Harmful Tax Practices – 2017 Peer Review Reports on the Exchange of Information on Tax Rulings

Malaysia

Malaysia’s implementation of the transparency framework is still in the early stages of development. Malaysia is recommended to finalise its information gathering process for identifying all past and future rulings and potential exchange jurisdictions, with a review and supervision mechanism, as soon as possible (ToR I.4). Malaysia is recommended to continue its efforts to complete the templates for all relevant rulings and to ensure that the exchanges of information on rulings occur as soon as possible (ToR II.5).

Malaysia can legally issue five types of rulings within the scope of the transparency framework.

In practice, Malaysia has issued 1836 past rulings, and for the year in review, Malaysia issued 173 future rulings within the scope of the transparency framework.

As no exchanges of information on rulings were conducted during the year in review, no peer input was received in respect of the exchanges of information on rulings received from Malaysia.

Introduction

821.  This peer review covers Malaysia’s implementation of the BEPS Action 5 transparency framework for the year 2017. The report has four parts, each relating to a key part of the ToR. Each part is discussed in turn. A summary of recommendations is included at the end of this report.

A. The information gathering process

822.  Malaysia can legally issue the five following types of rulings within the scope of the transparency framework: (i) rulings related to preferential regimes;1 (ii) cross-border unilateral advance pricing arrangements (APAs) and any other cross-border unilateral tax rulings (such as an advance tax ruling) covering transfer pricing or the application of transfer pricing principles; (iii) rulings providing for a downward adjustments of taxable profits; (iv) permanent establishment rulings and (v) related party conduit rulings.

823.  Rulings related to preferential regimes are granted by the Investment Promotional Agency via the issuance of letters of award relating to the preferential regime. These letters are subsequently transmitted to and processed by the Tax Incentive Advisory Division under the Tax Policy Department of Inland Revenue Board Malaysia (IRBM) for the purposes of the exchange of information on rulings under the transparency framework. Rulings in relation to APAs or permanent establishments are issued by the Mutual Agreement Procedure and Transfer Pricing Policy Division under the Department of International Taxation in IRBM and processed for the exchange of information on rulings under the transparency framework.

824.  During the year in review, Malaysia identified one past ruling in scope of the transparency framework, and conducted one exchange on this ruling. This was due to it being the first year of implementation of the transparency framework for Malaysia, and a misunderstanding as to the types of rulings in scope of the transparency framework. Since clarification of the scope of the transparency framework with the Secretariat, Malaysia has been working closely with the Secretariat throughout the 2018 peer review process to ensure that the processes are in place in Malaysia to implement the transparency framework going forward. Over 2 000 rulings were subsequently identified in 2018.

Past rulings (ToR I.4.1.1, I.4.1.2, I.4.2.1, I.4.2.2)

825.  For Malaysia, past rulings are any tax rulings within scope that are issued either: (i) on or after 1 January 2015 but before 1 September 2017; or (ii) on or after 1 January 2012 but before 1 January 2015, provided they were still in effect as at 1 January 2015.

826.  Malaysia acknowledges that it did not correctly implement the information gathering process during the year in review, due to a misunderstanding of the types of rulings in scope of the transparency framework. As a result, only one past ruling was identified for the year in review.

827.  However, Malaysia has implemented new processes to identify past rulings in 2018. The International Affairs and Exchange of Information Division is overseeing the process for the identification of past rulings in the Tax Incentive Advisory Division and Mutual Agreement Procedure and Transfer Pricing Policy Division. For rulings related to preferential regimes, the relevant promotional agency will identify the potential exchange jurisdictions by reviewing the internal database for the name and structure of the MNE group, and other group financial information if available. Malaysia has also utilised the “best efforts approach” where relevant, in addition to seeking the relevant information from the taxpayer where relevant.

Future rulings (ToR I.4.1.1, I.4.1.2, I.4.2.1)

828.  For Malaysia, future rulings are any tax rulings within scope that are issued on or after 1 September 2017.

829.  Malaysia acknowledges that it did not correctly implement the information gathering process during the year in review, due to a misunderstanding of the types of rulings in scope of the transparency framework. As a result, no future rulings were identified for the year in review.

830.  Since 2018, Malaysia’s information gathering process for future rulings is identical to the process for past rulings.

Review and supervision mechanism (ToR I.4.3)

831.  Malaysia did not yet have an appropriate information gathering process under the transparency framework for the year in review. Since 2018, one manager from the Tax Advisory Incentive Division, one manager from the Transfer Pricing Policy Division, one manager from the International Affairs and Exchange of Information Division and six managers from the respective promotional agencies now supervise the information gathering process. Malaysia will conduct regular meetings among the agencies to verify information under the transparency framework. The designated officers in the promotional agencies identifying rulings in scope are informed and guided by the Ministry of Finance (MoF) and IRBM.

Conclusion on section A

832.  Malaysia is recommended to finalise its information gathering process for identifying all past and future rulings and potential exchange jurisdictions, with a review and supervision mechanism, as soon as possible (ToR I.4). It is recognised that Malaysia has made efforts to rectify their information gathering process in 2018, and Malaysia’s implementation of the information gathering process during 2018 will be assessed in the next annual peer review.

B. The exchange of information

Legal basis for spontaneous exchange of information (ToR II.5.1, II.5.2)

833.  Malaysia has the necessary domestic legal basis to exchange information spontaneously. Malaysia notes that there are no legal or practical impediments that prevent the spontaneous exchange of information on rulings as contemplated in the Action 5 minimum standard.

834.  Malaysia is a party to international agreements permitting spontaneous exchange of information, including (i) the Multilateral Convention on Mutual Administrative Assistance in Tax Matters: Amended by the 2010 Protocol (OECD/Council of Europe, 2011) (“the Convention”) and (ii) double tax agreements in force with 74 jurisdictions.2

Completion and exchange of templates (ToR II.5.3, II.5.4, II.5.5, II.5.6, II.5.7)

835.  For the year in review, Malaysia identified one past ruling in scope of the transparency framework, and conducted one delayed exchange on this ruling.

836.  Since 2018, Malaysia has been finalising a process to complete the templates on relevant rulings, to make them available to the Competent Authority for exchange of information and to exchange them with relevant jurisdictions.

837.  For the year in review, the timeliness of exchanges is as follows:

 

Past rulings in the scope of the transparency framework	Number of exchanges transmitted by 31 December 2017	Delayed exchanges
		Number of exchanges not transmitted by 31 December 2017	Reasons for the delays	Any other comments
	0	1	The delay in exchanging the APA was due to the delay in receiving the relevant information from the taxpayer	As this was the first year of implementation of the transparency framework for Malaysia, processes were still being developed and staff members being familiarised with the framework.
Future rulings in the scope of the transparency framework	Number of exchanges transmitted within three months of the information becoming available to the competent authority or immediately after legal impediments have been lifted	Delayed exchanges
		Number of exchanges transmitted later than three months of the information on rulings becoming available to the competent authority	Reasons for the delays	Any other comments
	0	0	N/A	N/A
Total	0	1

 

Follow up requests received for exchange of the ruling	Number	Average time to provide response	Number of requests not answered
	0	N/A	N/A

Conclusion on section B

838.  Malaysia has the necessary legal basis to undertake spontaneous exchange of information. Malaysia is recommended to continue its efforts to complete the templates for all relevant rulings and to ensure that the exchanges of information on rulings occur as soon as possible (ToR II.5).

C. Statistics (ToR IV)

839.  As no information on rulings was exchanged for the year in review, no statistical data can be reported.

D. Matters related to intellectual property regimes (ToR I.4.1.3)

840.  Malaysia offers four preferential regimes, which also offer benefits to income from intellectual property (“IP regime”).3 However for the year in review no transparency requirements under the Action 5 Report (OECD, 2015) were relevant, as follows:

• New entrants benefitting from the grandfathered IP regime: not applicable for the year in review, because Malaysia is currently in the process of amending the two regimes and has not taken a decision yet on whether it will provide grandfathering to existing taxpayers. Should Malaysia provide grandfathering to taxpayers for which IP income benefits and that entered the regimes after the publication of the 2017 Progress Report (OECD, 2017) which occurred on 16 October 2017, transparency requirements will apply and this will be taken into account during the 2018 peer review.

• Third category of IP assets: not applicable to these regimes, which in 2017 were in the process of being amended.

• Taxpayers making the use of the option to treat the nexus ratio as a rebuttable presumption: not applicable to these regimes, which in 2017 were in the process of being amended.

Summary of recommendations on implementation of the transparency framework

 

Aspect of implementation of the transparency framework that should be improved	Recommendation for improvement
Malaysia did not accurately complete the information gathering process during the year in review.	Malaysia is recommended to finalise its information gathering process for identifying all past and future rulings and potential exchange jurisdictions, with a review and supervision mechanism, as soon as possible.
Malaysia did not undertake spontaneous exchange of information on all tax rulings within scope of the transparency framework during the year in review.	Malaysia is recommended to continue its efforts to complete the templates for all relevant rulings and to ensure that the exchanges of information on rulings occur as soon as possible.

References

OECD (2017), BEPS Action 5 on Harmful Tax Practices – Terms of Reference and Methodology for the Conduct of the Peer Reviews of the Action 5 Transparency Framework, OECD/G20 Base Erosion and Profit Shifting Project, OECD, Paris. www.oecd.org/tax/beps/beps-action-5-harmful-tax-practices-peer-review-transparencyframework.pdf.

OECD (2015), Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance, Action 5 - 2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris. https://doi.org/10.1787/9789264241190-en.

OECD/Council of Europe (2011), The Multilateral Convention on Mutual Administrative Assistance in Tax Matters: Amended by the 2010 Protocol, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264115606-en.

Notes

← 1.  Pioneer status – high technology and contract R&D; Principal hub; Green technology services; Bionexus status; MSC status; Special economic regions – Iskandar Malaysia, East Coast Economic Region, and Sabah Development Corridor

← 2.  Albania, Argentina, Australia, Austria, Bahrain, Bangladesh, Belgium, Bosnia and Herzegovina, Brunei, Canada, Chile, China (People’s Republic of), Croatia, Czech Republic, Denmark, Egypt, Fiji, Finland, France, Germany, Hong Kong, Hungary, India, Indonesia, Iran, Ireland, Italy, Japan, Jordan, Kazakhstan, Korea, Kuwait, Kyrgyzstan, Laos, Lebanon, Luxembourg, Malta, Mauritius, Mongolia, Morocco, Myanmar, Namibia, Netherlands, New Zealand, Norway, Pakistan, Papua New Guinea, Philippines, Poland, Qatar, Romania, Russia, San Marino, Saudi Arabia, Seychelles, Singapore, South Africa, Spain, Slovak Republic, Sri Lanka, Sudan, Sweden, Switzerland, Syria, Thailand, Turkey, Turkmenistan, United Arab Emirates, United Kingdom, United States, Uzbekistan, Venezuela, Viet Nam and Zimbabwe.

← 3.  These regimes are: 1) Principal hub, 2) MSC Malaysia, 3) Pioneer Status, and 4) Biotechnology industry.