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    Friday 19 April 2019

    Malaysia introduces earning stripping rules

    Malaysia is set to replace thin capitalisation rules with earning stripping rules, confirming its commitment to the OECD’s Base Erosion Profit Shifting (BEPS) initiative.

    Malaysia’s 2018 Budget announced on 27 October 2017 includes the introduction of earning stripping rules (ESR). These will come into operation on 1 January 2019 and will replace the existing thin capitalisation rules (TCR).

    Under the ESR, the interest deduction on loans between related companies within the same group will be limited to a ratio determined by the Inland Revenue Board of Malaysia (IRBM). These will range from 10% to 30% of a company’s earning before interest and taxes (EBIT) or earning before interest, tax, depreciation and amortisation (EBITDA). The IRBM is expected to issue more detailed guidelines relating to ESR in due course.

    The introduction of ESR follows Malaysia’s commitment to a number of initiatives, including the OECD’s BEPS action plans. The Prime Minister has also agreed to the Automatic Exchange of Information (AEOI) from September 2018, and the Forum on Harmful Tax Practices (FHTP) before 1 January 2019.

    The automatic exchange of information between countries will help ensure tax transparency and have a major impact on transfer pricing compliance.

    A note on TCR

    TCR were announced in Malaysia’s 2009 Budget but implementation was deferred several times because of its potential effect on foreign direct investments (FDI). The intention of TCR was to encourage and control foreign investment to achieve a reasonable level of actual capital investment instead of treating funds as loans to Malaysia and repatriating excessive interest on foreign holding company loans. With excessive interest disallowed as a deduction, investors could consider the prudence of converting their funds into Malaysia as share capital instead of loans. However, since 2009 the implementation of TCR has been deferred several times and it will now be replaced by ESR and so will not see the light of day.

    For more information, contact:

    Gary Yong or Tham Sheue Yi
    Nexia SSY Malaysia
    E: garyyong@nexiassy.com or sheueyi@nexiassy.com
    T: +60(3) 5039 1811
    W: www.nexiassy.com

    Malaysia is set to replace thin capitalisation rules with earning stripping rules, confirming its commitment to the OECD’s Base Erosion Profit Shifting (BEPS) initiative.
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