WHY LABUAN, MALAYSIA?
Peter K
Searle and Robert Gordon
Barristers-at-law
www.ectrustco.com
(FULL POWERPOINT VERSION – 74.7Mb)
1.
Index | SLIDE 2
2. Introduction
3. Taxation
of Labuan companies
4. Framework
of International Taxation
5.
Residence
6.
Source of income
7.
Permanent
Establishments
8.
High Tax countries’
use of CFC Legislation | SLIDE 3
9.
Dividends from Labuan
10.
Use of Labuan companies
11.
Comparison with Hong Kong and
Singapore
12.
General Anti-Avoidance Provisions
2.
Introduction | SLIDE 4
This
paper focuses on tax residence and compares
the advantages and disadvantages of
using a double tax treaty country such as Malaysia, with a non-double tax
treaty country.
Malaysia
has an extensive double tax treaty network with 53 countries including Canada,
Australia, New Zealand, other Commonwealth countries, ASEAN countries and many
EU and Arab countries (Appendix A).
Double tax treaty countries have
enormous advantages including the following -
(1)
a residence tie breaking Article
which deems dual resident companies to be a resident solely of the Contracting
State in which its place of effective management is situated. Without treaty
protection, the company is at risk of being a tax resident, and therefore
taxable in both, or numerous, States, whereas dual residence companies are
protected from taxation in the other Contracting State.
(2)
Provided the non-resident does not
have a “permanent establishment” in the other Contracting State:
(a)
“business profits” sourced in the
other Contracting State are protected from source country tax;
(b) Interest, unfranked dividends and royalties are
subject to a reduced rate of withholding tax.
(3)
Dividends distributed from a
double tax treaty country are commonly exempt from tax in the hands of
corporate shareholders in the Other Contracting State. | SLIDE 5
By way of contrast, income which
is properly subject to tax in non-double tax treaty countries may also be
taxable in high tax countries. The absence of a double tax treaty has the
consequence that numerous tax laws are capable of applying without the benefit
of any double tax treaty relief.
3.
Taxation and regulation of Labuan incorporated and
resident companies | SLIDE
6
The
Offshore Financial Centre Island of Labuan, a Federal Territory of Malaysia, is
strategically located in the South China Sea close to the Kingdom of
Brunei. It was proclaimed a Federal
Territory of Malaysia in 1984 by the Prime Minister, who said Labuan would be
developed not only as a tourist port but as an important Freeport in
ASEAN. The domestic law of Labuan
remains the law of Sabah, the State of Malaysia situated in Borneo of which it
formed part.
The
Island of Labuan was established as an International Offshore Financial Centre
(IOFC) and Freeport by six Acts passed by the Malaysian Parliament in 1990 and
as such, offers unparalleled advantages as an investment, asset protection
and/or e-commerce centre.
The
Offshore Companies Act, 1990 provides for the incorporation of offshore
companies, which are required to have a registered office in Labuan, at least
one director and a resident secretary. Unless exempted, Labuan offshore
companies must only trade with non-residents of Malaysia or with other Labuan
companies, and in a currency other than Malaysian ringgit.
The
Labuan Offshore Business Activity Tax Act, 1990 (“LOBATA”), taxes offshore
trading activities (excluding shipping and petroleum activities) carried on by
an offshore company at the rate of 3% on its audited offshore trading profits
or, upon election, at a fixed rate of MR20,000. (The MR is fixed at the rate of
3.8 to the US$).
Offshore
non-trading activity relating to investments in securities, stock, shares,
deposits and immovable properties is not chargeable to tax in Labuan.
The
Director General of Inland Revenue may require a person to furnish information
for the purposes of LOBATA but such information shall be regarded as
confidential and shall not be communicated or disclosed to any person except
for the purpose of the Act only. For
further information concerning Labuan’s stringent confidentiality regime, see
http://www.ectrustco.com/documents/Confidentiality.html
The
Income Tax (Amendment) Act, 1990 (Malaysia) provides that income derived by an
offshore company from its offshore business activity will not be taxable in
Malaysia under the Income Tax Act, 1967.
Interest,
royalties and management fees paid by an offshore company to a non-resident or
another offshore company are not subject to withholding tax. An offshore company is not subject to stamp
duty under the Stamp Duty Act, 1949.
There is no Malaysian tax on dividends paid by a Labuan company in
respect of dividends distributed out of income derived from offshore business
activities or income exempt from income tax.
Labuan
has excellent internet, IT, cable and telecommunications infrastructure. The local presence of many of the world’s leading
banks’ offshore offices, as well as leading insurance and international accounting
firms, means that issues pertaining to accounts, taxation and money movements
can be securely arranged in cooperation with the client’s preferred international
financial institutions. | SLIDE
7, 8, 9, 10
4.
Framework of International Taxation | SLIDE 11
Double
Tax Agreements
Whilst
each country has its own rulings concerning the taxation of international
business, there are a number of “norms”. These “norms” are also reflected in
the various model double tax agreements. Those are the OECD model conventions
(1963, 1977, and 1997), the UN model, the US model and the Andean model.
Although Malaysia is not a member of the OECD, its double tax agreements
generally subscribe to the OECD models.
Taxation
treaties seek to achieve their purpose of avoiding double taxation by
allocating the right to tax various types of income (and in some cases capital
gain) to the country of residence only, or partly to the country of source with
residual taxation to the country of residence. A country by its taxation treaties,
limits its right to tax certain sources of income in the hands of the resident
of the other country with which it has entered into the taxation treaty.
Elimination
of Double Tax
Where
both countries’ domestic law subjects the income to tax it is necessary to
prescribe a method for relieving double taxation in the taxation treaty.
Australia’s taxation treaties provide a credit basis for the relief of double
taxation to be applied by Australia and, in the other country, relief variously
by credit and sometimes by deduction.
The
“method for elimination of double taxation” article of Malaysian and Australian
treaties generally provides that a resident shall be entitled to a credit for
treaty country tax paid in accordance with the treaty, whether directly or by
deduction, in respect of income derived by that person from sources in the
treaty country.
Malaysia/Australia
DTA
The
Malaysia/Australia DTA contains “tie breaker” provisions in Article 4 where a
person (including a company) is a dual resident. In the case of a company,
Article 4(4) provides that the person –
”shall be deemed to be a resident solely
of the Contracting State in which its place of effective management is situated”
(emphasis added).
The
effect of Article 4 is that, for double tax treaty purposes, a company which is
a dual resident is deemed to be EITHER a tax resident of Australia OR Malaysia,
dependent upon where its “place of effective management is situated”.
Article
21 of the Malaysia/Australia DTA is to the effect that a dual resident deemed
to be a resident of one Contracting State shall only not be taxable in the
other Contracting State unless the income is sourced in that other Contracting
State.
Second
Protocol
On
28 July, 2002 Malaysia and Australia signed a Second Protocol to their DTA.
Amongst
other things, the 2002 Protocol denies Labuan offshore companies, with effect
from 1 July, 2003, the benefit of protection from Australian tax on income
sourced in Australia. The denial of protection by the double tax treaty means
the Labuan company would become
assessable in Australia on its Australian “business profits” even though it
does not have a “permanent establishment” in Australia, and denial of the lower
rates of withholding tax on Australian unfranked dividends, interest and
royalties provided by the treaty.
However,
none of Malaysia’s double tax treaties (including under the Second Protocol
with Australia) exclude all residents of the territory of Labuan (corporate or
otherwise) from status as Malaysian residents for the purposes of those
agreements.
Generally
Malaysia’s double tax treaties do not exclude Labuan offshore companies from
status as Malaysian residents for the purposes of those agreements. At present,
of 53 Malaysian double tax treaties, only five exclude Labuan companies
carrying on offshore trading business subject to s2 (1) of the LOBATA. They are
the 1997 United Kingdom treaty, the 1998 Netherlands treaty, the 1999 Protocol
to the 1999 Japanese treaty, and the 2002 Protocol to the Australian treaty.
This was achieved in all but the Japanese treaty, by an exchange of notes
contemplated by the treaty, concerning tax privileged persons. The Japanese
treaty refers explicitly to such Labuan companies carrying on offshore trading
business subject to s2 (1) of LOBATA. Norway has recently also excluded Labuan.
If anything, these exclusions support the view that Labuan is part of Malaysia
for the purposes of most treaties, as the Netherlands, Japan, the UK, Australia
and Norway have decided it was necessary to expressly exclude in their treaty
or by an exchange of notes contemplated by the treaty, Labuan companies
carrying on offshore business activities subject to s2(1) of LOBATA from
benefit of their treaties, to achieve that result. Accordingly, Labuan
companies are extremely useful for doing treaty protected business with 48
countries.
Malaysia
is listed in Schedule 10 of the Australian regulations as a “limited exemption
listed country”. As Labuan has not been excluded as part of Malaysia for the
purposes of the Malaysia/Australia double tax treaty, section 320(4) of the
Australian CFC provisions does not have the effect of treating the territory of
Labuan as if it was a separate “unlisted country”. Accordingly, non portfolio
dividends received by an Australia resident company from a Labuan company
continue to be entitled to exemption under s23AJ, and Labuan companies as
residents of a listed country, continue to avoid the deemed dividend provisions
in s47A.
CFC
Legislation
A number
of countries have a “territorial” system of taxation such that it is only
income sourced in that country which is subject to tax there. A good example in the Asia Pacific region is
Hong Kong. Such countries are not concerned from a tax perspective about
residents setting up offshore companies to derive foreign source income, as
they don’t tax such income anyway.
However,
most countries tax residents on domestic and foreign source income, but non
residents only on domestic source income, and so several high tax countries
have complex rules designed to attribute to resident taxpayers, income derived
by entities resident outside that country, but controlled by a resident. The
rules are designed to prevent the deferral that would otherwise apply until the
controlled entity paid a dividend to the resident. The control foreign corporation (CFC) and their related foreign
investment fund (FIF) and transferor trust rules, are usually designed to
attribute passive income, or income from transactions with associates (“tainted
income”). Countries with CFC rules include USA, Canada, United Kingdom,
Germany, France, Sweden, Norway, Japan, Australia and New Zealand.
5.
Residence of Companies | SLIDE 12
The
determination of residence of taxpayers is fundamental to the concept of relief
of double taxation pursuant to a treaty.
The “residence” article generally defines “persons” as a resident of
either treaty partner. “Person” is defined in the majority of treaties in the
“general definitions” article as, “includes individual, a company and any other
body of persons”.
The
“residence” article normally provides that a “person” who is a resident in one country
for the purposes of the tax law of that country will be a resident of that
country.
The test
of residence for companies often depends upon the place of management of the
company and/or the place of incorporation of the company.
Whilst
clearly the place of incorporation of a company provides certainty for
corporate taxpayers it has been described as arbitrary and unrelated to
economic reality. However, the concept
of placement of management or control as a test for residence of companies has
been described as almost as susceptible to manipulation as the place of
incorporation test. Most countries that
use the place of management as a test of residence for companies consider
central management to be located at the head office or corporate seat, for
example, France, Germany and Japan, or in the place where the directors meet,
for example, Canada and the United Kingdom.
Only in exceptional circumstances will a foreign subsidiary corporation
be considered to have its place of management or control in the country where
its controlling shareholders reside.
The
cases dealing with “central management and control” in the United Kingdom
referred to below demonstrate the importance of the board of directors of the
foreign subsidiary carrying out their duties properly in order that the foreign
subsidiary be treated as a resident of the country where the board meets.
Professor Arnold has said:
“If the foreign corporation is properly organised and its affairs are
conducted by its own properly constituted board of directors, even though they
simply act in accordance with the instructions of the controlling shareholder,
corporation will be treated as a non-resident corporation. In effect, the place of management test is
largely formal; it looks to de juri control of the foreign corporation. Consequently, the test can be easily avoided
and is not effective in dealing with tax haven abuse.
“Moreover, even if the place of management test is applied to treat
every tax haven corporation as resident where its controlling shareholders are
resident, there are serious difficulties in enforcing any domestic tax against
the tax haven corporation. Assuming, as
is quite likely, that the tax haven corporation does not have any assets within
domestic jurisdiction, it will be necessary for the domestic tax authorities to
collect the tax from the controlling shareholders”.
It is an
international “norm” that the fact that a company resident in a particular
country has a subsidiary in another country will not of itself make the
subsidiary a permanent establishment of the parent company, in the country of
residence of the subsidiary. See article 5(7) of the OECD model (1997), which
was adopted as article 5(7) of the Malaysia / Australia double tax agreement.
The
classic general law central management and control test, which until 1988 was
the sole test of company residence in the United Kingdom, was set out in the
speech of Lord Loreburn in De Beers
Consolidated Mines Ltd v Howe [1906] AC 455. Also see Unit Construction Co Ltd v. Bullock [1959] 3 All ER 831.
As can
be seen from Swedish Central Railway
Co v. Thompson [1925] AC 495, the central management and control of a
company can be shared between two countries, such that the company can under
the test, be a dual resident.
More
recently, both Untelrab Ltd v McGregor
(Inspector of Taxes) [1996] STC(SCD) 1 and R v Dimsey; R v Allen [2000] QB 744 referred to below, highlight
the need to be fastidious in ensuring that the majority of the board of a
Malaysia company is resident in Malaysia, and do in fact meet for the purpose
of considering resolutions, rather than that an individual, for example, in
Australia, whether a director or not, conduct the Malaysian company’s board
level decisions, on their own.
Malaysia
determines corporate residence solely on the basis of “central management and
control”.
The
United Kingdom and Australia are examples (there are many) of countries which
now determine corporate tax residence on the alternative bases of:
(a)
place of incorporation; or
(b)
place of central management and control.
In
contrast, the United States simply looks to the place of incorporation.
In
a report commissioned by the Business Council of Australia, “Removing Tax Barriers
to International Growth: positioning Australia’s tax system to maximise the
potential growth opportunities from international business” (Andersen, December
2001), at Chapter 6 it is concluded that the central management and control
test is an anachronism, and calls for the adoption of simply, the place of
incorporation test. Whilst recognising the issue, the Australian Treasury in a
consultation paper entitled “Review of International Taxation Arrangements”
(August, 2002) has not adopted that suggestion as an option (pp 53-56).
Until
the Andersen recommendation is implemented (if ever), companies incorporated in
Labuan, Malaysia, will still need to have “central management and control” in
Malaysia, to qualify as Malaysian resident companies for United Kingdom and
Australian purposes.
Whilst here has been no reported decision in Australia
for nearly 30 years, that the Australian Taxation Office has sought to allege a
foreign incorporated company that asserts foreign central management and
control, to be a resident of Australia for tax purposes, that issue has twice
been tested in the United Kingdom in the last eight years.
The High
Court of Australia in Esquire Nominees
Ltd v FC of T (1973) 129 CLR 177 held that a company incorporated on
Norfolk Island (then part of Australia but then only taxable on income sourced
from the mainland), and all of whose board resided on Norfolk Island, indeed
had its central management and control on Norfolk Island, notwithstanding the
resolutions for board meetings were prepared in Melbourne by the ultimate
shareholders’ accountants. This was on the basis that the board meet to
consider such resolutions, and it would not have passed them, had they been
illegal or not in the best interests of the company.
In Untelrab, the United Kingdom
Inland Revenue asserted that the company incorporated in Jersey, with two
Bermudian resident directors, and one director resident in Jersey, was
nonetheless resident in the UK, where the parent company was resident. The
Special Commissioners held that the company was resident in Bermuda and applied
Esquire Nominees. What is
interesting about the case is the depth of analysis of the evidence of the
activities of the company over a six year period, including cross examination
of the offshore directors.
The
Inland Revenue had more success in criminal proceedings in Dimsey where the defendants unsuccessfully appealed their
gaol sentences for “conspiracy to cheat the public revenue” and “cheating the
public revenue” respectively.
The central
allegation in those cases was that companies incorporated in Jersey and other
havens, and of which Mr Dimsey was a Jersey resident director, were in fact
centrally managed and controlled in the UK, such that the companies were liable
to UK corporations tax. The evidence accepted by the jury was that Mr Dimsey’s
clients in the UK, who were not actual directors, were shadow directors, and
were in fact actually managing and controlling the companies in respect of
board level decisions. The result for the companies was that they were resident
in the UK rather than Jersey.
The
relevant principles to be gleaned from the relevant authorities are:-
(1)
Effective Management should be
where the board of directors meets to conduct and manage the business including
ratifying any decisions made by others and
(2)
A majority of the board should be
residents of the jurisdiction the company is or purports to be resident of.
6. Source
of Income | SLIDE 13
There is
a “source of income” article appearing in most of Australia’s taxation
treaties. More than half of those articles provide that income derived by a
resident of one country which is permitted to be taxed in the other country in
accordance with the taxation treaty, is deemed for all purposes of the treaty
to be income arising from sources in the other country. This empowers each country to exercise
taxing rights allocated to it by the treaty. Almost all treaties specify this
to be the case for the purposes of providing tax credits, which ensures double
taxation relief as intended.
In
relation to dividends, the International Agreements Act (Australia) has a
general source rule in s18 which provides that where a company is not a resident
of Australia, but is a resident of a country with which Australia has a
taxation treaty, a dividend paid by that company shall, for the purposes of
that taxation treaty, be deemed to be derived from a source in the country of
residence of that company.
Taxation
treaties which do not contain a “source of income” article, other than one
which is only for the purposes of the “relief from double taxation” article,
invariably have limited source rules for particular types of income.
In
contrast to the international norms concerning residence, there is more
variation concerning what is regarded as domestic source income by various
countries. Generally, for businesses
carried on within a country, the income from the business will be considered to
be domestic source income. Similarly,
income from sources located within a country, such as real estate, is usually
taxed as domestic source income. Whilst
few countries have sophisticated source rules, the United States is a major
exception. Often, questions concerning the source of income are resolved by tax
treaties. For example, under most tax
treaties, income is allocated to a taxpayer’s foreign permanent establishment
on the principle that it is treated as a separate entity dealing at arm’s
length with the taxpayer.
It is an
international norm that the gross proceeds of a non-resident manufacturer or
merchant from the sale of goods in the ordinary course of business are income
according to ordinary concepts. In Anglo-Australian jurisprudence the source of
income from the sale of trading stock by a simple merchant is the place where
the contract of sale was entered into. The source of income where the
taxpayer’s business involves a range of activities, such as extraction,
manufacture/processing and sale, is apportioned between the places at which the
various activities are carried out.
An
intending purchaser may inspect sample goods in, for example, the Australian
warehouse of an agent for an overseas manufacturer. However, if the purchaser
then orders goods from the overseas manufacturer the place of the contract of
sale is where the manufacturer posts a letter of acceptance: for an exposition
of the rules which determine where a contract is made see the judgment of
Denning LJ in Entores
Ltd v Miles Far Eastern
Corporation [1955]
2 QB 327 at 332-4.
The
precise mechanism which brings a contract into existence may be significant.
Sending a catalogue from overseas to potential buyers, for example, in Australia is not a legal offer, it is an
invitation to treat: Granger & Son
v. Gough [1896] AC 325. As a result, an order from a purchaser is an
offer and the contract will be made where the acceptance is received. In Entores
Ltd v. Miles Far Eastern Corporation Denning LJ stated that where the
offeror and the offeree are located in different countries and communication is
not by post, but telephone, telegram, telex or some instantaneous means of
communication, acceptance will only be effective when it is received – not at
the moment of transmission – “and the contract is made at the place where the
acceptance is received”.
The
decision in Entores v Miles Far East
Corporation was applied by the New South Wales Supreme Court in Mendelson-Zeller
Co Inc v T & C Providores Ltd [1981] 1 NSWLR 366.
As the
place the contract is made is where the offeror receives notice of the
acceptance of the offer, an Australian purchaser from a Labuan resident
communicating electronically, is entering into the contract in Labuan if the
Labuan resident’s e-commerce server is in Labuan. That is, Labuan is the place
of receipt of acceptance.
Where
the law of the contract is specified to be that of Malaysia, and any dispute
concerning the contract is to be litigated in Malaysian, it is likely that the
contract will be made in Malaysia. It
follows that the source of the income arising from the contract will often be
Malaysia.
The
observation has been made that the significance of the Entores v Miles Far East Corporation and Mendelson-Zeller Co Inc v T & C
Providores Ltd cases is limited to determining the source of income
where the place of the contract is the most important factor in determining the
source. However, the place of entry
into of the contract is always a factor in determining source, even though its
significance may depend upon other factors.
The
“common law” source rules in any particular country may be modified by statute.
For instance, in Australia, under the domestic law the source of income from
the sale of goods is dependent upon goods being sold in Australia, or where any
person in Australia is instrumental in bringing about the sale of goods to an
Australian resident party.
Notwithstanding
the domestic source rules, a relevant double taxation agreement precludes the
source country from subjecting the vendor of the goods to source country
taxation unless the vendor has a “permanent establishment” in the source
country with which the income is “effectively connected”. There are only five
of Malaysia’s 53 treaties that have any qualification on the application of the
treaty to a Labuan company (viz. United Kingdom The Netherlands, Japan,
Australia and Norway).
7. Permanent Establishments | SLIDE 14
The
“business profits” article of most Double Tax Treaties provide that the business
profits of a resident of one treaty country are taxable only in that country
unless it carries on business in the other country through a permanent
establishment. Under these
circumstances, the profits of the enterprise which are “attributable” or
“effectively connected” to the permanent establishment may be subject to tax in
the treaty country in which the permanent establishment is located.
Where a
treaty country in which the permanent establishment exists subjects the permanent
establishment’s profits to tax, the country of residence of the enterprise is
required to avoid double taxation by providing a credit against its tax payable
or an exemption from tax on the permanent establishment’s profits.
The term
“permanent establishment” is defined in the “permanent establishment” article
as a fixed place of business through which the business of an enterprise is
wholly or partly carried on. Unlike the definition of “permanent establishment”
in the Australian Income Tax Assessment Acts 1936 & 1997, the concept in
taxation treaties requires that there be a “fixed” place of business, although
the OECD commentary suggests that the concept requires a specific geographical
place with some degree of permanence (even though it may have existed only for
a short time e.g. because of investment failure). The concept of “permanent
establishment” is of crucial importance for determining the taxation liability
of an enterprise of one contracting state in the other contracting state. Most
recently, the concept was considered in Australia in Unysis Ltd v FC of T (2002) 51 ATR 386.
As the
format of the “permanent establishment” article of Australia’s taxation
treaties is subject to significant variations, it is necessary to examine each
particular taxation treaty carefully in this regard.
The
“permanent establishment” article in Australia’s taxation treaties often
includes in the term; a place of management; a branch; an office; a factory; a
workshop; a mine, an oil or gas well, a quarry or any other place of extraction
of natural resources; a building site, a construction, assembly or installation
project, or supervisory activities in connection therewith (but usually only
where that site or project or those activities continue for a period or periods
aggregating more than 183 days within any 12 month period); a warehouse in
relation to a person providing storage facilities for others; and an
agricultural, pastoral or forestry property.
If a
person other than an independent agent acts in one country on behalf of an
enterprise of the other country, that person is likely to be a permanent
establishment if he or she has and habitually exercises an authority to
conclude contracts on behalf of his or her principal. Independent agents, being
brokers, general commission agents or any other type of agent acting in the
ordinary course of the business which the agent carries on, do not constitute a
permanent establishment of the principal.
Sometimes
the provisions of the “permanent establishment” article are applied for the
purposes of determining the existence of a permanent establishment outside both
countries, and whether an enterprise, not being an enterprise of one of the
countries, has a permanent establishment in the other country.
8.
High tax countries’ use of “controlled foreign corporation” anti-avoidance Legislation | SLIDE 15
Control
Whether
the Australian CFC regime applies to attribute income to an Australian resident
or not depends on –
(1) whether an Australian resident directly or
indirectly controls a 40% or more interest in the company, unless a non
resident actually has control; or 5 or fewer Australian residents directly or
indirectly control a 50% or more interest in the company, or an Australian
resident has actual control, by whatever means; (in which case the company is a “CFC”),
(2) the type of income derived by the CFC and
(3) whether the CFC is a resident of a
comparable tax country (“ listed”) country or a low-tax (“unlisted”) country .
From 1
July 1997 listed countries are either broad exemption or limited
exemption. Malaysia is a limited
exemption listed country. Labuan is a Federal Territory of Malaysia.
The CFC “control” rules may not apply to a Labuan trading subsidiary if the
holding company is a particular type of company limited by guarantee
(“CLG”) rather than shares. In relation
to the jurisdiction of incorporation of the CLG, in recent times the Labuan
Offshore Financial Services Authority (“LOFSA”) has allowed exemptions for the
incorporation of such companies. | SLIDE
16
CFC Attribution from Listed Country | SLIDE
17
Non-Australian sourced business profits derived by a
limited exemption listed country CFC (say, in Labuan, Malaysia) will generally
only be potentially attributable to its Australian controlling shareholders if
the income derived by it is “tainted” and the company fails the active income
test i.e. the ratio of tainted income to total turnover is greater than 5%.
Where the income is untainted it can only be attributable under the “fail-safe”
provision: s384(2)(aa).
Passive and Tainted Income
Section
384(2)(a) only applies to passive income and tainted income which is
attributable back to the Australian controlling shareholders in the Labuan
company. Passive income includes such things as interest. Income from the sale
of goods or the provision of services is not passive income. Sales and services
income may however, be tainted, if it involves dealing with an associate of the
CFC. It should be observed that sales income is not “tainted” provided it is
not for the sale to or purchase from an Australian resident company with which
the Labuan company is “associated” (broadly speaking, owned and controlled).
Fail-Safe Attribution
Section 384(2)(aa) will attribute income of a limited
exemption listed country (Malaysia) CFC which is not otherwise attributable
(under s384(2)(a)) where:
(i)
the income is not “adjusted
tainted income” of the CFC; and
(ii)
is not treated as derived from
sources in Malaysia for the purposes of the tax law of Malaysia; and
(iii)
is not “subject to tax” in
Malaysia or another listed country.
Subject to
Tax
Business
income is “subject to tax” in Malaysia provided the 3% tax rate is paid, and
the better view is that it is also “subject to tax” if the election is made to
pay RM20,000 flat tax (s324).
Accordingly, so it should not be attributable under the “fail safe”
provision.
The
expression “subject to tax” has a technical meaning; s324 gives an even more
particular meaning in relation to interest and royalty income by virtue of
Regulation 152C, but only in relation to broad exemption listed countries. For sales income, examining s324, the
question would be whether it could be said that the business income subject to
tax in Labuan is taxable pursuant to the “tax laws of Malaysia” because it is
“included in the tax base of that law”. As interest and royalty income appears
to be subject to tax in a broad exemption listed country where it is not
subject to a reduction of tax (from the general rate of company tax under
Regulation 152D), this would seem to imply that business income that is taxed
in Labuan is “subject to tax” in Labuan since there is no specification of such
income not being “subject to tax” where it is merely not taxed at the general
rate of company tax. Similarly, the tax applicable to a Labuan company,
although at a reduced rate on sales income, should still qualify as being
“subject to tax”.
Unlisted Countries
Whilst
attribution from unlisted country CFCs is on the same basis to that of listed
country CFCs (although there is no “fail safe” attribution), dividends from an
unlisted country company would not be exempt from tax under s23AJ
since they do not represent so-called “exempting receipts”. To be an exempting
receipt in relation to an unlisted country company the income must be “subject
to tax” in a “listed” country, which does not include only being subject to a
“withholding type” tax: s324. As the income from the source countries is only
likely to be subject to withholding tax in those countries (if the operations
of such an “unlisted” country company do not amount to a “permanent establishment”
in the source country), and the income is not subject to tax in any other
“listed” country, this “unlisted” country company alternative is not as
attractive as using a “listed” country resident.
There
are also considerable difficulties in getting the profits out of the “unlisted”
country CFCs due to the deemed dividend provisions of s47A. As an actual
dividend out of an “unlisted” country CFC will be assessable in Australia, s47A
deems dividends to have been paid where there are “disguised distributions” out
of accumulated profit “unlisted” country CFCs.
As s47A
is an anti-avoidance provision, and the many methods that could be employed to
transfer profits in non-dividend form, s47A has been drafted to catch
“distribution benefits” effectively transferred by the waiver of debts, the
granting of non-arm’s length loans, transfers of property or services for no or
inadequate consideration, the payment of a call on an allotment of shares, and
a variety of other arrangements involving an associated entity, and the
transfer of benefits involving third parties.
9. Dividends from Labuan | SLIDE 18
A
dividend paid by a Labuan company to an Australian company (in its own right
and not as a trustee of a trust), that holds a “non portfolio” shareholding in
the Labuan company (10% or more of the voting shares), will be an exempt
dividend under s.23AJ of the ITAA 1936.
This result is unaffected by the 2002 Protocol to the Australia/Malaysia
double tax treaty.
If the
Australian holding company distributes dividends to its shareholders, those
dividends will be assessable to the shareholders. As no Australian tax was paid
on the dividend received from Labuan, no franking credits will be available in
relation to the Labuan dividends. That is, the use of a Labuan subsidiary in
those circumstances, would only achieve tax deferral for as long as dividends
are not paid by the Australian holding company to its shareholders.
Unlisted
Country Dividends
In
contrast, if the non-resident entity is a resident of a “pure” tax haven (such
as the 36 tax haven jurisdictions listed in March 2002 by the OECD), it is in
an unlisted country for Australian tax purposes. If that company sells goods or
provides services other than as a branch operation in a listed country (and
subject to full tax rates there), the Australian shareholders or controllers
will be exposed to Australian tax on dividends paid to them. Thus the contrast
between Labuan, Malaysia on the one hand and the tax havens on the other.
Malaysia
Listed
Malaysia
is listed in Schedule 10 of the regulations as a limited exemption listed
country. Section 320(4) specifies that where expressly or by implication a
double tax agreement in force with a foreign country excludes a particular part
of a foreign country from the operation of the double tax agreement, then that
particular part of the foreign country is to be treated for CFC purposes, as
though it were a separate foreign country.
The effect of s320(1) is that such a separate part of a treaty country
which is not subject to the treaty will then only be a listed country if it is
expressly stated to be such in Schedule 10 to the regulations.
It
should be noted that s320(2) specifies that if apart from that section, a
colony, overseas territory or protectorate of a foreign country; or an overseas
territory for the international relations of which a foreign country is
responsible, is not a foreign country in its own right, the colony, territory
or protectorate is taken to be a foreign country in its own right.
However,
there would appear to be two reasons why s320(2) would not apply to Labuan:
(iv)
Malaysia is made up of Peninsular
Malaya, Sabah, Sarawak and a number of islands, and although Labuan is a
Federal Territory of Malaysia rather than a State of Malaysia, it would be
inappropriate to regard it as an “overseas
territory”; (Just as the
Northern Territory and the A.C.T. were formerly part of the State of South
Australia and New South Wales respectively, Labuan formerly formed part of the
State of Sabah and the domestic laws of Sabah still apply to Labuan).
(v)
it would be inconsistent with
s320(4) to treat Labuan as a separate country for CFC purposes when it is not
so regarded under Australia’s double tax agreement with Malaysia.
In
addition, s320(3) specifies that, subject to s320(4), where there are two or more
foreign countries with a common income tax system, those countries are to be
treated as the same country. Of course,
if a company is not incorporated under the Labuan offshore regime, whether it
is incorporated in Malaysia or elsewhere, it will be subject to “ordinary”
Malaysian income tax for its activities conducted in Labuan. That is, there is not a separate taxation
law applying for the federal territory of Labuan separate from that applying in
Malaysia. Rather, there is a concession
that is applicable only to entities incorporated or registered in Labuan and
the ordinary income tax provisions of Malaysia apply to other entities, and
indeed, also apply to a Labuan offshore company if it does business with
Malaysian residents in Labuan, or does business in Malaysian currency. We note
that the 3% tax or RM20,000 is actually paid to the Inland Revenue Department
of Malaysia, rather than a separate tax collection regime.
1999
& 2002 Protocols
Neither
the 1999 nor the 2002 Protocols to the Australia/Malaysia treaty excludes
Labuan as a geographic territory from the operation of that treaty. If they had
done so, the effect of s320(4) is that Labuan would have been treated as a
separate foreign country to Malaysia for the purpose of the CFC provisions. Whilst this would not adversely affect upon
the non attribution of amounts which are not “passive income”, not “tainted
sales income”, not “tainted services income”, nor “tainted royalty income”, it
would have affected the ability of receiving an exempt dividend under s23AJ, as
the dividend would no longer be one paid by a (limited exemption) listed
country, but rather would be one from an unlisted country.
However,
the 2002 Protocol denies Labuan offshore companies, with effect from 1 January,
2003, the benefit of protection from Australian tax on income sourced in
Australia. The denial of protection by the double tax treaty means the Labuan
company would will become assessable in Australia on its Australian “business
profits” even though it does not have a “permanent establishment” in Australia,
and denial of the lower rates of withholding tax on Australian unfranked
dividends, interest and royalties provided by the treaty.
Treaty
Definition of Malaysia
Australian
Taxation Ruling TR 97/19 dealing with whether Hong Kong is subject to the
Australia/China treaty does not appear to have any adverse implications for the
status of the geographic territory of Labuan with respect to the
Australia/Malaysia treaty. In particular,
we note that at paragraph 18 of TR 97/19 the ATO observes that “China” is
defined for the purposes of Article 3(1)(b) of the treaty, in such a way that
it includes geographical areas “in which the laws relating to Chinese tax
apply”. There is no equivalent definition of Malaysia being only that
geographical territory “in which the laws relating to Malaysian tax
apply”. In any event, the general
federal Malaysian tax does apply to a Labuan company if the source of its
income was Malaysia. That is, the tax
regime for Labuan companies only applies to ex Malaysian source income, and it
could not be said that the Malaysia tax “laws do not apply” to a Labuan
company. The 2002 Protocol is confirmation that Australia thought that it was
necessary to amend the treaty to deny Labuan offshore companies the benefit of
Australia’s treaty with Malaysia, but did not do so with reference to Labuan as
a geographical territory. Had it taken the view Labuan was not part of Malaysia
for the purpose of the treaty, it would not have needed to deny the benefit to
Labuan offshore companies expressly by treaty amendment. However, by proceeding
as it did rather than excluding the geographic territory of Labuan from the
definition of Malaysia, it has left Labuan as part of Malaysia with “listed”
country status.
It should
be noted that non-resident trusts are generally unsuitable to conduct active
business overseas for Australian controllers, as there is no “active income
test” in relation to trusts. Thus there is always a larger risk of attribution
with trusts than in relation to companies.
10.
Use of Labuan companies | SLIDE 19
From the analysis above, it will become apparent that
for Australian owned Labuan companies, to avoid attribution under the
Australian CFC the income should not be passive income, tainted sales, tainted
services, or tainted royalty income.
To illustrate the diversity of uses of Labuan
companies, we set out some examples, in each referring to the Australian client
as “Austco” and its offshore subsidiary company as “Offshoreco”. In each case,
Austco:
·
wants to do the offshore business
in the same time zone; keep the cost of doing offshore business down;
preferably in English; in a country with a recognisable legal system; that is
reasonably politically stable
·
realises that a website will allow
clients to find it, rather than the other way around
·
wants to choose an international
base that will allow it maximum flexibility for potential customers in many
jurisdictions | SLIDE 20
10.1
Trading in Goods | SLIDE 21
·
Austco is in the business of
buying goods in or outside Australia, and selling them in and outside Australia
·
Austco is looking for more vendors
and purchasers
·
Austco accepts that sales in
Australia are probably best effected through Austco, but wants to make sales
outside Australia though Offshoreco, to enhance its international credentials
·
If Offshoreco is formed under the
Labuan regime, if the source of its income will be from Offshoreco purchasing
goods either in or outside Australia from unrelated suppliers, and selling the
goods to unrelated customers outside Australia, none of that income will be
attributed back to Austco as the holding company under the CFC regime i.e. the
income will not be “tainted sales income”
10.2
Manufacturer “Offshoring” | SLIDE 22
·
Austco is in the business of
manufacturing goods in Australia with raw material sourced in or outside
Australia, and selling the finished product in or outside Australia
·
Austco is looking for more
purchasers
·
Austco wants to commence
manufacturing in China, due to its significantly lower costs
·
Austco accepts that sales in
Australia are probably best effected through Austco, but wants to make sales
outside Australia though Offshoreco, to enhance its international credentials
·
If a subsidiary of Offshoreco can
be formed in China (Chinaco), that will manufacture the goods to Offshoreco’s
specifications, using raw materials purchased either in or outside Australia
from unrelated suppliers, and selling the finished product to Offshoreco on a
cost plus basis, none of Chinaco’s income will be attributed back to Austco as
the holding company under the CFC regime i.e. the income will not be “tainted
sales income”
·
If Offshoreco is formed under the
Labuan regime, then as the source of its income will be from Offshoreco buying
finished product from Chinaco, and selling the goods to unrelated customers
outside Australia, none of that income will be attributed back to Austco as the
holding company under the CFC regime i.e. the income will not be “tainted sales
income”
10.3
Provider of Services
10.3.1 Computer Services | SLIDE 23
·
Austco is in the computer services
business
·
So far, it has only done work for
Australian resident clients
·
Austco is looking to do work for
clients overseas
·
If Offshoreco is formed under the
Labuan regime, then as the source of its income will be from providing services
to unrelated clients outside Australia, none of that income will be attributed
back to Austco as the holding company under the CFC regime i.e. the income will
not be “tainted services income”
10.3.2 Architectural Drafting | SLIDE 24
·
Austco is in the architectural
drafting profession
·
So far, it has only done work for
Australian resident clients
·
Austco is looking to do work from
clients overseas
·
If Offshoreco is formed under the
Labuan regime, then as the source of its income will be from providing services
to unrelated clients outside Australia, none of that income will be attributed
back to Austco as the holding company under the CFC regime i.e. the income will
not be “tainted services income”
10.4
Royalties
10.4.1 Software Licensing | SLIDE 25
·
Austco is in the computer software
writing business
·
Austco is looking to licence
clients overseas
·
Austco wants to license its
programs to overseas clients though an offshore company (Offshoreco), to
enhance its international credentials
·
If Offshoreco is formed under the
Labuan regime, and writes new programs from there, then as the source of its
income will be royalties from unrelated clients outside Australia, none of that
income will be attributed back to Austco as the holding company under the CFC
regime i.e. the income will not be “tainted royalty income”
10.4.2 Book Author | SLIDE 26
·
An Australian resident individual
(Aussie) is a writer
·
So far, she has only “sold” the
rights to her copyright to Australian based publishers
·
She has received advice that as
she has reached a relatively successful stage, that she should form an
Australian company (Austco) she would control, for whom she would write books,
and vest the copyright in the books immediately in Austco in return for a
salary, so that all “super profit” would accrue to Austco
·
Austco is set up for Australian
business
·
Aussie (and Austco) also look to
become established internationally
·
Aussie realises that the advice
she has received about using Austco in Australia, may translate for offshore
deals though an offshore company (Offshoreco), from which she could draw a salary,
it turn enhancing her international credentials
·
Aussie wants to choose an
international basis that will allow it maximum flexibility for potential
publishers in many jurisdictions
·
If Offshoreco is formed under the
Labuan regime, and Aussie writes her books for Offshoreco for a salary, and
Offshore does not “sell” the copyright, but licenses it, then as the source of
Offshoreco’s income will be royalties from unrelated publishers outside
Australia, none of that income will be attributed back to Austco as the holding
company under the CFC regime i.e. the income will not be “tainted royalty
income”
10.4.3 Rock Band | SLIDE 27
·
Australian resident individuals
are a Rock & Roll band (OzRock)
·
So far, OzRock has only “sold” the
rights to its copyright in its sound recordings to Australian based publishers
·
OzRock members have received
advice that as they had reached a relatively successful stage, that they should
form an Australian company (Austco) they would control, for whom they would
record soundtracks, and vest the copy right in the soundtracks immediately in
Austco in return for a salary, so that all “super profit” would accrue to
Austco
·
Austco is set up for Australian
business
·
OzRock (and Austco) also looking
to become established internationally
·
OzRock members realise that the
advice they has received about using Austco in Australia, may translate for
offshore deals though an offshore company (Offshoreco), from which they could
draw a salary, it turn enhancing their international credentials
·
OzRock want to choose an
international base that will allow them maximum flexibility for potential
record companies in many jurisdictions
·
If Offshoreco is formed under the
Labuan regime, and OzRock perform their music for Offshoreco for a salary, and
Offshore does not “sell” the copyright in the sound recordings, but licenses
them, then as the source of Offshoreco’s income will be royalties from
unrelated record companies outside Australia, none of that income will be
attributed back to Austco as the holding company under the CFC regime i.e the
income will not be “tainted royalty income”
10.4.4 Music Composer | SLIDE 28
·
An Australian resident individual
(Ozzie) is a music compose (e.g. Rock & Roll)
·
So far, he has only “sold” the
rights to his copyright to Australian based publishers
·
He has received advice that as he
has reached a relatively successful stage, that he should form an Australian
company (Austco) he would control, for whom he would write music, and vest the
copy right in the music immediately in Austco in return for a salary, so that
all “super profit” would accrue to Austco
·
Austco is set up for Australian
business
·
Ozzie (and Austco) also looking to
become established internationally
·
Ozzie realises that the advice he
has received about using Austco in Australia, may translate for offshore deals
though an offshore company (Offshoreco), from which he could draw a salary, it
turn enhancing his international credentials
·
Ozzie wants to choose an
international basis that will allow it maximum flexibility for potential
publishers in many jurisdictions
·
If Offshoreco is formed under the
Labuan regime, and Ozzie writes his music for Offshoreco for a salary, and
Offshore does not “sell” the copyright, but licenses it, then as the source of
Offshoreco’s income will be royalties from unrelated publishers and performers
outside Australia, none of that income will be attributed back to Austco as the
holding company under the CFC regime i.e the income will not be “tainted
royalty income”
10.5
Exempt Dividends | SLIDE 29
In each
of the cases referred to above, Offshoreco can pay a dividend back to Austco
exempt from Australian tax under s23AJ.
10.6 Treaty
Shopping into Australia | SLIDE 30
·
For example, companies or
individuals resident in the Middle East have no protection from Australian
taxation, as Australia has no double tax agreements with any countries in the Middle East
·
Residents of several other
countries that a have double tax agreement with Malaysia, have no treaty with
Australia
·
Residents of countries without a
treaty with Australia (NonTreatyResidents) may want to choose an international
base to set up a company (Offshoreco) that will allow it maximum flexibility
for potential customers in many jurisdictions
·
NonTreatyResidents can “treaty
shop” into Australia without paying 28% Malaysian corporate tax, provided they
use a “Malay Satay”
·
Whilst Australia has a double tax
agreement with Malaysia, the recently signed Second Protocol to that treaty
denies Labuan, Malaysia companies the benefits of the Malaysia/Australia treaty
·
Whilst Malaysia does not tax
Malaysian resident companies on their foreign source income, it currently
levies company tax at 28% on a Malaysian company paying a dividend to its
foreign shareholder on profits which have not had tax paid on them in Malaysia
·
Recently Labuan companies have
been allowed to own “ordinary” Malaysian subsidiaries, provided the Malaysian
subsidiary is only involved in deriving foreign source income
·
There is no Malaysian tax payable
when an “ordinary” Malaysian company pays a dividend to its Labuan, Malaysia
parent
·
There is no tax payable when a
Labuan, Malaysia company pays a dividend to its foreign shareholders
·
Malaysia has double tax agreements
with the following countries that do not have agreements with Australia:
·
Bangladesh, Egypt, Jordan,
Maritius, Mongolia, Myanmar, Pakistan, Turkey, United Arab Emirates,
Uzbekistan, Zimbabwe
·
It has also signed the agreements
with the following countries, but todate they have not been gazetted:
·
Albania, Iran, Kuwait, Brunei,
Malta, Morocco, Luxembourg
·
As Malaysia is a majority Muslim
country it has good credentials in the Middle East | SLIDE 31
11. Comparison with Hong Kong
and Singapore | SLIDE 32
Hong Kong is an unlisted country and Singapore is
listed. Accordingly, dividends paid back to an Australian holding company from
Hong Kong are generally not exempt income under s23AJ. Also, the use of profits
of a Hong Kong CFC other than for reinvestment into the active business in Hong
Hong will lead to deemed dividends under s47A.
Hong
Kong IRD Practice Note (reviewed 15 May, 2002) concerning the “Territorial
Source Principle of Taxation” interprets “Hong Kong sourced profits” very
broadly, so Hong Kong tax rates of currently16% are increasing likely to apply.
In order to prove that the profits from trading in goods bought and sold
outside Hong Kong does not have a source in Hong Kong, the Hong Kong
company must prove that substantial activity of the company was effected
outside Hong Kong, thereby putting the Hong Kong company at greater risk of
being taxable on its profits in the high tax jurisdictions in which it makes
sales: see CIR v Euro Tech Far East
Ltd (1995) 1 HKRC para 90-076 and Board of Review cases D28/86
and D47/93 (Case D24 (1994) 1 HKRC para 80-274); and compare CIR v Magna Industrial Co Ltd
[1996] HKCA 542.
Singapore’s ordinary company tax rate is currently
22%, and the ability to get a special 10% tax rate requires Ministerial
approval, which usually requires an expensive office set up with employment of
high wage staff. As Singapore companies are taxable on income accruing in or
derived from Singapore (and foreign source income remitted into Singapore), the
difficulties described above for companies trading in goods through Hong Kong,
also arise in Singapore. In any event, profits can generally only be paid out
of Singapore companies as a dividend, if Singapore company tax is paid on those
profits.
The Hong
Kong tax problems which arose in cases such as Euro Tech and D28/86 and D47/93 do not arise
in Labuan, where the 3% tax rate (or flat tax of RM20,000 (US$5,260))
encourages Labuan offshore companies to be taxable on their trading activities
“carried on in or from Labuan … with non-residents”. Thus, there is greater
flexibility in relation to trading in goods, thereby reducing the risk of
assessment to Offshoreco in the high tax jurisdictions with which Offshoreco
trades.
12. General Anti-Avoidance Provisions | SLIDE
33
In order
to examine the question of the potential application of the Australian general
anti-avoidance provision (Part IVA) it is necessary to have some factual
background. Assume the following:
·
Austco prefers to set up the
offshore company in a time zone that has a “window’ with the Australian
business day. Accordingly, the area under consideration spans, China, South
Korea, Japan, Hong Kong, Thailand, Vietnam, Malaysia, The Phillipines,
Singapore, & Indonesia
·
Austco wants to keep the costs of
its offshore company down
·
Austco prefers to set up in a
country with a British Common Law background as this is the legal system it
understands
·
Austco prefers to deal with staff
and customers, to the extent possible, in English
·
Austco prefers as stable as
possible political climate
·
Austco wishes to incur the least
possible overseas taxes on its world-wide income. This requires as low a
possible offshore tax rate and an extensive network of double tax agreements to
minimise source country tax
Discussion | SLIDE
34
·
Based on these considerations, it
narrows its choice down to three jurisdictions, Hong Kong, Singapore &
Malaysia
·
The cost of doing business in Hong
Kong is “sky high”
·
Whilst Hong Kong has no tax on
foreign source income, as its only double tax treaty is with China, third
country source income tax may be payable in those countries for sales made by
Offshoreco if it was resident in Hong Kong. The risk that China will fully take
back Hong Kong soon is also a concern
·
The cost of doing business in
Singapore is nearly as high as Hong Kong, but Singapore has an extensive list
of double tax treaties. However, its ordinary company tax rate is currently
22%, and the ability to get a special 10% tax rate requires Ministerial
approval, which usually requires an expensive office set up with employment of
high wage staff.
·
Labuan, Malaysia has excellent
telecommunications including Broadband internet, a modern airport serviced by
several 737 jet flights per day, extensive port facilities, and cheap but
reliable mail and courier services. | SLIDE 35, 36
The
Australian Courts have not yet had to deal “head on” with the simple question
of why Part IVA does not apply to the simple choice to conduct business as a
company, trust or partnership, rather than as a sole trader. The answer
probably lies in the fact that the ATO has always taken the view that it is
inherent in Part IVA, that it should not apply where, as was said by the Privy
Council in Newton v FC of T (1958)
98 CLR 1, it is not possible to look at what was done and predicate that it was
done that way for the purpose of avoiding Australian tax (see the Treasurer’s
Second Reading speech on introduction of Part IVA, and the speech by Second
Commissioner Nolan in 1984). | SLIDE 37
If a purpose involves avoiding foreign tax, this is
not a proscribed purpose under Part IVA.
Where
Australian parties wish to do business overseas, the like question could
arise as to why Part IVA shouldn’t apply to the decision to use an Offshoreco
rather than through Austco. The answer is likely to be the same as to that for
the decision to carry on business in Australia though a vehicle, rather than as
a sole trader (except perhaps where the business is in reality the provision of
personal services, rather than a trading business of one individual). That is,
it cannot be predicated that the decision to use Offshoreco was for the purpose
of avoiding (Australian) tax. For instance, we note that Telstra, which is 51%
Australian government owned, used a JV vehicle in Bermuda, in its $2B venture
with Hong Kong listed telco, Pacific Century Cyberworks Limited.
Obviously
cases like FC of T v Spotless Services
Ltd 96 ATC 5201 are very different, as there was no legitimate
business purpose served by investing offshore in that case, other than the tax
benefits. Compare with the decision in WD
& HO Wills (Australia) Pty Ltd v FC of T 96 ATC 4223.
That the
predication test referred to in Newton’s
case is likely to be the answer in the current case, can be seen from the
transcription of the Commissioner’s appeal to the High Court, from the decision
of the full Federal Court in Hart v FC
of T 2002 ATC 4608, transcribed as FC
of T v Hart & Anor [2003] HCATrans 452 (7 November, 2003).
From the
transcript it can be seen that Gleeson CJ has focussed on Newton’s case providing guidance to the question in that
case (see pp 15, 29, 51, and 58). Gleeson CJ also acknowledged that Part IVA
can’t be applied to a scheme which was so narrow as to apply alone to the very
feature that provides a tax benefit, without “robbing the scheme of all
practical meaning” e.g. the decision of use Offshoreco rather than Austco to do
the foreign business (see pp 31, 33, 39 and the discussion of R v Canadian Pacific Ltd [2002] 3
FC 170, at transcript pp 47-48).
Accordingly,
the choice to use Offshoreco rather than Austco to undertake the offshore
business, is not a choice which Part IVA should interfere with. Here, the
dominant purpose is to undertake the offshore business, and to focus on the
vehicle being an offshore company, rather than its use to undertake the
offshore business, is to rob a scheme focusing only on the offshore company, of
all practical meaning, which is impermissible. To the extent that minimising
foreign taxes is a purpose, it is not proscribed by Part IVA.
We would
also make the observation that major Australian multinationals have set up
operations in Labuan, Malaysia i.e. National Australia Bank and Macquarie Bank.
Disclaimer | SLIDE 38
This
paper does not constitute advice. It should not be relied on as such. Persons
wishing to explore these opportunities further should seek professional advice.
PETER K. SEARLE | SLIDE
39
ROBERT GORDON
www.ectrustco.com
3
February, 2004
Peter
Searle has been a tax specialist for over 27 years. He commenced his tax career
in 1977 in the Compliance and Appeals Divisions of the Australian Taxation
Office. He obtained a Masters of Law in Taxation at Monash University after
having completed an Honours degree in Law, including International Law, at the
Australian National University. After his admission as a Solicitor and
Barrister in the Supreme Court of Victoria he worked as a Senior Taxation
Manager at Coopers and Lybrand where his clients included large multinational
corporate groups. Since 1986 he has been an Australian barrister specializing
in Revenue Law and has appeared in taxation and other commercial cases in the
High Court of Australia, the Federal Court of Australia and the State Supreme
Courts. He moved his residence and family to the Federal Territory of Labuan,
Malaysia in 2002, where he is a Director and Trust Officer of EC Trust
(Labuan) Bhd.
MALAYSIAN DOUBLE TAX AGREEMENTS
|
Albania |
Indonesia |
Romania |
|
Argentina* |
Ireland |
Russia |
|
Australia+ |
Italy |
Saudi
Arabia* |
|
Austria |
Japan+ |
Singapore |
|
Bangladesh |
Jordan |
Sri
Lanka |
|
Belgium |
Korea,
Republic |
Sweden |
|
Canada |
Malta |
Switzerland |
|
China,People’s
Republic |
Mauritius |
Thailand |
|
Czech
Republic |
Mongolia |
Turkey |
|
Denmark |
Myanmar |
United
Arab Emirates |
|
Egypt |
Namibia |
United
Kingdom+ |
|
Fiji |
Netherlands+ |
United
States of America* |
|
Finland |
New
Zealand |
Uzbekistan |
|
France |
Norway+ |
Vietnam |
|
Germany |
Pakistan |
Yugoslavia |
|
Hungary |
PapuaNew
Guinea |
Zimbabwe |
|
India |
Philippines |
|
|
|
Poland |
|
Treaties
have also been signed with the Islamic Republic of Iran, Kuwait, Brunei,
Morocco and Luxembourg although not gazetted to date.
*
Restricted double tax treaty
+ excludes Labuan Offshore companies
www.ectrustco.com