Double tax treaties play a crucial role in facilitating cross-border transactions by providing clarity on the taxation of income and preventing double taxation. In this blog post, we will explore the key aspects of double tax treaties in Malaysia, including their application of the OECD Model, reservations to relevant articles, and the competent authority’s role in the Mutual Agreement Procedure (MAP) process. Understanding these provisions is essential for businesses operating internationally and seeking to mitigate tax risks.
I. Treaties in Force and Application of the OECD Model
Malaysia has signed over 70 double tax agreements, most of which align with the language of Article 9(1) of the OECD Model concerning associated enterprises. These treaties aim to eliminate double taxation and provide guidance on the taxation of transactions between related parties. Additionally, some treaties include a provision equivalent to Article 9(2) of the OECD Model, which allows for corresponding adjustments.
The bilateral double tax treaties in Malaysia generally incorporate an article on the MAP, similar to the OECD Model. The MAP enables the competent authorities of both contracting states to negotiate and resolve issues arising from potential double taxation. It serves as a mechanism to address situations where one state makes a transfer pricing adjustment, but the other state fails to make a corresponding adjustment to the profits of the other party involved in the transaction.
II. Reservations to Relevant Articles of the OECD Model and Commentary
Malaysia has reserved certain rights to modify specific articles of the OECD Model and Commentary. In Article 9 (associated enterprises), Malaysia reserves the right to specify in paragraph 2 that a correlative adjustment will be made if deemed justified. This reservation ensures that Malaysia has the flexibility to address transfer pricing adjustments in line with its domestic tax regulations.
Furthermore, in paragraph 4 of Article 25 (mutual agreement procedure), Malaysia reserves the right to omit the reference to a joint commission consisting of the competent authorities or their representatives. This reservation allows Malaysia to customize its MAP process based on its specific administrative procedures and requirements.
III. Competent Authority and MAP Processes
The Malaysian Inland Revenue Board (MIRB) acts as the competent authority for double tax treaty matters. Recently, the MIRB released updated Mutual Agreement Procedure (MAP) Guidelines, which align with the OECD’s Base Erosion and Profit Shifting (BEPS) Action 14 recommendations. The updated MAP Guidelines aim to enhance cooperation between the Malaysian competent authority and its treaty partner countries in resolving tax issues.
The updated MAP Guidelines outline various stages of the MAP process, including pre-filing meetings, formal request submission, a proposal for a unilateral agreement with the taxpayer, confirmation by the taxpayer, agreement implementation, and interaction between domestic appeal processes and the MAP.
In line with international efforts to prevent Base Erosion and Profit Shifting, Malaysia signed the OECD Multilateral Convention (MLI) on 24 January 2018. The MLI aims to implement tax treaty-related measures to address BEPS concerns. Subsequently, the MIRB issued new MAP guidelines on 19 December 2017, aligning them with the BEPS Action 14 minimum standard. Malaysia ratified the MLI on 4 August 2020, and it entered into force on 1 June 2021.
Navigating double tax treaties is vital for businesses operating across borders, as it helps to mitigate tax risks and prevent double taxation. Malaysia’s double tax treaties, which align with the OECD Model, provide a framework for determining taxation on cross-border transactions. Understanding the reservations to relevant articles and the competent authority’s role in the MAP process is crucial for taxpayers seeking resolution in cases of potential double taxation.
By familiarizing themselves with the provisions of double tax treaties, businesses can ensure compliance with international tax regulations, minimize tax risks, and optimize their global operations. Engaging qualified professionals with expertise in international taxation and double tax treaties can provide valuable guidance in navigating these complex treaty provisions and ensuring compliance with the applicable regulations.