Thin Capitalisation Rules --- Deferment to 31 December 2015

Please be informed that the Tax Analysis Division of Ministry of Finance (MoF) has notified the Institute that the implementation of Thin Capitalisation Rules has been deferred to 31 December 2015.

A copy of the MoF letter on Deferment of Thin Capitalisation Rules dated 11 December 2012 has been uploaded to the Institute's website at Members Only > Recent Updates.

Thin Capitalisation Rules --- Deferment to 31 December 2015

Please be informed that the Tax Analysis Division of Ministry of Finance (MoF) has notified the Institute that the implementation of Thin Capitalisation Rules has been deferred to 31 December 2015.

A copy of the MoF letter on Deferment of Thin Capitalisation Rules dated 11 December 2012 has been uploaded to the Institute抯 website at Members Only > Recent Updates.

PUBLIC RULING NO. 9/2012 ?TAXATION OF REAL ESTATE INVESTMENT TRUSTS / PROPERTY TRUST FUNDS

The Inland Revenue Board (IRB) issued the above Public Ruling (PR) on 26 November 2012. This Ruling replaces the Guidelines on Real Estate Investment Trusts or Property Trust Funds (REITs/PTF) dated 29 June 2005 issued by the IRB.

Objective

The objective of this Ruling is to explain the tax treatment accorded to approved REITs/PTF in Malaysia.

Some of the salient points made in the Ruling are highlighted below:

Basis of assessment

The basis period of a REIT/PTF is determined in accordance with provisions of section 21A of the Income Tax Act 1967 (ITA), [except for subsection 21A(5)]. The basis year for a year of assessment (YA) or the financial accounting period ending on a day other than 31 December is the basis period of the REIT/PTF for that year of assessment.

Special tax treatment

Prior to YA 2005, REITs/PTF are taxed in accordance with provisions of the ITA applicable to unit trusts (sections 61(1), 63A and 63B). 

With effect from YA 2005, section 63C is applicable. Under this section ?

• Rental income received by the REIT/PTF from investments in real property is treated as business income.
• Notwithstanding the above, the amount of deductible expenses is restricted to the gross income from the rental source.  Any excess expenditure is not allowed against other sources of income, or to be carried forward for deduction in subsequent years of assessment.  No deduction of expenses is allowed if a source does not produce any income. (Refer Example 8 and 9 in the PR.)
• Capital allowance (under Schedule 3 of the ITA) is allowed to be deducted in ascertaining statutory income from rental but the amount is restricted to adjusted income of the rental source for that YA, and any excess capital allowance is not allowed to be carried forward to the following YA. (Refer Example 7 in the PR.)

The following points pertaining to taxation of income of REITs/PTF are to be noted:

• Rental income from all rental properties is treated as a single source of income.
• Section 33(1) of the ITA is applicable in determining allowable expenses. An expense which is deductible under that section is manager抯 remuneration, but trustee抯 fee is not regarded as deductible.
• A special deduction from the rental source is allowed under the Income Tax (Deduction for Establishment Expenditure of Real Estate Investment Trust or Property Trust Fund) Rules 2006, in respect of legal, valuation and consultancy fees for establishing REITs/PTF which were incurred prior to approval by the Securities Commission.
• A REIT/PTF deriving rental income from a building that is used (by the tenant) as an industrial building may claim industrial building allowance (IBA) against adjusted income from that rental source.
• From YA 2008, a company which disposes of an industrial building on which it has claimed (or should have claimed) IBA, to a REIT/PTF, is deemed to have disposed of that building for a sum equal to the residual expenditure of the building on the first day of the company抯 final period, which amount is deemed to be the qualifying expenditure (QE) of the acquirer.  As such, the disposer is not subject to any balancing charge or allowance, while the acquirer (REITs/PTF) is eligible to claim IBA on the deemed QE. (Refer Example 3 in the PR.)
• Under transitional provisions, unabsorbed losses and capital allowances ascertained prior to YA 2005 are allowable against income for YA 2005 and subsequent years of assessment. (Refer Example 6 in the PR.)

Exemption of income of REITs/PTF

Prior to YA 2007 ?REITs/PTF are tax-exempt on their total income for a YA on an amount equal to the amount distributed to unit holders in the basis period for a YA. The amount not distributed is subject to tax at the prevailing corporate tax rate.

From YA 2007 ?REITs/PTF are fully exempt from tax for a YA if they distribute to their unit holders 90% or more of their total income in the basis period for that YA. [Section 61A(1)]

(Refer Examples 11 to 13 of the PR.)

Interest, dividends and other exempt income received by REITs/PTF

A list of the types of interest received by REITs/PTF which are tax-exempt is given in paragraph 9.3 of the PR. 

Taxable dividend income forms part of the total income of REITs/PTF.  When the total income of the REIT/PTF is distributed to the unit holder, the distribution is subject to tax at the unit holder level. 

Exempt income received by REITs/PTF (e.g. capital gains and exempt interest) is not included in computing the total income of REITs/PTF.

(Refer to Examples 14 to 17 for illustrations of the tax treatment on various types of income received by REITs/PTF.)

Distribution of REITs/PTF income to unit holders

Grace period ?If the REIT/PTF intends to distribute at least 90% of its total income but falls short of that percentage at the end of the basis period, a grace period of 2 months from the closing of its accounts is given for the REIT/PTF to distribute the balance so as to qualify for tax exemption at the REITs/PTF level.

Withholding tax ?Withholding tax must be deducted under section 109D when distribution of income is made to unit holders by REITs/PTF which are exempt under section 61A of the ITA. The rates of withholding tax that are applicable to various classes of unit holders are found in paragraph 11.4 of the PR.

Information to be provided ?Details that must be provided on the distribution voucher are listed in paragraph 11.6 of the PR.  The REITs/PTF must also provide information relating to unit holders to the IRB.  The list of required information is given in paragraph 11.7.

Payment of withholding tax and penalty for failure to pay

The rules relating to payment of withholding tax and administrative procedures for making payment are explained in paragraph 12 of the PR.

Paragraph 13 states that the penalty for failure to pay the amount of withholding tax due under subsection 109D(2) of the ITA is an increase of 10% of the amount which the payer had failed to pay, which amount, together with the amount which the payer had failed to pay,  becomes payable immediately to the Director General of Inland Revenue.

A specimen sample of a REITs/PTF distribution voucher is found in Appendix 1.

Members may refer to the full text of PR 9/2012 at the CTIM website or the IRB website. 

TAX INCENTIVES FOR PROFIT-ORIENTED PRIVATE SCHOOLS AND INTERNATIONAL SCHOOLS - ISSUANCE OF EXEMPTION ORDERS

The following statutory orders were recently gazetted:

P.U.(A)	Order	Effective from
420	Income Tax (Exemption) (No.7) Order 2012	8 October 2011
421	Income Tax (Exemption) (No.8) Order 2012	8 October 2011
422	Income Tax Exemption) (No.9) Order 2012	14 July 2010

Background

Budget 2012 contained a proposal to grant the following tax incentives for profit-oriented private schools and international schools:

• Private schools:

(i)   70% income tax exemption for a period of 5 years: or

(ii)  Investment tax allowance (ITA) of 100% on qualifying capital expenditure (QCE) incurred within a period of 5 years to be set off against a maximum of 70% of statutory income (SI).

• International schools

(i)   70% income tax exemption for a period of 5 years

(Legislation (prior to issuance of above Orders) allows such schools to enjoy ITA of 100% of QCE to be set off against a maximum of 70% of SI for 5 years.)

The above orders give legal effect to these proposals.

The following are some salient features of the respective Exemption Orders.

Income Tax (Exemption) (No.7) Order 2012 and

Income Tax (Exemption) (No.9) Order 2012 

Exemption

The above orders grant exemption from payment of income tax in a basis period for a year of assessment to a qualifying person (QP), on the statutory income derived from a business of private school in Malaysia, in an amount which is equivalent to 100% of QCE incurred in that basis period, subject to a maximum of 70% of SI.  The effect of the exemption is similar to the granting of ITA, as proposed under Budget 2012. 

The first Order (No.7) applies to private schools and the latter (No. 9) applies to international schools. The exemption is granted for a period of 5 years commencing from a date to be determined by the Malaysian Investment Development Authority under both Orders.

Qualifying person

The following table lists the conditions to be a QP under the respective Orders.

A 搎ualifying person?means:
(No.7) Order	(No. 9) Order
(a)  A society established under the Societies Act 1966 prior to 8 Oct 2011 or a company incorporated under the Companies Act 1965.	A society established under the Societies Act 1966 prior to 14 July 2010 or a company incorporated under the Companies Act 1965.
(b)  Resident in Malaysia
(c)  Registered with the Ministry of Education (MOE) and has complied with terms and regulations as determined by that Ministry under the Education Act 1996 to carry on the business of private school;	Registered with the MOE and has complied with terms and regulations as determined by that Ministry under the Education Act 1996 to carry on the business of international school;
(d) Approved by the Minister

Definitions

?SPAN style="FONT: 7pt 'Times New Roman'">         The following terms are defined in each respective Order (please refer to the full text for definitions).

(No.7) Order	(No 9) Order
Qualifying capital expenditure	Qualifying capital expenditure
Private school	International School

?SPAN style="FONT: 7pt 'Times New Roman'">         The terms 搃ncurred? 揗alaysian Industrial Development Authority? 損re-school education? and 搑elated company?are similarly defined in both Orders. (Please refer to full text.)

Withdrawal of tax Exemption

Under both Orders, the exemption will be withdrawn if the QP disposes of the asset within 2 years from the date of acquisition of the asset.

Application

(No.7) Order	(No 9) Order
The Order applies to a QP who has made an application to MIDA :
between 8 October 2011 and 31 December 2015; and	between 14 July 2010 and 31 December 2015; and
has not commenced the business of private school prior to the above application	incurred QCE from the year of assessment 2010

Non-application

It is provided under both Orders, that the respective Order would not apply for a year of assessment if the QP has, in that year of assessment:

?SPAN style="FONT: 7pt 'Times New Roman'">         Made any claims for Reinvestment allowance, or for any deductions under any Rules made under  section 154 of the Income Tax Act 1967 (ITA) (except for Schedule 3 allowances);

?SPAN style="FONT: 7pt 'Times New Roman'">         Been granted any incentive under the Promotion of Investments Act 1986, or any exemption under section 127 of the ITA; or

?SPAN style="FONT: 7pt 'Times New Roman'">         Fails to meet any conditions specified by the Minister of Finance in his letter of approval.

Please read the full text of the Rules by clicking on the following link.

Income Tax (Exemption) (No.8) Order 2012  

Exemption

This Order grants income tax exemption to a QP for a year of assessment on the statutory income derived from a business of private school or international school in Malaysia. The amount exempted is 70% of statutory income, which must be reduced:

(i) firstly, by current year adjusted loss from a business/es other than the business of private or international school in Malaysia; and

(ii)  next, by any unabsorbed loss or current year adjusted loss from the business of private school or international school in Malaysia exempted under this Order.

揚rivate school?and 搃nternational school?are among the terms which are defined in the Order.

Exempt period

The exemption is granted for a period of 5 years, commencing from a date to be determined by MIDA.

Qualifying person

The conditions for a qualifying person are the same as for Orders No. 7 and 9, except for item (c) which should read:

搑egistered with the Ministry of Education Malaysia and has complied with terms and regulations as determined by that Ministry under the Education Act 1996 to carry on the business of a private school or international school on or after 8 October 2011?

Adjusted losses

The Order sets out the rules relating to adjusted loss (current year loss and unabsorbed loss brought forward) in the computation of exempt statutory income of the business of private schools or international schools.  Among these are the following:

?SPAN style="FONT: 7pt 'Times New Roman'">         Any losses (current year and brought forward) which are utilized to reduce the statutory income of the business of private school or international school should not be taken into account for the purpose of subsections 43(2) and 44(2) of the ITA

?SPAN style="FONT: 7pt 'Times New Roman'">         Any current year loss or unabsorbed loss from the business of private school or international school that are not utilized to reduce the statutory income during the exempt period is carried forward for utilization in the basis period following cessation of the exempt period, in accordance with subsections 43(2) and 44(2) of the ITA, and in subsequent basis periods.

Application

The Order applies to a QP who has made an application to MIDA on or after 8 October 2011 but not later than 31 December 2015, and who has not commenced the business of private school or international school prior to the application. 

Non-application

The circumstances listed in this Order under which the Order is not applicable are the same as those listed for Orders No. 7 and No.9. (Refer above.)

Please read the full text of the Rules by clicking on the following link.

INCOME TAX (DEDUCTION FOR CONTRIBUTION BY LICENSED INSURERS TO THE MALAYSIAN MOTOR INSURANCE POOL) RULES 2012 [P.U.(A) 419/2012]

The above rules were gazetted on 28 November 2012 and are deemed to have come into effect from the year of assessment 2011 until the year of assessment 2015.

Deduction for contribution to Malaysian Motor Insurance Pool

The Rules provide for a deduction in ascertaining the adjusted income of the general business of a licensed insurer for the basis period for a year of assessment, of an amount equal to twice the amount of contribution made by that insurer to the Malaysian Motor Insurance Pool in that basis period.

Definitions

A licensed insurer is defined under the Rules as an insurer licensed under the Insurance Act 1996 [Act 553] to carry on general business as referred to in paragraph 4(1)(b) of the Insurance Act.

Malaysian Motor Insurance Pool means a high-risk insurance pool established collectively by licensed insurers to provide insurance for risks in respect of motor vehicles which are unable to obtain such insurance elsewhere.

Contribution means the payment to Malaysian Motor Insurance Pool by a licensed insurer in respect of the insurer抯 share of the losses suffered by the Malaysian Motor Insurance Pool.

Members may read the full text of the Rules at the Official Portal of e-Federal Gazette.

MALAYSIAN TAX RESEARCH FOUNDATION

The Chartered Tax Institute of Malaysia (CTIM) has promoted the formation of a body corporate on 11 June 2011 under the provisions of the Trustees (Incorporation) Act 1952, called the Malaysian Tax Research Foundation (Foundation). The Foundation is a separate and independent body from CTIM.  The Inland Revenue Board has given Section 44 (6) tax exemption for donations received by the Foundation.

The Foundation is a trust body specifically created for the promotion, encouragement and advancement of tax research in Malaysia and is currently the only such body in Malaysia. The objects of the Foundation are as follows:

1. To put Malaysia in the forefront of taxation-related studies by promoting the interest in tax research amongst Malaysians by providing assistance in tax related research work
2. To bridge the gap of understanding of taxation laws and the complying environment towards enhancing economic development of Malaysia
3. To bridge the divergence between taxation law and accounting standards
4. To undertake research on the impact of any proposals for changes in tax legislation and tax administration
5. To provide scholarship for those undertaking tax research in universities
6. To encourage and promote the advancement of knowledge in taxation
7. To carry out such other legally charitable purposes for the advancement of education and training in the Profession
8. To cooperate with other bodies and institutions with similar aims and objectives
9. To publish and disseminate literature in advancement of taxation

As a start, the Trustees have considered several broad areas of research as follows:

1. A survey of tax research in Malaysia and suggestions for future direction
2. Identifying the significant areas of concealed income and determining strategies to boost tax revenue
3. Establishing the size of the hidden economy

Should you wish to donate a monetary contribution or provide ideas for research proposals, please contact the Foundation secretariat at the offices of the Chartered Tax Institute of Malaysia at Unit B-13-2, Block B, 13th Floor, Megan Avenue 11, No 12 Jalan Yap Kwan Seng, 50450 Kuala Lumpur Tel: +603-21628989, Fax +603-21628990, email: secretariat@ctim.org.my

IRB Media Release – Re-Branding of Inland Revenue Board’s Contact Centre Toll- Free Line

Please be informed that the toll-free line 1-300-88-3010 of the Inland Revenue Board (IRB) has been replaced by 1-800-88-LHDN (5436). The toll-free line is for general inquiries about income tax matters.

With regard to any assistance or clarification on the 1 Malaysia People’s Aid (BR1M), members may contact 1-800-88-BR1M (1-800-88-2716). The BR1M_2.0 Form is linked for your convenience. For more information, members may visit https://ebr1m.hasil.gov.my .

The IRB Media Release may be viewed at the CTIM website or the IRB website.