EPCC (Engineering, Procurement, Construction, and Commissioning) contracts, prevalent in sectors like oil and gas, power, and infrastructure, often involve foreign contractors and substantial financial outlays. This article examines how multinational corporations utilize tax planning strategies to shift profits out of Malaysia, highlighting the tactics employed and the responses of Malaysian tax authorities.
EPCC contracts are commonly found in sectors like oil and gas, power generation, and large government infrastructure projects. These projects often necessitate substantial investment in infrastructure, plant and machinery, and specialized technology sourced from abroad. As a result, they frequently engage foreign contractors for implementation. The cost of these contracts can soar into the hundreds of millions, or even billions, of ringgit.
The acronym EPCC stands for Engineering, Procurement, Construction, and Commissioning. These contracts encompass the entire project lifecycle, from initial design and procurement to construction, testing, and final commissioning. While the entirety of the contract value might theoretically be taxed in Malaysia, this rarely happens in practice. Multinationals engaging in such projects tend to fragment contracts into smaller parcels, aiming to minimize their Malaysian tax liabilities. They employ sophisticated tax planning strategies to shift profits outside Malaysia, potentially to their home countries or jurisdictions with lower tax rates.If a foreign EPCC contractor were to declare full profits in Malaysia, they would be subject to a 24% tax rate on those profits. However, payments made to non-residents by the EPCC contract attract withholding taxes and imported service taxes. Typically, these large contracts are divided into work performed in Malaysia and work carried out overseas. Major foreign taxpayers often shift a larger portion of profits outside Malaysia, arguing that a significant amount of the work is executed abroad. This, they contend, justifies allocating a greater share of profits to the overseas operation, emphasizing the value creation occurring outside Malaysia.Tax authorities worldwide are increasingly aware of this profit-shifting practice, deeming it aggressive tax planning. They are actively challenging such transactions from various angles. Firstly, they probe transfer pricing arrangements, questioning whether the profits retained in Malaysia adhere to the arm's length principle. Secondly, they may employ anti-avoidance provisions, arguing that the profit split lacks commercial justification. Tax authorities possess substantial information to challenge these profit allocations. They can access CbCR (Country-by-Country Reporting) documentation, providing insights into the multinational group's overall financial structure. Moreover, upon request, local tax authorities can obtain information on the total contract profits generated both in Malaysia and overseas, allowing for a comprehensive comparison and assessment of profit distribution. This exchange of information is facilitated by tax treaties, which Malaysia has with over 70 countries.The Malaysian tax authorities are actively monitoring these large contracts and are cognizant of the tax planning strategies employed. These issues often surface when multinationals seek refunds for excess withholding taxes paid. Such refund applications prompt the Inland Revenue Board to conduct in-depth contract reviews.
EPCC Contracts Tax Planning Profit Shifting Malaysian Tax Authorities Transfer Pricing Anti-Avoidance Provisions
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