Wednesday, September 12, 2007

More On the Single Tier Tax System

Published on the Edge Daily:

  • 12-09-2007: Employees, pensioners among losers in single-tier tax system by Yong Yen Nie, 12 Sep 2007 11:59 AM

    12-09-2007: Employees, pensioners among losers in single-tier tax system
    by Yong Yen Nie

    KUALA LUMPUR: Employees lose more under the single-tier tax system as the Employees’ Provident Fund (EPF) will be unable to claim tax refunds, tax expert Ronnie Lim said.

    “The losers in this new tax system will be tax-exempt bodies such as the EPF, as well as lower-income groups such as pensioners,” he told The Edge Financial Daily on the sidelines of the 33rd Deloitte KassimChan Tax Management Seminar on

    “Introducing tax clinics-Breezing through taxing matters.”

    Under the present imputation system, companies are required to maintain a section 108 tax credit account in which, income tax paid by a company is “imputed” on dividends paid to shareholders. Excess in “imputed” tax is refunded to shareholders, provided their tax brackets are below that of the company.

    However, in the single-tier tax system, the section 108 tax credit system will be abolished over the six years transitional period ending on Dec 31, 2013 or when the section 108 tax credit account is zeroed. Hence, no tax refunds will be made thereafter.

    Lim, who is managing director for Deloitte KassimChan Tax Services Sdn Bhd said: “For instance, if the EPF receives a gross dividend of RM100, it means it receives cash of RM73 (after deducting taxes at 27% of gross dividend). Then, it will apply to the IRB to obtain the refund of RM27. So, EPF will still get total cash of RM100.”

    “But with the single-tier tax system, it will only get RM73 and nothing else. When the funds decrease, the employees will lose out, both the highly-paid and lowly-paid ones.”

    KPMG Tax Services Sdn Bhd executive director Nicholas Crist said: “Under the single-tier system, anyone who buys shares to obtain dividend income will be disadvantaged as the income is tax-exempt. Hence, interest expense paid in acquiring and holding these shares cannot be effectively set off.”

    Nevertheless, the single-tier tax system still benefits shareholders that are in the high-tax bracket (above 25%) because they no longer have to pay for the differences between corporate and personal tax rates, he told The Edge Financial Daily in an email interview yesterday.

    Crist said: “However, shareholders that belong to lower tax bracket (below 25%) will lose out because they can no longer claim tax refunds from the excess in section 108 tax credits on dividends. These shareholders include retirees who are dependent on dividend income.”

Previous blog posting: Retirees and the Single Tier Tax Dividend

Forum postings of interests: Budget 2008 and Min Brokerage Charges

Other noteable blog postings:


stocktube said...

so, it's clear now that retirees and low-income investors are screwed ...

still, i would like to hear clarification from the mouth of the govn, especially that yakcop guy since he talks so big about how great the budget was ...