Budget 2022, tabled on 29th Oct 2021, proposed multifarious measures. On 9th Nov 2021, the Finance Bill 2021 was made available to the public. Malaysia adopts a territorial principle of taxation in that only income accruing on or derived from or received in Malaysia from outside Malaysia is subject to income tax in Malaysia under Section 3 of the Income Tax Act, 1967.
On 29th Oct 2021, it was announced in the Budget 2022 that the exemption under Paragraph 28, Schedule 6 of the ITA will no longer be applicable to tax residents with effect from 1st January 2022. The Finance Act 2021, which was gazetted on 31st Dec 2021, and which amends Para 28 by removing the exemption previously enjoyed by tax residents, bought the law into force. Effectively, starting on 1st Jan 2022, Malaysian residents will be subject to income tax on income obtained from foreign sources and received in Malaysia. Such income shall get the same treatment as an income obtained or accruing in Malaysia that is taxed under Section 3 of the ITA.
Tax at 3% under the Special Income Remittance Program
Depending on when revenue from overseas sources is remitted to Malaysia, the implementation of the above legislation will take place over the next two time periods:
The FSI remitted will be taxed at a fixed rate of 3% on the gross amount of income remitted from 1st January to 30th June 2022, as stated by the IRBM in their PKPP.
On or after 1st July 2022, remitted FSI will be subject to taxation at the current rate for tax residents on the statutory income.
On 16th November 2021, the IRBM announced a Special Income Remittance Program (PKPP) which will take place between 1st Jan to 20 June 2022. Subject to certain terms and conditions, the FSI remitted during the PKPP period will be taxed at 3% of the gross income.
Withholding tax on payment to resident individuals must be remitted by the end of the following month.
The Inland Revenue Board (LHDN) has announced administrative changes regarding the submission of the 2% tax deduction by companies making payments to resident individual agents, dealers, or distributors (ADDs) effective July 2022.
The 2% withholding tax for 2022 applies to ADDs which have received more than RM 100,000 in a monetary and non-monetary form in 2021 from the company making the payments.
In Jan 2022, Company XYZ (payer) made a monetary commission (RM30,000) and non-monetary commission (RM20,000) to Mr. Jeremy (resident, Company Agent)
In the preceding year, he also received an amount of RM50,000(monetary) and RM80,000(non-monetary), and in total has exceeded RM100k.
Therefore, the company is required to withhold 2% when making payment in Jan 2022
RM30,000 x 2% = RM 600 (monetary)
RM20,000 is not subjected to WTH as it is non-monetary
RM600 is needed to be remitted to IRB on 1st April 2022.
Actions required from tax resident companies:
Review the Malaysian tax impact on remittance of any taxable FSI from outside Malaysia into Malaysia.
Maintain proper documentation on foreign source income and provide analysis on the funds repatriated, therefore whether the amount remitted is capital or revenue in nature.
Consider seeking professional opinion from the tax consultants on the FSI due to the possibility of an audit by the IRBM on foreign source income remitted into Malaysia.
Consider remitting FSI during the 6-month transition period from 1st January 2022 to 30th June 2022 to take advantage of the 3% tax rate on FSI remitted.