IN BUDGET 2022, the government announced that it intended to tax foreign-sourced income received in Malaysia from Jan 1, 2022 by all Malaysian tax residents. Non-residents were excluded.
Through a media release on Dec 31, 2021, the Ministry of Finance announced changes to the taxation of foreign-sourced income. In summary, resident individuals are exempted from all foreign-sourced income received in Malaysia, while companies and limited liability partnerships are exempted from foreign-sourced dividends received in Malaysia from Jan 1, 2022 to Dec 31, 2026. Foreign-sourced income received by large companies will be taxed at 24% despite the company being subject to Cukai Makmur at 33% (companies with taxable income exceeding RM100 million).
As it stands at the moment, the media release is not the law, but we have been assured that the position taken by the media release will be adopted by the tax authorities. The above relaxation is subject to conditions that are yet to be announced by the Inland Revenue Board (IRB).
Although we are coming close to the end of February, we still do not know the details of the conditions that will be announced by IRB. It is important for the authorities to announce the details very quickly so that taxpayers are not caught out with surprises.
What is left
As far as resident individuals are concerned, they can freely remit foreign-sourced income such as dividends, interest, rental, commissions, employment income, royalties, discounts, premiums, pensions until Dec 31, 2026.
Resident companies and limited liability partnerships will only enjoy this exemption on foreign-sourced dividend income. All other foreign-sourced income will be subject to tax.
Other taxable persons such as trusts, business trust, unit trusts, Hindu joint families, cooperatives, trade associations, clubs and societies are not covered by the above exemption.
The media release specifically mentioned that the exemption will not apply to individuals carrying on a partnership in Malaysia.
Points to note
Although resident individuals are now free to bring in their income from foreign sources, as mentioned in our article in January, individuals should be mindful to be able to account to IRB that the funds remitted have not escaped taxation in Malaysia previously and are truly income from foreign sources. The reason for this reminder is because IRB is increasingly requiring taxpayers to prepare capital statements especially those individuals who have foreign bank accounts and other foreign assets.
Although companies are exempted from taxing foreign sourced dividends, the primary problem with many companies is the lack of understanding the difference between foreign-sourced income and domestic-sourced income.For example, when it comes to business income, it is incorrect to assume that if you receive monies from overseas customers for work performed overseas but controlled from Malaysia is foreign-sourced income. With regard to other types of income such as interest income and rental income, there are specific criteria and rules that needs to be applied in determining whether the income is foreign sourced or domestic sourced. This misunderstanding could lead to costly outcomes.
All other taxpayers highlighted above have not been covered by this exemption.
Request to the authorities
It is only fair to bring all taxpayers into a level playing field by extending the exemption beyond individuals and companies.
This article was contributed by Thannees Tax Consulting Services Sdn Bhd managing director