“Schedule 7 – Double Taxation Relief” is read as follows:- Bilateral credit
1. Subject to this Schedule, the amount of Malaysian tax payable for a year of assessment shall be reduced by the amount of any bilateral credit.
2. Bilateral credit shall not be allowed against Malaysian tax for any year of assessment unless the person chargeable to the Malaysian tax is resident for the basis year for that year of assessment.
3. Where foreign income charged to foreign tax is income for a period which overlaps the basis period for a year of assessment, that income shall be apportioned in the manner provided by paragraph 3A and for that year of assessment bilateral credit may be given only in respect of so much of that income as is apportioned to the part of the overlapping period which overlaps the basis period.
3A
3A(1). For the purposes of paragraph 3, where a foreign income is receivable in respect of a period which overlaps the basis period (which is referred to in this paragraph as the overlapping period), that foreign income when received shall be apportioned between the part of the overlapping period which overlaps the basis period and the remaining part of the overlapping period.
3A(2). The apportionment under subparagraph (1) shall be made in the proportion that the number of days of the overlapping period that fall into the basis period bears to the total number of days of the overlapping period, unless the Director General, having regard to the facts of any particular case, otherwise directs.
3A(3). So much of that foreign income as is apportioned to the overlapping part of the overlapping period shall be treated as foreign income of the person for the basis period.
4. Where foreign income (being income for a particular period) is charged to Malaysian tax for more than one year of assessment or is charged to foreign tax more than once, bilateral credit may be allowed for a year of assessment for the total amount of foreign tax charged on that foreign income:
Provided that—
(a) the credit so allowed should not exceed the total amount of Malaysian tax charged on that foreign income; and
(b) where credit has been allowed for a year of assessment for any foreign tax, no credit shall be given for the same tax for any other year of assessment.
5. The bilateral credit to be allowed to a person in respect of any foreign income for a year of assessment shall not exceed a sum equal to so much of the Malaysian tax payable by him for that year (before the allowance of any credit under this Schedule) as bears to the whole of that Malaysian tax the same proportion as his statutory income in respect of that foreign income bears to his total income for that year.
6. Notwithstanding paragraph 5, the total bilateral credit to be allowed to a person for a year of assessment shall not exceed the total Malaysian tax payable by him on his chargeable income for that year before the allowance of any credit under this Schedule.
7. Bilateral credit shall not be allowed against Malaysian tax payable by a person for a year of assessment if he elects that credit shall not be allowed for that year.
8. (Deleted by Act 591 of 1998.)
9. Any claim for bilateral credit for a year of assessment shall be made in writing to the Director General not more than two years after the end of that year; and, where the claimant is aggrieved by the Director General’s decision on the claim, section 131(5) shall apply (with any necessary modifications) as it applies where an applicant is aggrieved by the Director General’s decision on an application under section 131(1).
10. Where the amount of any bilateral credit given is rendered excessive or insufficient by reason of any adjustment of the amount of any Malaysian tax or foreign tax, nothing in this Act limiting the time for making assessments, for making applications for relief or for giving notice of appeal shall apply to any assessment, application for relief or notice of appeal to which the adjustment gives rise, being an assessment, application or notice made or given not more than two years after the time when all such assessments, adjustments and other determinations have been made (in Malaysia or elsewhere) as are material in determining whether any and if so what bilateral credit falls to be given.
Special provisions for trusts
[Special provisions for trusts: Table of provisions]
11. Where the trust body of a trust is resident for the basis year for a year of assessment and the total income of the trust body includes foreign income which has suffered foreign tax, every beneficiary of the trust who is resident for that basis year shall be deemed for the purposes of this Schedule—
(a) to have a part of that foreign income proportionately equal to the share of the total income of the trust body to which he is entitled; and
(b) to have paid on that part of that foreign income a part of that foreign tax proportionately equal to that share of the total income of the trust body.
12. Where a trust is not resident for the basis year for a year of assessment, any beneficiary of the trust (including an annuitant) who is resident for that basis year shall, if he satisfies the Director General that—
(a) he has paid or suffered foreign tax on his income from his further source (within the meaning of section 61(5)) in relation to the trust body or on so much of the annuity as is derived from outside Malaysia; or
(b) any income from such further source or any annuity so derived was paid by the trust body from income which had suffered foreign tax,
be allowed bilateral credit in respect of that foreign tax in accordance with this Schedule.
Unilateral credit
13. Subject to paragraphs 14 and 15, unilateral credit shall be allowed in the same way as bilateral credit, and paragraphs 1 to 12 shall apply accordingly.
14. The unilateral credit allowed in respect of any foreign income for a year of assessment shall not exceed half the foreign tax payable on that income for that year.
15. Where an employee pays Malaysian tax and foreign tax in respect of income from an employment exercised outside Malaysia, then, whether or not he was resident for the basis year for the year of assessment for which the Malaysian tax was paid, unilateral credit may be allowed for foreign tax.
Interpretation
16. In this Schedule—
“bilateral credit” means credit in respect of foreign tax which, by virtue of any arrangements having effect under section 132, is to be allowed as a credit against Malaysian tax;
“foreign income” means income derived from outside Malaysia or in the case of bilateral credit, includes income derived from Malaysia charged to foreign tax;
“Malaysian tax” means tax imposed by this Act;
“unilateral credit” means credit in respect of foreign tax payable under the laws of a territory outside Malaysia with respect to which no arrangements under section 132 are in force.
Overview:
Double taxation relief refers to the mechanism by which a taxpayer is provided relief from paying taxes on the same income in more than one country.
The provisions outlined in the text are meant to govern the application of bilateral and unilateral credit in the context of Malaysian tax laws.
Key Provisions:
Bilateral Credit (Paragraphs 1-10):
- Definition: Bilateral credit is a credit against Malaysian tax for taxes paid in another country.
- Residency Requirement: Bilateral credit is allowed only if the taxpayer is a resident of Malaysia for the basis year.
- Foreign Income Apportionment (Paragraph 3): If foreign income overlaps the basis period, the credit is given based on the portion apportioned to the basis period.
Special Provisions for Trusts (Paragraphs 11-12):
- Deemed Proportionate Income: Beneficiaries of a trust are deemed to have a part of foreign income proportionate to their entitlement.
- Credit for Non-Resident Trust Beneficiaries: Non-resident beneficiaries may claim bilateral credit if they paid foreign tax on income derived from the trust.
Unilateral Credit (Paragraphs 13-15):
- Definition: Unilateral credit is credit for foreign tax paid in a territory outside Malaysia with no bilateral arrangements.
- Limitation (Paragraph 14): Unilateral credit cannot exceed half of the foreign tax payable on the income.
- Exemption for Overseas Employment (Paragraph 15): Employees paying tax in Malaysia and a foreign country for overseas employment may claim unilateral credit.
Interpretation (Paragraph 16):
- Bilateral Credit: Defined as credit for foreign tax under arrangements having effect under section 132.
- Foreign Income: Refers to income from outside Malaysia; for bilateral credit, it includes income from Malaysia subject to foreign tax.
- Malaysian Tax: Refers to tax imposed by Malaysian law.
- Unilateral Credit: Defined as credit for foreign tax payable in a territory with no section 132 arrangements.
Practical Impact: These provisions ensure that individuals and entities are not subjected to double taxation, promoting fair and efficient taxation across borders. The rules establish the conditions, limitations, and procedures for claiming credits, preventing abuse and ensuring compliance with international tax standards.
Amendment Overview:
The Finance (No. 2) Bill 2023 proposes an amendment to Schedule 7 of the Income Tax Act 1967, specifically to paragraph 16.
The amendment alters the definition of “foreign income” concerning both unilateral and bilateral credit.
The new definition distinguishes the nature of foreign income based on the type of credit claimed.
Amended Definition: The amended definition of “foreign income” is as follows:
- For Unilateral Credit (Paragraph 16(a)): It refers to income derived from outside Malaysia that is charged to foreign tax.
- For Bilateral Credit (Paragraph 16(b)): It includes income derived from both outside Malaysia and Malaysia, charged to foreign tax.
Explanation and Example:
Unilateral Credit (Paragraph 16(a)):
- Explanation: Under unilateral credit, only income derived from outside Malaysia and subjected to foreign tax is considered foreign income.
- Example: If an individual earns income from a foreign investment located outside Malaysia and pays foreign tax on that income, this income is treated as foreign income for unilateral credit purposes.
Bilateral Credit (Paragraph 16(b)):
- Explanation: For bilateral credit, the definition includes both income earned outside Malaysia and income earned within Malaysia, both subjected to foreign tax.
- Example: A multinational corporation earns income from its operations, both in Malaysia and abroad. The portion of income derived from operations outside Malaysia and from operations within Malaysia, both subjected to foreign tax, are considered foreign income for bilateral credit purposes.
Tax Impact:
- The amendment clarifies and aligns the definition of “foreign income” with the specific unilateral or bilateral credit requirements.
- Taxpayers can now precisely determine what constitutes foreign income based on the type of credit they are claiming.
- This amendment ensures accuracy and consistency in applying the credit provisions, reducing ambiguity in treating foreign income for tax credit purposes.
