Malaysia’s corporate tax system is a significant contributor to the country’s economic development. This is because corporate tax money is among the Malaysian government’s primary income sources. This article provides an overview of corporate tax in Malaysia and what it does for the country.
Corporate tax is a tax imposed on companies and businesses. Corporate tax is an integral part of any country’s tax system. One reason for this is the fact that corporate tax keeps a country’s economy balanced. This is because corporations usually have surpluses of money which are idle and unproductive. Hence, governments may use the money which has been taxed to achieve specific objectives and improve citizens’ welfare. Corporate tax also helps a country’s tax system function properly by ensuring that no one is tempted to store their money in corporate organizations so as to avoid being taxed.
In developing countries, corporate taxes are especially important because these countries do not have as many sources of revenue for the government as do their more developed counterparts. Malaysia is one such country, and corporate tax in Malaysia has helped the country’s economy grow significantly. According to the OECD, the Malaysian government received RM72.127 billion in corporate tax money in 2016. The vast majority of this revenue came from company income tax, with the rest being from petroleum income tax, offshore business activity tax, and electricity levies.
In Malaysia, companies are taxed based on the territorial tax system. A territorial tax system imposes taxes on individuals and businesses on any income earned within a particular country’s borders. Hence, companies in Malaysia are assessable on any income accrued in or derived from Malaysia. Income derived from abroad and remitted in Malaysia is tax-exempt unless the company is in the banking, insurance, air transport, or sea transport industries. Domestic dividends are also tax-exempt.
Only a company’s taxable income is subject to taxation. A company’s taxable income includes all its earnings derived from Malaysia. Taxable income includes the following: profits earned from a trade or business, premiums, rent, dividends, royalties, interest, or any other earnings.
Corporations in Malaysia are to abide by the single-tier system. The single-tier system has been used in Malaysia since 2008. Under this system, corporate income is taxed at the corporate level. The tax paid by the company is the final tax. There is no tax to be deducted from dividends paid, credited, or distributed to shareholders. Instead, all dividends distributed by the company are tax-exempt when they are in the hands of shareholders. The single-tier system also does not require the use of any tracking mechanisms.
If a company has paid any foreign tax, it may be credited against Malaysian tax on the same profits, though this is limited to 50% of foreign tax in the absence of a tax treaty. Foreign tax credit is restricted to the amount of Malaysian tax payable on the foreign income.
Most companies which are tax residents in Malaysia are taxed on an annual basis at a rate of 24%. A company is regarded as a tax resident in Malaysia if its management and control are exercised in Malaysia. The location of a company’s management and control is defined as the location where the company’s directors meet to discuss the company’s business affairs. The tax rate of 24% represents a decline in tax rate when compared to previous years’ rates. The corporate tax rate for tax resident companies was lowered from 25% to 24% in 2015. This rate was already a lowered one; the corporate tax rate peaked at 30% in 1997.
Resident companies which are small and medium enterprises (SMEs) pay corporate tax at different rates. Resident SMEs are defined as companies that have a paid-up capital of RM2.5 million or less when the basis period of a year of assessment (YA) begins. A YA’s basis period overlaps with a calendar year; for example, YA 2018 ran from January 1, 2018, to December 31, 2018. These companies must also fulfill at least one of the following criteria: not more than 50% of the paid-up capital in ordinary shares of the company is owned by a related company, not more than 50% of the paid-up capital in ordinary shares of the related company is owned by the previously-mentioned company, or not more than 50% of the paid-up capital in ordinary shares of the previously-mentioned company and the related company is directly or indirectly owned by another company. Related companies have a paid-up capital in ordinary shares of more than RM2.5 million at the start of a YA’s basis period.
The first RM500,000 of an SME’s chargeable income is taxed at a rate of 18%. Any chargeable income beyond this will have a 24% tax imposed against it. Finally, non-resident companies and branches are taxed at corporate income tax rates of 24%.
Other Taxes on Corporations
There are several other taxes which companies in Malaysia are required to pay. These include incorporation fees, payroll taxes, real property tax, social security, and stamp duty. Malaysian companies must pay an incorporation fee of RM1,000, while for foreign companies, this figure rises to between RM5,000 and RM7,000. Payroll tax, which is a tax on employment income, is withheld by the employer under a pay-as-you-earn scheme. This tax is subsequently remitted to the relevant tax authorities.
Corporations in Malaysia must also pay real property tax. Real property tax is a local tax levied on the value of real estate. This tax’s value is determined by a tax rate set by a taxing agency, which is then multiplied by the value of the property. In Malaysia, each state’s tax authorities impose real property taxes in the forms of quit rent and assessments. Each state levies different real property tax rates.
Employers and employees of Malaysian companies alike are required to make monetary contributions to the Social Security Organization (SOCSO). Employers usually contribute 1.75% of the total amount to be paid. The employer will make the payment for each employee registered with the SOCSO. Both employers and employees must also contribute to the Employees Provident Fund (EPF). The employer contributes at a rate of 12% to 13% of the employee’s remuneration, while the employee contributes at a rate of 11% of the employee’s remuneration. Starting from 2018, both the employer and employee must contribute 0.2% of the employee’s remuneration to the Employment Insurance System (EIS). The contribution to the EIS is capped at RM4,000. The qualifying condition to claim EIS money is loss of employment (excluding cases of voluntary resignation).
In Malaysia, stamp duty is imposed on property transfers and share transaction documents. For property transfers, stamp duty is levied at rates between 1% and 3%. If the property’s value is below RM100,000, the tax rate is 1%; if the value is between RM100,000 and RM500,000, 2%; and if the value is more than RM500,000, the rate is 3%. Share transaction documents are taxed at a 0.3% rate. Malaysia does not have a capital duty tax, nor does it impose any transfer taxes with the exception of stamp duty.
Malaysia does not impose a withholding tax on dividends; it only taxes profits out of which dividends are declared. However, some of the tax treaties between Malaysia and certain other countries state that if Malaysia were ever to impose such a withholding tax, there would be a maximum withholding tax regarding dividends related to those countries.
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 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.
Corporate Tax in Malaysia FAQs
Companies, limited liability partnerships, trust bodies, and cooperative societies that are dormant or have not commenced business are nevertheless required to submit the ITRF. This has been true ever since the 2014 year of assessment.
Tax administration in Malaysia is based on the concepts of paying, self-assessing, and filing. Monthly salary deductions are made for individuals with an employment income; they may also be made through installments for individuals with a business income. Taxpayers are to compute their own taxes and submit the ITRF to the IRB. The ITRF is to be accompanied by the payment for the balance of the income tax to be paid so as to meet any shortfall in the monthly payments or a claim for repayment if there is an overpayment.
Every individual who is to be taxed is required to declare income to IRB. The taxpayer is responsible for obtaining and forwarding the Income Tax Return Form (ITRF). The taxpayer has to submit an ITRF that has been duly completed before April 30 every year.