Malaysia: The end of international tax planning?

CROSS-border taxation in current times is poised for significant changes.

Tax is key in foreign ventures. Absent tax strategies and foreign tax leakages would erode margins and return of investment.

Although international tax-efficient strategies to mitigate capital gains tax (CGT), withholding tax (WHT) and the risk of creating a taxable presence (also known as permanent establishment (PE) in the tax world) are common – all these are likely to be a thing of the past.

If the CFO of a Malaysian MNC is not aware of the OECD/G20 Base erosion and profit shifting (BEPS) project, then he has reason to worry. There is a common misconception that BEPS relates solely to transfer pricing (TP) and Country-by-Country Reporting (CbCR) but the fact is that there are 15 action plans that one could not afford to miss – in particular, the tax treaty reliance and PE which are fundamentals to international tax planning.

In October 2015, the OECD secretariat published 13 final reports and an explanatory statement outlining consensus actions under the BEPS project. As expected, the G20 finance ministers endorsed the final package of measures for a comprehensive, coherent and coordinated reform of the international tax rules in Lima, Peru.

What exactly is BEPS? Does BEPS really matter to Malaysian corporates? BEPS simply means a strategy used by MNCs to achieve global tax efficiencies by taking advantage of the differences in taxation systems and treatment of income/expenses in different jurisdictions. Whilst international tax planning is not illegal, tax authorities around the globe are certainly not prepared to lose their fair share of tax collection.

In 2012, the G20 commissioned the OECD to look into this matter. Although Malaysia is neither a member of OECD nor G20, the BEPS measures will be adopted and have indeed been adopted for certain areas.

Time and tide wait for no man. If you have not considered BEPS aspects for your outbound investment, it is time to do so. We expect the present Malaysian tax treaties to be amended via the Multilateral Instrument route sometime in 2018.

Even without BEPS, Malaysian corporates investing overseas could be impacted by some unilateral anti-avoidance measures such the diverted profit tax regime in the UK and the similar regime proposed by Australia and France.

Amongst others, the CFO should review the sustainability of the group’s international holding and financing structures. The old structure could be based on “treaty shopping”. For example, the likes of the Malaysia-Mauritius-India structure may no longer work post–BEPS given the stringent anti-treaty shopping BEPS rule which would deny treaty benefit if the main purpose of the structure is for tax avoidance.

Post-BEPS, the risk of Malaysian companies creating an agency and fixed place PEs in foreign jurisdictions would be significantly higher.

The consequences of having a PE overseas is that the PE would need to file a corporate tax return (and perhaps a VAT return too) in the country concerned. Meeting the filing obligation is one thing, attributing profits to the PE is another major challenge. Herein lies the problem where the foreign tax authorities may seek to tax profits more than they are supposed to

. Transfer pricing comes into play on profit but as always, this is a subjective area and prone to litigation. Hence, it is best to avoid a PE, if possible. Therefore, the understanding of the existing and new PE rules pre-BEPS is key.

Moving forward, the tax planning of splitting long-term contracts with a view to avoiding the Malaysian MNC from creating a PE overseas would be curbed.

There are many other situations which will be impacted by BEPS. As a whole, the continued reliance on tax treaties would be in doubt, coupled with increased PE risks and documentation requirements/CbCR. Impacts of the BEPS project on the business supply chain and cross-border financing are insurmountable.

BEPS is coming to town. On Dec 23, the Malaysian authorities issued Income Tax (Country-by-Country Reporting) Rules 2016 (CbCR Rules), in line with the final recommendations of OECD BEPS Action Point 13.

The rules are based on the model legislation contained in the Country-by-Country implementation package of OECD.

his is the beginning of BEPS in Malaysia. Other changes on treaty shopping, PE etc. are on their way and could be implemented as early as 2018.

To sum up, the practicality of international tax planning schemes, especially those without solid commercial reasoning would be in serious doubt.

It is timely for Malaysian MNCs to reassess their overseas ventures. Tax risk management and compliance would probably be the main focus in the future.

Doing nothing and hoping that BEPS measures would not be adopted in Malaysian tax treaties is not an option. The re-imposition of Malaysian WHT on offshore services and the expansion of the meaning of royalty would further complicate cross-border deals.

  • Tan Hooi Beng is executive director of the international tax services group of Deloitte in Malaysia. The views above are his own.