Tuesday, 19 March 2019

Sugar tax in Malaysia: Sweet idea or bitter pill?




by Dave Ananth

Dave Ananth, Senior Tax Counsel with Stace Hammond Lawyers, is based in Auckland, New Zealand. He is a senior lawyer, a former Magistrate and advocate in Malaysia before taking up a position with the Inland Revenue Department in New Zealand as a Prosecutor. He is an expert in taxation and tax policy. He also writes extensively on direct and indirect tax issues in Malaysia and New Zealand. He is a consultant for Wolters Kluwer Malaysia. He can be reached at davea@shg.co.nz.



The usage of tax to change “unhealthy behaviour” is not uncommon. Examples include “sin taxes” on cigarettes and alcohol, tax on high fat food (Denmark) and a “metabo” law (Japan) which was introduced to overcome obesity through annual measurement of waist circumference, provision of weight loss classes and the imposition of fines[1].

Malaysia’s sweet tooth

In August 2018, Damanasara MP Tony Pua floated the idea of a “soda tax” to kill two birds with one stone – to increase government revenue and encourage healthy living. A few weeks later, Prime Minister Dr Mahathir Mohamad says the government is considering implementing a soda tax to encourage healthy living and reduce sugar consumption as the diabetes rate in Malaysia is very high.

It cannot be denied that Malaysians are eating and drinking too much sugar. Not just from soft drinks, but from other sweetened drinks (teh tarik), local kuih (cakes) and biscuits. Per the chart below, the estimated daily consumption of sugar is the highest among Malaysians[2] in Southeast Asia (SEA).

It was reported that in 2017, about 16.74% of adults in Malaysia have diabetes. While it is not the highest in the world (Malaysia ranks 12), Malaysia still has the highest number of diabetes sufferers in SEA[3]. It is also worth noting that Malaysia has the highest levels of obesity sufferers in SEA, at 15.6%. Again, while Malaysia is not the highest in the world[4], it is still a cause for concern. Total (direct and indirect) costs of obesity are highest in Malaysia, amid SEA, where it is estimated to be between 10% and 19% of national healthcare spending[5].

Wednesday, 13 February 2019

Managing Sustainability Reporting

In 2015, Bursa Malaysia launched its Sustainability Framework, making it mandatory for all public-listed companies (PLCs) to prepare sustainability reporting. Companies listed on the Main Market and ACE Market were required comply, depending on their market capitalisation, with the framework requirements in 2017, 2018 or 2019, where the sustainability reports are to be published alongside the annual reports.

Listed companies
Annual reports issued for financial year ending on or after
Reports
Main Market with market capitalisation
RM2b or more
31 December 2016
General and Detailed Sustainability Statement
RM1b to RM2b
31 December 2017
General and Detailed Sustainability Statement
Others
31 December 2017
General and Detailed Sustainability Statement
ACE Market
31 December 2018
General Sustainability Statement

Bursa Malaysia’s Sustainability Framework was developed in response to the United Nation’s 2030 Agenda for Sustainable Development. Under the 2030 Agenda, 17 goals consisting of 169 targets were set. They cover social and economic development issues such as poverty, hunger, health, education, global warming, gender equality, water, sanitation, energy, urbanisation, environment and social justice.

Prior to the issuance of the Sustainability Framework, both Main and ACE Market listed companies are required to disclose their CSR activities in their annual report. However, this tended to skew towards social/philanthropic activities which has minimal impact on a company’s business operations or value creation process. As such, the Sustainability Framework aims to, among others, encourage companies to integrate sustainability into their business models by taking into consideration the economic, environmental and social (EES) risks and opportunities alongside financial implications as well as report such non-financial information.

Tuesday, 12 February 2019

Evolution of Tax and Investment Incentives in Malaysia

The granting of tax incentives is one of the methods used to develop a particular economic activity. If designed and implemented properly, it attracts businesses (local or foreign) to invest in a country. Apart from that, it should also lead to increased employment, knowledge transfer, technology development and development to rural areas. Thus, this should lead to increased economic growth and tax revenue (after the expiration of the tax incentive period).

In Malaysia, tax incentives are granted in several ways:
  • Exemption of statutory income
  • Additional relief for qualifying capital expenditure
  • Double deduction
The three major tax incentives in Malaysia are as follows:

Tax incentive
Description
Pioneer Status
Companies in the manufacturing, agricultural, hotel, and tourism sectors, or any other industrial or commercial sector that participate in a promoted activity or produce a promoted product may be eligible for the pioneer status incentive.

It involves the granting of a partial exemption (of up to 70% of a company’s statutory income), or in limited cases, full exemption from income tax for a period of five years or 10 years.
Investment Tax Allowance
Companies in the manufacturing, agricultural, hotel, and tourism sectors, or any other industrial or commercial sector that participate in a promoted activity or produce a promoted product may be eligible for investment tax allowance.

It involves the granting of an allowance of 60% or 100% of qualifying capital expenditure incurred which can be deducted against 70% or 100% of statutory income.
Reinvestment Allowance
A resident company in operation for not less than 36 months that incurs capital expenditure to expand, modernise, automate, or diversify its existing manufacturing business or approved agricultural project may be eligible for reinvestment allowance.

It involves the granting of an allowance of 60% of qualifying capital expenditure incurred which can be deducted against 70% of statutory income.

The abovementioned investments serves to strengthen Malaysia’s key economic activities and encourage inflow of foreign capital. However, there were no targeted incentives provided for labour-based companies, especially, the manufacturing sector) to embrace digital transformation. Only the reinvestment allowance provides some incentive for companies to be more technologically-inclined. With digitalisation transforming the business landscapes, creating both new opportunities and challenges, it was important for the manufacturing sector to transform, considering that it contributed 23% to Malaysia’s GDP (Q3 2018).

Tuesday, 29 January 2019

The Three Standards: Revenue, Financial Instruments and Leases


Recently, we saw a trio of standards come into effect – MFRS 15 Revenue from Contracts with Customers and MFRS 9 Financial Instruments on 1 January 2018, and MFRS 16 Leases on 1 January 2019. Companies have undoubtedly gone through a tremendous amount of work and change to implement those three standards – changes to the business and reporting models, processes and systems, pricing strategies, compensation, etc.

MFRS 15 Revenue from Contracts with Customers

The new MFRS 15 set out a new model of revenue accounting. The core principle is that an entity recognises revenue to reflect the transfer of goods or services in an amount that reflects the consideration the entity expects to be entitled in exchange for those goods or services.

There were practical issues to consider during the implementation. For example, for a contract to exist under MFRS 15, it must fulfill five criteria as follows:

  • Parties to the contract have approved the contract.
  • Each party's rights can be identified.
  • Payment terms can be identified.
  • The contract has commercial substance.
  • It is probable that the entity will collect consideration it is entitled to in exchange for the goods and services.
Contracts would have needed to be reviewed to ensure important information such as payment terms are included and that they are clearly worded to make the identification of the contract’s commercial substance and each parties’ rights easier.

MFRS 9 Financial Instruments

The new MFRS 9 replaced earlier versions of MFRS 9 and introduced a host of improvements which includes a classification and measurement model, a single forward-looking “expected loss” impairment model and a substantially-reformed approach to hedge accounting.

Thursday, 24 January 2019

Service Tax and Management Services


A person that provides management services and exceeds the registration threshold is liable to charge service tax, pursuant to the Sales Tax Regulations 2018. The Regulations (prior to Budget 2019) provide the following:

Taxable Person
Taxable Services
Any person who provides management services, excluding the management services provided by—
 (a) any developer, joint management body or management corporation to the owners of a building held under a strata title;
 (b)any person who is licensed or registered with the Securities Commission Malaysia for carrying out the regulated activity of fund management under the Capital Markets and Services Act 2007; or
 (c) any person, Government agency, local authority or statutory body for the purposes of religious, welfare, bereavement, health or public transport services.
Provision of all types of management services including project management or project coordination, excluding provision of such services in connection with:
(i) goods or land situated outside Malaysia; or
(ii) other than matters relating to matters specified in (i) outside Malaysia.




The Regulations seems broadly worded, with little specifics regarding the definition of management services and the type of management services that are subject to service tax.

RMCD guidance on management services


The Royal Malaysian Customs Department (RMCD), in its Guide on Management Services, provided its interpretation and clarification of the abovementioned legislation as follows:
Management services covers the organisation and coordination of activities of a business in order to provide services to the clients and these services are not categorised under any specific taxable services (i.e. prescribed services). These activities consist of organising, supervising, monitoring, planning, controlling and directing business’s resources in terms of human, financial, technology, physical and other resources. 
The written contractual agreement between the person and client will be used to determine whether the services provided can be classified as management services. In a situation where no contractual agreement exists, the services may be treated as management services if such services meet the abovementioned definition.

Tuesday, 15 January 2019

Technically….

Withholding tax: Special classes of income


Section 4A(ii) has been subject to much debate as to whether a service that is subject to withholding tax under s 109B of the Income Tax Act (ITA) 1967 needs to be in technical in nature or not. What made a service “technical” was also the subject of much dispute.
Section 4A(ii) of the ITA 1967 provides the following:
“… the income of a person not resident in Malaysia for the basis year for a year of assessment in respect of …
(ii) amounts paid in consideration of technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme …
which is derived from Malaysia is chargeable to tax under this Act.”
The Finance Bill 2018 proposed that s 4A(ii) be amended to state as follows:
“… the income of a person not resident in Malaysia for the basis year for a year of assessment in respect of …
(ii) amounts paid in consideration of any advice given, or assistance or services rendered in connection with any scientific, industrial or commercial undertaking, venture, project or scheme…
which is derived from Malaysia is chargeable to tax under this Act.”
This widens the scope of withholding tax under s 109B by:
  • including non-technical services, and
  • not limiting the scope to technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme.
The proposed change aims to reflect case law decisions that have widened the definition of services under s 4A to include both technical and non-technical services.

Monday, 14 January 2019

Malaysian Business Reporting System

In 2018, the Companies Commission of Malaysia (SSM) introduced the Malaysian Business Reporting System (MBRS). It allows for the submission of:
  • Annual Return (AR)
  • Financial Statements and Report (FS), and
  • Exemption Applications (EA) related to the FS and AR.
The MBRS is a digital submission platform based on the eXtensible Business Reporting Language (XBRL) format. XBRL is by definition, an open international standard for digital business reporting. Foreign regulators, SEC (in USA), HMRC (in UK), ACRA (in Singapore) and CIPC (in South Africa), have mandated registered or publicly listed companies to report their financial information in XBRL. SSM is one of the latest adopters.

Its primary aim is to improve financial and business reporting and simplify ways for stakeholders to use, share, analyse and add value to data. SSM, in its FAQs, states that its reasons for XBRL adoption includes making the collection of financial and non-financial information more efficient, facilitating the analysis of financial reports for decision making and providing  SSM and other regulators with detailed data which can be aggregated, as well as aiding investigative efforts and other compliance.


MBRS is made of three main components:
  • SSM Taxonomy - dictionary of financial and non-financial reporting element of AR, FS and EA embedded in the MBRS Preparation Tool. The taxonomy for FS and AR has been established based on the disclosure requirements for MFRS, MPERS and Companies Act 2016.
  • MBRS Preparation Tool - preparation tools based on Microsoft Excel that allow companies to prepare documents online and offline and generated AR, FS and EA in XBRL.
  • MBRS Portal - submission platform to lodge FS, AR and EA to SSM.
All companies which follow MFRS and MPERS, except for companies that are regulated by the Bank Negara Malaysia, can file their financial statements via MBRS.

The key measures include ensuring that the XBRL tagging is done correctly during the implementation stage and ironing out any compatibility issues as early as possible.

Wolters Kluwer’s An Overview of the Malaysian Business Reporting System (MBRS) and eXtensible Business Reporting Language (XBRL) workshop aims to provide participants with an understanding of the following:
  • The scope and requirements under the MBRS
  • How to use the platform to file and submit the FS, AR and EA, and
  • How to effectively use XBRL.