Restriction on Deductibility of Interest Guidelines (Earning Stripping Rules)

July 18, 2019

 

 

Income Tax (Restriction on Deductibility of Interest) Rules 2019 which as earning stripping rules (ESR) has on 28 June 2019.

 

*Similar restrictions “Thin Capitalisation Rules” in some countries.

 

Purpose of these rules

As the name suggests, these rules are to address the tax planning trick by which profit is being shifted between related parties within the country, or from Malaysia to another country, through the charging of interest on inter-company borrowings.

 

Who would ?

The rules will apply to any company where the total interest expense payable to related parties exceeds RM500,000 in a basis period for a year of assessment.

 

When does it start?

The Earning Stripping Rules (ESR) will take effect from 1 July 2019.

 

 

Salient features of the restrictions

  • to 20% of the amount of tax-EBITDA.

        The rules provide the formula to determine the amount of tax-EBITDA which is:

       

         A + B + C

 

        * A” refers to the amount of the adjusted income of the person from business sources for the basis period for a year of assessment before                any restriction on deductibility of interest S.140C .

 

     *B” refers to the total amount of qualifying deductions allowed in the adjusted income in A. Qualifying deductions refers to

            the amount of expenditure incurred by the person which is twice the amount incurred and any deductions claimed under any rules   

           made under  S.154(1)).

 

      *C” refers to the total amount of interest expense incurred in relation to the gross income of the person for any financial in a   

            controlled transaction from his business sources.

  • The interest expense that has (not allowed in a particular year), can forward to in the subsequent year. There is no time limit for the carrying-forward of restricted interest expense if there the company meets the substantial shareholders continuity test (i.e. no major changes in ).
     

  • The rules seem to apply to all borrowings by a local company from its local and foreign related companies. IRBM has previously that ESR would apply to transactions only that IRBM would clarify this matter soon.
     

  • ESR do not apply to banks and selected financial institutions, special purpose vehicles, property developers, construction contractors subject to Income Tax (Construction Contracts) Regulations 2007.

     

Commentary:

Earning stripping rules or thin capitalisation rules are not new in the tax fraternity as many countries have implemented similar restriction. in Budget 2018. And for this purpose, S.140C and .

 

Companies with inter-company loans from related parties (local and foreign) should assess their inter-company financing arrangements and interest expense vis-à-vis these new interest restriction rules. 

 

 

Let’s talk:  Our management team Licensed Tax Agents and Chartered Accountants, please contact us if you need with the topic above.

 

                                                   to provide accurate information. However, the information

                                                   and regulations in this article are subject to changes and amendments by the

                                                   relevant authority. information in this article may not be current.

 

                                                And the information provided in this article is commentary only and shall

                                                not as advice or recommendation. As all tax situations are specific to

                                                their facts and will differ from the situations in this article - if you have specific tax

                                                questions you should consult a licensed tax agent.

 

 

 

 

 

 

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