The Maldives Inland Revenue Authority (MIRA) has recently announced significant changes to the Income Tax Regulation with the recent implementation of the fifth amendment. This amendment brings significant changes to payment currency of income taxes, especially for entities operating in foreign currencies aimed at addressing the country's foreign currency shortage.

Here, we look at the key aspects of this amendment and its implications for taxpayers.

Key aspects of the fifth amendment

Payment Currency

One of the primary changes in the Fifth Amendment is that it mandates that taxpayers whose functional currency is not the Maldivian Rufiyaa (MVR) must pay their income taxes in United States Dollars (USD).

For the payment of interim and final income taxes, this change takes effect from the tax year 2024 onwards with an exception made for the first interim return of the tax year 2024, as stated in Section 106(d-1). This allows taxpayers some flexibility during the initial transition period. 

For the payment of employee withholding tax, non-resident withholding tax, and capital gains withholding tax, this change takes effect from periods ending on or after 31^st October 2024.

Presentation Currency

Section 106 and 107 introduces new requirements for the preparation and presentation of income tax returns (including employee withholding tax, non-resident withholding tax, and capital gains withholding tax), financial statements and other documents for income tax purpose. If a taxpayer's functional currency is not the Maldivian Rufiyaa, their tax returns along with financial statements and supporting documents must be prepared and presented in USD.

This change applies to returns for periods ending on or after October 31, 2024, and does not extend to 1^st Interim return of the tax year 2024.

Discretion for Rufiyaa-based Taxpayers

For taxpayers whose functional currency is the Maldivian Rufiyaa, the amendment provides discretion to pay their taxes either in MVR or USD. This also applies to non-resident withholding tax, employee withholding tax, and capital gains withholding tax, provided their functional currency is MVR.

Determining Functional Currency

As per section 60(b) of the Income Tax Regulation, to determine the functional currency, businesses must adhere to International Accounting Standard 21 (IAS 21), which addresses the effects of changes in foreign exchange rates. According to ISA 21, the functional currency is defined as the currency of the primary economic environment in which the entity operates. Several factors are considered, including:

• Primary Indicators: The currency in which the entity's sales prices for goods and services are denominated and settled, and the currency in which labor, materials, and other costs of providing goods or services are denominated and settled.
• Secondary Indicators: The currency in which funds from financing activities are generated, and the currency in which receipts from operating activities are retained.

Effective Date and Implementation

The amendment came into effect immediately upon its publication in the government gazette on September 13, 2024.

For further details and professional advice on how these changes may impact your tax obligations, please contact CST Advisory LLP at [email protected]. Our team of experts is here to assist you in navigating these changes effectively.