Impact of the Malaysia Finance Bill 2018 on Labuan Company

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The new Malaysia Finance Bill 2018 passed on 10 December 2018 now removes the reference to a 97% deduction limitation of the expenditure incurred by Malaysian residents in relation to payments to Labuan company.

On 10 December 2018, the lower house of the Malaysia parliament passed the below Bills which concerned Labuan International Business Financial Centre in particular:

  1. Finance Bill 2018
  2. Labuan Business Activity Tax (Amendment) Bill
  3. Income Tax (Amendment) Bill 2018

These Bills was passed as a result of those proposals in Budget 2019 that was tabled in Parliament on 02 November 2018.  All Bills were passed without any amendments, except the Finance Bill 2018 describe in number 1 above.  However, it has Not been gazetted yet and usually in Malaysia it will take some time before a law is gazetted and may be up to six months.

Whilst many of the players in Labuan was aware on the removal of the ceiling tax of MYR 20,000 but many were caught unaware especially to the proposed 97% of the expenditure incurred by Malaysian residents in relation to payments to Labuan companies be disallowed as a tax deduction.

So why so many players in the Industry did Not know this new proposal?

On 10 May 2019, the Barison Nasional was defeated in the Malaysia 14th General Election which resulted in the change of government for the first time over sixty years since 1957 to Pakatan Harapan, helmed by former Malaysian prime minister Mahathir Mohamad.  The law maker in the new government did not consult the industry players and did Not fully study the negative impact to Labuan if the law was enacted.

In particular two type of Labuan companies that will be badly affected due to their dealing with Malaysia Resident are

  1. Labuan Banks and
  2. Labuan Leasing Companies

After the Budget 2019, many parties include the regulator started to discuss with the Ministry of Finance.  Also, many associations such as the Association of Labuan Trust Companies, Malaysia Shipowners Association, The Association of Labuan Banks and other professional bodies such as The Chartered Tax Institute of Malaysia submitted memorandum on issues arising trying to lobby for the government to be more flexible on the 3% allowable expenses incurred by Malaysian residents in relation to payments to Labuan companies as a tax deduction.

The Good News is that the amended Finance Bill 2018 now removes the reference to a 97% deduction limitation. However, It did prescribe that a tax deduction will not be allowed on payments by Malaysian residents to Labuan companies, subject to any rules that may be prescribed by the Minister of Finance. It is expected that Labuan Financial Service Authority to release these Rules which will provide guidance on the conditions which need to be met in order for a deduction to be obtained.

It is not yet known when the Rules will be released but at the time of writing it is understood that at least 67% deduction of the expenditure incurred by Malaysian residents in relation to payments to Labuan company is allowed.

To illustrate:

For tax planning purpose and cheaper margin of financing, it is very common for a Labuan Bank to borrow from its HQ and the Labuan Bank then loan to its Parent or related company in Malaysia which is also a License Bank licensed under Bank Negara Malaysia.  If a Malaysia Bank obtained a loan from the Labuan Bank of USD 100,000,000 and pays an interest of 1% per annum = USD 1,000,000.

A. Computations based on 3% allowable expenses:

Of the USD 1,000,000 of interest paid, only USD 30,000 (ie 3% X USD 1,000,000) is allowed as deduction against the chargeable income of the Malaysian Bank for tax computation purposes. So by disallowing USD 970,000 (ie USD 1,000,000 less USD 30,000) of the interest payment, the Malaysian Bank would have to pay tax of 24% based on the Malaysia Income tax bracket

If the Malaysia Bank tax bracket is 24% then on this amount of USD 1,000,000 the amount payable to the Inland Revenue of Malaysia comes to USD 232,800 (24% of USD 970,000 ie USD 1,000,000 less USD 30,000).

Thus in this example, the Malaysian Bank would have to pay USD 1,000,000 of interest payment to the Labuan Bank plus USD 232,800 to Inland Revenue which sum up to USD 1,232,800 when making an interest payment of USD 1,000,000

B. Computations based on 67% allowable expenses:

Of the USD 1,000,000 of interest paid, USD 670,000 (ie 67% X USD 1,000,000) is allowed as deduction against the chargeable income of the Malaysian Bank for tax computation purposes. So by disallowing USD 330,000 (ie USD 1,000,000 less USD 670,000) of the interest payment, the Malaysian Bank would have to pay tax of 24% based on the Malaysia Income tax bracket

If the Malaysia Bank tax bracket is 24% then on this amount of USD 1,000,000 the amount payable to the Inland Revenue of Malaysia comes to USD 79,200 (24% of USD 330,000 ie USD 1,000,000 less USD 670,000).

Thus in this example, the Malaysian Bank would have to pay USD 1,000,000 of interest paid to the Labuan Bank plus USD 79,200 to Inland Revenue which sum up to USD 1,079,200 when making an interest payment of USD 1,000,000.

From the above example A and B above means now with the revised 67% allowable expenses the Malaysia Bank can safe tax amount of USD 153,600 (USD 232,800 less USD 79,200)

This comes as a much relief to all the Industry Players in Labuan.  We hope the Regulator will push for 80% allowable expenses.

 

About the Author

Clament Chua was born in Labuan and start his Trust Company in Labuan in 2009.  He is a down to earth and humble man.  His firm offer personalized services.

 

For more Information Please contact:

Corporate Services Trust Co Ltd
Unit B, Lot 49, 1st Floor, Block F,
Jalan Ranca-Ranca,
P O Box 80192
87000 Federal Territory of Labuan,
Malaysia.

Tel: 6 087 419000 or 419100
Fax: 6 087 419 200
Email: info@cstcl.com.my

Website
www.cstcl.com.my

Facebook
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Clament Chua

Clament started his career with Ernst & Young before joining The National Australia Bank Limited from 1999 to 2005. In 2009 he founded CS Trust to provide tailored incorporation solutions to international clients.

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