Computation of Income Tax - Doc

Taxation

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................3
1. Describing on how to determine basis period and year of assessment...................................3
2. Explaining elements in computing the chargeable income.....................................................4
3. Discussion on capital expenditure claimable by organisation................................................6
4. Computation of tax payable with the help of annual report of company................................7
SUMMARY.....................................................................................................................................8
REFERENCES..............................................................................................................................10

INTRODUCTION
The nature of Carimin Petroleum Berhad is an investment holding company engaged in
energy sector. It was established in 1989 and evolved to become leading oil and gas companies
providing technical and engineering support services in Malaysian industry. Organisation
specialises in engineering, scheduled/work pack development, procurement, recommissioning
and commissioning activities. It also includes deploy marine vessels such as work barges,
accommodation vessels, crew boats, anchor handling tug supply vessels which are regarded as
part of marine spread activities. Business has steadily grown in recent years from just a
manpower service provider to dynamic and emerging contractor in integrated maintenance,
rejuvenation and hook-up and commissioning (HUC) of both offshore and onshore in oil and gas
support industries.
Till date, Carimin Petroleum Berhad had completed projects of more than RM1 billion
and has diversified portfolio of reputed clients. These clients include PETRONAS Carigali,
Murphy Oil, Repsol, Exxon Mobil and many other clients. The corporate structure of company is
drawn below-
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It can be ascertained that corporate structure provides clarity that firm has one segment of
civil engineering which is Carimin Bina Sdn Bhd. On the other hand, there are two dormant
segments such as Carimin Resources Services Sdn Bhd and Fazu Resources (M) Sdn Bhd.
While, rest of segments are of oil and gas support services. It can be ascertained that organisation
structure of Group is well-defined and it follows hierarchy organisational structure in which
there are clear lines of accountability and delegation of authority. It is present for major tenders,
project capital expenditure, acquisition and disposal of business and other significant transactions
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requiring approval of Board. Management team is effectively led Managing Director and assisted
by Executive Directors with particular heads of departments. Responsible and competent
personnel is recruited for overseeing better operational functions.
The Group has clearly defined policies and procedures along with limit of authority under
each head. This has led to attain and promote transparency, responsibility, operational efficiency
and better corporate governance in the best manner possible. It can be said that business provides
variety of support services to clients in the industry and management is liable to perform
adequately so that better results may be attained. Moreover, management structure of Carimin
Petroleum Berhad is well-defined and responsibilities are effectively delegated to employees by
Board of Directors.
MAIN BODY
1. Describing on how to determine basis period and year of assessment
The income tax computation under the Malaysian law prescribed by MASB (Malaysian
Accounting Standards Board) can be used for identifying and determining basis period.
Company that have qualified for group relief may surrender maximum of 70 % of its adjusted
loss for year of assessment to either one or more than one companies (Faizal & et.al., 2017).
With the effect of year of assessment 2019, period in which organisation may surrender its
adjusted loss is limited to starting 3 consecutive years of assessment after completion of its first
12-month basis period from commencement of operational activities of organisation.
The basis period is termed as the time period for which company pays out tax each year.
The basis period is however the same as its accounting year (Kiow, Salleh & Kassim, 2017).
Carimin Petroleum Berhad is one of the largest company engaged in energy sector listed on
Bursa Malaysia also determines basis period. Financial year of 2018 has been ended on 30 June
2018. In relation to this, basis period is determined from 1 May 2017 to 30 June 2018. This is
evident from the Section 21A of Income Tax Act 1967 which is used for company, limited
liability partnership (LLP), trust or cooperative soceity. According to Subsection (2) of Section
21A, where set of accounts have been made for the period of 12 months ending on day other than
31 December, such period is to be constituted as basis period for YA (Year of Assessment).
According to Subsection (4) which has been in effect from YA 2014 has simplified
determination of basis periods upon commencement of operations. When an entity set its first
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accounts which falls in first, second or third year YA after date of commencement, period
covered by accounts is accepted as basis period for first applicable YA. In addition to this, YA's
before that YA will then deemed to have no basis periods. On the other hand, YA can be
determined as per the company's choice as Companies Act 2016 does not make specification
regarding date in which financial year may be commenced or end. Directors of company is
obliged to prepare financial statements within 18 months after incorporation of organisation.
Moreover, in subsequent 6 months of financial year-end for submitting reports with Companies
Commission of Malaysia. It should be determined by looking on business cycle and taxation
period as there are complications especially when closing falls in March, June, September and
December because audit fees are not easy to be negotiated.
2. Explaining elements in computing the chargeable income
1. Capital expenditure
The capital expenditure is termed as funds which are being invested or used by
organisation in maintaining or acquiring fixed assets like land and buildings, equipments. In
accordance to Malaysia, deductions are allowed under chargeable income for any revenue
expenditure incurred on wholly or exclusively in production of income (Malaysia Publishes
Guidance on Qualifying Expenditure and Computation of Capital Allowances. 2015). However,
no deduction is allowed under preliminary costs, capital expenditure, floatation costs registration,
winding up or liquidation of corporation unless specifically permitted by Income Tax Act 1967
or order by Malaysian Ministries. However, tax incentives would be provided for encouraging
transformation to IoT, robots and big data analytics by manufacturing and service sector (Pui
Yee, Moorthy & Choo Keng Soon, 2017). Capital allowances will be provided on first RM 10
million of qualifying capital expenditure incurred during YA 2018 to 2020 with fully claimable
within two YA.
Plans are underway for developing five-acre yard into integrated facility that will include
better blasting and painting activities leading to enhance capability of Carimin Petroleum Berhad
in the best manner possible. Capital expenditure for this purpose will be financed on partial basis
from listing proceeds. On the other hand, Carimin Petroleum Berhad uses segment capital
expenditure for acquiring plant and equipment and which does not include goodwill.
2. Capital gain
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It is known as the rise in the value of capital asset (investment or real estate) that gives
higher worth than the purchase price of capital asset. Gain is never realised unless it is sold.
Capital gain may be of short-term ranging to one year or long-term of more than one year. It is
required to get claim on income taxes. However, Malaysia does not charge or tax capital gains
from the sale of capital assets or investments other than land and buildings. In relation to this,
real property gains tax applies to sale of land in Malaysia only. It includes gains from the sale of
shares in controlled company whose holdings of real property or shares amount to at least 75 %
of more of its tangible assets (Hamzah, Tokimatsu & Yoshikawa, 2017.).
The rate for disposals of real property is 30 % and that too made within 3 years of
acquisition date. Moreover, such rates are reduced subsequently after 3 years. This is evident
from the fact that rates stipulated are 20 % in fourth year and is 15 % for disposals after five
years of acquisition which is further decreased to 5 % after sixth year post-acquisition. This
means that Malaysia does not have provision for capital gains tax but it is made to real property
of some classes.
3. Capital loss
The capital losses are those which are opposite of capital gains. In simple words, when
purchase price of capital asset is more than its selling price, loss is occurred for the entity. This
highlights that business is required to make proper evaluation regarding disposals in order to
avoid losses up to a major extent. On the other hand, treatment of capital losses arising from sale
of real property can be used for offsetting against capital gains earned from such sales with ease.
Gains resulting from such real property disposal acquired are mandatorily exempted from the tax
as are asset transfer by domestic companies of Malaysia approved under restructuring scheme.
Carimin Petroleum Berhad falls under title of domestic company.
Capital losses can be effectively offset as against capital gains made by company. It can
be ascertained that Carimin Petroleum Berhad with reference to financial assets has made clear
in annual report. The financial assets at fair value through profit or loss are stated at fair value
only with any gains or losses arising on remeasurement recognised in profit or loss (Bong &
et.al., 2017). Gains or losses arising from sale of financial assets are recognised in
comprehensive income and accumulated in fair value reserve. While, on de-recognition,
cumulative gain or loss already accumulated in such reserve is reclassified from equity into profit
or loss.
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3. Discussion on capital expenditure claimable by organisation
Capital expenditure can be claimed by meeting out the purpose of giving relief for wear
and tear of business' fixed assets. Capital allowances comprises initial allowance and annual
allowance. It can be ascertained that in Malaysia, initial claim is fixed at 20 % on the basis of
original cost of asset at the time particularly when capital expenditure is incurred. It is granted in
year when real expenditure is incurred and asset is being utilised for purpose of business (Capital
Allowance. 2018). On the other hand, annual allowance can be claimed by company at the
prescribed rates based on cost given for every year during which asset is in use and that at the
end of basis year for business purpose. The rates for qualifying assets for both allowances are
listed below-
Qualifying Asset Initial Allowance (in %) Annual Allowance (in %)
Industrial building (purchased
or constructed)
10 3
Heavy Machinery 20 20
Plant and Machinery (General) 20 14
Furniture and Fixtures 20 10
Office Equipment 20 10
Motor Vehicles 20 20
Assets of value less than RM
1300
- 100
It can be ascertained that accelerated capital expenditure claim is available for industrial
building, plant, machinery, building used as warehouse, computers etc. in addition to this, On 27
August 2015, Inland Revenue Board of Malaysia published Qualifying Expenditure and
Computation of Capital Allowances. It imparts guidelines on tax treatment with references to
qualifying expense on plant and machinery for claiming capital allowances for capital
expenditure and also calculation of capital allowances.
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Major areas covered under the publication with examples are qualifying expenditure
which include details for incidental expenditures, vehicles, hire purchase assets, assets used
previously for non-official purposes. It also includes detail for asset installation services,
expenditure on dismantling and removing assets, foreign exchange differences which arises from
abroad loans for providing funding for purchase of plant and machinery. Another area is persons
eligible for claiming capital allowances when qualifying expenditure is incurred. Moreover, rules
for assets with expected life of below two years.
The operating segments of Carimin Petroleum Berhad consists of MPS (Manpower
Services) and CHUCTMM (Construction, Hook Up and Commissioning as well as Topside
Major Maintenance) which are two main customers of Group. The capital expenditure is PPE
(Property, Plant and Equipment) which was RM 59000 for MPS and RM 113000 for
CHUCTMM. While, MS (Marine Services) consists of capital expenditure of RM 253000 and
others are RM 23000 making it total to RM 448000 of whole Group (Annual Report of Carimin
Petroleum Berhad. 2018). For the year ended 2018, CC (Civil Construction) is not incurred
heading towards expenditure.
The capital expenditure starting from YA 2001, limitation amount for qualifying plant
expenditure for motor vehicle has been increased from RM 50,000 to RM 100,000 on condition
that motor vehicle bought is new one and on road price of purchase does not exceed RM 150,000
(Taxation and Investment in Malaysia 2018. 2018). It can be referred to example that when new
truck is purchased by Carimin Petroleum Berhad at cost of RM 40,000 which increases book
value of assets to the same amount. This amount has to recorded under cash flow statement as
capital expenditure under investing activities, then gradually truck depreciates over the years.
Thus, as per the law, truck which is acquired at a cost of RM 40,000 does not qualify as claim
under capital expenditure.
4. Computation of tax payable with the help of annual report of company
Computation of income tax payable by Carimin Petroleum Berhad
Particulars
2018
(In RM'000)
(Loss)/ Profit before tax -24452
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Corporate tax @ 24 % -5868
Tax effects of-
Share of joint ventures 251
Non-taxable income -259
Non-deductible expenditures 288
Unrecognised deferred tax assets 6237
Others
(Over)/ Under provision of previous
financial year-
Current tax 317
Deferred tax
Income tax expense 966
It can be analysed that income tax expense has been calculated of organisation. For
computing tax, domestic income tax rate of 24 % is charged of assessable profit for accounting
year. For YA 2017 and 2018, Malaysian statutory tax rate will get reduced to 1 % to 4 % based
on proposed incremental percentage of chargeable income from business compared to previous
YA. Carimin Petroleum Berhad has unused tax losses and unabsorbed capital allowances of RM
23,309,361 and RM 82,106,318 that are made available for offset against future taxable profits of
subsidiaries where losses arose. No deferred tax assets are recognised. Moreover, both
unabsorbed capital allowances and unused capital losses are not going expire under current
legislation. Hence, income tax expense of 966 has been charged.
SUMMARY
Hereby it can be summarised from the report that Carimin Petroleum Berhad is required
to perform well as it is incurring losses from last two years. The capital expenditure has been
increased up to a major extent, however, return from capital assets have not been adequate. It is
needed that business should focus on the return on invested amount so that profits may be
ascertained. On the other side, capital gains may be earned which may be used for offsetting
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capital losses in a better manner. Carimin Petroleum Berhad is largest and oldest petroleum
company engaged in energy sector. All of its subsidiaries and operational segments are required
to be performed adequately in order to maximise profits and minimise losses. Furthermore, it is
needed that business may be able to attain higher growth and expand itself by acquiring more oil
and gas organisations.
Income tax computation at Malaysian statutory rate of 24 % has been applied and RM
966 has been charged. However, company has incurred loss requires implementing higher
strategies and newer business model for eradicating losses. Basis period and YA both have been
determined which is used for tax computation by corporate. Elements such as capital
expenditure, capital loss and capital gain have been explained along with treatment for attaining
chargeable income. Capital expenditure claimable by Carimin Petroleum Berhad has also been
analysed. Thus, it can be summarised that tax computation is one of the important element which
is required to be done in coherent manner by referring to MASB provisions and Income Tax Act
1967 so that correct computation may be made. Furthermore, deductions and incentives if any
can also be adjusted with the help of abiding by law. Hence, proper tax computation is the
liability of business and make proper filing to income tax authority of Malaysia.
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REFERENCES
Books and Journals
Bong, C.P.C & et.al., 2017. Review on the renewable energy and solid waste management
policies towards biogas development in Malaysia. Renewable and Sustainable Energy
Reviews. 70. pp.988-998.
Faizal, S. M & et.al., 2017. Perception on justice, trust and tax compliance behavior in
Malaysia. Kasetsart Journal of Social Sciences. 38(3). pp.226-232.
Hamzah, N., Tokimatsu, K. & Yoshikawa, K., 2017. Prospective for power generation of solid
fuel from hydrothermal treatment of biomass and waste in Malaysia.Energy Procedia. 142.
pp.369-373.
Kiow, T. S., Salleh, M.F.M. & Kassim, A.A.B.M., 2017. The determinants of individual
taxpayers’ tax compliance behaviour in peninsular malaysia. International Business and
Accounting Research Journal. 1(1). pp.26-43.
Pui Yee, C., Moorthy, K. & Choo Keng Soon, W., 2017. Taxpayers’ perceptions on tax evasion
behaviour: an empirical study in Malaysia. International Journal of Law and
Management. 59(3). pp.413-429.
Online
Annual Report of Carimin Petroleum Berhad. 2018 [PDF]. Available Through:
<http://disclosure.bursamalaysia.com/FileAccess/apbursaweb/download?
id=190080&name=EA_DS_ATTACHMENTS>.
Capital Allowance. 2018 [Online]. Available Through:
<http://taxsummaries.pwc.com/ID/Malaysia-Corporate-Deductions>.
Malaysia Publishes Guidance on Qualifying Expenditure and Computation of Capital
Allowances. 2015 [Online]. Available Through:
<https://www.orbitax.com/news/archive.php/Malaysia-Publishes-Guidance-on-18808>.
Taxation and Investment in Malaysia 2018. 2018 [PDF]. Available Through:
<https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-
malaysiaguide-2018.pdf>.
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