Key Updates from the Amendment
The 5th Amendment to the Income Tax Regulation, published on 12 September 2024, marks a notable shift in tax compliance requirements for businesses and individuals with a functional currency other than the Maldivian Rufiyaa (MVR).
Under the new amendment, taxpayers whose functional currency is not MVR will be required to pay all taxes in US Dollars (USD). On the flip side, those who use MVR as their functional currency still have the option to make tax payments either in MVR or USD, offering some level of flexibility for local dealings.
Moreover, beyond payment rules, this update alters reporting requirements too. Taxpayers with a functional currency other than MVR must now submit all tax returns, financial statements and any related notes in USD. In contrast, those entities that operate primarily with MVR aren’t obligated to switch their reports to USD and can keep filing them in MVR.
These changes will be effective for income tax returns starting from the 2024 tax year, though they exclude the first interim payment of 2024. For Employee Withholding Tax, Non-Resident Withholding Tax, and Capital Gains Withholding Tax, the new reporting requirements will apply to periods ending on or after 31 October 2024.
Determination of Foreign Currency
Under Section 60(b) of the Income Tax Regulation, taxpayers are required to determine their functional currency by applying the principles outlined in International Accounting Standard (IAS) 21 – The Effects of Changes in Foreign Exchange Rates.
According to IAS 21, the functional currency is defined as the currency of the primary economic environment in which an entity operates. This is generally the currency in which the entity primarily generates and expends cash.
Entities should carefully assess their operational environment to determine their functional currency, as this will impact compliance with the new requirements under the 5th Amendment. If an entity’s functional currency is not MVR, it must be prepared to meet the new obligations to pay taxes and present documentation in USD.