Malaysia Budget 2011: A Snapshot

The Malaysia Budget 2011 was delivered and tabled by the Prime Minister/ Finance Minister on Oct 15, 2010. Some of the highlights of the Malaysia Budget 2011:

• Parent medical tax relief extended to care for parents' expenses
• 50% stamp duty exemption on housing S&P and loan agreements
• Service tax increases from 5% to 6%
• Astro fees will be subjected to 6% service tax
• EPF relief scope extended but limit not increased

To download the Budget Speech and Finance Bill, please click here.

Google grooves around with Transfer Pricing

The following is a synopsis of an article published on Yahoo! finance dated Oct 21, 2010.

[To reduce its overseas tax bill, Google uses a complicated legal structure that has saved it $3.1 billion since 2007 and boosted last year's overall earnings by 26 percent. While many multinationals use similar structures, Google has managed to lower its overseas tax rate more than its peers in the technology sector. Its rate since 2007 has been 2.4 percent. According to company disclosures, Apple (Nasdaq: AAPL), Oracle (Nasdaq: ORCL), Microsoft (Nasdaq: MSFT), and IBM (NYSE: IBM) - which together with Google make up the top five technology companies by market capitalization - reported tax rates between 4.5 percent and 25.8 percent on their overseas earnings from 2007 to 2009. It is remarkable that Google's effective rate is that low, considering that this company operates throughout the world, mostly in high-tax countries where the average corporate rate is well over 20 percent. The corporate tax rate in the U.K., Google's second-largest market after the U.S., is 28 percent. So, how does Google grooves around with Transfer Pricing to gain a tax advantage?

A company's obligation to its shareholders is to try to minimize its taxes and all costs, but to do so legally. The setup lowers Google's overseas tax bill, but it also affects U.S. tax revenues as the government struggles to close a projected $1.4 trillion budget gap. Google Ireland licenses its search and advertising technology from Google headquarters in Mountain View, Calif. The licensing agreement allows Google to attribute its overseas profits to its Irish operations instead of the U.S., where most of the technology was developed.

The subsidiary is supposed to pay an "arm's length" price for the rights, or the same amount an unrelated company would. Yet because licensing fees from the Irish subsidiary generate income that is taxed at 35 percent, one of the highest corporate rates in the world, Google has an incentive to set the licensing price as low as possible. The effect is to shift some of its profits overseas in an arrangement known as "transfer pricing." This, too, is legal. In 2006 the IRS approved Google's transfer pricing arrangements, which began in 2003, according to Google's SEC disclosures. Transfer pricing arrangements are popular with technology and pharmaceutical companies in particular because they rely on intellectual property, which is easily transportable across borders.]

To read the entire article, please click here.

Cukai Tanah vs. Cukai Pintu

The author was at YB Hannah Yeoh's office earlier this week. Unexpectedly but pleasantly, he met 2 tax officers from MPSJ and had a hearty chat on Cukai Tanah (Quit Rent) and Cukai Pintu (Assessment). Apparently, many property owners are confused between Cukai Tanah and Cukai Pintu. Well, in a nutshell, apartment owners are only required to pay Cukai Pintu whereas landed property owners are required to pay both Cukai Tanah and Cukai Pintu. For more information, please contact your local council. For Selangor residents, please visit http://ptg.selangor.gov.my/.

(YB Hannah Yeoh is a lawyer by profession, an ADUN (State Assemblyman) for Subang Jaya and a faithful woman of God.)

Transfer Pricing: the Stranger in our midst

For years, the author scratched his head and raised his eyebrow whenever this 'stranger' (if the author may call it) is mentioned. Transfer Pricing (TP) is a term that reveals too little about its personality but yet, portrays a sophisticated corporate image. Governments pay prudent scrutiny on TP and MNCs pay a similar attention to it. What is the secret of this stranger that seduces such attention?

TP is simply the act of pricing of goods and services or intangibles when the same is given for use or consumption to a related party (e.g. a subsidiary). There can be either market-based, i.e. equivalent to what is being charged in the outside market, or non-market based. The reasons for the pricing could be internal (e.g. to monitor manager's performance by putting a cost to imported inputs) or external (e.g. taxes and tariffs issues) (Mayank K Agrawal, Transfer Pricing A Beginner's Perspective).

Understanding the interesting character of TP, it is not surprising that MNCs may manipulate TP to its advantage. It is this TP manipulation that Governments are discouraging. TP manipulation is basically fixing transfer price on non-market basis which generally results in saving the total quantum of organization's tax by shifting accounting profits from high tax to low tax jurisdictions (Mayank K Agrawal, Transfer Pricing A Beginner's Perspective). The implication is moving one nation's tax revenue to another.

It is not only corporate tax differential that induces organizations to manipulate TP. Other reasons include High Customs Duty, Restriction on Profit Repatriation and Ownership Restrictions.

The effect of TP manipulation on a nation limits not only to lower tax revenue, but also lead to distortion in Balance of Payments between the host and home country, and level of attractiveness towards Foreign Direct Investments (FDI). Nations such as Singapore and Hong Kong which have no TP controls become much more attractive for FDI.

In short, TP arises in the global economy with sourcing and consuming destinations being different, with organizations operating in different nations, and most importantly, due to varying tax and other laws in different countries. As more organizations are going global, including many local corporations in Malaysia, TP has risen up as an important aspect in corporations, whether we are familiar with it or not. Unsurprisingly, the author intends to get cozy with TP and perhaps, fall in love with this stranger in our midst.

2011 Budget

A statement that caught the author's eyes this morning - "Malaysia's budget deficit in 2011 will be lower than 2010's 5.6 percent," Second Finance Minister Husni Ahmad Hanadzlah said. ((2010, Sept 27) Reuters, Malaysia Sees Lower Budget Deficit in 2011).

Clearly, the much anticipated 2011 Budget is going to be the event of the month of October.

Tax Residence Status for Individual

The American recession may be officially over after 18 months, but the response to this announcement, already echoing through blogosphere, is that, hey it doesn't feel like recession is over! (R.A.: (2010, Sept 20) It's Over, The Economist) The truth in this statement could be witnessed back home in Malaysia as many foreigners (in particular, Americans and Europeans) are seen to be residing in Malaysia under the Malaysia My Second Home (MM2H) programme.

Needless to say, one issue that troubles many residents under MM2H programme is the individual tax residence status. The concept of 'resident' is important in the Income Tax Act 1967. An individual who is a tax resident in Malaysia would be given an overall preferential tax treatment as compared to a non-resident individual. Generally, a non-resident individual is taxed at a flat rate of 27% without any personal deductions. Income of a non-resident in respect of technical advice or administration of any scientific, industrial or commercial undertaking is taxed at 10% on gross income. Note that only income derived from Malaysia is subject to Malaysia income tax each year. Income from sources outside of Malaysia is exempted from tax, e.g. pension and dividend. Well, residents of Malaysia, on the other hand, enjoy a scaled individual tax rate ranging from 0% - 27%.

So, how can foreigners obtain the tax residence status? Residence status is not determined by nationality but by the length of stay in Malaysia. The status is determined for each calendar year. For e.g., an individual will be considered as a resident if he or she stays in Malaysia for 182 days or more. What if one stays for less than 182 days for year 1 but the period is linked to another period of more than 182 days consecutively? What if for the past 3 consecutive years, one is qualified as a resident for tax purposes but in the 4th year, one fail to stay for 182 days? An elaborate answer is available in the official homepage of MM2H: http://www.mm2h.gov.my/pdf/mm2h15.pdf

The author advises readers to double check their information and understanding with a tax consultant. Please note that there could be updates that the author is not aware of.

Welcome to 'Kiss Tax Goodbye'

Like the saying goes, death and tax are 2 things man can never escape. A lawyer by profession and an entrepreneur, the author was previously attached to KPMG Tax Advisory. He has the passion to share some of his experiences and tax knowledge to readers of this blog. The author hopes that by sharing his insights, his readers can avoid getting into trouble with the tax authorities, pay lesser taxes or even bid farewell to taxes without compromising a lesser income!

Disclaimer: Although the author of this blog takes pride of his writing, the author takes absolutely no responsibility for any incorrect information. The author strongly suggests readers to check their understanding with a tax consultant.