APAC Tax Matters: November 2012
At a glance
On 25 April 2012, Malaysia signed an agreement with Hong Kong for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income.
The comprehensive double tax agreement (DTA) allocates taxing rights between Hong Kong and Malaysia, and will provide investors with greater certainty on their tax liabilities from cross-border economic activities and boost closer economic and trade ties between Hong Kong and Malaysia.
The DTA will come into force in the tax year following the calendar year in which the relevant ratification procedures are completed. Assuming the ratification procedures are completed in 2012, the DTA shall have effect in Malaysia on or after 1 January 2013 and shall have effect in Hong Kong on or after 1 April 2013.
The following table summarizes the reduced withholding tax rates payable by Malaysia to a Hong Kong resident as a result of the DTA:
|Passive income||Dividends||Interest||Royalties||Technical fees||Capital gains on disposal of shares|
|Normal withholding rate||0%||15%||10%||10%||0%|
|Reduced rate under the DTA|| 5%/ |
| 0%/ |
1 Currently, there is no withholding tax on the outflow of dividends from Malaysia. In the event that Malaysia imposes dividend withholding tax in the future, the rate will be capped at 5% if the beneficial owner of the dividends is a company (other than a partnership) which holds, directly or indirectly, at least 10% of the share capital of the dividend paying company in Malaysia. For other cases, the 10% rate applies.
2 The 0% rate applies if the recipient is the Hong Kong government, the Hong Kong Monetary Authority or certain qualifying institutions of the Hong Kong government. For other cases, the 10% rate applies.
3 Currently, Malaysia does not impose a tax on capital gains. In the event that Malaysia imposes a capital gains tax in the future, capital gains derived by a Hong Kong resident investor on the disposal of shares in a Malaysian entity will, nevertheless, generally be exempt from tax in Malaysia under the DTA, unless the shares being disposed of are in respect of a company holding substantial immovable property located in Malaysia, and the shares are not quoted on a recognized stock exchange.
Transfer pricing (TP) refers to pricing arrangements for the transfer of goods, services and intangibles between related parties. Legitimately or otherwise, tax authorities are concerned that associated companies shift profits through TP to countries where the tax system and rates are more favorable.
The bedrock of TP legislation is the arm’s length principle. The arm’s length principle aims to ensure that the prices between related parties are the same as prices between independent entities under similar circumstances.
In Malaysia, Finance Act 2009 introduced provisions - Sections 140A and 138C - to facilitate the operation of TP and advance pricing arrangements (APAs). APAs enable taxpayers to confirm with the IRB that the transfer pricing methodology adopted is acceptable.
On 11 May 2012, the Income Tax (Transfer Pricing) Rules 2012 [P.U.(A)132] and the Income Tax (Advance Pricing Arrangement) Rules 2012 [P.U.(A)133] were gazetted to apply retrospectively from 1 January 2009.
On 20 July 2012, the IRB issued a 98-page document entitled TP Guidelines 2012 to explain the administrative requirements pertaining to Section 140A and TP Rules. The 2012 guidelines replace the 2003 TP Guidelines. The 24-page APA Guidelines 2012 aims to explain the procedural and administrative requirements pertaining to Section 138C and APA Rules.
On 9 May 2012, a revised double taxation agreement (DTA) was signed between India and Malaysia. The revised DTA includes mutual agreement procedures and tax information exchange provisions that are in line with internationally-accepted standards.
Malaysia and Indonesia signed a Protocol on 20 October 2011 to revise Article 25: “Exchange of Information” to align the provisions with internationally-accepted standards. Pursuant to this, the Double Taxation Relief (The Government of the Republic of Indonesia) (Amendment) Order 2012 [P.U.(A)217] was gazetted on 19 July 2012. The Order provides the relevant revision to the double tax agreement pursuant to Section 132 of the ITA.