Most multinational enterprises (MNEs) have external borrowings on which they pay interest and other financing costs. The borrowings may range from multi-billion syndicated loans used to finance a significant acquisition or takeover; to overdraft facilities used to help manage the cash flow of individual enterprises within the group.
Beside external borrowings, MNEs have various borrowing arrangements between the enterprises within the group. As such, restriction on deductibility of interest under Section 140C of the Income Tax Act 1967 (hereinafter referred to as the Act) and Income Tax (Restriction on Deductibility of Interest) Rules 2019 [P.U. (A) 175], (hereinafter referred to as the Rules) has been introduced to restrict deductions for interest expenses or any other payments which are economically equivalent to interest, to ensure that such expenses commensurates with the business income.
This legislation on interest restriction is based on the Base Erosion and Profit Shifting (BEPS) Action 4 of the Organisation for Economic Cooperation and Development (OECD), where the aim is to prevent base erosion, through the use of excessive interest expense or any payments which are economically equivalent to interest claimed by businesses.
Part of this legislation has been adopted directly from the OECD BEPS Action 4, and there are parts which have been customised to ensure adherence to the Act and Inland Revenue Board of Malaysia’s (IRBM) procedures as well as domestic circumstances.
The objective of these Restriction on Deductibility of Interest Guidelines (after this referred to as “the Guidelines”) is to explain the determination of the amount deductible and restricted in relation to:-
- business interest expenses; and
- other payments which are economically equivalent to interest
for the basis period beginning on or after 1.7.2019 and subsequent basis periods.
In respect of basis period beginning on or after 1 July 2019, apply to a person who has been granted any financial assistance exceeds RM500,000 in a controlled transaction.
Not apply to:-
- an individual;
- a licensed banks, insurers, reinsurers, takaful and retakaful operators, development financial institutions;
- a construction contractor as defined under the Income Tax (Construction Contracts) Regulations 2007;
- a property developer as defined under the Income Tax (Property Developer) Regulations 2007; and
- a person who has been granted an exemption under Paragraph 127(3)(b) or Subsection 127(3A) of the ITA in respect of the person’s adjusted income.
Maximum amount of interest
Pursuant to Section 104C of the Income Tax Act 1967, the maximum amount of interest shall be an amount equal to 20% of the tax-EBITDA of that person consisting of a business source for the basis period for a Year of Assessment.
EBITDA means earnings before interest, taxes, depreciation and amortization.
tax-EBITDA means A + B + C, where
- is the adjusted income of the person from his business sources before any restriction on deductibility of interest under Section 140C of the ITA is made;
- is the total qualifying deductions allowed in ascertaining the adjusted income in A;
- is the total interest expense incurred in relation to the person’s gross income for any financial assistance in a controlled transaction from his business sources
Qualifying deduction is defined as:
- an amount of expenditure incurred by the person computed in any deduction falling to be made under the ITA where the amount of deduction is twice the amount of expenditure by the person; and
- any claim for deduction under any rules made under Paragraph 154(1)(b) of the ITA where the deduction is allowed for purposes of ascertaining the adjusted income of the person.
Carry forward of interest expense
Interest expense which is in excess of the maximum amount of interest as ascertained for a basis period for a year of assessment, the amount of that excess shall be allowed to be carried forward and deducted against the adjusted income of the company for the subsequent years of assessment subject to the maximum amount of interest ascertained.
MALAYSIAN INCOME TAX (RESTRICTION ON DEDUCTIBILITY OF INTEREST) RULES 2019
MALAYSIAN RESTRICTION ON DEDUCTIBILITY OF INTEREST GUIDELINES