Foreign funds / assets : How to clear your tax headache

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This article was published in the Sun on 28th January 2019

 

It is no longer possible to hide your foreign assets and income from the “taxman”.

Although Malaysia does not tax foreign income, the Inland Revenue Board (IRB) of Malaysia has the right to scrutinize your tax affairs to determine the source of funds which gave rise to the overseas assets.

IRB is interested to know whether the source of funds (capital gains or income) which originated from Malaysia were disclosed to them in your tax returns during the earlier years.

The government has opened the door and provided an opportunity to taxpayers who have not declared income or capital gains which should have been subjected to tax in the earlier years without undergoing a detailed and sometimes painful scrutiny. As a sweetener, the government has provided a lenient penalty regime of 10% of the underdeclared tax until 31 March, and 15% until 30 June 2019.

This is provided for under the Special Voluntary Disclosure Programme (SVDP).

Can you carry on with a “hide and seek” game?

From September 2018, with the implementation of the Common Reporting Standards (CRS), under the Automatic Exchange of Information (AEOI) agreement, the foreign tax administrations are forwarding financial information to IRB. Waiting for the IRB to seek you out is not advisable as they are reviewing the information received. They have started contacting taxpayers to explain their past tax position.

Since the SVDP works on a good faith and voluntary basis, it will be advisable for the taxpayer to approach the IRB rather than wait. The voluntary approach will certainly add credibility to your disclosure and makes the settlement easier.

What information is available to the IRB?

All financial information available with depository institutions, custodial institutions, investment entities such as banks, insurance companies, mutual funds, sharebroking institutions, etc. This will cover bank balances, fixed deposits, insurance policies, shares, investment funds / instruments, etc.

What about real properties?

Although this is not covered in the first instance under the AEOI, IRB can ask the foreign tax authorities to provide the relevant information since most taxpayers will be declaring the rental income in the foreign countries. Alternatively, IRB can easily get this information through your foreign bank accounts. Although the offshore rental income will not be taxed in Malaysia, the IRB is interested in the source relating to the purchase of the property.

Will time bar protect you from disclosure?

No, it will not protect the taxpayer.

In the first place, if you have not filed a tax return in Malaysia or omitted such information in the earlier years, then the 5-year time bar can be breached on the grounds that there could be an element of fraud / wilful default / negligence.

Does SVDP provide a closure to your past?

The whole SVDP program is based on good faith and honesty on the part of the taxpayer. Only in exceptional circumstances where the IRB receives from third parties concrete evidence that the disclosure was significantly incorrect, the IRB is unlikely to re-open the case.

SVDP will give you assurance that your past affairs up to 2017 is up to date.

Can I declare any amount I like?

It is not advisable to declare without carrying out a due diligence of your past records of the amount of monies remitted out of Malaysia which should have been taxed in the past.

Foreign assets would have grown over the years, how to explain?

It is best to be transparent to the IRB to explain how the taxpayer has grown / multiplied their investments so that there is protection in the form of disclosure. It also prevents the IRB from going back to the past again as they would have accepted your explanation.

To further protect your past position and to provide a clean slate from 1 January 2018, it will be advisable for the bigger taxpayers to prepare a net worth statement of your assets and liabilities as at 30 December 2017, and have it deposited with the IRB as part of the SVDP.

The above approach will give you more or less absolute assurance that your past will not be scrutinised.

How will IRB reciprocate your goodwill?

Upon closure of an SVDP, IRB will provide you a clearance letter.

Don’t miss this golden opportunity to come clean.