Case Study on derivation of income Does Malaysia have the taxing right? Asniza Abd Rahman

Case Study 1Case Study 2 Sam Co Pte Ltd Korea Malaysia Singapore 1.Where are the profits derived from? 2.Where should the profits be taxed? Computer system in HK to make order from supplier in UK  Distributorship agreements.  Bulk agreements were in Malaysia Hong Kong UK UK will ship the order made to the place as required. Invoice issued by Sam Co Pte Ltd for payment received. Express Bus Co SingaporeMalaysia Tickets sold in S’pore through an agent. In accounts Malaysian tickets were shown separately from tickets sold in S’pore. Return tickets were also sold in Malaysia to people who resided in S’pore

Related Acts to consider Sec 3 (ITA) Sec 8 1 a & b (ITA) Sec 8 1 a & b (ITA) Sec 12 1a & 2 (ITA) Sec 12 1a & 2 (ITA) Charge of Income Income tax shall be charged for each year of assessment upon the income of any accruing in or derived from Malaysia or received in Malaysia from outside Malaysia. 1 (a) A company is resident in Malaysia if the management and control of its business are exercised in Malaysia 1 (b) A company is resident in Malaysia if the management and control of its affairs are exercise in Malaysia. Business carried out outside Malaysia shall deemed to be derived from Malaysia if 1.Business or part thereof is carried on Malaysia

Bases to determine charge of income tax According to Sec 3 (ITA), there 3 different bases to consider in determining the charge of income Resident (Related Acts to consider)Related Acts to consider Company in banking, shipping, sea or air transport? Business Income? Territorial basis World Scope Derived and remitted Yes Liable on income accruing in or derived in Malaysia Liable on ALL income. Whether received or arising in M’sia No Yes No Liable on income accruing,received from Malaysia and outside Both cases met this criteria, so the basis is territorial.

Factors establishing ‘trading in’ Malaysia 1. Place where contract executed 2. Place where business operations are carried on ( Permanent Establishment ) 2. Place where business operations are carried on ( Permanent Establishment ) 3. Place where title to goods passes from seller to buyer 3. Place where title to goods passes from seller to buyer 4. Place where proceeds of sales are received. 4. Place where proceeds of sales are received. Case of 1.Hong Kong TVB International Ltd 2. Magna Industrial Co. Ltd Case of Exxon Chemical International Case of 1.Bank of India Case of HK Whampoa Dock

Permanent Establishment  PE means a fixed place of business in which the business of an enterprise is carried on and includes : A place of management; A branch; An office; A building site or construction or assembly project which exists for more than certain period of time (generally 6 months); and The carrying on of supervisory activities for more than certain period of time. (generally 6 months)

Bank of India v CIR  FACTS - The Bank was carrying on business in Hong Kong and was active in trade financing through discounting of foreign bills. The bills originated from international trade. The drawers of the bills, companies of Hong Kong, were suppliers of goods. The drawees were importers of goods residing outside Hong Kong. The Bank was the payee. On application of the customers, the Bank discounted the bills and paid the proceeds to the customers in Hong Kong while the collection of the value of the bills on maturity was performed overseas by the Bank's agent. The Bank made profits from the difference between the costs of the bills and proceeds on the maturity of the bills.  The profits were assessed to Profits Tax. The Bank appealed to the Board who decided in favor of CIR.  HELD - It was held that the operations from which the profits arose took place in Hong Kong as the contract made in Hong Kong. The application for the purchase of the bill was made in Hong Kong and it was processed in Hong Kong.

CIR v Hong Kong TVB International Ltd  FACTS - The taxpayer is a company incorporated in Hong Kong and carrying on business here. According to the facts found by the board, and recited in the stated case, the taxpayer's ultimate holding company is HK-TVB Limited ("TVB") which is also incorporated in Hong Kong.  The issue is whether the profits of the taxpayer which the commissioner has assessed to profits tax were profits "arising in or derived from Hong Kong".  HELD - It was held that the profits were assessable because the operations producing the profits, the acquisition of the exclusive rights of granting sub-licenses together with the relevant films and the grant of those sub-licenses together with the provision of the film by contracts with individual customers, were carried out in Hong Kong.

Magna Industrial Co. Ltd v CIR (1996)  Facts : Magna's business was trading: Buying goods manufactured overseas (mainly in the USA) and selling them also overseas, though a small proportion was sold in Hong Kong.  This appeal concerns only the profits arising from sales overseas.  HELD : The respondent was responsible for issuing the invoice, packing, weight list, sending the shipping advice, giving details of the ship and insuring the goods. He also retained certain control over the export manager under the term of appointment. The court held that the profit arose and was derived from the respondent’s activities in Hong Kong

Exxon Chemical International Supply v CIR  FACTS - The taxpayer was the wholly-owned subsidiary of a multi-national corporation in the USA.  It carried on business in Hong Kong and the Bahamas.  In the course of business in Hong Kong, it purchased goods from one affiliate within the group and sold them to another at a profit.  The taxpayer invoked Section 70 A to correct a profits tax assessment on the argument that all services (for example shipping of goods) were performed outside Hong Kong.  After his claim rejected by CIR, the taxpayer appealed to the Board which upheld the CIR's determination. The taxpayer then appealed to High Court and his appeal was dismissed.  HELD - It was held that as the order from buyer and placing of order with the seller, took place respectively in Hong Kong, the profit made by ECIS on this transaction arose in, or derived from Hong Kong

CIR v Hong Kong Whampoa Dock Co. Ltd  FACTS - This case concerns the profit derived by a Hong Kong ship-building company from a ship-salvage operation performed in waters outside Hong Kong's boundary.  The company received a phone call from a Danish company asking to salvage a ship stranded on a reef near the Parcel Islands. The company inspected the ship and signed an agreement with the ship master for the salvage operation.  The contract was signed on the seas outside Hong Kong. The ship was repaired and re-floated and towed to Hong Kong. The company argued that because the operation was done outside Hong Kong, the profit was not taxable.  HELD - The court upheld the Board’s decision and held that the payment of services is of no importance in deciding the issue and because almost the entire services performed, which gave rise to the profits, were performed outside Hong Kong, the profit did not arise in or derive from Hong Kong.

Conclusion Case 1 1. Place where contract executed 2. Place where business operations are carried on ( Permanent Establishment ) 2. Place where business operations are carried on ( Permanent Establishment ) 3. Place where title to goods passes from seller to buyer 3. Place where title to goods passes from seller to buyer 4. Place where proceeds of sales are received. 4. Place where proceeds of sales are received. Contracts/agreements made in Malaysia is liable to tax No specific place of operation because online business. However invoice issued by Sam Pte Ltd. Profits liable to Hong Kong (refer Magna case) Place title of goods passes from Seller to buyer is in Hong Kong. Profits liable to Hong Kong (refer Exxon case) No specific place as the operation place was not determined. However the entire services is carried out in Hong Kong. Profits liable to Hong Kong (refer to Whampoa case)

Conclusion Case 2 1. Place where contract executed 2. Place where business operations are carried on ( Permanent Establishment ) 2. Place where business operations are carried on ( Permanent Establishment ) 3. Place where title to goods passes from seller to buyer 3. Place where title to goods passes from seller to buyer 4. Place where proceeds of sales are received. 4. Place where proceeds of sales are received. Contracts/agreements made with Singapore to agent is liable to Singapore. (tickets sold by agent) Malaysia is the place of business operation, so the profits liable in Malaysia. Place title of goods passes from Seller to buyer is in Malaysia. Profit liable in M’sia Place of proceed is in Malaysia. Profit liable in Malaysia