BUDGET 2022’s proposal for Malaysia to withdraw the tax exemption on foreign-sourced income(FSIE) is uncompetitive, unfair and harmful to the long term investment attractiveness and financial interests of Malaysia. The withdrawal of FSIE includes remittances for dividends of companies and individuals, interest income and rental or gains on the disposal of properties overseas and possibly for children working overseas sending home living expenses for their old parents.
From January 1, 2022, the tax exemption on foreign-sourced income received in Malaysia under Paragraph 28, Schedule 6 of the Income Tax Act (ITA) 1967, will be withdrawn, meaning that foreign-sourced income — whether from business or employment or in the form of dividend, royalties, interest or rental — remitted into the country will be subject to Malaysian tax. Tax expert Amarjeet Singh told The Edge that this tax exemption has been in place since 1998 for companies and since 2004 for individuals, in a bid to encourage remittance of such income. Clearly the withdrawal of the FSIE will do the opposite.
DAP MPs will oppose the Finance Bill to be debated next week unless that there is clarity that the FSIE will not be withdrawn or substantially reviewed to not affect hard-working individuals and companies wanting to bring back their foreign earnings back to the country. Not only will this withdrawal of Foreign Sourced Income Exemption (FSIE) result in capital flight and reductions in capital inflows but it is also unfair for individuals who are compelled to work overseas due to better pay prospects and higher opportunities.
For all this negative impact on our financial attractiveness, the Ministry of Finance estimates that a mere RM1.2 billion in revenue can be collected by taxing foreign-sourced income in 2022. Is the extra RM1.2 billion in revenue worth losing out to our neighbouring countries with a more attractive tax regime? The real concern are companies that had repatriated an annual average of RM27.8 billion in investment income — from both direct and portfolio investment — back to Malaysia between 2010 and 2020, compared with RM7.5 billion the decade before, may no longer do so.
The Inland Revenue Board (IRB) recently said it was offering a Special Income Remittance Programme (PKPP) to residents in Malaysia who have income kept abroad, which will run from January 1 to June 30, 2022. During these six months, the Finance Bill 2021 proposed that the concessionary rate of 3% tax would be imposed on foreign-sourced income remitted. After that the normal tax rate applies.
This means that foreign sourced income and foreign dividend income remitted back after the six month period, the taxpayer will have to pay the tax based on his individual income tax bracket or for a company at the 24% corporate tax rate. If the source income is from a country that has entered into a double taxation agreement with Malaysia, then any differential in the respective tax rates that is in favour of the taxpayer will have to be paid.
IRB added that it would not carry out an audit review or investigation nor impose a penalty on income brought in during this period, but would accept it in good faith. No one believes in the commitment of the IRB which has a record of breaking its promises under the current administration.