Sunday, May 10, 2015

Labuan: A comprehensive look (Last updated: P6 exam team 24/4/2015)

Labuan: A comprehensive look (Last updated: P6 exam team 24/4/2015)
Matters to be discussed:
(i) Background of Labuan.
(ii) Legislative framework
(ii) Salient features and terms used
(iv) Preceding year basis of assessment
(v) 'Labuan Business Activities'

(vi) Trading activities
(vii) Scope of charge
(viii) Net profit per audited accounts for Labuan trading activities
(ix) Tax rate
(x) Tax return and statutory declaration

(xi) Election for tax of RM20k.
(xii) Tax rebate
(xiii) Non-trading activities not chargeable to tax
(xiv) Election to be subject to provisions of the Income Tax Act
(xv) Exemptions

(xvi) Withholding tax
(xvii) Individuals working in Labuan for Labuan entities.
__________________________________________________________________

(i) Background of Labuan.
    1) Labuan = An island in the South China Sea off the coast of Sabah in East
                       M'sia.
    2) In 1990, Labuan was established as an international offshore financial centre
        (IOCF) [In a bid to attract international financial activities]
    3) Malaysian Government
        - Take pains to avoid the label 'tax haven' for Labuan, and
        - Had been vigilant against being used for international money laundering.
    4) Its fixed tax rate of 3% capped at RM20k per year = Calls to mind 'low-tax
        regime' and inevitably, Labuan was viewed as a tax haven.
    5) Some double tax treaty partners of M'sia formally, through protocols or re-
        negotiated treaties. [Introduced limitations of benefits (LoB) with regard to
        Labuan structures.]
    6) The M'sian Govt. put in laws = Facilitates a Labuan entity to irrevocably elect
        to come under the purview of the mainstream M'sian tax system.
        (Rather than enjoy the tax goodies available under the Labuan tax regime)
    7) Last few years, Labuan IOFC being rebranded as IBFC (International Business
        Financial Centre) = Involving the renaming Labuan legislations, terms and
        nomenclatures.
        [To omit the word 'offshore' which arguably carries the pejorative 'tax haven'
         connotations and associations.]

(ii) Legislative framework
     1) Apart from Labuan Business Activity Act 1990 (LBATA), there are parallel
         Labuan legislations for Companies Act, Trust Act.
     2) In 2010, a slew of legislations governing foundations, LLP, financial services
         and securities and Islamic financial services and securities have been put in place.

(ii) Salient features and terms used
      1) Labuan = The Federal Territory of Labuan.
      2) Labuan Company = Labuan Co incorporated under the Labuan Companies Act
                                       1990, and include a foreign Labuan company registered
                                       under the said Act.
      3) Labuan Entity = Include Labuan Co, Foundation, Islamic Foundation, Islamic
                                  Partnership, Limited Partnership, LLP, Islamic Trust, Trust,
                                  M'sian Islamic Bank Licensee, Malaysian Bank Licensee,
                                  Financial Institutions, Person declared by the Minister to be a
                                  Labuan entity under subsection 2B(2).

(iv) Preceding year basis of assessment
      1) Tax under LBATA is levied on the preceding year basis.
          (E.g. The YA 2013 has its basis period ending in 2012)
          [This is in contrast to the current year basis practised in the mainstream tax
           system under the Income Tax Act 1967]

(v) 'Labuan Business Activities'
     1) It means activities carried on by a Labuan entity in a foreign currency.
         (With non-residents or with another Labuan entity)
     2) Ministry of Finance may designate any activity to be a Labuan business
         activity.
         (Which then may enable the carrying out of activities with residents or in
          the M'sian currency)
       
(vi) Trading activities
      1) Banking, Insurance, Shipping operations, Any other activity not being a
          Labuan non-trading actvity (BISA), Management, Licensing, Trading (LTM)
      2) Labuan non trading activities = Activities relating to the holding of
                                                       investments in secuities, stocks, shares, loans,
                                                       deposits or any other properties by a Labuan
                                                       entity on its own behalf.

(vii) Scope of charge [s.3]
       1) Labuan entity is subject to tax under LBATA in respect of its Labuan business
           activity.
           (Eg. In foreign currency with non-residents or other Labuan entities, or in
            respect of any designated Labuan biz activities which then may be transacted
            with residents or in the M'sian currency)

(viii) Net profit per audited accounts for Labuan trading activities
        1) Tax is chargeable = On the net profits per audited accounts in respect of
                                         Labuan trading activities
            (I.e. Banking, Insurance, Trading, Management, Licensing, Shipping operations
                   and any other activity (Other than the holding of investments in securities,
                   stocks, shares, loans, deposits or other properties)

(ix) Tax rate
      1) Tax rate is 3% upon the chargeable income.
          (From only the Labuan trading activities)
      2) Inc from the Labuan non-trading activities of a Labuan entity = Not subject to tax
                                                                                                     at all.
          (ie the holding of investments in securities, stocks, shares, loans, deposits or
           other properties)

(x) Tax return and statutory declaration
     1) A Labuan entity carrying on Labuan biz activities which are Labuan trading
         activities = Must file an annual statutory declaration and tax return.
         (Within 3 mths from the commencement of the YA - ie by 31/3 of the following
          calendar year)

(xi) Election for tax of RM20k.
      1) Labuan entity may elect to be charged to tax of RM20k instead of 3% of net pfts.
          (Within 3 mths of the start of the YA, in prescribed form)
          [Means that Labuan entity will not be required to submit a tax return for that YA]
      2) Labuan entity with an accounting net profit of,
          - Less than or equal to RM666,667 a yr = Should file a tax return and taxed at 3%.
          - > RM666,667 = Should elect to be taxed at the fixed sum of RM20k and
                                    thereby avoid having to file a tax return as well.

(xii) Tax rebate
       1) Zakat paid to a Labuan ISlamic religious authority (and evidenced by a receipt)
           = Up to the amount of tax charged (Whether at 3% or at the fixed sum of RM20k)
              may be given as a rebate.
           [No refund is available if the Zakat paid > Tax charged]

(xii) Non-trading activities not chargeable to tax
       1) Labuan entity carrying on a Labuan biz activity which is a Labuan non-trading
           activity = Not chargeable to tax.
           [A statutory declaration in a prescribed form is all that is required compliance wise]

(xiv) Election to be subject to provisions of the Income Tax Act
       1) 11 countries have specifically excluded Labuan from treaty benefits in their double
           tax agreements with M'sia.
           [They are Japan, Netherlands, United Kingdom, Australia, Sweden, Luxembourg,
            Republic of Seychelles, Chile, Indonesia, SOuth Africa and South Korea]
       2) The law have been amended to allow a Labuan Co to elect to be treated under the
           Inc Tax Act 1967, rather than the Labuan Biz Activities Tax Act 1990.
           (To facilitate Labuan Co in accessing treaty benefits)
       3) The election is irrevocable.

(xv) Exemptions
       1) No indirect taxes (Labuan enjoys free-port status. Indirect taxes not applicable)
       2) Stamp duty (Exempted on all instruments executed by a Labuan entity in
           connection with its Labuan business activity)
       3) Exchange control (Labuan entities not subject to exchange control restrictions)
       4) Payments by Labuan entities (Available to recipients of inc from Labuan entities)
           - Dividends received by an offshore co.
           - Dividends received from an offshore co
             (Which are paid, credited or distributed out of inc derived from an offshore biz
              activity or, inc exempt from tax)
           - Distributions received from an offshore trust by the beneficiaries.
           - Interest received from an offshore co by a resident person.
             (Other than a person licensed to carry on a biz under Banking and Financial
               Institutional Act 1989 (BAFIA), Insurance Act 1996 or Takaful Act 1984)

(xvi) Withholding tax
        1) The following payment made by Labuan entities to non-residents are exempted
            in the hands of the non-resident recipients = Not subject to withholding
            provisions.
            [Royalties, Interest, Technical services, advice or assistance specified in Section
             4A(i) and (ii) of the Inc Tax Act,and Other inc(see order 209 of 2012) (RITO)]

(xvii) Individuals working in Labuan for Labuan entities.
       

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