The turnaround in foreign source income – what’s left?

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THE The government made a surprising turnaround on December 30, 2021 after announcing that foreign-source income received in Malaysia by Malaysian tax residents will be taxed. It is certainly welcomed by all the taxpayers concerned, but it does not send a signal of confidence to the business community or to foreign investors. Despite numerous discussions with industry groups and professional bodies before the budget was drawn up, it is a pity that the authorities did not take into account the setback they would suffer from the business community. Going forward, in order to avoid erosion of confidence in the fiscal measures announced by the government, authorities are advised to obtain feedback through the issuance of a draft proposal. of all parties concerned before the announcement of a political measure.

Today’s position

The 2021 finance law which taxes foreign income remains as it is. Last Thursday, a press release said the government had agreed to exempt all types of foreign source income for individuals who are tax residents in Malaysia, except those who operate partnership businesses in Malaysia. Corporations and limited liability companies that are tax resident in Malaysia will be exempt from foreign source dividend income. This will be effective from January 1, 2022 to December 31, 2026.

All other taxable persons such as trusts (except commercial trusts), executors and administrators of estates, co-ops, corporations, clubs, professional associations, etc. will be subject to tax in Malaysia when the foreign source income is received in Malaysia.

In calculating the Cukai Makmur for businesses, any foreign source income received in 2022 will be exempt.

The above exemptions are subject to eligibility guidelines to be issued shortly by the Inland Revenue Board (IRB).

What are the uncertainties?

Do nothing until eligibility criteria are announced by the IRB. Now we don’t know the eligibility requirements and we need certainty, and this can only be provided through an amendment to the law or a Gazette Order. The press release does not give the necessary authority to override existing legislation. Don’t start sending money until the law is changed and the guidelines published.

It is surprising why natural persons carrying out a partnership activity in Malaysia do not benefit from this exemption, since partnerships as a rule are not taxed. It is the individual partners who are taxed. The authorities should explain the exception noted in the press release as it does not appear to be compatible with tax legislation.

What should individuals do?

Despite this announcement of exemption for foreign source income received by individuals, individuals are advised to keep good accounts of their investments and income abroad to distinguish between capital and income. Who knows if there will be a policy change again in the future? Be prepared that in the event of a future U-turn you will not be caught if you have returned capital instead of income to Malaysia.

With the Automatic Exchange of Information between countries and the availability of information within the various government authorities, individuals are advised to reconcile your annual increase in wealth with the various sources of income, capital gains, and non-taxable revenues such as as estates, etc. so that you are prepared to explain to the tax authorities in the event of a future audit which now becomes a common occurrence.

The taxation of foreign source income has not disappeared. With the exception of resident individuals, corporations and limited liability companies receiving dividends, all others are subject to tax when they receive other types of income such as rental income, income from interest, trust income, part of partnership income, part of joint venture income, branch profit, etc. will be subject to tax.

This article was written by the Managing Director of Thannees Tax Consulting Services Sdn Bhd, SM Thanneermalai.


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