Know About Foreign-Sourced Income – Malaysian Income Tax
Malaysia doesn’t tax foreign-sourced income, for businesses like insurance, banking, sea and air operations.
References for Income Tax Act, 1967
- Section 3 Income Tax Act, 1967 (ITA) says that “income shall be charged for the income of any person accruing in or derived from Malaysia or received in or from Malaysia.” The phrase “accrues in or from Malaysia” tells to that the income source should be from Malaysia.
- Based on the 2004 assessment year effect, a foreign-sourced income is not subject to taxes in Malaysia.
- Income Tax Act 1967 Section 12 is for determining the income source or where it was derived from.
- Tax exemption is written in Schedule 6, Paragraph 28 of the 1967 Income Tax Act
How to Find out if it is Derived from Malaysia or Outside
Section 12 of the ITA defines the Derivation of Income.
Determining the income source is difficult and most often open for discussion which is also complex and disputable. There is not really a definite guide that is applicable to all scenarios that will determine if the income comes from Malaysia or outside. Further, it is dependent on the income source and business transactions that give rise to that income.
In general, the income is considered derived outside Malaysia if it is directly attributed to activities done outside Malaysia. Further, the obligation is placed on the taxpayer; that they must prove the income was sourced outside Malaysia.
According to Section 12(1)(a), the gross income that does not come from business operations done outside Malaysia is recognized as derived from Malaysia.
Hence, if the total gross income is from the work done outside Malaysia and the taxpayer wants to consider it as foreign-sourced, the taxpayer must substantiate that it can be attributed to business operations outside Malaysia.
Main Points that Must be Considered in Determining the Income Source
- Where the contracts are concluded – Is it outside or in Malaysia?
- Whether the business owners risk is in or outside Malaysia
- Whether the services rendered are in or outside Malaysia
Disclaimer
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