Maldives to revamp its tax regime together with the introduction of Personal Income Tax

Introduction

On 15 October 2019, the Government of Maldives submitted Income Tax Bill (“ITB”) to the Parliament. Once the Bill is passed by the Parliament and ratified by the President, it would introduce personal income tax and bring major changes to current Business Profit Tax and Bank Profit Tax regimes

As per the proposed ITB, effective from 1 January 2020, the current Business Profit Tax Act (Law No: 05/2011) (“BPT Act”), Bank Profit Tax Act (Law No: 9/85) and Imposition of Tax from The Revenue of Petroleum Companies (Law No: 1/89) will be repealed. Furthermore, Land Sales Tax levied under Maldives Land Act and Remittance Tax levied under Employment Act will also be repealed. It is intended that the provisions of these repealed be incorporated into the ITB to make the ITB, the all-encompassing tax legislation.

Introduction of Personal Income Tax (PIT)

The Proposed ITB introduces personal income tax in the Maldives. Even though a modern tax regime was introduced in the Maldives in 2011, it was limited to business profit tax and personal income (other than those derived through business) was not taxed in the Maldives. However, with the introduction of the ITB in 2020, it is intended to introduce personal income tax levied on salaries under “Pay As You Earn” basis.

Under the Act, Employers shall be required to withhold and pay on behalf of their employee as Employee Withholding Tax (“Employee WHT”). Amounts withheld are treated as an advance payments of income tax due. In accounting Employee WHT, employers can only deduct pension contribution born by the employee under Maldives Pension Act (Law number 8/2009). The term “Salary” is intended to include wages and other remuneration paid in cash or otherwise.

Employee WHT would be applicable to anyone who derives an income from the Maldives, under an employment contract (whether the contract is permanent or temporary in nature) regardless of their nationality.
Unlike business income tax, PIT has a very few allowable deductions such as zakat, donation and pension contribution. Individuals who already paid advance tax in the form of Employee WHT can file annual tax return to claim refunds related to such deductions. Employee WHT shall be paid on monthly basis. Applicable rates are as follows:

Monthly Income (MVR) Applicable Tax Rate
40,000 and below 0%
Between 40,001 to 60,000 8%
Between 60,001 to 100,000 10%
100,001 and above 15%

Business Income Tax

Although the BPT Act will be repealed with the introduction of Income Tax, the taxes levied under BPT Act (15% of taxable profit that exceeds tax-free threshold and 10% of WHT on specified payments made to non-residents) will be continued under Income Tax regime.

Under the proposed ITB, individuals who carry out business will no longer enjoy the annual tax-free threshold of MVR 500,000 which they have been enjoying under the BPT Act. Instead, they will get a tax-free threshold of MVR 480,000 a year. However, under the Income Tax regime, individuals whose taxable income exceeds tax-free threshold will attract a progressive tax rate from 8% to 15% as illustrated in the table above.

Most of the principles included under the current BPT Act are intended to remain the same under Income Tax regime as well. However, the proposed ITB will introduce new specific anti-avoidance rules and will enable businesses to pay interim payments based on estimates. Further, rules relating to loss relief are intended to be restricted more and a more comprehensive non-resident WHT regime which may have a substantial tax impact on resident businesses are intended to be introduced. Key elements included in the proposed ITB are as follows;

  • 10% WHT on dividend paid or payable to a non-resident shareholder.
  • 10% WHT on interest paid or payable to a non-resident lender other than licensed banks and financial institutions approved by MIRA (which will have an impact on shareholder loans).
  • 10% WHT on amount paid or payable to a non-resident contractor who provides a service in the Maldives.
  • 10% WHT on royalties paid or payable to a non-resident. The proposed ITB included a very comprehensive definition which includes, among other things, right to use of a copyright, patent, trademark or any other such intangibles.
  • 10% WHT on insurance premium paid or payable to a non-resident.
  • First and second interim payments can be made based on an estimate rather than based on preceding year’s tax liability. Under current business profit tax regime, regardless of current year’s business performance, first and second interim payment shall be equal to 50% of previous year’s tax liability. However, if taxpayer has reasons to believe that their tax liability for the current year is less than that of preceding year’s tax liability, ITB allows taxpayers to make reasonable estimate of their interim payments. In case if your actual tax payable for the year happens to be 20% more than the sum of interim payments paid based on your estimate, you have to pay applicable fine for underpayment of interim payment.
  • Restriction of directors and partners remuneration at 10% of specified profit has been removed. Under proposed ITB, director’s and partner’s remuneration will be taxed at the hands of the director and partner as personal income tax.
  • The proposed ITB requires certain taxpayers to prepare and maintain transfer pricing documentation in relation to related party transactions and such documents should be prepared on or before the return filing deadline.
  • Introduction of Control Foreign Entity rule. Basically, if a non-resident company, partnership, trust or other entity (foreign entity) is controlled by 5 (Five) or fewer residents of the Maldives, in computing taxable income of each such resident person shall include their share of foreign entity’s taxable income.

Bank Income Tax

Upon ratification of the ITB, Bank Profit Tax Act will be repealed but tax levied under the Act will be continued under Income Tax regime. Unlike individuals and other businesses, licensed banks operating in the Maldives will not get any tax-free threshold and they have to pay 25% of their taxable income as “Bank Income Tax”.

Similar to any other businesses, banks are allowed to deduct expenses wholly and exclusively incurred to generate income, in accordance with Income Tax Act and Income Tax Regulation (to be formulated by MIRA upon commencement of the Act).

Even though, as a general rule, provision for irrecoverable debts is not a deductible expense in computing taxable income of businesses (other than banks), banks are allowed to deduct a specific provision for loan losses within a certain limit. Proposed rule with regards to provision for loan losses is same as the existing rule under Bank Profit Tax regime.

Transition from BPT Act to Income Tax Act

Taxpayers already registered under the existing Tax Administration Act prior to commencement of Income Tax Act, would not have to apply for registration under Income Tax Act. However, for the purpose of Employee WHT, the employer of an employee who works in the Maldives at the time of commencement of Income Tax Act shall apply for registration within 60 (Sixty) days from the date of commencement of Income Tax Act.

Interim and final payments related to tax year 2019 should be computed and paid in accordance with current Business Profit Tax Act. 

Filing and payment deadlines of business income tax and non-resident WHT shall remain same as BPT regime.

Commencement of the Act and charge tax under Income Tax Regime 

Income Tax Act shall enter into force on the date the President ratify the Bill and upon its publication in the Gazette.

The first year in which tax shall be charged in accordance with the Income Tax Act shall be the tax year commencing on 01 January 2020.

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