Single Tier Company Income Tax System

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1.0 Introduction

Singapore already start adopting a one-tier corporate tax system effect from 1 January 2003. In Malaysia, it is referred as the ‘single tier’ system. The government allowed a six-year transitional period to enable companies with unutilized dividend franking credits to pay franked dividends. From 1 January 2008, all resident companies in Singapore will come under the one-tier system. Meanwhile, other countries including Hong Kong, Ireland and also Malaysia are adopting the one-tier system effective from 1 January 2014.

Generally, the Malaysian dividend system has undergone a complete overhaul in 2008 with the objective of providing companies, shareholders and the government with a simple, transparent, efficient and equitable system. With effect from Year Assessment (YA) 2008, a single tier dividend system replaces the tax imputation system on dividend payments to shareholders. All the changes from changing of dividend system have arisen as a result of legislative amendments introduced by Finance Act 2007 (Act 683) gazette by the government on 28 December 2007.

The new corporate tax system is called the single tier system because profits earned by companies are only taxed once and the profits distributed are no longer taxable on shareholders of the company. In this regard, the principal Income Tax Act 1967 is amended by substituting sec 108 with the following: 108. where a dividend is paid or credited by a company to any of its shareholders in the basis period for a year of assessment, the company shall not be entitled to deduct tax from such dividend paid or credited.

1.1 Chart: The Single Tier Company Income Tax System

The company
Company shareholders

Income from the Income Profits
business operations from investments in the company

Tax on company profits

The profits after taxes
Profits after tax
Net dividend
paid out as dividends

2.0 Advantages of Single Tier Dividend System

First, single tier dividend system allows complete free flow in the channeling of profits of the company to the shareholders as exempt dividends. There are two sources of profits that can be identified. It is including revenue gains (where income tax has been paid) or capital gains from the disposal of long-term investments like, shares, landed property, plant, machinery, and factory by the company. The company may now frank out these profits as dividends to shareholders without any restrictions. From YA 2008, companies are no longer subject to the restrictions of having to maintain a tax imputation balance on dividend payments.

Besides that, the second advantage is shareholders who receiving the exempt dividends are not requires to report the dividend income in their tax return. However, they are required to keep records and documents on their exempt dividend income for 7 years to substantiate this income in the event of a tax audit.

The third advantages is that the company are no longer have a section 108 (6) charge issues. Single tier system simplifies tax compliance. At the same time, it is enhancing efficiency of tax administrative system because no need keep track of tax paid and also dividends amount distributed to...
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