BUSINESS restructuring in Malaysia involves numerous tax considerations that needs to be carefully managed to avoid unintended tax consequences which can be costly. This will include general income tax matters such as deductibility of expenses, tax losses, capital allowances, transfer pricing, withholding taxes, real property gains tax, capital gains tax, stamp duty, sales and service taxes, customs duties, tax incentives, employment taxes, Employees Provident Fund and social contributions, and other employee-related taxes, dividend and distribution taxes, foreign taxes, etc.
The most common types of restructuring will involve mergers, demergers, or reorganising business structures. It can also involve spinoffs into new companies or divestures of part of the operations.
In most cases, the commercial considerations take the prime spot and supported by the legal counsel who will execute the intention of the parties. Unless the financial advisers and legal advisers are aware of the tax implications, the tax liabilities will come as a surprise at a later date. Once the arrangements and agreements have been signed and executed, it will be difficult to reverse or reorganise the transactions to mitigate the adverse tax consequences.
Tax should not be an afterthought as subsequent tax liabilities will be significant as the income tax rate is usually 24%, withholding tax can range between 10% and 15% of the gross payment, sales and service tax can range between 5% and 10%, and stamp duty could go up to as much as 4% of the transaction value or market value.
Mispricing of the transfer prices could give rise to a 5% surcharge on any future adjustment. If the tax issues are analysed simultaneously whilst the transaction is being executed, the opportunity for mitigating the taxes will not be missed.
It is important to be able to show the tax authorities in any future audits that the business restructuring was undertaken primarily for commercial reasons and obtaining a tax benefit is a natural consequence of the transaction.
Issues for consideration
The starting point would be to ensure that maximum deduction is obtained for the operating expenditure and capital expenditure. Throughout the restructuring, the timing of the tax deduction or taxation of the income is also important. On the revenue side, decisions must be made to distinguish between capital versus revenue for income tax purpose. If there is a transfer of land related assets, attention needs to be paid to real property gains tax. With the introduction of capital gains tax, sales of unlisted shares by companies, trusts, limited liability partnerhips and cooperatives must consider capital gains tax.
Throughout the reorganisation, any legal document produced needs to be stamped although in certain cases, you can explore opportunities within the law to benefit from the exemptions or remissions. In most group reorganisations, you cannot forget transfer pricing because inevitably you will find that there are transfer prices involving goods, services, financing, and the use of intangibles via royalty payments. Any reorganisation of these prices must meet the arm’s length test, otherwise there will be additional taxes and surcharges.
The most common tax area that is forgotten is indirect taxes such as sales tax, service tax, and customs duties. An example would be the imported service tax for services imported from overseas such as payments made to digital companies overseas or between cross-border related parties.
Another common example that would trigger customs duties and sales tax on importation could be a change of the customs harmonised system codes if the imported goods change their character, for example from complete knocked down to complete built up.
Another area could trigger customs duties is where the reorganisation involves a change in the supply chain and consequently it may affect the relief accorded under the preferential tariffs of the respective free trade agreements.
There are many other areas of taxation which needs to be carefully analysed to determine the cost of the restructuring. If the analysis is done correctly, there are opportunities to mitigate this cost.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).
