Tax Note: Abolishment of 2% Advance Income Tax for border trade

In December 2017, the Internal Revenue Department (“IRD”) abolished the 2% Advance Income Tax (“AIT”) on goods exported via the Border Trade System for companies under self-assessment due to an increase in the tax compliance level of self-assessed taxpayers. Currently, only the Large Taxpayers’ Office (“LTO”) and Medium Taxpayers’ Office (1) (“MTO”) are under self-assessment; therefore, a total of 816 companies under the LTO and 703 companies under the MTO are included under the 2% AIT exemption list. Goods imported via Border Trade System are still subject to 2% AIT.

When the Ministry of Planning and Finance (“MoPF”) first introduced the 2% AIT on imported and exported goods in 2016 with Notification 17/2016. The importer and exporter on records are required to pay 2% AIT, together with other applicable taxes due, which is collected by the Customs Department upon importation and exportation under the Border Trade System, Normal Trade through Border System and Normal Trade System. Although the 2% AIT is an advance payment of income tax and the taxpayer can offset it against their annual income tax liability, small traders may not have sufficient annual income tax liability to offset against 2% AIT paid during importation or exportation or kept proper accounting records to utilise the AIT paid during the year. This exemption should provide some relief to smaller traders doing border trade.

There are talks about removal of domestic 2% Withholding Tax (“WHT”) on goods, services and lease during the Union Taxation Meeting as well. If this 2% WHT is indeed abolished, this would allow distributors and small traders who earn small margins to have a better cash flow situation since the cash would not be trapped as advance income tax payments.