GLOBALISATION is knitting separate national economies into a single world economy.

       In the current pandemic, the heightened use of online platforms has given rise to increased borderless transactions.

       Malaysian taxation is levied on income earned from Malaysia since Malaysian tax is imposed on a territorial basis.

       Malaysian tax is not imposed on income earned overseas, except for Malaysian companies in the shipping and air transport, insurance and banking industries in which case Malaysian taxes are imposed on their worldwide income.

       Also, where the income earned overseas is incidental to a Malaysian employment or it is attributable to a place of business in Malaysia, it is subject to Malaysian tax.

       Cross-border transactions can be broadly categorised into inbound and outbound transactions.

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       Inbound transactions

       The tax rules and treatment for different types of income earned by foreign enterprises from Malaysia can be quite complicated and each stream of income (business profits, interest, royalties, dividends etc) needs to be looked at separately.

       A foreign company selling goods to Malaysian customers from overseas is not carrying on business in Malaysia and not subject to Malaysian income taxes.

       Similarly, non-residents performing services from overseas for Malaysian parties would not be subject to Malaysian income taxes (service tax considerations need to be taken into account though).

       However, if the non-resident party performs services in Malaysia, Malaysian income tax will apply by the imposition of withholding tax on such income (10% under the Malaysian Income Tax Act, 1967 but may be reduced under Double Tax Agreements (DTA) signed by Malaysia with various countries).

       Further, if the foreign enterprise is deemed to be carrying on business in Malaysia by virtue of various rules (as found in the Double Tax Agreements for example), then the foreign enterprise would need to file its income tax returns in Malaysia (with the withholding tax mechanism in place in case the foreign enterprise does not file the income tax return).

       Malaysian withholding tax is also imposed on other payments to non-residents like interest, royalties, commissions, public entertainers’ fees, rental of equipment or other moveable assets and contract payments.

       With the widespread use of technology and digital services offered by foreign providers such as Google, Amazon, Facebook, Zoom etc, the question arises as to whether the payments made are for services or royalty.

       If it is for services performed in Malaysia, then withholding tax applies.

       If the digital services providers are overseas, payment for services performed overseas are not subject to withholding tax.

       However, if it is a royalty payment, then withholding tax applies regardless of whether the intellectual property is provided in Malaysia or from overseas. This is an area of ambiguity and needs careful deliberation.

       Outbound transactions

       Investment income earned from overseas (interest, rental, dividend income) is regarded as foreign exempt income and not taxable.

       Interest income for example is derived from Malaysia if the responsibility to pay the interest lies with a Malaysian resident person, and the funds that are borrowed by that person are used in Malaysia; or the interest is charged as an expense against Malaysian income.

       Essentially therefore, if the funds are used overseas and the payer of the interest is a non-resident, the interest earned from overseas does not fall within the ambit of Malaysian taxes.

       The Court of Appeal affirmed that interest income earned from loans made to an offshore entity is foreign-sourced and not subject to Malaysian income tax.

       The MIRB argued that the interest income was sourced in Malaysia as the funds lent were generated from business activities of the taxpayer in Malaysia.

       The Court of Appeal affirmed that the source of the interest income is located “where money was lent”.

       Therefore, the interest received by the taxpayer from its related Dutch company was foreign-sourced income.

       If a broker based in Malaysia manages foreign investments on behalf of his clients or a person runs his overseas business from Malaysia, where activities in connection with purchases or sales and business decisions are undertaken in Malaysia, the commission income of the broker or the business income of the person will be taxed in Malaysia since the income earning activities are carried out in Malaysia.

       Where a Malaysian company sends it employees overseas for a short period to perform some work (typically less than six months), then the income earned from the work done overseas would be seen to be attributable to a place of business in Malaysia and be subject to Malaysian income taxes.

       However, if the period of stay/ performance of services overseas is extended (typically for more than six months), the profits earned could be argued to be attributable to a place of business in the foreign country and therefore not subject to Malaysian taxes.

       Determining whether the source of income is Malaysian or foreign can be complicated and contentious as many factors need to be considered.

       Other related issues

       Based on the Malaysian Transfer Pricing guidelines, transfer pricing documentation needs to be prepared to justify that related party transactions are carried out in a fair and arms’ length manner.

       More so when the related party is in a country with a low tax regime, as this could give rise to profit shifting.

       Major economies have been pushing for a Global Minimum Tax to discourage multinationals from shifting profits to low-tax countries regardless.

       Increasingly, income from intangible sources such as drug patents, software and royalties on intellectual property has migrated to these countries, enabling companies to pay avoid paying higher taxes in their home countries.

       The global minimum tax rate would apply to overseas profits.

       Governments could still set whatever local corporate tax rate they want, but if companies pay lower rates in a particular country, their home governments could “top-up” their taxes to the minimum rate, eliminating the advantage of shifting profits.

       Harvindar Singh is managing partner of Harvey & Associates. The views expressed here are his own.