ACC3024 : Advanced Taxation

Lecture 2
Advanced Aspects in Corporate Taxation
(Part 2)

Topics
Residence status for an incorporated entity
meaning of control and management

s.8
Case law
Residence = Permanent Establishment??

Operation carried out in Malaysia

s.12
Case law

Residence of companies
3 common tests used to determine the
residency of a company:

Incorporation Test

Central Management and Control Test

Other Controlling Authority Test (not included in
ITA 67)
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Residence rules company

s.8(1)(b)
a company /carrying on a business is
resident in Malaysia for the basis year
(calendar year) for a YA if at any time during
that basis year the management and control of
its business is exercised in Malaysia
s.8(1)(c)
/ management and control of its affairs are
exercised in Malaysia by its directors or other
controlling authority.
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Residence rules company

Management and control of its business/ affairs
in Malaysia resident in Malaysia
Place of business [s.8(1)(b)] Permanent
Establishment (see later slides)
place where Board of Directors (not shareholders)
meet [s.8(1)(c)]

A question of fact
N.B. Not place of operations or place company
was incorporated
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Incorporation test

A company is a Malaysian Resident for tax
if it is incorporated in Malaysia straightforward.

Questions wont be that simple. In a real
situation, entity will never be incorporated
in Malaysia, thus requiring you to go onto
the next test.

Example, sales branch setup by a foreign
company permanent establishment, see
later slides.
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Illustration
ABC Pte Ltd (company in Australia) setup a sales
office in Malaysia. This office is authorised to:
accept sales orders from customers;
negotiate sales prices;
Handle after sale services (e.g. change of
defective goods, refund, complaints)
Goods are made in Australia, sales office in
Malaysia keeps sufficient stocks for domestic
market.
Discuss the tax implication(s).

Illustration
Incorporation

Place of business

Accept orders
Negotiate prices
Keep stock (mere stock keeping does not constitute place
of business)

Sales office might be a tax resident by virtue of

s.8(1)(b) (see later slides)
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Central management & control test

A company is Malaysian Resident for tax if it:
has its central management and control in
Malaysia;

it is deemed to have carried on business in

Malaysia

Looks like two tests but is really only one (see

Malayan Shipping Co Ltd v FCT).

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Malayan Shipping... v FCT

Facts of the case:
Incorporated in Singapore.
Registered office in Singapore.
Major shareholder and managing director, Mr.
Sleigh, was an Australian resident.
He had broad powers and could approve and
appoint or remove directors easily.
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Malayan Shipping v FCT

Facts of the case:

The companys day to day activities were not
conducted in Australia

It involved chartering a ship in London and subchartering it in Singaporean waters.

There was no actual business conducted in
Australia.

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Malayan Shipping... V FCT

Outcome of the case:

Central management and control was with Mr. Sleigh,
an Australian resident.

Therefore the central management and control was in
Australia.

Since central management and control was in
Australia, the company was carrying on a business in
Australia.

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Residence rules company

Significance of being a tax resident
No obligation to withhold tax for payment to
resident companies*
Entitlement to tax incentives (e.g. Sch 7A para
1 reinvestment allowance)*
Entitlement to double tax relief (e.g. Sch 7
para 1)*
*Will be covered later

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Residence rules company

Significance of being a tax resident cont
Entitlement to lower tax rate depending on paid
up capital (Sch 1 para 2A)
Prior to YA 2008 resident companies must
comply with the then s.108 provisions on paying
dividends (see corporate distributions)

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Permanent Establishment (PE)

Resident (s.12 of ITA 1967)

place of management
branch, office
factory, workshop
supervisory role at building site
or construction, installation or
assembly project > 6 months
(varies on DTA)
regularly conclude contracts
(including sales and other
contracts)
regularly purchase AND maintain
stock in trade (mere purchasing
OR storage is not PE)

Management & control of business:

Trade and adventure or concern
in the nature of trade
negotiate, fix pricing,
conclude revenue contracts
regularly
Sales activities, taking sales
orders, customer service

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PE vs Resident Common Characteristics

Management & control of affairs:

Location where ultimate control
is exercised
Place for strategic decision
making
Board meeting

Very likely, but not always

Question of facts, must look at the activities
carried out by entity
Example 1: AJS Ltd, an Australian company setup
a sales office in KL to take care of the sales
activities in Malaysia. However, this sales office
will not carry any stock and shipment of goods to
Malaysian customers is directly from Australia. Is
the sales office a:
PE in Malaysia?
Tax resident in Malaysia?

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Is PE a Tax Resident?

AJS Ltds Sales Office in Msia

place of management
branch, office
factory, workshop
supervisory role at building site or
construction, installation or
assembly project > 6 months (varies
on DTA)
regularly conclude contracts
(including sales and other contracts)
regularly purchase AND maintain
stock in trade (mere purchasing OR
storage is not PE)

Resident (s.12 of ITA 1967)

Management & control of business:
Trade and adventure or concern in
the nature of trade
negotiate, fix pricing, conclude
revenue contracts regularly
Sales activities, taking sales
orders, customer service

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Permanent Establishment (PE)

Management & control of affairs:

Location where ultimate control is
exercised
Place for strategic decision making
Board meeting

AJS Ltds sales office is both PE and tax resident in Malaysia

ONLY income derived by sales office from Malaysia will be
taxed.

 Example 2: AJS Ltd, an Australian company secured a

service contract to oversee and supervise a construction
project launched by a Malaysian company. The contract
duration is for 10 months. This service contract is
negotiated and concluded by Australian directors. AJS will
setup a temporary site office in Malaysia to house its
engineers, however these engineers are not allowed to
take any variation order from the Malaysian company
without approval from HQ at Australia. The office will be
closed once the contract is over. Is the site office a:
PE in Malaysia?
Tax resident in Malaysia?

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Is PE a Tax Resident?

Permanent Establishment (PE)

Resident (s.12 of ITA 1967)

place of management
branch, office
factory, workshop
supervisory role at building site
or construction, installation or
assembly project > 6 months
(varies on DTA)
regularly conclude contracts
(including sales and other
contracts)
regularly purchase AND maintain
stock in trade (mere purchasing
OR storage is not PE)

Management & control of business:

Trade and adventure or concern
in the nature of trade
negotiate, fix pricing,
conclude revenue contracts
regularly
Sales activities, taking sales
orders, customer service

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AJS Ltds Site Office in Msia

Management & control of affairs:

Location where ultimate control
is exercised
Place for strategic decision
making
Board meeting

AJS Ltds Site Office in Msia

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AJS Ltds site office is PE but not tax resident in Malaysia

Income derived from Malaysian company (i.e. contract sum)
will be taxed as s.4(a) business income in Malaysia at nonresident tax rate as business operation (as in PE) is carried on
within Malaysia [s.12(1)(a)]:
engineers are in Malaysia to supervise and monitor
construction project; and
Construction site/ project undertaken in Malaysia
As the site office is a non-resident, thus withholding tax
provision applies [s.107A]

 Then AJS Ltds site office is not quite a PE and not tax resident
in Malaysia
Issue term office not clearly defined in DTA
Income derived from Malaysian contractee (i.e. contract sum)
still tax as s.4(a) business income at non-resident tax rate as
business operation (as in PE) is carried on within Malaysia
[s.12(1)(a)]:
engineers are in Malaysia to supervise and monitor
construction project; and
Construction site/ project undertaken in Malaysia
Withholding tax provision still applies [s.107A]

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AJS Ltds Site Office in Msia What If Contract

Duration Is 3 months Only?

Example 3: AJS Ltd, an Australian company setup a

warehouse cum purchasing office in KL to store all stock in
trade acquired from contracted Malaysian suppliers
(purchase prices fixed). The warehouse manager will reorder the stocks when they are running low. All sales
transactions with Malaysian customers are processed in
Australia (via B2B online portal) and the KL warehouse will
deliver goods when instruction is received from HQ in
Australia. All major management decisions in respect of
this warehouse must be made in Australia. Is the
warehouse a:
PE in Malaysia?
Tax resident in Malaysia?

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Is PE a Tax Resident?

Permanent Establishment (PE)

Resident (s.12 of ITA 1967)

place of management
branch, office
factory, workshop
supervisory role at building site
or construction, installation or
assembly project > 6 months
(varies on DTA)
regularly conclude contracts
(including sales and other
contracts)
regularly purchase AND maintain
stock in trade (mere purchasing
OR storage is not PE)

Management & control of business:

Trade and adventure or concern
in the nature of trade
negotiate, fix pricing,
conclude revenue contracts
regularly
Sales activities, taking sales
orders, customer service

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AJS Ltds Warehouse Cum Purchasing Office in

Msia

Management & control of affairs:

Location where ultimate control
is exercised
Place for strategic decision
making
Board meeting

 AJS Ltds warehouse is PE but not tax resident in Malaysia

Very sticky situation - income derived from Malaysian
customers might be taxed in Malaysia at non-resident tax
rate as certain part of business operation (as in PE) is carried
on within Malaysia [s.12(1)(a)], especially if the sustainability
of the business in Malaysia is affected by the warehouse
operation
Not practical, very difficult to do business under this setup;
problems in certification, license and permit applications as
no subsidiary company is incorporated
Better arrangement would be AJS to use commercial
warehouse space and delivery services (e.g. DHL), all
replenishment orders will be issued at HQ in Australia

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AJS Ltds Warehouse Cum Purchasing Office in

Msia

Quite certainly, but somehow not always

Question of facts, must look at how an entity attained its
tax resident status
Example 4: AJS Ltd, a company with place of business and
registered in Singapore. Mr. A, the major shareholder
(70% shareholding), CEO cum chairman of the board of
AJS, is residing at Johor Bahru. He works from home most
of the time and occasionally meet his senior executives
via video-conferencing from home. Managers are
authorised to make operational and general management
decision but all major strategic decisions must come from
Mr. A and the board. In many occasions, board meeting
was held at Johor Bahru. Is AJS Ltd a:

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Is Tax Resident a PE?

PE in Malaysia?
Tax resident in Malaysia?

Permanent Establishment (PE)

Resident (s.12 of ITA 1967)

place of management
branch, office
factory, workshop
supervisory role at building site or
construction, installation or
assembly project > 6 months (varies
on DTA)
regularly conclude contracts
(including sales and other contracts)
regularly purchase AND maintain
stock in trade (mere purchasing OR
storage is not PE)

Management & control of business:

Trade and adventure or concern in
the nature of trade
negotiate, fix pricing, conclude
revenue contracts regularly
Sales activities, taking sales
orders, customer service

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AJS Ltds Status in Msia

Management & control of affairs:

Location where ultimate control is
exercised
Place for strategic decision making
Board meeting

AJS Ltd is likely to be a tax resident without clear PE identity in

Malaysia
Case: Malayan Shipping Co Ltd v FCT

Operation carried out in Malaysia

s.12 of ITA67 income derived from Malaysia from
business, if:
ss.1(a) income not attributable to operations
outside Malaysia (i.e. attributable to operations in
Malaysia);
ss.1(b) income from sale outside Malaysia article,
product, produce or other thing, manufactured,
grown, mined, produced or harvested in Malaysia
(i.e. export sales).

Kyros International v DGIR

Facts o the case:
Taxpayer is operating a kebab fast food chain with
good reputation.
It is the registered owner of the trade mark KYROS.
Taxpayer granted sole and exclusive right to
franchisees to operate in designated areas.
The exclusive right involves
proprietary trade mark, KYROS; and
the operating system of the taxpayer.

Kyros International v DGIR

Facts o the case cont:
Taxpayer supports franchisees in operations
by giving the following services:
audit on the operating system to ensure
compliance with SOP; and
giving advice to franchisees on ways to improve
operations and business development.

In order to achieve the services above,

taxpayer sends staffs to franchisees.

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Kyros International v DGIR

So? What is the problem?!
Taxpayer claimed that franchise fees received
from Pakistan, China, Indonesia, Singapore,
and Brunei are exempt under Para 28 Sch 6:
payers of fees (franchisees) are located overseas;
taxpayer is not a BIAS company.

Kyros International v DGIR

IRB contended:
fees should be taxed under s.4(a) with reference to s.12;
Penalty should be imposed under s.113 for making
incorrect return by omitting or understating taxpayers
income.

IRBs reasons:
the fees received, by the taxpayer for the franchise owned,
services and advice provided by taxpayer are indeed based
on an operation outside Malaysia.
Caught under s.12(1)(a).

Kyros International v DGIR

SCIT held in favour of taxapyer:
We find as a fact the execution or operations of
business by the foreign franchisees took place outside
Malaysia, through the evidence of the Respondent's
witness (RW1). The foreign franchisees are independent,
i.e. not related to the Appellant. We therefore hold that
all activities in respect of the agreements entered into
with the foreign entities took place outside Malaysia.
SCIT cited CIR v. Hang Seng Bank which states profit
will have arisen in or derived from the place where the
property was let, the money was lent.

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Kyros International v DGIR

High Court (HC) (2012) overturned SCITs decision:
Error in law to cite CIR v. Hang Seng Bank by SCIT
There was no letting of property as in CIB v Hang Seng
Bank in this case
The fees were related to services provided by taxpayer to
franchisees, fees in question do no include exploitation of
trade mark
However, HC ordered IRB not to impose penalty as :
Franchise fee is not clearly covered in the Act; and
Taxpayer did not hide any information about the fees
received.

Kyros International v DGIR

Court of Appeal (2013) overturned HCs
decision:
Taxpayer argued that the fees were related to the
exclusive right granted overseas.
IRBs councils failed to show clear evidence to link
the franchise fees to services provided by
taxpayer, so HC cannot rebut finding by SCIT
Technically, HC should not question SCITs finding
on the operation of taxpayer was located outside
of Malaysia (court proceeding problem).

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