Tax Deductions and Incentives
Tax deductions are usually granted for outgoings and expenses that companies incur in the production of their income. Among the items for which most companies are allowed to claim tax deductions include employment costs to employees, business insurance, rental of premises, utility charges, renewal of licenses, printing, stationery, and staff training. However, Malaysia does not have any tax exemption schemes for companies which have recently started up. Despite this fact, certain other expenses are usually denied a tax deduction. These expenses include, but are not limited to, the following: provision of expenses, unrealized foreign exchange loss, pre-commencement expenses, renovation costs, fines, penalties, donations, licensing expenses, and registration of trademarks. Therefore, companies that fully comprehend the differences between which expenses are usually allowed tax deductions and which are not can use this knowledge to minimize expenses which are not, prioritize those which are, and thus reduce the company’s overall tax burden.
Many tax incentives are also available to companies in certain industries. This is because the Malaysian government intends to attract foreign direct investors to these industries. Hence, these incentives may spur investors to either set up operations in or relocate to Malaysia. Industries that may benefit from these tax incentives include ICT, venture capital, tourism, Islamic finance, environmental protection, energy conservation, manufacturing, healthcare, biotechnology, and agriculture. Among the tax incentives that may be claimed include exemptions on income, double deduction of expenses, preferential tax treatments for promoted sectors, extra allowances on capital expenditure incurred, investment tax allowances, reinvestment capital allowances, and accelerated capital allowances. By using these tax incentives, companies which are eligible for them are often able to pay tax at a rate below the standard corporate tax rate of 24%.
Paul Hype Page & Co is able to help you and your company take full advantage of these deductions and incentives, and thus reduce your company’s corporate tax burden. Our tax experts will put their knowledge of Malaysia’s tax laws and system to use in order to bring maximum benefits to your company.
Corporate Tax in Labuan
The corporate tax system in Labuan, a Malaysian federal territory located off the Malaysian mainland, greatly differs from that of Peninsular Malaysia. Companies based in and conducting business operations in Labuan pay corporate tax at a rate different from the corporate tax rate on the mainland.
Just as is the case in Peninsular Malaysia, financial years in Labuan coincide with calendar years; i.e. each financial year runs from January 1 to December 31. Business activities carried out by Labuan companies are divided into four categories: trading activity, investment holding activity, dormancy, and non-Labuan business activity.
Trading activity carried out by a Labuan company includes business operations in any of the following fields: banking, management, trade, licensing, insurance, consultancy, imports, exports, and advisory services. Companies involved in any of these fields are taxed at a rate of 3%. An audit report is also required of such companies when they file taxes. Labuan companies that act as investment holding entities of assets such as securities, stocks, loans, shares, deposits, and immovable properties are not subject to any taxation. Such companies are nevertheless required to supply a management account, but they do not have to submit an audit report.
Even if a Labuan company is dormant, it must still submit any relevant tax documents. Generally speaking, dormant companies are those which have recently registered and therefore have not yet engaged in any meaningful business activity since incorporation. Dormant Labuan companies are neither required to pay corporate tax nor make audit reports, but they must supply management accounts. Labuan companies that deal with other Malaysian entities are considered to be involved in non-Labuan business activity. According to the Income Tax Act, such companies are to pay a 24% corporate tax on their net profit. These companies must also submit audited financial accounts to the Inland Revenue Board (IRB). They may even opt to be permanently taxed under the Income Tax Act so that they can benefit from tax advantages offered by Malaysia’s double tax agreements.
Tax Compliance for Corporations
Tax compliance is a vital area of any country’s tax system. This is due to the fact that a lack of compliance among taxpayers inhibits the government’s ability to accumulate revenue with which it can pursue financial and social goals. Hence, the Malaysian governments has laid out certain rules and guidelines in order to better facilitate tax compliance among corporations.
In Malaysia, consolidated returns are against the existing tax laws. Each company must file its own tax return. However, in certain situations, group relief is available. Group relief allows a company which is a tax resident and incorporated in Malaysia to relinquish up to 70% of its adjusted losses in the current YA to one or more companies which are likewise Malaysian tax residents and incorporated in Malaysia. Companies are deemed to be related if at least 70% of the paid-up capital of the surrendering company is either directly or indirectly owned by the claimant company or vice versa, or at least 70% of the paid-up capital of the surrendering company and claimant company is either directly or indirectly owned by another company which is a tax resident of and incorporated in Malaysia.
The Malaysian corporate tax system uses a self-assessment regime. In a self-assessment regime, all information provided by the taxpayer to tax authorities when submitting a tax return or any other forms will be regarded by the tax authorities as true unless proven otherwise. Advance corporate tax is to be paid in 12 monthly instalments, and all companies are also required to file a tax return within seven months of the due date, which is the date when their financial year ends.
If you need any assistance in submitting a tax return or any other necessary forms, we at Paul Hype Page & Co are able to help you do so. Our team of consultants is constantly examining current tax conditions so as to make it easier for you to complete your tax computation and negotiate your corporate tax dealings.
Should a taxpayer have any questions or seek clarification about the tax treatment of any tax-related transaction, the taxpayer is allowed to request an advance ruling from the tax authorities. The objectives of advance rulings are to increase tax compliance and reduce disputes between taxpayers and the IRB. An advance ruling is binding upon a person in relation to an arrangement and only for the period or YA specified in the advance ruling. On occasion, the Malaysian tax authorities may also issue public rulings. Public rulings are intended to provide guidance for both the public and the officers of the IRB. Public rulings do not have to be permanent and may either be wholly or partially withdrawn should the situation call for such a course of action to be taken.
Failure to comply with Malaysian corporate tax laws will cause one or more punishments to be meted out by the authorities. Depending on the type and severity of the offense, the punishments that may be imposed include fines of an amount between RM200 to RM20,000, imprisonment, a tax surcharge of 200% to 300% of any amount undercharged, or any combination of the preceding.
In a developing country such as Malaysia, an effective and functional corporate tax system is truly crucial in order to help the country’s economy grow. Malaysia’s corporate tax system has also made Malaysia’s economy more competitive on a regional and global stage alike. This in turn makes foreign investors and companies more likely to invest in Malaysia. Thus, the Malaysian tax authorities and government must continue to work together to formulate a corporate tax plan that will result in the most benefits for the country.