Thursday 28 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on November 22, 2021 - November 28, 2021

AS announced in Budget 2022, the proposal to remove tax exemption on income derived from foreign sources (withdrawal of foreign- sourced income exemption, or FSIE) and received in Malaysia by Malaysian tax residents under Paragraph 28, Schedule 6, of the Income Tax Act 1967 will come into effect on Jan 1, 2022.

Under a Special Remittance Programme announced by the Inland Revenue Board, a tax rate of 3% will be imposed on foreign-sourced income brought in by a tax resident from Jan 1 to June 30 next year, and all income will be accepted in good faith without any review or investigation conducted by the authority. Any income brought in from July 1, 2022, would be subject to the prevailing tax rate.

For clarity, an individual who is in Malaysia for a period of 182 days or more in a calendar year is generally categorised as a tax resident, whereas a company is defined as a tax resident in Malaysia if the management and control of its business is in the country.

Here are some scenarios involving foreign-sourced income. The Edge asks tax experts to weigh in on these examples.

 

Scenario 1:

A Malaysian company that is a tax resident earns dividend income from its subsidiary in Singapore and remits that income to Malaysia, or a Malaysian individual who is a tax resident brings back dividend income earned from shares held in Singapore.

Subject to Malaysian tax with effect from Jan 1, 2022: Yes

Tricor Services (Malaysia) Sdn Bhd non-executive chairman Dr Veerinderjeet Singh: In Singapore, similar to Malaysia, the dividends paid are subject to the single-tier system and therefore no tax is imposed on the dividends credited to shareholders.

With the proposed provision, the company will be subject to tax in Malaysia once it brings in that dividend income into the country, and it looks like it will not receive any tax credit on the dividend as the dividend has not suffered any tax in Singapore. Therefore, for companies, a tax rate of 24% is expected to be imposed on the dividend income brought in (assuming that it is brought in after the Special Remittance Programme period is over).

For corporates, as these dividends are paid out from the retained earnings of the Singaporean subsidiary, a corporate tax has already been paid in Singapore. So, the argument here is why would the Malaysian corporate need to pay tax again here, as corporate tax has already been paid by its subsidiary in Singapore.

However, if you are a Malaysian company with a subsidiary in Indonesia, a withholding tax is imposed on dividends paid out. So, when the Malaysian company remits that dividend income to Malaysia, it will be taxed here and a credit for the Indonesian withholding tax suffered will be claimed against the Malaysian tax imposed on the dividend income, and only the differential is paid.

Another aspect that needs to be considered is double taxation agreements, which may impact the taxability of the income brought in.

As for Malaysian individuals, they would be taxed on dividend income brought in, but the rates will follow the existing personal tax rates applicable to individuals. So, foreign dividend income will be added to all other income and the relevant personal tax rate will be applied.

As for non-residents that bring in dividend income, they will not be taxed on such foreign income as non-residents are exempted from the proposed provision.

 

Scenario 2:

A Malaysian company that is a tax resident earns interest income from bonds or fixed deposits held overseas and remits that income to Malaysia, or a Malaysian individual who is a tax resident earns interest income from bonds or fixed deposits held overseas and remits that income to Malaysia.

Subject to Malaysian tax with effect from Jan 1, 2022: Yes

Veerinderjeet: Assuming that the interest income earned is subject to a withholding tax overseas, and now with the proposed provision, once the interest income is brought here, it will also be taxed. However, the taxpayer should be able to claim a credit for the tax suffered in the foreign country. But all documentation pertaining to that interest income needs to be kept. And this is a problem because prior to this proposed provision coming into force, no one would strictly maintain such documentation on interest income as it was not required before. As for the withholding tax imposed overseas that is normally automatically deducted, in most cases, you may not get a receipt as evidence of the deduction of tax paid overseas. So now with this proposed provision, taxpayers would need to exercise more diligence in obtaining these documents.

As for Malaysian individuals, they would also be taxed on the interest income brought in, but the rates will follow the existing personal tax rates. So, foreign interest income will be added to all other income and the relevant personal tax rates will apply.

Baker Tilly Malaysia managing partner and Asia-Pacific leader for tax services Anand Chelliah: Generally, such interest income received by individuals from placement in a fixed deposit in Malaysia is not taxable as a concession. However, similar foreign-sourced interest income would be brought to tax under the proposed amendments. In the Budget 2022 appendices, it was mentioned that the proposal to impose tax on Malaysian residents on foreign-sourced income received in Malaysia is to provide equitable tax treatment with the income accrued in Malaysia or derived from Malaysia. There is a perceived inconsistency on this equitable tax treatment in respect of the above.

 

Scenario 3:

A Malaysian tax resident living in Johor Baru and working in Singapore who remits his employment income earned in Singapore to Malaysia.

Subject to Malaysian tax with effect from Jan 1, 2022: Yes

Veerinderjeet: In this case, the person will pay tax on employment income in Singapore. And because this person is staying in Malaysia, he will be a tax resident here as he will bring in the income earned in Singapore to Malaysia. Currently, he does not pay tax on his employment income from Singapore in Malaysia as he has paid tax in Singapore. But under the proposed provision, such income will be taxed by the authorities here when he brings the income back.

So now, the person would need to prove that tax was suffered in Singapore to be eligible to claim a tax credit against the Malaysian tax imposed, and that will involve more paperwork. And there is also the possibility that not all of his employment income will be brought into Malaysia — some of it might still be kept in Singapore, so Malaysia will only impose income tax on the portion of the income that was brought in. The tax credit would be only for that portion of the income brought into Malaysia.

Baker Tilly Malaysia director of tax services (technical) Murugan Anbanantham: For employment income that is earned in Malaysia, an individual pays tax on the income received and may have built up savings for the future. Such savings on which tax had already been paid previously will not be subject to future tax when withdrawals are made from such savings in Malaysia.

However, an employee who works overseas and has saved his or her employment income in foreign banks may now be worried if such savings withdrawn from foreign banks and remitted to Malaysia will be subject to tax. Also, the savings may have earned interest — again the issue of interest income for individuals being taxed on remittance back to Malaysia.

For Malaysian employees, their withdrawals from the Employees Provident Funds are obviously not taxable. However, such employees who may have worked overseas and contributed to a similar pension fund overseas may find themselves being questioned if and when they were to remit such funds back to Malaysia — let’s say, if they are planning to return to Malaysia after many years working overseas. There must be clear rules in place to alleviate such concerns on the part of such persons.

 

Scenario 4:

A Malaysian company that is a tax resident earns rental income from properties held overseas and remits that income to Malaysia, or a Malaysian individual who is a tax resident earns rental income from a property held overseas and remits that income to Malaysia.

Subject to Malaysian tax with effect from Jan 1, 2022: Yes

Veerinderjeet: Rental income is taxable, and if there is any foreign tax suffered overseas, a double tax credit can be claimed against the Malaysian tax imposed. A double tax credit, also called a bilateral credit, applies to countries with which Malaysia has a double tax agreement. For countries with which Malaysia does not have a double tax agreement, a double tax credit called a unilateral credit can be claimed. But this would be up to only half of the foreign tax suffered.

 

Other possible issues

Another issue, says Veerinderjeet, would pertain to the definition of the word “remitted” and the possibility that certain foreign income is deemed to be remitted in Malaysia even though funds were not brought in. This is mostly seen in contra transactions between related companies.

“For example, foreign dividend income declared by a Singapore subsidiary which is due to a Malaysian resident company is offset against certain amounts due from the Malaysian resident company to the Singapore subsidiary.

“In the usual context, such offsets will result in the foreign dividend income being deemed to have been remitted to Malaysia and so, would be taxable in Malaysia under the proposed provision. All these aspects will need to be looked into and will create more compliance requirements as well as increase compliance costs,” says Veerinderjeet.

TraTax Tax Controversy partner Renganathan Kannan says the earnings of Malaysian companies and entrepreneurs are subject to tax on all income from businesses operated, managed and controlled in or from Malaysia — even if such income is paid by a foreign customer and the income is retained in a foreign bank account.

“Such income [would be taken as] Malaysian income and not foreign income, but businesses that have not paid Malaysian tax on such income are given an opportunity to remit the funds to Malaysia between January and June 2022 and may only get charged a 3% — instead of the prevailing — tax rate,” he adds.

“The tax authority clarified earlier this week that no audit, investigation or penalty would be imposed on amounts remitted between January and June 2022. Hence, the 3% tax appears to be final. But it has to be kept in mind that Malaysian-derived income during or after [the year of assessment] 2021 does not qualify for this treatment.”

Renganathan says for taxpayers who actively manage funds overseas, careful documentation is vital to analyse the capital and revenue nature of the funds retained after July 1, 2022, as the tax authority has expressed such amounts would be scrutinised to ensure no Malaysian-sourced income is retained therein without payment of tax.

Baker Tilly’s Anand says guidance is needed for taxpayers in differentiating between revenue and capital gains as income tax in Malaysia goes on the premise that only revenue gains are taxed while capital gains are not taxable.

“As such, guidance is also needed by taxpayers in the manner of recognising what is revenue and capital gains when it comes to foreign-sourced income when such gains are repatriated. What is capital gains in Malaysia may be taxed as income in another country.

“Also, the relief provisions in our tax laws are aimed at relieving a person from suffering tax twice on the same income. Under such circumstances, there is an avenue to claim bilateral or unilateral relief. However, it may be a difficult task to ascertain the tax paid in the foreign country if such foreign taxes were paid in the past, and taxpayers would need to ensure that the related documents are kept and capable of substantiating the case for bilateral or unilateral tax relief. This is certainly burdensome.”

Baker Tilly’s Murugan says there is also the issue of deductibility of expenses on the foreign-sourced income that is repatriated back to Malaysia once the 3% on gross remittance period is over. Securing the tax deductions is going to be an arduous task ahead. “This may cause anxiety going forward,” he adds.

 

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