Tan Hooi Beng
By Tan Hooi Beng
International Tax Leader of Deloitte Malaysia

MALAYSIA adopts a territorial tax regime, where only Malaysian-sourced income is within the ambit of its tax net. That said, banking, insurance, or sea and air transport sectors are taxed on a worldwide basis. On 5 October 2021, the European Commission officially announced updates to the European Union (EU) grey list.

Malaysia, together with Hong Kong, Costa Rica, Qatar, and Uruguay are in the list. In reference to Annex II, the grey list are countries that have yet to comply with international tax standards but have made the commitment to reform tax policies.

As a result of the foreign source income exemption regimes review, the EU considers Malaysia’s territorial sourced tax regime harmful. The EU has granted Malaysia a deadline of 31 December 2022 to amend its regime, and it is understood that Malaysia has agreed to do so. As a result of Malaysia’s willingness to respond to the EU’s concerns, defensive measures by the EU will be suspended, subject to the passing of those amendments.

Malaysia should not be hasty in amending its tax regime and should continue its good practice of consulting relevant stakeholders. A robust review is essential including analysing the regimes of countries that are not on the list or have moved out from the list. Take for example Singapore’s territorial and remittance basis regimes, and Hong Kong’s proposed legislative amendments targeting corporations with no substantial local economic activity who are receiving passive income that is not chargeable to tax in Hong Kong, are something for Malaysia to ponder. It was reported that Hong Kong will continue to adopt the territorial source principle.

*Full press release is attached

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