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 as international exports and imports are a common source of income for countries. To tackle this, Double Tax Agreement (DTA) was established.
What is a Double Tax Agreement?
DTA is essentially a settlement between two governments to avoid double taxations. Double taxation occurs due to the income being taxed in different ways in different countries; some countries tax it on source basis while some on residential basis.
TIP: Hire a tax agent who will advise you on your tax resident status and how your company can benefit from a DTA.
This agreement serves to facilitate international flow of investments, trades and financial activities between Malaysia and other countries. This allows both trading countries to become more interdependent economically and socially.
If a taxpayer fulfils the tax resident requirements of both countries consisting of the DTA, the individual will be regarded as a tax resident of the country he resides in.
Features of Malaysia’s Double Tax Agreements
In Malaysia, DTAs generally apply to the taxes of both the taxpayers of Malaysia and the other country involved. These taxes may be related to the taxpayers’ 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 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 the purposes of delivery, storage, or display
Use of facilities for the purposes of delivery, storage, or display of goods belonging to the enterprise
Maintenance of stocks of goods or products 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
FUN FACT: Did you know that Farms and Plantations are also considered as Permanent Establishments? That also means that individuals that work as farmers are also taxed!
Singapore-Malaysia Double Tax Treaty
One of Malaysia’s DTA is with its neighbouring country – Singapore. The objectives of having such an agreement are:
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.
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.
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.
Deepens economic ties Singapore and Malaysia share political, cultural histories, and close bilateral relations. With Singapore being one of the top sources of foreign direct investments into Malaysia and home to many Malaysians, this DTA eases the burden of having the same income being taxed twice.
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 through essentially allocating taxation rights for each country, while avoiding penalisation.
Encourages trade between countries The DTA often provides for reduction of net taxation. Foreign investors from Singapore in Malaysia and vice versa benefit from the Singapore-Malaysia DTA provisions as it allocates for special treaty rates for the applicable withholding taxes.
The types of taxes covered by the Singapore-Malaysia DTA are:
The credit provided shall not exceed the local country’s tax as computed before the credit is given. Simply put, the credit will not exceed the local taxes; otherwise, it would result in a net negative tax in the local country. Note that for the purpose of this credit computation, the tax payable shall not take into consideration any special waiver, exemptions, or grants provided by the respective jurisdictions; thus, the taxpayer will continue to enjoy these benefits in the credit computation.
The Double Tax Treaty is an avoidance of double taxation agreement between whom and what is its purpose?Tommy2021-09-17T13:30:19+08:00
A Double Tax Treaty is an agreement between governments and not states or counties or provinces with the purpose of avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income.
Can a Double Taxation Agreement or Double Tax Treaty impose tax?Tommy2021-09-17T13:29:51+08:00
No, a Double Taxation Avoidance Agreement, DTA (also called a Double Tax Treaty, DTT) cannot impose tax, and therefore if you are looking at whether relief is due or not, the starting point should always be to refer to domestic law. If there is no tax liability under domestic law, then the Double Tax Treaty cannot impose tax liability.
What is a ‘beneficial owner’ for tax purposes?Tommy2021-09-17T13:29:25+08:00
A beneficial owner is an individual who ultimately owns or controls more than 25% of a company’s shares or voting rights, or who otherwise exercises control over the company or its management. This owner is one who ultimately enjoys the income on the asset and also controls such income receipts and the assets itself.