What you should know about the upcoming changes to the MSC Malaysia’s Bill of Guarantees

A month ago, Simon Bowers, a senior journalist spoke at TED Talk in Glasgow on how journalists around the world worked together under International Consortium of Investigative Journalists (ICIJ) which have led to various names and companies being involved in complex structuring schemes to avoid taxes or better known as Panama Papers and Paradise Papers.

In the talk below, Mr Bowers described how multinational companies have the resources and political links to exploit their advantages by structuring their entities to reduce tax exposures. In the talk, Mr Bowers described with clarity how Nike, a major sports company sets up a company in Netherland as the company receiving revenues from other sales sold by Nike across all other European countries so that Nike can benefit from its low tax regime.

On 6 July 2018, Malaysia Digital Economy Corporation (MDEC) published a summary of the changes to MSC Malaysia BOG 5. The full statement may be read below.

Important Updates and Changes on MSC Malaysia BOG 5

We would like to bring your attention to the announcement by the Government of Malaysia on 12 June 2018 which can be found on MDEC's website.

The post seem quite straightforward but we still think that we can share some reasons as to why this changes are being made.

What is the BOG?

Bill of Guarantees or BOG is a set of 10 guarantees by the Government of Malaysia to encourage companies to set up their businesses here in Malaysia.

Some of the guarantees are to liberalise foreign equity ownership, allowing foreign workers to work freely, freedom for companies to source for fundings and so on. You can read all the 10 guarantees by the government on MDEC’s website here.

Wait a minute, how did this whole MSC idea all came about in the first place?

The history of the BOG may be traced back to Tun Mahathir’s launch of the Malaysia Super Corridor or the MSC in 1996. To encourage foreign companies to set up their shops in Malaysia, the government also carved out the MSC area with special economic zone status. In other words, companies and people working in the area are entitled to certain economic benefits such as lower tax and government support.

To get more foreign companies to operate in Malaysia, the government also introduced certain financial incentives known as Pioneer Status or an Investment Tax Allowance. Under a Pioneer Status, you may be eligible for 100% tax exemption for up to 10 years! Similarly, Investment Tax Allowance would allow a company to get tax allowances based on certain capital expenditures during number of years.

So why is the Government of Malaysia suddenly changing it?

Well, it’s not that the Government of Malaysia wants to do it, the government has no choice but to amend this guarantee because it had agreed to commit to this move to reduce harmful tax practices. The commitment is made alongside other powerful countries such as Australia, Germany, United States and other nations under the Organisation for Economic Co-operation and Development (OECD) and the G20 countries.

Click the link below to read the full statement by the Ministry of Finance.

Malaysia's Commitment in International Tax Standard

Why does this proposed changes matter?

Based on our reading of the statement, there may be two scenarios that you may fall under.

SCENARIO A: I haven’t applied for MSC Malaysia Status. How am I affected?

Sorry, it seem like there won’t be any new approvals for MSC Malaysia Status starting from 1 July 2018. This moratorium is imposed so that the government has some time to comply with the new commitment. One potential issue that may occur is if you’re planning to hire foreign knowledge worker as having MSC Malaysia Status does help with this.

It looks like the new approvals may only be considered once the new rules are in force sometime at the end of this year.

If you may have already applied for MSC Malaysia Status, you may claim for a refund.

SCENARIO B: I already have MSC Malaysia Status. What do I do now?

Um, based on the statement, you may have two options. First option is to continue enjoying the income tax exemption granted for IP income and/or non-IP income until 30 June 2021. This is also known as ‘grandfathering’. IP income are things like royalty or license fee received as payments for the exploitation of an IP. Non-IP income is income which is not derived from an IP.

Alternatively, another option that you may adopt is to subject to the new rules once it comes to force.

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