How About Foreign Dividends? They will be taxed too?

Budget 2022 proposed that foreign-sourced income will now be taxed. One of the key issues to address is if foreign dividends are banked into Malaysia bank account will they be taxed? 

I Don’t think foreign dividends should be taxed

Here’s the counterargument against taxing these foreign dividends. The law currently exempts local dividends from income tax due to the single-tier system that Malaysia adopts. 

Double taxation on foreign dividends is not right

Double taxation is a “crime”. Well, not legally a crime. Instead, it is conventional not to put the same income to tax twice. 

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Does the word “Double Taxation” sound foreign to you? Read on.

How “Double Taxation” works

It all started due to the Company Law concept of “separate legal entities”. The company and its shareholders are considered two separate legal entities. The company is taxed on their taxable profit. 

Tax the hand receiving the dividend?

Despite the profit that provided the cash to pay the dividends were already taxed at the company level. When a company pay out dividends to shareholders, that dividend received is regarded as income in the hand of shareholders and subjected to tax. 

That’s why it is called double taxation, ie. taxed on the company’s end and also on the shareholders. 

Generally, double taxation is seen as a negative element of a tax system. That’s why most tax systems will create either tax credit or shift to a single-tier tax system. 

Single-tier tax system

Malaysia has long shifted fully on Single tier dividend tax system (since 1st January 2014). Where all dividends received from Malaysia Company will be exempted from tax in the hand of shareholders. 

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Become an International tax issue

It has long been good practice for countries to avoid taxing the same income twice. That’s where the OECD conventions come into play. The key purpose why countries signed treaties with each other is to avoid double taxation. 

Paragraph 28 Schedule 6

In Malaysia, we rely on Paragraph 28, Schedule 6 to exempt foreign-sourced income, which includes dividend income. The foreign dividend was exempted for a very long time. 

At this moment we are uncertain how this “taxing foreign-sourced income” will work. Will government remove Para 28? Or insert a new section just to tax specific type of foreign source income?

Conclusion

As such should it be a blanket removing of para 28, there should be a system to claim tax relief should the same income be subject to tax elsewhere be it in a foreign country. 

We will need to wait and study the final gazetted Finance Act to have a final understanding of what is government’s ground on this.