US Tax of Malaysia Income, Account & Assets: IRS Compliance (2024)

US Tax of Malaysia Income, Account & Assets

There are many US Persons who still maintain overseas assets, accounts, investments, and income sources in Malaysia. Common sources of Malaysian income include the Employee Provident Fund (EPF), Foreign Rental Properties, and Mutual Funds held in organizations and traded on the Malaysia Stock Exchange.While there is no international tax treaty between the United States and Malaysia, there is a FATCA agreement — and banks such as Maybank doreport US Person Account Holders to the US Government — which can lead to significant FATCA Fines and FBAR Penalties. A common question we receive is whether income earned in Malaysia is taxable in the U.S. The Malaysian tax system is set up differently than the tax system in the United States and the IRS tax and reporting compliance requirements are complicated. Each year we represent many clients from Malaysia with issues involving offshore investments. Since the Internal Revenue Service has taken an aggressive approach to matters involving foreign accounts compliance and unreported foreign income, it is important to get into compliance to avoid offshore penalties.

EPF Fund

We have a separate page dedicated to evaluating the U.S. tax of an EPF.

Malaysia & Income Tax Treaty

Since there is no Tax Treaty between the United States and Malaysia the default position is that a taxpayer who is a US person such as a US Citizen, Legal Permanent Resident, or Foreign National who meets the Substantial Presence Test is taxed worldwide. With Malaysia, this would also include income that is being generated in Malaysia and may be tax-free under the tax rules of Malaysia.

Worldwide Income

The idea behind the Worldwide Income tax model is the concept that a person is subject to tax on the income of the country they are a citizen of, whether or not they reside in the country — and whether or not the income they generate is sourced in that country. In other words, a taxpayer is forced to pay tax simply for the benefit of being a citizen of that country. The United States is one of only two countries that practices this type of tax system. Take for example a US Taxpayer who lives abroad. If the US Citizen abroad resides in a foreign country and earns all of their money from foreign sources, is it really fair for the United States to have the power to tax that individual — upwards of 37% — simply because they have US Citizen status? Making matters worse, is that even though it is referred to as Citizenship-based taxation, in fact, it refers to US persons and not just US citizens – which is why foreign nationals who are considered US residents can get swept up into the definition of CBT. But, if a taxpayer has paid taxes overseas on foreign income then they can usually claim a foreign tax credit. Likewise, if the taxpayer resides overseas sufficient to meet either the bonafide residence test or physical presence test, then they should qualify for the foreign earned income exclusion –– which allows them to exclude upwards of 108,000 of annual income from US tax liability — along with a housing exclusion –– and married couples can each claim FEIE.

US Taxation of Malaysia Income (Pension & Retirement)

If the US person is earning income that is pension-related from Malaysia, there are a few different categories to consider when deciding whether or not any income is taxable.

Let’s go through the basics:

Malaysian Pension Contributions

Even when there is a tax treaty in place between the United States and the second country, the general rule is that when a foreign employer makes pretax contributions to the US person’s foreign pension plan – those contributions are taxable — and do not receive tax-deferred status. This is true, even if the equivalent to a 401(k) and possibly tax-deferred in a foreign country – those benefits are usually not applicable on the US tax return. One example is the UK, in which certain contributions made from a foreign employer on behalf of a US person into a UK pension may receive US tax-deferred treatment as well, similar to 401K.

Growth within a Malaysian Pension

If income is being accumulated or accrued in a foreign pension account in Malaysia then chances are that income can be taxable in the United States. It really is an unfair position, because that income is typically tax-free and may be subject to limited tax at the time of distribution.*

*A distinction should be made as to whether there is income actually accumulating in the pension fund, or whether just the value of the assets has increased.

Distributions from the Malaysia Pension

If a US person is receiving distributions from a Malaysian pension plan, then chances are that income is going to be taxable absent some specific exception, ruling, or other regulation or Revenue Procedure.

International Tax Forms Reporting

Each year, US taxpayers who have foreign investments, accounts, pension plans, and life insurance policies may be required to report the values of their overseas assets — along with any income generated from them — to the Internal Revenue Service.When a taxpayer misses an international information reporting return deadline, it may lead the IRS to issue fines and penalties. Oftentimes these international penalties can be avoided or abated through one of the offshore voluntary disclosure programs — or other IRS amnesty procedures. It is important to note that not all foreign account filing forms have the same deadlines and due dates — and the process for seeking an extension will vary depending on the type of form. Let’s look at six important facts about foreign account filing deadlines.

FBAR Due Date and Extension

The FBAR is used to report foreign bank and financial accounts to the US Government. The Form is due on April 15, but is currently on automatic extension. Therefore, if you did not file the FBAR (FinCEN Form 114) by April 15, you still have until October to file it. And, you do not have to file an extension form such as Form 4868 or 7004 to obtain the FBAR extension — because the extension is automatically granted.

Form 8938 Due Date and Extension

Form 8938 is used to report foreign assets to the IRS in accordance with FATCA (Foreign Account Tax Compliance Act). It is similar (but not identical) to the FBAR. Form 8938 is filed with your tax return and is due when your tax return is due. If you are an individual filing a Form 1040, then the Form 8938 would be due in April along with your 1040 tax return — but if you extend the time to file your tax return, then your Form 8938 will go on extension as well.

Form 3520 Due Date and Extension

Form 3520 is used to report foreign gifts and foreign trust information. The due date for Form 3520 is generally April 15, but taxpayers can obtain an extension to file Form 3520 by filing an extension to file their tax return for that year. Similar to Form 8938, there is no specific Form 3520 extension form required beyond requesting an extension of the underlying tax return.

Form 3520-A Due Date and Extension

Form 3520-A is used to report US ownership of a Foreign Trust. Unlike Form 3520, Form 3520–A is usually due in March and not April. In addition, the rules for filing an extension for Form 3520-A are different as well (subject to the substitute filing rules). In order to extend the due date to file Form 3520-A, the taxpayer must file a separate Form 7004 extension form.

Form 5471 Due Date and Extension

Form 5471 is used to report the ownership of certain foreign corporations. The filing date is the same as when a person’s tax return is due — and if the taxpayer files an extension for the underlying tax return, Form 5471 will go on extension as well. In recent years, Form 5471 has become infinitely more complex — so taxpayers should be cognizant of the different filing requirements and plan accordingly.

Missed Prior Year’s Foreign Account Reporting Deadlines?

If a taxpayer has not properly reported their foreign accounts, assets, or investments in prior years, they may want to wait before filing these documents for the current year. That is because Taxpayers should try to avoid making a quiet disclosure (which may result in significant fines and penalties). To do that, Taxpayers should submit to one of the offshore disclosure programs. Taxpayers may also want to consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in international tax matters before submitting to the IRS to get an understanding of the different requirements.

Golding & Golding: International Tax Lawyers Worldwide

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