MALAYSIA is a small economy with a population of 33 million and, therefore, businesses have to expand overseas in order to grow. This is reflected in the sizeable direct investments abroad of RM543.9 billion as at third quarter of 2021 and our monthly exports on average exceed RM100 billion.
Normally businesses expanding into the international markets evolve through three phases. They begin by exporting directly to overseas customers. Thereafter they appoint agents or set up their own marketing network, and finally progress to set up manufacturing operations or a full physical infrastructure to provide services locally.
Upon entering the host country, the Malaysian company needs to identify a suitable legal vehicle such as a company, branch, project office and limited liability partnership. They should also be mindful of the foreign exchange regulations to avoid any problems in repatriating profits or exiting the investment.
Exporting directly overseas
For export of goods, the concern should be on indirect taxes such as import duties or value-added taxes of the host country since there will be no presence overseas. Where services are exported from Malaysia, the main considerations would be the host countries’ value-added taxes, digital taxes, withholding taxes on payments received for services rendered by the Malaysian company.
At this stage, the tax consideration will largely be the Malaysian tax aspects of the transaction.
Setting up operations – appointing agents
The main direct tax consideration to watch out for is to ensure the transaction between the Malaysian company and the foreign agent is dealt with on an arm’s length basis. You should ensure that the agent is not authorised to act on behalf of the Malaysian company because, in majority of the countries, the local tax authorities will deem the Malaysian company to have a tax presence in the host country, thereby subjecting a portion of the profits from the transaction to tax in the host country.
To avoid this problem, you should ensure that the agent is not given authority to act on your behalf but act on his own capacity.
Set up physical presence to distribute goods or services
The Malaysian company will be exposed to the full set of local tax laws. The direct taxes would include income tax, capital gains tax, stamp duties on any agreements, business taxes, withholding taxes on services purchased from the Malaysian company. The indirect taxes would include customs duties, value-added tax, sales tax, service tax, and excise duties.
There are also other taxes and levies such as fringe benefit tax on assets and employment levies to be considered.
In many countries, including India and China, you should take note that there are separate sets of taxes imposed at the federal, state level, and city levels.
Prepare in advance before you venture overseas
The profit projections of any overseas venture can very easily become negative if you fail to understand the taxation regime of the host country.
There have been many examples of Malaysian companies venturing overseas without fully understanding the tax regime of the host country or, upon entering the country, failing to comply with the local tax regulations, or not seeking proper professional assistance to navigate through the idiosyncrasies of each tax authority.
Understand the taxation issues and the costs of operating overseas before you venture overseas, otherwise the taxes will come to haunt you in the future.
This article was contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai.