Faculty of Business and Information Science
Faculty of Business and Information Science

A coursework completed as part of the requirement for SUBJECT NAME: Taxation 2 SUBJECT CODE:BA302 LECTURER/TUTOR: MS. JOSEPHINE CHANG SWEE MEI Submitted on DATE OF SUBMISSION : 12TH October 2015 DUE DATE : 12TH October 2015 Produced by STUDENT NAME & ID: No. | Name | Student ID | Contribution | 1 | TRINH HONG DUONG | 1000924085 | 1(A) | 2 | GAO ZIYI | 1001233382 | 1(B) | 3 | YAO TONG MEI | 1001233058 | 1(C) | 4 | OMUVWIE NYERHOVWO | 1001130432 | 1(D) | 5 | YONG YIP HEE | 1001130054 | 2 | 6 | TANG CARMEN | 1001130031 | 2 | 7 | LEE CHEE KUAN | 1001129097 | 2 |

TABLE OF CONTENTS

1(A) | Bright Sdn Bhd’s basis periods for the years of assessment (YA) 2015 and 2016 | | 1(B) | Bright Sdn Bhd have Permanent Establishment (PE) in Hong Kong | | 1(C) | the Income Tax Implications and Treatment for Bright Sdn Bhd during the 24 months | | 1(D) | Mr Kan Lek’s Malaysian Residence Status and Tax Treatment of years of assessment 2015, 2016 and 2017 | | 2.0 | Goods and Services Tax (GST) | | 2.1 | Standard Rated | | 2.2 | Zero Rated | | 2.3 | Exempted Rate | |

1(A) Bright Sdn Bhd’s basis periods for the years of assessment (YA) 2015 and 2016 Bright Sdn Bhd has been carrying on business for a number of years and prepares its accounts up to 31 June each year. Its basis period for the year of assessment 2013/2014 is from 1 July 2013 to 30 June 2014 (section 18B(1)).

But in 2015, Bright Sdn Bhd intends to change its year end to September 2015, thereafter annually year end of Bright will be changed to September. As a restult, Bright Sdn Bhd's basis period for the year assessment 2015 is 1 July 2014 to 30 September 2015 and its basis period for the year assessment 2016 is 1 October 2015 to 30 September 2016. It will be determined by direction by Director General of Inland Revenue

1(B) Bright Sdn Bhd have Permanent Establishment (PE) in Hong Kong

The concept of permanent establishment in tax law is vital to revenue authorities as the presence of one will render an enterprise liable to tax in a contracting state on its profits derived therein.

There are three situations to identify permanent establishment. Each situation provides the various circumstances of permanent establishment or deemed permanent establishment

Firstly, a permanent establishment will exist where: there is a continuity of activity in Malaysia and/or there is an active conduct of nosiness in Malaysia .The definition of a permanent establishment would necessitate the existence of a fixed place of business. The term permanent establishment includes a fixed place of business in which the business or the enterprise is wholly or partly carried on, especially 1) A place of management 2) A branch 3) An office 4) A factory 5) A workshop 6) A mine, an oil or gas, a quarry or other place of extraction of natural resources including timber or other forest produce 7) A plantation 8) A building site or construction, installation or assembly project which exists for more than six months. However, this 6 month period could alternate with eight, none or 12 months, depending on the terms of the treaty.

Secondly, where a deemed permanent establishment can arise. Paragraphs 4 Article 5 deems a permanent establishment to be in the other territory , are as follows 1) It carries on supervisory activities in the other territory in connection with a construction, installation or assembly project which is being undertaken in that territory. Certain DTAs concluded by Malaysia state that supervisory activities must be for a period exceeding 3 or 6 months before a deemed permanent establishment exists. 2) It carries on business which consists of providing the services of public entertainers. This circumstance of permanent establishment presence may not be present in all DTAs which Malaysia has concluded 3) Substantial equipment being used or installed in the other states, for or under a contract , with an enterprise
Finally, the concept of further extending permanent establishment is covered by Paragraphs 5.This para provides that a person acting in one of the territories on behalf of the enterprise, other than an independent agent, will be deemed to be a permanent establishment if 1) He has , and habitually exercises in that first –mentioned contracting state , an authority to conclude contracts in the name of the enterprise , unless his activity are limited to the purchase of goods for the enterprise 2) He maintains in the first –mentioned contracting state a stock of goods belonging to the enterprise from which he regularly fills orders on behalf of the enterprise.

According to Mr Kan Lek was recruited by Bright Sdn Bhd and distributed in HongKong for 24 months. As question clearly mention Mr Kan Lek ‘s duty is seek out suppliers and customers for Bright Sdn Bhd’s trading business. This activity is type of branch of business under definition of permanent establishment .where is:

The term permanent establishment includes a fixed place of business in which the business or the enterprise is wholly or partly carried on, especially, a branch .

Bright Sdn Bhd can reduce taxable and other relevant expense by way of have a permanent establishment . This is because benefit of permanent establishment (PE)is that it may clause in all the Double Taxation Avoidance Agreement between Malaysia and HongHong , that is can be have a permanent establishment in a low cost tax city (we suggestion Bright Sdn Bhd have a permanent establishment in Hong Kong) .reasons are :

Under Malaysia Income Tax Act a resident company are taxed at the rate of 25% , however Hong Kong tax rate are 16.5% which is lower than Malaysia tax rate .

Malaysia company tax rate

Hong Kong company tax rate

1(C) the Income Tax Implications and Treatment for Bright Sdn Bhd during the 24 months ITA1967 Section 3 income tax shall be charged for each year of assessment upon the income of any person accruing in or derived from Malaysian or received in Malaysian from outside Malaysian.

ITA 1967 Section 12(a) gross income from the business as is attributable to operation of the business carried on outside Malaysian shall be deemed to be derived from Malaysian
Section12 (1)(b) of the business consist wholly or partly of the manufacturing, growing, mining, producing, or harvesting in Malaysian of any article, products, produce or other thing.

The other side to decide whether the income tax in Malaysian is by determines the company residence statues and management and control system.

Under section 8 (1)(b), a company is resident in Malaysian for the basis year if at any time during that basis year the management and control of its business or any one of its business exercised in Malaysian is taxable.
DTA is an agreement signed between two countries to either eliminate, wholly or partially, the burden of “double taxation” of income and at the same time prevents or minimizes fiscal evasion. Double taxation occurs when income derived by a person from a source is brought to charge in more than one tax jurisdiction. The country from whether the source of income arises normally has the right to tax on that income. If that income is remitted to another country, then the income may be subject to tax again in that other country and hence the incidence of double taxation.

Since double taxation agreement (DTA) between Hong Kong and Malaysia was singed on 25 April 2012. Under the DTA, the withholding tax on dividends, interest and royalties is as follows:

1. Withholding tax on dividends is reduced to five percent where the recipient is a company, which holds directly or indirectly at least 10 percent of the capital of the paying company. However, Malaysia does not currently levy withholding taxes on dividends. 2. Withholding tax on interest is reduced to nil where the recipient is the Government of the Hong Kong Special Administrative Region (HKSAR), the Hong Kong Monetary Authority or such other institutions established by the Government of the HKSAR for the discharge of functions of a public purpose normally carried out by a government as may be agreed upon from time to time between the competent authorities of the two Contracting Parties.
As the question stated the Bright Sdn Bhd is wholly taken over by Upbeat Berhad and the company Bright Sdn Bhd is resident in Penang Malaysian. Mr Kan Lek is fully authorized to enter into business contract on behalf of Bright Sdn Bhd. The management and control wholly charged by the Bright Sdn Bhd.
So during 24 months the income is deemed derived from Malaysian should be taxable and the remit 50% of rental income will be tax in Hong Kong as a result.

1(D) Mr Kan Lek’s Malaysian Residence Status and Tax Treatment of years of assessment 2015, 2016 and 2017
Mr Kan’s Malaysian Residence Status:

Year 2015:
Jan: 31 days
Feb; 28
Mar: 31
Apr: 30
May: 31
Jun: 30
October: 7
Total days present in Malaysia = 188 days
Mr Kan is a tax resident in Malaysia for the basis year of 2015 as he was physically present in Malaysia for a total of more than 182 days. Sec 7(1)(a) of the income tax act 1967.

Year 2016:
Jan: 7 days
Apr: 7
Jul: 7
Oct: 7
Total number of days present in Malaysia = 28 days.
Mr Kan is a resident in Malaysia for the year of assessment 2016 as he was in Malaysia for 28 days in 2016, which is linked to a period of more than 182 consecutive days in 2015, throughout which he was in Malaysia. The temporary absence is considered as part of that period as he was in Malaysia before and after the temporary absence. Sec 7(1)(b) of the income tax act 1967.

Year 2017:
Jan: 7 days
Apr: 7
Jul: 7
Oct: 7
Total number of days present in Malaysia = 28 days.
Mr Kan is a non-resident in Malaysia for the basis year for the year of assessment 2017 as he was in Malaysia for only 28 days in 2017 and he stayed back in Hong Kong for social visit which exceeded 14days which is the approved allowed social visit days. Sec 7(1)(b) of the income tax act 1967.

For the year 2015 - 2017, he would be taxed for his rental income in Malaysia. He would also be taxed for his Hong Kong income he sent to Malaysia because although it is a foreign business, its source of funding is from Malaysia. The only difference is that in the year 2015-2016, he would be taxed as a resident in Malaysia while for the year 2017, he would be taxed as a non-resident in Malaysia.

2.0 GST
In 2014, our Prime Minister Datuk Seri Najib Razak announced the introduction of Goods and Services Tax (GST) where some country named it as Value Added Tax (VAT). To be implemented in April 2015, it will be replace Malaysia’s Sales Tax (10%) and Services Tax (6%) only at a rate of 6%. Annual income of any business entities that exceed RM500,000 are compulsory or voluntary to register for GST at Customs Department.

Under GST, most of the goods and services (except basic necessities) will be charged a tax rate of 6% at every stage of the supply chain. GST is charged on the value added at each stage of the supply chain. Consumers as the end of the supply chain is not entitle to recover any taxes. Furthermore, GST will be charged no matter it’s a cash sales or credit sales once the company has registered GST and is payable to the Government monthly or every 3 months effective from April of 2015.

2.1 STANDARD RATED Goods and services in this category will be charged a standard rate of 6% at every stage of the supply chain. Any registered GST business entities are required to collect output tax on behalf of government and claim input tax from government on their business sales. However, consumers could not claim any taxes from government and they can classify the standard rate supplies by viewing at tax invoice. Generally, standard rated supplies GST categorized with an “S”. The examples of the goods in standard rated supplies are cloth, car and fruits.
The following calculation shows how Standard-Rated GST works:

2.2 ZERO RATED
Goods and services in this category will be charged a GST rate of 0%. Any registered GST business entities can claim back credits on their input tax. Therefore, final consumers are not liable for any GST and they can classify the zero rate supplies by viewing at tax invoice. Generally, zero rated supplies GST categorized with an “Z”. The examples of the goods in zero rated supplies are basic food item (meats, fish and cooking oil) and first 200 unit of electricity per month.
The following calculation shows how zero-rated GST works, assuming the final product is zero-rated but the raw materials are standard rated:

2.3 EXEMPTED RATE
Goods and services in this category will be exempted from GST. Any registered GST business entities do not eligible to claim back credits on their input GST and not required to collect GST on their business sales. Therefore, consumers are not liable for any GST and they can classify the exempted rate supplies by viewing at tax invoice. Generally, exempted rated supplies GST also categorized with an “Z”. The examples of the goods in exempted rated supplies are residential property and health care services.
The following calculation will give a clearer picture on how exempt-rated works:

To be conclude, most of the goods and services will be fall into standard-rate category where those suppliers registered for the GST will collect 6% from their consumers. As the intention to reduce the risk of GST driven inflation, certain items are prescribed as zero-rated or exempted.
For those zero-rated supplies, they qualify the supplier for input tax credit recovery. Therefore, exempted supplies is totally different, which mean that it is not allow to claim for input tax on its capital goods, overhead and purchases. In the other way, the biggest difference between zero-rated and exempted would be the availability or denial of input tax credit that claimed by suppliers.