Inventory is stated at cost or net realisable value (i.e. market price) for tax purposes. There is no specific requirement for the valuation of cost. The only legal emphasis is consistency in the application of the selected method. This means that one cannot change from one valuation method to another over different tax periods.
The tax basis for capital gains is the cost of the asset adjusted by the applicable consumer price index (inflation index). Once determined, the taxable gain is subject to corporate tax at the rate applicable to the particular entity.
Capital gains arising from the disposal of personal and domestic assets not used in connection with trade are exempt from corporate tax.
Capital gains arising from the sale of shares held for more than one year traded on the Malawi Stock Exchange are not taxable.
If a business asset is sold and the taxpayer acquires a qualifying replacement asset, the taxpayer may claim rollover relief. This means that the taxpayer does not immediately pay the tax on the gain. Instead, the cost of the replacement asset is reduced by the amount of the gain. The taxpayer must declare this in the tax return.
A qualifying replacement asset is an asset similar to, or related in service or use to, the asset disposed of. The replacement asset must be acquired within 18 months of the disposal giving rise to the gain.
Dividend income is exempt from corporate tax; however, dividends received from Malawi sources are subject to a 10% dividend WHT, which is a final tax. Note that although the word 'final' has not been defined, it is applied as meaning that dividend WHT suffered may not be offset against an income tax liability.
A return for dividends declaration has to be filed with the tax authorities within 30 days of the declaration, while the WHT has to be remitted within 180 days of the declaration.
Interest is added to the other income categories and taxed at a rate applicable to the person that earns the income. There is a mandatory WHT on any interest earned unless the earner is exempted.
There is deemed interest on any interest-free loans and balances. The deemed interest is taxable income to the lender.
Except for mineral royalties, royalty income is added to other income and taxed at a rate applicable to the person that earns it. Royalties earned from a mining project are taxable at 20% where the recipient in a non-resident.
Foreign exchange gains and losses
Foreign exchange gains realised on foreign currency assets or liabilities are taxable.
Foreign exchange losses realised on foreign currency assets or liabilities are tax deductible to the extent of any unrealised foreign exchange gains; otherwise, they are carried forward until there is no limitation.
Unrealised gains and losses are carried forward until realised and then included in income or allowable expenditures. The maintenance of records that accurately track unrealised exchange rate adjustments from year to year is necessary to ensure correct tax computations.
The following are common examples of other tax-exempt income:
- The income of agricultural, mining, and commercial institutions or societies not operating for private pecuniary profit or gain of the members.
- The income of clubs, societies, and associations formed, organised, and operated solely or principally for social welfare or civic improvement or other similar purpose, provided that the income of such bodies may not be divided among or used for the benefit of the members or shareholders.
- The income of ecclesiastical, charitable, and educational institutions of a public character.
Generally, income whose source is not Malawi is not taxable in Malawi.