Malaysian Courts such as that on Pan Century Edible Oils may no longer apply.

This treatment is not conducive to encouraging the use of funds in carrying out business activities and this treatment would likely result in increasing the cost of doing business in Malaysia.



Treasury Shares (TS)

The Bill proposes that a deduction be given to the company having a business income on the cost of acquiring the treasury shares which are to be transferred to its employees under the employee-based remuneration scheme. The details of the proposal are available in the Bill.

Members should be aware of the following issues:

(i) As defined in the Bill, “treasury share” means a share of a company that was previously issued but was repurchased, redeemed or otherwise acquired by such company and not cancelled. It does not apply to new issue of shares to employees.
(ii) Significant efforts in keeping track of costs of acquisition on a First In First Out (FIFO) basis will be required for many larger organizations, where the shares are acquired over a period of time and subsequently transferred to the employees at different points in time.

This is a potential issue which could lead to disputes between the taxpayer and the tax auditors from the Inland Revenue Board in future.

Again CTIM will raise this issue to the MOF.



Assets Held for Sale (AHFS)

The Bill proposes that assets classified as AHFS shall be deemed to have ceased to be used for business for Schedule 3 of ITA purposes. Consequently, such classification will lead to a deemed disposal and computation of balancing allowance/balancing charge has to be done.

The legislation is silent on what happens if such as asset is then reclassified (back) as an asset that is being used again: will the balancing allowance/balancing charge calculated be reversed? The mechanism for this reversal is missing.

Again CTIM will raise this issue to the MOF

Meanwhile, we would be pleased if you could also forward your suggestions, comments and feedback on the 2013 Budget proposals to the Institute as soon as possible. The Technical Committees (both direct tax and indirect tax) will review all suggestions, comments and proposals and where appropriate, include them in the Memorandum for submission to the Ministry of Finance, Inland Revenue Board and Royal Malaysian Customs.

Please submit all comments and proposals to technical@ctim.org.my or fax to 03-2162 8990.

IRB Media Release IRB is Not Involved in the Payment of the RM500 Cash Assistance [BR1M]

Further to our e-CTIM No.10/2012, the Inland Revenue Board (IRB) has issued a media release on 19 January 2012 to inform the public that the IRB does not dispense the “cash assistance” under the Bantuan Rakyat 1Malaysia [BR1M] Programme.

The IRB has provided the following clarification:

i)              It has been designated with the responsibility of assisting in the implementation of the BR1M   programme, in terms of the acceptance and registration of all BR1M application forms.

ii)                     The payment mechanism is the responsibility of other parties, as follows:-

a)      for the states of Selangor, Pulau Pinang, Kedah and Kelantan, the payment mechanism will be managed by the respective Directors of Federal Development Department [Jabatan Pembangunan Persekutuan] (JPP); and

b)    for all other states, it is handled by the respective State Government Secretaries [Setiausaha Kerajaan Negeri] (SUK).

iii)           The SUK and JPP will issue a letter of notification of the status, in respect of each BR1M application (including the unsuccessful applications).

iv)           For applicants who qualify for the assistance, the arrangement for the delivery of the cash vouchers will be made by the offices of the relevant Parliamentary Constituencies or State Assemblymen, as stated in the notification letter.

In view of the above, the public is advised not to go to the IRB Branch offices for BRIM purposes.

However, other than calling the MOF hotline 1-800-222-500, the public may still call the IRB Customer Service Centre at 1-300-88-3010 to check up on the status of their BR1M applications.

In addition to the above, MOF has also issued the Frequently Asked Questions on BR1M. You may view the information provided at the website of the Institute.