GST - a consumption tax

KPMG has produced a lucid piece that describes the impending GST regime for Malaysia:

Our Prime Minister, in his maiden National Budget speech on October 23 2009, had announced that the government was in their final stage of completing its study on the proposed implementation of a Goods and Services Tax (GST) system in Malaysia.

After much anticipation, this week, the Prime Minister further announced that a proposed bill to introduce GST will be tabled in Parliament at the end of the present Dewan Rakyat sitting. To allay concerns that the GST will unnecessarily burden the rakyat, the Prime Minister has re-assured the rakyat that GST will be introduced gently and at a rate that would not burden the poor or the middle-class.

Falling into the family of indirect taxes, the GST is intended to replace the Malaysian service tax and sales tax. This article seeks to provide a general illustration of the principles and mechanics of a GST system.

It is assumed that the Royal Malaysian Customs would be the authority in charge of administering the GST.

The GST, also known as a consumption tax, is a tax levied on supplies of goods and services. To the man on the street, it is incurred only when money is spent.

If no consumption occurs, no GST is suffered by the individual. This can be contrasted with an income tax which is payable when income is generated.

Hence, some have viewed the GST as a more equitable means of collecting revenue for the government as it matches the tax with the ability to pay.

A number of countries including Singapore, Thailand and Australia, have already adopted a similar type of indirect tax.

The mechanics of GST are similar to the value added tax in the UK and Europe, so this tax although new to Malaysia has an established place on the world tax scene.

Mechanism of GST

Conceptually, GST is imposed on the value added to goods or services by each separate processor in the production and distribution chain.

The value added is the value that a producer (whether a manufacturer or distributor, etc) adds to its raw materials or purchases before selling the new or improved product or service.

Upon selling the product or service, the manufacturer or distributor will include a charge for GST at the relevant rate on the value of the supply made.

The manufacturer or distributor will pay the GST collected on its sales (also known as output tax), to the Royal Malaysian Customs, but after deducting the GST it suffered on its purchases (also known as the input tax). And the cycle goes on.

Hence, in reality, GST is a multi-stage tax on the increase in the sales price of the goods or services as they pass through the chain.

The consumer ultimately bears the burden of the tax. This can be seen in the simple illustration chart (right).

Input tax and output tax

In order for a taxpayer to impose GST, the taxpayer must be registered with the Royal Malaysian Customs.

There will generally be a minimum threshold (e.g. based on turnover) before a taxpayer is required to charge GST. The registered taxpayer would be required to submit periodic GST returns. If the output tax is greater than the input tax, the taxpayer will have to pay the excess.

Conversely, if the input tax is greater than the output tax, the taxpayer could seek a refund from the Royal Malaysian Customs.

GST rates and taxable supplies

It is envisaged that not all goods and services will be subject to GST. In the UK for example, there are four types of supply for GST, namely standard rate (15 per cent), zero rate (0 per cent), exempt supplies as well as the reduced rate (5 per cent).

The table above shows an example of the four classifications of supplies in the UK:

It is important to know what category the supplies fall in. This is because where a registered taxpayer is supplying standard rated or zero-rated supplies, the registered taxpayer will be able to claim an offset for input tax suffered on supplies it acquired. However, if the registered taxpayer's supplies are exempted, the taxpayer will not get a refund on the input tax suffered.

Similarly, the taxpayer's customer will not have any input tax to set off against its output tax. This may be an important factor in determining the business competitiveness of the taxpayer.

What can be expected next is the release of the GST Bill. However, as GST is industry-based, there would be accompanying Regulations to implement the system effectively and these regulations are likely to be quite extensive.

It would be interesting to see the various rates of GST and the extent of the taxable supplies. And as everybody will be affected, it is important to understand not only how the system works but what actions need to be taken in the run up to GST.

Running through the checklist below could be a good starting point.

Getting prepared for GST

Checklist for businesses:

* Check whether you need to register for GST

* Check whether you need to register for GST* If yes, what are the compliance requirements

* If yes, what are the compliance requirements* Prepare a costing/ pricing analysis as well as pricing strategies

* Prepare a costing/ pricing analysis as well as pricing strategies* Notify your customers/ suppliers on your GST status

* Notify your customers/ suppliers on your GST status* Update your invoices

* Update your invoices* Educate your staff

* Educate your staff * Check IT capabilities

* Check IT capabilities* Review long-term contracts

* Review long-term contracts

Checklist for final consumers:

* Check whether the goods and services you consume are taxable and the relevant rates

* Check whether the goods and services you consume are taxable and the relevant rates* Price of goods and services post-GST may or may not change. Hence plan your budget wisely

* Price of goods and services post-GST may or may not change. Hence plan your budget wisely

Clearly, preparation for the implementation of GST is essential for businesses and at the same time understanding the implications of GST on consumption is vital for consumers.

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GST likely in 2011 or 2012

The Malaysian government is expected to table the draft of the Goods and Services Tax Bill in Parliament on December 17. The Goods and Services Tax ("GST") is a consumption tax which is also called a valued-added tax in other jurisdictions.

The GST is regarded by economists as an efficient tax mechanism due to its broader base of tax reach.

Some analysts expect the actual implementation of the GST in Malaysia to take place in 2011 or 2012. It is also expected that there will be a reduction in the top-tier personal income tax to ameliorate the effect of the GST. There is also likely to be significant transactions that are exempted from the GST to avoid burdening lower-income groups.

There is some concern about the efficiency of GST refunds, which is a key feature of value-added tax regimes in other jurisdictions.

Here is the report from the Business Times:

The goods and services tax is likely to be near term revenue neutral and could be accompanied by personal income tax cuts to avoid political backlash, says an economist

MALAYSIA may eventually implement the goods and services tax (GST) although analysts say it is more likely to happen either in 2011 or 2012.

They said the government is expected to study all aspects before introducing the tax.

"This is because GST is a regressive tax hitting the lower income group the most, so (it) can be politically unpopular," economist Kit Wei Zheng said.

He was commenting on a news report quoting Prime Minister Datuk Seri Najib Razak in New York as saying that the first reading of GST proposal will be tabled during the current parliamentary session.

He thinks the GST is likely to be near term revenue neutral, as it would be replacing sales tax and could be accompanied by personal income tax cuts to avoid political backlash.

"The fiscal benefits from GST implementation would be felt more in the medium term, with immediate benefits far less visible," he said.

He added that the government has already hinted it is in the final stages of completing a study on the GST implementation and that the rate would be lower than the sales and services tax rates while exemptions would be granted to lower income groups.

The cabinet decided at its meeting last week for the tabling to allow for discussions and feedback from the public.

Najib had said that if the government decides to implement the tax, it would at a rate that will not burden the poor or the middle class.

Najib also said the rate for the proposed GST may be less than the current sales and services rate of between 5 per cent and 10 per cent.

Standard Chartered Bank economist Alvin Liew said the decision to look at the GST is definitely a move in the right direction.

"The timeline for this to happen may not be in 2010, maybe more likely in 2011 when growth becomes more entrenched," he said.

RPGT: Possible computation workings

Below is an article by Dr Choong Kwai Fatt that attempts to explain the manner in which the new RPGT (Exemption Order) 2009 is to be calculated. The drafting of the Order is still a matter of vigorous debate by Malaysian lawyers. Nonetheless, Dr Choong has offered his considered views on the matter:

Exemption order an interim measure to a complete RPGT system

IN Malaysia, real property gains tax (RPGT) is imposed with the intention to curb property speculations. It is imposed on the gains on disposal of Malaysian landed properties and the rate varies from 5% to 30% depends on the holding period.

With effect from April 1, 2007, the Government decided to exempt RPGT in view of the economic slowdown and it was aimed at assisting property developers in disposing of their houses, and spearheading the economic progress.

Prime Minister Datuk Seri Najib Tun Razak, who is also Finance Minister, on Oct 23, however, reintroduced RPGT to put in place a fair administration of taxes.

In a nutshell, an equitable system will now be in place as income tax are imposed on income derived by any person in Malaysia while RPGT, on capital gains on disposal of landed properties. There will not be any loss of revenue to the Government.

In the Budget 2010 speech, the Government’s intention was clear. It is to ensure that the Malaysian tax system is equitable and continue to be able to generate revenue for development purposes. In line with this, the Government proposed that a tax of 5% be imposed on gains from the disposal of real property from Jan 1 2010. Any agreements signed between now till Dec 31 remains RPGT exempted.

Finance Minister II Datuk Seri Ahmad Husni Mohamad Hanadzlah then, exercising his power under section 9(3) of the Real Property Gains Tax Act 1976 (RPGTA), gazetted Real Property Gains Tax (Exemption) Order 2009 which will take effect from Jan 1, 2010. A fixed RPGT rate of 5% on gains from property gains is achieved through the application of this exemption order.

Malaysian individuals are accorded tax exemption of 10% of the chargeable gain (CG) from the computation of RPGT3. Thus, this would effectively mean that they will be paying less than 5% of RPGT rate while companies continue to pay 5%.

The RPGT Exemption Order exempts any person from the application of Schedule 5 of the RPGTA on the payment of tax on the CG arising from any disposal of assets on or after Jan 1, subject to the condition that the amount of CG exempted shall be determined in accordance with the following formula: A/B x C where:

A = Tax on CG at the appropriate tax rate reduced by the Tax on CG at 5%;

B = Tax on CG at the appropriate tax rate;

C = Amount of CG

Effectively, the exemption formula can be simplified as follows:

Chargeable gain x (Appropriate rate – 5%) / Appropriate rate

The appropriate tax rate to be applied on this exemption order depends on the holding period of the property which is summarised as per Table A.

Illustration: Malaysian citizen individuals

Chia Lat acquired a condominium in Bangsar for RM500,000 on Jan 1, 2008. On March 31, 2010 he decides to dispose the property for RM780,000. The RPGT to be paid by him would be as per Table B.

Illustration: Companies

Using the same example as above, and assuming the taxpayer is a Sdn Bhd, the RPGT payable would be as per Table C.

Mathematical confusion

The mathematical formula stipulated in the RPGT exemption basically restores to the fact that the RPGT is 5% on the CG. This is the mathematical equation:

Assuming the appropriate tax rate is y and CG is x, then the RPGT payable after the RPGT exemption would be :

[x – x(y - 5%)/y ] y =xy – xy + 5% x

= 5% of x

The Government has stated that the purpose of the RPGT is to have a fair administration of taxes. Thus the exemption is an interim measure to begin with RPGT of 5% taxes. In years to come, once the exemption order is revoked, RPGT payable would revert to the original position, ranging from 30% to 5%, depending on the holding period.

Policy reform: Currently, taxpayers are only required to keep accounting records for seven years under the law. It may not be feasible to impose 5% on the chargeable gain on gains derived from holding periods more than seven years. This would mean tax payers are required to keep their accounting records for an indefinite time to justify cost attributable to the acquisition.

It is therefore suggested that the Government impose 2% on selling price instead of holding periods exceeding seven years or as in the past, exempt these gains from RPGT. After all, the underlying purpose of RPGT is to curb speculation of properties rather than tax collection.

Moving forward, the Government may likely further align the taxes on landed transactions to be equitable with the income tax system. Therefore, it is crucial that the rakyat understand the Government’s overall objectives and appreciate that this exemption order is an interim measure to prepare the country for a complete restoration of the RPGT system when the time comes.

Once the country’s economy is paced and sustaining desired growth, this exemption may likely to be revoked and property gains will be back causing gains will be taxed at the appropriate rate.

Till then, this exemption order will continue to allow us to enjoy most of our short-term trading gains from real property transactions.

Case Digest: Thor Eagle Maritime Agencies v Innovest Bhd

The recently reported case of Thor Eagle Maritime Agencies v Innovest Bhd [2009] 6 MLJ 74 decided by the High Court in Kuala Lumpur dealt with the features of contracts of affreightment that is instructive for the shipping, logistics and transportation industry.

The case involved a customer that had entered into a contract of affreightment with the shipping line, via a shipping agency, to carry goods.

The time of shipment stated that the date of arrival of the ship would be "about" 10-15 August 1998.

The ship actually arrived on 16 August 1998.

About one week prior to the date of the ship's arrival, the client had communicated clearly to the shipper that it wished to repudiate or terminate the contract.

The facts of the case suggest that the client's act of repudiation or termination was not effective. The court did not deal with the matter. So, we are not able to see why the repudiation by the client was not effective.

The issues before the High Court were:

1. Whether time was of the essence in that contract of affreightment. If it was found that time was of the essence, the client would not be liable to the shipper; and

2. Whether the shipper had made any effort to mitigate losses from the repudiation. If there were no efforts to mitigate, the client's liability would be reduced.

Whether time was of the essence
The High Court relied on 3 matters in ruling that time was NOT of the essence in that case.

a. The contract of affreightment did NOT specifically state that time was to be of the essence in the contract.

b. The contract merely stated that the date of arrival of the ship was "about" 10-15 August 1998.

c. There were previous occasions in dealings between the client and the shipper where the client had proceeded to load the goods even though the ship had arrived later than the scheduled dates.

The High Court made the following observation:

It is trite that in contracts relating to shipping, time may not be of the essence and it all depends on the terms of the contract, intention of parties, custom, practice etc.

Mitigation by the shipper
As with the laws of contract of most nations, Malaysian contract law required the shipper to make an effort to mitigate or reduce its losses from the cancellation of the contract by selling the cargo space to other clients.

In that case, the shipper did not offer any proof that it had attempted to mitigate its losses.

As such, the shipper's claim of USD256,760-00 was reduced to USD80,000-00.

FRS 139 and its bearing on transfer pricing

As if transfer pricing per se is not complex enough, by January 1, 2010 there will be an added factor that involves fair value accounting which is also known as the "mark-to-market" rule.

Since transfer pricing compliances are very much driven by collating data on comparable activities and products provided by competitors within the same jurisdiction - a process that is already difficult in and, of itself, fair value accounting will mean that applicants may have even higher standards of proof.

This Ernst & Young piece is instructive:

COME Jan 1, the Malaysian Accounting Standards Board’s Financial Reporting Standard 139 – Financial Instruments: Recognition and Measurement (FRS 139) will finally be implemented in Malaysia. Four years since its implementation date was set, it is still considered uncharted waters for many corporations. This is not surprising since FRS 139 is considered the “mother” of all standards by some.

Under FRS 139, many financial assets and financial liabilities are required to be carried at fair value. This will have a significant impact on loans between related parties, which generally can be interest-free or carry interest rates which are well below the market rates.

The definition of fair value under FRS 139 is “the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction”. Paragraph 48A of FRS 139 further states that “The best evidence of fair value is quoted prices in an active market ... Valuation techniques include using recent arm’s length market transactions between knowledgeable, willing parties, if available ... ”

Interestingly, it loosely echoes the Organisation for Economic Cooperation and Development’s guide for an arm’s length interest rate:

“... an arm’s length interest rate shall be an interest rate which was charged, or would have been charged, at the time the financial assistance was granted, to uncontrolled transactions with or between independent persons under similar circumstances.”

It could well imply that the measurement of related party loans initially at their respective fair values and subsequently at amortised cost using the effective interest method, may be deemed to be in line with the arm’s length principle since market interest rate is used.

Following the introduction of Section 140A of the Income Tax Act 1967 (ITA) which basically requires taxpayers to ensure that their related party transactions are carried out at arm’s length, would this then mean that an assessment of the fair value of related party loans by the auditors under FRS 139 can serve as contemporaneous documentation for transfer pricing purposes?

The corporate taxpayers do not have an option as to whether to accept the fair value accounting treatment in their financial statements – it is a requirement of FRS 139 and also the Companies Act 1965.

Further, requiring corporations to measure related-party loans initially at their respective fair value may not only affect the income statement. However, for certain, the subsequent amortisation amounts, measured at amortised costs, will represent accounting interest income or interest expense in the income statement. Book entries are generally not the actual receipts or payments, and in tax terms are not real costs or income earned.

At this point, it would be helpful to look at what other tax jurisdictions have done under similar circumstances. Hong Kong, Singapore and New Zealand tax authorities have issued departmental interpretation and practice notes on the income tax implications arising from the adoption of IAS 39 or its local equivalent.

While in general most tax authorities require the tax treatments to follow or be consistent with the accounting treatment under FRS 139 as far as possible, they also acknowledge that the revenue versus capital consideration would need to be considered in determining the tax treatment.

As an example, in Singapore, the tax adjustment is such that the discount on the interest-free loan recognised in the income statement will not be allowed as a tax deduction and the interest income recorded will not be taxed because these are merely book entries.

The auditor’s primary role is still that of expressing an opinion as to the true and fair view of the financial statements. This means that corporations would still need to provide auditors with supporting evidence of the fair value of the related-party loans to enable auditors to express an opinion.

The fair value measurement rests on the rebuttable presumption that effective interest rates used in the amortised cost method is the market interest rate and is thus, at arm’s length. While this is generally true, loan arrangements made with unrelated parties in the current business environment should be considered as arm’s length, although they may not carry the same market interest rates due to various factors such as level of credit risks, tenure, size of collaterals, etc.

So, what would corporations provide to the auditors? Section 140A of the ITA provides that the acquisition or supply of property or services with related parties be conducted at arm’s length, failing which the Director General of Inland Revenue may adjust the transfer prices.

Since 2003, transfer pricing guidelines have been issued, setting out the extent of information required in a transfer pricing report. The guidelines also stipulate that it is a pre-requisite that a comparable analysis (benchmarking) be carried out to substantiate the arm’s length pricing.

To ensure that corporations provide auditors with the correct arm’s length and market rate interest for related-party loans in the FRS 139 measurement of fair value, it is very likely that a comparable analysis would need to be carried out. This should then provide the setting not only for the auditors but for the tax authorities in support of the argument for arm’s length. Any fair value book entries put through the financial statements should then be met with minimum queries from the tax authorities.

Abolition of Foreign Investment Guidelines in Malaysia

This is a re-cap from the liberalisation of Malaysian investment policies earlier in 2009. This is extracted from Maybank Investment:

Market-friendly Initiatives on corporate equity ownership. PM Najib’s abolition of FIC guidelines and other directives for GLCs, and capital raisings will mark him as one of the most market-friendly Malaysian prime ministers. We believe the changes would benefit commercial REITs, potentially raise interest in Sime and a handful of other stocks, and in the long-term, attract foreign direct investments.

The abolition of Foreign Investment Committee (FIC) rules for all corporate equity transactions and most property transactions could become a hallmark of Najib’s premiership. Foreign REIT managers would now have greater reason to enter and eventually list REITS on Bursa, while a major shareholder who had wanted to raise his shareholding may now do so more easily. Foreign ownership restrictions imposed by ministries / regulators remain in key sectors such as telecoms, water, energy, media.

GLCs to be further transformed. PM Najib has also instructed Government-linked companies (GLC) on two market-friendly moves: (i) government shareholdings in GLCs to be reduced to aid market liquidity and free-float, (ii) GLCs to dispose non-core assets. Both moves will render GLCs more attractive investments although it could initially dampen appetite for their shares. The moves would also benefit the investment banking community with more corporate deals.

Property, by comparison, was a sideshow. The FIC guideline changes to corporate equity ownership and equity raisings, and potential GLC activity, may well have a greater impact on the capital market than on physical property. In particular, individuals states may continue to impose conditions or require consent for foreign property ownership, frustrating foreign investements.

Table 1: Summary of Reforms

Reforms	Key measures
FIC deregulation	FIC guidelines on acquisition of interests, mergers and takeovers repeated with immediate effect FIC will no longer process share transactions nor impose equity conditions on such transactions
FIC approval on acquisition of properties	FIC will only process transactions involving dilution of Bumiputera and Government interests. Even then, FIC approval is only required for properties > RM20m All other transactions (e.g. transactions between foreigners and non-Bumiputeras) no longer require FIC approval
Corporate equity ownership	30% Bumiputera equity requirement during IPO is removed* SC, as sector regulator, will continue to impose at least 25% public spread requirement Bumiputera allocation of IPO shares to be 50% of public spread requirement No equity condition imposed on equity raisings post IPO except for RTOs and backdoor listings
Ownership in services industry	Wholesale segment of the fund management industry fully liberalized to allow 100% ownership Foreign shareholding limits for retail unit trust management companies and existing stock broking companies raised to 70% from current level of 49% BNM and SC will review all visa applications for the financial services industry and capital market respectively

5% RPGT: A prelude to full re-imposition?

One of the country's prominent tax practitioners believes that the revival of the RPGT by imposition of a 5% tax on capital gains on property transactions is a prelude to the full reintroduction of the previous RPGT regime. Here is an extract of the report in StarBiz:

The Government’s proposal to impose a real property gains tax (RPGT) of 5% from Jan 1 may just be a temporary measure, says Taxand Malaysia Sdn Bhd managing director Dr Veerinderjeet Singh.

“We feel that it is a temporary imposition. We think that in the long term, the original scale rates of 30%, 20%, 15%, etc will be coming back,” he told a press conference prior to a seminar on Budget 2010 jointly organised by Taxand and the Malaysian International Chamber of Commerce and Industry (MICCI) yesterday.

Interest Schemes in Malaysia

The Malaysian Companies Act offers an interesting alternative for plantation owners to gain access to investment funds. This is an alternative to conventional funding methods such as bank loans or being publicly-listed. This avenue should be of particular interest to plantations that are starting-up or undergoing a major replanting programme.

The first-ever Agricultural Investment Scheme ("AIS") approved by the Companies Commission of Malaysia ("CCM") is the Country Heights Growers Scheme ("CHGS") promoted by Tan Sri Lee Kim Yew, the creator of the upmarket gated communities of Country Heights in Kajang and Damansara and, the Mines Resort City.

After extensive research into AIS programmes in Australia, Canada, Scotland and several other countries, our law firm was able to conceptualise and present a concept paper on behalf of CHGS for CCM's consideration and approval.

CHGS established 40,000 investment units known as Growers Plots. The scheme was launched in March, 2007 and to-date, the takeup rate has been so phenomenal that more than 80% of available Growers Plots have been subscribed for.

With the success of the pioneering CHGS, plantation owners are now able to consider AIS as a fundraising option.

AIS gives plantation owners direct access to a ready pool of investors who are interested in a direct investment in the oil palm sector. An investor may invest in shares of a listed plantation company, which offer returns in the form of dividends and, gains (or losses) in the movement of share prices. The risks and returns are obvious to all. AIS, however, offers a steadier, yet attractive, rate of return which should appeal to risk-averse investors.

AIS is similar to a closed-end fixed yield instrument. This is one of the key features of CHGS. The annual yield payable to the investor is a range of percentages between 6% to 12% of the initial investment sum which is linked to the annual average price of crude palm oil ("CPO") published by the Malaysian Palm Oil Board ("MPOB").

The yield computation formula is designed to achieve 2 things:-

• It is easy for the investor to monitor his/her expected returns for the year.
• It is an objective formula i.e. not dependent on the operational efficiency of the plantation.

The added sweetener is that there is a bonus feature in that additional yields will be paid to the investor based on the actual tonnage of fresh fruit bunches ("FFB") harvested by the plantation.

AIS is an agricultural investment model that has arrived in Malaysia. It is worthy of consideration by plantation owners seeking access to investment funds for starting-up plantations or replanting programmes. To have a better idea of the AIS-model have a look at CHGS at http://www.chgs.com.my/.

RPGT: Real Property Gains Tax 2010

The Malaysian Government has decided to revive the imposition of the RPGT with effect from January 1, 2010.

Poon Yew Hoe of the accounting firm of Horwath has offered a perspective of the re-imposition of RPGT that should serve as a useful reference for property owners who plan to sell their properties in the near future. His views are extracted from StarBiz:

It may be possible by transferring properties to a company, but there are many pitfalls to consider

AT the recently concluded budget seminar of our firm, a major focus of the 650 attendees was the proposed real property gains tax (RPGT) of 5% to be imposed on disposals of property after Jan 1.

Resigned to the inevitability of the tax and the futility of objections, the ingenious ones posed the question to us on the possibility of tax minimisation by transferring their current properties to a company before Jan 1.

The plan calls for properties which were acquired many years ago at a cheap price (say RM1mil) to be transferred to a company controlled by them at the prevailing market price (say RM3mil).

The transfer will be effected before Jan 1, thus attracting no RPGT on the disposal.

In the future when the property is disposed off by the company, the company will only be taxed on the capital gain over and above the new cost of RM3mil.

If the disposal price by the company is RM4mil, the company will only pay tax on the capital gain of RM1mil (RM4mil less RM3mil) at the rate of 5%, thus resulting in RPGT of RM50,000.

A very ingenious idea indeed. The comparison of taxes payable shows a tax saving of RM100,000 calculated as seen in the table.

Before anyone embarks on such a potentially lucrative move, one has to bear in mind many of the pitfalls, some of which are discussed below.

Date of disposal

For the purpose of this discussion, the term “chargeable assets” is used to refer to properties and other assets that can be caught under RPGT.

Chargeable assets include shares in real property companies which are companies that predominantly hold assets in the form of properties or shares in other real property companies. Only chargeable assets disposed on Jan 1 or after will be assessed to RPGT. Those disposed of from April 1, 2007 to Dec 31, 2009 will not. A day is literally night and day for tax purposes!

But the term “disposal date” has a technical definition and it is not the date when the sales price is paid over as we usually consider a sale to be. In sales circles, as they say, a sale is not a sale until the money is collected!

However, for RPGT purposes, a sale is a sale on the day a written agreement is entered into.

Hence, the date that a sale and purchase agreement is entered into for the sale of a property is usually the date of disposal for RPGT purposes. But what if there is no written agreement?

The law provides that the date of disposal is the earlier of two dates – the date that the sales price is fully received or the date that the ownership is transferred. Disposals of this nature may have disposal dates being deferred to a later date, which may fall in the 5% taxable period!

Likewise, disposal dates may be deferred even much later if the sale is dependent on securing approvals from the “Government or an authority, or committee appointed by the Government” – for example, the state government, the Securities Commission (SC) or Foreign Investment Committee.

For these “conditional contracts” which are covered by Para 16 of Schedule 2 of the RPGT Act, the disposal date is when the last of the approvals is obtained.

If a sale and purchase agreement is signed in December 2009 that is subject to SC approval which is obtained in February 2010, the disposal will be treated as having taken place in 2010 and thus subject to the 5% RPGT!

Stamp duty on the transfer

Stamp duty is imposed on the documents for the transfer of title; for example, the memorandum of transfer for transfer of property.

The rates applicable are fairly steep for properties which range from 1% to 3% with the highest rate of 3% being applicable for transfer prices which exceed RM500,000.

Transfers of shares attract duty at the rate of RM3 for every RM1,000 of the transfer price or 0.3%.

However, to avoid stamp duty, one may wish to transfer the property without the transfer of title; for example, the owner holds the property in trust for the company.

What if no transfer of title is effected as in these circumstances? Will the issue of tax avoidance then arise? Perhaps.

Anti-tax avoidance in the RPGT Act

Section 25 of the RPGT Act contains the general anti-avoidance provisions which allow the tax authorities to disregard transactions, vary transactions or impose taxes that should have been imposed.

The law specifies that this right is available if the transactions had the effect of “altering the incidence of tax”, “relieving a person from tax liability” or “evading or avoiding any liability which would otherwise have been imposed”.

Besides these general anti-tax avoidance measures which are also found in the Income Tax Act to discourage income tax avoidance, Section 25 of the RPGT Act also provides for persons who provide loans to related parties; for example, Mr A providing loans to Company A which is owned by him.

The law provides that if Company A sells a property and the property was financed by a loan provided by Mr A, the disposal may be regarded as a disposal by Mr A and not by Company A.

However, the cost of acquisition to Mr A is the market value of the property when Company A acquired the property from Mr A. If Company A had acquired the property from Mr A at the true market value, this anti-tax avoidance provision of the RPGT Act should not pose any problem.

Previous rules by Ministry of Finance (MOF)

A few years ago, the Government had granted a similar tax free period from June 1, 2003 to May 31, 2004.

During that period, the MOF had issued some guidelines to curb the avoidance of RPGT by mandating that any disposal of property must be evidenced by a sales and purchase agreement which must be duly signed and stamped within the exemption period.

Sale of property to a company in exchange for shares

Care should be taken if the property owner transfers a property to a company controlled by him in exchange for shares, or at least 75% in the form of shares. If the transfer is done this way, the shares may be considered to be chargeable assets.

In the future when these shares are sold, the gains will be subject to the RPGT of 5%. The cost of shares for RPGT purposes is not the par value of the shares but the price paid by the property owner for the property plus incidental expenses incurred by him on the acquisition; for example, legal fees.

As such, if Mr B transfers a piece of property acquired for RM1mil to his company (Company B) at market price of RM3mil in exchange for 3 million RM1 shares, and the shares are subsequently sold for RM4mil, the gains on disposal are calculated at RM3mil which is RM4mil sales price less the acquisition price to Mr B of RM1mil.

Indirectly therefore, Mr B is taxed on his full capital gains and not merely on the gains made by Company B owned by him.

RPGT or income tax?

Another aspect which has deep implications is whether the disposer had held the property as stock-in-trade or as a long term investment.

If held as stock-in-trade, the gains on disposal will attract income tax whereas if held as a long term investment, the gains will attract RPGT.

Some property investments which are disposed as part of a quick sale, or as a single isolated transaction in circumstances which give it a cloak of “adventure in the nature of trade”, could be caught under income tax.

Due to space constraints, we are unable to elaborate on this issue. If these disposals are caught under income tax, what then is the advantage of disposing the properties before Jan 1 if the disposer has to pay income tax at 25% on the gains upfront?

The obstacles can be quite challenging as seen above and careful navigation of the tax law is necessary. But I am sure good tax advisers will find a way out of the conundrum!

New lottery games, including toto, coming up

The introduction of new products by number forecast operators (NFOs) is intended to draw consumers away from illegal operators and expand the legal market.

Magnum Corp Sdn Bhd, a 51% subsidiary of Multi-Purpose Holdings Bhd, and Berjaya Sports Toto Bhd (BToto) were given the green light by the Government in the middle of this year to introduce new games – the first since the Government froze approvals in 1992.

In September, Magnum launched the 4D Jackpot while BToto is expected to release a new lotto variant, Power Toto 6/55, by year-end to replace its existing lotto games, Toto 6/42.

BToto’s new game was expected to have a much larger matrix of numbers for punters to select and a minimum guaranteed upfront jackpot of RM3mil, the highest minimum jackpot size currently, a research house said.

The approvals given to the two companies, coupled with the authorities’ generous allocation of special draws, had turned the operating environment in favour of legal NFOs, said a bank-backed brokerage in a report.

“It may not be overly optimistic to expect the legal market to grow beyond the low single-digit level with the latest expansion of product offerings,” it said.

It noted that the sector had high single-digit growth from 2003 to 2005, partly due to the extension of product offerings to the permutation variant.

Sales of NFOs had grown at a compounded average growth rate of 2.5% in the past 10 years, it said.

In an e-mail reply to StarBiz, the management of Magnum indicated that the sector remained resilient despite the difficult economic conditions.

“Sales have improved in the last few years albeit in the single-digit range and this is likely to sustain. Every business is not spared from the recession but it also depends on how severe the impact is.

“We believe everyone wants to nurture a little hope in his life and, for some lucky ones, this comes true with Magnum,” it said.

Another industry player, who declined to be named, said the NFO was a small-ticket item, hence the affordability for consumers even in a downturn.

The performance of NFO companies in the last 12 months was also an indication of the sector’s resilience.

“Whether upturn or downturn, punters will continue to punt,” he said.

Source: StarBiz

MNCs face greater transfer pricing scrutiny

Multinationals are facing new tax challenges due to growing transfer pricing (TP) scrutiny by world’s tax authorities, according to a survey.

The survey by international accounting firm Ernst & Young found a dramatic increase in the scope of TP documentation required by governments with penalties imposed more frequently and at higher levels when multinationals get it wrong.

Locally, Malaysia has introduced the new Sections 140A and 138C of the Income Tax Act 1967 relating to TP, which referred to the price charged by one part of an organisation for products and services it provides to another.

Given the need for governments to raise revenues in this challenging economic climate and the changing regulatory environment, the study anticipates heightened litigation in the near future.

This expectation was driven by the almost universal trend towards increased TP investigation resources within tax authorities, it said, adding that this trend was also shared by Malaysia.

“As governments search for tax revenues to offset growing budget deficits, many are sharpening their focus on compliance, enforcement and legislative approaches,” said Ernst & Young Malaysia partner and head of transfer pricing, Janice Wong.

“It has thus become inevitable that both domestic and multinational businesses be prepared for more TP audits and investigations,” she said.

In Malaysia, the Inland Revenue Board (IRB) has set up a dedicated Multinational Tax Department to focus its efforts and resources on TP matters such as TP audit, compliance, policy and advance pricing arrangement.

The specialist resources consist of accountants, economists and those with business and finance backgrounds, and the dedicated resources are expected to increase significantly.

Source: StarBiz