Petroleum (Income Tax) Lawyer in Malaysia

Tax Assessment for Petroleum Activities in Malaysia

In Malaysia, when a company has income from “petroleum operations”, as defined under section 2 (1) of the Petroleum (Income Tax) Act 1967 (PITA), it will be assessed for tax under PITA, while for non-petroleum sources, it will be subject to Income Tax Act 1967.

Prior to PITA, Petroleum Company was subjected to income tax under the Income Tax Ordinance 1947, and Income Tax Act 1967. In 1968, PITA came into force.

Scope of PITA

The petroleum operations must be within Malaysia. The term “Malaysia” includes:

1. Malaysia’s territorial waters; and

2. Malaysia’s continental shelf

What does it means by “Territorial Waters”?

Territorial Water means 12 nautical miles from its territorial waters. Therefore, Malaysia can claim 12 nautical miles territorial sea. The law came from the 1958 Geneva Convention on the Territorial Sea and the Contiguous Zone. Malaysia has retified the Article of 1958 Geneva Convention and also under the Emergency (Essential Powers) Ordinance No. 7, (01.08.1969), Malaysia had claimed a 12 natical mile territorial sea.

What does it means by “Continental Shelf”?

Continental Shelf is defined as “the sea-bed and subsoil of submarine areas adjacent to the coast of Malaysia but beyond the limits of the territorial waters of the States, the surface of which lies at a depth no greater than two hundred metres below the surface of the sea, or, where the depth of the superadjacent water admits of the exploitation of the natural resources of the said areas, at any greater depth.

The term “superadjacent” allows for room for exploitation of natural resources. This has allows for nation and/or company with technological advancement to push for drilling on the continental shelf further.

Definition of "petroleum", "petroleum operations" and "crude oil"

“Petroleum operations” means searching for and winning or obtaining of petroleum in Malaysia by or on behalf of any person for his own account or on a joint account with any other person by any drilling, mining, extracting or other like operations or process, in the course of a business carried on by that person engaged in such operations, and all operations incidental thereto and any sale or disposal by or on behalf of that person of petroleum so won or obtained, and includes the transportation within Malaysia by or on behalf of that person of petroleum so won or obtained to any point of sale or delivery or export, but does not include -

1. Any transportation of petroleum outside Malaysia;

2. Any process of refining or liquefying of petroleum;

3. Any dealings with products so refined or liquefied; or

4. Service involving the supply and use of rights, derricks, ocean tankers and barges.”

“Petroleum” has been defined in section 2 as:

“Petroleum” means any mineral oil or relative hydrocarbon and natural gas existing in its natural condition and casing-head petroleum spirit including bituminous shale and other stratified deposits from which oil can be extracted.”

“Crude oil” has been defined in section 2 as:

“Crude oil” means any oil won in Malaysia including oil extraced by destructive distillation from bituminous shales or other stratified deposits either in its natural state or after thr extraction of water, sand or other substance therefrom but before any such oil has been refined or otherwise treated.”

Scope of Charge of PITA

Scope of Charge of PITA are as follow:

1. any resident company or non resident company having petroleum operations within Malaysia is subject to the provisions of the Petroleum (Income Tax) Act 1967;

2. Profits from petroleum (crude oil), natural gas, casinghead petroleum spirit, bituminous shales and other stratified deposits from which oil can be extracted are subject to PITA;

3. The definition of “petroleum operations” includes transportation of crude oil within Malaysia, ie, Company A extracts crude oil, but Company B transports the crude oil to places within Malaysia. Company B is engaged in petroleum operations and is subject to petroleum income tax (PITA). Transportation to outside Malaysia is excluded. If Company B transport crude oil to places within Malaysia and outside Malaysia, only the income generated from the transport within Malaysia is taxable under PITA.

4. Profit from refining or liquefying petroleum are not subject to PITA.

5. Petrol kiosks, companies retailing refined petroleum products and petro-chemical industries are not subjcted to PITA.

6. Companies specializing in service such as supply and use of oil rigs, derricks, ocean tankers and barges are not subject to PITA.

7. A person who drills oil, and transfer to another person its right to bore for and dispose of oil in consideration of royalties, such royalties are income from a business of the person and taxable under PITA (see C.I.R v The Budderpore Oil Co. Ltd 12 TC 467).

Conclusion

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