Update on Earning Stripping Rule (ESR)
Update on Earning Stripping Rule (ESR)
The Income Tax (Restriction on Deductibility of Interest) (Amendment) Rules 2022 (“Amendment Rules”) has been gazetted to amend the Income Tax (Restriction on Deductibility of Interest) Rules 2019.
The following two Principal Rules is amended in amendment rules:
1. Definition of qualifying deduction
2. Carrying forward of excess interest
The amendment rules came into operation on 1 February 2022.
Key takeaways:
You will understand: -
1. What is ESR?
2. Scope of application
3. New amendment on Principal Rules
4. Non-application
Summary of learnings:
1. What is ESR?
Effective from 01 July 2019, ESR was introduced under Section 140C of the Income Tax Act 1967 (ITA) to restrict the tax deduction on interest expenses in relation to financial assistance in a controlled transaction.
Under the ESR, the maximum amount of interest that can be deducted is 20% of the tax – EBITDA (earnings before interest, tax, depreciation, and amortization).
*Tax – EBITDA = Adjusted Business Income + Qualifying deduction+ Total Interest Expenses claimed in business Income.
2. Scope of application
ESR apply to interest expenses that arise from financial assistance granted by:
- its associated person outside Malaysia;
- its associated person outside Malaysia which operates through a permanent establishment in Malaysia;
- a third party outside Malaysia where the financial assistance is guaranteed by its holding company or any other enterprises under the same MNE Group
Financial assistance includes loans, interest-bearing trade credit, advance, debt, or the provision of security or guarantee.
3. New amendment on Principal Rules
The amendments are as outlined below:
i. Definition of qualifying deduction
Qualifying deduction is equal to the total incentive claims (special deduction, further deduction, double deduction, etc.) deducted in arriving at adjusted income. The definition is replaced as follows:
- where there is business expenditure incurred in the profit and loss account is allowed as deduction under the 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
- where there is no business expenditure incurred in the profit and loss account, the amount of deduction is allowable under the Act.
ii. Carry forward rules
- The carry forward rules allow the restricted interest expenses in a year of assessment (YA) to be carried forward and to be deducted against the company’s adjusted income for the subsequent YAs.
- This rule now applies to any person and is not limited to a company.
4. Non-application
According to the De minimis threshold, ESR is not applicable where the total interest expenses for all financial assistance is equal to or less than RM500,000 in a YA.
Source:
Income Tax (Restriction on Deductibility of Interest) (Amendment) Rules 2022:
https://phl.hasil.gov.my/pdf/pdfam/ESR_Rules_Pindaan_2022.pdf
Restriction on the deductibility of interest guidelines:
http://lampiran1.hasil.gov.my/pdf/pdfam/RDIG_05072019.pdf
This message was brought to you by KTP
Visit Us
Wisma KTP, 53 Jalan Molek 1/8, Taman Molek, 81100 Johor Bahru
Wisma THK, 41, Jalan Molek 1/8, Taman Molek, 81100 Johor Bahru
KTP (Audit, Tax, Advisory)
An approved audit firm and licensed tax firm operating under the KTP group based in Johor Bahru providing audit, tax planning, advisory and compliance services to clients
Website www.ktp.com.my
Instagram https://bit.ly/3jZuZuI
Linkedin https://bit.ly/3sapf4l
Telegram http://bit.ly/3ptmlpn
THK (Secretarial, Book-keeping, Payroll, Advisory)
A licensed secretarial firm in Johor Bahru providing fast reliable incorporation, secretarial services, corporate compliance services, outsource book-keeping, and payroll services to clients
Website www.thks.com.my
Facebook https://bit.ly/3nQ98rs
KTP Lifestyle
An internal community for our colleagues on work and leisure.
Tiktok http://bit.ly/3u9LR6Q
Youtube http://bit.ly/3ppmjyE
Facebook http://bit.ly/3ateoMz
Instagram https://bit.ly/3jZpKLo
KTP Career
An external job community on vacancy in Johor Bahru for interns, graduates & experienced candidates.
Instagram https://bit.ly/3u2PxHg
Facebook http://bit.ly/3rPxz9o
#Ktp #Thks
Archive
- November 2024
- October 2024
- September 2024
- August 2024
- July 2024
- June 2024
- May 2024
- April 2024
- March 2024
- February 2024
- January 2024
- December 2023
- November 2023
- October 2023
- September 2023
- August 2023
- July 2023
- June 2023
- May 2023
- April 2023
- March 2023
- February 2023
- January 2023
- December 2022
- November 2022
- October 2022
- September 2022
- August 2022
- July 2022
- June 2022
- May 2022
- April 2022
- March 2022
- February 2022
- January 2022
- December 2021
- November 2021
- October 2021
- September 2021
- August 2021
- July 2021
- June 2021
- May 2021
- April 2021
- March 2021
- February 2021
- January 2021
- December 2020
- November 2020
- October 2020
- September 2020
- August 2020
- July 2020
- June 2020
- May 2020
- April 2020
- March 2020
- November 2019
- September 2019
- August 2019
- July 2019
- June 2019
- May 2019
- April 2019
- March 2019
- February 2019
- January 2019
- December 2018
- November 2018
- October 2018
- September 2018
- August 2018
- July 2018
- June 2018
- May 2018
- April 2018
- March 2018
- February 2018
- January 2018
- December 2017
- November 2017
- October 2017
- September 2017
- July 2017
- June 2017
- May 2017
- April 2017
- March 2017
- November 2016
- October 2016
- September 2016
- August 2016
- July 2016
- June 2016
- May 2016
- April 2016
- March 2016
- February 2016
- January 2016