Malaysia Bracing for Taxation of Foreign-Sourced Income – Bloomberg Tax
With effect from Jan. 1, 2022, the current income tax exemption on foreign-sourced income (FSI) received in Malaysia by Malaysian residents will be removed.
This article highlights the impact and practical considerations that businesses and individuals alike should contemplate in preparing for the impending tax on FSI. The contents of this article reflect the legislation and FAQs publicly available as at Dec. 20, 2021.
Overview of Existing FSI Exemption
Currently, FSI of any person that is received in Malaysia is exempted from income tax, with the exception of Malaysian resident companies carrying on the business of banking, insurance, or air or sea transport. This has not always been the case—the tax exemption on FSI was first introduced in 1998 for resident companies to encourage taxpayers deriving income overseas to repatriate their income back to Malaysia (with the exception of the few industries mentioned above). In 2004, this exemption on FSI was extended to all taxpayers, including individuals.
Impending Taxation of FSI in Malaysia
During the Budget 2022 announcement, the government proposed to remove the tax exemption on FSI received by residents in Malaysia with effect from Jan. 1, 2022. This proposal is reflected in the Finance Bill 2021, which has been passed by the House of Representatives but is still being read in the Senate and has yet to be gazetted as law at the time of writing (Finance Bill).
Under the Finance Bill, FSI received in Malaysia between Jan. 1, 2022 until June 30, 2022 by all tax residents, including individuals and companies, will be taxed at 3% on a gross basis. The tax rate on FSI received after this period will be the prevailing tax rates for resident individuals and companies. The proposal as it stands covers all forms of income (for example, business or employment income, dividends, interests, royalties) and will affect all Malaysian resident taxpayers regardless of their size or sectors.
On Nov. 16, 2021, the Inland Revenue Board of Malaysia announced in a media statement that they will be offering a Special Income Remittance Program (Program Khas Peremitan Pendapatan, also referred to as PKPP) for the period of Jan. 1, 2022 to June 30, 2022, during which FSI received in Malaysia by taxpayers that have declared their participation in the PKPP by July 30, 2022 will not be subject to audits, investigations or penalties.
The Inland Revenue Board issued FAQs in relation to the PKPP on Dec. 17, 2021 (PKPP FAQs), which provide that taxpayers can declare their participation in the PKPP in an online form via MyTax.
Basis for Change in Tax Treatment of FSI
According to the Budget 2022 speech, the reasons behind the proposal to tax FSI received in Malaysia by Malaysian residents are to ensure that there is sustainable …….