Tax Update-1998 Budget Issues

  With the proposed reduction of the corporate tax rate from 30% to 28% which is to be
effective year of assessment 1998, a new subsection 2E to Section 108 has been
proposed which deems dividends paid, distributed or credited in the calendar year
1997 to have suffered tax at the proposed rate of 28% notwithstanding that income tax
at the rate of 30% may have been actually deducted from those dividends. Thus, in
cases where dividends have been paid and vouchers issued showing that 30% tax
has been deducted, the net dividends would have to be regrossed at 28% as
illustrated below:




Gross dividend
Tax deducted/deemed deducted

Net dividend





The recipient of the dividend may only claim a Section 110 set-off of RM 27.22 in the
above illustration in arriving at his tax payable. On the part of the company paying the
dividend, only the tax deemed deducted of RM 27.22 in the above illustration is to be
subtracted from its Section 108 credit account.

These proposals are standard features accompanying changes in the corporate
income tax rate.

  Presently, income arising from sources outside Malaysia which is received in Malaysia
by a resident company (other than a company carrying on the business of banking,
insurance, shipping and air transport) is exempt from tax.

It is proposed in the Finance Bill that the above exemption be withdrawn.

The withdrawal of this exemption with effect from year of assessment 1998 appears
to be harsh and it is hoped that the exemption would be reinstated by way of an
exemption order.

[page 2 of 27]

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