Malaysia in EU tax watch list nothing to panic about

The country, together with Hong Kong, Costa Rica, Qatar and Uruguay, are on EU’s grey list


MALAYSIA’S inclusion into the European Union (EU) tax watch list is nothing to panic about, according to Deloitte Malaysia’s international tax leader Tan Hooi Beng.

He said Malaysia adopts a territorial tax regime, where only Malaysian-sourced income is within the ambit of its tax net. That said, banking, insurance, or sea and air transport sectors are taxed on a worldwide basis.

Tan stressed Malaysia’s commitment to amend its tax law by Dec 21, 2022, is not unexpected as the country has always been a jurisdiction that promotes tax fairness and transparency.

“This is evident with our membership in the Organisation for Economic Cooperation and Development’s Base Erosion and Profit Shifting (BEPS) Inclusive Framework, where we recently supported the Global Minimum Tax proposal.

“Malaysia also amended its Labuan and other tax incentive regimes to be in full compliance with the generally accepted international tax standards. It is therefore just a matter of time before Malaysia moves to the white list.

“As such, there is no need for anyone to push the panic button,” he said in a statement. On Oct 5, 2021, the European Commission officially announced updates to the EU grey list.

Malaysia, together with Hong Kong, Costa Rica, Qatar and Uruguay are on the list.

In reference to Annex II, the grey list comprises countries that have yet to comply with international tax standards, but have made the commitment to reform tax policies.

As a result of the foreign source income exemption regimes review, the EU considers Malaysia’s territorial-sourced tax regime harmful.

The EU has given Malaysia until Dec 31, 2022, to amend its regime and it is understood that Malaysia is willing to do so. As a result, defensive measures by the EU will be suspended, subject to the passing of those amendments.

Based on the EU’s guidance, foreign source income exemption regimes that apply on a territorial basis are not inherently problematic.

“However, the EU is concerned where such regimes create situations of double non-taxation.

“In particular, they are concerned with the non-taxation of passive income in the form of interest or royalties where the income recipient has no substantial economic activity,” Tan said.

Malaysia should not be hasty in amending its tax regime and continue its good practice of consulting relevant stakeholders.

Tan said a robust review is essential, including analysing the regimes of countries that are not on the list or have moved out from the list.

“Take for example Singapore’s territorial and remittance basis regimes and Hong Kong’s proposed legislative amendments targeting corporations with no substantial local economic activity, who receive passive income that is not chargeable to tax in Hong Kong.

“It was reported that Hong Kong will continue to adopt the territorial source principle,” he added.

If Malaysia decides to amend its territorial source tax regime, it is interesting to note that the timing coincides with that of the BEPS 2.0 Pillar Two project (Global Minimum Tax) ie Jan 1, 2023.

For taxpayers with consolidated revenues over €750 million (RM3.63 billion), the impact of Pillar Two is likely to be far more significant than the impact of the territorial regime revisions in response to the EU concerns, as their effective tax rate as a whole will be required to be at least 15%.

Accordingly, while revisions to Malaysia’s territorial regime will be of interest, the focus of these taxpayers should remain on Pillar Two.

However, groups with consolidated revenue of less than €750 million that have implemented intellectual property planning, or financing structures involving the receipt of offshore royalty and interest income, must understand the impact on their current structures and consider making adjustments to preserve their current tax profile.