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)?
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.
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 (DTA)
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 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:
Singapore-Malaysia Double Tax Treaty
One of Malaysia’s DTA is with its neighbouring country – Singapore. The objectives of having such an agreement are:
The types of taxes covered by the Singapore-Malaysia DTA are:
- Income & corporate taxes in Singapore
- Income & petroleum taxes in Malaysia
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?
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.
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.
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.