Double Tax Agreements in Malaysia

When it comes to taxation, no company likes to be charged twice when engaging in cross-border transactions. Double taxation usually occurs when any individual taxpayer of Malaysia engages in an international business transaction within the territory of another country. Such transactions are not tax-friendly, because international exports and imports are a common source of income for countries. So to tackle this, Double Tax Agreements (DTA) in Malaysia were established.

What is a Double Tax Agreement (DTA)?

DTA is essentially a settlement between two governments to avoid double taxation. Generally, companies that operate internationally risk double taxation due to different tax rules in different countries. An example, where you source your income is which determines your tax in certain countries, while in others, it’s the location of your company’s residence that determines the tax.

Double tax agreements in Malaysia exist to facilitate the international flow of investments, trade and financial activities between Malaysia and other countries. This allows both trading countries to become more interdependent economically and socially.

To be eligible for a DTA, a taxpayer must fulfil the tax resident requirements of both countries to which the DTA applies. Thus, the country the taxpayer resides in would consider them a resident for tax purposes.

Features of Malaysia’s Double Tax Agreements (DTA)

In Malaysia, DTAs generally apply to the taxes of both the taxpayers of Malaysia and the other countries involved. These taxes may be related to the taxpayer’s total income or elements of income. This is inclusive of taxes derived from gains earned from the alienation of property.

In specific cases, there are other taxes apart from personal income tax to which the provisions of Malaysia’s DTAs apply. Some of these taxes include corporate tax, petroleum income tax, and capital gains tax.

Permanent Establishments & Double Tax Agreements in Malaysia

In a DTA, a permanent establishment may be defined as a fixed business location through which an enterprise’s business activities may be partially or completely performed. After the setup of a permanent establishment of Malaysia, it will only experience taxation on its income earned in Malaysia.

However, certain activities conducted by a permanent establishment do not fall under the purview of the official definition. These activities include the following:

• Maintenance of stocks of goods or products owned by the permanent establishment for delivery, storage, or display
• Use of facilities for delivery, storage, or display of goods belonging to the enterprise
• Maintenance of stocks of goods or products that owned by the enterprise which will solely be used by another enterprise for processing
• Maintenance of a fixed business location solely for either the purpose of purchasing merchandise or collecting information for the enterprise
• Maintenance of a fixed business location solely for the performance of any activity of a preparatory or auxiliary character
• Maintenance of a fixed business location solely for any combination of activities which have been mentioned if the primary business activity of the location in question is of a preparatory or auxiliary character

Singapore-Malaysia Double Tax Treaty

One of Malaysia’s DTA is with its neighbouring country – Singapore. The objectives of having such an agreement are:

1. Achieving relief from double taxation

The Singapore-Malaysia DTA removes double taxation by ensuring tax relief in one or both countries. In Malaysia, the Singapore tax paid will be allowed as a credit tax against any similar local Malaysian tax and vice versa in Singapore, for Malaysian tax paid.

2. Sets out taxing rights of countries

The way the double taxation agreement goes about in achieving its objective of removing double taxation is by sorting out or allocating taxing rights between countries.

3. Prevents tax evasion and avoidance

DTA combats the evasion of tax typically through the Exchange of Information Article that allows governments to pass across information about taxpayers.

4. Deepens economic ties

Singapore and Malaysia share political, and cultural histories, and close bilateral relations. With Singapore being one of the top sources of foreign direct investments in Malaysia and home to many Malaysians, this DTA eases the burden of having the same income being taxed twice.

5. Avoids penalising taxpayers

The income of taxpayers that flow between two countries can become subject to taxation in both countries. The DTA addresses this by avoiding financial losses from double taxation by essentially allocating taxation rights for each country while avoiding penalisation.

6. Encourages trade between countries

The DTA often provides for a reduction of net taxation. Foreign investors from Singapore in Malaysia and vice versa benefit from the Singapore-Malaysia DTA provisions as it allocates special treaty rates for the applicable withholding taxes.

The types of taxes covered by the Singapore-Malaysia DTA are:

• Income & corporate taxes in Singapore
• Income & petroleum taxes in Malaysia