Exciting times: A new budget comes along with a number of regulatory changes

On September 28 2012 Najib Abdul Razak, the prime minister and minister of finance, released the 2013 budget, titled “Prospering the Nation, Enhancing Well-Being of the Rakyat: A Promise Fulfilled”. The 2013 budget aims to reduce the nation’s fiscal deficit from 4.5% of GDP in 2012 to 4% in 2013. With the projection of a positive economic outlook, GDP growth is forecast at between 4.5% and 5.5%, giving rise to the prospect of the GDP surpassing the RM1trn ($322.6bn) mark for the first time in the nation’s history.

AUDIT OVERSIGHT BOARD (AOB): In an effort to promote quality and transparent independent auditing and to enhance the quality and reliability of audited financial statements of public interest entities in Malaysia, the AOB, along with its statutory powers, was established on April 1, 2010.

The task of promoting and developing an effective audit oversight framework was given to Securities Commission Malaysia. The desired outcome of the AOB would be to achieve high-quality and reliable financial statements, high-quality independent audit practices and high-quality financial reporting practices.

FINANCIAL REPORTING: The new financial reporting standards framework (the MFRS Framework), meant to bring public interest entities in Malaysia to full convergence with the International Financial Reporting Standards, became effective as of the first day of January 2012. The current two-tier financial reporting system remains unchanged. Private entities can continue to apply Private Entities Reporting Standards or they may opt to adopt the MFRS Framework in its entirety.

TRANSFER PRICING: The Transfer Pricing (TP) environment has evolved with the recent change in the Income Tax Act of 1967 (ITA). Section 140A (S140A) of the ITA, which was introduced with effect from January 1, 2009, specifically requires taxpayers to ensure that their transactions with associated persons are at arm’s length. The burden of proof lies with the taxpayers to show they have taken reasonable steps to comply with S140A of the ITA. The Inland Revenue Board (IRB) is empowered to make adjustments when transactions with associated persons are not at arm’s length.

The Income Tax Transfer Pricing Rules 2012 (TP Rules), which are an extension to S140A of the ITA, were gazetted in May 2012 and are deemed to have retrospective effect from January 1, 2009. In July 2012 a set of new TP Guidelines were also issued by the IRB.

The introduction of TP Rules and Guidelines provide taxpayers with guidance as to how companies having dealings with related party determine arm’s length price and the types of documentation to facilitate the support of compliance with the arm’s length principle.

There is now a clear requirement for taxpayers to prepare a contemporaneous TP documentation at the point of their developing, implementing and reviewing any controlled transactions.

LIMITED LIABILITY PARTNERSHIPS (LLP): With the new LLP Act 2012 being gazetted in February 2012, a new type of entity, the LLP, was introduced as an alternative vehicle to conduct business. A LLP combines the characteristics of a company and partnership firm but it provides the protection of a limited liability for its partners. As a LLP is a legal entity by itself, it has been proposed in the 2013 budget that a LLP should be treated as a company for tax purposes.

GOODS & SERVICES TAX (GST): The Malaysian Government announced its intention to introduce GST into the tax framework in December 2009, and the legislation was scheduled to have been enacted as law in March 2010. However, the second reading of the bill was postponed to allow the government to further study the impact of GST on the economy.

The GST will replace the existing service tax and sales tax, and is expected to be 4%. The GST is a broad-based consumption tax which will be imposed at each transaction stage, when the supplier of goods and services will charge and collect GST. Thereafter, an input credit can be claimed for the GST incurred on acquisition.

It is now expected that the GST will be implemented fully after the country’s 13th general election.