Malaysia’s Tax System
Every country’s tax system involves various complex forms of taxation. Each of these forms of taxation play vital roles within the country’s tax system. Such is also the case in Malaysia. Among the primary forms of taxation in Malaysia are income tax, corporate tax, and sales and services tax (SST), among others. The maximum income tax rate in Malaysia is 26% while the corporate tax rate is 24% and the SST rate is 6%.
However, in the following paragraphs, the focus will be placed on corporate tax as well as other taxes which are to be paid by the companies of Malaysia.
The prevailing corporate tax rate in Malaysia is 24%. In general, corporations are taxed on all income derived from Malaysia. However, there are certain exceptions to these; such exceptions apply to corporations involved in the banking, insurance, air transport, and shipping sectors. Taxable income includes all earnings derived from Malaysia including gains or profits from dividends, interest, royalties, and land trading business or other similar earnings.
Companies in Malaysia occasionally have to pay withholding tax. This tax is applied to certain types of taxable income. Among the types of taxable income to which withholding taxes apply are royalties, technical fees, interest, and rentals of movable property. All are taxed at a rate of 10% except interest, which is taxed at 15%. Malaysia does not levy any withholding taxes on dividends.
History of Taxation and Corporate Tax in Malaysia
Income tax regulations in Malaysia were first introduced in 1947. The first income tax regulations were enacted under the Income Tax Ordinance 1947. In subsequent years, the Sabah Income Tax Ordinance 1956 and the Sarawak Inland Revenue Ordinance 1960 were introduced; these acts were eventually replaced by the Income Tax Act in 1967. Public rulings issued by the Inland Revenue Board of Malaysia supplement the Income Tax Act 1967 in providing further details on the regulations.
The basis year for corporate taxation is determined based on the basis period for a year of assessment. The year of assessment was first determined based on prior year of assessment; this format was replaced by current year of assessment in 2000. This also created a corporate tax waiver for income earned during the tax period which ended in 1999. The basis period is generally determined in accordance with the company’s 12-month accounting period. In other cases such as instances of changes of accounting period and commencement of operations, an accounting period of less or more than 12 months may occur. In such instance, the basis period is determined according the rules and regulations mentioned in Public Ruling No. 7/2001 Basis Period for Business & Non-Business Sources (Companies). This public ruling serves as a detailed theoretical and technical ruling on how basis periods are to be determined. It was issued by the Inland Revenue Board of Malaysia in 2001.
The Malaysian tax assessment system operates through a self-assessment system (SAS). The system was introduced to Malaysian companies in 2001. It replaced the official assessment system as the method for calculation, submission, and remission of tax payments and tax returns. Despite objections related to high compliance costs which have been made by some taxpayers, the system has been proven to increase taxpayer compliance and reduce the assessment tasks undertaken by the country’s tax authorities.
If you need any assistance with the management and filing of any of your tax payments or returns, we at Paul Hype Page & Co are here to help. We will ensure that all the necessary information is mentioned when we help you file your taxes. Thus, you will be compliant with all of Malaysia’s tax regulations.
To minimize double taxation issues, dividends distributed by companies are not to be taxed after their recipients receive them. This system is referred to as the single-tier system. The system was first implemented in the year of assessment of 2008. It served as a substitute for the imputation system which had been enforced according to Section 108 and Section 110 of the Income Tax Act 1967. The benefits of the transition include reduction of administrative work in assessing tax on dividends which have been distributed as well as reduction of compliance costs of the companies which have paid dividends. This implies that the single-tier system is in effect for corporate dividend taxation.
Corporate tax rates in Malaysia have experienced gradual reductions since the late 1980s. The tax rate once stood at 40% but is today at 24%. The rate was at its maximum prior to a reduction of five percentage points in 1989 which reduced the rate from 40% to 35%. In subsequent years, reductions occurred at rates of two percentage points which took place in 1994, 1995, and 1998. To accommodate small and medium-sized corporations, tax rates based on taxable income brackets were first introduced in 2003. This was expected to be an effective strategy which would support the government’s policies to develop the country’s small and medium-sized enterprises. Corporate tax rate reductions took place in 2007, 2008, and 2009; each reduction was by one percentage point. In 2009, the country’s corporate tax rate was 25%; the lowest it had ever been. Today, the standard corporate tax rate in Malaysia is 24% while the rate for resident small and medium-sized companies (companies which have been incorporated in Malaysia, have a paid-up capital of RM2.5 million or less, and are not part of a group containing a company with more than RM2.5 million worth of paid-up capital) is 17% on the first RM500,000, with the remainder taxed at a rate of 24%.
Some people may be interested in starting a company in Malaysia. If you are such a person, let us at Paul Hype Page & Co be of service to you. We will expedite the incorporation process for you so that you can begin running your company as soon as possible. We will even communicate with SSM on your behalf if you require us to do so.
Although the reductions in tax rates may be seen by some as a by-product of the reduced contributions of corporate tax to the Malaysian government’s revenue, further analysis proves that there is little to no correlation between the corporate tax rate and the amount of corporate tax acquired by the government in relation to the government’s total earnings. Therefore, a decrease in corporate tax rates is not necessarily associated with a reduction in the government’s overall income and economic condition.