MIRA Proposes Significant Changes to Income Tax Regulation
The Maldives Inland Revenue Authority (“MIRA”) has released a draft of the Sixth Amendment to the Income Tax Regulation (“Amendment”), proposing several significant changes that could impact businesses across various sectors, particularly those in the tourism industry.
Staff accommodation as a taxable benefit
The Amendment introduces a critical distinction for accommodation benefits provided to employees. According to the proposed changes, if accommodation is provided exclusively to an employee, where the employee has access to an exclusive bathroom not shared with other employees, such accommodation will be treated as a non-cash benefit subject to employee withholding tax regardless of its size or standard. This reclassification could have substantial tax implications for resorts and other tourist establishments where employee housing arrangements often include private bathroom facilities.
The Amendment also proposes a new formula for calculating employee accommodation benefits at tourist establishments. For resorts, integrated tourist resorts, resort hotels, picnic islands, private islands, yacht marinas, and hotels or guesthouses on uninhabited islands, the monthly value of employee accommodation would be calculated using the following formula:
A × 2% × (1/12)
Where A represents the purchase price of the accommodation.
Capital allowance rates for buildings located in tourist establishments
Additionally, the draft Amendment introduces a significant change to capital allowance rates for buildings. While the current rate of 4% applies to all buildings until 31 December 2024, the proposal is to reduce this to 2% specifically for buildings at tourist establishments ( tourist resorts, integrated tourist resorts, resort hotels, picnic islands, private islands, yacht marinas, hotels on uninhabited islands, or guesthouses on uninhabited islands) starting 1 January 2025. This reduction effectively extends the depreciation period for these assets, potentially increasing taxable income for resort operators.
Finance lease criteria
The draft Amendment also introduces comprehensive criteria for classifying leases as finance leases for tax purposes. Under the proposed section 72-2, a lease would be considered a finance lease if it meets any of the eight specific conditions outlined below.
| Criteria for finance lease classification |
| 1. The lease transfers ownership of the asset to the lessee either before or at the end of the lease term. |
| 2. The lessee has an option to purchase the asset at a price significantly below the fair market value, and it was reasonably certain at the lease inception date that the option would be exercised. |
| 3. The lease term covers a major part of the asset’s economic life, even if ownership is not transferred. |
| 4. At the lease inception date, the present value of minimum lease payments amounts to substantially all of the leased asset’s fair value. |
| 5. The leased assets are so specialized that only the lessee can use them without major modifications. |
| 6. If the lessee cancels the lease, the lessor’s losses associated with cancellation are borne by the lessee. |
| 7. Gains or losses from fluctuations in the residual fair value accrue to the lessee. |
| 8. The lessee can continue the lease for an additional period at a rent substantially below market rates. |
While the criteria are similar to the conditions provided in Paragraph 63 and 64 of IFRS16 for lessor classification of leases, under IFRS 16, these conditions serve only as indicators rather than definitive criteria for determining lease classification. The standard requires a holistic assessment of all relevant factors to conclude whether a lease should be classified as a finance lease or an operating lease.
Foreign currency and registration requirements
The draft Amendment introduces significant changes to how businesses determine and apply functional currency rules for tax purposes. Under the proposed section 105-1, a person’s functional currency would be defined as the currency in which more than 50% of their total income was received in the tax year immediately preceding the tax year to which the accounting period or tax return relates.
This represents a departure from the current approach which relies on International Accounting Standard (IAS) 21 criteria for determining functional currency. Instead of applying the broader qualitative assessment under IAS 21, the Amendment proposes a simpler, quantitative approach based solely on the predominant currency of income in the preceding year.
For new businesses in their first tax year, the functional currency would be the currency in which more than 50% of their total income is expected to be received during that year.
Other significant proposals include specific rules for recording foreign currency transactions, using exchange rates within 2% of official rates published by the Maldives Monetary Authority, and expanded registration requirements for businesses that must withhold taxes from payments to non-residents.
Criteria for cash basis accounting and auditor’s report exemption
Currently, individuals and entities can prepare their accounts on a cash basis if their total annual income does not exceed MVR10 million. However, the proposed Amendment specifies that both total annual income and the total value of non-current assets must not exceed MVR10 million to qualify for cash basis accounting.
This change may impact rental income earners opting for the special deduction against rent from immovable property under section 28(a) of the Income Tax Act1, as this special deduction can only be claimed if the accounts are prepared using the cash basis.
Furthermore, the proposed Amendment changes the criteria for businesses to submit an auditor’s report. As per the current rules, businesses with an annual total income of MVR10 million or less are exempt from submitting an auditor’s report. However, under the new rules, a business will only be exempt if both its total annual income and the total value of its non-current assets fall below MVR10 million.
Opportunity for public comments
As these changes are currently in draft form and open for public consultation, stakeholders have an opportunity to provide feedback before they are finalised. Industry associations and businesses, particularly in the tourism sector, are encouraged to review the proposed amendments and submit comments.
The public consultation period is expected to close on 15 April 2025.
Our firm is actively analysing these proposed changes and will be providing detailed guidance to clients on potential impacts and strategies for adaptation. Businesses concerned about these amendments are encouraged to contact our advisory team for personalised assistance.
