Banking Business in malaysia
Content
Table of Contents
INTRODUCTION................................................................................................ 1
1.0
Resident bank......................................................................................... 2
2.0
Overseas business loss...........................................................................3
3.0
Non-banking business income................................................................4
4.0
Bank with overseas subsidiary................................................................4
4.1
Foreign withholding tax imposed on dividend income.........................4
4.2
Underlying tax..................................................................................... 6
5.0
Incentives to bank.................................................................................. 6
6.0 Chargeable Income.................................................................................... 6
7.0 Interest paid by banks or finance companies.............................................7
7.1 witholding tax on net working funds.......................................................8
7.2 Tax planning............................................................................................ 8
7.3 Case law decision on net working fund...................................................9
8.0 Tax planning on foreign banking income....................................................9
8.1 FOREIGN ACCOUNT TAX COMPLIANCE ACT (FATCA)..............................13
9.0 Investment in shares and property held by bank.....................................14
9.1 shares as trading stock.........................................................................14
10.0 Deductibility of bad debt........................................................................15
10.1 Meaning of ‘reasonably estimated’.....................................................15
INTRODUCTION
DEFINITION OF ' BANKING BUSINESS '
What is banking business? Banking business defined as a company's financial
dealings with an institution that provides business loans, credit, savings and checking
accounts specifically for companies and not for individuals. The banking business is also
known as commercial banking and occurs when a bank, or division of a bank, only deals
with businesses. (http://www.investopedia.com/terms/b/business-banking.asp)
However, a bank that deals mainly with individuals is generally called a retail
bank, while a bank that deals with capital markets is known as an investment bank.
** In the past, investment banks and retail/commercial banks had to be separate entities,
under the Glass Steagall Act, but now a single bank can deal with business banking, retail
banking and investment banking.
In Malaysia, the operations of commercial banks and finance companies are
governed by the Banking and Financial Institutions Act 1989, and closely supervised by
Bank Negara Malaysia (Choong Kwai Fatt, 2014). Under Act 53 of Income Tax Act
1967, the only section related to banking business is Section 60C. This section is
categorized in part III- ascertainment of chargeable income under chapter 8 special cases
(Act 53 Income Tax Act 1967). In order to understand the tax treatment for banking
business, the discussion didn’t solely rely on this section. We are referring to another
section which is related such as section 132 and section 133 double taxation relief.
Refer to the above statements, we are general explaining what is banking
business. Further the discussion is about the distinguish treatment between bank or
financial institution with other business, solving the problem arising relate to tax, and
how to record the appropriate treatment for bank and financial institution. Lastly, the
calculation of chargeable income for bank or financial institution will be discussed as
well.
1
2
1.0 Resident bank
Section 60C of Act 53 Income Tax Act 1967 states that:
‘‘Where a person who is resident for the basis year for a year of assessment carries on a
business of banking in Malaysia and elsewhere, his gross income and adjusted income or
adjusted loss for the basis period for that year of assessment from that business and his
statutory income for that year of assessment from that business shall be ascertained by
reference to his income there from wherever accruing or derived excluding the gross
income, adjusted income or adjusted loss and statutory income attributable to an offshore
business activity of a licensed Malaysian offshore bank.’’
In brief, the banking business source, namely as banking business income is taxed
on world income scope, wherever it accruing in or derived. The world scope of taxation
means the income of a financial institution resident in Malaysia is taxed on a world scope
basis. This scope only applies to the banking business and cover the relationship of
Malaysian head office (bank/ financial companies) with overseas branches carrying on
the business of banking (Choong Kwai Fatt, 2014).
As we know, when the income derived from outside Malaysia, such income
would be subject to Malaysia income tax as foreign income (Public Ruling No. 11/2011).
In the cases of suffering foreign tax, a tax relief called as double tax relief would be
allowed against the income tax payable in accordance with section 132 double taxation
arrangement and section 133 unilateral relief from double taxation (Act 53, Income Tax
Act 1967).
The bilateral relief under section 132 is computed when the foreign country has a
double taxation agreement with Malaysia. The condition of this relief is the person should
make a claim on it, otherwise this relief will not be given. Beside that, it must noted that
total bilateral credits should not exceed total Malaysian tax payable on chargeable income
before allowance of any bilateral credit (Public Ruling No. 11/2011). The amount of
3
bilateral relief to be claim is the lower of tax payable in the foreign country and
Malaysian tax payable on foreign income.
Whereas, if the foreign country does not have a double taxation agreement with
Malaysia, a unilateral relief would be allowed to be claimed. The tax credit is limited to
one-half of the foreign tax payable on the foreign income for the year or the Malaysian
tax chargeable in respect of the foreign income, which is also taxed, whichever is lower
(Public Ruling No. 11/2011). In according to Paragraph 15 of Schedule 7, Income Tax
Act 1967, an employee who pays Malaysian tax and foreign tax on employment
exercised outside Malaysia may claim a unilateral credit for the foreign tax, irrespective
whether or not he/she is a tax resident of Malaysia.
In the nutshell, the foreign income from banking which subject to be taxed can
seek a tax relief either bilateral or unilateral relief in according to the condition provided.
2.0 Overseas business loss
The section 60C provides that statutory income from the business of banking is
computed by reference to world income scope. Although adjusted loss from banking is
also determined by reference to world income scope, it would not be allowed to set off at
the aggregate income level (Choong Kwai Fatt, 2014). This is because the deduction is
not provided by section 60C.
However, when referring to section 44 (2), it permits only Malaysia current year
business loss against the aggregate income. This meaning that deduction of current year
business loss (adjusted loss) is only restricted to Malaysian banking business income
accruing in or derived from Malaysia. After the statutory income stage, all deductions
available which are permitted under the Act are restricted to those incurred in Malaysia.
For example, donation deduction.
So, when a banking business subject to be tax on world income scope basis suffer
adjusted loss for the particular year, only the banking business income accruing in or
derived from Malaysia are allow to be deducted as current year business loss against
aggregate income level.
4
3.0
Non-banking business income
If the resident bank carries on other than banking business such as investment and
leasing business, the scope of income taxation would be the modified territorial scope
namely as Malaysia derived income and foreign source income received in Malaysia
from outside Malaysia.
4.0
Bank with overseas subsidiary
If the resident bank in Malaysia has overseas subsidiaries providing the banking
business, the world income scope will not be applied for the overseas subsidiary’s
income. Therefore, it will be taxed based on the foreign jurisdiction. In short, there is no
Malaysia income tax imposed on the foreign source income. However, dividend paid
from the overseas subsidiary to the Malaysia holding company will be taxed based on the
Malaysia income tax. It will be treated as investment income under the section 4(f) other
income. If the dividend and interest received from overseas investment to the Malaysia
investors other than the resident company carry on banking business in Malaysia, it is
exempted from tax. Besides that, the foreign investors who are non-resident are exempted
from tax if the interest received is paid by the Malaysia banking or financial business
(Public Ruling No. 2/2014 Taxation of Investors on Income from Foreign Fund
Management Company, 2014).
4.1
Foreign withholding tax imposed on dividend income
The withholding tax charged on the foreign dividend income, that withholding tax is
accord either unilateral or bilateral relief against the Malaysia income tax. Withholding
tax means a method of collecting income tax from non-resident deriving Malaysia
income paid to the Inland Revenue Board of Malaysia. If there is underlying tax
provision, the underlying tax is allow to use in the computation of unilateral or bilateral
relief after taking into account of withholding tax. However, if there is no underlying tax
provision, only the withholding tax is used to compute unilateral or bilateral relief. Below
is the formula used to compute the unilateral and bilateral relief:
5
a) Bilateral relief is the lower of:
Gross Foreign Income
× Malaysian Income Tax Payable
a.
Total Income
OR
b. Foreign tax payable
b) Unilateral relief is the lower of:
a.
Gross Foreign Income
× Malaysian Income Tax Payable
Total Income
OR
b.
1
× ForeignTax Payable
2
Below is the example of calculating bilateral and unilateral relief.
Net premiums
Allowable expenses
Investment income:
Rental
Dividend (25% tax @7,000,000)
Interest (Malaysia)
Interest (UK tax 100,000)
Computation of tax payable:
Net Premiums
Less: allowable expenses
Statutory income from business
Rental
Dividend
Interest (Malaysia)
Interest (UK)
Total Income
Income tax charge (25%)
Withholding tax in UK (10%)
RM
140,000,000
100,000,000
34,000,000
28,000,000
9,000,000
1,000,000
RM
140,000,000
(100,000,000)
40,000,000
34,000,000
28,000,000
9,000,000
1,000,000
112,000,000
28,000,000
100,000
Bilateral Credit:
6
=1,000,000/112,000,000×28,000,000
= RM250,000
OR
RM100,000 whichever is lower. Therefore, the bilateral credit is RM100,000.
Unilateral Credit:
=1,000,000/112,000,000 ×28,000,000
= RM250,000
OR
=1/2 ��100,000
= RM50,000 whichever is lower. Therefore, the unilateral credit is RM50,000.
4.2
Underlying tax
Underlying tax is the tax imposed on the profit arising in the foreign country
when dividend is paid. In computing bilateral relief, underlying tax is allowed as part of
the foreign tax due to the foreign country want to encourage investment in their country.
The underlying tax is negotiated and stated into the double taxation agreement. Double
taxation agreement is occurred when the income derived by a person from a source is
brought to charge in more than one country. This is the taxation agreement between two
countries. The shareholders will be received net dividend income after deduction of
withholding tax.
5.0
Incentives to bank
Banks who will get exemption on statutory income from business conducted in
international currency business and qualifying Ringgit accounts are international Islamic
bank, international Takaful operator and international currency business units. The
international currency business means the business is carried on non-RM. However,
qualifying Ringgit accounts mean business is carried on Ringgit Malaysia. Income
derived from international currency business and qualifying Ringgit accounts are two
different income sources. The exempted statutory income will be brought into an exempt
income account. Besides that, those banks also can enjoy stamp duty exemption on
certain instruments for promoting Malaysia International Islamic Financial Centre
(Malaysian Tax and Business Booklet, 2013/2014). This incentive is valid from 1 January
2007 till 31 December 2016.
7
6.0 Chargeable Income
The Chargeable Income (CI) is computed based on the general income tax
provisions, there are no special regulations or rules on the taxation of banks and financial
institutions. The computation as follows :
Gross Income [s 4 (a)]
(-) Expenses wholly and exclusively incurred in the production
RM
XXX
XXX
of income (s33)
Adjusted Income
(-) Capital allowance (Sch 3)
Statutory Income (World scope)
(-) Business losses b/f (Malaysian)
Chargeable Income
XXX
XXX
XXX
XXX
XXX
Gross income for bank and financial institutions included interest and discount
receivable, commissions, realized gain on foreign exchange, dividends from short-term
investments, rental of safe deposit boxes , sales of Malaysian Government Securities
(MGS), etc
7.0 Interest paid by banks or finance companies
According to the paragraph 33 of schedule, for those who are not resident in
Malaysia and do not have a place of business in Malaysia receiving interest from bank or
finance companies , then he/she will be exempted from withholding tax. Witholding tax
is a methd of collecting income tax from non-resident deriving Malaysian income. Tax is
deducted at source which means pay in net.
Besides that, any interest income paid by Islamic bank established under the
Islamic Banking Act 1983 and other financial institutions approved by the Minister of
Finance is also exempted from withholding tax. Example such as, Kuwait Finance House
(Malaysia) Berhad.
However , the exemption does not applicable for the interest paid by branches of a
foreign bank that carrying business in Malaysia to its head office or other branches
outside Malaysia for the purpose of maintaining the net working funds of the Malaysian
8
branch. Working fund of banks refer to the funds deployed by a bank in its business or in
other sentence it means total resources of the bank. It includes capital, reserves and
surplus, deposits , borrowings , other liabilities and provision.
7.1 witholding tax on net working funds
According to the section 37(1)(a) of bank and financial institutions act 1989 ,
foreign banks required to maintain 6% of the total assets or RM10 million whichever is
the lower as net working funds. During shortfall, foreign bank would remit fund from
oversea branchs or head office, those interest paid to an oversea branches or head office
as a return on the remittance will be subjected to 15% of withholding tax.
7.2 Tax planning
It is more tax efficient for interest to be charged by the overseas branch or head
office when funds are remitted into Malaysia for net working fund purposes. This is
because such interest expense is allowable expenses in computing the tax liability of
Malaysia branches. This is because the corporate tax rate is 25% , while withholding tax
on interest payment is only at 15% (lower rate is presecibed under the bilateral credit.)
Scenario 1
Scenario 2
Overseas bank do not
Overseas bank do
charge interest on funds
charges interest on
remitted
funds remitted
Gross Income
(-) Interest paid to overseas
RM
100,000
__
RM
100,000
(20,000)
branch
Chargeable income (CI)
Income tax (25%)
Withholding tax paid (15%x
100,000
25,000
__
80,000
20,000
3,000
RM 20,000)
Total tax paid
25,000
23,000
Tax savings (A-B)= RM 2,000
9
7.3 Case law decision on net working fund
In U Bank Ltd v KPHDN (1996) MSTC 2,646, the appellant carried on baking business
in Singapore and also in Malaysia, through a branch set up in Kota Kinabalu.
Permanent establishment under the Double Taxation Agreement (DTA) of Malaysia
branch with Singapore were has made interest payments attributable to fund used to
maintain net working fund to the head office in Singapore and also overseas branches
during year of assessment (YA) 1982 to 1996. The issue of the determination is whether
the interest income received by the head office are rightly not exempted from tax by the
proviso in para 33 of Sch 6 or the interest income was not subject to tax by relying on
Article IV and XV of the Double Taxation Relief (Order) 1973.
Both companies are distinct and separate enterprise, interest make by the branch were
received by the head office to form part of the income & profits. Therefor liable to tax in
Malaysia. Under para 33 of Sch 6, interest charges received by the head office from it
permanent establishment were not interest accruing and also paid to maintain net working
funds.
8.0 Tax planning on foreign banking income
Malaysia resident bank has been taxed on world scope basis including branch profits
derived in Malaysia. Therefor, advisable for Malaysia bank to set up a subsidiary in
foreign countries because profit of subsidiary will not be taxed in Malaysia at the point of
accrual and will only be taxed at the prevalent tax rates in that foreign country. The
dividends declared of foreign country were received by the Malaysia bank then only
subject to tax.
10
Example:
Titanic Bank Berhad (‘Titanic’) (Malaysia resident) is a licenced bank having several
branches in Malaysia and an overseas branch in Alphaland. Titanic’s result for it’s
financial year ended on 31.12.2014 were:
Adjusted income computed for Malaysia tax purpose:
RM
Home branches
500,000
Alphaland branch
200,000
The following additional information is supplied:
1. Titanic has a 15% shareholding in Betabank, net dividend of RM18,900 was received
in Malaysia in 2014 were not included above. Malaysia has double taxation agreement
with Betaland which is full tax credit relief were tax including for a shareholding
exceeding 10% in any company, relief for underlying tax. Betabank deducted tax of 10%
on paying the dividend. For the year 2014, Betaland suffered tax equivalent to RM50,000
and its accounting profit after tax were equivalent to RM150,000.
2. Titanic has suffered Alphaland tax of RM46,800 on the income of its Alphaland branch
for 2014, calculated at 25% on branch income as adjusted for Alphaland tax purposes
(RM180,000). Malaysia has a DTA with alphaland, which provides for tax credit relief.
Profit of Alphaland branch for 2013 is RM40,000 was remitted to Malaysia in 2014.
11
Answer:
Bilateral tax credit:
RM
RM
RM
a. alphaland branch profits
Malaysia tax 200/728 x RM 182,000
50,000
Aphaland tax
46,800
Lower of
46,000
12
b. Betaland dividend
RM
Malaysia tax 28/728 x RM 182,000
Betaland tax net dividend
Add:withholding tax RM 18,900 x 10/90
RM
RM
7,000
18,900
2,100
2,100
21,000
Add: underlying tax 21,000/150,000 x 50,000
7,000
Gross amount
28,000
Tax suffered
Lower of
7,000
9,100
7,000
53,800
13
8.1 FOREIGN ACCOUNT TAX COMPLIANCE ACT (FATCA)
FATCA is a legislation to help counter tax evasion in the United States of America.
FATCA creates a new information reporting and withholding regime for payments made
to certain foreign financial institutions and other foreign entities. The FATCA
requirements came into effect on 1 July 2014. FATCA is intended to increase
transparency for the United States (U.S.) Internal Revenue Service (IRS) with respect to
U.S. persons that may be investing and earning income through non-U.S. institutions.
While the primary goal of FATCA is to gain information about U.S. persons, FATCA
imposes tax withholding where the applicable documentation and reporting requirements
are not met.
FATCA requires a foreign financial institution (“FFI”) like Bank Islam (“the
Bank”/”Bank”) and other financial intermediaries to report to the U.S. Internal Revenue
Service (“IRS”), a U.S. Person‟s specified foreign financial assets maintained with the
Bank in the form of “depository financial accounts” that exceed certain thresholds. For
Bank Islam, depository financial account includes all deposit accounts and investment
accounts offered to individuals and entities. For Bank Islam, depository financial account
includes all deposit accounts and investment accounts offered to individuals and entities.
persons will also be impacted as they may now be required to withhold a 30% tax on that
income paid to a non-U.S. person under FATCA.
FATCA is applicable both:
1.All new to Bank customers regardless if the applicant is an individual or entity applying
to open a deposit account or an investment account.
2.Existing customers regardless if account holder is an individual or an entity holding a
deposit account or an investment account.
14
9.0 Investment in shares and property held by bank
Shares is short term were related to banking business whereas property is long term
investment were non banking business. The distinction is crucial as gain form realization
of the long term investment are not subject to income tax.
However, the investment held by banks as current assets that constitute stock in trade
held in connection with its normal banking business will be subject to tax were any gain
from the disposal assets.
9.1 shares as trading stock
A liability to income tax would arise where investments in shares are held in connection
with the banking business, example were the share held to meet the withdrawal of
depositors, earning income to pay the interest expense commited on deposits.
Under Traditional view:
In punjab co-operative bank ltd v CIT (1940) bank would be taxed on profit derived from
its investments because linked with deposits and withdrawals of cash.
Under Current development:
In waylee investment ltd v CIR(1990) were bank was able to hold long term investment
and the profit of disposal was not taxable. In this case, the bank intended to hold the
investment for an indefinite period. The following principles are established:
(a) An Investment is acquired as trading stock if it was held by the bank as being
available to meets the demands of the depositors.
(b) financial institutions are able to hold long term investment separate from any portfolio
of short term investments. The criteria to determine this is not only the length of the
period of holding and the purpose for which the shares were acquired but also whether
the investment in question could reasonably be treated as part of the financial institution’s
capital structure, or whether they were held as part and parcel of funds available to meet
demands of depositors.
15
10.0 Deductibility of bad debt
Under S34(2) on deductibility of bad debt would need to satisfy the following
requirements:
(1) it has to be a trade debt
(2) it is reasonably estimated in all circumstances of the case to be wholly or partly
irrecoverable.
(3) it arises in the course of carrying on the business and not from taking over the debts
from other traders.
10.1 Meaning of ‘reasonably estimated’
Tax authorities may require the bank to show that all necessary actions, including legal
action have been instituted to recover the trade debts, before a tax deduction is allowed.
The tax authorities would allow a tax deduction when a provision is made for the
following reason:
(a) The debtor is insolvent
(b) The debtor has absconded
(c) The debtor has passed away
(d) The debt is statute barred
In order for debt to qualify for deduction under S34(2) of the Act, it must first come
within the meaning of debt as defined in S34(3), which includes:
(1) a debt in respect of interest of the kind referred to in S24(5), example interest which
has been treated as business income for tax purposes.
(2) a debt arising in respect of a loan of the kind mentioned in S24(5) granted in the
course of carrying on the business, example loan from which was derived the interest that
was treated as business income for tax purposes.
16
Bibliography
Malaysian Tax and Business Booklet. (2013/2014). 28.
Public Ruling No. 2/2014 Taxation of Investors on Income from Foreign Fund
Management Company. (2014, April 28). Retrieved from Inland
Revenue Board of Malaysia:
http://www.hasil.org.my/pdf/pdfam/PR2_2014.pdf
17
INTRODUCTION................................................................................................ 1
1.0
Resident bank......................................................................................... 2
2.0
Overseas business loss...........................................................................3
3.0
Non-banking business income................................................................4
4.0
Bank with overseas subsidiary................................................................4
4.1
Foreign withholding tax imposed on dividend income.........................4
4.2
Underlying tax..................................................................................... 6
5.0
Incentives to bank.................................................................................. 6
6.0 Chargeable Income.................................................................................... 6
7.0 Interest paid by banks or finance companies.............................................7
7.1 witholding tax on net working funds.......................................................8
7.2 Tax planning............................................................................................ 8
7.3 Case law decision on net working fund...................................................9
8.0 Tax planning on foreign banking income....................................................9
8.1 FOREIGN ACCOUNT TAX COMPLIANCE ACT (FATCA)..............................13
9.0 Investment in shares and property held by bank.....................................14
9.1 shares as trading stock.........................................................................14
10.0 Deductibility of bad debt........................................................................15
10.1 Meaning of ‘reasonably estimated’.....................................................15
INTRODUCTION
DEFINITION OF ' BANKING BUSINESS '
What is banking business? Banking business defined as a company's financial
dealings with an institution that provides business loans, credit, savings and checking
accounts specifically for companies and not for individuals. The banking business is also
known as commercial banking and occurs when a bank, or division of a bank, only deals
with businesses. (http://www.investopedia.com/terms/b/business-banking.asp)
However, a bank that deals mainly with individuals is generally called a retail
bank, while a bank that deals with capital markets is known as an investment bank.
** In the past, investment banks and retail/commercial banks had to be separate entities,
under the Glass Steagall Act, but now a single bank can deal with business banking, retail
banking and investment banking.
In Malaysia, the operations of commercial banks and finance companies are
governed by the Banking and Financial Institutions Act 1989, and closely supervised by
Bank Negara Malaysia (Choong Kwai Fatt, 2014). Under Act 53 of Income Tax Act
1967, the only section related to banking business is Section 60C. This section is
categorized in part III- ascertainment of chargeable income under chapter 8 special cases
(Act 53 Income Tax Act 1967). In order to understand the tax treatment for banking
business, the discussion didn’t solely rely on this section. We are referring to another
section which is related such as section 132 and section 133 double taxation relief.
Refer to the above statements, we are general explaining what is banking
business. Further the discussion is about the distinguish treatment between bank or
financial institution with other business, solving the problem arising relate to tax, and
how to record the appropriate treatment for bank and financial institution. Lastly, the
calculation of chargeable income for bank or financial institution will be discussed as
well.
1
2
1.0 Resident bank
Section 60C of Act 53 Income Tax Act 1967 states that:
‘‘Where a person who is resident for the basis year for a year of assessment carries on a
business of banking in Malaysia and elsewhere, his gross income and adjusted income or
adjusted loss for the basis period for that year of assessment from that business and his
statutory income for that year of assessment from that business shall be ascertained by
reference to his income there from wherever accruing or derived excluding the gross
income, adjusted income or adjusted loss and statutory income attributable to an offshore
business activity of a licensed Malaysian offshore bank.’’
In brief, the banking business source, namely as banking business income is taxed
on world income scope, wherever it accruing in or derived. The world scope of taxation
means the income of a financial institution resident in Malaysia is taxed on a world scope
basis. This scope only applies to the banking business and cover the relationship of
Malaysian head office (bank/ financial companies) with overseas branches carrying on
the business of banking (Choong Kwai Fatt, 2014).
As we know, when the income derived from outside Malaysia, such income
would be subject to Malaysia income tax as foreign income (Public Ruling No. 11/2011).
In the cases of suffering foreign tax, a tax relief called as double tax relief would be
allowed against the income tax payable in accordance with section 132 double taxation
arrangement and section 133 unilateral relief from double taxation (Act 53, Income Tax
Act 1967).
The bilateral relief under section 132 is computed when the foreign country has a
double taxation agreement with Malaysia. The condition of this relief is the person should
make a claim on it, otherwise this relief will not be given. Beside that, it must noted that
total bilateral credits should not exceed total Malaysian tax payable on chargeable income
before allowance of any bilateral credit (Public Ruling No. 11/2011). The amount of
3
bilateral relief to be claim is the lower of tax payable in the foreign country and
Malaysian tax payable on foreign income.
Whereas, if the foreign country does not have a double taxation agreement with
Malaysia, a unilateral relief would be allowed to be claimed. The tax credit is limited to
one-half of the foreign tax payable on the foreign income for the year or the Malaysian
tax chargeable in respect of the foreign income, which is also taxed, whichever is lower
(Public Ruling No. 11/2011). In according to Paragraph 15 of Schedule 7, Income Tax
Act 1967, an employee who pays Malaysian tax and foreign tax on employment
exercised outside Malaysia may claim a unilateral credit for the foreign tax, irrespective
whether or not he/she is a tax resident of Malaysia.
In the nutshell, the foreign income from banking which subject to be taxed can
seek a tax relief either bilateral or unilateral relief in according to the condition provided.
2.0 Overseas business loss
The section 60C provides that statutory income from the business of banking is
computed by reference to world income scope. Although adjusted loss from banking is
also determined by reference to world income scope, it would not be allowed to set off at
the aggregate income level (Choong Kwai Fatt, 2014). This is because the deduction is
not provided by section 60C.
However, when referring to section 44 (2), it permits only Malaysia current year
business loss against the aggregate income. This meaning that deduction of current year
business loss (adjusted loss) is only restricted to Malaysian banking business income
accruing in or derived from Malaysia. After the statutory income stage, all deductions
available which are permitted under the Act are restricted to those incurred in Malaysia.
For example, donation deduction.
So, when a banking business subject to be tax on world income scope basis suffer
adjusted loss for the particular year, only the banking business income accruing in or
derived from Malaysia are allow to be deducted as current year business loss against
aggregate income level.
4
3.0
Non-banking business income
If the resident bank carries on other than banking business such as investment and
leasing business, the scope of income taxation would be the modified territorial scope
namely as Malaysia derived income and foreign source income received in Malaysia
from outside Malaysia.
4.0
Bank with overseas subsidiary
If the resident bank in Malaysia has overseas subsidiaries providing the banking
business, the world income scope will not be applied for the overseas subsidiary’s
income. Therefore, it will be taxed based on the foreign jurisdiction. In short, there is no
Malaysia income tax imposed on the foreign source income. However, dividend paid
from the overseas subsidiary to the Malaysia holding company will be taxed based on the
Malaysia income tax. It will be treated as investment income under the section 4(f) other
income. If the dividend and interest received from overseas investment to the Malaysia
investors other than the resident company carry on banking business in Malaysia, it is
exempted from tax. Besides that, the foreign investors who are non-resident are exempted
from tax if the interest received is paid by the Malaysia banking or financial business
(Public Ruling No. 2/2014 Taxation of Investors on Income from Foreign Fund
Management Company, 2014).
4.1
Foreign withholding tax imposed on dividend income
The withholding tax charged on the foreign dividend income, that withholding tax is
accord either unilateral or bilateral relief against the Malaysia income tax. Withholding
tax means a method of collecting income tax from non-resident deriving Malaysia
income paid to the Inland Revenue Board of Malaysia. If there is underlying tax
provision, the underlying tax is allow to use in the computation of unilateral or bilateral
relief after taking into account of withholding tax. However, if there is no underlying tax
provision, only the withholding tax is used to compute unilateral or bilateral relief. Below
is the formula used to compute the unilateral and bilateral relief:
5
a) Bilateral relief is the lower of:
Gross Foreign Income
× Malaysian Income Tax Payable
a.
Total Income
OR
b. Foreign tax payable
b) Unilateral relief is the lower of:
a.
Gross Foreign Income
× Malaysian Income Tax Payable
Total Income
OR
b.
1
× ForeignTax Payable
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Below is the example of calculating bilateral and unilateral relief.
Net premiums
Allowable expenses
Investment income:
Rental
Dividend (25% tax @7,000,000)
Interest (Malaysia)
Interest (UK tax 100,000)
Computation of tax payable:
Net Premiums
Less: allowable expenses
Statutory income from business
Rental
Dividend
Interest (Malaysia)
Interest (UK)
Total Income
Income tax charge (25%)
Withholding tax in UK (10%)
RM
140,000,000
100,000,000
34,000,000
28,000,000
9,000,000
1,000,000
RM
140,000,000
(100,000,000)
40,000,000
34,000,000
28,000,000
9,000,000
1,000,000
112,000,000
28,000,000
100,000
Bilateral Credit:
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=1,000,000/112,000,000×28,000,000
= RM250,000
OR
RM100,000 whichever is lower. Therefore, the bilateral credit is RM100,000.
Unilateral Credit:
=1,000,000/112,000,000 ×28,000,000
= RM250,000
OR
=1/2 ��100,000
= RM50,000 whichever is lower. Therefore, the unilateral credit is RM50,000.
4.2
Underlying tax
Underlying tax is the tax imposed on the profit arising in the foreign country
when dividend is paid. In computing bilateral relief, underlying tax is allowed as part of
the foreign tax due to the foreign country want to encourage investment in their country.
The underlying tax is negotiated and stated into the double taxation agreement. Double
taxation agreement is occurred when the income derived by a person from a source is
brought to charge in more than one country. This is the taxation agreement between two
countries. The shareholders will be received net dividend income after deduction of
withholding tax.
5.0
Incentives to bank
Banks who will get exemption on statutory income from business conducted in
international currency business and qualifying Ringgit accounts are international Islamic
bank, international Takaful operator and international currency business units. The
international currency business means the business is carried on non-RM. However,
qualifying Ringgit accounts mean business is carried on Ringgit Malaysia. Income
derived from international currency business and qualifying Ringgit accounts are two
different income sources. The exempted statutory income will be brought into an exempt
income account. Besides that, those banks also can enjoy stamp duty exemption on
certain instruments for promoting Malaysia International Islamic Financial Centre
(Malaysian Tax and Business Booklet, 2013/2014). This incentive is valid from 1 January
2007 till 31 December 2016.
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6.0 Chargeable Income
The Chargeable Income (CI) is computed based on the general income tax
provisions, there are no special regulations or rules on the taxation of banks and financial
institutions. The computation as follows :
Gross Income [s 4 (a)]
(-) Expenses wholly and exclusively incurred in the production
RM
XXX
XXX
of income (s33)
Adjusted Income
(-) Capital allowance (Sch 3)
Statutory Income (World scope)
(-) Business losses b/f (Malaysian)
Chargeable Income
XXX
XXX
XXX
XXX
XXX
Gross income for bank and financial institutions included interest and discount
receivable, commissions, realized gain on foreign exchange, dividends from short-term
investments, rental of safe deposit boxes , sales of Malaysian Government Securities
(MGS), etc
7.0 Interest paid by banks or finance companies
According to the paragraph 33 of schedule, for those who are not resident in
Malaysia and do not have a place of business in Malaysia receiving interest from bank or
finance companies , then he/she will be exempted from withholding tax. Witholding tax
is a methd of collecting income tax from non-resident deriving Malaysian income. Tax is
deducted at source which means pay in net.
Besides that, any interest income paid by Islamic bank established under the
Islamic Banking Act 1983 and other financial institutions approved by the Minister of
Finance is also exempted from withholding tax. Example such as, Kuwait Finance House
(Malaysia) Berhad.
However , the exemption does not applicable for the interest paid by branches of a
foreign bank that carrying business in Malaysia to its head office or other branches
outside Malaysia for the purpose of maintaining the net working funds of the Malaysian
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branch. Working fund of banks refer to the funds deployed by a bank in its business or in
other sentence it means total resources of the bank. It includes capital, reserves and
surplus, deposits , borrowings , other liabilities and provision.
7.1 witholding tax on net working funds
According to the section 37(1)(a) of bank and financial institutions act 1989 ,
foreign banks required to maintain 6% of the total assets or RM10 million whichever is
the lower as net working funds. During shortfall, foreign bank would remit fund from
oversea branchs or head office, those interest paid to an oversea branches or head office
as a return on the remittance will be subjected to 15% of withholding tax.
7.2 Tax planning
It is more tax efficient for interest to be charged by the overseas branch or head
office when funds are remitted into Malaysia for net working fund purposes. This is
because such interest expense is allowable expenses in computing the tax liability of
Malaysia branches. This is because the corporate tax rate is 25% , while withholding tax
on interest payment is only at 15% (lower rate is presecibed under the bilateral credit.)
Scenario 1
Scenario 2
Overseas bank do not
Overseas bank do
charge interest on funds
charges interest on
remitted
funds remitted
Gross Income
(-) Interest paid to overseas
RM
100,000
__
RM
100,000
(20,000)
branch
Chargeable income (CI)
Income tax (25%)
Withholding tax paid (15%x
100,000
25,000
__
80,000
20,000
3,000
RM 20,000)
Total tax paid
25,000
23,000
Tax savings (A-B)= RM 2,000
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7.3 Case law decision on net working fund
In U Bank Ltd v KPHDN (1996) MSTC 2,646, the appellant carried on baking business
in Singapore and also in Malaysia, through a branch set up in Kota Kinabalu.
Permanent establishment under the Double Taxation Agreement (DTA) of Malaysia
branch with Singapore were has made interest payments attributable to fund used to
maintain net working fund to the head office in Singapore and also overseas branches
during year of assessment (YA) 1982 to 1996. The issue of the determination is whether
the interest income received by the head office are rightly not exempted from tax by the
proviso in para 33 of Sch 6 or the interest income was not subject to tax by relying on
Article IV and XV of the Double Taxation Relief (Order) 1973.
Both companies are distinct and separate enterprise, interest make by the branch were
received by the head office to form part of the income & profits. Therefor liable to tax in
Malaysia. Under para 33 of Sch 6, interest charges received by the head office from it
permanent establishment were not interest accruing and also paid to maintain net working
funds.
8.0 Tax planning on foreign banking income
Malaysia resident bank has been taxed on world scope basis including branch profits
derived in Malaysia. Therefor, advisable for Malaysia bank to set up a subsidiary in
foreign countries because profit of subsidiary will not be taxed in Malaysia at the point of
accrual and will only be taxed at the prevalent tax rates in that foreign country. The
dividends declared of foreign country were received by the Malaysia bank then only
subject to tax.
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Example:
Titanic Bank Berhad (‘Titanic’) (Malaysia resident) is a licenced bank having several
branches in Malaysia and an overseas branch in Alphaland. Titanic’s result for it’s
financial year ended on 31.12.2014 were:
Adjusted income computed for Malaysia tax purpose:
RM
Home branches
500,000
Alphaland branch
200,000
The following additional information is supplied:
1. Titanic has a 15% shareholding in Betabank, net dividend of RM18,900 was received
in Malaysia in 2014 were not included above. Malaysia has double taxation agreement
with Betaland which is full tax credit relief were tax including for a shareholding
exceeding 10% in any company, relief for underlying tax. Betabank deducted tax of 10%
on paying the dividend. For the year 2014, Betaland suffered tax equivalent to RM50,000
and its accounting profit after tax were equivalent to RM150,000.
2. Titanic has suffered Alphaland tax of RM46,800 on the income of its Alphaland branch
for 2014, calculated at 25% on branch income as adjusted for Alphaland tax purposes
(RM180,000). Malaysia has a DTA with alphaland, which provides for tax credit relief.
Profit of Alphaland branch for 2013 is RM40,000 was remitted to Malaysia in 2014.
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Answer:
Bilateral tax credit:
RM
RM
RM
a. alphaland branch profits
Malaysia tax 200/728 x RM 182,000
50,000
Aphaland tax
46,800
Lower of
46,000
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b. Betaland dividend
RM
Malaysia tax 28/728 x RM 182,000
Betaland tax net dividend
Add:withholding tax RM 18,900 x 10/90
RM
RM
7,000
18,900
2,100
2,100
21,000
Add: underlying tax 21,000/150,000 x 50,000
7,000
Gross amount
28,000
Tax suffered
Lower of
7,000
9,100
7,000
53,800
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8.1 FOREIGN ACCOUNT TAX COMPLIANCE ACT (FATCA)
FATCA is a legislation to help counter tax evasion in the United States of America.
FATCA creates a new information reporting and withholding regime for payments made
to certain foreign financial institutions and other foreign entities. The FATCA
requirements came into effect on 1 July 2014. FATCA is intended to increase
transparency for the United States (U.S.) Internal Revenue Service (IRS) with respect to
U.S. persons that may be investing and earning income through non-U.S. institutions.
While the primary goal of FATCA is to gain information about U.S. persons, FATCA
imposes tax withholding where the applicable documentation and reporting requirements
are not met.
FATCA requires a foreign financial institution (“FFI”) like Bank Islam (“the
Bank”/”Bank”) and other financial intermediaries to report to the U.S. Internal Revenue
Service (“IRS”), a U.S. Person‟s specified foreign financial assets maintained with the
Bank in the form of “depository financial accounts” that exceed certain thresholds. For
Bank Islam, depository financial account includes all deposit accounts and investment
accounts offered to individuals and entities. For Bank Islam, depository financial account
includes all deposit accounts and investment accounts offered to individuals and entities.
persons will also be impacted as they may now be required to withhold a 30% tax on that
income paid to a non-U.S. person under FATCA.
FATCA is applicable both:
1.All new to Bank customers regardless if the applicant is an individual or entity applying
to open a deposit account or an investment account.
2.Existing customers regardless if account holder is an individual or an entity holding a
deposit account or an investment account.
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9.0 Investment in shares and property held by bank
Shares is short term were related to banking business whereas property is long term
investment were non banking business. The distinction is crucial as gain form realization
of the long term investment are not subject to income tax.
However, the investment held by banks as current assets that constitute stock in trade
held in connection with its normal banking business will be subject to tax were any gain
from the disposal assets.
9.1 shares as trading stock
A liability to income tax would arise where investments in shares are held in connection
with the banking business, example were the share held to meet the withdrawal of
depositors, earning income to pay the interest expense commited on deposits.
Under Traditional view:
In punjab co-operative bank ltd v CIT (1940) bank would be taxed on profit derived from
its investments because linked with deposits and withdrawals of cash.
Under Current development:
In waylee investment ltd v CIR(1990) were bank was able to hold long term investment
and the profit of disposal was not taxable. In this case, the bank intended to hold the
investment for an indefinite period. The following principles are established:
(a) An Investment is acquired as trading stock if it was held by the bank as being
available to meets the demands of the depositors.
(b) financial institutions are able to hold long term investment separate from any portfolio
of short term investments. The criteria to determine this is not only the length of the
period of holding and the purpose for which the shares were acquired but also whether
the investment in question could reasonably be treated as part of the financial institution’s
capital structure, or whether they were held as part and parcel of funds available to meet
demands of depositors.
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10.0 Deductibility of bad debt
Under S34(2) on deductibility of bad debt would need to satisfy the following
requirements:
(1) it has to be a trade debt
(2) it is reasonably estimated in all circumstances of the case to be wholly or partly
irrecoverable.
(3) it arises in the course of carrying on the business and not from taking over the debts
from other traders.
10.1 Meaning of ‘reasonably estimated’
Tax authorities may require the bank to show that all necessary actions, including legal
action have been instituted to recover the trade debts, before a tax deduction is allowed.
The tax authorities would allow a tax deduction when a provision is made for the
following reason:
(a) The debtor is insolvent
(b) The debtor has absconded
(c) The debtor has passed away
(d) The debt is statute barred
In order for debt to qualify for deduction under S34(2) of the Act, it must first come
within the meaning of debt as defined in S34(3), which includes:
(1) a debt in respect of interest of the kind referred to in S24(5), example interest which
has been treated as business income for tax purposes.
(2) a debt arising in respect of a loan of the kind mentioned in S24(5) granted in the
course of carrying on the business, example loan from which was derived the interest that
was treated as business income for tax purposes.
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Bibliography
Malaysian Tax and Business Booklet. (2013/2014). 28.
Public Ruling No. 2/2014 Taxation of Investors on Income from Foreign Fund
Management Company. (2014, April 28). Retrieved from Inland
Revenue Board of Malaysia:
http://www.hasil.org.my/pdf/pdfam/PR2_2014.pdf
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