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"Economic Substantive": Amendments to the tax return may be required if the taxpayer fails to comply

Updated: May 3, 2023

Effective 1 January 2022, the tax exemption for foreign-sourced income ("FSI") received by Malaysian residents provided for under Para 28 was removed following the Budget 2022 made on 29 October 2021.

On December 29, 2022, the Malaysian Inland Revenue Board (IRB) issued a press release (available only in Bahasa Malaysia) announcing an additional requirement for tax exemption on eligible persons' foreign-source dividend income received in Malaysia.

Paragraph 7 of the press release was extracted as follows:

The English meaning for Paragraph 7 is for Income Tax Return Form (ITRF) submitted on or before 29 December 2022, taxpayers must submit amendments to the ITRF if additional "economic substantive" requirements are not complied with, and no penalties will be imposed.

CTIM Comment:

We thank IRBM for its decision not to impose a penalty on the revision of the income tax return form submitted up to 29 December 2022.

However, this concession should not be limited to tax returns submitted on or before 29 December 2022.

The reason is that even at the time of writing, the full context of ‘economic substance’ may not be clear in many practical cases.

Time is of the essence, and the due date for tax return submission is the end of December, January, or even February.

Hence, if the decision to retrospectively impose these economic substance requirements is unchanged (for which we appeal otherwise in the preceding points), we request that the flexibility to amend the tax return be granted for a longer window.

Suppose the decision is to impose these economic substance requirements retrospectively. In that case, we also bring to IRBM’s attention the complexities of the CP204A tax estimate revisions and potential underestimation penalties under S.107C (10) of the Act.

Consider the examples below:

A company with financial year-end being 31 December. 

For YA 2022, the due date to file the CP204A is 30 September 2022, when the economic substance requirements were unknown. Hence, IRBM may grant this company flexibility to file a revised tax estimate, which involves payment beyond the 13th month of the basis period. 

Alternatively, to make an administrative policy decision not to impose any ‘increase in tax’ under S.107C (10) for underestimation arising due to the newly imposed economic substance requirements.
A company with financial year-end being 30 June. For YA 2022, the due date to submit the CP204A is 31 March 2022. In this case, even the flexibility to revise the tax estimate would not be helpful as it is too close to the due date for submission of the tax return. Hence, there should be an administrative policy decision to waive the S.107C(10) ‘increase in tax that arises when the tax return is filed by January 2023 or February2023duetothenewlyimposedeconomicsubstance requirements.

Feedback from IRBM:

A company can appeal to IRBM if subjected to a tax increment under subsection 107C(10).


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