Crowe Chat Vol.2/2022

Section 140C of the MITA was legislated in the Finance Act 2018 to implement the ESR. The details of the implementation of Section 140C of the MITA were laid out in the Income Tax (Restriction on Deductibility of Interest) Rules 2019 which was gazetted on 28 June 2019. Subsequently, the IRBM issued the Restriction on Deductibility of Interest Guidelines on 5 July 2019 to provide clarification on the Rules.

In a nutshell, ESR affect the deductibility of interest expenses on financial assistance from outside Malaysia in controlled transactions – where deduction is allowed only up to a maximum of 20% of Tax-EBITDA. 

Tax-EBITDA = Adjusted income from business + Qualifying deductions + Interest expenses incurred on any financial assistance in a controlled transaction from sources consisting of business

Amended Income Tax Rules

The Income Tax (Restriction on Deductibility of Interest) (Amendment) Rules 2022 was gazetted on 31 January 2022 and came into operation on 1 February 2022. 

 

Details of the Amended Income Tax Rules

 

Principal Rules	Amended Rules
Qualifying deduction means (extracted verbatim from the relevant Rules) – (a) an amount equal to the expenditure incurred by the person which qualifies for double deduction, (b)  any claim for deduction under any rules made under Paragraph 154(1)(b) of the MITA where the deduction is allowed for purposes of ascertaining the adjusted income of the person.     Qualifying deduction = expenditure allowed for double deductions, further deductions and specific deductions allowed by the Minister.	Qualifying deduction means (extracted verbatim from the relevant Rules) - (a) where there is business expenditure incurred in the profit and loss account is allowed as deduction under the Act and the amount of the deduction allowed exceeds the amount of the business expenditure incurred, an amount equal to the difference between the amount of the deduction allowed and the amount of the business expenditure incurred in the profit and loss account; or (b) where there is no business expenditure incurred in the profit and loss account, the amount of deduction allowable under the Act.   Qualifying deduction EXCLUDES expenditure allowed for double deductions, further deductions and specific deductions allowed by the Minister.
The carry forward of unabsorbed interest expenses is applicable only to companies.	The carry forward of unabsorbed interest expenses is now applicable to any person, and is not restricted to a company. For companies, the carry forward of unabsorbed interest expenses is subject to the existing shareholders’ continuity test.

As previously outlined in Crowe Chat Vol.1/2022, the IRBM has recently issued its FAQs (available in Bahasa Malaysia only) to provide further clarification on the application of Section 107D of the MITA. 

Details of the FAQs

Major points highlighted in the FAQs are:

• Credit notes and discounts given as well as contra transactions with agents, dealers or distributors are not subject to withholding tax under Section 107D of the MITA. 
• Agents, dealers or distributors include resident individuals who are sole proprietors and partners in a partnership. 
• The RM100,000 threshold value refers to the payment received from each payer company.
• The RM100,000 threshold is determined by the payer company annually. 
• The tax residency status of the agent, dealer or distributor in the immediately preceding year is not relevant in determining the applicability of withholding tax under Section 107D of the MITA.

Payments and Reporting by Payer Companies

• Payer companies must use the withholding tax remittance form (CP107D) when making the 2% withholding tax payment via post or at the IRBM service counters.
• If payment is made to several agents, dealers or distributors, the complete details of payment for each agent, dealer or distributor can be completed  in the appendix [Lampiran CP107D(1)]. Each appendix can cater up to 20 agents, dealers or distributors.
• The 2% withholding tax payment is still applicable to the payments made to the agents, dealers and distributors even though the agents, dealers and distributors are subject to tax instalment payments under CP500.
• Upon submission of the income tax return forms by the relevant agents, dealers or distributors, the 2% withholding tax paid will be offset in arriving at the “balance of tax to be paid”.

Deferment of the 2% Withholding Tax Payment

• The deferment is given automatically to all payer companies. 
• The IRBM has provided further clarification on the application of the deferment as follows:-
  
  

• Payment made to the agents, dealers or distributors	Due date to remit the 2% withholding tax payment to the IRBM
  1 January 2022 – 2 March 2022	On 1 April 2022
  3 March 2022 onwards	Within thirty (30) days after paying or crediting the agent, dealer or distributor.