IMPORTANT UPDATE AND CHANGES ON MSC MALAYSIA BOG 5
We would like to update on the recent changes happening towards MSC Malaysia Status. Please find below announcement given by MDEC
In order to address the issue of base erosion and profit shifting, the OECD and the G20 countries have introduced the BEPS Action Plan as international taxation standards. Malaysia in principal has committed to implement the aforesaid international standards. Under this commitment, Malaysia has joined the OECD Inclusive Framework on BEPS as an associate member for the global implementation of the aforesaid international standards. Pursuant thereto, the Government of Malaysia will be taking the necessary steps to streamline all relevant tax incentives of Malaysia to be consistent with the minimum standards under the BEPS Action 5.
Accordingly, the tax incentives granted under MSC Malaysia Bill of Guarantee No. 5 (BOG 5) will be amended to incorporate the minimum standards under the BEPS Action 5.
MSC Malaysia tax incentives currently exempt income deriving from the approved MSC Malaysia Qualifying Activities, which may comprise income deriving from intellectual property (IP income) and/or income deriving from non-intellectual property (non-IP income). Under the aforesaid international standards, a regime exempting IP income will have to adopt the nexus approach and a regime exempting non-IP income will have to adopt the substantial activity requirements.
The new legislation and guidelines for MSC Malaysia tax incentives are currently being reviewed by the Government and MDEC will be releasing further information on the new criteria/conditions in due course.
Moving forward, in order to adhere to the timelines imposed by the aforesaid international standards and to ease transition into the new regime:
- No new approvals will be granted for applications for MSC Malaysia Status starting from 1 July 2018, including applications for extension of income tax exemption period or applications to add new MSC Malaysia Qualifying Activities.
- Existing MSC Malaysia Status companies with tax incentives will be given option:
- to grandfather i.e. to continue to enjoy the income tax exemption granted for IP income and/or non-IP income under their existing MSC Malaysia Status Conditions of Grant until 30 June 2021; OR
- subject to the new legislation and guidelines coming into force, to move into the new regime and to be subjected to the new criteria/conditions.
However, for MSC Malaysia Status companies which have been granted approval on or after 17 October 2017 for non-IP income, if these companies would like to opt for grandfathering, the grandfathering period will end on 31 December 2018.
- New approvals and extension of the income tax exemption period will only be considered once the new legislation and guidelines come into force, which is targeted to be by 31 December 2018.
The details on the aforesaid international standards can be found at OECD, “Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance, Action 5: 2015 Final Report ”, “ Harmful Tax Practices – 2017 Progress Report on Preferential Regimes: Inclusive Framework on BEPS: Action 5 ”.
MDEC will be providing update on this matter from time to time. Once the new criteria/conditions have been approved by the Government, MDEC will engage the affected companies on the next steps.