11 November 2016
Global Tax Alert
Malaysia announces 2017 budget
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Executive summary On 21 October 2016, Malaysia announced its 2017 budget (the Budget). Key proposals include significant changes to the withholding tax rules, a temporary reduction of corporate income tax rates in certain circumstances, penalty provisions for failure to submit Country-by-Country (CbC) reports, and an increase in stamp duty rate for transfer of real estate valued above RM1 million (approximately US$240,000). In addition, it is confirmed that the 6% Goods and Services Tax (GST) rate will be retained. This Alert highlights key features of the Budget.
Detailed discussion Expansion of withholding tax on service fees and royalties The Budget proposes to amend the Malaysian withholding tax laws to apply a 10% withholding tax to all amounts paid or credited to nonresidents in consideration for services, even if such services are performed outside Malaysia. The Malaysian tax authorities take the position that service income of a nonresident is a “special class of income” distinct from business profits and widespread treaty protection may not be available. However, certain treaties may still provide relief or reduced withholding tax rates.
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Global Tax Alert
In addition, the budget proposes to expand the definition of “royalty” to include any consideration paid for the use of or the right to use software. Accordingly, such amounts will be subject to the 10% domestic royalty withholding tax which may be reduced under tax treaties.
Temporary reduction of corporate income tax rates The Government is proposing to reduce the current 24% tax rate by one to four percentage points, depending on the percentage of an increase in taxable income from the previous tax year. The proposed reduced rates would apply only for the years of assessment (YA)1 2017 and 2018, and are as follows:
% of increase in taxable income from previous YA
Percentage point in tax rate reduction (%)
Tax rate on incremental taxable income (%)2
5% - 9.99%
1
23
10% - 14.99%
2
22
15% - 19.99%
3
21
Over 20%
4
20
Penalty provisions introduced for CbC reporting The Malaysian Government previously announced its intent to implement CbC reporting requirements.3 In order to ensure compliance with the expected changes, the Budget proposes to introduce penalties for the failure to furnish CbC reports, incorrect reporting or omission of information, and noncompliance with mutual administrative assistance. Failure to comply with the rules may subject a taxpayer to a fine of between RM20,000 (US$4,800) and RM100,000 (US$24,000), imprisonment for a maximum of 6 months, or both. The court may also issue a further order to the person to comply with the rules within 30 days or any other period as the court deems appropriate.
One percentage point increase in stamp duty rate for transfer of real estate valued above RM1 million (US$240,000) The Budget proposes to increase the stamp duty rate on the transfer of real estate of more than RM1 million (US$240,000) from 3% to 4%. It is expected that the increased stamp duty rate of 4% will only apply to amounts in excess of RM1 million.
There have been informal clarifications that the above reduction would only apply to business income and not to passive income such as interest income or non-business rental income. It also suggested that the reduced tax rates for YA 2017 will be available only to a company that is in a taxable position for YA 2016. Similarly, the reduced rates for YA 2018 will apply only if a company is in a taxable position for YA 2017. An Exemption Order will be released in due course to formalize this proposal.
Endnotes 1. The term refers to an accounting/financial year which ends in that particular calendar year. 2. The reduced tax rate applies on incremental taxable income compared to the immediate preceding YA. For example, if the taxable income of a company for YA 2016 and YA 2017 are RM10 million and RM12 million respectively, the tax rate for incremental taxable income of RM2 million (i.e., 20% increase) is 20%. 3. See Global Tax Alert, Malaysia plans to introduce Country-by-Country Reporting and Master File-Local File Documentation requirements, dated 31 March 2016.
Global Tax Alert
For additional information with respect to this Alert, please contact the following:
Ernst & Young Tax Consultants Sdn Bhd, Kuala Lumpur • Amarjeet Singh • Anil Kumar Puri
+6 03 7495 8383 +6 03 7495 8413
Ernst & Young LLP, Asia Pacific Business Group, New York • Chris Finnerty • Kaz Parsch • Bee-Khun Yap
+1 212 773 7479 +1 212 773 7201 +1 212 773 1816
Ernst & Young LLP, Asia Pacific Business Group, Houston • Trang Martin
+1 713 751 5775
[email protected] [email protected]
[email protected] [email protected] [email protected]
[email protected]
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