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Tax Incentives for Treasury Management Centres

The Malaysian Government recently announced the 2012 proposals in a Budget themed around national transformation focusing on several areas including accelerating investment, generating human capital excellence and easing inflation. One of the 2012 Budget proposals that is noteworthy is the concept of a Treasury Management Centre (TMC). In an effort to attract MNCs to locate their treasury management activities in Malaysia, tax incentives have been proposed for TMCs. It has been proposed to allow a 70% tax exemption for 5 years on income arising from qualifying treasury services rendered to related companies. Qualifying services relate to cash management, current account management, financing and debt management, investment, financial risk management and corporate and financial advisory services.

Taxand Malaysia discusses the key benefits of the TMC incentives to multinationals considering locating their treasury management centres in Malaysia.

Currently, approved Operational Headquarters Companies (OHQs) are provided with a 100% tax exemption on income from qualifying services rendered to at least 3 related companies outside Malaysia. A portion of income from such services provided to related companies within Malaysia is also exempt from tax. Treasury services also form part of the qualifying services. Exemption for an OHQ, however, mandates provision of a mix of 3 qualifying services. Mere provision of treasury services does not attract exemption. TMCs therefore allow greater flexibility than OHQs for MNCs wishing to centralise their treasury functions in Malaysia.

This proposal is also in line with the Government's objective of developing a more sophisticated and comprehensive financial services industry within the country. This could encourage multinational corporations to centralise their treasury or financial functions in Malaysia.

Tax incentives for TMCs
It is proposed that a TMC be granted the following tax incentives:

  • 70% tax exemption on the statutory income arising from provision of qualifying treasury services by a TMC to its related companies for a period of 5 years. This shall include:
    (i) All fees and management income from providing qualifying services to related companies within and outside Malaysia
    (ii) Interest income received from lending to related companies within and outside Malaysia
    (iii) Interest income and gains received from placement of funds with licensed onshore banks or short term investments (onshore and offshore) as part of managing surplus funds within the group
    (iv) Foreign exchange gains from managing risks for the group, including exchange rate risk, interest rate risk and commodity risk
    (v) Guarantee fees
  • Exemption from withholding tax on interest payments made to overseas banks and related companies on borrowings by the TMC for qualifying activities
  • Stamp duty exemption on all loan and service agreements executed by the TMC in Malaysia in for qualifying services
  • Expatriates working for a TMC shall be taxed only on that portion of their chargeable income which is attributable to their stay in Malaysia.

Malaysia vs. Singapore
It is also interesting to note that similar tax incentives are granted to approved Finance and Treasury Centres (FTC) established in Singapore. A comparison of the incentives proposed to be granted to TMCs in Malaysia and those granted to FTCs in Singapore is briefly summarised below:

Malaysia - TMC

Singapore - FTC

Treasury services to related companies within or outside Malaysia

3 qualifying services to 3 or more related companies within or outside Singapore

70% exemption on income received from providing qualifying services. Thus the balance of 30% is subjected to corporate tax at 25% which translates to an effective tax rate of 7.5%.

Income received from providing qualifying services is subject to a reduced tax rate of 10%

Period: 5 years

Period: 5-10 years, depending on the level of financial and manpower commitment by the FTC in Singapore

Withholding tax exemption on interest

Withholding tax exemption on interest

Stamp duty exemption on loan and service agreements

No stamp duty exemption


 

Taxand's Take


With the introduction of the TMC incentive in Malaysia, MNCs in the region will have more choice in terms of the location for their treasury management centres. Singapore has traditionally captured the market for such entities, but Malaysia now provides a viable alternative. Aside from MNCs, the TMC incentive is also designed to attract large Malaysian companies, who may have located their treasury centres elsewhere in the past. As is always the case, apart from the tax angle, other business and legal considerations will also need to be borne in mind in making strategic decisions as to where to locate a treasury centre for a group of companies.

Your Taxand contacts for further queries are:
Renuka Bhupalan
T. +603 2032 2799
E. rb@taxand.com.my

Vivian New
T. +603 2032 2799
E. vnlw@taxand.com.my

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Taxand's Take Author