Crowe Broadening Tax Net Section 12

Broadening the Tax Net under Section 12 of the IncomeTax Act 1967

Chong Mun Yew, Executive Director (Tax)
Crowe Broadening Tax Net Section 12
Malaysia has recently introduced an amendment to Section 12 of the Income Tax Act 1967 (“ITA”). This amendment may be far reaching especially to those who are unsure whether they are conducting a business in Malaysia and therefore are taxable on the profits derived from that business. 

Ordinarily, it is not difficult to know whether a person is conducting a business in Malaysia. However, there may be cases where businesses are more transient whereby the operations may be conducted without a full set of business premises and the sales are secured via agents or via the business’ website.

For these borderline cases, one may need to refer to the relevant Double Tax Agreement (“DTA”) that the country of the person has entered into with Malaysia (“DTA countries”). Only where the person has a “permanent establishment” in Malaysia, will this person be held to be taxable in Malaysia on his profits(excluding specific income such as interest, royalty and technical fees). If he is from a country which does not have a DTA with Malaysia(“non-DTA countries”), there is not much guidance in the ITA.

Resultantly, the question as to whether a person is “doing business in Malaysia or doing business with Malaysia” is a question of facts and circumstances. This nebulous concept oftentimes introduces ambiguity and complication into the Malaysian tax law.

Hence, persons from the USA, Bahamas, Serbia, Cyprus, Ecuador, etc. which either do not have any DTA with Malaysia or have a limited double tax treaty with Malaysia, will find their tax position to be uncertain. So, do these new changes in Section 12 provide more clarity or introduce more confusion as to the source of income for Malaysian tax purposes?

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