Income tax: The good, the bad, the befuddling

Understanding the Income Tax Law and all its latest amendments.

Source: MIRA

Source: MIRA

Maldives seems to be levying income tax based on the premise that it is a developed nation with an admirable GDP; however, this belies the on-the-ground reality. Income disparity and income inequality is at an all-time high, especially given the impact of the COVID-19 pandemic.

Yet, while theory suggests that taxing the rich might help alleviate these issues, there are currently no solid programs or policies to lift those in poverty out of it. At the same time the increasingly frustrated public sees the state affording more and more concessions to the high-earning tourism sector, in terms of rent deferments and other fiscal and monetary easements, while the public faces more taxation and an ever-growing list of fines and state levies. Add to this the preferential tax treatment made available for foreign companies as currently proposed, will lead to local industries faring even worse off than earlier. 

Parliament rushed through the introduction of the Income Tax Act in December 2019. It was implemented on 1 January 2020, with tax on remuneration that is taxable under the act implemented effective 1 April 2020 — leaving shockingly reduced times to create proper awareness on a system the public is very alien to; especially in the midst of a pandemic that has seen lower, and even uncertain, earnings while roll-out of such systems in more sophisticated economies have allowed for significantly more time so that citizens can get more properly acclimatised. Residents of the Maldives, as defined under the Act, are taxed on their local and foreign income, while non-residents are taxed on income generated in the Maldives. 

The Member of Parliament for Gadhdhoo constituency, Ahmed Zahir, in April 2021, sponsored amendments proposed to the Act by the government. The objective of the government in proposing the bill, as stated in parliamentary documents, are to amend the types of incomes exempted, providing exemptions on bank commissions, interconnection charges and reinsurance premiums paid to non-residents, and to resolve some of the administrative bottlenecks and issues faced in implementing the tax as well as to strengthen tax administration. The bill is currently at committee stage in parliament.

The proposed amendments close some of the current perceived loopholes in the Act, including an additional provision to include those temporarily resident in the Maldives but deriving a taxable income as those who may be taxed (Article 2).

Proposed amendments also include exemptions for areas that are intuitively reasonable for inclusion as exemptions (Article 12) and some that are already a part of the income tax regulations, such as pension annuities, and defining a term limit on gifts that can be claimed for tax exemptions. An added positive inclusion is for employer contributions under the Pension Act being exempt. 

Provisions are also made to further expand the definition of income derived in the Maldives (Article 11) to include commission on services provided in the Maldives, income for entertainment services, income from research and development, and income derived by a non-resident contractor. 

There are also several other major contentious amendments, including an addition to allow for the President to exempt specific projects or areas from taxation (Article 12-1). Although the proposed article states that the exemption can only be granted under advice from the cabinet of ministers, and requires publishing of details in the government gazette, examining the impact of granting the exemption on state revenues as well as the economic and social impacts, the provision becomes alarming given the tendency in the Maldives for economic decisions to be frequently politically biased. It also undermines the authority derived from a law passed by the parliament and allows the President to grant tax exemptions without any prescribed limits.

This may also be regarded as granting preferential tax treatments, although according to the Ministry of Finance, the amendment was first proposed to overcome administrative difficulties related to implementing tax exemptions granted for foreign grant and loan financed projects that normally include provisions on tax exemptions for projects carried out in the implementing country.  

The second major contentious issue is the removal of payments made to non-resident contractors from the type of payments that are subject to withholding tax (Article 55(a)9).  

This gives the impression that payments made to foreign contractors by local parties will no longer have deductions for withholding taxes. This will allow foreign entities to carry out projects in the Maldives and transfer their full payments or profits out of the country without being liable for any taxes. 

In light of the Maldives Association of Construction Industry (MACI) raising concerns over foreign contractors not being charged withholding tax, this publication spoke to the Ministry of Finance to ascertain the reasoning behind this provision. The ministry said that under the current provisions of the income tax law, foreign contractors end up paying a higher rate of tax with the withholding tax at 10 percent of their gross income, and hence the withholding tax on payments made to foreign contractors have been amended to be five percent to reflect an issue with overtaxing, as stipulated in the amendment proposed under Article 55(b) – which states that any payments made by a resident business to a non-resident contractor has to deduct five percent from the payment as withholding tax. 

However, while local resident companies are still subject to taxes on income and GST and other fees in the Maldives, the removal of this article will tilt the playing field in favour of non-resident construction companies who are not registered in Maldives.

Fairness in taxation is admirable; however at the same time a more holistic view of the matter could be that as a piece of legislation concerning the Maldives and its citizens, it should seek to gain advantages for Maldivians as well. Could, for example, leaving the amendment as it is encourage more partnerships between Maldivian companies and foreign entities which could in turn lead to better skill sharing?

In 2017 the European Union placed the Maldives on its list of non-cooperative tax jurisdictions, along with 37 other countries. With commitments to compliance by the end of 2019, the Maldives was included as part of a "grey list" of 34 countries in late 2018. As of February 2019, Maldives remans on the "grey list" and according to a review done by the EU in February 2021, the Maldives has been given an additional four months to ratify the OECD Multilateral Convention on Mutual Administrative Assistance. As of publishing, the Maldives has not ratified this convention.Failure to ratify the Convention will result in the Maldives being put back on the blacklist.

The current provisions allowing for the President to grant tax exemptions and non-resident contractors not being subject to withholding taxes may categorise the Maldives as a country that provides preferential tax treatment and implements harmful tax practices. The Maldives is currently a member of the OECD's BEPS and Inclusive Frameworks.

Amendments such as those proposed now opens the opportunity for foreign companies, especially construction and design companies from neighboring countries that increasingly work on resort projects and other major contracts in the Maldives taking advantage of the amendments and places local companies at risk of unfair competition.  Open-ended exemption powers given to the government will also allow for preferential tax treatment to be granted based on political objectives. 

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