The Core Problem: Old Tax Rules vs New Economy

The traditional tax system is built on two key principles:

• Tax residency (where the company is located)

• Source of income (where the income is generated)

However, digital business models do not fit neatly into these concepts.

For example:

• A company is incorporated in Country A

• Its servers are located in Country B

• Its customers are in Country C

So, which country has the right to tax the income?

Issue #1: Allocation of Taxing Rights

One of the biggest challenges is determining which country gets to tax the profits.

In the digital economy:

• Value is often created in market jurisdictions (where users are)

• But profits are reported in low-tax jurisdictions

This creates:

• disputes between countries

• unfair tax outcomes

• revenue loss for many governments

Issue #2: BEPS and Profit Shifting

Multinational companies often engage in Base Erosion and Profit Shifting (BEPS) strategies.

Common practices include:

• locating intellectual property in tax havens

• shifting profits to low-tax jurisdictions

As a result:

• profits are not taxed where economic activity actually occurs

• developing countries are disproportionately affected

Issue #3: The “Nexus” Problem

Traditionally, a company must have a physical presence in a country to be taxed there.

But in the digital economy:

• businesses can generate significant revenue

• without any physical presence

This challenges the concept of nexus—the connection required for taxation.

There is now a clear need to redefine nexus based on:

• user participation

• digital presence

• economic activity

Global Response: The OECD Two-Pillar Solution

To address these challenges, Organisation for Economic Co-operation and Development introduced a global framework:

Pillar One: Reallocation of Profits

• Allows countries to tax a portion of profits

• even without physical presence

• focuses on market jurisdictions

👉 Objective: Improve fairness in profit allocation

Pillar Two: Global Minimum Tax

• Introduces a minimum corporate tax rate (around 15%)

• reduces incentives for profit shifting

👉 Objective: Limit tax avoidance

The Rise of Unilateral Digital Taxes (DST)

While waiting for global consensus, many countries have introduced Digital Services Taxes (DST).

However, this has led to:

• inconsistent tax rules

• double taxation risks

• increased international disputes

This highlights the limitation of unilateral actions in solving a global issue.

Implementation Challenges

Despite strong policy proposals, implementation remains difficult.

Key challenges include:

• differences in national interests

• legal and regulatory variations

• concerns over tax sovereignty

• political and economic priorities

In practice, achieving global agreement is complex and time-consuming.

Why This Matters for Businesses

Although this discussion often focuses on multinational corporations, the impact extends to:

• digital entrepreneurs

• e-commerce businesses

• cross-border service providers

In the future:

• tax compliance requirements will become stricter

• international tax rules will become more complex

Taxtivo Insight

The digital economy has fundamentally changed how value is created.

However, the tax system is still catching up.

Until there is:

• global consensus

• consistent implementation

there will continue to be:

• tax gaps

• planning opportunities

• regulatory uncertainty

Conclusion

The current international tax framework is no longer sufficient for the digital economy.

Key challenges include:

• allocation of taxing rights

• outdated nexus rules

• widespread profit shifting

The OECD’s Two-Pillar Solution represents a major step forward.

However, its success depends on one critical factor:
👉 global cooperation

Without it, fragmentation and tax disputes will continue to shape the future of international taxation.

This article is developed based on academic insights derived from the subject Contemporary Issues in InternationTaxation.

References

• Ponomareva, K. (2022). Tax challenges arising from the digitalisation of the economy

• Organisation for Economic Co-operation and Development (2021). Two-Pillar Solution

2. Big Difference: Rule-Maker vs Rule-Taker

This is the most important concept.

UK = Rule-Maker

• Influences global tax policies

• Active in OECD / G20

• Shapes international tax rules

Malaysia = Rule-Taker

• Adopts global standards

• Focuses on protecting local revenue

• Adjusts based on domestic capacity

👉 Reality:
Developed countries create rules
Developing countries adapt them

3. Tax Approach: Source vs Residence

Malaysia

• Focus on source-based taxation
  👉 Tax income generated in Malaysia

UK

• Focus on residence-based taxation
  👉 Tax global income of residents

👉 This affects:

• tax treaties

• cross-border structuring

• multinational tax planning

4. Transfer Pricing (Key for SMEs & MNCs)

Both follow OECD standards, but:

Malaysia:

• Has Transfer Pricing Guidelines

• Enforcement still developing

• Limited comparable data

UK:

• Strong enforcement

• Advanced data systems

• Better expertise in global structures

👉 Same rules, different execution.

5. CbCR (Country-by-Country Reporting)

Both countries require multinational reporting.

But:

• Malaysia → used mainly for risk assessment

• UK → used for deep audit & enforcement

👉 UK extracts more value from the data.

6. Compliance & Audit Approach

Both:

• Self-assessment system

• Risk-based audits

Malaysia:

• Audit + education approach

• Moving towards digitalisation

UK:

• Advanced analytics

• Behavioural tracking

• Real-time risk monitoring

👉 UK = proactive
👉 Malaysia = still evolving

7. Anti-Avoidance Power

UK:

• Uses GAAR (General Anti-Avoidance Rule)
  👉 Strong, flexible, widely applied

Malaysia:

• Uses Section 140 ITA 1967
  👉 Similar concept, but depends on enforcement strength

👉 Law alone is not enough—execution matters.

8. Dispute Resolution (Very Important for MNCs)

Both use:

• MAP (Mutual Agreement Procedure)

• APA (Advance Pricing Arrangement)

Key difference:

• UK → structured, predictable

• Malaysia → limited (no binding arbitration in many treaties)

👉 Less certainty = higher tax risk

9. Global Tax (BEPS & Pillar 2)

Both countries participate in:
👉 Organisation for Economic Co-operation and Development initiatives

UK:

• Early adopter

• Active contributor

Malaysia:

• Adopting gradually

• Implementing minimum tax (Pillar 2)

👉 Malaysia catching up, but still behind in execution capacity

10. Key Challenges for Malaysia

• Limited digital infrastructure

• Lower enforcement capacity

• High implementation cost (BEPS 2.0)

• Less influence in global policymaking

Taxtivo Insight (IMPORTANT SECTION)

If you want to understand international tax:

👉 It’s not just about law
👉 It’s about capacity + system strength

Because:

• same rules ≠ same results

• strong system = strong enforcement

• weak system = loopholes

What This Means for Businesses

For Malaysian businesses:

• cross-border tax risk is increasing

• compliance requirements will get stricter

• documentation (TP, CbCR) becoming critical

👉 Especially for:

• Sdn Bhd with international transactions

• digital businesses

• companies dealing with related parties

This article is developed based on academic insights derived from the subject Contemporary Issues in InternationTaxation.

References

Organisation for Economic Co-operation and Development (2022). OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.

HM Revenue and Customs. (n.d.). HMRC Governance and Structure.

Inland Revenue Board of Malaysia. (2024). Guidelines on the Implementation of Global Minimum Tax in Malaysia.

What is ETR and BTD?

Before going deeper, it’s important to understand the basics.

Effective Tax Rate (ETR)

ETR measures how much tax a company actually pays relative to its profit.

ETR = Tax Expense / Profit Before Tax

A lower ETR may indicate:

• tax incentives

• efficient tax planning

• or lower taxable income

Book-Tax Differences (BTD)

BTD shows the difference between accounting profit and taxable profit.

BTD = [ Tax Expense−(0.24×Profit Before Tax)] / 0.24

• Negative BTD → taxable income is lower than accounting profit

• Positive BTD → taxable income is higher than accounting profit

What the Data Shows

Based on the analysis of 10 plantation companies in Malaysia, three clear patterns emerge.

1. Tax-Efficient Companies (Low ETR + Negative BTD)

Some companies consistently show:

• ETR below 24%

• Negative BTD

Examples include:

• Hap Seng Plantations

• Far East Holdings

• Kim Loong Resources

What does this mean?

These companies are likely benefiting from:

• capital allowances

• reinvestment incentives

• tax-exempt income

In simple terms —
they are paying less tax legally through structured tax planning.

2. Stable Companies (ETR ≈ 24% + Balanced BTD)

Another group shows:

• ETR close to statutory rate (24%–26%)

• small and stable BTD

Examples include:

• United Plantations

• Ta Ann Holdings

• Sarawak Plantation

• Sarawak Oil Palms

What does this mean?

These companies:

• follow a consistent tax approach

• have minimal tax distortions

• show strong compliance behaviour

This is what we call a “clean tax position” — no aggressive planning, no major surprises.

3. High Tax Burden Companies (High ETR + Positive BTD)

Some companies stand out with:

• ETR above 30%

• large positive BTD

Examples include:

• TH Plantations

• Kumpulan Fima

• TSH Resources

In fact, one company recorded ETR as high as 36.4% in a single year.

What does this mean?

Possible reasons:

• non-deductible expenses

• deferred tax adjustments

• foreign taxation exposure

These companies are effectively:
👉 paying more tax than expected

4. Tax Behaviour is Not Static

One important finding:

👉 Tax position changes over time

For example:

• Some companies moved from negative BTD → positive BTD

• Others improved tax efficiency across years

This shows that:

• tax is dynamic

• influenced by operations, incentives, and timing differences

Key Takeaways for Business Owners

Even though this study focuses on large plantation companies, the lessons apply to SMEs as well.

1. Tax is a Strategy, Not Just Compliance

Your tax outcome depends on how you structure your business.

2. Incentives Matter

Many companies reduce tax legally through:

• capital allowances

• reinvestment incentives

3. Accounting Profit ≠ Taxable Income

What you report in financial statements is not always what you are taxed on.

4. High Profit Doesn’t Always Mean High Tax

And low tax doesn’t always mean non-compliance.

Conclusion

The plantation industry shows that even within the same sector, companies can have very different tax outcomes.

Some are:

• highly tax efficient

• some are stable

• others face higher tax burdens

This proves one thing:

👉 Tax is not just about rates — it’s about decisions.

Understanding ETR and BTD helps business owners see beyond the numbers and make better financial and tax planning decisions.

This article is developed based on academic insights derived from the subject Tax Accounting & Auditing For Companies.

References

This article is based on analysis of annual reports from selected plantation companies listed on Bursa Malaysia (2022–2024), including:

• Hap Seng Plantations Holdings Berhad

• Far East Holdings Berhad

• TSH Resources Berhad

• Kim Loong Resources Berhad

• TH Plantations Berhad

• Kumpulan Fima Berhad

• United Plantations Berhad

• Ta Ann Holdings Berhad

• Sarawak Plantation Berhad

• Sarawak Oil Palms Berhad

Issue

The key issue in this case is:

Whether the compensation received constitutes taxable income, or merely a capital receipt, and whether it falls within the scope of charge.

State of Law

The legal principles relevant to this case are:

• Only income is taxable under the scope of charge

• A distinction must be made between:

  • Income receipt (taxable)

  • Capital receipt (generally not taxable)

In determining this, courts will examine:

• The nature of the payment

• The purpose of the compensation

• Whether the payment replaces:

  • Loss of profits (income nature), or

  • Loss of a capital asset or structure (capital nature)

The key test:
Does the payment substitute trading income, or does it compensate for the loss of an income-producing structure?

Application in Dickinson v Abel (45 TC 353)

In this case:

• The taxpayer received compensation following a disruption or termination affecting business arrangements

• The tax authority argued that:

  • The compensation should be treated as taxable income

However, the court analysed:

• The real reason for the payment

• The underlying structure of the business affected

The court found that:

• The compensation was not a substitute for trading profits

• Instead, it related to the loss or impairment of a capital structure

This means:

The payment was not earned through normal business operations, but arose from a structural change affecting the business itself

Conclusion

The court held that:

• The compensation received was capital in nature

• Therefore, it does not fall within the scope of charge as taxable income

Key Takeaways

• Not all receipts are taxable — classification matters

• The distinction between capital vs income is critical

• Courts will focus on:

  • The substance of the transaction

  • The purpose of the payment

• Compensation is:

  • Taxable → if it replaces lost profits

  • Not taxable → if it compensates loss of business structure

Practical Insight for Business Owners

This principle is highly relevant in real-world situations such as:

• Contract termination compensation

• Loss of distributorship or agency rights

• Settlement payments

• Business restructuring

Misclassification may lead to:

• Overpayment of tax

• Or under-reporting (audit exposure)

References

• Dickinson v Abel 45 TC 353

• Income Tax Act 1967 (Malaysia), Section 3

• Inland Revenue Board of Malaysia (LHDN). (2024). Guidelines on Tax Treatment in Relation to Income Received from Abroad

• British Insulated & Helsby Cables Ltd v Atherton [1926] AC 205

• Van den Berghs Ltd v Clark [1935] AC 431

How Indirect Tax Systems Are Evaluated

The study adopts a quantitative and economic modelling approach, using:

• Household Expenditure Survey (HES) data

• Elasticity analysis (consumer response to price changes)

• Econometric models (AIDS & LES)

• Simulation comparison with the UK tax system

The objective is to assess:

• Efficiency of the tax system

• Distribution of tax burden across income groups

• Potential areas for tax reform

Key Issues in Indirect Taxation

1. Inefficiency Due to Complex Structures

Indirect tax systems with multiple rates and categories often create unnecessary complexity.

This leads to:

• Higher administrative costs

• Increased compliance burden for businesses

• Economic distortions in consumer behaviour

A simpler structure, such as a uniform tax rate, is generally more efficient and easier to manage.

2. Regressive Impact on Lower-Income Groups

Indirect taxes are typically considered regressive.

This means:

• Lower-income individuals spend a larger portion of their income on consumption

• As a result, they bear a relatively higher tax burden

Unlike direct taxes, indirect taxes do not consider an individual’s ability to pay, raising concerns about fairness.

3. Limited Role in Income Redistribution

Indirect taxation is not an effective tool for redistributing income.

Because:

• Tax is applied based on consumption, not income level

• Differences in consumption patterns are not sufficient to target specific groups effectively

👉 Direct taxes and government transfers are more suitable for achieving equity.

4. Dependence on Elasticity Assumptions

Tax policy design often relies on elasticity estimates.

These estimates attempt to predict how consumers respond to price changes. However:

• Elasticity is difficult to measure accurately

• Results can vary depending on assumptions and models

This creates uncertainty in policy outcomes and may affect the reliability of tax design decisions.

5. Administrative Complexity and Compliance Issues

A complex tax system creates challenges for both taxpayers and authorities.

Common issues include:

• Difficulty in understanding tax rules

• Increased risk of non-compliance

• Higher enforcement and administrative costs

In some cases, the cost of managing the system may outweigh its benefits.

Insights from the UK Tax System

The study includes a simulation comparing the Greek tax system with that of the United Kingdom.

Findings suggest that the UK system is:

• Simpler

• More efficient

• Relatively more equitable

However, it is important to note that tax systems cannot be directly replicated across countries due to differences in:

• Economic structure

• Administrative capacity

• Taxpayer behaviour

Policy Implications and Reform Recommendations

Based on the findings, several key reforms are suggested:

1. Simplify the Tax Structure

Reduce the number of tax rates and categories to improve efficiency and clarity.

2. Consider a More Uniform Tax Rate

A single-rate system can minimise distortions and enhance transparency.

3. Shift Focus Towards Direct Taxation

Direct taxes are more aligned with the principle of ability to pay and are more effective for redistribution.

4. Improve Data and Classification

Better data collection and classification of goods can support more accurate and responsive tax policies.

5. Strengthen Government Spending Mechanisms

Ensuring that tax revenue is effectively redistributed is essential for achieving overall economic welfare.

What This Means for Businesses

For business owners, indirect tax is not just about tax rates.

It directly affects:

• Pricing strategies

• Cost structures

• Compliance requirements

• Audit risk exposure

📌 Practical implications:

• Complex tax structures increase accounting and reporting burden

• Misclassification of goods or services may lead to tax audit issues

• Policy changes can impact long-term business planning

Understanding the structure behind the tax system is crucial for making informed business decisions.

Strengths of the Study

• Comprehensive analysis covering efficiency, equity, and administration

• Use of real household data (HES)

• Strong theoretical and econometric foundation

• Practical insights through simulation with the UK system

Limitations of the Study

• Based on relatively older data, which may not reflect modern challenges such as digitalisation

• Heavy reliance on elasticity assumptions and econometric models

• May not fully capture real-world behavioural and administrative complexities

• Limited discussion on how tax revenue is redistributed into public welfare

👉 These limitations suggest that the findings should be applied with caution in modern contexts.

Conclusion

Indirect taxation plays a crucial role in government revenue generation. However, its effectiveness is limited by structural issues related to efficiency, fairness, and complexity.

A well-designed tax system should:

• Maintain a simple and transparent structure

• Balance between indirect and direct taxation

• Ensure that tax revenue contributes meaningfully to public welfare

While indirect tax remains an important component of the tax system, it must be carefully structured to avoid unintended economic and social consequences.

This article is developed based on academic insights derived from the subject Contemporary Issues in InternationTaxation.

Reference

Kaplanoglou, G., & Newbery, D. M. (2003). Indirect taxation in Greece: Evaluation and possible reform. International Tax and Public Finance.