RECENTLY, there was a media announcement by the Inland Revenue Board (IRB) that it has identified 14,858 Malaysian tax residents with RM10 billion in undisclosed offshore financial accounts which have not been reported for tax purposes.
It is not uncommon to find many Malaysians with foreign bank accounts. If a taxpayer has a foreign bank account, it is the duty of the taxpayer to disclose the fact by ticking the box provided for in the annual tax return form. By doing so, the taxpayer is informing IRB of the presence of the foreign bank account.
In the event that any money in a foreign bank account is taxable in Malaysia, the taxpayer should follow through and bring it to tax in Malaysia. This will only happen if the income was sourced in Malaysia. In simple terms, the income should have been earned or generated from activities or investments carried out in Malaysia but subsequently remitted to the overseas bank accounts.
Income such as interest, rent, dividend, commission, profits from offshore business activity, income from services provided overseas, etc, will not be taxable in Malaysia since the place at which this income is generated is overseas. In the event the taxpayer remits the income to Malaysia, the tax law allows Malaysia to tax such income. However, an individual taxpayer is exempted from tax on such remittance until 2036.
Is it all taxable?
The cardinal principle of Malaysian income tax is, unless there is fraud, negligence or wilful default by the taxpayer, IRB is barred from raising assessment beyond the five-year time limit. For taxpayers who have foreign bank accounts but have not disclosed them in the tax return, the chances of such taxpayers being pulled up by IRB are high. In the event you are pulled up, IRB will ask you how the foreign funds were accumulated and this will inevitably lead to a requirement to prepare a capital statement for the past five years.
The capital statement will capture your increase or decrease in wealth on a year-to-year basis in and outside Malaysia. The capital statement for the individual will also capture assets that has been transferred to minors below the age of 18. It is also not uncommon to club husband and wife into a single capital statement.
In simple terms, the increase in wealth on a year-to-year basis must be reconciled with the income that has been declared for tax purposes together with other income that is not subject to tax such as capital gains, exempt income, offshore income which are not remitted back to Malaysia, etc.
It is possible that among the 14,858 cases mentioned, the bank balances may contain wealth that was accumulated over a long time. The difficult part here is to prove that such wealth was accumulated over a period of time since the paperwork to support that may be missing.
Taxpayers must find alternative evidence to support their legitimacy of the balance. Such evidence could be in the form of inheritance which can be found in the will of the deceased or court documents supporting amounts due to the taxpayer in the past. It is also not uncommon for taxpayers to have funds placed overseas many years ago that subsequently generate investment income overseas. Such income will not be taxed in Malaysia.
What should you do?
If you have any offshore accounts that are not declared, do not wait for IRB to come and find you. You can voluntarily seek an amendment to your tax return in case you have not done so. It is advisable that before you do so, you’re able to explain the source of your funds or if you wish to be comprehensive, it is best for you to prepare a capital statement for the past five years.
IRB should cooperate by accepting voluntary disclosure despite the fact that capital statements prepared by such individuals do not show deficit which will not result in any additional tax liability.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).
