Public Ruling No. 11/2011: Claiming of bilateral and unilateral tax credits
This Public Ruling (PR) was issued by the IRB on 20 December 2011 to explain how a person who has been charged to tax on the same income both in Malaysia and in another country may claim bilateral credit or unilateral credit.
Double taxation occurs when two countries impose income tax on a person with respect to the same income.
To mitigate the effects of double taxation on residents deriving income from another jurisdiction, many countries including Malaysia have entered into agreements for the Avoidance of Double Taxation (DTA).
If a DTA has been concluded with the other country, the appropriate provisions of Schedule 7 of the ITA (Income Tax Act) shall apply in respect of allowing the foreign tax payable as a bilateral credit relief pursuant to section 132 of the ITA.
In cases where there is no DTA concluded with the other country, a relief from Malaysian tax is given unilaterally pursuant to section 133 of the ITA 1967.
Under a DTA, if the income is taxable in both countries, relief is given by way of a tax credit known as bilateral credit. The general rules that govern the claim of bilateral credit in Malaysia are:
- Bilateral credit can only be claimed by a person who is resident in Malaysia.
- In the case of foreign income chargeable for foreign tax in respect of a period which overlaps the basis period for a year of assessment (YA), only that amount of the income which overlaps the relevant period is to be taken into account. Bilateral credit can only be allowed in respect of the income of the overlapping period that falls into the basis period for the appropriate YA.
- In the case where foreign income is chargeable for Malaysian tax or foreign tax more than once, bilateral credit may be allowed for the YA in respect of the total amount of foreign tax charged on that foreign income; no further credit is given for the same tax for any other YA.
- Bilateral credit for a YA must not exceed the Malaysian tax payable for that YA.
- The total bilateral credit for any YA must not exceed the total Malaysian tax payable on chargeable income for that YA before the allowance of any bilateral credit.
- No bilateral credit will be given if a person decides not to make a claim for a YA.
- Bilateral credit for a YA has to be claimed within two years after the end of that YA. The claim has to be made in writing to the Director General of the Inland Revenue (DGIR).
- If the bilateral credit allowed is excessive or insufficient because of adjustments made to the amount of Malaysian tax or foreign tax, an application for relief or a notice of appeal may be made or given within two years after the time that such assessments, adjustments or determinations have been made (paragraph 10 of Schedule 7, ITA).
- Pursuant to paragraph 9 of Schedule 7, ITA, a person may apply to the DGIR for a bilateral credit. If the person is aggrieved by the decision of the DGIR on the application, he may appeal within 6 months after being informed of the decision and request the DGIR to send the application to the Special Commissioners of Income Tax (SCIT) in accordance with subsection 131(5) of the ITA.
- Unutilised foreign tax credits cannot be carried forward to subsequent years of assessment.
- The amendment to the definition of foreign income in relation to bilateral credit, with effect from YA 2007, seeks to include income derived from Malaysia that has suffered foreign tax. Prior to YA 2007, no bilateral credit was available for such income.
- The formula for computation of bilateral credit is as follows:
|Foreign income (statutory income)||X||Malaysian tax payable before|
|Total income||bilateral/unilateral credit |
Foreign tax charged in respect of the foreign income includes income derived from Malaysia and charged to foreign tax, whichever is lower.
Where there is no DTA between Malaysia and a foreign country, a person, who is resident in Malaysia for the basis year for a year of assessment and who is chargeable to tax in Malaysia and has suffered tax in respect of the same income in that foreign country in which the income arose, may claim unilateral credit.
The general rules that govern unilateral credit are:
- Unilateral credit can be allowed in the same way as bilateral credit.
- Unilateral credit can be claimed by a person resident in Malaysia.
- The formula for computation of unilateral credit is as follows:
or ½ x foreign tax, whichever is lower.
|*Foreign income (gross)||X||Malaysian tax payable before bilateral/unilateral credit |
*Foreign income means income derived from outside Malaysia
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.
- An employee who pays Malaysian tax and foreign tax on employment exercised outside Malaysia may claim a unilateral credit for the foreign tax, whether or not he is a tax resident of Malaysia (Paragraph 15 of Schedule 7, ITA).
Foreign sourced income and remittances
- Pursuant to paragraph 28(1) of Schedule 6 of the ITA, income of any person, other than a resident company carrying on the business of banking, insurance and sea or air transport for the basis year for a YA derived from sources outside Malaysia and received in Malaysia is exempt from tax. In view of this, bilateral credit and unilateral credit are usually relevant only to a Malaysian resident that carries on the business of banking, insurance and sea or air transport and those with income that is derived from Malaysia but has nevertheless, suffered foreign tax.
- Residents of Malaysia are not eligible for bilateral credit or unilateral credit if the foreign income remitted to Malaysia has not been subject to Malaysian tax.
- To substantiate the foreign tax suffered, any of the following documents may be submitted:
- Notice of assessment from the foreign tax authority or receipt for the tax paid; or
- Statement from the foreign tax authority setting out the particulars that would normally be recorded on a notice of assessment or receipt for payment.
This public ruling is effective for YA 2011 and subsequent YAs.
Tax deduction on franchise fee gazette
A franchise is a business model whereby a franchisee is given the right to sell and distribute products or services based on the franchisor's system or plan.
This business model typically involves an initial franchise fee as well as subsequent royalty or other periodical payments.
Franchisees who intend to undertake such businesses are often deterred from doing so as the initial franchise fee is disallowed a tax deduction as the expense is incurred prior to the commencement of the business.
In recognition of this and to encourage franchise businesses, the Income Tax (Deduction for Expenditure on Franchise Fee) Rules 2012 [P.U.(A) 76] were gazetted on 23 February 2012.
This Gazette Order implements Budget 2012's proposal and takes effect from the year of assessment (YA) 2012.
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