Shipping and air transport

Specialised industries

2014 1
Shipping and airline operations
• Sea and air transport are specialized
industries.
• Unlike land based industries, sea and air
transport is operated on a world scope
• The taxation of the industry is therefore on a
world scope, too
• Special provisions apply.

2014 2
 Resident sea and air operators

2014 3
• Section 54(2) (a)
– Subject to section 54A, where that person is
resident for the basis year for a year of
assessment, his gross income and adjusted income
or adjusted loss for the basis period for that year
of assessment from the business of transporting
passengers or cargo by sea or air his statutory
income for that year of assessment from that
business shall be ascertained by reference to his
income therefrom wherever accruing or derived;

2014 4
• The provisions of section 54(2) applies to both
the sea and air transport
• Only the income from the business of
transporting passengers or cargo by sea or air
would be taxed on a world scope (as
compared to the ‘territorial scope’ for other
industries)
• Other sources of income of the operator e.g.
rent, would be taxed on a territorial scope
2014 5
• Gross income from wherever derived‖ means
the total of all sums first receivable by the
operator in the relevant period in respect of
transporting by sea or air (whether before, in
or after the relevant period) passengers or
cargo in ships or aircraft owned or chartered
by the operator;

2014 6
 Exemption of resident shipping
operators

2014 7
Resident sea operators

• Exemption of shipping profits

• Resident sea operators are given a partial exemption on the shipping
income under section 54A (1) as follows:

• *54A. (1) Subject to the following subsections, where a person who is

resident for the basis year for a year of assessment carries on the
business of—
– (a) transporting passengers or cargo by sea on a Malaysian ship; or
– (b) letting out on charter a Malaysian ship owned by him on a voyage or time
charter basis,
• seventy per cent of the statutory income of that person for that year of
assessment from that business shall be exempt from tax.
• The law is applicable with effect from YA 2014
• ‘Person’ includes a partnership [sec 54A(6)]

2014 8
Separate business source
• The income derived from each Malaysian ship
shall be treated as separate and distinct
business source.
• If there is any adjusted loss, such loss can only
be used to:
– To reduce the exempt income of the other
Malaysian ships in the year of assessment
– To be carried forward to the next year of
assessment to be deducted from the exempt
income of the same Malaysian ship
2014 9
Deemed total income
• Of the statutory income so determined, the
tax treatment is as follows:
• The 70% shall be exempted
• The 30% shall be deemed the total income
and would be brought to charge

2014 10
• Example
RM
Gross income from shipping 100,000
Less: Expenses 30,000
Adjusted income 70,000
Less: Capital allowances 20,000
Statutory income 50,000
Less: Exempted 70% 35,000
Deemed total income 15,000

2014 11
Malaysian ship
• Malaysian ship is defined under section 54A(6)

– Malaysian ship‖ means a sea-going ship registered

as such under the Merchant Shipping Ordinance
1952 [Ord. 70 of 1952], other than a ferry, barge,
tug-boat, supply vessel, crew boat, lighter,
dredger, fishing boat or other similar vessel;

2014 12
• A ship will be registered as a Malaysian ship if
the following conditions are met:
– The principal place of business is in Malaysia
– The majority shareholdings are held by Malaysian
citizens
– 20% of the directors are Malaysians
– 30% Bumiputra participation at all levels

• Case law
• Labuan Ferry Corporation Sdn Bhd

2014 13
Capital allowance
• For the exemption of income purposes, capital
allowances are deemed claimed under Para 77
Schedule 3
• The exemption is therefore based on the statutory
income and not the adjusted income
• Allowances are given under schedule 3

• Law
• Section 54A(1A)

2014 14
Tax exempt dividends
• The operator is required to maintain separate
accounts for each ship
• The exempted income is credited to an
exempt account and exempt dividends can be
declared from the balance in this account

2014 15
Capital allowances
• Capital allowances in respect of a ship whose
income is exempt is deemed claimed
• The capital allowance in respect of a
Malaysian ship shall only be available against
the exempt income of the same ship

2014 16
Losses
• Sec 54A(2)(b)
• the adjusted loss (if any) of the person for any
year of assessment in respect of a source
consisting of a Malaysian ship shall not be
available as a deduction in arriving at the total
income of that person for that year of
assessment

2014 17
Losses
• Sec 54A(2)(c)
• an amount of statutory income of a person from a source
consisting of a Malaysian ship which is exempt under this
section for the following year of assessment shall be
reduced by the adjusted loss referred to in that paragraph,
• and if by reason of insufficiency or absence of that statutory
income, the amount of adjusted loss which has not been so
utilized shall further reduce the amount of statutory income
of that person from that source which is exempt under this
section for any subsequent years of assessment until the
amount of adjusted loss is fully utilized; and

2014 18
 Non-resident shipping operators

2014 19
Non-resident operator
• Scope of charge
• A non-resident operator carrying on a
business of transporting passengers and cargo
by sea or air would be assessed to Malaysian
tax on the gross income derived from Malaysia
• Note that the world scope do not apply to a
non-resident operator

2014 20
• Gross income derived from Malaysia Sec 54(5)

• ―gross income derived from Malaysia for the relevant period‖ means the total of all sums
first receivable by the operator in the relevant period in respect of transporting by sea or
air (whether before, in or after the relevant period) passengers or cargo embarked or
loaded in Malaysia into ships or aircraft owned or chartered by the operator, except sums
so receivable in respect of passengers or cargo—

• (a) brought to Malaysia, whether by the operator or otherwise, solely for transfer—
– (i) from one ship or aircraft to another;
– (ii) from a ship to an aircraft; or
– (iii) from an aircraft to a ship; or

• (b) so embarked or loaded into such a ship or aircraft if the call of that ship or aircraft at a
port, aerodrome or airport in Malaysia for that embarkation or loading was a casual call
within the meaning of subsection (6),
• less any sums received in the relevant period or prior thereto which are refunded in the
relevant period and any sums first receivable in the relevant period or prior thereto which
in the relevant period cease, otherwise than on the receipt thereof, to be receivable;

2014 21
Exclusion from gross income
• Note that gross would exclude the following:

– except sums so receivable in respect of passengers or cargo

—
• (a) brought to Malaysia, whether by the operator or otherwise,
solely for transfer—
– (i) from one ship or aircraft to another;
– (ii) from a ship to an aircraft; or
– (iii) from an aircraft to a ship; or
– (b) so embarked or loaded into such a ship or aircraft if the
call of that ship or aircraft at a port, aerodrome or airport in
Malaysia for that embarkation or loading was a casual call
within the meaning of subsection (6),

2014 22
• For the shipping income to be brought to charge, the
passengers or cargo must be embarked or loaded in
Malaysia into ships or aircraft owned or chartered by
the operator.
• As the law excludes ‘transshipment’ and ‘casual call’, it
important to understand the meaning of those terms

• Case law
• OOCL Ltd v KPHDN

2014 23
Deemed derived from Malaysia
• It is important that an income must be derived
from Malaysia or deemed derived from
Malaysia
• The meaning of ‘derived from Malaysia’ was
litigated in the case of Oil Asia Ltd.

2014 24
Statutory income: non resident operator
• The chargeable income of a non-resident
operator would be determined as follows:
– The 5% method; or
– The acceptable ratio certificate method

• The chargeable income would be taxed at 25%

2014 25
5% method
• The statutory income is deemed to be 5% of
the gross shipping charges received from the
embarkation of passengers or gross freight
cargo loaded from Malaysia

• Example Year of assessment 2014 RM

Gross shipping charges 100,000

Deemed statutory income

5% of RM100,0000 5,000

Income tax: 25% of RM5,000 1,250

2014 26
Acceptable ratio certificate method
• If the non-resident operator was assessed on the
5% method, it can be re-computed based on the
ratio certificate method if this method gives a
lower taxable figure
• The certificate must be submitted within 3 years
after the commencement of the relevant year of
assessment

• Example
• Year of assessment 2014
• Certificate must be submitted on or before 31 December 2016

2014 27
Computation under certificate method
• The statutory income is computed using the
following formula – one for income and one
for capital allowance

• Formula: income
Gross income from Malaysia
World adjusted
x income /(Loss)
Gross world income

2014 28
• Formula: capital allowance

Gross income from

Malaysia x World capital allowances
Gross world income

2014 29
Losses under the certificate method
• The losses would be allowed against the
future shipping income
• It must be using the certificate method

2014 30
Acceptable certificate
• Some conditions must be fulfilled:
– Issued by the revenue authority of the country of
residence of the operator
– The revenue authority must compute and charge
to tax the income on a world basis
– The computation method must be similar to the
Malaysian laws

2014 31
• The certificate should state clearly the
following information:
– World gross freight earnings
– Adjusted profit or losses
– Capital or depreciation allowances

2014 32
• Malaysian revenue authorities would accept
the certificate from most countries with which
Malaysia has a double tax agreement
• Example
• Belgium, Denmark, New Zealand, India, Norway, Sri Lanka, Sweden etc.

2014 33
WHT exemption
• A resident shipping operator is not required to
deduct WHT at 10% under section 109B in
respect of payment:
– for the rental of movable property to a non-
resident under an agreement or arrangement for
participation in a pool
– Rental payment on ships under a voyage, time or
bare boat charter to non-residents

Law
Income Tax (Exemption) Order 2007

2014 34
Exemption for employees on a ship
• Exemption on income is available to any
individual exercising an employment on board
a ship used in a business operated by a
resident person who is the registered owner
of a ship under the MSO 1952

2014 35
Tax administration
• The IRB can appoint an agent for the non-resident shipping or aircraft
operator to account for the formalities of Malaysian taxation

• The agent is responsible for:

– Informing the IRB of any port calls by the non-resident operator

– Withhold tax at 1.3% of the gross freight and pay it to the DGIR
– Provide all relevant information as and when required by the DGIR

• The agent would be assessed and charged to tax on behalf of the non-
resident operator

• Law
• Section 68(1)

2014 36
 End

2014 37