Common compliance issues with Employee Withholding Tax
by Hamdhulla Hussain
With the implementation of the Income Tax Act 1 (“ITA”) in 2020, the Maldives has transitioned from imposing tax only on business income to covering tax on personal income as well. As such, the most notable change brought under the new regime is the imposition of tax on employment income.
Like many other jurisdictions, tax on remuneration is collected through a Pay As You Earn (PAYE) system in the Maldives; meaning that the employer acts as an agent – deducting or withholding tax from remuneration as the employee earns it. The employer has the primary responsibility to account for, declare and pay the correct amount of tax to the tax authority. Hence, the introduction of the PAYE system not only affects employees, but the employers as well, especially from an administrative point of view.
In this blog, I will try to briefly explain common compliance issues that employers need to keep in mind when accounting for employee withholding tax.
Registration for PAYE
If an employer has at least one employee whose monthly remuneration exceeds MVR 60,000 (which is the monthly tax paying bracket), then the Income Tax Regulation 2 (“ITR”) requires the employers to register all employees earning more than MVR 30,000 for the PAYE. Although the requirement seems simple, it becomes confusing for some employers, especially given that this threshold must be computed considering all the cash and non-cash benefits provided to the employees.
What is taxable remuneration?
Before diving into the compliance issues in detail, let us understand what taxable remuneration under the ITA is. Section 79(c) of the Act defines remuneration as “salary, wages, allowances, and benefits derived by an employee or director or partner as consideration for services rendered by the employee or director or partner, and includes any compensation for the loss of employment or service, restrictive covenant payment, and entry or exit inducement payment”.
The general rule therefore is that all forms of benefits paid to an employee, whether in cash or in-kind, are subject to income tax, unless specifically exempted. Further, it is important to note that the ITA provides a de-minimis threshold of MVR 1,000 for small value benefits, i.e. where the total of all non-monetary benefits during the month is less than MVR1,000, such benefits need not be accounted for in determining the taxable remuneration.
Non-cash benefits – especially those that are not reflected on an employee’s payslip – is an area that is subject to confusion. As a result, employee withholding tax declarations are often made without considering such taxable benefits. Below are some examples of benefits that are commonly overlooked in accounting for PAYE.
Employee Discount Schemes
If an employer sells a good or a service to the employee at a price lower than its ordinary open market value, ITR states that the amount by which the sale price of that good or service is lower than its ordinary open market value should be considered as remuneration.3 However, general discounts that are available regardless of employment status should not be considered as a taxable benefit.
Services to employees by the employer
The ITR states that where the employer provides a service to an employee (even if the services in question are provided through a third party) for a purpose other than the performance of the recipient’s duties of employment for no consideration or at a price lower than the ordinary open market value of the service, such service must be valued at the open market value and the difference between the open market value and the service price must be included as remuneration4.
Insurance premium paid on behalf of the employee
According to the ITA, medical insurance provided under Maldives Immigration Act5 will be considered an exempt benefit6. In all other circumstances, the employee will be subject to tax on the share of benefits of the premium paid by the employer, whether the premium is paid to a local insurer or otherwise.
Transportation benefits
Transportation benefits given to the employee will also fall within the purview of the taxable remuneration. herefore, transportation benefits must be considered as taxable remuneration if the employer provides transportation to an employee, including transportation to and from the Maldives, travel to the primary place of work for commencement of work, or from the primary place of work at the time of resignation or termination.. However, ITA specifies that the aforementioned rule will not be applicable where the transportation provided to the employee is to commute to the primary place of work, given that the primary workplace is located on an uninhabited island and that employee is not residing on that island.7
Right to use assets or services of the employer
The ITR stipulates that if employees are allowed to use the assets or services of the employer free of charge or at a subsidised rate for reasons beyond performing employment duties, it should be considered a taxable benefit to the employee. The prescribed formula in the ITR should be referred to for this purpose.8 This is an area that a number of employers fail to comply with.
Conclusion
Ensuring tax compliance is imperative for businesses to avoid a negative reputation and minimise unnecessary costs. It is crucial that employers are aware of and clearly understand the tax implications of the benefits that their employees are entitled to. However, as per the existing provisions, the rules on valuing taxable benefits are not clear enough and can be interpreted in various ways. This poses compliance and reputational risks to many taxpayers. Hence, I believe that the tax authority should revisit the existing rules and provide much-needed guidance and clarity on the valuation of taxable benefits.
