Covid-19: Tax Resident Status, Permanent Establishment & Foreign Employment Income
04 June 2020
The Inland Revenue Board of Malaysia (“IRB
”) recently issued a FAQ
addressing the issues on tax resident status, permanent establishment (“PE
”) and foreign employment income arising from the travel restrictions imposed as a result of the COVID-19 pandemic.
A summary of the FAQ’s main points are as follows:
Individual’s Tax Resident Status
Generally, an individual will be regarded as a Malaysian tax resident if he/ she stays in Malaysia for more than 182 days (including any temporary period of absence).
In light of the travel restrictions imposed around the globe, for the purposes of determining the tax residence status of an individual, the following applies:
- the period where a local individual is stranded in a foreign country by reason of the COVID-19 travel restrictions shall be considered as part of their period of stay in Malaysia; and
- the period where a foreign individual is stranded in Malaysia by reason of the COVID-19 travel restrictions shall not be considered as part of his/ her period of stay in Malaysia.
Company’s Tax Resident Status
A company will be regarded as a Malaysian tax resident if the management and control of its business is exercised in Malaysia. An oft cited example of “management and control” is where a board of directors meeting is held in Malaysia.
The IRB stated that where a company is unable to hold its board of directors meeting physically in Malaysia as its directors are not able to travel by reason of the COVID-19 travel restrictions, the IRB is prepared to presume that the company is a Malaysian resident if:
- the company is a resident in the preceding year of assessment;
- there have been no changes to the economic circumstance of the company; and
- the directors are only able to attend the board of directors meeting outside of Malaysia (either physical meeting or through electronic means) due to the COVID-19 travel restrictions.
The IRB is also prepared to presume a company is a non-resident in Malaysia if the company is forced to hold its board of directors meeting in Malaysia (physically or virtually) due to the travel restrictions and there are no changes to the economic circumstance of the company.
In essence, the IRB will consider that the temporary presence of employees of a foreign company in Malaysia will not result in the creation of a PE here provided the foreign company did not have a PE in Malaysia prior to the COVID-19 travel restrictions and the temporary presence of the foreign company’s employees in Malaysia is due to the travel restrictions.
Foreign Employment Income
The IRB is also prepared to consider the foreign employment income of an individual who is employed outside of Malaysia as not being derived from Malaysia provided that there is no change to the employment contract and the arrangement of working remotely from Malaysia is temporary.
- At the outset, we highlight that the FAQ has no force of law. In absence of any legislation, the relevant tax legislation and case law will be the determinative authority on issues regarding tax resident status, PE and foreign employment income. The legality of the FAQs may be called into question when they are in direct conflict with the provisions of the ITA. For example:-
- The term “temporarily absent” was used in the FAQ. However, the criteria set out by the IRB in relation to being “temporarily absent” differs from how “temporary absence” (e.g. social visits) is defined under Section 7(1)(b) of the ITA.
- Item 2 of the FAQ is in direct contravention with Section 7(1)(a) of the ITA, which states that as long as an individual is in Malaysia for more than 182 days in a year, he/ she will be regarded as a Malaysian tax resident.
- Some of the FAQ items reiterate the provisions of the ITA. For example:-
- The IRB states it is prepared to presume that companies who were tax residents in Malaysia for the preceding year of assessment will be presumed to be a Malaysian tax resident for this year. However, Section 8(2) of the ITA has in fact expressly provided for such a presumption.
- The IRB states that it is prepared to consider the foreign employment income of an individual who is being employed outside of Malaysia as not being derived from Malaysia. However, Section 3 of the ITA clearly states that income tax in Malaysia is taxed on a territorial basis regardless of tax residency status. Therefore foreign employment income derived outside of Malaysia, is not taxable in Malaysia in any event.
- Finally, we make two cautionary comments:-
- Whilst the IRB has stated in the FAQ that employees of a foreign company temporarily situated in Malaysia should not constitute a PE, we caution such foreign company to ensure that its employees who working remotely from Malaysia do not render any services, conclude any contract, or conduct any business with the foreign company’s Malaysian clients in Malaysia.
- The IRB has placed an emphasis on the record keeping of relevant documentation to support the fact that any presence or absence in Malaysia was due to the COVID-19 travel restrictions. We highlight that maintaining proper records is mandatory under Section 82 of the ITA.
The fact that the FAQ does not have legal force is one of the reasons why Malaysia needs to enact a comprehensive COVID-19 legislation. Such legislation would provide certainty in governing all novel issues (including tax) amidst this unprecedented pandemic. In this regard, it has been announced that a Covid-19 temporary measures law will be tabled before the Malaysian Parliament when it reconvenes in July 2020.
If you have any queries, please contact Preetha Pillai (firstname.lastname@example.org) or Desmond Liew (email@example.com).