On March 10, the Inland Revenue Board issued the following clarification:
“We wish to refer to a report in the Chinese newspaper today which has caused confusion regarding basic questions of income derived from Singapore and tax residence status.
Generally, income taxable under the Income Tax Act 1967 (ITA 1967) is income derived from Malaysia such as business or employment income. Therefore, income received from employment exercised in Singapore is not liable to tax in Malaysia. This is because that income is not derived from the exercising of employment in Malaysia.
For an individual residing in Malaysia for a period exceeding 183 days, the individual is deemed to be a resident for tax purposes in Malaysia under the ITA 1967. However, if the said individual does not receive any income deriving from Malaysia and only receives employment income derived from Singapore, then the individual is still not liable for tax in Malaysia. The resident status of an individual in Malaysia will not automatically result in the income received by the individual to be subjected to Malaysian tax laws.
Further to that, any income remitted to Malaysia from abroad is also exempt under Paragraph 28, Schedule 6 of the ITA 1967.”
In this article, I will help explain the tax concepts and principles that underline the above media release so that readers may be better informed about what is taxable and what is not taxable in Malaysia.
Scope of charge
The Malaysian income tax scope, that is, the parameters of the Malaysian tax net, is stated as follows:
“... a tax to be known as income tax shall be charged for each year of assessment upon the income of any person accruing in or derived from Malaysia or received in Malaysia from outside Malaysia.”
Income derived from Malaysia
There are two key terms here — “income” and “derived from Malaysia”.
To be subject to income tax in Malaysia, the amount received or receivable must be income (that is, revenue in nature, not capital gain). Some common examples of revenue income are remuneration or fees for services rendered, amounts received for sale of goods and services, amount received for use of money or indebtedness and amount received for use of amenities and premises.
The classes of income are:
- Business income;
- Employment income;
- Dividends, interest or discounts;
- Rents, royalties or premiums;
- Pensions, annuities or other periodical payments;
- Other gains or profits.
Derived from Malaysia
“Derived” means accruing from, arising from or springing from.
“Malaysia” is defined to include:
- the territories of the Federation of Malaysia;
- the territorial waters of Malaysia (defined as 12 nautical miles from the shore line), the seabed, the sub-soil of the territorial waters and the airspace above the territorial waters; and
- the Exclusive Economic Zone (EEZ), over which Malaysia has sovereign rights or jurisdiction for purposes of exploring and exploiting natural resources, whether living or non-living.
Read together, any income that is derived from Malaysia, as defined, is subject to income tax in Malaysia.
Persons employed to work on oil rigs in the South China Sea, off the coast of East Malaysia, are flown out to the oil rig from Hong Kong to work for two weeks and flown back to Hong Kong to rest for two weeks. They are paid in Hong Kong as their families reside there. It has been determined that the oil rig is located within the EEZ.
As the oil rig is situated within the EEZ, the persons exercise their employment in Malaysia. They therefore derive employment income from Malaysia and are subject to tax in Malaysia. The fact that they are paid in Hong Kong is irrelevant.
Notice that the scope of charge refers to income “of any person”, without specifying the tax residence of the person. Thus any person, regardless of tax residence, who has income derived from Malaysia is liable to tax in Malaysia on that income. Conversely stated, any income that is not derived from Malaysia is not subject to tax in Malaysia. This explains the part in the IRB statement above that says:
“Therefore, income received from employment exercised in Singapore is not liable to tax in Malaysia. This is because that income is not derived from the exercising of employment in Malaysia.”
Income received in Malaysia from outside Malaysia
If income (not capital gains) derived from outside Malaysia is remitted to Malaysia, that is, sent back to or received in Malaysia, it is conceptually subject to tax in Malaysia, but Malaysia has introduced law (Schedule 6, Paragraph 28) to specifically exempt such income. The rationale for this exemption is to encourage the inward remittance of foreign income. This explains the last sentence of the statement:
“Further to that, any income remitted to Malaysia from abroad is also exempt under Paragraph 28, Schedule 6 of the ITA 1967.”
As long as the income is derived from Malaysia, it is subject to tax in Malaysia. The residence status of the person affects “how” he is taxed. The table above shows generally how a resident is taxed, relative to a non-resident.
These tax rules are illustrated in the following scenario, which is commonly-encountered
Encik Ahmad lives in Johor, travels daily to work in Singapore and receives remuneration from his Singapore employer. The monthly salary is credited into Ahmad’s bank account in Singapore.
Ahmad owns a flat in Singapore, which he lets out to Malaysian students, whose parents pay rent in ringgit (cash) to Ahmad in Malaysia.
Two years ago, Ahmad brought his Singapore earnings to Malaysia to acquire an orchard in Melaka. He derives income from the sale of the fruits by consigning the produce to a Singapore fruit trader, who pays him via Singapore dollars put into his bank account in Singapore.
- Ahmad exercises employment in Singapore because he physically carries out his employment duties in Singapore. Therefore, he derives employment income from Singapore, which, being not derived from Malaysia, is not subject to income tax in Malaysia.
- When Ahmad brought his Singapore earnings to Malaysia to acquire the orchard, the foreign-sourced income received in Malaysia is specifically tax exempt under Paragraph 28 of Schedule 6 of the Income Tax Act.
- The rental from the Singapore flat is derived from Singapore because the real property is situated there. The source of the rental income is in Singapore. Ahmad receiving the rental income in ringgit in Malaysia does not change the fact that it is foreign-sourced income, which, even when received in Malaysia, is specifically tax exempt.
- The net proceeds from the sale of the fruits on consignment to the Singapore fruit trader are derived from Malaysia as the fruits are produced in an orchard in Malaysia. This is subject to tax in Malaysia as business income. The fact that it is paid in a foreign currency and in a foreign country does not change its Malaysian-derived nature. The proceeds must be brought to tax in Malaysia.
- He should report the net income from the sale of the fruits in his annual tax return in Malaysia.
- Ahmad travels to Singapore daily, so he spends part of each day in Malaysia as well. This qualifies him for tax residence in Malaysia as he will have more than 182 days in a year of physical presence in Malaysia.
- As he is a tax resident, he will be eligible for personal reliefs and will be subject to tax at scale rates.
- As none of his income is doubly taxed, the question of double tax relief does not arise.
Yong Siew Chuen has wide experience in Malaysian taxation. She now focuses on tax training and coaching. Comments: [email protected].