COME Jan 1, 2022, foreign sourced income received in Malaysia will be taxed. The announcement made during the tabling of Budget 2022 last Friday will see the country reverting to its previous income tax scope, where foreign sourced income was taxed.
While some may see this as a quick method to raise revenue collection, Malaysia has in some ways been compelled to do so in order to comply with global tax standards.
What those outside the tax fraternity may be unaware of is that Malaysia was added to the council of European Union’s “grey list” on Oct 5, 2021, whereby the country was identified as having a “harmful” foreign sourced income exemption regime, but had committed to amend or abolish this regime by Dec 31, 2022.
EY Asean tax leader and Malaysia’s tax managing partner Amarjeet Singh says that the exemption on foreign sourced income was first given during the Asian financial crisis of 1997/98 in order to encourage remittance back into the country.
However, with global developments, there is a necessity for Malaysia to revisit the exemption, lest it loses out on foreign investors.
“This is a significant overhaul to our taxation system, which has been predominantly a territorial tax system. [Among] the key issues to address is if dividends received locally will now be taxed because the law currently exempts local dividends from income tax due to the single-tier system that Malaysia adopts.
“There should also be a facility to claim tax relief should the same income be subject to tax elsewhere. In Singapore, certain foreign sourced income such as foreign sourced dividends are not subject to Singapore tax, subject to fulfilment of certain conditions,” says Deloitte Malaysia tax leader Sim Kwang Gek.
KPMG head of tax Tai Lai Kok says that Malaysia appears to be adopting a stance that is similar to Singapore’s where foreign sourced income will be taxed only if it is remitted.
“If the income stays overseas, it will not be taxed. What should be highlighted here also is that this will only apply to income. Gains that are not taxable in Malaysia will not be subject to tax,” he says.
Tax consultants say there is no concern of double taxation, as there are tax treaties in place to prevent that from happening.
Nevertheless, it is possible that the removal of the exemption on foreign sourced income could discourage companies and individuals from remitting their income back to Malaysia.
“Care should be taken to ensure that this move does not discourage the remittance of funds back into Malaysia. It is hoped that a transitional period will be provided and the government should consider directing this proposal at corporates and not individuals,” says Amarjeet.