Deloitte Touche Tohmatsu Tax Services Sdn Bhd managing director Ronnie Lim defines the new singletier corporate tax system (STS) and compares it with the former two-tier imputation system (TTS)

Ronnie Lim

THE new corporate tax system is called the STS because profits earned by companies are only taxed once, i.e. on the company that gained those profits. When that company declares dividends, the profits thus distributed are no longer taxable on the shareholders of the company.

In contrast, under a TTS, companies pay normal corporate tax on their profits. Dividends distributed by those companies are not tax exempt and shareholders are again taxable thereon whether at their marginal rates or some reduced rate in respect of dividends. This creates a TTS because profits earned by companies are taxed twice – once at the company level and later in the hands of the shareholder who receives a distribution of profits by way of a dividend. A TTS will discourage payment of dividends, especially in the case of family-controlled companies.

Malaysia’s current imputation system of taxation looks through companies and views their shareholders. Although companies are taxable, their profits are not taxed twice because tax paid by companies is imputed to shareholders when dividends are paid. Thus, to the extent that corporate earnings are distributed, these profits are taxed in the hands of shareholders at their marginal tax rates, with a credit allowed for the relevant corporate tax paid earlier.

However, double taxation does arise under the current imputation system of taxation in the case of non-residents who are unable to claim credit in their home countries in respect of tax deducted or deemed deducted from dividends.