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The Malaysian Finance Act 2020 introduced, among others, several legislative changes to the Malaysian Income Tax Act 1967 (ITA) in respect of transfer pricing. Notably, a penalty provision was introduced. Effective 1 January 2021, taxpayers (where applicable) who fail to furnish transfer pricing documentation (TPD) upon the Malaysian Inland Revenue Board’s (MIRB’s) request will be subject to a fine ranging from RM 20,000 to RM 100,000 and / or imprisonment.

Consistent with this, the MIRB has also revised the Transfer Pricing Guidelines 2012 to reduce the time given to taxpayers to furnish their TPD from 30 days to 14 days.

On January 6, 2021, Treasury and the Internal Revenue Service (IRS) issued final regulations (“Final Regulations”) relating to the credit for carbon oxide capture and sequestration under Code Section 45Q.  These regulations finalize proposed regulations issued in May 2020 (“Proposed Regulations”).  Congress enacted section 45Q in 2008 to incentivize the capture and disposal of carbon dioxide to prevent release into the atmosphere.  Originally, the credit was available for carbon dioxide that was captured and either disposed of in secure geological storage or injected into an enhanced oil recovery (“EOR”) project.  However, in 2018 Congress expanded the credit to also cover carbon monoxide and to cover additional methods to “utilize” captured carbon oxide.

Generally, an affiliated group allocates and apportions its interest expense in determining foreign-source taxable income as if all members of the group are a single corporation. Only domestic corporations are included in the affiliated group with the result that a US-based multinational with a significant portion of its assets overseas is required to allocate a significant portion of its interest expense to foreign-source income. This may cause an over-allocation of interest expense to foreign-source income, thereby reducing foreign-source taxable income and limiting the foreign tax credit.

Since 2013, even if the interest income from a loan to an affiliated company in Sweden was taxed at a rate of at least 10% in the lender’s country of residence, the interest deduction was often disallowed on the ground that the principal reason for the debt having arisen was for the group to receive a substantial tax benefit. Last Wednesday, 20 January 2021, the ECJ ruled that it is contrary to EU law to deny interest deduction on cross-border loans on this ground if the interest would have been considered deductible if the lender had been a Swedish entity. This landmark ruling provides companies the possibility to reassess non-deductible interest costs in Sweden.

On 14 January 2021, Federal Law No. 14.119/2021 was published to establish the National Policy of Payments for Environmental Services (PNPSA), which aims to encourage the preservation of ecosystems, water resources, soil, biodiversity, genetic heritage and associated traditional knowledge, valuing ecosystem services economically, socially and culturally. The law is already in force.

In brief
The Inland Revenue (Amendment) (Tax Concessions for Carried Interest) Bill 2021 (“Bill”) was published in the Gazette today. The Bill sets forth the legislative framework for granting concessionary tax treatment to carried interest received by or accrued to fund managers and their employees, and is in line with the proposals put forward by the government in its August 2020 consultation paper as well as in the discussion paper issued by the Legislative Council Panel on Financial Affairs earlier this month.

Further to our client alerts published in August 2020 and January 2021 detailing the parameters and eligibility criteria of the concession, we set forth in this alert other features newly introduced in the Bill, which are worthy of note. We will provide a more detailed alert summarizing the features of the Bill at a later date.

The Bill adopts all the features mentioned in the discussion paper issued earlier this month. For the purposes of this alert, we set out other notable features of the concessionary regime that are further elaborated in this Bill.

Application. The concession will have retrospective effect and will apply to eligible carried interest received by or accrued to qualifying persons on or after 1 April 2020. However, the Bill makes it clear that the concession will not apply to carried interest accrued before 1 April 2020, even if it is only received after 1 April 2020.

Form of the tax concession. For profits tax purposes, the concession will take the form of a 0% profits tax rate on the net eligible carried interest received or accrued. For salaries tax purposes, remuneration paid by qualifying fund managers to their employees for work performed in securing the eligible carried interest received will also not be subject to salaries tax.

Eligible carried interest. In addition to the requirements that the carried interest must be profit-linked and must only be payable subject to fulfillment of the hurdle rate under the terms of the agreement governing operation of the fund, the Bill additionally provides that to the extent there is no significant risk that the amount would not be received or accrued, such amount is not to be regarded as eligible carried interest. Any risk that the amount would be prevented from being received or accrued (by reason of insolvency or otherwise) will for this purpose be ignored.

Qualifying person. Under the Bill, fund managers may only qualify for the tax concession if they carry out investment management services, or arrange for such services to be carried out, in Hong Kong from the day they start providing such services to the fund, to the day when they receive the carried interest (“Applicable Period”). The investment management services must also not be partially carried on through a permanent establishment which the fund manager has outside of Hong Kong.
Employees, on the other hand, may only qualify for the concession if they are employed by a qualifying fund manager or an associate of such qualifying fund manager who carries on a business in Hong Kong. The employee himself must also provide investment management services in Hong Kong to qualify for the tax concession. The salaries tax concession only applies to the extent that the amount received by the employee is paid out of eligible carried interest that is exempt from profits tax under the concession. Fund managers and employees wishing to take advantage of the tax concession should take care to ensure that the terms of employment are appropriately drafted and relevant documentation is maintained to establish the nexus between payments to employees and the carried interest.

Substantial activities requirement. Under the discussion paper, it was suggested that the fund manager must have on average two full-time employees in Hong Kong who carry out investment management services, and incur expenditures of HKD 2 million in Hong Kong in providing the investment management services for each year of assessment in which the concession is sought to be claimed. The Bill clarifies that these conditions must be satisfied during the entire Applicable Period. In addition, even if the conditions are satisfied, the Inland Revenue Department (IRD) may still disallow the concession if it considers that the average number of full-time employees and the total amount of operating expenditure incurred are inadequate.

Detailed information and record retention requirements. The Bill contains detailed information and record retention requirements. Qualifying fund managers must, for instance, provide information relating to any eligible carried interest which it receives, and details regarding employees who receive eligible carried interest, to the IRD, and retain sufficient records to enable the accuracy and completeness of payments or accruals of carried interest to be ascertained for a seven-year period. Qualifying payers (i.e., certified investment funds and other qualifying payers) are also subject to similar record retention requirements. Failure by qualifying payers to do so may render any carried interest which they pay ineligible for the tax concession.

Anti-avoidance provision. The Bill also includes a new specific anti-avoidance provision which applies to arrangements that have as one of their main purposes the obtaining of a tax benefit under the carried interest tax concession, whether for the person or any other person. This intends to serve as a catch-all to prevent abuse of the rules, such as where an arrangement has been disguised as an eligible carried interest scheme that satisfies all of the specified conditions. The need for this rule is questionable given the scope of this specific anti-avoidance rule appears to overlap with the general anti-avoidance provision.

Right to seek advice from the HKMA. We also note that under the Bill, the IRD is expressly empowered to seek advice from the Hong Kong Monetary Authority in respect of any matter relevant to a person’s entitlement to the tax concession.

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