Guidelines on tax treatment for banks/development FIs adopting MFRS 9

Guidelines on the income tax treatment for banks or development FIs which adopt the MFRS 9 – Financial Instruments

As highlighted in an earlier alert, the “Malaysian Financial Reporting Standard 9 Financial Instruments” (MFRS 9) was issued to provide updated guidance for the recognition and measurement of financial instruments, effective 1 January 2018. Thereafter, the Income Tax (Special Treatment for Bank or Development Financial Institution which Adopt Malaysian Financial Reporting Standard 9: Financial Instruments) Regulations 2021 [P.U.(A) 400/2021] were gazetted on 14 October 2021 (see Tax Alert No. 21/2021). These Regulations apply to the following financial institutions which adopt MFRS 9:

• A licensed bank under the Financial Services Act 2013 (FSA),
• A licensed Islamic bank under the Islamic FSA, or
• A development FI prescribed under the Development Financial Institutions Act 2002

Following the above, the IRB has recently published on its website technical guidelines titled “Guidelines on the Income Tax Treatment for Bank or Development Financial Institution which Adopt Malaysian Financial Reporting Standard 9 – Financial Instruments”, dated 11 November 2021. The Guidelines are issued to explain the changes and provide guidance on the tax treatment for banks or development FIs that adopt MFRS 9. These new Guidelines replace the earlier Guidelines on the Income Tax Treatment from Adopting FRS 139 – Financial Instruments: Recognition and Measurement.

The new Guidelines broadly outline the classification, measurement and recognition of financial assets, financial liabilities and impairments (refer also to Appendix 1 of the Guidelines). The Guidelines explain the tax treatment for the following:

• Financial assets and/or liabilities on revenue account
• Financial assets and/or liabilities on capital account
• Impairment losses of financial assets
• Other movements in the expected credit loss (ECL) account per the Statement of Financial Position
• Transaction costs
• Gain or loss in respect of hedging instruments
• Gain or loss arising from foreign exchange transactions

The Guidelines also explain the transitional provisions applicable to certain situations, which are illustrated in Appendix 2 of the Guidelines.

In line with the Regulations, the new Guidelines are effective from:

• YA 2018: Bank or development FI with an accounting period ending on 31 December
• YA 2019: Bank or development FI with an accounting period ending on a day other than 31 December