Restriction on Deductibility of Interest Guidelines 2022

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The Income Tax (Restriction on Deductibility of Interest) Rules 2019, i.e., Earning Stripping Rules (“ESR Rules”), which came into effect on 1 July 2019, limit the interest deduction for financial assistance between related parties to 20 percent of the Tax-EBITDA. 
  

Qualifying Deduction

Subsequently, the definition of “qualifying deduction” under the ESR Rules has been amended via the Income Tax (Restriction on Deductibility of Interest) (Amendment) Rules 2022 (“Amendment Rules”), effective 1 February 2022. 
  
In the following, the Malaysian tax authorities issued the 2022 ESR Guidelines with the following salient points: 
  
  1. The new definition of “qualifying deduction” has been included in the 2022 ESR Guidelines which state that: (a) where business expenditure incurred in the profit and loss account is allowed as a deduction under the Malaysian Income Tax Act, and the amount of the deduction allowed exceeds the amount of the business expenditure incurred, an amount equal to the difference between the amount of the deduction allowed and the amount of the business expenditure incurred in the profit and loss account; or (b) where there is no business expenditure incurred in the profit and loss account, the amount of deduction is allowed under the Malaysian Income Tax Act. 
  2. Section 33(4) Interest expense incurred and payable on monies borrowed for a particular year of assessment (“YA”) is deductible in arriving at the adjusted income of that YA when the said interest is due to be paid. In order for such interest to be deductible, written notice for such claim has to be submitted to the Malaysian tax authorities not later than 12 months after the interest expense is due to be paid. Under the ESR Rules, interest deduction against business income for a YA is capped at 20 percent of Tax-EBITDA.
      
    The 2022 ESR Guidelines states that in a YA in which Section 33(4) applies, i.e., interest payable for that YA which is due to be paid in a later YA would have to be excluded from the total interest expense incurred for the business which is in connection with or on financial assistance from a controlled transaction (since it would have been excluded in arriving at the adjusted income). 

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