As the name goes, Withholding tax means an amount, representing the tax portion of an income of a non-resident recipient, withheld by the payer in Malaysia, and paid directly to the Inland Revenue Board of Malaysia.

The above sounds very confusing.  Let’s dissect the paragraph into smaller parts to get a better understanding:-

• Tax portion of income:  There is a specific tax rate for specific purpose of such income.
• Non-resident recipient:  In simplicity form, these are service providers who do not operate within Malaysia.
• Payer:  An individual/body carrying on business in Malaysia.

Payment of Withholding Tax

The Payer is liable to make the payment to Inland Revenue Board within 30 days from the date the payment is made to the non-resident recipient, or invoice is received from the non-resident recipient.

Failure to make the payment to the Inland Revenue Board within the stipulated time, penalty will be 10% on the amount of the unpaid tax.

Tax rates

Different sources of income to the non-resident recipient will be subjected to different rates:

**  Note:  There could be changes in tax rates from Double Tax Agreements, depending on the countries involved.

The Malaysian Institute of Accountants (“MIA”), had in 2010, issued a Recommended Practice Guide 7 (Revised) on the charging of audit fees.  This is a replacement to the earlier practice guide issue in 2007.  All auditors in Malaysia are required to abide by this practice guide.

Purpose

The MIA issued this Practice Guide because of the following reasons:-

1. Increased in compliance burden due to higher auditing standards requirements
2. Increased in operating costs, mainly salaries
3. To ensure auditors professionalism are not affected due to “price wars” among auditors

Audit fee rates computation

The general method of determining audit fees is based on either Turnover or Total Assets.  Methods used are according to nature of business.  Example, for a trading company will use Turnover as audit fees, whereas an asset based company will use the Total Assets method.

(i)         Gross Turnover or Total Assets Basis

In cases where the above methods are not practical to be used, the method below will be applied instead.  An example where a company has Turnover of RM10 million, Total Assets of only RM5,000, and operating expenses of RM2 million.

(ii)       Total Operating Expenditure Basis

Lastly, the Practice Guide also mentioned specifically that the audit fee for a Dormant Company shall be a minimum of RM800.

Businesses in the US and Europe have long been using offshore companies for tax planning measures. However, there are certain groups of people/companies have abused this tax planning tool to perform fraudulent measures such as money laundering, drug and arms smuggling, etc. Such companies are a taboo to Asians in general, and therefore, little knowledge of their legal benefits is understood.

This article is merely to assist the readers to understand a little bit more about the legal aspects of an offshore company, especially their benefits:

1. Assets protection
2. Protection from lawsuits
3. Privacy
4. Simplicity
5. Minimising taxation

Asset Protection

Placing personal assets into a separate legal entity is generally favourable, whether in an onshore or offshore company. The main reason is that there is additional layer of protection for the assets in cases of legal claims over your assets.

The fact that offshore companies provide added privacy will make ownership of your assets harder to track. Lawyers typically perform preliminary searches to locate assets that are owned by you, to maximise recover of claims from a winning judgement. By transferring your assets to an offshore company, thereby relieving your personal ownership on these assets, these offshore companies can be a valuable tool in deterring these lawyers from locating these assets.

Protection from lawsuits

It is very difficult to take legal action against properly structured offshore companies because of the added difficulty of locating foreign assets and subsequently proving ownership of them. Further, in many jurisdictions, the lawsuit would have to take place in the country of incorporation since foreign judgments are not recognized except in cases of money-laundering, weapons and drug smuggling, and criminal tax fraud.

It is important to note that tax fraud is entirely different from tax avoidance. Tax fraud is an offense and tax avoidance is an entirely legal means of minimizing personal and corporate taxes.

Privacy

In many offshore jurisdictions, the company officers, shareholders and beneficial owners can either be omitted from the incorporating documents and/or are not disclosed on any public record at all.

This will provide privacy and anonymity in conducting your business, bank transactions and/or personal financial investments.

Simplicity

Generally, the ongoing requirements for offshore companies are often very relaxed compared to onshore companies. Many of these jurisdictions do not require the accounts to be audited, and no filing of Annual Returns.

Minimizing Taxation

Offshore companies incorporated in low or zero tax jurisdictions may reduce, delay or eliminate the tax burden on the company. However, you need to understand that taxes are still paid in the country of citizenship/residence or business domicile, ie. the onshore company.

Transactions and profits arising from these offshore companies will be subjected to the tax laws in within their jurisdictions regardless of location of funds. Therefore, if the jurisdiction is having zero tax, then the company will automatically enjoys tax free profits.

You have to take note of other tax implications that may overlap with the offshore companies, such as withholding tax and transfer pricing matters.

Following KLM’s extremely popular article, Malaysia’s Budget 2010, we’re bringing you new highlights of Malaysia’s 2011 Budget this year.

For the year 2011, there are some notable changes that the Rakyat should look at.

Personal & People’s Budget 2011

1. Exemption on sales tax for all Mobile Phones
2. Service tax raised from 5% to 6%
3. Service tax imposed on paid television broadcasting services (e.g. Astro)
4. Excise duty exemption on National Vehicles, purchased by the disabled, to be raised from 50% to 100%
5. Tax relief of RM5,000 to be extended for employ caretakers for parents, day care centers & other caring daily needs
6. 50% stamp duty exemption for first time property (residential, house) buyers on loan agreement instruments
7. Special Financial Assistance of RM500 provided to all civil servants of Grade 54 and below, including retirees & contract officers
8. Amount of loan for low cost houses raised from RM10,000 to RM20,000 for Support Group 2
9. Maximum loan eligibility raised up to RM450,000 from RM360,000 per pax, starting Jan 1st 2011
10. Funeral Arrangement Assistance rate increased to RM3,000
11. You can now have the chance to determine how many days are your fully-paid maternity leave, not exceeding 90 days from the current 60 days subject to a total of 300 days of maternity leave throughout your tenure of service
12. Introduction of “Skim Rumah Pertamaku” providing a guarantee of down payment of 10 percent for houses below RM220,000 for first-time house buyers
13. Estate workers can now own low-cost houses through BSN scheme
14. Establishment of a “1Malaysia Smart Consumer” portal
15. 1MDB (1Malaysia Development Berhad) will supply multiple types of vitamins to primary school children, low income group.
16. Monthly consumption of RM20 electricity rebate remains active.
17. PLUS highway toll rates will not be raised in the next 5 years.
18. Application for PR (Permanent Resident) status can only be submitted after staying in Malaysia for 5 or more years.

Human & Non-human Development Projects & Spending

1. Affordable houses will be built in Sg. Buloh (Selangor) amounting to RM10 billion, aimed to be completed by 2015.
2. Malaysia’s next new landmark is to be built – “Warisan Merdeka”, a 100-storey tower at RM5 billion, to be completed by 2015.
3. Development of large-scale integrated Aquaculture Zones in Pitas, Sungai Telaga & Sungai Padas (Sabah) and Batang Ai & Tanjung Manis (Sarawak) with RM252 million budget allocation.
4. Construction and repair of 12,000 houses nationwide particularly in Sabah and Sarawak with an allocation of RM300 million.
5. RM135 million will be allocated to agricultural farmers for basic infrastructure costs to encourage participation & activities in high value agriculture activities.
6. RM85 million allocated to facilitate basic infrastructural facilities for construction of hotels & resorts in remote areas of Malaysia to promote tourism.
7. RM50 million to construct shaded walkways in KLCC – Bukit Bintang areas.
8. Construction and repair of 12,000 houses nationwide particularly in Sabah and Sarawak with an allocation of RM300 million.
9. RM3 billion for development of the world’s first integrated eco-nature resort in Sabah by Nexus Resort Karambunai starting 2011.
10. RM850 million for infrastructure support to corridor and regional development.
11. RM119 million for local content creation, hosting local content and unlocking new channels for content developments.
12. RM411 million allocated for research, development and commercialization activities as a platform for enhancing value-added activities, spanning across a diverse group of economic sectors.
13. RM200 million to purchase creative products such as high quality locally produced films, dramas, documentaries and rich media.
14. Increasing enforcement, coverage and audit on tax for all parties that are taxable.
15. Restructuring and strengthening of the education & training sector. RM29.3 billion for the Education Ministry, RM10.2 billion for the Higher Education Ministry and RM627 million for the Human Resources Ministry.

Budget 2011 Resources Allocations & Facts

1. RM212 billion is proposed for the Malaysia’s 2011 Budget, where it is 2.8% higher than the budget allocated for 2010.
2. RM162.8 billion for Operating Expenditure.
3. RM49.2 billion for Development Expenditure.
4. Under the Operating Expenditure, RM45.6 billion is allocated for Emoluments, RM28.2 billion for Supplies and Services, RM86.4 billion is allocated to Fixed Charges and Grants.
5. RM1.4 billion for the Purchase of Assets while RM1.2 billion for Other Expenditures.
6. For Development Expenditure, RM28.3 billion is allocated to the economic sector for infrastructure, industrial, agricultural and rural development.
7. RM15.5 billion will be allocated to the social sector, including education and training, health, welfare, housing and community development.
8. RM4.4 billion for the development of the Security Sector.
9. RM955 million for General Administration.
10. RM2 billion Contingencies.
11. Federal Government revenue collection is estimated to increase 2.3% to RM165.8 billion in 2011 when compared with RM162.1 billion in year 2010.
12. Federal Government deficit for 2011 is expected to further decline to 5.4% of GDP, compared with 5.6% in 2010.

Malaysian Public Service

1. For the Ministry of Education, a sum of RM6.4 billion is allocated for Development Expenditure to build and upgrade schools, hostels, facilities and equipment as well as uphold the status of the teaching profession.
2. RM213 million allocated to reward high performance schools and remuneration of Principals, Head Teachers and Excellent Teachers.
3. The Malaysian Government will increase pre-school enrolment rate to a targeted 72% by end 2011 through additional 1,700 clases, strengthen the curriculum as well as appoint 800 pre-school graduate teachers.
4. The Government allocated RM111 million for PERMATA programme including the construction of the second phase of Sekolah PERMATA Pintar school complex, 32 PERMATA Children Centres (PAPN) and financing operations of 52 completed PAPNs.
5. RM250 million allocated for Development Expenditure for religious schools, Chinese-type schools, Tamil national schools, missionary schools and Government-assisted schools nationwide.
6. The Malaysian Government will provide assistance per capita for primary and secondary rakyat religious schools with an allocation of RM95 million.
7. RM576 million allocation in the form of scholarships for those wishing to further their studies.
8. RM213 million is allocated to enhance proficiency in Bahasa Malaysia, strengthen the English language as well as streamline the standard curriculum for primary schools.
9. The Government will recruit 375 native-speaking teachers including from the United Kingdom and Australia to further enhance teaching of English.
10. The number of PhD qualified academic staff will be increased to 75 percent in research universities and to 60 percent in other public institutions of higher learning with an allocation of RM20 million.
11. Full import duty and 50% excise duty exemption was granted to franchise holders of hybrid cars.
12. Allocation of RM500 million for the implementation of 1Malaysia Training Programme by Community Colleges, National Youth Training Institutes, Giat Mara and Industrial Training Institutes to commence in January 2011.
13. The establishment of National Wage Consultation Council as the main platform for wage determination.
14. The establishment of 1Malaysia Youth Fund with an allocation of RM20 million.
15. Increase in monthly allowance for the Chairman of JKKK and JKKP, Tok Batin, Chairman of JKKK Orang Asli and Chairman of Kampung Baru to RM800 compared with RM450 currently.
16. The abolishment of the Competency Level Assessment or PTK to be replaced with a more suitable evaluation system by June 2011.
17. Extension of services of Pegawai Khidmat Singkat for an additional period of one year from December 2010.
18. Introduction of the Distribution of Essential Goods program to standardize prices across areas.
19. Introduction of the Retail Shop Transformation Programme, Automotive Workshop and Community Market projects.
20. The launch of a Private Pension Fund in 2011.The launch of Bumiputera Property Trust Foundation with the size of RM1 billion and syariah-compliant.
21. A review of the current minimum bankruptcy limit of RM30,000.
22. The application for Permanent Resident status may be submitted after five years of residence.
23. Providing four buses for Mobile Clinic.
24. Formulating a new development model for Orang Asli.
25. JHEOA will be restructured and strengthened as Jabatan Kemajuan Orang Asli.

In the recent 10 years, there have been many investment gurus who came to teach, especially employees and young individuals, how to invest in properties to create retirement income, or more fondly known as “passive income”.

With this new trend of property investments, owning one property by these individuals is just the beginning. Rather, it was told to me by many loan officers and property agents that these individuals are in their early 30s, and owning an average of 6 properties.

Many of my friends and clients told me that they heard from their friends that it is more “beneficial to own properties under a company rather than individual” but they do not understand why. This article is to give property investors an idea of why it is preferred by many investors to own properties under a company.

Benefit 1: Expenses

The first obvious benefit is using expenses to reduce rental income, ie to declare lower profits, hence paying lower taxes. Unless an individual declares his/her rental income as business income, expenses are generally not deductible against rental income.

One example is the furnishing of the property, like air conditioners, furniture etc. There are capital allowances attached to these assets, used to reduce the profits of the company. To an individual, such items are generally not allowed to reduce from rental income.

Benefit 2: Easy of disposal

An average time for an individual to sell a property is 6 months, whereby you need to complete the title transfer before the transaction is completed. Whereas, if you want to dispose a property owned by your company, the transaction can be much faster, depending how fast can the buyer settle the full payment of the purchase price. You will need to transfer your shares of the company to the buyer and complete the share transfer process. For this process, it is advisable that you get a good lawyer to write up the Sale & Purchase Agreement.

Benefit 3: Succession planning

This is very similar to disposal of shares but to spouse or children. Therefore, the most common idea is to transfer the shares without receiving any money. This can be done fairly quickly, possibly even before the individual passes away. With this, transactional complications of property transfers within a Will or Estate, such as time delay and high costs, can be avoided.

Having said the benefits, there are also costs such as incorporation of a company, and other statutory expenses that comes along with maintaining a company.

This accounting standard is by far the most contentious, complicated and still in the process of updating and change, among all the other standards.

As frightful as it may sound, the Malaysian Accounting Standards Board (“MASB”) has announced the accounting standards relating to financial instruments shall be implemented and applicable for financial periods beginning on or after 1 January 2010. This will be the one of the most daunting tasks to all financial executives. Accounting standards applicable are as follows:-

1. FRS 139 – Recognition and Measurement
2. FRS 132 – Presentation
3. FRS 7 – Disclosures

Without going to the technicalities in detail (and start confusing everyone), we will just touch on the general area for each of the standards.

FRS 139 – Recognition and Measurement

• All entities other than private entities are affected. These are mainly public listed companies, and subsidiary/associate/joint controlled companies of public listed companies.
• Financial instruments cover both financial assets and financial liabilities. Examples of such assets and liabilities are trade receivables/payables, intercompany balances, bank facilities, debts, derivatives (forwards/futures/options)…. and the list goes on.

There are four (4) categories of financial assets:

1. Fair value though profit and loss (“FVTPL”) – assets held for trading (not designated for hedging).
2. Loans and receivables (“LR”) – fixed and determinable payments.
3. Available for sale (“AFS”) – non-derivative assets initially recognized as available for sale, and not classified as FVTPL or LR.
4. Held to maturity (“HTM”) – non-derivative assets with intention to hold until maturity, and not classified as FVTPL or LR.

Financial liabilities are categorized into either:-

1. FVTPL – held for trading or designated upon initial recognition
2. Others – not classified under FVTPL.

FRS 132 – Presentation

This standard establishes the principle whether the financial instruments are presented as liability or equity. Further, this standard prescribes the accounting for treasury shares as well as specific conditions for an asset or liability to be offset in the balance sheet.

In deciding whether the financial instrument is classified as a liability or equity depends very much on the substance of the contract.

FRS 7 – Disclosure

• In the Balance Sheet, the carrying amounts of the financial instruments are required to be separately disclosed according to financial assets and liabilities categories mentioned above. Further explanation and information on each and every item on the value measurement, amortization methods, and accounting concepts are required.
• For the Income Statement, there is also a requirement to disclose gains and losses arising from each of the financial assets or liabilities, with elaborated information on the accounting reasoning behind it.
• Other disclosures such as basis of measurements, and if hedge accounting is used, the description, nature and fair value of hedge accounting.
• Qualitative disclosures such as management’s objectives, policies and processes in managing the risk of each class of financial instruments.
• Quantitative disclosures such as credit risk, liquidity risk and market risk where various analysis are required to be disclosed within the financial statement.

Should you have any further questions regarding accounting standards for financial instruments, feel free to contact KL Management Services at +603-2282 0888 or email info@klmanagement.com.my.

At the end of 2009, Malaysia’s prime minister Datuk Seri Najib Tun Razak announced that a bill on the proposed introduction of Goods and Services Tax (“GST”) will be tabled at this year’s Budget 2010. Some indicated expectations about GST are as followed:

• GST is to be implemented from the 3rd quarter of 2011;
• The rate is set at 4%; and
• GST is applicable to all businesses with turnover above RM500,000.

What is GST?

GST is to set to replace the current Sales Tax and Service Tax systems in Malaysia and it is a multi-tier consumption tax; which simply means GST is applied at every stage of the supply chain; i.e. from raw material supplier, all the way until the retailers selling to consumers (or end-users). In a nutshell, the consumer bears the burden of the ultimatum tax figure.

The word “consumption tax” is used.

This indicates that GST is applied on consumption value, and not earnings or profits. GST is applicable on virtually all supplies of goods and services, except for this essential commodities such as rice, flour etc.

How GST works

It’s actually very simple. GST paid on purchases (are called “input tax”) shall be deducted from the GST charged to customers (called “output tax”). This offsetting mechanism is to ensure GST paid by businesses are incremental, based on value-added basis and do not end up being permanent cost…. well, consumers do not apply here.

Below is an illustration, showing how GST works:

GST mechanism in the Supply Chain

How does GST work? GST's mechanism in the supply chain for GST calculations and tax in Malaysia, for budget 2010

1. Let’s say the selling price from the supplier is RM100, and where 4% GST is charged.
2. The supplier then charges the tax to the manufacturer, where you can see “value added” is pushed on.
3. When the distributor receives and pays for the tax, it’s transferred to the consumer at the end price.

Payment of GST to the Government

1. Supplier will pay RM4 (output tax) to the Government.
2. Manufacturer will pay RM4 (output tax of RM8 less input tax of RM4) to the Government.
3. Distributor will pay RM2 (output tax of RM10 less input tax of RM8) to the Government.

At the end of the day, consumers are the ones who are paying for GST of RM10, and the Government, who eventually receives total GST of RM10.

Prior to 1 April 2007, Real Property Gains Tax (RPGT) has been in effect for quite some time already, and during that time, the RPGT rates are as follows:

Real Property Gains Tax (RPGT) rates in Malaysia prior to 1st April 2007

In summary, the RPGT during that time was applicable to all companies that disposed their properties, regardless of the duration of ownership.  As for individuals, there will be no RPGT is disposed after owning more than 5 years.

Due to the weak economy in 2006 and 2007, the government announced exemption of RPGT across the board, meaning for companies and individuals, and ignored the ownership period.  Exemption means “ignoring” the RPGT Act, not removing the Act.  All Malaysian citizens and companies lauded this move, and supported this exemption because the simple fact is, they benefit.

Now, in Budget 2010, this exemption is lifted.  RPGT will return effective 1 January 2010.  However, the RPGT rates have generally been lowered as followed:

Real Property Gains Tax (RPGT) rates in Malaysia starting January 1st, 2009

Companies and Malaysian individuals will share the same RPGT rates, fixed at 5%.  This is the part that caused dissatisfaction among the Malaysian individuals as it becomes more expensive for owners to sell their properties.

Furthermore, it is even harder for property companies to sell their properties as house buyers have slowed down their buying spree, especially those speculative house buyers who have intention to flip their properties.  Their costing have changed.

Nominating Committee

The nominating committee is responsible to identify, nominate and orientate new directors, both executive and non-executive. The main reason for delegating such responsibility is to ensure recruitment matters relating to directors are addressed in detail, allowing the Board to spend time on strategic matters. It is, however, the Board’s responsibility to appoint a candidate to be a director.

General duties and responsibilities

1. Recommend candidacy for directorship filled by shareholders, taking into consideration their knowledge, skills, experience, expertise, professionalism, integrity etc;
2. Assist the Board to review the required mix of skills, experiences and other qualities which non-executive directors should bring to the Board on annual basis;
3. Consider recommendations of candidates proposed by the CEO or other senior management or shareholders or directors;
4. Review annually, the effectiveness and contribution of the Board, each committee and each individual director; and
5. Review periodically, and report to the Board on succession planning, and to evaluate potential successors.

Additional tasks of the Nominating Committee, subject to approval of the Board, can be as follows:-

1. Assess the optimal balance for Board membership;
2. Assess the desirable number of independent directors; and
3. Consider possible representation of interest groups.

Composition

According to the Corporate Governance Code, the Nominating Committee should comprise wholly non-executive directors with a majority as independent. These persons are expected to be outspoken and frank.

There should also be rotating membership in the committee where all members are appointed for a fixed term of service. This is required to avoid complacency in the committee thereby affecting a drop in the committee’s performance.

Remuneration Committee

The main purpose of a Remuneration Committee is to ensure a proper balance between having a remuneration package that can attract and retain good directors, and not paying excessively.

Composition

Recommendation from Corporate Governance Code, this committee should be made up of wholly or mainly of non-executive directors. It also calls for the Board to disclose the committee membership in the directors’ report.

Same as the Nominating Committee, this Remuneration Committee should also appoint its members on rotation basis.

The Audit Committee

The third part of our Corporate Governance series, we will be covering the functions and responsibilities of an Audit Committee within an organization, which is fundamentally about accountability and good governance.

Pursuant to Paragraph 15.10 of the Listing Requirements, all listed companies in Malaysia must have an Audit Committee. This committee will provide the Board of Directors with assurance on the reliability and quality of the financial statements, which certain information shall also be made available to the public.

While the Board is responsible for the accuracy and reliability of the company’s financial information, it may not be practical for them to keep up with the continuous changes and complexities of financial reporting. The Audit Committee, therefore, functions as an additional and more specialized oversight reviewer of the financial reporting process.

An effective Audit Committee must be seriously aware of its position within the organization, and should assume the following key responsibilities:-

1. Assess risks and control environment – the Committee must determine that the management had implemented sufficient policies to identify and evaluate risks, and controls are in place to address these risks.
2. Oversee financial reporting – assess the appropriateness/relevancy of accounting policies and disclosures in compliance with approved accounting standards. Further, the Committee is also expected to assess whether the financial report presents a true and fair view of the company’s financial position and performance.
3. Evaluate the internal and external process – there are 2 parties involved, namely the external and internal auditors. The external auditors are responsible for auditing the financial statements of the company whereas the internal auditors are responsible for evaluating the risk management, control and governance process. The Committee, therefore, functions to coordinate both parties’ efforts and review their competencies.
4. Review conflict of interest situations and related party transactions – related party transactions may present potential conflict of interest and probably cause a company decision made based on a consideration not to the best interest of its shareholders. The Committee is responsible to determine the company’s policies with regards to these transactions, and ensure timely internal and regulatory disclosures are made, including appropriate review exercises and reporting.

While the size of the Audit Committee varies, the Listing Requirements requires a company to appoint minimum of 3 members. All members must be non-executive directors, with a majority being independent. At least one member of the committee must fulfill the financial expertise criteria of the Listing Requirements.