THERE are many individuals who live in Malaysia and work for foreign employers. It may due to the fact that the family is in Malaysia or Malaysia is a suitable, cost-effective location to service the region for the foreign employers. There are also individuals living in Malaysia who may be simultaneously working for a Malaysian employer and a foreign employer.
In such situations, there is a possibility that the individuals living in Malaysia may be brought to tax on the foreign income on the basis that the income is sourced from Malaysia or arises in Malaysia. This is an area that can be misunderstood by taxpayers who may be relying on the latest announcements that foreign-sourced income received by Malaysia resident individuals until end of 2026 will not be taxed despite the monies being remitted into Malaysia.
When will the problem arise?
The key question the taxpayer has to address is whether he is exercising employment in Malaysia. Exercising employment means discharging the duties of employment. If the taxpayer is located in Malaysia and is performing his duties of employment for the foreign employer from Malaysia, then the taxpayer will be regarded to be exercising his employment in Malaysia, and the whole of his income will be taxed in Malaysia as the source of that income is derived from Malaysia.
Another scenario is where the individual is employed by the foreign employer who has operations in both Malaysia and overseas and the individual covers both Malaysian and overseas operations. If the individual can prove that his duties relating to the overseas operations are entirely performed overseas, and the work he performs in Malaysia is only minimal or incidental to the foreign operations, the portion of income can be regarded as foreign source on the basis that that part of the employment is exercised overseas.
However, in the modern age where it is common to use internet and virtual meetings, it may be difficult to entirely dissect the activities relating to the exercise of employment overseas from the work done in Malaysia. The burden of proving to the authorities lies with the taxpayer and when the situation is blurred, the Inland Revenue Board (IRB) will challenge such taxpayers and attempt to bring the whole of that foreign income into the Malaysian tax net on the basis the duties performed overseas are incidental to the employment exercised in Malaysia.
In the case where the taxpayer has a dual contract with separate employment contracts for the duties performed in Malaysia and overseas, the tax position will follow the same tax treatment. The taxpayer has to prove that the contract relating to the foreign employment has to be fully performed overseas.
What should you do to enjoy the tax exemption?
If you wish to benefit from the foreign-sourced income exemption which is related to the exercising of employment overseas, you should be very disciplined and organised to prove to the authorities that you are exercising your employment overseas and the work done in Malaysia is entirely incidental to the work done overseas. You should keep records of your travel in and out of Malaysia, a log of the activities you carried out overseas, be able to show that you have physical places that you can work overseas, and you have the necessary support of your company or staff overseas. The number of days that you spend overseas should be commensurate to the activities you perform overseas and the remuneration you receive for the overseas duties. There must be clear evidence to support the segregation, otherwise you will be challenged by the IRB.