Malaysia Explains New Cap On Interest Expense Deductions
11/07/2019
The Inland Revenue Board of Malaysia has released new guidance on restrictions to the deductibility of interest expenses.
Malaysia's rules restricting the deductibility of interest expense are contained in Section 140C of the Income Tax Act 1967. The Income Tax (Restriction on Deductibility of Interest) Rules 2019 have been introduced to restrict deductions for interest expenses or any other payments that are economically equivalent to interest, to ensure that deductions are commensurate with business income, effective July 1, 2019.
The rules are based on the recommendations of the OECD in Action 4 of its base erosion and profit shifting (BEPS) Action Plan. The rules are intended to prevent tax base erosion through the use of excessive interest expense deductions to reduce domestic tax. There are parts that have been customized based on domestic circumstances.
The Malaysian rules cap allowable interest expense deductions at 20 percent of a taxpayer's income before interest, tax, depreciation, and amortization (EBITDA). Disallowed deductions for one year can be carried forward to the subsequent year.
The interest restriction under Section 140C of the ITA and the Rules do not apply to:
- (a) An individual;
- (b) A person who is licensed under the Financial Services Act 2013 [Act 758] to carry on banking business, investment banking business, insurance business, or reinsurance business;
- (c) A person who is licensed under the Islamic Financial Services Act 2013 [Act 759] to carry on Islamic banking business, takaful business, or retakaful business;
- (d) Labuan banks and Labuan investment banks licensed under Part VI of the Labuan Financial Services and Securities Act 2010 (LFSSA);
- (e) Labuan Islamic banks and Labuan Islamic investment banks licensed under Part VI of the Labuan Islamic Financial Services and Securities Act 2010 (LIFSSA);
- (f) Labuan insurers and reinsurers including Labuan captive insurance business licensed under Part VII of the LFSSA;
- (g) Labuan takaful and retakaful operator including Labuan captive takaful business licensed under Part VII of the LIFSSA;
- (h) A development financial institutions (DFIs) prescribed under the Development Financial Institutions Act 2002;
- (i) A special purpose vehicle (SPV) as defined under Subsection 60I(1) of the ITA;
- (j) A person who is carrying on a business as a construction contractor who is subject to Income Tax (Construction Contracts) Regulations 2007 [P.U. (A) 276/2007]; and
- (k) A person who is carrying on a business as a property developer which is subject to Income Tax (Property Developers) Regulations 2007 [P.U. (A) 277/2007].
The restriction on deductibility of interest under Section 140C of the Act and the Rules will only be applicable on a business source where the basis period of a person start on or after July 1, 2019. In a scenario where the basis period of a person begins prior to July 1, 2019, the interest restriction under Section 140C of the Act and the Rules will not be applicable.
Source: Pride Partners International