Malaysia: Resolving International Tax Disputes

Introduction 

Shaped three decades ago by the then Prime Minister, Tun Dr. Mahathir bin Mohamad, Vision 2020 outlined Malaysia’s goals in becoming a fully developed nation. With the country’s move towards achieving this ‘Malaysian dream’, more Malaysian companies are venturing and investing outside of Malaysia. The increase in trade transactions outside of Malaysia results in the increased tax controversies that would have an impact on Malaysian companies when investing outside of Malaysia. As such, these Malaysian companies are relying on the Mutual Agreement Procedure (MAP) to resolve the tax disputes encountered when investing in a foreign country. 

Mutual Agreement Procedure 

The Inland Revenue Board of Malaysia (IRBM) has uploaded the Guideline on Mutual Agreement Procedure (Guideline) on 28 January 2015. 

Where a Malaysian resident or in some cases a national considers that the actions of either or both Malaysia’s and its Treaty Partner’s tax administrations result or will result in taxation not in accordance with the provisions of the Tax Treaty, the person may request assistance from the Malaysian Component Authority (CA) under the MAP Article of an applicable Tax Treaty. Examples of taxation not in accordance with a Tax Treaty that may warrant a request for assistance to the CA include but not limited to transfer pricing, resident status, withholding tax, permanent establishment, and characterisation or classification of income. 

The time limit for presenting a case for CA assistance is as specified in the applicable Tax Treaty, or if not specified, the Malaysian CA will apply the limit stated in Article 25 (MAP) of the OECD Model Tax Convention on Income and on Capital. 

A request for a pre-filing meeting prior to making a formal request for MAP can be made. If the outcome of a pre-filing meeting merits consideration for MAP, the Office of MAP shall inform the taxpayer to submit a formal request. 

After receiving a request for MAP, the Tax Division and the Office of MAP will jointly evaluate the said request. The Office of MAP may request the taxpayer to submit additional documents necessary for the purpose of the MAP. 

The Office of MAP shall notify the taxpayer when a proposal for MAP is not to be initiated with the CA of the Treaty Partner and provide reasons for the rejection of the taxpayer’s request. If the MAP is to be initiated, a proposal will be conveyed by the Tax Division to the CA of the Treaty Partner; the Office of MAP shall notify the taxpayer with regard to the commencement of MAP negotiations. 

MAP negotiations between the Malaysian CA and the CA of the Treaty Partners are a government-to government process in which there is generally no direct taxpayer involvement. However, taxpayers are expected to cooperate fully with the Malaysian CA by providing information and documents when requested. 

If it is recognised that agreement will be reached with the CA of the Treaty Partner, the taxpayer will be informed in writing of the contents of the proposed agreement. The taxpayer must then confirm his acceptance in writing, after which the Malaysian CA will reach agreement with the CA of the Tax Treaty Partner. Where an agreement has been reached, the taxpayer will be notified in writing of the date and contents of the agreement. If the taxpayer is not satisfied with the proposed agreement, he may reject it, in which case the CAs will consider the case closed and the taxpayer will be informed accordingly. 

The Malaysian CA may propose to the CA of the Treaty Partner for the case to be terminated under specific circumstances. If this is accepted by the CA of the Treaty Partner, the taxpayer will be informed of the termination. 

The taxpayer may make a written request, stating reasons, for the application to be withdrawn before a MAP agreement has been reached. Upon receiving such a request, the CA of the Treaty Partner will be notified of the withdrawal by the taxpayer. 

Conclusion 

The issuance of the Guideline would assist in a more transparent method of applying the MAP, hence a more effective dispute resolution process for settling increasing international disputes.

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