AGAINST the backdrop of the ever growing local industries as well as the importance of domestic investments being a new catalyst to the Malaysian economy, the national Budget 2004 has been announced.
Individuals and companies will enjoy a number of tax goodies. One of the most interesting incentives is the proposed income tax exemption on foreign income remitted to Malaysia by a resident individual. We will highlight some of the practical implications arising from this proposal, which may affect our daily life.
It is reckoned that this exemption may enhance domestic spending and investments. With the new exemption, it is envisaged that individuals will be more willing to spend or invest domestically now, financed by their foreign income. Previously, individuals earning income overseas may tend to keep their money offshore and invest therefrom as remittance of such income will be subject to income tax in Malaysia.
How effective will the proposed exemption be? To give a satisfactory answer, present tax law ought to be analysed. Currently, Malaysia adopts a modified territorial scope of taxation where only income accruing in or derived from Malaysia or received in Malaysia from outside Malaysia (foreign source) will be subject to tax.
However, foreign income received by non-resident individual, non-resident companies and resident companies (other than company carrying on the business of banking, insurance, shipping and air transport) will be exempted from income tax whilst remittance of such income by resident individuals will continue to be taxed. For Malaysian tax purposes, the tax residency of an individual is determined by reference to the number of days the person is present in Malaysia whilst citizenship and permanent resident status are of no relevance.
Fair to say, most of the income derived in foreign land by an individual would have been already taxed in that particular jurisdiction. Subsequently, when the individual decides to remit the same income to Malaysia, whether the said income will be taxed again in Malaysia would depend on his tax residency (prior to the new proposal).
On the basis that the individual is a Malaysian tax resident at the point of remittance, such income received in Malaysia will be caught by the Malaysian tax net. Nevertheless, a double tax relief will be granted to the resident individual.
At a glance, one may conclude that the proposed exemption may immediately encourage individuals to remit their foreign income to Malaysia and consequently has an immense impact on local spending. This may not be always the case since the foreign income remitted is to be exempted from Malaysian tax, the double tax relief will no longer be applicable. The double tax relief will only be granted if a resident individual suffers foreign tax as well as Malaysian tax on the same foreign income.
Moving further, if an individual is to capitalise on the opportunity to remit overseas income to Malaysia free of Malaysian tax, then the onus is always on him to keep track of what had been remitted, in terms of the quantum and the nature of the remittance, i.e. income vis-à-vis capital.
He then needs to justify that the purchase of properties or other spending are indeed financed by the said tax-free income as well as other disposable income. Thus, taxpayers would need to retain all the bank remittance slips and other relevant documents.
With the proposed exemption, it may no longer be a significant issue to differentiate between income and capital remitted from overseas since the former is specifically exempted from Malaysian income tax whilst the latter would never be caught within the income tax net.
With this latest development, suffice to say that gone are the days where tax advisors need to plan for an individual to ensure he remains as a non-resident so his foreign income remitted to Malaysia would be exempted from income tax. Likewise, the idea of changing the character of an income to capital before being remitted to Malaysia may only remain as textbook planning.
Apart from the above, it is wondered whether this exemption may result in the dirty money (money-laundering) being channelled into Malaysia, particularly from the tax havens.
Whilst this article has not discussed other proposals under Budget 2004, it is a view of the majorities that the budget is a balanced one with more concentration on spurring domestic spending and investments.
One of the possible ways is to encourage individuals to remit their foreign income to Malaysia and this may be workable. However, the relevant practical implications arising therefrom ought to be considered.
l The article is courtesy of the Malaysian Institute of Certified Public Accountants (MICPA). The authors are associate director and manager respectively of Deloitte KassimChan Tax Services Sdn Bhd.