APAC Tax Matters: 12th edition

Malaysia

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At a glance

  • Implementation of thin capitalisation provision deferred
  • New property gains Tax exemption order now in operation

Ministry Of Finance defers implementation of thin capitalisation provision to 31 December 2015

A thin capitalisation provision introduced in the Income Tax Act 1967 (ITA) with effect from 1 January 2009  states that any interest, finance charge or other consideration payable in respect of financial assistance to an “associated person” will be disallowed if the financial assistance is deemed excessive in relation to the taxpayer’s fixed capital. The thin capitalisation provision, Section 140A(4), reads as follows:

"(4) Where the Director General, having regard to the circumstances of the case, is of the opinion that in the basis period for a year of assessment the value or aggregate of all financial assistance granted by a person to an associated person who is a resident, is excessive in relation to the fixed capital of such person, any interest, finance charge, other consideration payable for or losses suffered in respect of the financial assistance shall, to the extent to which it relates to the amount which is excessive, be disallowed as a deduction for the purposes of this Act"

Soon after the introduction of the thin capitalisation provision, the Ministry of Finance (MOF) announced that its implementation would be deferred until "after 2012". On 20 December 2012, the IRB announced that the implementation of the thin capitalization provision will be deferred until 31 December 2015.

The letter issued by the MOF also stated that the MOF will carry out a review from time to time on this deferment.

Comments

Although the MOF has deferred the implementation of the thin capitalization provision, interest rates in excess of an arm’s length price between related companies may be disallowed under the relevant transfer pricing rules (See Tax Alert No. 12/2012 on the Income Tax (Transfer Pricing) Rules 2012 [P.U.(A) 132]).

Real property gains tax (exemption) order 2012

The Real Property Gains Tax (Exemption) Order 2011 was gazetted on 26 November 2012 [P.U. (A) 415] and comes into operation on 1 January 2013.

This Exemption Order implements the changes to the Real Property Gains Tax (RPGT) that were proposed in the 2013 Budget wherein the RPGT rate is now increased from 10% to 15% for disposals made within a period of 2 years from the date of acquisition, and from 5% to 10% for disposals made between the second and fifth year from the date of acquisition. The relevant changes have taken effect since 1 January 2013.

Effectively, the Exemption Order provides for a formula (provided below) to determine the chargeable gain and exempts a certain portion of the chargeable gain. This effectively results in the following RPGT rates:

Disposal RPGT rates
(with effect from 1 Jan 2013)
Previous RPGT rates
Within 2 years from date of acquisition 15% 10%
Between 2–5 years from date of acquisition 10% 5%
After 5 years from date of acquisition 0% 0%
The formula for the exempt portion

Pursuant to this Order, a person is exempted from paying tax on the chargeable gain on disposal of a chargeable asset as provided under Schedule 5 of the RPGT Act, on or after 1 January 2013, on condition that the amount of chargeable gain is determined according to the following formula:

 X C
B
Where,

A is the amount of tax charged on the person at the appropriate rate reduced by 15% of the tax charged (for disposals made within two years after the date of acquisition of the asset) or by 10% of the tax charged  (for disposals made in the third, fourth and fifth year after the date of acquisition).

B is the amount of tax charged on the chargeable gain at the appropriate rate.

C is the amount of chargeable gain.

Where the disposal of a chargeable asset is made after the fifth year from the date of acquisition of the asset, the gain is not liable to tax. 

This Order revokes the RPGT Act (Exemption) (No.2) 2011[P.U. (A) 434/2011].