Four Public Rulings (PRs) updated, and two new PRs issued by the IRB

Four Public Rulings (PRs) updated, and two new PRs issued by the IRB

The IRB has published the following PRs:

• PR No. 6/2021: Notification of Change of Accounting Period by a Company / LLP / Trust Body / Co-operative Society
• PR No. 7/2021:  Partnerships Taxation Part I – Determination of the Existence of a Partnership
• PR No. 8/2021: Partnerships Taxation Part II – Computation and Allocation of Income
• PR No. 9/2021: Private Retirement Scheme
• PR No. 10/2021: Tax Treatment of R&D Expenditure Part II – Special Deductions
• PR No. 11/2021: Bilateral Credit and Unilateral Credit

PRs No. 7/2021 and No. 8/2021 are new PRs, while the remaining PRs are to replace previous PRs.

The details are discussed below:

The IRB has published PR No. 6/2021: Notification of Change of Accounting Period by a Company / LLP / Trust Body / Co-operative Society, dated 29 December 2021. This new 22-page PR replaces PR No. 8/2019, which was issued on 6 December 2019 (see Tax Alert No. 23/2019). The new PR comprises the following paragraphs and sets out 13 examples:

1.0    Objective
2.0    Relevant provisions of the law
3.0    Interpretation
4.0    Estimate of tax payable
5.0    Notification of change of the accounting period
6.0    Computation of the revised tax instalment after the change of the accounting period
7.0    Increase related to tax instalment payments and the revised estimate of tax payable
8.0    Failure to notify on the change of the accounting period
9.0    Updates and amendments
10.0  Disclaimer

The PR explains the requirement to notify the Director General of Inland Revenue (DGIR) of any change in the accounting period by a company, LLP, trust body or co-operative society, which has to make payments by instalments in respect of an estimate of tax payable for a YA.

The new PR is broadly similar to the earlier PR. The key changes are as outlined below:

• The new PR was updated to more accurately reflect that the determination of the due date for the submission of Form CP204 for a new company is based on when it commences operations (“operations” is defined in Section 21A of the ITA). Previously, it was stated as “business operations”.
• As highlighted in an earlier alert, Operational Guidelines No. 1/2021 (OG) stipulate that entities intending to revise their tax estimates due to a change in their accounting periods will need to do so in the sixth or ninth month of the basis period for the YA (see Tax Alert No. 3/2021). Previously, the revision of the tax estimate due to the change in the accounting period was possible outside of the stipulated time frames, under certain circumstances.

As the OG provide an updated methodology for ascertaining the tax instalment payments after a change in accounting period, the IRB had previously stipulated on its website that Paragraph 6 of PR No. 8/2019 with regard to the computation of revised tax instalment payments after a change in accounting period would no longer apply.

In line with this, the above-mentioned Paragraph 6 has been removed from the new PR. 

• The new PR outlines the circumstances under which a tax increase under Section 107C(10A) of the ITA will be imposed.

Please note that this new PR must be read together with PR No. 8/2014: Basis Period of a Company, LLP, Trust Body and Co-operative Society (see Tax Alert No. 25/2014).

The IRB has published PR No. 7/2021: Partnerships Taxation Part I – Determination of the Existence of a Partnership, dated 29 December 2021, to explain how the existence of a partnership is determined for income tax purposes. This new 15-page PR comprises the following paragraphs and sets out seven examples:

1.0    Objective
2.0    Relevant provisions of the law
3.0    Interpretation
4.0    Introduction to a partnership
5.0    Characteristics of a partnership
6.0    Existence of a partnership
7.0    Types of partners
8.0    Partnership accounts
9.0    Filing of Income Tax Return Form (ITRF)
10.0  Disclaimer

Some of the key points are outlined below:

• The PR explains the definition and characteristics of a partnership under the Partnership Act 1961 and the ITA
• The PR provides guidance and examples on the factors to be taken into consideration in determining the existence of a partnership, including the existence of a formal partnership agreement (e.g., deed of partnership), the registration of the partnership, whether the terms of the deed of partnership are indeed followed, the determination of profit-sharing and others. The PR also discusses the distinction between a partnership and co-ownership or joint venture.
• The PR elaborates on the various categories of partners (e.g., active, salaried, inactive, limited, corporate and precedent) in a partnership.
• The PR broadly explains the preparation of a partnership’s business accounts as well as the ITRF filing requirements 

Please note that this PR should be read together with PR No. 8/2021: Partnerships Taxation Part II – Computation and Allocation of Income (see below).

The IRB has published PR No. 8/2021: Partnerships Taxation Part II – Computation and Allocation of Income, dated 29 December 2021, to explain the computation of a partnership’s income or loss and the ascertainment of the respective partners’ share of the income or loss.This new 19-page PR comprises the following paragraphs and sets out seven examples:

1.0    Objective
2.0    Relevant provisions of the law
3.0    Interpretation
4.0    Chargeable person
5.0    Basis period of a partnership
6.0    Computation of partnership income
7.0    Changes in a partnership
8.0    Sole proprietor business becoming a partnership
9.0    Partnership is a partner in another partnership
10.0  Non-business income
11.0  Partnership losses
12.0  Capital allowances
13.0  Partner incurring own capital expenditure in partnership
14.0  Disclaimer

Some of the key points are outlined below:

• The PR explains that for income tax purposes, a partnership is not a chargeable person. Income derived from a partnership is allocated to its partners based on an agreed profit-sharing ratio and taxed in the hands of the partners.
• The PR provides guidance and examples to demonstrate the methodology of computing the provisional adjusted income or loss of a partnership, the divisible income or loss of a partnership (i.e., the amount to be allocated to the partners), as well as a partner’s income from a partnership.
  
• The PR also clarifies the treatment (with examples) of a change in profit-sharing arrangements.
• The PR clarifies and provides examples to demonstrate the treatment where there are changes in a partnership arrangement, when a sole proprietor business becomes a partnership, or when a partnership is a partner in another partnership. 

As highlighted above, this PR should be read together with PR No. 7/2021: Partnerships Taxation Part I – Determination of the Existence of a Partnership (see above).

The IRB has published PR No. 9/2021: Private Retirement Scheme, dated 29 December 2021. This new 20-page PR replaces PR No. 9/2014, which was issued on 24 December 2014 (see Tax Alert No. 2/2015). The new PR comprises the following paragraphs and sets out 13 examples:

1.0  Objective
2.0  Relevant provisions of the law
3.0  Interpretation
4.0  Establishment and features of the scheme
5.0  Tax treatment
6.0  Updates and amendments
7.0  Disclaimer

The PR provides guidance on the tax treatment of private retirement scheme (PRS) contributions by individuals and employers, income of the PRS fund and withdrawal of contributions to the PRS. 

The new PR is broadly similar to the earlier PR. The key changes are as outlined below:

• The PRS offers various types of funds for investors to contribute to. A default option, which is based on age groups, is available for an investor who does not specify his choice of fund. 

The new PR reflects the updated age groups for each type of fund under the default option, in line with the Guidelines on PRS issued by the SC dated 4 May 2020

• The new PR explains and provides examples to reflect the legislative changes below:

-        Pursuant to the Finance Act 2019, effective 1 January 2020, withdrawals from a PRS for the purpose of healthcare or housing before the contributor reaches the age of 55 will not be taxed as long as the withdrawals are made in compliance with the criteria set out in the relevant guidelines issued by the SC

-        Pursuant to the Finance Act 2020, the tax relief of RM3,000 for contributions to PRS is extended up to YA 2025

The IRB has published PR No. 10/2021: Tax Treatment of R&D Expenditure Part II – Special Deductions, dated 29 December 2021. This new 25-page PR replaces PR No. 6/2020, which was issued on 13 August 2020 (see Tax Alert No. 14/2020). The new PR comprises the following paragraphs and sets out six examples:

1.0    Objective
2.0    Relevant provisions of the law
3.0    Interpretation
4.0    Eligibility to claim an incentive for a qualifying R&D activity
5.0    Double deduction or single deduction
6.0    Qualifying R&D expenditure
7.0    Claim for a double deduction under Section 34A of the ITA
8.0    Pioneer company undertakes R&D activity and makes an election under Section 34A(4A) of the ITA
9.0    Claim for a double deduction under Section 34B of the ITA
10.0  Claim for a single deduction under Subsection 34(7) of the ITA
11.0  IBA and capital allowances
12.0  Penalty for incorrect information
13.0  Application for approval for R&D activities under Section 34A of the ITA
14.0  Updates and amendments
15.0  Disclaimer

The PR explains the types of expenditure in respect of a qualifying R&D activity that would be eligible for special deductions, and the relevant application processes.

The new PR is broadly similar to the earlier PR. The key changes are as outlined below:

• The new PR explains and provides examples to reflect the following legislative changes pursuant to the Finance Act 2020, effective from 1 January 2021:

-        Only Malaysian residents are eligible for the deductions under Section 34(7), 34A and 34B of the ITA

-        Pursuant to Section 34A, if the R&D expenditure incurred outside Malaysia in a YA exceeds 30% of the total R&D expenditure in the YA, the claimant will not be eligible for a double deduction (i.e., the claimant           is only eligible for a single deduction), and vice versa.

• The PR stipulates that the following will also need to be retained in respect of R&D expenditure for technical services, if any:

-        Agreement between the client and service provider

-        Explanation of the novelty or technical risk involved during the period  the researcher, consultant and/or organization carried out the R&D activities

(The above are in addition to the other information outlined in the earlier PR)

• The new PR stipulates that for deductions under Sections 34(7) and 34B of the ITA, if the project is outsourced to any service provider (approved by the relevant Minister), it is important for the company to understand how the product or process is developed. The company and service provider will have to identify, determine and explain any novelty or technical risk involved, and the systematic, investigative and experimental studies involved for the purpose of claiming the deductions, in the event of an audit by the IRB.
• References to the “Guidelines on the Application Procedure for a Special Deduction in respect of a Qualifying R&D Activity” have been updated accordingly to reflect the new guidelines (refer further below)

The IRB has published PR No. 11/2021: Bilateral Credit and Unilateral Credit, dated 31 December 2021. This new 16-page PR replaces PR No. 11/2011, which was issued on 20 December 2011 (see Tax Alert No. 1/2012). The new PR comprises the following paragraphs and sets out seven examples:

1.0    Objective
2.0    Relevant provisions of the law
3.0    Interpretation
4.0    Double taxation agreement
5.0    Bilateral credit
6.0    Unilateral credit
7.0    Foreign sourced income and remittances
8.0    Documents required for double taxation relief claim
9.0    Updates and amendments
10.0  Disclaimer

The PR explains how a person who has been charged to tax on the same income both in Malaysia and in another country may claim a bilateral or unilateral credit. 

The new PR is broadly similar to the earlier PR. The key changes are as outlined below:

• The definitions of “foreign tax”, “body of persons” and “person” have been updated
• The formula for the computation of bilateral credit and unilateral credit are as follows:

Bilateral credit

Foreign income
(statutory income)            Malaysian tax payable
-------------------------    X      before bilateral credit*
       Total income

Unilateral credit

Foreign income
(statutory income)            Malaysian tax payable
-------------------------    X      before unbilateral credit*
       Total income

*Previously “bilateral / unilateral credit”

Further updates may need to be made to the PR due to the removal of the foreign-sourced income exemption for Malaysian residents, pursuant to the Finance Act 2021. The IRB has also stated on its website that the PR has not taken into consideration the said legislative change.*Previously “bilateral / unilateral credit”