Bp34303 Specialised Tax Topic : Transfer Pricing, Advanced Pricing Arrangement and REIT

Bp34303 Specialised Tax Topic : Transfer Pricing , Advanced Pricing Arrangement and REIT.

GROUP MEMBERS. No NAME NO Matric 1 JULIA BINTI MOHD JULASRI BB18110139 2 NURUL ATIQAH FARHANA BINTI MANSUR BB18110174 3 NORAZLIN BINTI YUNUS BB18110140 4 NORHAZIRAH BINTI JIKRI BB18110206 5 FARDAWANI BINTI YAKOB BB18110218.

01. Transfer Pricing. CONTENTS. 1.5.1 Definition 1.5.2 Transfer Pricing Guidelines 1.5.3 Overview of the 2012 Transfer Pricing Rules 1.5.4 Application of Transfer Pricing Rules 1.5.5 Procedure to Apply Transfer Pricing Methods 1.5.6 Comparability of Transactions 1.5.7 Transfer Price for Separate and Combined Transactions 1.5.8 Transfer Pricing Documentation 1.5.9 Prescribed Form 1.5.10 Failure to Maintain Contemporaneous Transfer Pricing Documentation 1.5.11 Powers of DGIR 1.5.12 Intra-group services 1.5.13 Interest on Financial Assistance 1.5.14 Permanent Establishment 1.6 Self-Amendment of Income Tax Return.

01. Transfer Pricing. The 2012 Income Tax (Transfer Pricing) Rules [PU(A) 132/2012] - 11 May2012 Rules are deemed from 1 January 2009..

1.5.1 Definition The setting of rates at which products and services are transacted between related parties, particularly between corporations in different tax countries. 1.5.2 Transfer Pricing Guidelines designed to provide multinational companies (MNEs) with all required information on the country's transfer pricing policy The rules must be read in conjunction with the transfer pricing legislation enacted under the Malaysian Income Tax Act 1967's anti-avoidance provisions sec 140 and sec 140A. (MITA). 1.5.3 Overview of the 2012 Transfer Pricing Rules 14 Rules Rule 1 - the title of the gazette order and the retroactive start date, which is January 1, 2009 Rule 2 - describes the scope and application. Rule 3 explains how crucial terms should be interpreted. Interpretation of key words “Controlled transaction” refers the transaction referred to in subsections 140A(2) and (5) of MITA. “Property” includes any goods, movable or immovable thing, or property and beneficially owned property "Service" includes any rights, benefits, privileges or facilities that are, or to be, provided, granted or conferred under an arrangement Rules 4 - a requirement for taxpayers to prepare and maintain “contemporaneous transfer pricing documentation”.

1.5.4 Application of Transfer Pricing Rules "controlled transactions" involving the acquisition or delivery of property or services, as well as the methods for administering them “controlled transaction” are those that take place between associated parties, in contrast to arm’s length deals The arm’s length principle is defined in para 1 of Article 9 of the OECD Model Tax Convention 2003 as follows: “when conditions are made or imposed between the two enterprises, then any profits which would, but for those conditions, have not so accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.” 1.5.5 Procedure to Apply Transfer Pricing Methods. the approaches employed to determine “arm’s length price” for the acquisition or supply of property or services traditional transactional methods Comparable Uncontrolled Price Method (CUP); Resale Price Method (RPM); or Cost Plus Method (CPM). transactional methods if the traditional transactional methods cannot be reliably applied or cannot be Profit Split Method (PSM); or Transactional Net Margin Method (TNMM). applied at all.

1.5.6 Comparability of Transactions arm’s length price (Rule 5) and it deals with comparability of transactions the basis to compare with a controlled transaction the comparability factors of both transactions are sufficiently similar; none of the differences in respect of the comparability factors between both transactions or reasonably accurate adjustments 1.5.7 Transfer Price for Separate and Combined Transactions determine the arm's length price for each controlled transaction by these Rules (Rule 7). DGIR - combination of transactions 1.5.8 Transfer Pricing Documentation "contemporaneous transfer pricing documentation" (Rule 4)' organizational structure nature of the business or industry and market conditions the controlled transaction; strategies, assumptions and information comparability, functional and risk analysis; selection of the transfer pricing method..

1.5.9 Prescribed Form Malaysian corporations engage in related party transactions Must describe such transactions in Part N of the annual income tax return (Form C) Form C: specified form that each corporate taxpayer must file within seven months of the end of the financial period. 1.5.10 Failure to Maintain Contemporaneous Transfer Pricing Documentation tax authorities may levy a 45 percent penalty on the excess tax owed penalty rates can be reduced for taxpayers who keep complete and thorough transfer price paperwork. Section 82 ITA: such records must be preserved for seven years 1.5.11 Powers of DGIR Rule 8: allows DGIR to completely dismiss any structure used by an individual in entering into a controlled transaction if: the economic substance of the transaction differs from its form despite the fact that the form and substance are the same, the arrangements made in relation to the transaction, when viewed as a whole, differ from those that would have been used by independent persons acting in a commercially rational manner and the actual structure impedes the from determining an appropriate transfer price.

1.5.12 Intra-group services Rule 9: person must show that the intra-group services have been rendered that the provision of such services has conferred an economic benefit or commercial value to his business that the charge for the services is justified Rule 10: when an individual enters a cost contribution arrangement with an associated person to share the costs and risks of acquiring or supplying property or services, he must: Determine the allocation costs, Determine the payment that would have been made in a similar arrangement by an independent person dealing with each other at arm's length Rule 11: If a person bears the expenditures and risks connected with the creation of an intangible property, that person is regarded to be the owner of that intangible property and is entitled to any revenue related to that intangible property.

1.5.13 Interest on Financial Assistance Rule 12: The arm’s length interest rate shall be determined by person in a controlled transaction that provides/receives financial assistance directly/indirectly, to/from another person, with/without consideration. Rule 13: Adjustment to reflect the arm’s length price or interest rate may be done by DGIR if it believes that any price including the rate of interest imposed or would have imposed in a controlled transaction is not at arm’s length. 1.5.14 Permanent Establishment Rule 14: Permanent Establishment treated as a distinct and separate entity from its head office and related branches. Rule 14(2): Permanent Establishment have same meaning assigned to it in the Double Taxation Agreement (DTA). If no DTA made under S.132 MITA, Permanent Establishment means: - a fixed place of business through which the person’s business is wholly or partly carried on - a fixed place of business of another person through which the particular person makes supplies.

1.6 Self Amendment of Income Tax Return Self Assessment System (SAS) S.77B allows to amend income tax return for an additional assessment. S.2 defined ‘person’ as company, a body of person, corporation sole. - tax return submitted by taxpayer become notice of assessment on the day the return is submitted to DGIR.

02. Advanced Pricing Arrangement.

1.7.1 Definition Income Tax (Advance Pricing Arrangement) Rules 2012 audit a mechanism entered into by a taxpayer and the relevant tax authorities arm' S length principle of their CIOSS border sets out the terms and conditions for a taxpayer to apply for an APA the application process post agreement compliance requirement 1.7.2 Categories of APA Unilateral APA tax authority confirmation of tax taxpayer’s transfer pricing position domestically.

Bilateral AP A Related party MIRB & Foreign tax authority negotiate and agree on the transfer price application by Malaysian & its foreign related party for the said transaction..

Multilateral APA Related parties When arrangement is arrived at both domestic & foreign tax authority.

The Income Tax (Advance Pricing Arrangement) Rules 2012 stipulate that any person carrying out a cross border transaction APA with the DGIR transfer pricing methodology EXAMPLE QUESTION Alam Electronics Sdn Bhd. Is a Malaysian resident company in the business of manufacturing of electrical appliances in Shah Alam . The share capital of RM5 million of Alam Electronics Sdn.Bhd . is fully owned by Malaysian shareholders. Required: Compute the income tax liability of Alam Electronics Sdn . Bhd. for the year assessment 2011..

Suggested a nswer: Cornputation of Tax Liability for Alam Electronics Sdn.Bhd. for the year assessment 2011 4(a): Business Net profit tax CCFt Of sales: Donation of appliances Theft of stock Insurance recovery Other income: Rent Dividend Rumeneration: Recruitment Entertainment allowance (500/0 disallowed) Unapproved fund Disabled employee salaries Professional fees: Legal fees on unfair dismissal Non-trade debt Accounting and auditing Income tax appeal Feasibility study Advertising Interest on borrowing Entertainment: Hampers for customers (50% x 4,000) Staff refreshments Promotional gifts Disbursement of promotion (50%) mubtful debts Add (+) 19,882,000 70,000 Nil Nil 220,000 71,400 2,500 Nil 5,000 15,000 34,000 2,000 22,500 60,000 Deduct 180,000 75,000 48,000 54,000 Lease Rental: Peugeot (75,000 - 50,000) (maximum RM50,OOO) Nissan van Repairs and maintenance: New alarm system (capital) Component parts of machinery painting Of factory Modification for disabled employees Foreign Exchange: Unrealised loss on sale goods Realised loss on purchase of machinery Fines: Traffic fines penalty (Income tax) thnations: Scholarships Cultural show university library (115,000 - 100,000) Approved institution Insurance: credit insurance Motor vehicles, stock and buildings Keyman insurance-term Research and development: Fixtures and equipment Operating costs Depreciation Adjusted Income (+) Balancing charge (-) Capital allowance 25,000 54,000 25,000 49 40,000 15,000 7,000 15,000 100,000 72,000 200,000 20,986,400 (969,000) 46,000 125,000) 48,000 564,000 969,000.

*Tax payable RM19,542,400 @25% = RM4,885,600. (-) Balancing allowance Statutory income Investment Tax Allowance (-) Business loss b/f — section 43(2) (+) Other income: Rental (exempt) Single tier dividend Aggregate Income (-) Approved donation: Cash (subject to 10% restriction) Total/ChargeabIe income (24,000) 19,914,400 (230,000) (42,000) 19,642,400 Nil Nil 19,642,400 100,000 19,542,400.

03. REIT Real Estate Investment Trusts.

4.1 Definition a unit trust scheme that invests or seeks to invest principally in income-generating real estate real estate refers to land and the natural features of the land, as well as everything related to the property both below and above ground. REITs should be established and operated by a SC-approved management business. 4.2 Tax Treatment 4.2.1 Tax Treatment on REIT Income (Section 61A (1)) Rental, dividend, interest, and capital gains are all possible sources of revenue for REITS. Property revaluation gains (capital gains) and some interest incomes are excluded from the calculation of REIT total income (tax-exempt). Starting in YA 2017, only REITs listed on Bursa Malaysia are totally free from tax for a year of assessment if they distribute 90% or more of their total revenue to unit holders throughout the base period for that year of assessment Before distributing revenue (generated from Malaysia) to unit holders, REITs must deduct a withholding tax at the rate applicable to such income, according to Section 109D..

4.2.2 Tax Treatment on Rental Income Section 4(a): W.e.f. YA 2005, rental income received by REITs from investments in real properties is treated as business income Expenses that are fully expended in the production of rental revenue can be deducted from gross income only to the extent that they are wholly incurred in the production of rental income in that year Compensation of the REITs management is deductible Trustee’s fee: not allowed (section 33(1)) Fees for legal, valuation, and consultation for establishing REITs prior to SC approval are also permitted as deductions 4.2.3 Tax Treatment on Interest and Dividend Income Interest income received by REITs from the following is exempt from tax: Saving certificates issued by the government. Securities or bonds issued or guaranteed by the government. Debentures, other than convertible loan stock, approved by the SC. Bon Simpanan Malaysia issued by Bank Negara Malaysia. A bank or financial institution licensed under the Banking and Financial Institutions Act 1989 or Islamic Banking Act 1983. Bonds and securities issued by Pengurusan Danaharta Nasional Berhad . Interest received from a foreign source and remitted to Malaysia..

4.2.4 Incentives to Investors of Real Estate Investment Trusts (REITs) Investors in Real Estate Investment Trusts (REITs) will benefit from the following tax breaks for additional three years (from 1st January 2017 to 31st December 2019): Profit distributions from REITs listed on Bursa Malaysia are subject to a final withholding tax of 10% for foreign institutional investors, notably pension funds and collective investment funds Non-corporate investors, including resident and non-resident individuals and other local entities, are subject to a final withholding tax of 10% With effect from YA 2016, the tax rate on income delivered by a REIT to a unit holder that is a non-resident firm has been decreased to 24 percent from 25 percent..

EXAMPLE 1 IntelekLand REIT, a listed and approved REIT received rental from the letting of a hotel and tax-exempt interest. For the year ended 31 March 2020, IntelekLand and REIT claimed capital allowances of RM15,000 and had the following Income and Expenditure Statement:.

REQUIRED: Compute total income, chargeable income and tax liability for IntelekLand REIT for the year of assessment 2020..

Closed-end fund (CEF) is governed by Section 60H of the ITA 1967..

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