Foreign Source Income and Foreign bank accounts – What is the tax impact of Malaysia?

Mr. Lam Kwai Soon - Automatic Exchange of Information Regime


Malaysia is having a tax amnesty period with the Special Voluntary Disclosure Program (SVDP) starting from 3 November 2018 to 30 June 2019 to encourage people with income that are not reported for Malaysian tax or any mistakes in the past years of assessment, to disclose them to the Inland Revenue Board of Malaysia (IRBM). Those that do so will be given a lower penalty rate of 10% if voluntary disclosure is made by 31 March 2019 (it has been extended by Minister of Finance to 30 June 2019) and 15% if the voluntary disclosure is made between 1 April 2019 to 30 June 2019 (it has been changed to 1 July 2019 to 30 September 2019). Prior to this amnesty period, the penalty for tax audit was a minimum of 45% and after the amnesty period the penalty rate would increase to a minimum of 80%. Under this measure, the IRBM does not rely solely for people with unreported income to come forward, but it does promote the SVDP actively via media sending out letters and emails to most of the taxpayers in their database. Other than that, under the Automatic Exchange of Information between countries, for which the arrangement was initiated by the OECD, IRBM has obtained information of Malaysians with bank accounts in other countries and will send out letters to them to requesting for explanation on the source of their funds. On top of that, IRBM has strongly advised Malaysians via the press and other media to report to IRBM if they have bank accounts in other

This has created misunderstanding among Malaysians with the assumption that those funds kept in bank accounts in other countries are subjected to tax in Malaysia. We have received some queries from the public as well on what they should do if they have bank accounts in other countries. Malaysia has adopted a territory basis for taxation where only income derived from Malaysia is taxable in Malaysia except for the business of banking, insurance and sea or air transportation.

Paragraph 28 Schedule 6 Income Tax Act 1967 provides that the income derived from sources outside Malaysia is exempt from tax. For those funds kept in bank accounts overseas, if its source can be proved and explained as those from outside Malaysia, the funds will be not taxable in Malaysia. However, the Income Tax Act 1967 does not define the “source of income”,  it has to refer to a number of case laws and relevant Double Tax Agreements as references. It is very common that some businessmen may have set up companies in tax havens to receive the income but the company has no man powers and physical substance set up abroad for business operations. The main purpose of this structure is to shift profit or income from Malaysia to tax havens by avoiding paying tax.

Under this circumstance, the income can be deemed to be taxable in Malaysia if it is not attributed to any operation in other countries. In the past it was harder for IRBM to detect these kinds of bank account information but now under the Automatic Exchange of Information arrangements between countries, it can be obtained via regular and automatic means. This has enhanced the cooperation between countries and transparency on financial information for combating money laundering and
tax evasion activities.

Many people have also misunderstood that income received from overseas are considered source “outside” of Malaysia. For example, a freelancer based in Kuala Lumpur to provide digital marketing services to clients in the United Kingdom (UK) via online communications. All income is received from the UK while he/she does not have any office with employees there. All services are provided from his home in Kuala Lumpur. For tax purposes it is very important to determine where is the base
or the permanent establishment to determine the source. All Double Tax Agreements (DTAs) between Malaysia with other countries provide definition of permanent establishment and for business income. Usually the taxing right lies with the authority of the country where the permanent establishment is located in. The Malaysian Income Tax Act 1967 has also been amended by inserting the definition of “place of business” recently to clarify on this area.

Permanent establishments in most of the DTAs include place of management, office, branch, factory, etc. where the main business activities are carried out. It is not important where the income is received. It can be received from any country in the world. If the permanent establishment is in Malaysia, the business income is considered to be derived from Malaysia. The concept is different between trading in overseas or trading with overseas. Let’s take an example of a factory based in
Malaysia that exports all its products abroad. It is considered “trading with overseas” with its permanent establishment based in Malaysia. If a company set up a branch in Vietnam and that branch sells products within Vietnam then that “branch” is considered “trading in Vietnam” where the source is outside of Malaysia. The income of that branch is taxable in Vietnam and not in Malaysia.

The aforementioned is just a basic explanation and only applies to business income. When it comes to employment income, it is different. If the employment is exercised in Malaysia the income may be taxable in Malaysia if it does not satisfy all the 3 conditions where most of the DTAs have provided as below:-

1) The particular employee is present in Malaysia not more than 183 days in the fiscal/calendar year
2) The payer of the employment remuneration is a non-resident of Malaysia for tax purpose
3) Remuneration is not borne by a resident or permanent establishment in Malaysia If any one of the above conditions are not satisfied, it could result in the employment income being taxable in Malaysia.

If anyone has bank accounts overseas are not sure of the tax implications in Malaysia, we strongly
advise you to consult a tax advisor for a clearer picture.

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