TAR UC (FAFB) – RAC Year 3 (ACADEMIC YEAR 2020/2021)

BBFT3014/BBFT3013 ADVANCED TAXATION

Tutorial 1: Cross Border Activities & Transactions

Suggested answer to question 1

From: Mr. Au Yong (Tax Director), RAC Tax Services Sdn. Bhd.

To: The Board of Directors

MyJew Pte. Ltd.

Date: Current date

Report On the Tax Implications Of Options of Business Expansion

We understand that MyJew Pte. Ltd. (PSPL) plans to expand business to Malaysia. We would
like to give you this report which covers the respective tax implications related to the options
under consideration as follows:

(a)(i) Setting up a branch in Kuala Lumpur

The branch in Kuala Lumpur would constitute a ‘permanent establishment’ (PE).
A PE means a ‘distinct site’ or ‘fixed place of business’ in which business is wholly or
partly carried on.

MyJew Pte. Ltd. (MJPL) would be regarded as trading in Malaysia and has a business
source in Malaysia. The business profit of the PE is deemed to be derived from
Malaysia and is liable to income tax at 24% (MJPL is a non-resident company) in
Malaysia.

(ii) Setting up a subsidiary company

MJPL will not be having a permanent establishment in Malaysia if a subsidiary
company is set up in Malaysia. For the subsidiary company in Malaysia is a chargeable
person.

When its Malaysian subsidiary company buys jewelries from MJPL and subsequently
sell them to Malaysian customers in Malaysia, MJPL would be regarded as trading with
Malaysia. MJPL will not be subject to tax in Malaysia in respect of the business profit
made when selling jewelries to its subsidiary company in Malaysia. The business profit
will not be regarded as derived from Malaysia.

When MJPL sells jewelries to its Malaysian subsidiary company, each transaction must
be at the arm’s length price (market value) as they are related parties.

(b) The general tax treatments of a subsidiary company

The subsidiary company which is set up will be a chargeable person. It is chargeable to
tax on the profit of the business carried on in Malaysia.

It will be resident in Malaysia for a year of assessment (YA) if its management and
control of its business are exercised in Malaysia at any time in the basis year for the
relevant YA.
BBFT3014/BBFT3013 ADVANCED TAXATION

Suggested answer to question 1 (cont’d)

If the subsidiary company is resident in Malaysia, its chargeable income will be taxed
at 24% as its holding company has a paid-up ordinary share capital of more than
RM2.5 million (actual: RM10 million) on the first day of the basis period for the year
of assessment 2020. The preferential rate of 17% cannot be applied in respect of the
first RM600,000 of its chargeable income. Although, its paid-up capital is not more
than RM2.5 million and with a projected gross business income of not more than
RM50 million in the basis period for the year of assessment. The subsidiary company
will be under the single tier system and any dividend distributed by it would be tax-
exempt.

If the subsidiary company is not resident in Malaysia, the rate of tax is flat at 24%.

(c) Differences in the tax treatments – resident company and non-resident company
There are these differences in the tax treatments in respect of a resident or non-resident
subsidiary company are as follows:

1. For a resident subsidiary company, any interest received from a bank in

Malaysia will be subject to tax for a resident subsidiary company. Such interest
will be exempt when received by a non-resident company.

2. Special classes of income derived from Malaysia received by a resident

company is not subject to a withholding tax. Such an income received by
a non-resident company is subject to a withholding tax (of 10%).

3. The employment income of a director of a resident company is deemed derived

from Malaysia. Such employment income is not deemed derived from
Malaysia in the case of a non-resident company.

(d) Business profit not subject to Malaysian tax

Your company can avoid having a PE by setting up an office in Kuala Lumpur merely
for display of jewelries and provision of related product information. Malaysian
customers who wish to buy jewelries produced by your company can contact your sale
office in Australia which will make arrangement to deliver the jewelries to them in
Malaysia.

Your company which is non-resident in Malaysia will not be exposed to Malaysian tax
if it does not have a PE in Malaysia. It will be treated as trading with Malaysia and not
trading in Malaysia. It will not have a business source in Malaysia. Any business profit
arising from selling jewelries to Malaysian customers will not be deemed derived from
Malaysia, hence not taxable in Malaysia.

- End of report -
BBFT3014/BBFT 3013 ADVANCED TAXATION

Suggested answer to question 1 (cont’d)

Take note on the format of the report:

1. There is no closing salutation for a Report. It should not with ‘Yours faithfully’
which is then followed by a signature.

2. If there is any detailed calculation(s), it should by shown as an Appendix.

Suggested answer to question 2

(a) The branch set up by MyFragrance Sdn. Bhd. (MFSB) in A-Land constitutes
a permanent establishment in A-Land. MFSB is trading in A-Land and had
a business source in A-Land. The business profit of that branch is deemed derived
from A-Land / not derived from Malaysia under the usual principle established
under the double tax agreement (DTA) between Malaysia and A-Land.

The portion (80%) of the profit after tax (suffered in A-Land) will be exempt for
the year of assessment 2020 as it was received in Malaysia (on 15.6.2020) in its
basis period ending 30.6.2020.

The exempt income is (RM4,000,000 x 75% = 3,000,000) x 80% = RM2,400,000.

It can be credited to an exempt income account of MFSB and exempt dividends
can be distributed from it. The exemption of the foreign income is under Para. 28,
Sch. 6 can be given to MFSB as it is a resident company and it is not carrying on
any business involving a specialized industry (banking, insurance, air or sea
transport).

MFSB cannot claim a bilateral credit in respect of the tax suffered in A-Land
because the foreign branch profit received in Malaysia is exempt under Para. 28
Sch. 6.

(b) The subsidiary company in A-Land would be a chargeable person. MFSB would
not have a permanent establishment in A-Land. The sale of the perfumes by
MFSB to its subsidiary company would be the gross income of the business
carried on in Malaysia. MFSB would be regarded as trading with A-Land.

The business profit of the subsidiary company in A-Land can be distributed as

dividend(s) to MFSB in the basis period for the same/later year of assessment. It
would tax exempt under Para. 28 Sch. 6 when its received in Malaysia. It can be
credited to an exempt income account of MFSB and exempt dividends can be
distributed from it.
BBFT3014/BBFT3013 ADVANCED TAXATION

Suggested answer to question 3

(a) (i) If the royalty is attributed to the business carried on by the PE in Malaysia, it will be
taxed as income (of business) carried on in Malaysia by the permanent establishment.
It will be taxed at 24% on its chargeable income.

The royalty will not be subject to withholding tax. The payer is not required to deduct
withholding tax under s109.

If the royalty (derived from Malaysia) is not attributed to the business carried on by
the PE in Malaysia, it will be subject to withholding tax at 10%. The payer is required to
deduct withholding tax under s109 when making or crediting payment.

(ii) Under the double tax agreement, the royalty may be exempted from withholding tax or
subject to a modified rate of withholding tax which is lower than the domestic ITA, 1967.
The rate of tax stipulated in the DTA will supersede/override the rate stipulated in
the domestic ITA, 1967.

(b) For a local company with business income to be given a bilateral credit, the conditions to be
fulfilled are as follows:

1. The company is resident in Malaysia in the basis year for the year of assessment 2020;

2. It has income which suffers double taxation* which means that income is taxed in
Malaysia in the year of assessment 2020 and taxed outside Malaysia;

3. There is a double tax treaty between Malaysia and the foreign country (country of source)
concerned; and

4. The claim is made within two years after the year of assessment 2020 which would mean
not later than 31.12.2022.

* Note: This ‘double taxation’ of income can occur if it is a resident company which carries on
a specialized business (banking, insurance, sea or air transport) which is taxed on
wherever derived basis. Besides, with such a specialized business, its other foreign
business income and non-business income will not be exempt when received in /remitted
into Malaysia (taxable on remittance basis);

(c) Differences:

No. Bilateral credit Unilateral credit

1. There is a double tax agreement (DTA) There is no DTA between Malaysia and
between Malaysia and the country of source the country of source where income is
where income is derived from. derived from.

2. The bilateral credit is the lower of - The unilateral credit is the lower of -

Malaysian tax chargeable on foreign income, Malaysian tax chargeable on foreign income,
or the foreign tax. or half of the foreign tax.
BBFT3014/BBFT3013 ADVANCED TAXATION

Suggested answer to question 4

For the Japanese company to avoid having a PE in Malaysia, the agent’s role must be restricted to
just taking orders without having authority to accept them (i.e. the agent has no authority to
conclude contracts on behalf of the Japanese company).

Suggested answer to question 5

Smart Tax Consultancy Sdn. Bhd.

No. 1, Jalan Cerdik
42000 Petaling Jaya
Selangor

Current date

Mr. Kim Huat,

Director,
MyHealth Sdn. Bhd.
No. 8, Jalan Gembira
Kawasan Perindustrian
40000 Shah Alam, Selangor

Dear Sir,

Business Options and Tax Issues

We are glad that your company wishes to venture the Malaysian business into C-Land.
We would like to bring your attention on the following issues raised by the company
and our tax advices are as follows:

(a) Permanent Establishment (PE)

PE means a fixed place of business in which the business is wholly or partly carried
on.

It includes:

(a) A place of management;

(b) A branch;
(c) An office;
(d) A factory;
(e) A workshop;
(f) A mine oil or gas well, quarry or any other place of extraction of natural
resources including timber or forest produce;
(g) A building site or construction, installation or assembly project which exists for
more than 6 months.
(h) A farm or plantation.
BBFT3014/BBFT3013 ADVANCED TAXATION

Suggested answer to Q5 (cont’d)

PE is an important factor to consider in determining which country will have the

authority to impose tax on a particular business activity.

A contracting state will impose tax on business income attributable to the PE of the
company (trading in).

A company’s income will not be taxed (trading with) in the other state if no PE exists in
that state.

(b) Tax treatment on the Malaysian company for the 3 options in C-Land is as
follows:

(i) Office

An office constitutes a permanent establishment in C-Land. If the office

activities are preparatory or auxiliary in nature and merely for research and
advertising it would not deemed to have a PE.

For there is no sales of the health product in that office and it does not generate
any business income that is liable to income tax.

(ii) Branch

The branch set up by your company, MyHealth Sdn. Bhd. (MHSB) in C-Land
constitutes a permanent establishment in C-Land. MHSB is trading in C-Land and
has a business source in C-Land. The business profit of that branch is deemed
derived from C-Land and not derived from Malaysia under the usual principle
established under the double tax agreement (DTA) between Malaysia and C-Land.

The profit after tax suffered in C-Land will be tax exempt in Malaysia if it was
received in / remitted into Malaysia under Para. 28 of Sch. 6. It can be credited to
an exempt income account of MHSB and exempt dividends can be distributed
from it. This exemption of foreign income can be given to MHSB as it is a
resident company and it is not carrying on any business involving a specialized
industry: banking, insurance, air or sea transport.

(iii) Subsidiary company

If a subsidiary company were to incorporate in C-Land, it would be a

chargeable person but it would not constitute a permanent establishment in C-Land
for MHSB. The sale of the health-food products by MHSB to its subsidiary
company would be gross income of the business carried on in Malaysia. The sale
price must be at the arm’s length price (i.e. at market value) for such related party
transactions.
BBFT3014/BBFT3013 ADVANCED TAXATION

Suggested answer to Q5 (cont’d)

The business profit (after tax in C-Land) of the subsidiary company in C-Land can be
distributed as dividend(s) to MHSB in the basis period for the same/later year of
assessment. It would tax exempt under Para. 28 of Sch. 6 when received in / remitted into
Malaysia. It can be credited to an exempt income account of MHSB and exempt
dividends can be distributed from it.

We trust that the above information is of assistance to you. Please do not hesitate to
contact us if you need further clarification or information.

Yours faithfully,

Miss Alice Ang

Tax Manager
Smart Tax Consultancy Sdn. Bhd.