Malaysia - Imputation to Single Tier System
There are several advantages and disadvantages of the single tier dividend system over the imputation system.
The first and main advantage of this system is the ‘complete free flow in the channeling of profits of the company to the shareholders as exempt dividends’ (Choong, 2008). This is to say that as long as there are profits made by the company, it is allowed to frank the said profits as dividends to its shareholders without any limitations.
Under the imputation system, the company was allowed to pay dividends only to the extent of its Section 108 credits. Capital gains are not taxable in Malaysia; consequently the gains do not create tax credits. ‘With the abolition of the imputation system, capital gains may now be distributed to shareholders without first ensuring the company has paid sufficient income tax’ (Koh, 2007). Essentially this means the company may distribute more dividends to their shareholders.
Second advantage is it reduces the administrative costs for the tax authorities because there is no longer any need to oversee the Section 108 credit accounts of the various companies. They also do not need to handle any claims for repayable tax by shareholders who have surplus tax credits over their tax liability. This will allow the authorities to concentrate on other important tax issues such as tax auditing.
Thirdly, the single tier system supplements the group relief provisions. ‘Beginning Year of Assessment 2006, tax losses may be utilised to set-off against the aggregate income of another company within the same group provided stipulated conditions are met’ (PricewaterhouseCoopers. 2008). If the conditions are met, the company that is making losses can transfer up to 50% of its losses to the company that is has an aggregate income.
Nonetheless, here are a few disadvantages with the single tier system as well. Firstly is that those who are of the lower income group, and is subject to tax at a rate lower than the current
The first and main advantage of this system is the ‘complete free flow in the channeling of profits of the company to the shareholders as exempt dividends’ (Choong, 2008). This is to say that as long as there are profits made by the company, it is allowed to frank the said profits as dividends to its shareholders without any limitations.
Under the imputation system, the company was allowed to pay dividends only to the extent of its Section 108 credits. Capital gains are not taxable in Malaysia; consequently the gains do not create tax credits. ‘With the abolition of the imputation system, capital gains may now be distributed to shareholders without first ensuring the company has paid sufficient income tax’ (Koh, 2007). Essentially this means the company may distribute more dividends to their shareholders.
Second advantage is it reduces the administrative costs for the tax authorities because there is no longer any need to oversee the Section 108 credit accounts of the various companies. They also do not need to handle any claims for repayable tax by shareholders who have surplus tax credits over their tax liability. This will allow the authorities to concentrate on other important tax issues such as tax auditing.
Thirdly, the single tier system supplements the group relief provisions. ‘Beginning Year of Assessment 2006, tax losses may be utilised to set-off against the aggregate income of another company within the same group provided stipulated conditions are met’ (PricewaterhouseCoopers. 2008). If the conditions are met, the company that is making losses can transfer up to 50% of its losses to the company that is has an aggregate income.
Nonetheless, here are a few disadvantages with the single tier system as well. Firstly is that those who are of the lower income group, and is subject to tax at a rate lower than the current