NOTICE FOR LABUAN ENTITIES

Date: 10th February 2021

Our Ref: HMRKLB00121

 

MALAYSIA’S LATEST GAZETTED AMENDMENT TO THE LABUAN TAX REGULATIONS EXCLUDES TWO LABUAN BUSINESS ACTIVITIES FROM THE SCHEDULE

 

Another shocking decision made by the Government of Malaysia that caught Labuan jurisdiction by surprise with two Labuan business activities were taken out from the recently gazetted amendment to the Schedule. After “general trading activity” was snubbed in the first-round overhaul of the Labuan tax regime back in late December 2018, this time Code 6; “Labuan International Commodity Trading Company” (LICT) was completely deleted while Code 23; “Other Trading Activity” (OTC) was not cited at all in the Schedule.

 

Kindly take note that this notice is intended only for Labuan entities carrying on business activities as LICT (Code 6) or OTC (Code 23) and are significantly affected by this latest amendment.

 

Quick background of the sudden turnabout in policy and why it has brought jittery to the industry, illustrated below in chronological events –

 

 

 

* first Schedule – Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2018

** letter – Labuan FSA letter dated 21st January 2020 – “Addition to the Revised Substance Regulations”

*** letter – IRB letter dated 5th February 2021

 

Note that between 31st December 2018 and 24th December 2020, there were numerous meetings held and consultation among the Labuan financial services stakeholders i.e., the Association of Labuan Trust Companies (ALTC), Labuan FSA, Inland Revenue Board of Malaysia (IRB) and the Ministry of Finance to iron out uncertain issues arising from the Labuan tax regime overhaul. Some issues were addressed and settled but the main sticky points are still unresolved as of the date of this notice.

 

What does this mean to Labuan entities affected by this amendment?

 

  • LICT (Code 6) was deleted and OTC (Code 23) was not cited in the latest Schedule. This means Labuan entities affected by this amendment are out of scope and will not be benefiting from the 3% tax rate under the LBATA.

 

  • Chargeable income will be taxed up to 24% under the ITA.

 

  • Following the latest Government’s gazette, the IRB issued a letter on 5th February 2021 ruling that the affected Labuan entities with OTC business activity must file their tax return under the domestic ITA. Now that the affected Labuan entities will be assessed in accordance with the domestic tax regulations i.e., on a current year basis, and it is not anymore on a preceding year basis.

 

So, what now?

 

  • Filing of tax return is no more a straightforward affair. A qualified tax agent in Labuan will need to be engaged by the affected Labuan companies to do the proper tax computation and file the tax return with the IRB which is due this 31st March 2021.

 

  • The tax filing requirement will have a retroactive effect starting from year of assessment (YA) 2019.

 

  • The affected Labuan entities are no longer subject to economic substance requirements (ESR). There is no need to comply with the full-time employees and meeting the OPEX requirements in Labuan.

 

Awaiting clarifications from Labuan FSA

 

Our association, the ALTC, is demanding clarifications from Labuan FSA about this matter. We will update you with more information and any new development.

 

We will be contacting our clients whose Labuan entities are affected by this latest amendment and discuss steps to take and explore options available.

 

Thank you.

 

 

Yours faithfully,

 

Sukor Ashak

Managing Director

HMR Konsultan (Labuan) Ltd.