The Maldivian government has introduced the 5^th Amendment to the Income Tax Regulation which is effective from 12^th September 2024. This Amendment fundamentally shifts how businesses that operate using foreign currencies must approach their tax obligations; this regulatory update will impact financial reporting, payment compliance, and—unsurprisingly—businesses’ bottom lines. This article will cover the mandatory USD tax payment requirements, changes in reporting currency, the timeline of adoption, how to determine functional currency and wider economic implications. Finally, it will also include a cheat sheet outlining relevant section numbers, summarising key changes and timeline of applicability.

Following the 5^th Amendment, taxpayers whose functional currency is not Maldivian Rufiyaa (MVR) must make all tax payments in United States Dollars (USD). This applies to:

1. Corporate/ Personal Income Tax
2. Employee Withholding Tax
3. Non-Resident Withholding Tax
4. Capital Gains Tax

Taxpayers previously had the option to pay tax in either MVR or USD regardless of their functional currency. The functional currency, elaborated further in section 4 of this article,is broadly the main currency used by businesses in their operations. After the 5^th Amendment, payments in USD is compulsory for those businesses that operate with a functional foreign currency.

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1.Tax Payment Currency Requirement

Under the new Amendment, taxpayers whose functional currency is not the MVR are now required to make all tax payments in USD. Prior to this change, taxpayers could make payments in either MVR or USD regardless of their functional currency. Nevertheless, as mentioned above, now payment in USD is compulsory for those with a foreign functional currency.

For taxpayers whose functional currency is MVR, there is no change in the options available. These taxpayers can continue to pay in either MVR or USD, providing some flexibility. However, it is difficult to envisage any business operating in MVR choosing to pay taxes in USD, considering the exchange costs they would incur.

This Amendment also considers the term presentation currency, which refers to the currency in which tax returns and payments must be made. If a business’s functional currency is foreign, its presentation currency for tax payments must be USD. For businesses using MVR as their functional currency, the presentation currency can be either MVR or USD.

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2. Changes in Reporting Currency

The Amendment also impacts the currency used for reporting tax returns and financial documents. Previously, taxpayers could choose whether to submit returns in MVR or USD, even if their functional currency was different. However, pursuant to this update taxpayers with a functional currency other than MVR must now submit all tax returns, financial statements, and accompanying documents exclusively in USD.

This change standardises the reporting process for entities with foreign currencies, aligning their reporting currency with their functional currency to avoid exchange rate fluctuations during the preparation of financial statements. Businesses with MVR as their functional currency can continue reporting in MVR.

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3. Adoption Timeline for New Rules

The new rules will take effect in phases, depending on the type of tax being paid and the tax period. Here’s an overview of the implementation timeline:

• For Income Tax and Interim Payments: The new USD payment requirements apply to all income tax returns for the 2024 tax year onwards. However, the first interim payment for 2024 is exempt from this mandate.
• For Withholding Taxes (Employee, Non-Resident, and Capital Gains): The USD payment requirement applies to all withholding tax returns for periods ending on or after 31 October 2024.

This staggered timeline allows businesses to gradually adapt to the new compliance requirements while ensuring that all systems are aligned with the Amendment by the end of 2024.

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4. Determining Functional Currency

The determination of functional currency plays a crucial role in complying with the new Regulation. As per Section 60(b) of the Income Tax Regulation, taxpayers must establish their functional currency based on the principles of International Accounting Standard 21 (The Effects of Changes in Foreign Exchange Rates).

Essentially, the functional currency is the one most representative of the economic environment where a business operates. In practice, this is usually the currency in which the business generates and spends most of its cash. For example, a company in the tourism sector that primarily receives payments in USD and incurs expenses in USD would consider USD as its functional currency.

This determination is pivotal since it governs not only the currency used for tax payments but also the one used for reporting. Therefore, businesses need to conduct a thorough assessment of their operational activities and cash flows to accurately determine their functional currency as a first step. This evaluation will then influence the presentation currency for reporting financial statements and subsequent tax payments.

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5. Economic Implications

The 5th Amendment is expected to have wide-ranging implications for businesses and the Maldivian economy. Here are a few key considerations:

• Foreign Exchange Stability: By mandating tax payments in USD for businesses operating with foreign functional currencies, the government aims to stabilise foreign currency reserves. This move ensures a more predictable inflow of USD into the economy – much needed for an import-reliant country like the Maldives, especially given our current predicament with debt servicing and the financial tightrope we seem to be walking.

• Operational Adjustments for Businesses: For businesses that operate in foreign currencies, the amendment simplifies tax payments and reporting by eliminating the need for currency conversions. In theory, this shift reduces the risks associated with fluctuating exchange rates, particularly for companies earning revenue in USD but previously having to convert taxes into MVR. However, practically, no businesses were complaining about having to exchange the USD they earned, as significant gains could be made through black market exchanges. The exchange rate gains these businesses received previously would far outweigh the administrative ease this Amendment brings.

• Compliance Burden: Compliance burdens almost invariably fall on smaller businesses whenever new legislative or regulatory changes are introduced. While the 5^th Amendment streamline tax payments and reporting for businesses with foreign currency operations, smaller entities will face additional compliance costs. These businesses will need to ensure their financial reporting systems are updated to handle USD tax returns and payments effectively. These changes will strain the resources of small businesses and divert the attention of business owners from operations, forcing them to focus more on compliance instead. Despite their individual size, small businesses collectively create substantial economic value and help maintain competition within markets, thereby making them crucial for economic resilience as well as growth.

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6. The 5^th Amendment of the Income Tax Regulation Cheat Sheet:

Section	Key Changes	Applicability
s106(c)	Presentation currency for entities with functional currency other than MVR must be USD	Tax year 2024 With the exception of the first interim return for the tax year 2024.
S107(c)	Returns for entities with a functional currency other than MVR must be prepared in USD	Periods ending on or after 31 October 2024.
S108(b)	The tax payment currency for these entities with a presentation currency other than MVR must be in USD	Tax year 2024 With the exception of the first interim return for the tax year 2024.
S108(e), (f)	Non-resident withholding, employee withholding, and capital gains withholding tax is payable in USD if the functional currency is not USD.	Period ending on or after 31st October 2024.

In summary, businesses with a functional currency other than MVR must use USD as their presentation currency. Their returns must be prepared in USD and their tax payments must also be in USD.

Conclusion: Adapting to the New Regulatory Landscape

The 5th Amendment to the Income Tax Regulation introduces several important changes regarding tax payments, reporting currencies, and the determination of functional currency. For businesses operating in foreign currencies, the mandatory USD payment requirement and revised reporting obligations represent a shift towards greater consistency in tax compliance.

As these rules begin to take effect in 2024, businesses should take the necessary steps to assess their functional currency, adjust their accounting practices, and ensure that they are prepared to comply with the new Amendment. While this adjustment may require operational changes, the overall impact of the Amendment is likely to provide long-term benefits in terms of clarity, currency stability, and financial transparency. Compliance teams RIP. Fun stuff.