Question

Royalty income is subject to Malaysian tax if the royalty income is derived in Malaysia.

Explain how gross income of interest or royalty shall be deemed to be derived from Malaysia. [8 marks]

Answer 1

Gross income in respect of interest shall be deemed to be derived from Malaysia-

a) If responsibility for payment of interest lies with the Govt, a State Govt or al local authority

b) i) If responsibility for payment of interest in the basis year for a year of assessment lies with a person who is resident for that basis year.

ii) In the case of interest it is payable in respect of money borrowed by that person.

c) If the interest is charged as an outgoing or expense against any income accruing in or derived from Malaysia.

The basis of recognising interest income is on the receipt basis, unlike the accrual basis for a business source of income.

The interest is deemed to be obtainable on demand when it is due to be paid.

To summarise, when interest is not received yet, but receivable on demand, the interest is deemed received, there fore becoming taxable. This means that the deduction of the interest expense is synchronised with the taxing of the interest income. In the process, it is necessary to revise prior years' assessments.