One of the most significant proposed changes to our tax system is imposition of tax on foreign sourced income.
Once the amendments to the Income Tax Act are passed, foreign sourced income that is remitted to Malaysia by Malaysian residents (individuals and corporates) would be subject to tax starting from 1 January 2022.
While we expect the Inland Revenue Board of Malaysia (IRBM) to issue guidance on this matter soon, let us examine the implications of the proposed amendments.
Scenario 1
A Malaysian resident has been working in Singapore since 2010 and has been paying tax on his salary income in Singapore. The person is planning to transfer some of his money to Malaysia. Will the money be taxable in Malaysia under the new rule?
Answer: If the person resides in Singapore permanently, the person is likely not a Malaysian tax resident. Hence, the money that he remits into Malaysia will not be taxable in Malaysia.
Scenario 2
A Malaysian resides in Johor but travels to Singapore daily to work, is planning to remit his employment income to Malaysia in year 2022. Is the money remitted to Malaysia subject to tax in Malaysia?
Answer: As the person resides in Malaysia permanently, he would be “treated” as a Malaysian tax resident. As such, the Singapore income that he remits to Malaysia will be subject to Malaysian tax under the proposed amendment.
To avoid the person’s income from being taxed twice (by Singapore and Malaysia governments) – the person has to show proof that tax has been paid on the Singapore sourced salary and would then be eligible to claim tax credit against the Malaysian tax imposed.
Scenario 3
A Malaysian resident owns a property in Australia and earns a rental income from the property. When the person remits the rental income to Malaysia in year 2022, would the person be subject to tax in Malaysia?
Answer: The rental income is first subject to Australian tax. In addition, the income would be subject to Malaysian tax when the money is remitted to Malaysia under the new rules. To avoid “double tax” on the rental income, the person must produce documented proof that tax in respect of the rental income has been paid in Australia. The person would then be entitled to claim tax credit against the tax raised by the Malaysian tax authority.
Scenario 4
A Malaysian company has a 100% owned foreign subsidiary. The foreign subsidiary paid the Malaysian holding company a dividend of RM200,000. The money was then remitted to Malaysia. Is the dividend money remitted to Malaysia subject to tax?
Answer: The scope of foreign income appears to be wide and would likely include foreign dividend income. The Malaysian company has to look at the relevant Double Tax Agreement (DTA) to determine if the dividends are subject to tax and whether relief is available under the DTA. It is generally an acceptable tax principle that the provisions of DTAs shall prevail over the provisions of the Income Tax Act.
Many countries that are taxing foreign sourced income exclude certain dividends and foreign branch profit where tax has been suffered in the originating country. We hope IRBM would issue further guidance on this matter.
How to avoid double taxation?
Under a DTA, where the foreign income is charged to Malaysian tax or foreign tax more than once, bilateral credit may be allowed in respect of the total amount of foreign tax charged on that foreign income. Credit so allowed must not exceed the total amount of Malaysian tax charged on that foreign income. Bilateral credit is available to foreign income arising from countries where Malaysia has signed a double tax agreement with.
For foreign income arising from a country which does not have a double tax agreement with Malaysia - the Malaysian taxpayer may claim for unilateral credit. But this is limited to half of the foreign tax suffered.
Documented proof for claiming tax credit
a. Notice of assessment from the foreign tax authority or receipt for the tax paid; or
b. Statement from the foreign tax authority detailing the particulars that would normally be recorded on a notice of assessment or receipt for payment.
Commentary
As our valued clients, you are advised to keep a complete record (documented proof) of your foreign income, foreign tax assessments and tax paid. You must also be able to differentiate and substantiate what constitutes capital and what is income when managing your foreign income and assets, as only foreign sourced income remitted would be taxed while remitting capital is not.
This information is required when determining your tax liability and for claiming tax credit. In the event of tax audit, this information is essential in explaining your tax position.
If you have substantial foreign income and assets, you may want to assess your tax position and plan ahead. You are welcome to contact us if you need consultation on this matter.