The Maldives Inland Revenue Authority (MIRA) has released the first draft of the Sixth Amendment to the Income Tax Regulation for
public consultation and feedback. This draft introduces significant changes, particularly impacting businesses operating in the tourism sector. Stakeholders are encouraged to review the proposed amendments and submit their comments by
Tuesday, 15 April 2025 as these changes are expected to have major tax implications moving forward.
1. Changes to Capital Allowance rates for Buildings
A major proposed change is the adjustment to the capital allowance rate for buildings, effective from the tax year 2025. This change could significantly impact the tax liabilities of tourism-related businesses. The new rates will differ between the tourism sector and other industries:
- Tourism Sector: Buildings in tourist resorts, integrated tourist resorts, resort hotels, picnic or private islands, yacht marinas, hotels, and guesthouses on uninhabited islands will have a reduced capital allowance rate of 2% (down from the current 4%).
- To put this change into perspective: If you’re planning to start a business in the tourism sector in 2025, you’ll now be able to claim the cost of your buildings over 50 years instead of the previous 25 years. This means that the taxable income will increase as the deduction is spread over a longer period.
- Other sectors: The current rate of 4% will continue to apply to buildings
2. Valuation of Staff Accommodation
According to Section 12 (w)(7) of the Income Tax Act, accommodation provided to a person for the performance of duties of employment, in a place that is setup explicitly for employee accommodation, and the setup is such that a person other than an employee can neither be accommodated nor has the right of accommodation in that place is exempt from tax.
The draft regulation states that if an employee has their own private accommodation or a private bathroom that they do not have to share with others, it doesn’t qualify for exemption. This means such setups are considered as places where someone else could also be accommodated. The draft regulation further clarifies that the scale and quality of the accommodation is irrelevant in the determination. Further the draft regulation proposes that the accommodation benefit to be computed monthly based on the below formulae. Staff Accommodation benefit = Purchase price ×2% ×1/12
3. Preparation of accounts and applicable currency
Cash Basis Accounting:
Businesses with an annual income and non-current assets not exceeding MVR 10 million can elect to prepare accounts on a cash basis instead of the accrual basis. This threshold also applies to determining whether an Auditor’s Report is required. Currently only the annual income threshold is considered in electing to prepare accounts on cash basis.
Functional Currency:
The draft simplifies the determination of functional currency. For existing businesses, it is the currency in which more than 50% of income was generated in the previous year. For new businesses, in the first year of operation, the functional currency will be based on the currency in which 50% of income is expected to be generated.
4. Finance lease classification
The draft regulation proposes eight criteria to determine whether a lease qualifies as a finance lease for tax purposes. These criteria align with the examples and indicators under IFRS 16 and include:
- The lease transfers ownership of the asset to the lessee before or by the end of the lease term
- The lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain, at the inception date, that the option will be exercised
- The lease term is for the major part of the economic life of the asset even if title is not transferred
- At the inception date, the present value of the lease payments amounts to at least substantially all of the fair value of the leased asset
- The leased asset is of such a specialized nature that only the lessee can use it without major modifications
- If lessee cancels the lease, the lessor’s losses associated with the cancellation are borne by the lessee
- Gain or losses resulting from fluctuation in the fair value of the residual accrue to the lessee
- The lessee has the option to continue the lease for a secondary period at a rent that is substantially lower than market rent
At Premier Chambers, we specialize in providing expert guidance on tax regulations and compliance. Our team is here to help you understand how these proposed amendments may impact your business.