For year of assessment 2016, no changes have been made to tax or capital allowance rates. However, in a recent notice issued by the revenue division of the Ministry of Finance (MoF) dated April 19, 2016, effective from year of assessment 2016 onward, pursuant to Section 133B and 133C of the Companies Act, Chapter 39 (Amendment) (No.2) Order, 2014, certain companies are not required to submit audited financial statements to the Collector of Income Tax if the company has been dormant from the time of its formation or since the end of the previous financial year. This is also the case for private companies if:
- The revenue in that year does not exceed BN$1m ($712,000);
- The beneficial interest in its share is not held, directly or indirectly, by any corporation; and
- It consists of no more than 20 members.
These companies, however, are still required to file their income tax returns annually, as per Section 52 of the Income Tax Act (Chapter 35). Since 2012, tax returns can be filed electronically via the System for Tax Administration and Revenue Services (STARS) portal at www.stars.gov.bn. In the event that a company’s revenue exceeds BN$1m ($712,000) in the subsequent year, it is no longer eligible for exemption on the submission of its audited financial statements. Currently, there is still no personal income tax, sales tax or goods and services tax in Brunei Darussalam. In addition, sole proprietorships and partnerships are not subject to any form of taxation.
Income tax in Brunei Darussalam is governed by the Income Tax Act (Chapter 35) and Income Tax (Petroleum) Act (Chapter 119), Laws of Brunei. Under Section 8(1) of this Act, income accrued in, derived from or received in Brunei Darussalam by any corporations, registered locally or elsewhere, is taxed at a rate of 18.5% for year of assessment 2016 and subsequent years of assessment. Companies that are engaged in the exploration and production of oil and gas have their profits taxed at a rate of 55%.
A tax threshold is the lower limit of earnings at which tax needs to start being paid.
Newly incorporated companies: Under Section 35(5) of the Income Tax Act (Chapter 35), exemption is granted to a newly incorporated company for the first BN$100,000 ($71,200) of its chargeable income during the first three consecutive years of assessment falling within or after year of assessment 2008. A tax threshold is also granted, where for the next BN$150,000 ($107,000) of chargeable income, tax is charged at 50% of the applicable rate of taxation.
It should be noted that the first three years of assessment in relation to a newly incorporated company include the year of assessment relating to the basis period during which the company was incorporated or registered and the two consecutive years of assessment immediately following that year of assessment.
Existing companies: A tax threshold was initially introduced in 2008 and subsequently revised in 2011. This was introduced primarily to help reduce the tax liabilities of small and medium-sized enterprises (SMEs) and encourage SME development. The tax threshold is as follows:
- For the first BN$100,000 ($71,150) of chargeable income, tax shall be charged at 25% of the applicable tax rate;
- For the next BN$150,000 ($107,000) of chargeable income, tax shall be charged at only 50% of the applicable tax rate; and
- The remaining balance of the chargeable income shall be taxed at the applicable tax rate.
For example, if a company has a chargeable income of BN$500,000 ($356,000), the tax payable is BN$64,750 ($46,000), as per the table below.
Tax On Exports
A flat tax rate of 1% is in place to encourage export activities of approved exports. Under these special circumstances, the total turnover of the exporter is treated as exports if local sales do not exceed 20% of total turnover.
There are several mandatory administrative duties.
Registration of income tax payer: Upon registration with the Registrar of Companies, businesses must register electronically with the revenue division of the MoF using the STARS online portal.
Filing estimated chargeable income and income tax returns: Under Section 52A of the Income Tax Act, a company is required to submit its estimated chargeable income to the Collector of Income Tax within three months of the end of the accounting period related to that year of assessment. A company must file its final income tax return by June 30 of the year of assessment. It is necessary for all filing to be done online via STARS. An income tax return is a company’s declaration on their income or profit for a period of 12 months.
Income tax returns must be submitted together with a certified copy of the audited financial statements, income tax computation, capital allowance computation, schedule of fixed assets and supporting schedules. Failure to file returns is an offence against the Income Tax Act. Upon conviction, offenders are liable to a fine of BN$10,000 ($7112), and in default of payment, can be sentenced to imprisonment for up to 12 months.
Bookkeeping: Companies are required to keep records of business transactions going back seven years to enable the Collector of Income Tax to determine the correct amount of tax the company is liable for. This includes complete and accurate records of opening and closing stocks, purchases, sales, receipts, invoices, bills of lading, bank statements and all other documents and books of account pertaining to business.
The period of assessment is on a preceding year basis, where a calendar year ending December 31 is adopted as the basis period.
Types Of Income
Among the types of income that are subjected to tax are:
- Gains or profits from any trade, business or vocation;
- Gains or profits from any employment;
- The net value of land and improvements;
- Dividends, interest or discounts;
- Any pension, charge or annuity; and
- Rents, royalties, premiums and any other profits arising from property.
Dividends accrued in, derived from or received in Brunei Darussalam by a corporation are included in taxable income, apart from dividends received from a corporation taxable in Brunei Darussalam, which are excluded. Dividends received in Brunei Darussalam from the UK or from Commonwealth countries are grossed up in tax computations, and credit is claimed against the Brunei Darussalam tax liability for tax suffered either under the double tax treaty with the UK or the provision for Commonwealth tax relief.
All expenses wholly or exclusively incurred in the production of taxable income are allowable as deductions for tax expenses. These deductions include:
- Interest on borrowed money used in acquiring income;
- Rent on land and buildings used in trade or business;
- Costs of repair or premises, plant and machinery;
- Bad debts and specific doubtful debts, with any subsequent recovery being treated as income when received;
- Employers’ contributions to approved pensions or provident funds, such as Tabung Amanah Pekerja (TAP) or the Supplement Contributory Pension Fund; and
- Zakat, fitrah or any religious dues, payment of which is made under any written law.
Expenses not allowed as deductions for tax purposes include:
- Expenses not wholly or exclusively incurred in acquiring income;
- Domestic private expenses;
- Any capital withdrawal or any sum used as capital;
- Any capital used in improvements apart from replanting or plantations;
- Any sum recoverable under an insurance or indemnity contract;
- Rent or repair expenses not incurred in the earning of income;
- Any income tax paid in Brunei or in other countries; and
- Payments to any unapproved pension or provident funds.
Donations are not allowable but are claimable if they are made to approved institutions.
Capping On Deductible Expenses & Capital Allowances For Motor Vehicles
Qualifying expenditure on a motor vehicle that has been constructed or adapted to carry no more than seven passengers (excluding the driver), whose weight does not exceed 3000 kg, and which was bought on or after January 1, 2008 is restricted to a maximum limit of BN$50,000 ($35,600), as per Section 16(4) and 16(5) of the Income Tax Act.
Section 11(1A) of the Income Tax Act also restricts deductions on expenses incurred on motor vehicles that cost more than BN$50,000 ($35,600). In such instances, the expenses deductible for tax purposes are limited to the proportion that BN$50,000 ($35,600) bears to the actual costs of the motor vehicle.
Industrial Buildings & Structures
In line with the government’s efforts to promote tourism in Brunei Darussalam, claims for capital allowance on industrial buildings or structures under Section 15(1) of the Income Tax Act ( Chapter 35) also include capital expenditure on the construction of buildings or structures occupied for the purposes of hotellery. Any such building or structure that was in operation prior to January 1, 2008 is only eligible to claim annual allowance at the rate of 4% per annum, in accordance with Section 15(3) of the Income Tax Act (Chapter 35). However, claims for initial allowance are available on capital expenditure incurred on buildings or structures completed on or after January 1, 2008.
Depreciation is not an allowable expense and is replaced by capital allowance for qualifying capital expenditure.
Industrial Buildings: As a form of incentive to help local companies expand, the rate for claims on capital allowances was increased, with effect from the year of assessment 2015. These figures, outlined in Section 13(1) and 13(2) of the Income Tax Act, can be seen in the table below.
Plant & machinery: Another form of incentive brought into effect for companies in the manufacturing sector during year of assessment 2015 was an increase in capital allowance from 100% to 150% for assets categorised as plant and machinery, where certain terms and conditions apply.
Disposal of industrial buildings, plant or machinery: Balancing allowances or charges are made upon the disposal of industrial buildings, plant or machinery. These adjustments cover the shortfall or excess of the tax written down value as compared to the sale proceeds.
Unabsorbed capital allowance: These allowances can be carried forward indefinitely but must be set off against income from the same trade.
Tax credits allow taxpayers to deduct from the tax they are liable for under certain circumstances.
Local employment: When a business employs a citizen of Brunei Darussalam, the company is entitled to claim tax credit at 50% of the salary paid to the new employee for a maximum of three years of that worker’s employment. This incentive is subject to the following conditions:
- The employees are either citizens or permanent residents of Brunei Darussalam;
- Their gross salary does not exceed BN$3000 ($2130) per month; and
- An amount equal to the contribution is paid to TAP.
Additional contributions made to TAP (in excess of contributions made in the previous year): Tax credit is admissible over and above deductions and further deductions of contributions to TAP at the rate of 10%.
Training: Regarding company expenditure for the training of employees, a tax credit of 100% of the gross salary paid during the training period is allowed against the tax payable. This incentive is subject to the following conditions:
- The employees are either citizens or permanent residents of Brunei Darussalam;
- The gross salary of each employee is not in excess of BN$2000 ($1420) per month; and
- An amount equal to the contribution is paid to TAP.
Fresh investment in industrial plant and machinery for balancing, modernisation and replacement: When a company invests in new plant and machinery for balancing, modernisation and replacement, it is entitled to 15% of the amount invested, which is allowed against the tax payable. The conditions for this incentive are as follows:
- The investment is made before December 31 2017; and
- Tax credit can be carried forward for two years.
Limit On Tax Credits
The total amount of tax credits cannot exceed 50% of total tax payable in one year, excluding credit for foreign tax paid.
Commonwealth income tax: Relief may be obtained on income arising from Commonwealth countries that provide reciprocal relief. The maximum relief cannot exceed half the Brunei Darussalam rate and applies to both resident and non-resident companies.
Investment incentives order, 2001: This order was introduced to encourage the establishment and development of industrial and other economic enterprises in the Sultanate, as well as to boost investment from local and foreign investors.
Losses that are incurred by a company can be carried forward for a maximum of six years and set off against future income. Losses can also be carried back one year, provided a claim is made in writing within one year of the relevant year of assessment.
Penalty For Late Payment
- If tax due based on effectively connected income is not paid three months from the end of the accounting period of any year of assessment, a penalty of 5% of the amount due shall be imposed.
- If tax due based on income tax returns is not paid after June 30 of the relevant year of assessment, a penalty of 5% of the amount due shall be imposed.
- An additional penalty of 1% of the tax outstanding shall be imposed for each completed month that the tax remains unpaid, but the total additional penalty shall not exceed 12% (Section 72(1)(bb)).
Refund requests must be submitted to the revenue division along with the original payment receipt. These requests can also be submitted online via STARS, but it is still necessary to submit the original receipt of payment to the MoF.
What is withholding tax?:
- Withholding tax is the collection of tax on the income of a non-resident derived from Brunei Darussalam.
- The law requires that any person who makes a payment of a specified nature to a non-resident withholds tax at a rate prescribed as a percentage of that payment. The amount withheld must also be paid within 14 days to the Collector of Income Tax. The amount thus withheld is called a withholding tax.
Why impose withholding tax?
- Non-residents deriving income from Brunei Darussalam owe tax on such income;
- To facilitate the collection of income tax from non-residents on their Brunei-sourced income, since payers are within the jurisdiction of the country while payees might be outside its jurisdiction; and
- Tax relief is available in some countries on income which has been liable to taxation in the country of source.
How is a resident defined?
- An individual who resides in Brunei Darussalam except for temporary absences, which the Collector of Income Tax may view as reasonable and not inconsistent with the claim that the individual is a resident of Brunei Darussalam;
- A person who is physically present or who is employed (other than as a director of a company) in the Sultanate for 183 days or more during the year preceding the respective year of assessment; and
- A company or body of persons whose business is controlled and managed in Brunei Darussalam.
Withholding tax implications for non-residents of Brunei Darussalam:
- Tax is deducted at source on payments of a specified nature made to non-residents.
- Withheld tax is deemed to be paid by the non-resident.
- Withheld tax can be declared by the non-resident for the purpose of claiming any tax relief available under their domestic tax law.
- Non-resident taxpayers permanently established in Brunei Darussalam are required to submit tax returns and claim expenses incurred wholly or exclusively in the production of income.
In such cases, the taxpayer is required to supply certified accounts and tax computations for consideration. The tax withheld is adjustable in such cases against the final tax liability. Conversely, if the tax withheld is less than the final tax liability, the taxpayer will have to pay the balance.
OBG would like to thank KPMG for its contribution to THE REPORT Brunei Darussalam 2016
Type of payments subject to withholding tax
Withholding tax was initially only imposed on interest due under a charge, debenture or loan paid by a company to a non-resident of Brunei Darussalam at a rate of 20%. However, since January 1, 2008 withholding tax has been payable on the following types of payment, which are sourced in Brunei Darussalam or deemed to be sourced in Brunei Darussalam under Section 9(4) or Section 9(5) of the Income Tax Act (Chapter 35):
- Interest, commission, fees and other payments relating to loans or indebtedness;
- Royalty or other lump-sum payments for the use of or the right to use movable property;
- Payments for the use of or the right to use scientific, technical, industrial or commercial knowledge or information;
- Payments for the rendering of technical assistance or service in connection with the application or use of scientific, technical, industrial or commercial knowledge or information;
- Payment for the management or assistance in the management of any trade, business or profession;
- Rent or other payments for the use of any movable property; and
- Any payment of remuneration to any director who is not a resident of Brunei Darussalam (see table on previous page).
The government has signed Avoidance of Double Taxation Agreements with 18 nations worldwide to lessen the tax burden on firms that operate in Brunei Darussalam and other signatory countries. Nations to have signed a treaty with the Sultanate include China, Indonesia, Japan, South Korea and the UK, among others.