On 28 December 2021, the Director General of Tax (DGT) issued SE-551 as an internal guideline to implement Minister of Finance (MoF) Regulations 2 on Controlled Foreign Companies (CFC).
SE-55 provides comprehensive guidelines including various examples. We highlight several issues with additional guidance to the provisions set out in the MoF Regulations.
Tax treatment for CFC losses
In principle, in calculating the tax base, overseas losses cannot be offset against other domestic income. In determining the basis for the imposition of deemed dividends concerning CFC losses, the following shall apply:
- The CFC losses from different countries/jurisdictions cannot be offset against CFC income from another country.
- The CFC losses can be netted off with CFC income from CFCs within the same country/jurisdiction. However, if the total Net Profit After Tax from all CFCs in the same jurisdiction resulted in a loss position, then the loss cannot be offset against domestic income or CFC income from other countries.
Interaction of the CFC Rules with the dividend exemption rules under the Omnibus Law
With the enactment of the offshore dividend exemption rules under the Omnibus Law, the provisions of the CFC Rules remain valid as long as:
- The CFC does not distribute dividends to domestic taxpayers; and/or
- The domestic taxpayer does not invest the paid dividends distributed by the CFC as required under the Omnibus Law.
Deemed dividend on trust
PMK-93 stipulates that the ownership through a trust or similar arrangements is deemed as a “pass-through” and will be considered as ownership by the investor(s) in the trust or similar entity. SE-55 affirms that in principle, those who recognize and report the deemed dividend as well as claim the Foreign Tax Credit (FTC) on the paid dividends are the settlors. However, if the settlor has passed away or cannot be identified, then the beneficiary of the trust can recognize and report the deemed dividend as well as claim the foreign tax credit.
Foreign Exchange rate to be used in applying CFC
Rules SE-55 provides guidance and examples which reaffirms that:
- Conversion of the amount of deemed dividends and paid dividends are using the BI middle rate or the daily spot rate of foreign exchange on the international market if the BI middle rate is not available.
- The exchange rate used for the dividend amount is the one applicable at the time of the deemed dividend recognition or when the dividends are received.
- The exchange rate used for the FTC is the exchange rate determined by the MoF at the time the foreign income tax is payable, paid, or withheld. If the domestic taxpayer is conducting United States Dollar (USD) bookkeeping, any FTC in a currency other than USD must be converted into USD.
- The netting off of deemed dividend with the paid dividend follows examples given in the MoF Regulations. No separate calculation is necessary to calculate gain or loss from the difference of exchange rates used at the time the dividend is deemed and distributed.
Reporting the deemed dividend, dividend paid, and foreign tax credit in Annual Income Tax Return (AITR)
This SE-55 explains how to report the deemed dividend, paid dividend, and FTC in AITR Forms 1770 S, 1770, and 1771, which can be highlighted as follows:
- For Form 1770 S, both deemed dividend and paid dividend is reported under the Overseas Net Income column.
- For Forms 1770 and 1771, the deemed dividend is added as a positive fiscal adjustment when it is recognized and reversed as a negative fiscal adjustment when the actual dividend is paid. The paid dividend will be reported under the Overseas Commercial Net Income column.
For the various scenario of the amount of deemed dividend and paid dividend, please refer to the examples given in SE-55.
