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Tan How Teck; Simon Poh, The New Singapore-Malaysia Tax
Treaty, 33 Int'l Tax J. 31 (2007)

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 July-August 2007

The New Singapore-Malaysia

Tax Treaty
By Tan How Teck and Simon Poh

Introduction
Singapore and Malaysia are neighboring countries
and members of the Association of South East Asian
Nations (ASEAN).' Formerly British colonies, Ma-
laysia became independent in 1963 and Singapore
in 1965.
Singapore first signed a tax treaty with Malaysia
on August 16, 1966. On December 26, 1968, the
two countries concluded a tax treaty which en-
tered into force on the same day. The 1968 treaty
took into account, among other things, Malaysia's
switch to the worldwide basis of taxation from
year of assessment (YA) 1968.2 Under the 1968
treaty, read with the 1973 supplementary treaty
which took retrospective effect, the provisions of
the 1966 treaty applied forYA 1966 to 1968 only,
and those of the 1968 treaty itself took effect from
YA 1969. The 1968 treaty will be replaced by the
new treaty, which was signed on October 5, 2004.
Tan How Teck teaches taxation at The new treaty entered into force on February 13,
Nanyang Business School, Nanyang 2006, and takes effect, in the case of Singapore,
Technological University, Singapore. for income tax chargeable from YA 2008.1
The new treaty reflects developments in both
countries during the intervening period and seeks
to enhance the scope of tax exemption and reduc-
tion. By adopting a structure and language closer
to that of the OECD Model Tax Convention4 the
new treaty also overcomes some shortcomings of
Simon Poh is a tax practitioner with
more than 20 years of Singapore and the 1968 treaty. Although Singapore and Malaysia
regional tax experience, and he teaches are not OECD countries, it is submitted that they
at the National University of Singapore. endorse the OECD commentaries where the text of

INTERNATIONAL TAXJoURNAL 02007 T. How Teck and S. Poh

The New Singapore-Malaysia Tax Treaty

the new treaty is based on the OECD Model; this and exploiting the natural resources, whether
viewpoint also accords with the principle of good living or non-living.
faith in treaty obligations.'
This commentary discusses some key changes in Provided that nothing contained in the above
the new treaty. The perspective taken is mainly that of definition shall be construed as conferring rec-
Singapore, but changes to some important Malaysian ognition or acceptance by one contracting state
tax laws are also examined where they underlie the of the outstanding maritime and territorial claims
changes to or insertions of substantive provisions in made by the other contracting state, nor shall be
the new treaty. taken as pre-judging the determination of such
claims8 (emphasis added).
Commentary
First, the term "Singapore" in Singapore's Interpre-
"Personal Scope" Article tation Act (Cap. 1) means, in that Act and in every
The insertion of a "personal scope" article is in line written law, unless there issomething in the subject or
with the OECD Model. It clarifies that a person who is context inconsistent with such construction or unless
resident in neither Singapore nor Malaysia would not it is otherwise expressly provided, "the Republic of
be entitled to the treaty benefits. A Singapore branch Singapore and shall be deemed to include the Island
of a third-country resident company would therefore of Singapore and all islands and places which on 2nd
6
not fall within the scope of the treaty. June 1959 were administered as part of Singapore and
"Taxes Covered" Article all territorial waters adjacent thereto." The treaty term
"Singapore" prima facietherefore has awider meaning
The article covers, in the case of Singapore, the than that of the domestic term. But the two definitions
income tax. are not incompatible, as the wider geographical scope
The 1968 treaty covers, in the case of Malaysia, the envisaged by the treaty definition can be ascribed to
income tax, the tin profits tax and the development "Singapore" only upon designation as provided for. In
tax. The latter two taxes have since been abolished any case, it isconsidered that Singapore cannot apply
in Malaysia,' and the new treaty covers the income the new treaty to impose a tax on income derived by
tax and the petroleum income tax. Under Malaysia's a Malaysian enterprise on the ground that the income
Petroleum (Income Tax) Act, 1967, the petroleum constitutes business profit attributable to a permanent
income tax is imposed on income from petroleum establishment in "Singapore" under the treaty, where
operations, on a basis of taxation similar to that of that income isforeign sourced because the activities
income taxation in Malaysia. giving rise to it take place outside "Singapore" in the
domestic sense.°To do so would effectively be to ap-
"General Definitions" Article ply the treaty so as to result in a tax where none arises
The terms "Singapore," "person" and "international under domestic law.11
traffic" in the "General definitions" article are singled Second, the wording is probably intended to
out for comment here. achieve symmetry with that of the treaty definition of
1. "Singapore."ln the new treaty, unless the context "Malaysia," itself similar to the Malaysian domestic
otherwise requires, "Singapore" means: definition2 which took effect from YA 1988. Malaysia
will therefore preserve its taxing right over the income
the territories of the Republic of Singapore, derived by Singapore residents from working within
the territorial waters of Singapore and the sea- Malaysia's exclusive economic zone, which refers to
bed and subsoil of the territorial waters, and the offshore area extending up to 200 nautical miles
when used in a geographical sense includes from the Malaysian coast. 3 The geographical sense
any area extending beyond the limits of the of "Malaysia" will also cover the Federal Territory of
territorial waters of Singapore and the sea-bed Labuan, Malaysia's international offshore financial
and subsoil of any such area, which has been centre, even though the tax treatment of income in
or may hereafter be designated under the laws respect of an offshore business activity carried on by
of Singapore and in accordance with interna- an offshore company in Labuan is governed sepa-
tional law as an area over which Singapore has rately by the Labuan Offshore Business Activity Tax
sovereign rights for the purposes of exploring Act 1990 and not Malaysia's Income Tax Act. 4

32
 July-August 2007

2. "Person." In the new treaty, unless the context therefore qualify as a "resident of Singapore" so as
otherwise requires, the term "person" includes an to be entitled to treaty benefits.
individual, a company and any other body of persons 3. "International Traffic." Reflecting the two cou n-
15
that is treated as a person for tax purposes. Under tries' proximity, Article 3(1)(i) of the treaty defines
Article 4(1)(b), for purposes of the treaty, the term "international traffic" to mean any transport by a ship,
"resident of a contracting state" means in the case aircraft or road vehicle operated by an enterprise of
of Singapore, a person who is resident in Singapore a contracting state, except when the ship, aircraft
for the purposes of Singapore tax, and includes that or road vehicle is operated solely between places
state, any political subdivision, local authority or a in the other contracting state. It is not clear whether
statutory body thereof. transport by road vehicle excludes rail transport. The
The following discusses whether limited liability reference to "road vehicle," which does not exist in
partnerships (LLPs) and registered business trusts the OECD Model, appears in some other treaty provi-
(RBTs), two new types of business entities in Singa- sions and is discussed below.
pore, may qualify as a "resident of Singapore" so as
to be eligible for treaty benefits in accordance with Omission of
the "personal scope" article. The discussion is not "Limitation of Relief" Article
specific to the new treaty but has been included Under the "limitation of relief" article in the 1968
for completeness. treaty, exemption or reduction of tax will be granted
a. Limited Liability Part- on income by the state of
nership. A limited liability The new t reflects source only to the extent
partnership (LLP) in Singa- re aty rthat the income has been
pore is a body corporate developments in both countries remitted to or received
which is formed by regis- during the inter ye ning period and in the other contracting
tration under Singapore's seeks to enhanc"e the scope of tax state (i.e., the state of resi-
dence). As Singapore and
Limited Liability Partner-
ships Act (No. 5 of 2005). exemption in( d reduction. Malaysia adopt the remit-
20
Although a new tax regime tance basis of taxation,
has been introduced for LLPs, there was no change to the article prevents a taxpayer from enjoying unin-
the definition of a "body of persons" (which is defined tended double taxation relief or avoiding tax in both
6
as excluding a partnership).1 For tax purposes, except countries by the simple expedient of nonremittance.
as otherwise provided, all references to "partnership" The "limitation of relief" article isnot reflected in the
include an LLP; an LLP is therefore not a "body of OECD Model, which envisages that the domestic
persons" unless the context requires.'7 Although a laws of contracting states impose a "comprehen-
separate legal entity, an LLP is treated as a partnership sive liability to tax"21 on a person who is resident
(i.e., fiscally transparent) and not a separate entity for (in other words, the worldwide or residence basis
tax purposes-tax is imposed not at the partnership of taxation).
level but on each partner in respect of the LLP income The omission of the article in the new treaty reflects
9
or losses allocated to him or her." An LLP cannot a growing trend among Singapore treaties and may
therefore be a "person" or a "resident of a contracting be explained by recent tax changes in Singapore.
state" so as to qualify for treaty benefits; but individual With effect from January 1, 2004, foreign in-
partners who form the LLP can. come received in Singapore by all individuals is
b. Registered Business Trust. Unlike other trusts, exempt from tax. 22 Moreover, from June 1, 2003, a
the registered business trust (RBT), which is a trust Singapore resident company is exempt under sec-
registered under the Business Trusts Act 2004 (Cap. tion 13(8), SITA, on three types of foreign income
31A), is treated for tax purposes as a company un- received in Singapore: (1) the trading profit of a
der Singapore's one-tier system with effect from the foreign branch of the Singapore resident company;
first year it commences operation as such a trust.'9 (2) foreign dividends; and (3) foreign income from
The reason is that the economic purpose, structure professional, consultancy and other services. Three
and operation of a RBT are similar to those of a conditions must be satisfied for the exemption to
company. An RBT is therefore a "person" under apply.23 First, the income must be subject to tax (i.e.,
domestic tax law and for treaty purposes, and may tax must have been paid or payable)21 in the foreign

INTERNATIONAL TAXJoURNAL 33
The New Singapore-Malaysia Tax Treaty

jurisdiction from which it is received. Second, the time in Malaysia during the year. Moreover, a
highest corporate tax rate in the jurisdiction from company that carries on two or more businesses
which the income is received (the so-called "head- is resident in Malaysia if any one or more of its
line tax rate") must be at least 15 percent.25 Lastly, businesses is managed and controlled at any time
the Comptroller of IncomeTax must be satisfied that during the year in Malaysia. On the other hand,
the exemption would be beneficial to the Singapore under Singapore's tax law, a company is "resident
resident company. The 2006 Budget has proposed to in Singapore" if the control and management of
extend the scope of exemption for the three foreign its business is exercised in Singapore. 8 There has
26
incomes under some circumstances. been no official ruling as to whether in Singa-
From Singapore's point of view, the extensive pore, the exercise of management and control
scope of exemption for resident individuals and is indivisible such that, in any year, the exercise
resident companies has diminished the "subject can only be wholly in Singapore or not at all, and
to tax" objective of the "limitation of relief" article what the position is for a company that carries
and probably explained the article's omission from on more than one business.
the new treaty. In broad terms, a Singapore resident m The definition of "resident in Singapore" implies
recipient of interest and royalty income from Ma- that a company must first carry on an existing
laysia will therefore be able to enjoy the reduced business (as opposed to preparatory or pre-com-
treaty withholding tax rates of 10 percent and eight mencement activities) before its residence status
percent respectively even though the income is not can be ascertained. 9 Based on local case law,
received in Singapore (see further under "Interest" a "business" connotes habitual and systematic
and "Royalty" articles below). operations, a continuity or repetition of acts or
similar operations, and a business could com-
"Resident" Article mence only after it is in a position to generate
Both Singapore and Malaysia adopt a "management income, but the business need not have turned in
and control" test (and only this test) for corporate a profit for it to commence. 0 By contrast, Malay-
tax residence; tax residence is not determined by sian tax law envisages that any company, whether
reason of "domicile, residence, place of manage- it is carrying on any business' or none at all1,2
ment, or any other criterion of a similar nature" per may qualify to be resident in Malaysia.
the OECD Model. Accordingly, Article 4(1) of the s A company is regarded as "resident in Singapore"
new treaty defines the term "resident of acontracting if the management and control of its business is
state" as simply meaning, for purposes of the treaty, exercised in Singapore in the year preceding the
a person who is resident in a contracting state for its year of assessment concerned. From YA 2001,
tax purposes. The term "management and control" Malaysia has moved to the current year basis
is not defined in the legislations of both countries of assessment for companies and a company's
and both countries appear to adopt the U.K. concept residence is determined by facts existing in the
of "central management and control" in practice. current basis year, which is the year ended De-
Based on case principles, central management and cember 31 regardless of the accounting date. A
control is identified with the governing body vested company whose business is managed and con-
with the superior directing authority. The governing trolled in Singapore during 2005 but in Malaysia
body is generally the Board of Directors but where during 2006 will therefore be dual resident for
the Board "stood aside" from their directorial duties YA 2006. The tiebreaker in Article 4(3) is the
such that another body (e.g., the parent company place of effective management, but the Protocol,
who is a dominant shareholder) exercises de facto paragraph 1, provides circularly that this is the
control and management of the company, the par- place where the control and management of the
ent will have been vested with the superior directing business is exercised. 33 The practical effect is that
authority instead.27 a dual resident company will invariably have to
The exact manner of applying the "management and resort to the mutual agreement procedure.
control" test by each country may however differ: The 1968 treaty provides that the source of a divi-
* Malaysian tax law provides that a company that dend, where it has been declared by a dual resident
carries on a business is resident in Malaysia if company, will be deemed to be in the country in
the management and control is exercised at any which the meeting at which the dividend is declared

34
 July-August 2007

was held.14 The new treaty removes this provision but hend all items of income. For example, because
retains the 1968 provision that a Singapore resident management fees fell within the exclusion clause
company may declare itself to be a resident of Malaysia of the definition, they did not qualify as "income
for purposes of paying aMalaysian dividend (and vice or profits." The absence of a PE in Malaysia would
versa).35 Consequently, dual corporate residence does not therefore relieve the fees from any taxation
not appear to pose any problem of adual-sourced divi- in Malaysia as the state of source. The absence
dend (see further under "Dividends" Article). Neither of the "income not expressly mentioned" article
does it give rise to the possibility of double deductions meant that such fees were subject to the full force
under Singapore's loss transfer model of group relief, of Malaysia's domestic law. The problem was also
which requires as a condition that companies be in- compounded by the 1968 Article XII(4) (repro-
corporated (but not necessarily resident) in Singapore duced below):
to qualify as members of the group.
Notwithstanding anything contained in this
"Permanent Establishment" Article Agreement, while services are provided in one
The new treaty raises the threshold of a perma- of the contracting states by an enterprise of the
nent establishment (PE) by inserting a six-month other contracting state, then the profits derived
period for a building site, from providing those
construction, installa- services by such an en-
tion or assembly project, Under the new treaty, however, terprise may be taxed
and also for supervisory a Singapore resident company is in the first-mentioned
activities in connection contracting state un-
with such a site or proj- entitled to double taxation relief less the enterprise is
ect. 36 In addition, the in Singapore on the Malaysian substantially supported
new treaty clarifies that dividends it received in Singapore by the public funds
an agent whose activities of the Government of
are devoted wholly or regardless of the percentage the other contracting
almost wholly on behalf of voting shares it owns in the state in connection
of an enterprise would Malaysian resident company. with the provision of
not, by that fact alone, be such services. (Empha-
regarded as a dependent sis added.)
agent; he must also have transacted with the enter-
prise under non-arm's-length conditions. 3" In the case of SGSS Pte Ltd,38 the Malaysian High
Court's reference to Article XII(4) of the 1968 treaty
"Business Profits" Article suggested that payments for the provision of ser-
The new treaty omits the 1968 Article 11(1 )(1) defini- vices would have been taxable in Malaysia if (and
tion of the term "income or profits of a Singapore to the extent) the taxpayer's services were provided
enterprise," which excludes rents or royalties in in Malaysia, notwithstanding the absence of a PE
respect of literary or artistic copyrights, motion there. If source state taxation of such income does
picture films or tapes for television or broadcast- not depend on the existence of a PE, Article XII(4)
ing or of mines, oil wells, quarries or other places is a marked departure from treaty norms.
of extraction of natural resources or of timber or The new treaty removes the problematic Article
forest produce, or income in the form of dividends, XII(4) and fills up the gap in coverage by removing
interest, rents, royalties or fees or other remu- the old-style definition of "income or profits" and
neration derived from the management, control or inserting the "income not expressly mentioned"
supervision of the trade, business or other activity article. The new treaty also clarifies the interac-
or another enterprise or concern or remuneration tion between the "business profits" article and
for labor or personal services or income derived the other articles by inserting the OECD-style
from the operations of ships or aircraft. Article 7(7) so that where profits include items
Because the 1968 treaty defines the above term of income which are dealt with separately in the
as shown and omits the "Income Not Expressly other articles, those other articles prevail over the
Mentioned" article, that treaty does not compre- "business profits" article.

INTERNATIONAL TAxJouRNAL 35
The New Singapore-Malaysia Tax Treaty

"Shipping, Air The new treaty therefore provides that dividends paid
and Road Transport" Article by a company resident in one contracting state to a
person who is the beneficial owner of the dividends
Shipping and air transport income now qualifies for and a resident of the other contracting state are not cur-
100-percent exemption in the state of source; the 1968 rently subject to any tax on dividends in addition to the
treaty provides for only 50-percent exemption.3 9 tax chargeable on company profits. The treaty however
Under the new treaty, profits from the operation of contemplates the possibility that either country might
ships or aircraft in international traffic are taxable only switch to a classical corporate tax system in the future
in the state of residence, a departure from the OECD by setting a maximum tax rate of five percent or 10
criterion of "place of effective management." For percent for gross dividends, depending on whether the
this purpose, such profits include incidental profits beneficial owner isa company which holds directly at
derived from the rental on a bare boat basis of ships least 25 percent of the capital of the company paying
or aircraft used in international traffic, and incidental the dividends. Article 10(2) of the treaty also clarifies
profits from the use or rental of containers. that the five-percent or 10-percent tax rates do not
Profits derived from the operation of road vehicles affect the taxation of the company in respect of the
in international traffic for the carriage of passengers profits out of which the dividends are paid.
are similarly taxable only in the state of residence The Protocol, paragraph 3, to the new treaty
(emphasis added). 41 Such profits would therefore retains the 1968 Article VII(3) which enables a
include profits from the rendering of transportation company resident of one contracting state to de-
services via coaches, tourist buses and taxis plying clare itself to be a resident of the other contracting
between the two countries. But profits from freight state, but only for purposes of the "dividends"
trucking may be taxable in the state of source if and article. This provision enables shareholders who
only to the extent they are attributable to a PE there. A are resident in either country to benefit from tax
PE may arise if there isa fixed place of business (e.g., credits (attached to the franked dividends) from the
depot or terminal) through which the trucking enter- other country. To illustrate, a Malaysian resident
prise wholly or partly carried on its business. Under company may have a branch in Singapore earning
Article IV(4) of the 1968 treaty, no profits are to be profits that have been assessed to Singapore tax.
attributed to a PE by reason of the mere transportation The company is required to maintain a franking
of goods or merchandise on behalf of the enterprise. account in Singapore for purposes of accumulating
The removal from the new treaty of the reference to the Singapore tax assessed, which will be imputed
transportation suggests that such transportation in to the shareholders when the company pays a Sin-
itself can no longer give rise to a PE. gapore franked dividend by declaring itself to be
a Singapore resident for that purpose. The imputa-
"Associated Enterprises" Article tion credit can be set off against the shareholder's
The new treaty adopts the OECD article on associated personal tax liability in Singapore, and where
enterprises. 4' The notable aspect that was absent in the the franking credit exceeds the tax liability, the
1968 treaty isthat a contracting state must now make difference is fully refundable to the shareholder.
a corresponding adjustment under the circumstances The rate at which Singapore tax is deducted from
set out in Article 9(2). the dividend may be adjusted by reference to the
rate of tax appropriate to the year of assessment
"Dividends" Article immediately following that in which the dividend
Up to December 31, 2002, Singapore adopted a full was paid. Such an adjustment may be necessary
imputation system. Singapore moved to the one-tier where, for example, the government announced a
corporate tax system on January 1, 2003, and has in- change to the corporate tax rate after the company
troduced transitional rules for the five-year period up to has paid a dividend and deducted tax from it at the
December 31, 2007, during which the two systems exist. previous tax rate. The adjustment ensures that the
From January 1, 2008, the one-tier system will apply to tax will be deemed deducted and the imputation
all Singapore resident companies; they will be subject to tax credit will be allowed at the new tax rate.
tax at the prevailing corporate tax rate and shareholders Reflecting Singapore's complete move to the
are exempt from tax on the dividends. Malaysia's full one-tier system from January 1, 2008, the Protocol,
imputation system issimilar to that in Singapore. 42 paragraph 4, to the new treaty states that, from that

36
 July-August 2007

date, a Malaysia resident company may no longer and for that purpose, the term "government" means the
declare itself to be a resident of Singapore for pur- MAS, GIC and the statutory bodies48 (emphasis added).
poses of paying a Singapore franked dividend43; the Reading the treaty as a whole, Government interest
converse also applies. income will remain exempt beyond December 31,
2007, but the exemption will apply only to "govern-
"Interest" Article ment" in the latter narrower sense after that date.
The 1968 treaty does not provide for any reduction of
tax for interest income, but the new treaty provides for "Royalties" Article
a maximum tax rate of 10 percent. This contrasts with The 1968 treaty does not provide for any tax reduc-
the 15-percent domestic tax rate applicable to a non-4 tion for royalty income, but the new treaty sets a
resident person in both Singapore' and Malaysia. 1 maximum tax rate of eight percent for royalty. This
The new treaty source rule for interest (Article 11 (8)) contrasts with the domestic tax rate of 10 percent ap-
is based on the OECD source rule, and is consistent plicable to a nonresident person in both countries.49
with the domestic source The new treaty source
46
rules of both countries. rule for royalty (Article
The interest to which a The new trea ty has removed 12(5)) is consistent with
resident of Singapore is significant sho rtcomings of the the domestic source rules
beneficially entitled is, 1968 treaty. It is considered that the of both countries.50
however, exempt from "personal scope" Under Article 12(3) of
tax if the loan or other in- insertions of the the new treaty, "royalties,"
debtedness in respect of article, the coot linating provisions as used in the royalties
which the interest is paid that correspond to OECD Article article, means payments
is an "approved loan" as 7(7), and the "in of any kind received as
defined in section 2(1), -ome not expressly a consideration for the
MITA. The definition in- mentioned" article have, in use of, or the right to use,
cludes any loan or credit particular, impr oved the structure any copyright of literary,
(approved by the Minister of the n artistic or scientific work
of Finance) made by a ew treaty. (including cinematograph
Singapore resident person films, and films or tapes
to the Malaysian Government, State Government, for radio or television broadcasting), any patent,
local authority or statutory body, where the loan or trademark, design or model, plan, secret formula or
credit agreement was executed in Malaysia or, with process, or for the use of, or the right to use, industrial,
the Minister's prior approval, outside Malaysia. commercial or scientific equipment, or for informa-
tion (know-how) concerning industrial, commercial
Exemption of Government Income or scientific experience.
Under the new treaty, any income derived by The "royalties" article under the new treaty ex-
the Government of one contracting state up to cludes sums from alienation of right or property and
December 31, 2007, 4 is exempt from tax in the accordingly removes the 1968 provision stipulating
other contracting state. For this purpose, the term that such sums are derived in the contracting state in
"Government" is defined as including, in the case which the right or property isused.? Thus, any income
of Singapore, the Monetary Authority of Singapore from the disposal of such rights or property will now
(MAS); the Government of Singapore Investment fall under the "business profits" article, there being
Corporation Pte Ltd (GIC); any statutory authority no "capital gains" article.
exempt from tax in Singapore; and such institutions, 1. Payments for the Use of Industrial Equipment.
as may be agreed from time to time between the Being payments for the use of equipment, equipment
two contracting states. The Protocol, paragraph 6, leasing payments are clearly "royalties" as defined.
to the new treaty also preserves refunds of franking The following discusses the Singapore tax treatment
tax credits to the Government despite the exemption of leasing income derived by a Malaysian enterprise
of dividend income derived by it. from a Singapore company, and vice versa.
The exemption of Government interest income is Based on the Malaysian case of Walter Wright,52 it
also separately provided for under the "interest" article, is domestic tax law that determines the nature of an

INTERNATIONAL TAx JOURNAL 37

The New Singapore-Malaysia Tax Treaty

income and charges it to tax. Only after these factors Notwithstanding the provisions of section 4 and
are established can the treaty be resorted to in order subject to this Act, the income of a person not
to determine whether relief is available. resident in Malaysia for the basis year for a year
a. Singapore's Tax Treatment. Under Singapore's of assessment in respect of-
domestic tax law, the withholding tax rate for income
from the use of movable property is 15 percent (final) i. amounts paid in consideration of services
if the income is not derived by the nonresident per- rendered by the person or his employee in
son from a trade or business carried on or exercised connection with the use of property or rights be-
in Singapore and the income is not effectively con- longing to, or the installation or operation of any
nected with any PE (taking the domestic meaning plant, machinery or other apparatus purchased
under section 2(1), SITA) in Singapore of the person. from, such person;
Otherwise, the income will be subjectto withholding
tax at 20 percent (non-final) unless the withholding ii. amounts paid in consideration of technical
requirement has been waived." advice, assistance or services rendered in connec-
Where income isderived by a Malaysian resident tion with technical management or administration
company from leasing out cranes to a Singapore of any scientific, industrial or commercial under-
enterprise, section 12(7)(d), SITA, will deem the taking, venture, project or scheme; or
source to be in Singapore. If the leasing income
constitutes a trade or business source under sec- iii. rent or other payments made under any
tion 10(1)(a), SITA, the domestic tax rate of 20 agreement or arrangement for the use of any
percent (non-final) will apply. Applying the treaty moveable property,
next, the domestic characterization of the income
as business profit will be adopted. Assuming that which is derived from Malaysia is chargeable to
a PE (taking the treaty meaning) does not exist in tax under this Act.55
Singapore, the payments will escape Singapore
tax. The treaty cannot be applied, notwithstanding The leasing payments would fall under section
Article 7(7), to treat such leasing income (being 4A(iii) today. It is understood that Malaysia has in the
payments for the use of, or the right to use, indus- past applied the "income not expressly mentioned"
trial equipment) as royalties and expose the income article for any section 4A payment because section
to tax in Singapore; to do so isto treat the character 4A prevails over the general charging provisions of
of the treaty as that of a charging or taxing statute section 4 in Malaysia. Malaysia as the source state
instead of an agreement for relief against taxation. was thus able to tax the section 4A payment, without
Assuming that a PE exists in Singapore, however, treaty relief, where the "income not expressly men-
the leasing income attributable to that PE will be tioned" article is basedon that article in the United
subject to tax in Singapore. Nations Model Convention 6 or is absent (as is the
On the other hand, if applying Singapore's domestic case with the 1968 treaty).
law the leasing income constitutes a passive source
under section 10(1)(f), SITA, a final withholding tax "Technical Fees" Article
of 15 percent will apply. Applying the treaty next, The OECD Model does not have a separate article for
the domestic characterization as rental income will technical fees, the tax treatment of which is therefore
be adopted. Because Article 7(7) assigns precedence governed by the "business profits" article.
to the "royalties" article over the "business profit" The "technical fees" article is likely to have been
article, such payments will be assessed as "royal- inserted in the new treaty at Malaysia's request and it
ties" subject to eight percent under the treaty.54 The allows Malaysia to now tax (up to five percent) tech-
treaty characterization as royalties prevails over the nical fees even if the taxpayer has no PE in Malaysia
domestic one as rental income. to which the fees are attributable." 7The converse ap-
b. Malaysia's Tax Treatment. In the opposite situ- plies for Singapore but, as technical fees are subject
ation where a Singapore resident company derives to a non-final tax of 20 percent in Singapore (i.e.,
income from leasing cranes to a Malaysian enterprise tax liability is 20 percent of the amount of fees net
today, the special charging provisions of section 4A of deductible items claimed),58 the tax liability will
in Malaysia will be relevant: be capped at the treaty rate of five percent of gross

38
 July-August 2007

amount. The term "technical fees" as used in the If the gains on sale of the real property in the above
article means payments of any kind to any person, scenario are not of an income nature, Singapore does
other than to an employee of the person making not tax the gains. In the converse situation where a
the payments, in consideration for any services of Singapore resident company sells real property in
a technical, managerial or consultancy nature (not Malaysia for gains that are not subject to income tax
employment income by nature). in Malaysia, the real property gains tax 6' (RPGT) in
Technical fees are deemed to arise in a contract- Malaysia will apply to the gains unmitigated by the
ing state when the payer is a resident of that state treaty as the RPGT is not among the taxes covered.
and the services are performed in that state. Where,
however, the payer, whether he is a resident of a Articles Relating to Income
contracting state or not, has in a contracting state of Individuals
a PE or a fixed base in connection with which the This part comments on the articles on "independent
obligation to pay the technical fees was incurred, personal services," "dependent personal services,"
and such technical fees are borne by such PE or fixed and "teachers and researchers." The other articles
base, then such technical fees deemed to arise in that relate mainly to income of individuals, namely
the contracting state in which the PE or fixed base "director's fees," "artistes and sportsmen," "pensions,"
is situated if the services are performed in that state "government service," "students and trainees," and
(emphasis added). The italicized words represent "diplomatic and consular officers" adopt the wording
an additional condition to the treaty source rules of the respective OECD articles with minor variations
applicable to the "interest" and "royalties" articles and have therefore been excluded from the scope of
under the new treaty, and reflect Malaysia's domestic this paper.
law as recently amended., 9 1. "Independent Personal Services" Article. The
The "special relationship" anti-avoidance provi- inclusion of this article, together with references to
sions in the OECD Model have also been included in "fixed base" elsewhere in the new treaty, suggests that
the "interest," "royalties" and "technical fees" articles both countries have not accepted the current OECD
in the new treaty. view of equating a "fixed base" with a PE.
Under the article, income derived by a Singa-
Omission of "Capital Gains" Article pore resident individual from rendering services
The Commentaries to the "capital gains" article in in Malaysia in his independent capacity would be
the OECD Model state that "it is left to the domestic subject to tax in Malaysia only if he has a fixed
law of the taxing state to decide whether a tax on base regularly available to him in Malaysia for the
capital gains or on ordinary income must be levied" purposes of performing those services and, in such
6
and that the article does not prejudge that question. 1 a case, only so much of his income as is attributable
The omission of the "capital gains" article from the to that fixed base is subject to tax in Malaysia. The
1968 treaty and the new treaty cannot therefore be IRAS has set out its view that, for purposes of grant-
merely explained by the absence of a general capital ing the tax exemption under section 13(8), SITA, on
gains tax in both countries. The full reasons for the foreign-sourced service income, the income will be
omission are not known, but several implications regarded as foreign sourced only if the services were
follow from this. performed through a "fixed place of operation" in a
In the case of Singapore, where gains of a trading foreign jurisdiction. For this purpose, afixed place of
nature accrue to a Malaysian resident company on operation refers to aplace of management, an office,
the sale of real property in Singapore and there is no or a certain amount of floor space at the disposal of a
PE in Singapore to which such gains are attributable, person carrying on a trade, business or profession of
the improbable result would arise that the gains will rendering services through which he or his employ-
be treaty-protected in Singapore (the state of situs)! It ees perform the activities that produce the profits of
is likely that Singapore will seek to tax the gains on his trade, business or profession in the rendering of
sale as income falling instead under the sweep-up services. 62 In the light of Singapore's continued adop-
source of section 10(1)(g), SITA (and not as a trade tion of the former OECD concept of "fixed base,"
source under section 10(1)(a), SITA) and in accor- therefore, an unresolved issue is how a fixed place
dance with the newly inserted "income not expressly of operation differs from a fixed base. Given that the
mentioned" article (see below). "independent personal services" article takes priority

INTERNATIONAL TAXJOURNAL 39
The New Singapore-Malaysia Tax Treaty

over the "business profits" article by virtue of Article shares of the Singapore resident company paying the
7(7) (see above), it also appears that the "business dividend, then Malaysia will grant double taxation
profits" article would apply only to income derived relief for the Singapore underlying tax payable by
from a trade or business carried on by a person who 4 Malaysia's corporate tax rate
the latter companyMAs
is not an individual. (27 percent) is higher than Singapore's (20 percent)
2. "Dependent Personal Services"Article.The new and Malaysia adopts the ordinary credit method of
treaty replaces the former "1 20-day" condition by a relieving double taxation, 65 the Malaysian resident
"183-day" condition for source state exemption of company will likely suffer incremental Malaysia tax
tax on employment income. on the gross-up amount of the Singapore dividends
Remuneration in respect of an employment exer- received in Malaysia. Where the Malaysian resident
cised aboard a road vehicle operated in international company owns less than 10 percent of the voting
traffic for the carriage of passengers (e.g., a coach shares, by implication, it will be taxed on the net
driver's salary) by a Malaysian resident company pro- amount of Singapore dividends (i.e., net of Singa-
viding transport services is taxable only in Malaysia. pore tax deducted) received in Malaysia without any
If, however, the coach driver is a Singapore resident, double taxation relief.
then Singapore may also tax the salary.63 Under the new treaty, however, a Singapore resi-
3. "Teachers and Researchers" Article. The new dent company is entitled to double taxation relief in
treaty inserts this article, under which a two-year Singapore on the Malaysian dividends it received
period applies to the tax exemption of remunera- in Singapore regardless of the percentage of voting
66
tion for teaching or research in the state of visit. The shares it owns in the Malaysian resident company.
teaching or research must be undertaken in the public The reason why the "10 percent voting shares"
interest and not primarily for the private benefit of condition is not similarly stipulated may be that the
a specific person or persons. The article is absent Singapore resident company can already alternatively
from the OECD Model and its inclusion (in about claim unilateral tax credit in Singapore for the Ma-
half of Singapore's extant tax treaties) is indicative laysian underlying tax regardless of share ownership,
of Singapore's policy. where the dividends do not qualify for exemption in
Singapore. 67 As Singapore's effective tax rate is less
"Income Not Expressly than 27 percent and Singapore also adopts the ordi-
Mentioned" Article nary credit method of relief, the Singapore resident
The insertion of this article (Article 22) in the new company will not suffer any incremental Singapore
treaty ensures that so long as a payment is subject to tax anyway. Like Malaysia, Singapore adopts a per-
income tax in either country, it would fall within the country, per-source basis of allowing relief; foreign
scope of the treaty. The article provides that items of incomes are not segregated into baskets or classes,
income of a resident of a contracting state which are nor is there provision for unutilized reliefs to be car-
not expressly mentioned in the foregoing articles of ried back or carried forward.
the treaty shall be taxable only in that contracting The 1968 treaty does not have any tax-sparing
state. Such income may also be taxed in the other provisions. Thus, where a Malaysian subsidiary that
contracting state if it is derived from sources in that enjoys a Malaysian tax incentive pays a tax-exempt
other state-the state of source therefore preserves dividend to its Singapore parent company, the po-
its right to tax such income. tential tax on the dividends received in Singapore
reduces the attraction of the Malaysian tax incentive
"Elimination of Double to the Singapore parent. It is understood, however,
Taxation" Article that Singapore has, in practice, granted a remission
Previously, from YA1 995 to YA2003, foreign divi- of tax to a Singapore resident company in respect of
dends were exempt in Malaysia if received by a Malaysian pioneer dividends received in Singapore;
Malaysian resident company (other than a com- the tax remission in essence amounts to a unilateral
pany carrying on a business of banking, insurance tax-sparing relief.
or shipping and air transport). This exemption was The new treaty provides for 1 0-year mutual tax
withdrawn from YA2004. sparing, with possibility of extension, for speci-
The new treaty provides that if a Malaysian resi- fied tax incentives found in Singapore's Income
dent company owns 10 percent or more of voting Tax Act and Economic Expansion Incentives Act,

40
 July-August 2007

and in Malaysia's Income Tax Act and Promotion Other Articles

of Investments Act. In the case of Singapore, the The other articles, which are mainly administrative
tax incentives include pioneer enterprise; pioneer or procedural in nature, are indicative of Singapore's
service companies; investment allowance; develop- prudence in tax administration.
ment and expansion incentive; shipping incentives; Thus, although the "mutual agreement procedure"
offshore insurance and reinsurance incentives; and article (Article 25) in the new treaty now sets a time-
exemption of dividends paid out of the profits of frame (of three years) for a taxpayer to present a case
offshore insurance and reinsurance incentives. Any for mutual agreement, it retains the 1968 clause that
incentives that may subsequently be introduced both competent authorities are to resolve the dispute
in Singapore in modification of, or in addition to, on a best-endeavor basis only.
those laws in so far as they are agreed by both The "exchange of information" article provides that
competent authorities to be substantially similar, the scope of information that is exchangeable by the
will also qualify.6 The coverage of tax incentives competent authorities is restricted to information that
in the case of Malaysia is broadly similar.69 is necessary73 for carrying out the treaty provisions or
The tax-sparing reliefs generally mean that no the domestic laws of both countries concerning taxes
further tax will be due on those Malaysian incomes covered by the treaty and that relates only to a person
74
received in Singapore. who is resident of either or both contracting states.
The new treaty also omits the article on "as-
"Non-Discrimination" Article sistance in the collection of taxes," which was
The ambit of non-discrimination under the article, inserted in the OECD Model in 2003. The omis-
from Singapore's perspective, is significantly smaller sion means, among other things, that each country
than that under the OECD article on several counts. is not obliged to use its resources to enforce the
First, the scope of the article is restricted to income collection of tax owing by its residents to the tax
tax.7° Second, the article does not require Singapore authorities of the other country.
to grant Malaysian resident individuals any personal
reliefs or rebates on account of civil status or family Conclusion
responsibilities that Singapore grants to Singapore
resident individuals.71 Third, the article does not The new treaty has removed significant shortcomings of
require Singapore to grant Malaysians who are not the 1968 treaty. It isconsidered that the insertions of the
resident of Singapore those personal reliefs and re- "personal scope" article, the coordinating provisions
ductions available in Singapore only to non-resident that correspond to OECD Article 7(7), and the "income
Singapore citizens. Effectively, the proportionate tax not expressly mentioned" article have, in particular,
reliefs under section 40, SITA, that the 1968 treaty ex- improved the structure of the new treaty. The new treaty
tends to non-resident Malaysians will be withdrawn. has also extended the scope of tax exemption and
A likely reason for the withdrawal is that such reliefs reduction-examples are the full exemption accorded
have become less important owing to the general to income from international transport and government
exemption from tax on foreign income received by income and the lower tax rates provided for interest
any individual in Singapore. Finally, the article does and royalty incomes: the latter two types of income did
not prevent Singapore from granting tax incentives not qualify for tax reduction under the old treaty. Other
designed to promote social or economic develop- aspects of the new treaty such as departures from the
ment in Singapore only to its nationals-Singapore's OECD Model in the wording of some administrative
group relief regime, which is applicable only to provisions are fairly typical of Singapore's treaties con-
Singapore-incorporated companies, would therefore cluded over the last ten years or so. On the other hand,
not be a breach of the article.72 In this respect, it is the changes in the "dividends" article and the omission
considered that an LLP and a RBT would qualify as of the "limitation of relief" article mark an important
"nationals" under Article 3(1 )(h)(ii), being "any legal shift of Singapore's prevailing treaty policy following
person, partnership, association and any other entity changes to the relevant domestic tax laws. This com-
deriving its status as such from the laws in force in mentary suggests, however, that some provisions may
a contracting state." The article would therefore not require further official clarification-an important
be breached if the proposal to extend to LLPs the tax provision isthe tiebreaker rule which contains the term
incentives available to companies is implemented. "effective management" in the "resident" article.

INTERNATIONAL TAX JOURNAL

The New Singapore-Malaysia Tax Treaty

ENDNOTES

1 The other eight member countries of profits tax, was abolished. The development the foreign income is received in Singapore
ASEAN are Indonesia, Brunei, Thailand, tax was initially chargeable at five percent by a resident individual through a partnership
Myanmar, Laos, Cambodia, Vietnam and before it was progressively reduced to two in Singapore: §§13(5) and 13(7A), SITA.
the Philippines. percent forYA1 992 on the income of a person 23 §13(9), SITA.
2 Explanatory Notes on the Agreement for from all his development sources. The devel- 24 §13(10), SITA. From July 30, 2004, the
the Avoidance of Double Taxation - Ma- opment tax was abolished from YA1 993. IRAS treats the "subject to tax" condition as
laysia/Singapore, para. 3, reproduced in A 8 Article 3(0)(b). satisfied where the income is exempt from
Subramaniam, Principles of Double Taxa- 9 §2, Interpretation Act. tax in the foreign jurisdiction from which it
tion (Relief) Agreements (Kuala Lumpur: 10 Only income accruing in or derived from is derived as a result of a tax incentive for
Arjunan Tax Research and Consultancy Singapore or received in Singapore from carrying out substantive activities in that
Sdn Bhd, 1988), at 159. The worldwide outside Singapore is subject to tax in Sin- jurisdiction. IRAS Circular, Tax Exemption for
basis applied to any person ordinarily gapore: §10(1), Singapore's Income Tax Act Foreign-Sourced Dividend, Foreign Branch
resident in Malaysia under the then §3, (hereinafter SITA). Exemptions may apply to Profits and Foreign-Sourced Service Income,
Malaysia's Income Tax Act (hereinafter the income. May 21, 2003, paras. 12 and 14; IRAS
MITA), 1967. Malaysia, however, aban- The concepts of continental shelf and ex- Supplementary Circular, Tax Exemption for
doned the worldwide basis and reverted clusive economic zone are contrasted in I. Foreign-Sourced Dividend, Foreign Branch
to the remittance basis from YA1 974 as it BROWNLIE, PRINCIPLES OFPUBLIC INTERNATIONAL Profits and Foreign-Sourced Service Income,
had met with difficulties in obtaining infor- LAW (5th ed., 1998), at 221. July 30, 2004, para. 7. A taxpayer may use
mation on foreign income and in examin- 12§2(1), MITA. either of two administrative methods or any
ing the accounts of business conducted 13 Malaysia's Exclusive Economic Zone Act other method satisfactory to the Comptrol-
outside Malaysia by ordinarily resident 1984. ler to show that he has met the "subject to
persons. See V. SINGH, MALAYSIAN TAXATION: 14§3B, MITA. An offshore company in Labuan tax" condition for exemption of the foreign
ADMINISTRATIVE AND TECHNICAL ASPECTS (4th that undertakes offshore business can elect dividends. IRAS Supplementary Circular, Tax
ed., 1999), at 95. On the other hand, to pay tax of either 20,000 Malaysian ringgit Exemption for Foreign-Sourced Dividend,
Singapore has adopted the remittance (Malaysian dollars) or three percent of net Foreign Branch Profits and Foreign-Sourced
basis of taxation since the income tax was profit for each year of assessment; it may Service Income, May 31, 2006, paras. 2-4.
introduced from YA1 948. The income tax qualify for an income tax rebate equivalent 25 As for the application of the "headline

legislations of both countries were based to the amount of zakat paid to a Labuan tax rate" condition relating to foreign
on the Model Colonial Territories Income Islamic religious authority, subject to a limit income that is chargeable to tax under a
Tax Ordinance, 1922, which was devised of either amount: §§8A and 11, Labuan special tax legislation independent of the
for British colonies at the time; they there- Offshore Business Activity Tax Act 1990. main legislation, see IRAS Supplemen-
fore retain some common traits reflecting The income of an offshore company from tary Circular, May 31, 2006, id., at paras.
that common heritage, and one of these non-trading activities (such as the holding 5-6. A consequence of that Circular is
traits is the remittance basis of taxation. of securities, shares, immovable property, that income received in Singapore from
Article 28(1)(b). the taking of loans and placing of deposits) Labuan that qualifies for the tax election
In this article, all references are made to is however not subject to any tax. (supra note 14) under the Labuan Offshore
the OECD Tax Convention on Income and Article 3(1)(d). Business Activity Tax Act (being a special
on Capital (2005 condensed version) (Paris: 16§§2(1) and 36A, SITA. tax legislation) will no longer satisfy the
OECD, 2005). The OECD Model is used as a An exception is §24, SITA, which treats "headline tax rate" condition for section
benchmark as the tax treaties of Singapore, a partnership as a body of persons in the 13(8) exemption. The headline tax rate for
although not a member country of the context of related party transfers of assets. Malaysia under Malaysia's IncomeTax Act
OECD, are generally based on the Model 18 §36A, SITA; Inland Revenue Authority of (main legislation) is currently 27 percent.
with some characteristic departures. Singapore (IRAS) e-Tax Guide, Income Tax This rate will be reduced to 26 percent from
H. Tan, Do Singapore's Domestic Tax Laws Treatment of LLPs, July 15, 2004. the YA2008.
Constitute a Tax Treaty Override? 26 INT'L TAX 11§36B, SITA; IRAS e-Tax Guide, Income Tax 26 The proposed exemption will be provided un-
J. 3 (2000), at 50-51; and generally E.van der Treatment of a Trust Registered under the der §13(12) instead of §13(8), SITA. For details,
Bruggen, 'Good Faith' in the Application and Business Trust Act 2004, Dec. 14, 2004, see IRAS Supplementary Circular, May 31,
Interpretation of Double Taxation Conven- paras. 2 and 3. The income of a registered 2006, id.; and IRAS Circular, Tax Exemption
tions, 1 BRITISH TAX REV. (2003), at 25-68. business trust is taxable at the trustee level. Under Section 13(12) for Specified Scenarios
6 In the case of IRC v. Commerzbank AC; IRC The unit-holders will not be subject to tax and REITs, May 31, 2006, paras. 1-5.
on their shares of the trustee's statutory 27 See especially De Beers Consolidated Mines
v. Banco do Brasil, SA 90 BTC 182, the U.K.
High Court held that the London branches income to which they are entitled (whether Ltd v. Howe, 5 T.C. 198; Bullock v. Unit
of banks resident in West Germany and in distributed or not), and no credit will be Construction Co. Ltd, 38 T.C. 712.
Brazil which had received interest from cor- allowed to the unit-holders for the tax paid 28 §2(1), SITA.
by the trustee. 29 See also R .CouzIN, CORPORATE RESIDENCE
AND
porations in the United States were entitled
to the exemption from U.K. tax under the 20 The only exception is that a Malaysia resident INTERNATIONAL TAXATION (2002), at 65.
1945 U.K.-U.S. treaty as it did not have a person carrying on a banking or insurance 30 See especially DEF v. CIT [1961 ], MALAYAN
"personal scope" article. business or an air and shipping transport LAW JOURNAL 55 (CA); and T Ltd v. CIT [2006]
Before YA1 986, the tin profits tax and the undertaking is subject to tax in Malaysia on SGCA 13 (at paras. 15-16).
development tax (together with timber prof- its worldwide income: §54(2), MITA. 31 In Malaysia, "business" is defined as in-
its tax) were chargeable under Malaysia's 21 Paragraph 3 of the Commentary to OECD cluding profession, vocation and trade and
Supplementary Income Tax Act, 1967. From Article 4. every manufacture, adventure or concern
22 Exemption does not apply, however, where in the nature of trade, but excluding em-
YA1 986, the tin profits tax, as well as timber

42
 July-August 2007

ENDNOTES

ployment: §2(1), MITA. reversed, holding that the taxpayer was MITA.
32 A company that does not carry on any busi- an independent contractor providing "in- 47 Tax exemption also applies, up to December
ness is resident in Malaysia for the basis year spection and expediting services" and that 31, 2007, to the income derived by any
for a year of assessment if at any time during the payments were therefore "income or pension or provident fund or society of
that basis year the management and control profits."The High Court (at 3,822) however one contracting state (if approved under its
of its affairs are exercised in Malaysia by added that as the taxpayer had rendered taxation law) from sources within the other
its directors or other controlling authority: the services entirely outside Malaysia, the contracting state: Protocol, para. 6.
§8(1), MITA. services may be brought under Article XII(4) 48 Article 11 (4) and 11 (5).
'3 Owen comments that effective management
49 §§12(7)(a), 12(7)(b), 43(3A) and 45A, SITA;
and the taxpayer could not be liable to tax
is practically the same as central manage- in Malaysia. The doubt regarding Article §§15 and 109, MITA.
ment and control in the U.K.: P.Owen, Can 50 §§12(7)(a) and 12(7)(b), SITA; and §15, MITA.
XlI(4) was previously noted in J. Kadet, The
Effective Management be Distinguished from 51 Article VIII(3) and VIII(7).
Application of the Singapore-Malaysian
Central Management and Control? BRITISH 52 Walter Wright Pte Ltd v. DGIR (1990) 3 MA-
Double Taxation Agreement, INLAND REVENUE
TAX REVIEw (2003), at 296-305. It is debat- DEPARTMENT CONCISE TAX PROGRAM (Singapore: LAYANLAW JOURNAL 186. In that case, which
able, however, that the concept of central Longman, 1984), 181, at 189. pre-dated the introduction of §4A, MITA (see
management and control differs from that 3 Article 8(1); 1968 ArticleVl(1). infra note 56), the taxpayer was incorporated
of management and control, which may 'o Article 8(4). The reference to "road vehicles" and resident in Singapore (i.e., a "Singapore
be exercised in more than one place. See reflects the geography that Singapore enterprise") and it carried on its business of
generally Ernst and Young, Company Tax and West Malaysia are connected by two hiring out cranes and trucks in Singapore. In
Residence-Recent Tax Cases, SINGAPORE Causeways over the Strait of Johor, a narrow the years endingJune 30, 1976 and June 30,
ACCOUNTANT, July-Aug. 1998, at 44; and J. strip of water. Everyday, many workers and 1977, it hired cranes to a Malaysian compa-
Avery Jones, Place of Effective Management visitors commute between Singapore and ny for use in Malaysia. The taxpayer did not
as a Residence lie-Breaker 59 BULLETIN FOR West Malaysia. (Malaysia covers also East have a PE in Malaysia, and argued that the
INT'L FISCAL DOCUMENTATION (2005), at 20-24. Malaysia, which comprises the two states of "business profits" article exempted its hiring
14 1968 Article VII(2).
Sarawak and Sabah; the latter two states lie income from Malaysia tax. The Malaysian
11 1968 Article VII(3) is retained in the Proto- to the north of Kalimantan, which is a part tax authorities contended that the income
col, para. 3, of the new treaty. of Indonesia.) was taxable as royalty in Malaysia both
36 Article 5(4).
Article 9(1) and 9(2). under §4, MITA, and under Article VIII(1)
17Contrast Article 5(6) with OECD Article 5(6). §§44 and 44A, SITA; §108, MITA. of the 1968 treaty. The High Court held that
38SGSS (Pte) Ltd v KPHDN (Special Commis- 4 Under the full imputation system, where although the rental income was referred to
sioners)(1998) MSTC 2,997; (High Court) a Singapore resident company receives in in §4(d) MITA, it nevertheless constituted
(2000) MSTC 3,814. The taxpayer was a Singapore foreign income that qualifies income from a business (i.e., §4(a), MITA) as
company incorporated and resident in for foreign tax credit, the foreign tax credit it was receivable in the course of carrying on
Singapore. It entered into a contract with reduces the company's tax assessed. Such a business of putting the taxpayer's property
a Malaysian company (PCSB) for the provi- a company may thus find itself in a "sec- to profitable use by letting it out-in fact, it
sion of third party inspection and expedit- tion 44 trap" because it could pay only had been found that the taxpayer's business
ing services for a particular project. The a smaller amount of Singapore franked of hiring out cranes and trucks in Malaysia
taxpayer's services could be called upon dividend based on the reduced franking "was not an inconsequential sideshow but
whenever PCSB required certain equipment balances. In 1990, Singapore adopted a was its lifeblood." That being the case, the
and machinery to be inspected for quality flow-through exemption regime under treaty could not then be applied to change
or to be delivered promptly for the project. which a Singapore resident company may the character of the income from "business
The payments were made after October 21, pay out an exempt dividend out of foreign profits" to "royalties" so as to give rise to a
1983, and PCSB treated the amounts paid income that it receives in Singapore and that tax liability.
as amounts received by the taxpayer under qualifies for foreign tax credit: §13E, SITA. §§43(3) and 43(10), SITA. The withholding
§4A(ii), MITA (see further under "Royal- The payment of the exempt dividend is not tax rate of 20 percent is the prevailing cor-
ties" article). PCSB accordingly withheld subject to the franking rules and therefore porate tax rate from YA2005 to YA2007. As
tax from the payments, and the taxpayer avoids the section 44 trap. §13E(11 )(c), SITA, proposed by the 2007 Budget, this rate will
sought a refund of the tax withheld. It pre-empts a Singapore resident company be reduced to 18 percent with effect from
was common ground that the taxpayer from double dipping by paying a Malaysian YA2008.
was a Singapore enterprise, and that it franked dividend in accordance with the 54 Article 12(1), (2)
and (4).
did not carry on business through a PE in 1968 Article VII(3) and an exempt section s §4A, MITA, which took effect from October
Malaysia. The only issue was whether the 13E dividend out of the same income. 21, 1983, was enacted by Malaysia to over-
payments amounted to "income or profits See S. imms, Singapore: Tax Planning for come the decision in DCIR v. Euromedical
of a Singapore enterprise" from Malaysia; Outbound Investments-Bringing Home Industries Ltd. (1 983) 2 MALAYAN LAW JOUR-
if they were, they were not subject to tax the Returns, AsIA-PACIFIC TAX AND INVESTMENT NAL 57. In Euromedical, the taxpayer was
in Malaysia as there was no PE to which RESEARCH CENTRE BULLETIN, Nov.-Dec. 1993, incorporated and resident in the U.K. In
they were attributable. The Special Com- 438, at 447; and P. Knight, The Singapore- 1973, the taxpayer entered into an agree-
missioners held that the payments were Malaysia Treaty, in PRINCIPLESAND PRACTICE ment with a Malaysian company PASB to set
chargeable to tax under §4A, MITA, and, OF SINGAPORE TAXATION, Asia-Pacific Tax and up a company (EISB) in Malaysia (with its
being "project management services", were Investment Research Centre Bulletin (1986), registered office in Penang) for the purpose
not "income or profits of the Singapore at 12-13. of manufacturing catheters. The agreement
enterprise"; the absence of a PE in Malay- §§12(6), 43(3) and 45, SITA. provided, inter alia, for the taxpayer to ap-
sia did not therefore protect the taxpayer " §§15 and 109, MITA. point three directors to the board of EISB
from taxation in Malaysia. The High Court 46 OECD Article 11(5); §12(6), SITA; and §15,
and for these directors and for other employ-

INTERNATIONAL TAx JOuRNAL 43

The New Singapore-Malaysia Tax Treaty

ENDNOTES

ees of the taxpayer to provide managerial, performed in Malaysia will be deemed 68Article 23(2).
69 These include exemption of shipping
planning, training, technical, operational, derived from Malaysia. This amendment
marketing and development services to was reflected as a proviso to §15A and profits; reduced taxation on income
EISB. These management fees fell within the is in line with the Malaysian High Court from inward reinsurance business of an
former definition of "royalties" in §2, MITA, decision in SGSS Pte Ltd (supra note 39). insurer; reduced taxation on income from
so the Malaysian tax authorities assessed tax For the withholding tax provisions, see offshore insurance business; reinvestment
under §4(d), MITA. The fees however fell §109B, MITA. allowance; and investment allowance
outside the U.K.-Malaysia treaty definition 60 Paragraph 4 of the Commentary to OECD for services sector, among others; and
of "royalties." The court held that treaty Article 13. tax incentives relate to manufacturing,
provisions prevailed over the domestic law 61 In Malaysia, the RPGT applies to the charge- agriculture, tourism, research and develop-
in the event of an inconsistency, and so able gain on the disposal of a chargeable ment, technical or vocational training, and
the fees could not be treated as royalties asset (which includes real property and multimedia: Article 23(4).
subject to withholding tax but as income or shares in real property companies). Where 70 Article 24(6). By contrast, OECD Article 24(6)
profits under the "business profits" article. the transaction that gives rise to the gain extends the ambit of nondiscrimination to
As the taxpayer had no PE in Malaysia, it amounts to a trade or business, the gains "taxes of every kind and description."
was not liable to tax in Malaysia. The treaty are subject to the income tax instead. The 11Only Singapore resident individuals qualify,
characterization of the income as business RPGT is generally imposed at graduated for personal reliefs and child rebates: §§39
profits therefore prevailed over the domestic rates that decrease with the holding period and 42A, SITA.
characterization as royalty. of the chargeable asset: Malaysia's Real 72 §37C, SITA.
11 See also M. Krause, Tax Treatment of the Property Gains Tax Act, 1976. See Singh, 71 Contrast this with "foreseeably relevant," the

Provision of Technical Services, Seminar supra note 2, 973. term used in the OECD article.
A, International Taxation of Services, 43rd 62 IRAS Supplementary Circular, dated July 30, 74 Article 26(1); S.Y. Cheong, The Experience

Congress of the International Fiscal Associa- 2004, supra note 25, paras. 10-13. of Singapore, in R. VANN, OECD PROCEED-
tion (Sao Paulo, 1989), 32 at 37, cited in 63 Article 15(3). iNcS, TAX TREATIES: LINKAGES BETWEEN OECD
D. Ward et al., The Other Income Article 64 Article 23(1). MEMBER COUNTRIES AND DYNAMIC NON-MEMBER
65 §132, MITA. (1996), at 187-91. By contrast,
of Income Tax Treaties, 11 BRITISH TAX REV. ECONOMIES
(1990), 352 at 367. 66 Article 23(3). OECD Article 26(1) explicitly provides
57 Article 13(1) and 13(2). 67 §50A, SITA. In Singapore, double taxation that the "exchange of information" article
5§ §§43(3), 43(7) and 43(10), SITA. credits and unilateral taxation credits are is not restricted by Articles 1 ("personal
19§1 5A, MITA, contains the deemed source not mandatory: §50(8), SITA. Where the scope") and 2 ("taxes covered"). In other
rules for the three special classes of in- taxpayer does not want to avail itself of words, the OECD wording envisages the
comes under §4A, MITA. From September such credits, the deduction method will exchange of information that may relate to
21, 2002, however, in respect of incomes apply and it will be taxed on the after-tax a third-country person as well as to "taxes
under §§4A(i) and 4A(ii), MITA, only the amounts of the foreign income received of every kind and description" other than
amounts attributable to services which are in Singapore. the income tax, in the case of Singapore.

Reg. §301.7701-3(a).
Conclusion Kentuckiana's failure to pay the employment
taxes was apparently the result of the first of
While tax planning has marched several dramatic events that surrounded the
on, it was only a matter of time case. The funds that would otherwise have
been used to pay the employment taxes were
test. A challenger would argue that until someone challenged the embezzled by the general manager. William
the regulations were not a reason- validity of the check-the-box regu- J. Rowe, Right Without Reason? The Check-
able or permissible interpretation lations. Tax planners can generally the-Box Corporate or Partnership Election
Regulations Correctly Held Valid: Littriello
of a statute the meaning of which breathe a sigh of relief as to the v. United States, 59Tsx LAW. 913 2006) (text
had been so long and consistently result in Littriello. But future chal- accompanying n. 18) (citing Proof Brief of
established under Morrissey and lenges could arise and, if they do, Appellant, at 5, Littriello III, supra note 3).
6 Littriello I, supra note 2, at 2582.
the Kintner regulations. The IRS they might be based on issues left
Chevron, U.S.A., Inc. v. Natural Res. Def.
would presumably respond that unaddressed in that case. Council, Inc., SCt, 467 US 837, 104 SCt
the check-the-box regulations 2778 (1984).
' Littriello I, supra note 2, at 2583, quoting
were not such a dramatic depar-
ENDNOTES Chevron, supra, 467 US,at 842-43.
ture from established precedent, Section references are to the Internal Reve-
since they replaced a regime under 1 Reg. §§301.7701-1 through -3. nue Code of 1986, as amended, (the "Code")
FA. Littriello, DC-Ky., 2005-1 USTC 50,385 and the Treasury Regulations promulgated
the Kintner regulations that was ef- (hereinafter "Littriello "). thereunder.
fectively elective with an explicitly FA. Littriello, CA-6, 2007-1 USTC 50,426 Chevron, supra note 7, 467 US, at 843.
elective regime. (hereinafter "Littriello I1l"). Littriello I, supra note 2, at 2584.

44
 July-August 2007

See Kintner, CA-9, 54-2 USTC 9626, 216

F2d 418.
DCL Closing
F.A. Littriello, DC-Ky., 96 AFTR2d 5764 Agreements and
(2005) (hereinafter "Littriello If").
.4 Gregg D. Polsky, Can Treasury Overrule New Domestic
ENDNOTES
the Supreme Court? 84 B.U. L. REV. 185 Use Elections
(2004). Law/Federal Regulations and Naval Opera-
15 M.G. Neal, SCt, 516 US 284, 116 SCt 763
tions" (slide presentation), slide 21, at http://
The final regulations eliminate the
(1996); Lechmere, Inc. v. NLRB, SCt, 502 navsci.berkeley.edu/ns 12A/LESSONS/Y- requirement for DCL closing agree-
US 527, 112 SCt 841 (1992); and Maislin
Indus., U.S., Inc. v. Primary Steel, Inc., SCt,
Intemational%2OLaw%201.ppt. ments. Instead, certain filings are
21 Reg. §1.863-8(d)(1)(i).
497 US 116, 110 SCt 2759 (1990). 22 Reg. §1.863-8(d)(1 )(ii). required in order to avoid DCL re-
16 Neal, supra.
23 Id. capture, including a "new domestic
17 Polsky, supra note 14, at 201.
24 Reg. §1.863-8(d)(3). use election" by the acquiring
18 Id., at 202 (citing Maislin Indus., U.S., Inc. v.
25 Reg. §1.863-9(h)(3)(i).
Primary Steel, Inc., supra note 15 and quot- 26 Reg. §1.863-9(h)(3)(iii). domestic corporation." Similar to
ing Mead Corp., SCt, 533 US 218, 247, 121 2 Reg. §1.863-9(h)(3)(iv). the proposed regulations, the final
SCt 2164 (2001) (Scalia, J., dissenting)). 28 Reg. §1.863-9(h)(3)(ii). This separate treat- regulations provide rules governing
19 Morrissey,SCt, 36-1 USTC 344, 296 US 344,
ment of foreign-originated transmissions the computation and assessment of
56 SCt 289 (1935). is a substantial relaxation of the rules set
20 Id., at 359-61.
forth in both the First and Second Proposed
DCL recapture pursuant to a new
1 Prior Reg. §301.7701-2(a)(3).
22 Notice of Proposed Rulemaking, 70 FR
Regulations. domestic use election. 82
28 Reg. §1.863-9(h)(3)(v).
60,475 (Oct. 18, 2005).
The new domestic use elec-
3o Reg. §1.863-8(b)(1).
23 Proposed Reg. §301.7701-2(e)(3), 70 FR 31 Reg. §1.863-8(b)(2). tion rules supersede the prior
60,475 (Oct. 18, 2005). 32 Reg. §1.863-8(b)(3). regulations' closing agreement
Littriello III, supra note 3.
'4

25 Littriello III, supra note 3. The appeal

31 Reg. §1.863-8(b)(5). procedures with respect to eligible
11 Reg. §1.863-9(b)(1), (2)(ii).
involved consolidated cases in which transactions that occur after April
11 Reg. §1.863-9(b)(2)(i), (iii), (iv).
Littriello's liability for employment taxes 11 Reg. §1.863-9(d). 18, 2007.?1 Taxpayers can elect
owed by at least three disregarded enti- 11 Reg. §1 .863-9(c), (f). In a substantial relax- the new domestic use election
ties, including Kentuckiana, was consid- ation of both the First and Second Proposed
ered. procedures in lieu of the prior
Regulations, the Final Regulations permit the
26 National Cable & Telecommunications taxpayer to use any reasonable method to closing agreement rules for eligible
Association v. Brand X Internet Services, identify the beginning and end points of a transactions occurring after March
545 US 967, 125 SCt 2688 (2005). The
case, decided June 27, 2005, had been
transmission. Reg. §1.863-9(h)(3). 19 and before April 19, 2007.84
38 Further elucidation of these issues can be
published before the District Court's opin- found in David R. Tillinghast, Final Regula-
ion upon the motion for reconsideration
of Littriello, but is not mentioned in the
tions on Space and Ocean and Communica- New Reasonable
tions Income: Some Relief, Some Anomalies,
opinion. Littriello II, supra note 13.
27 Id., at 979.
and Some Double Taxation Issues Unre- Cause Procedure
28 Id., at 982.
solved, TAX MGMT. INT'L J. , Mar. 9, 2007.
The complexities of the DCL
1_ Id., at 983. rules, together with the timeliness
30 Id., at 982. It should be noted that while
Professor Polsky's article argued that prior requirement applicable to DCL
Supreme Court decisions should take pre- filings, make the procedures and
cedence over later agency interpretations, standards applicable to late DCL
National Cable reflects deference to an No Possibility filings extremely important.
agency interpretation that conflicts with
a lower-court decision. National Cable of Foreign Use Under the prior regulations,
gives no indication whether, under Chev- The final regulations retain the taxpayers requested permission to
ron, Supreme Court precedents should be
given more deference than those of lower
DCL exception for NOLs that make late DCL filings under Reg.
courts. cannot be "used" in any circum- §301.9100-3 ("§9100 relief").
31 Littriello III, supra note 3. stance under foreign law and With the exception of a late re-
32 Littriello III, supra note 3.
31 Swallows Holding Ltd., 126 TC 96, Dec.
thus do not require a domestic quest for a DCL closing agreement
56,417 (2006). use election. 79 However, under with respect to a tax year subject
11 Reg. §1.882-4(a)(3)(i). the final regulations, this excep- to the prior regulations,8 s the final
as Supra note 33, at 144. tion requires a timely filing that regulations remove all DCL filings
36 National Muffler Dealers'Association, SCt,
79-1 USTC 9264, 440 US 472, 99 SCt
includes a computation of the from the scope of §9100 relief and
1304. DCL amount and an analysis of adopt a "reasonable cause excep-
32 Supra note 33, at 144-45. foreign law describing why the tion" in its place." This change is
38 Supra note 33, at 144.
exception applies.8° effective as of March 19, 2007.8

INTERNATIONAL TAXJOURNAL 45
 Consolidated Loss Closing Agreements--A (ii) (prior regulations).
Subsequent to issuing the pro- Small Step in the Right Direction, J.TAx'N 14 Reg. §1.1 503(d)-3(a)(2)(i).
posed regulations, the IRS detailed GLOBAL TRANS., Winter 2003, at 65, regarding 41 Reg. §1.1 503(d)-3(a)(2)(ii).
46 Id.
the DCL reasonable cause proce- proposed amendments to the prior regulations
47 Reg. §1.1503(d)-3(c)(2); Reg. §1.1503-2(c)
(amendments finalized in 2003).
dures in Notice 2006-13. 5BThe final " Reg. §1.1503(d)-8(a). (15)(ii) (prior regulations).
regulations are generally consistent Reg. §1.1503(d)-1 (b)(2)(i); Reg. §1.1503-2(c) 48 Id.

41 Reg. §1.1503(d)-3(c)(3) and (d).

with the Notice. Pursuant to these (2) (prior regulations).
50 Reg. §1.1503(d)-3(c)(4)(i).
6 Reg. §1.1503(d)-i(b)(1); Proposed Reg.
procedures, a late DCL filing re- 51 Reg. §1.1 503(d)-3(c)(4)(iii).
§1.1503(d)-1 (b)(1).
quires a showing that the failure to I Reg. §1.1503(d)-i (b)(1). 52 Reg. §1.1503(d)-3(c)(5).

timely file was due to reasonable I The foreign branch separate unit definition 13 Reg. §1.1 503(d)-3(c)(6).

14 Reg. §1.1503(d)-3(c)(7).
cause and not willful neglect .8The cross-references to Reg. §1.367(a)-6T(g)(1).
Reg. §1.1503(d)-i (b)(4)(i)(A). 11 Proposed Reg. §1.1503(d)-1(b)(14)(v);
demonstration ismade by attaching I Reg. §1.1503(d)-i(b)(4)(i)(B). compare Reg. §1.1503-2(c)(15)(iv) (prior
the omitted filing to an amended 10 Reg. §1.1503(d)-1 (b)(4)(iii). regulations).
56 Reg. §1.1 503(d)-3(e)(1).
tax return and including a written Reg. §1.1503(d)-1 (b)(4)(iv).
17 Reg. §1.1503(d)-7(c), Example 18(iii).
See LTR 200716010 (Jan. 8, 2007); LTR
statement explaining the reasons 200709005 (Nov. 21, 2006). 58 Reg. §1.1503(d)-3(e)(1).
for the failure to comply.9° In addi- 1 Reg. §1.1503-2(c)(3)(ii). 19 Reg. §1.15 03(d)-3 (e)(2).
14 Reg. §1.1503(d)-1(b)(4)(ii). 60 Reg. §1.1503(d)-7(c), Example 18(i) and
tion, the taxpayer must provide a (ii).
15 Reg. §1.1503(d)-5(c)(4)(ii).
copy of this filing and statement to " See, e.g., Reg. §1.1 503(d)-5(g)(3) (basis ad- 61 Reg. §1.1503(d)-3(e)(2)(i).

any agent examining the taxpayer's justment); Reg. §1.1 503(d)-6(b)(2) (bilateral 62 Reg. §1.1503(d)-3(e)(2)(ii).

63 Reg. §1.1503(d)-6(b).
return or, if not under exam, to the agreement exception to the mirror rule).
17 Reg. §1.1503-2(g)(2)(ii); Proposed Reg. 64 SeeAnnouncement 2006-86, IRB 2006-45,
appropriate IRS official with juris-
§1.1503(d)-4(d)(2). 842.
diction of the relevant return.9 1 19 Reg. §1.1503(d)-1 (b)(16)(i). 65 Reg. §1.1503-2(d)(3); Proposed Reg.
The IRS must notify a taxpayer 20 Reg. §1.1503(d)-1(b)(16)(ii). §1.1503(d)-3(d).
21 Reg. §1.1503(d)-5(c)(1 )(iii). 66 Reg. §1.1503(d) -5(g).
within 120 days if itdetermines that 21 See Reg. §1.1503(d)-1 (b)(12)(iv) (including 67 Reg. §1.1 503(d)-8(b)(5).
the failure to comply was not due an interest in a transparent entity in the defi- 68 Reg. §1.1 503(d)-4(c)(3).
to reasonable cause or if it needs nition of a "domestic affiliate," applicable 69 See Reg. §1.1503(d)-6(d)(1).
70 See Reg. §1.1503(d)-l(b)(20), defining the
additional time to make a deter- for purposes of the domestic use limitation
of Reg. §1.1503(d)-4(b)). "certification period."
mination.9 2 This 120-day period 22 Reg. §1.1503(d)-5(c), discussed below. 71 Reg. §1.1503(d)-8(b), as amended 72 FR

begins to run on the date ataxpayer 23 Reg. §§1.1503(d)-1 (b)(2)(ii) and -6(a)(3). 20,424 (Apr. 25, 2007).
is notified that the submission has 24 T.D. 9315, 72 FR, at 12,904. 72 Reg. §1.1503(d)-8(a).
25 See Reg. §1.1503-2(d)(1)(ii) (DCL attrib- 71 Reg. §1.1503(d)-6(d)(1).
been received and assigned for 14 Reg. §1.1503(d)-6(e)(1 )(iv).
utable to a separate unit determined by
review. 3 A taxpayer is deemed to computing the taxable income of the sepa- " Reg. §1.1 503(d)-6(g).
have satisfied the reasonable cause rate unit as if it were a separate domestic 76 Reg. §1.1503(d)-6(e)(2).
77 Reg. §1.1503(d)-6(h)(2).
standard if the taxpayer isnot again corporation and a DRC "using only those
items of income, expense, deduction, and 78 Reg. §1.1503(d)-6(h)(4)(ii).
contacted by the IRS within the loss that are otherwise attributable to such 71 Reg. §1.1503(d)-6(c).
120-day period4 separate unit"). 80 Id.; compare Reg. §1.1503-2(c)(5)(ii)(A)
26 Reg. §1.1503(d)-5(c)(2)(i). (prior regulations).
27 Reg. §1.1503 (d)-5(c)(2)(ii). 81 Reg. §1.1 503(d)-6(f)(2).
28 Reg. §1.1503(d)-5(c)(2)(iii). 82 Reg. §1.1503(d)-6(h)(3); Proposed Reg.
ENDNOTES
29 Reg. §1.1503(d)-5(c)(3)(i). §1.1503(d)-4(h)(3).
1 T.D. 9315, 72 FR 12,902. 30 See Proposed Reg. §1.987-2(b). 83 Reg. §1.1503 (d)-8(b)(4).
2 REG-102144-04, 70 FR 29,868. See Philip A. 31 72 FR, at 12,909. 84 Id.
McCarty, Martin J.Collins and Michael A. Di- 32 Reg. §1.1 503(d)-5(c)(4)(i)(A). 85 Reg. §1.1503(d)-8(b)(3)(ii).
Fronzo, Dual Consolidated Loss Regulations- 31 Reg. §1.1503(d)-5(c)(3)(i). 86 Reg. §1.1503(d)-8(b)(3)(i).

The Over-Under Bet and Selected Other 34 Id. 87 While no specific effective date is provided for
Issues, J.TAX'N GLOBALTRANS., Fall 2005, at 55, 11 Reg. §1.1503(d)-5(c)(4)(v). the reasonable cause rule, the final regulations'
for a discussion of the proposed regulations. 36 Reg. §1.1503(d)-5(c)(1)(ii). general effective date is March 19, 2007.
Reg. §1.1503-2. See Michael Danilack and 17 Reg. §1.1 503(d)-5(c)(4)(i). 88 IRB 2006-8, 496.
Irwin Halpern, It's ime to Rethink the Dual 30 Reg. §1.1503(d)-5(c)(4)(iii). 89 Reg. §1.1503(d)-i (c)(1).
Consolidated Loss Rules, J. TAX'N GLOBAL 31 Reg. §1.1 503(d)-5(c)(4)(iv). 90 Reg. §1.1503(d)-1 (c)(2).
TRANS., Spring 2002, at 53, for a discussion of 40 Proposed Reg. §1.1503(d)-1 (b)(14)(i). 91 Id.
the prior regulations as well as the legislative 41 Reg. §1.1 503(d)-3(a)(1). 92 Reg. §1.1503(d)-I (c)(1).

background and development of Code Sec. 42 Id.; Reg. §1.1 503-2(c)(1 5)(iii) (prior regula- 93 Id.
1503(d). See also Irwin Halpern and John Mer- tions). 94 Id.
rick, Proposed Regulations Addressing Dual 43 Reg. §1.1 503(d)-3(b); Reg. §1.1 503-2(c)(1 5)

46