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aws 全区号[(www.2km.me)_Budget 2022: Impact on investment management

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THE Budget 2022 proposed that foreign-sourced income received in Malaysia would be subject to income tax in Malaysia with effect from Jan 1, 2022.

It is assumed that this effective date refers to the date of the remittance received in Malaysia for ease of administration.

While relatively straightforward, this proposal does have far reaching implications to the Malaysian investment management community.

The current position in the Malaysian Income Tax Act, 1967 (MITA) states that foreign sourced income (income that has been derived from sources outside of Malaysia) when received in Malaysia is exempt from income tax, except in the case of a resident company engaged in the business of banking, insurance, sea transport or air transport.

This is provided for under Paragraph 28 of Schedule 6 of MITA.

This exemption made Malaysia a jurisdiction that afforded favourable tax treatment to outbound investments, akin to Hong Kong and Singapore.

The proposal announced on Oct 29, 2021 intends to repeal this exemption, in line with Malaysia’s commitment to address the European Union’s concerns of harmful tax practices.

The repeal of this exemption could have significant implications on the post-tax returns of investment vehicles in Malaysia that have built up a portfolio in non-Malaysian securities and instruments.

Where these investments currently provided tax exempt income in the form of foreign interest, coupon, and dividends; moving forward, this income would be taxable at 24% effective from Jan 1, 2022.

In the short term, this means a 24% haircut on the investment returns of these vehicles will be borne by the investors when the profits are distributed.

Depending on the laws of the investors’ jurisdiction, they may or may not get a relief on the 24% tax suffered at source.

In the case of unit trust structures, the tax impact appears restricted to the income flow from the holding of these non-Malaysian investments, and does not impact any gains from the sale/realisation of the investments directly as Section 61(1) of MITA provides that gains arising from the realisation of investments shall not be treated as income of a unit trust.

In summary, unit trust funds will lose a significant portion of investment returns in non-Malaysian investments as it will now be subject to 24% tax.

However, any profits/gains from the divestment of such investments will not be taxed.

In light of this, let’s consider what alternative unit trust funds and investment vehicles have, to preserve the anticipated returns on investments from non-Malaysian securities.

Paragraph 35 of Schedule 6 provides that interest paid or credited to any unit trust and listed closed-end fund is tax exempt provided:

> The interest is in respect of securities or bonds issued or guaranteed by the government; or

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