Taxation : Articles File 1

Source: TheStar 4-December-2001

Tax consultant emphasises importance of transfer pricing

IT is increasingly recognised that strategically planned transfer prices between entities in a group of companies are the key to a successful and balanced outcome that serves as a key to maximising shareholder value, Ernst & Young Tax Consultants Sdn Bhd head of transfer pricing Yvonne Chan said.

In a statement, she said that as national borders became minor obstacles to the expansion of business organisations, companies with business activities in two or more tax jurisdictions would encounter the issue of juggling within a matrix of tax, commercial and operational benefits and risks to be borne by the entities in each jurisdiction.

Ernst & Young is a professional services firm with 13 offices and 1,600 staff in Malaysia. It offers services in assurance and advisory business, tax, and corporate finance.

Chan said Ernst & Young’s 2001 Global Transfer Pricing Survey, which covered 638 parent companies and subsidiaries in 22 countries, found that for six years running now, transfer pricing remained the “top of mind” international tax issue which parent companies dealt with, and one they expected to continue to deal with over the next two years.

“Tax authorities across the world are fully aware of the implications of globalisation and the increase in cross border transactions. In all fairness, they will want their share of the global profit pie and in consensus, they would want to see related party transactions priced at arm’s length,” she said.

“More and more, tax authorities across the world are putting in place formal transfer pricing regimes, where they have guidelines to indicate what their views and policies are, legislation for enforcement of the policies and penalty structures, and enforcement procedures, which generally comprise audits,” she added.

Chan said Ernst & Young’s 2001 Global Transfer Pricing Survey also revealed that nearly two-thirds of respondents reported having suffered a transfer pricing audit somewhere in their organisation.

“Interviews conducted with authorities in the countries surveyed also revealed an increased zeal on the part of enforcement authorities and an increased capability to do their job,” she said.

Source: TheStar 1 Aug 2002

Interest from FD ‘cannot be taxed’

By CHELSEA L.Y. NG

KUALA LUMPUR: Interest earned by companies from fixed deposits (FD) cannot be taxed because the principal sum would have already been charged as the company’s profit or business income, the Court of Appeal ruled yesterday.

Although there is a specific provision in the Income Tax Act, 1967 to tax interest income, the idle money put into fixed deposits constitutes income from a source consisting of a business, the court said.

The court made this ruling when upholding a Deciding Order of the Special Commissioners of Income Tax dated March 13, 1997, which had set aside a notice of assessment issued by the Inland Revenue Board (IRB} against Pan Century Edible Oils Sdn Bhd demanding RM169,917.53 as tax for the interest income for the years 1987 to 1990.

Justices Abdul Hamid Mohamad, Mohd Noor Ahmad and P.S. Gill unanimously held that the Commissioners were correct in their decision in holding that the interest income fell within Section 4(a) of the Act.

“Therefore, we dismiss the appeal (of the IRB’s Director-General) with costs,” Justice Mohd Noor said in a 16-page judgment yesterday.

Under the Income Tax Act, gains and profits from a business are taxable under Section 4(a) while dividends, interest or discounts come under subsection (c).

The IRB had claimed that the money in question was “clearly interest’’ and not gains or profits from a business.

It said that fixed deposits, whether short- or long-term, was current assets and liquid cash which could be obtained at any time and had no element of risk.

It added that although the transactions were repetitive, they did not amount to trade.

The company, however, asserted that the interest income “is part and parcel of its business income or ancillary to its business or it is business income arising out of an adventure’’ which should be chargeable under Section 4(a).

Pan Century, which is involved in refining and processing palm oil, said that the price of crude palm oil fluctuated from time to time.

“When the price of crude palm oil dropped, less cash was needed to fund the purchase, and when its price went up, more cash was needed.

“When less cash was needed to fund the purchase, the excess cash was placed on short-term and long term deposits and very short-term negotiable deposits,’’ it said.