Q: My company incurs substantial amount annually for the purpose of promoting sales of our products. Unfortunately, most of these expenses are currently disallowed by the Inland Revenue Board, which deems promotional expenses as entertainment. Please advise on the effect of the proposed changes to the treatment of entertainment expenses.
A: The term “entertainment” is defined under the Income Tax Act 1967 to include the provision of food, drink, recreation or hospitality of any kind; or the provision of accommodation or travel in connection with or for the purpose of facilitating entertainment of any kind mentioned in paragraph (a).
Presently, as the definition stands, the tax authorities adopt a wide interpretation of the term “entertainment”, resulting in certain genuine advertising and promotional expenses incurred for the purpose of the business being disallowed.
Only certain types of expenditure such as expenses incurred on entertainment of employees, promotional gifts at trade fairs, trade or industrial exhibitions held outside Malaysia for the promotion of exports from Malaysia, samples, entertainment expenses for cultural or sporting events open to the public and promotional gifts which incorporate conspicuous advertisement or logo of the company, are allowed tax deduction.
Budget 2004 proposed that full deduction be given for entertainment expenses that are wholly related to sales arising from the business. It is also proposed that 50% deduction would be allowed for other forms of entertainment expenses. However, it is still uncertain how the tax authorities will interpret the meaning of “?entertainment expenses?wholly related to sales?”. Nevertheless, this proposal does reduce the cost of doing business.
Q: My accountant informed me that my company, which is an approved operational headquarters (OHQ), would benefit from the Budget 2004. Can you please explain to me the implication of the proposed change to the incentive applicable to an approved OHQ?
A: As you may be aware, qualifying services for an approved OHQ include the following:
·management and administrative services in relation to general management and administration; business planning and coordination; procurement of raw materials, components and finished products; technical support and maintenance; marketing control and sales promotion planning; and data/ information management and processing.
·treasury and fund management services; corporate finance advisory services; research and development work; as well as training and personnel management.
It is common for OHQ to provide the above services to related companies both in Malaysia and outside Malaysia. Under the current legislation, only the income from qualifying services provided to related companies outside Malaysia is exempted from tax. Under the Budget 2004 proposal, income from qualifying services provided by an OHQ to its related companies in Malaysia would also be tax exempt if such income does not exceed 20% of the OHQ income from qualifying services.
Assuming that ABC Sdn Bhd is an approved OHQ which provides qualifying services to its related companies in and outside Malaysia with an income statement as shown in the Table above.
Prior to the Budget 2004 announcement, income of ABC Sdn Bhd in relation to services provided to its related companies in Malaysia does not qualify for exemption. With the proposed amendment, the total income of the company is now exempted as the portion of income from services provided to related companies in Malaysia is less than 20% of the company’s total income.
Q: Besides employment income, I also have business income and rental income from the letting out of my properties. I understand that from Year of Assessment 2004, I am allowed to revise the tax estimate issued by the tax authorities in the sixth and ninth month. Is this true?
A: It is proposed in Budget 2004 that corporate taxpayers be allowed two revisions of their tax estimate, once in the sixth month and another in the ninth month. However, this treatment is not extended to individuals with business income and rental income.
Q: It was proposed that the basic child relief be raised from RM800 to RM1,000. What would be the impact on me? I have two children, one of whom is studying at a local education institution.
A: Presently, the tax relief for a dependant child ranges from RM800 to RM3,200 depending on circumstances as follow:
·RM800 if the child is below the age of 18 years;
·RM800 if the child is of age 18 years and above who is studying in an overseas institution of higher learning;
·RM3,200 (i.e. four times the basic relief) if the child is of age 18 years and is studying in a local institution of higher learning.
The proposal for increasing the basic child relief to RM1,000 will effectively benefit a taxpayer with additional relief to the extent of:
·RM200 for each child below the age of 18 years;
·RM200 for each child of age 18 years and above who is studying in an overseas institution of higher learning;
·RM800 for each child of age 18 years and above who is studying in a local institution of higher learning.
By itself, the increase in the basic child relief will not result in significant tax savings, For example, with all other factors constant, even if the taxpayer is at the highest marginal 28% tax bracket, in cases (i) or (ii) above the RM200 increase in relief will yield tax savings of only RM56, while the RM800 increase in relief in (iii) above will yield tax savings of only RM224.
In your case, you will enjoy a total tax savings of RM280 (i.e. tax savings of RM56 for the younger child and RM224 for the older child).
Q: I heard from the budget speech that there are certain incentives introduced in the budget 2004 for royalties received by researchers. Would you please explain further?
A: Yes. It is proposed in Budget 2004 that researchers who undertake research which focus on value creation be given 50% tax exemption on income such as honorarium or royalty received from commercialisation of their research findings for 5 years from the date of such payment. However, such undertaking has to be verified by the Science, Technology and Environment Ministry. It is expected that a gazette order will be issued soon to this effect.
Q: We are presently foreign lecturers with a local college which has a twinning programme with a major university in Australia. As part of our college’s commitment to the National Accreditation Board to contribute to the enhancement of the quality of education in Malaysia, we are occasionally requested by our college to serve as quality validators, moderators or accreditators of franchised education programmes. Do we correctly understand that it was proposed for the associated fees or honorarium received by us to be exempt from Malaysian income tax?
A: Although the proposal in the budget speech appears encouraging, however, the proposed legislation provides that this exemption is not available if the associated fees or honorarium is received by you as part of your emoluments in the exercise of your official duties with your college.
Q: The Minister announced that the exemption period for import duty and sales tax on spare parts and consumables for the manufacturing and services sectors, which is due to expire on Dec 31, 2003, be abolished. Is the abolition for an indefinite period?
A: Yes, it was proposed that the exemption period for import duty and sales tax on spare parts and consumables be extended indefinitely.