W EEK 5 P RESENTATION Presented By : Muhamad Suhaimi Bin Ramli

Q UESTION  Sam Co Pte. Ltd, entered into distributorships agreements with several countries including Malaysia, Korea, & S’pore. The bulk of the agreements were with Malaysia.  The Company had a computer system in Hong Kong whereby orders could be taken and relayed to the supplier in UK. In fact orders could be processed from anywhere the officers of the Company were in, doing promotions, through a laptop.  The goods will be shipped from UK to Malaysia or Korea as required.  Invoices to the customer were issued by Sam Co Pte. Ltd and they obtained payments.  Where should the profits be taxed. Are there alternatives. What are the considerations you should take into account. Substantiate with legal cases and articles. Minimum cases 2

U NDERSTANDING OF THE C ASE 3

Distributorships Agreements Note : The agreements were with Malaysia. U NDERSTANDING OF THE QUESTION …. 4 Sam Co Pte Ltd

U NDERSTANDING OF THE QUESTION …. 5 Computer System maintained in Hong Kong Order taken anywhere using a laptop Goods shipped from UK to Korea

U NDERSTANDING OF THE QUESTION …. 6 Sam Co Pte Ltd

R ESULT D ETERMINATION Based on the criteria in previous slide, we conclude that type of business is 7 e-commerce

Discussion 8

E-C OMMERCE :D EFINITION Any transaction involving the exchange of goods and services between two or more parties using technological tools and techniques Used interchangeably with ‘Cyberspace Trading’ and ‘Internet Trade’ 9

E-C OMMERCE : T AX I MPLICATIONS Section 3 ITA: Basis of Taxation “Tax to be known as income tax shall be charged for each year of assessment upon income of any person accruing in or derived from Malaysia or received in Malaysia from outside Malaysia 10

E-C OMMERCE : D ETERMINING S OURCE Ascertain nature of income and decide which class of Section 4 income Ascertain originating cause of such income, ie.,what the taxpayer did to earn the income Ascertain geographical location of originating source, ie, where the taxpayer earned it 11

BASICS OF CROSS-BORDER TAXATION Worldwide approach All income is taxable Deduction or credit to relieve double taxation Territorial approach Income tax only on events occurring within borders Regardless of who the taxpayer is 12

A RGUMENT Two-steps territorial test : i. Place where the business carried on (Principal place of business). ii. Place contract made & performed. Supported case CIR v The Hong Kong & Whampoa Dock Co o However, 13

A RGUMENT ( CONT ’ D ) Other important factors : 1. Place of back office staff operating 2. The ‘controlling brain’ of the business operating 3. The existence of banking facilities 4. The making of shipping arrangements Supported case Sinolink Overseas Limited v CIR Federal Commissioner of Taxation v United Aircraft Corporation Cosco Trading Company Ltd v CIR 14

C ONCLUSION : E ND R ESULT The income or profit will be taxable by territorial basis Thus, income tax only on events occurring within borders Based on the question, we decide that there were elements that the income tax imposed can be in Malaysia, Korea & Singapore. 15

C ONCLUSION : A LTERNATIVE Alternatively, the income or profit could be taxable in Hong Kong if the tax authorities can prove the following criteria : 1) Back office staff operating (computer system) in Hong Kong; 2) The ‘controlling brain’ of the business operating from Hong Kong; 3) The existence of banking facilities in Hong Kong; 4) The issuance of invoices or receipt of purchase orders in Hong Kong; and 5) The making of shipping arrangements in Hong Kong. Case : Sinolink Overseas Limited v CIR 16

T HE E ND 17

CIR V T HE H ONG K ONG & W HAMPOA D OCK C O Court held : As the services were performed in the Paracel Islands and the salvage contract was signed in the Paracel Islands, it was the true locality of the source of the income and profit. 18

S INOLINK O VERSEAS L IMITED V CIR Hunter J decided he had to consider all the operations of the taxpayer to ascertain the source. He looked at: i. pre-contract preparation and management ii. The making of contracts of purchase iii. The making of contracts of sale iv. Post contractual performance and management 19

F EDERAL C OMMISSIONER OF T AXATION V U NITED A IRCRAFT C ORPORATION Latham CJ: “ Property is one possible source of income. The work of persons or acts done by persons are other possible sources of income… I have not been able to think of any source of income other than property or acts done. If a person has rights over property or in relation to property he may derive income from that property” 20

C OSCO T RADING C OMPANY L TD V CIR Extract from the judgement : “The place where a contract is made maybe of some importance from the point of view of contract law and jurisdiction. But for the purposes of determining the source of profits, the place where the contract is signed by the taxpayer is equally, if not more, determinative of the source of profits as it is where one of the most importance activities earning the profits carried out” 21