Question 1
Assuming that you are an accountant in private practice and clients have approached you with information on payments made by the following Malaysian resident companies to non-residents:
Kiong Joo Ltd, a company resident in South Korea sold a crane to CSK Sdn Bhd, a contractor in Port Dickson for RM1,400,000. According to the terms of the purchase agreement, an additional sum of RM60,000 was payable by CSK Sdn Bhd to Kiong Joo Ltd for technical services to install the crane.
A consultancy firm resident in India was engaged by GHT Sdn Bhd, a Malaysian company, to give advice in negotiating and preparing a bid for a contract from the Tamil Nadu State Government. The services of the consultancy firm were performed in Chennai. GHT Sdn Bhd credited a sum of RM70,000 to the consultancy firm's bank in Chennai, India.
Nikkono Ltd, a Japanese company, rendered technical services to Trend Setters Sdn Bhd which is located in Kajang, Selangor. Nikkono Ltd issued an invoice for the value of RM80,000 which included reimbursements covering cost of accommodation charges of RM12,000 incurred by the company's consultants in Malaysia. These reimbursements were classified as hotel charges in the profit and loss account of Trend Setters Sdn Bhd.
Required:
Explain, with reasons, whether each of the above payments made to the non-residents are subject to withholding tax under the Income Tax Act 1967 (as amended). Also compute the withholding tax, if any, applicable to those payments.
Question 2
Tan and Bong Partners made payments to a legal firm resident in Jakarta to give advice in negotiating and preparing a legal document with the Indonesian Petrochemical Board.
The services offered by the legal firm were performed in Jakarta. The Tan and Bong Partners paid the firm a sum of RM30,000 to the legal firm located in Jakarta, Indonesia.
Required:
Outline, with reasons, whether the above payment of RM30,000 to the Indonesian legal firm is subject to withholding tax under the Malaysian Income Tax Act 1967. Compute the withholding tax, if applicable.
Question 3
The government promotes the development of the capital market in Malaysia. In this regard, interest payments derived from numerous financial instruments are not subject to withholding tax under the Malaysian Income Tax Act 1967.
Required:
List any six financial instruments on which interest payments made are not subject to the withholding tax provisions.
Question 4
Chin Beng Motors Sdn Bhd (the company) pays a royalty to a Japanese company for the use of a proprietary patent in the manufacture of a special braking system for its motor vehicles manufactured in Malaysia. On 14 August 2014 the company was liable to pay royalty of RM200,000 to the Japanese company. A sum of RM180,000 being royalty net of withholding tax of RM20,000 was paid to the Japanese company and the withholding tax, inclusive of the late payment increase, was paid to the IRB on 17 December 2014.
Required:
Explain the tax treatment on the payment of royalty to the Japanese company, and whether Chin Beng Motors Sdn Bhd would be entitled for a deduction in year of assessment 2014 in respect of the royalty paid.
Question 5
Temasek Tiles Pte Ltd (TTP Ltd), a Singapore based company is in the business of selling floor and wall tiles. The company has a website hosted in a server in Malaysia. However the business activities of the company such as selling, marketing, and delivery are all carried out in Singapore.
TTP Ltd has allowed a Malaysian company Temasek Tiles (Malaysia) Sdn Bhd to use its' know-how to make and sell its tiles in Malaysia in return for royalty payment.
Required:
Explain the whether Temasek Tiles Pte Ltd is carrying on a business in Malaysia.
Explain the tax treatment on the payment of royalty by Temasek Tiles (Malaysia) Sdn Bhd to Temasek Tiles (Pte) Ltd, a Singapore based company.
Question 6
How does double taxation arise?
Question 7
What is the purpose of concluding a double tax agreement?
Question 8
Explain how bilateral relief is made and how does this differ from a unilateral relief?
Question 9
What is the norm or framework within which a double tax agreement is based?
Question 10
How does one determine whether an economic activity has taken place in one of the affected tax jurisdictions to determine the taxability of income derived therefrom?
Question 11
Trend Setter Designs Ltd (hereafter referred to as TSDL) specializes in producing branded clothes in the Peoples' Republic of China (PRC). The Company, TSDL owns the brand "Trendy Designs" for sale of designer clothes. At all material times, TSDL is a tax resident of PRC and derives its business income by selling the branded clothes to boutiques and supermarkets all over China. TSDL promotes the recognition of its trademark and the value of its contribution to agents by continuous R&D activities, active participation in trade exhibitions and advertising.
In March 2013, TSDL is considering to sell designer clothes in Malaysia through Farrah Designs Bhd for a license fee of RM1 million for the use of its brand. While negotiations were taking place, it was agreed that TSDL will not have a business presence in Malaysia. The agreement would be finalized soon but there is one outstanding matter pertaining to taxation of the royalty fee. In this regard, Ms. Comel who is the Chartered Accountant of Farrah Designs informs Russel Ho, the financial controller of TSDL that Farah Designs will have to deduct withholding tax under the provisions of the Malaysian Income Tax Act 1967 at a rate of 10 percent upon the gross amount of the royalty fee being paid or credited to TSDL.
Russel disagrees as he is of the view that TSDL is the business of designing, sewing and selling clothes, hence the profits are subject to income tax in PRC. Russel further urges that TSDL should be entitled to relief under the Malaysia-PRC Double Tax Agreement (DTA) and emphasizes that the right of taxing the license fee payable by Farrah Designs lies with the Chinese Government. According to Russel, it is expressly stipulated in Article 5 of the DTA that the industrial or commercial profits of an enterprise of a Contracting State shall be subject to tax only in that Contracting State unless the enterprise carries on business in the other Contracting State through a permanent establishment (PE) situated therein. As TSDL does not have a PE in Malaysia, Russel Ho asserts that the license fee should be payable without deducting any Malaysian tax. Russel would be formally discussing the tax issues with Ms. Comel soon and he is in a hurry to know whether there is a legal basis to support his views.
Required:
You are to advice Russel Ho based on the existing Malaysian tax provisions. Relevant case law could be used to support your answer.
Question 12
Kenchana Berhad paid RM2,000,000 to Heavy Machine Incorporation for supplying and installing machines in Kenchana premise in Malaysia. Of the total amount, 12% is for the installation and commissioning the machines.
Required
Advise Kenchana's accountants on the tax treatment of the payment made to Heavy Machine Inc.