The purpose of a tax system in any country is to generate revenue for the government, who in turn are to use this money to fund their operations and better serve the public. Malaysia’s tax system is no different. In Malaysia, income tax is the government’s primary source of revenue, contributing approximately 50% of the total amount. According to the latest figures, Malaysia’s tax revenue, including sales tax revenue, stands at US$10.833 billion. The bulk of Malaysia’s tax money is used to fund education, home security, and defense.
Tax Laws in Malaysia
The primary law governing income tax in Malaysia is the Income Tax Act. The Income Tax Act was enacted in 1967. It consists of 10 Parts containing 156 sections and nine schedules including 77 amendments. Some of the most important portions of the Income Tax Act relate to topics such as classes of income on which tax is chargeable, rates of tax, resident status, charging of income tax, and applicable tax deductions.
The only entity which is legally authorized to impose taxes in Malaysia is the Inland Revenue Board (IRB). The IRB was established with the enactment of the Inland Revenue Board of Malaysia Act 1995. The IRB is in charge of various tax-related policies such as those connected to income tax, real property tax, stamp duty, and petroleum income tax.
The Income Tax Act and the Inland Revenue Board of Malaysia Act 1995 are supported by several other important pieces of legislation that govern taxation in Malaysia. These include public rulings, technical guidelines, operational guidelines, and advance rulings.
Public rulings are intended to provide guidance for both the public and the officers of the IRB. They set out the Director General of Inland Revenue (DGIR)’s interpretation of a specific tax law of Malaysia and specify what policies and procedures are to be used in each particular circumstance. Public rulings are not necessarily permanent, as they may either be wholly or partially withdrawn when a new ruling comes into force that renders the prior ruling irrelevant, when the publication of a new ruling causes the old and new rulings to be inconsistent with each other, or when a notice of withdrawal is issued.
Each relevant paragraph in a public ruling is accompanied by an effective date. The effective date follows the effective date of any related provisions in the Income Tax Act 1967, Income Tax Exemption Income Orders, or Income Tax Rules. Occasionally, concessions may be given, and when this occurs, the effective date or period of the concession is mentioned in the respective paragraph where necessary. In 2018, there were 12 public rulings issued, and these rulings covered topics ranging from taxation of resident individuals to accelerated capital allowance to withholding tax on special classes of income.
From time to time, the IRB issues technical guidelines. These guidelines provide clarification on tax-related issues for which the Income Tax Act does not specify what is to be done in a particular tax-related circumstance. The IRB may also make amendments to the technical guidelines that it issues, should it be deemed necessary to do so. Over the last decade, the IRB has issued 32 sets of technical guidelines. These guidelines have laid out information regarding subjects such as taxation of electronic commerce, mutual agreement procedures, transfer pricing, and advance pricing arrangements.
The IRB may also issue operational guidelines. Operational guidelines contain details on the proper procedures in a given circumstance. Some of the more recent operational guidelines issued are about the recently-introduced Special Program for Voluntary Disclosure, an offer of reduction of tax penalties and the elimination of a tax rise, the procedures to apply for the Tax Solicitation Approval (SPC) for individuals, and applications for tax settlement letters for companies, limited liability partnerships, and Labuan entities.
An advance ruling is a written statement by the DGIR to a person that gives information on how one or more of the provisions specified in the Income Tax Act applies to a proposed arrangement. Advance rulings about the interpretation and applications of the income tax provisions specified in the Income Tax Act may be issued by the IRB upon request. Advance rulings are intended to give certainty and clarity with regard to tax treatment, as well as foster greater consistency in the application of Malaysia’s tax laws.
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 year of assessment specified in the advance ruling. Should the specified time period expire before the arrangement stipulated in the advance ruling is carried out, the advance ruling will automatically lapse. However, an advance ruling is always binding upon the DGIR unless qualifications stated in the ruling prevent it from being so.
Malaysian Income Tax Details
Taxes in Malaysia are assessed on a current-year basis. This means that tax is charged on any profits arising in the accounts for the basis period ending in the related tax year. The basis period for a year of assessment with regard to taxation in Malaysia is concurrent with the corresponding calendar year. Thus, each year of assessment ends on December 31 of that calendar year.
Malaysia’s tax system is territorial. According to the Income Tax Act, any income that was accrued in, derived from, or remitted to Malaysia is liable to be taxed. However, income derived from foreign sources and received in Malaysia, with the exception of instances when a resident company carries on the business of banking, insurance, or sea or air transport, is tax-exempt.
Malaysia uses double-tax treaties to prevent anyone from having their income taxed twice. If a company has paid taxes to a foreign tax authority, this same tax could be credited against the company’s Malaysian tax on the same profit. This tax credit is limited to 50% if the relevant tax jurisdiction has a tax treaty with Malaysia and is only applicable to foreign income.
Malaysian tax laws do not only classify individuals as “persons”. Companies, bodies of persons, partnerships including limited liability partnerships, and corporations sole are also classified as persons for tax purposes. Therefore, all of these entities are liable to be taxed. The Income Tax Act also goes on to define each entity to be regarded as a person, with the exception of the corporation sole. A company is a body corporate and includes any body of persons established with a separate legal identity by or under the laws of a territory outside Malaysia and a business trust. A body of persons is an unincorporated group of persons which is also not a company. A Hindu joint family is considered to be a body of persons, but a partnership is not. A partnership is defined an association of any kind between parties who have agreed to combine any of their rights, powers, property, labour, or skill for the purpose of carrying on a business and sharing the profits derived from it. Hindu joint families and limited liability partnerships are excluded from this definition.
Income in Malaysian Tax Law
Although the Income Tax Act does not explicitly provide a definition of the word “income”, it nevertheless does set out what types of income are liable to be taxed. The Income Tax Act requires the following forms of income to be taxed: gains or profits from an employment; rents, royalties or premiums; gains or profits from a business, for whatever period of time carried on; dividends, interest or discounts; pensions, annuities or other periodical payments not falling under any of the prior descriptions; and gains or profits not falling under any of the prior descriptions. In Malaysia, only a person’s chargeable income is liable to tax.
The Income Tax Act also divides income into five different categories; these are gross income, adjusted income, statutory income, aggregate income, and chargeable income.
Gross income includes any sums receivable or deemed to have been received for a particular basis period in relation to a certain source through insurance, indemnity, recoupment, recovery, reimbursement, compensation for loss of income from that source, or in cases where such sums are in respect of the kind of outgoings and expenses deductible in ascertaining the adjusted income of that person from that source or under a contract of indemnity.
Adjusted income for the basis period for a year of assessment is determined by deducting all of a person’s outgoings and expenses wholly and exclusively incurred during that period by that person in the production of gross income from a source from the gross income of that person from that source for that period.
A person’s statutory income for a year of assessment is the person’s adjusted income from a source for the basis period for the relevant year added to the amount of any balancing, agriculture, or forest charges or their related aggregate amounts, from which the amount of any allowance or the aggregate amount of the allowances falling to be made for the relevant year is subtracted.
Aggregate income for a year of assessment is the sum of a person’s aggregate of the person’s statutory income for the relevant year from all sources and any additions falling to be made for the relevant year pursuant to Schedule 4 of the Income Tax Act, reduced by any deduction falling to be made for the relevant year pursuant to subsection (2) of the Income Tax Act.
The chargeable income of a person for a year of assessment is the person’s total income for that year after subtracting any deductions allowed by Chapter 7, Part III of the Income Tax Act for that year. Chargeable income is the most important of the five groups because it is a person’s chargeable income which is subject to taxation.
Tax resident status in Malaysia
Taxpayers in Malaysia, whether they live in Peninsular Malaysia, Sabah, or Sarawak, are either considered to be residents or non-residents. Tax resident status in Malaysia is not contingent on one’s nationality. Anyone who has lived and worked in Malaysia for at least 182 days of a given calendar year will be considered a tax resident by the Malaysian government, while those who have lived and worked in Malaysia for between 60 and 182 days of a given calendar year will not be considered a tax resident. Anyone who has lived and worked in Malaysia for fewer than 60 days of a given calendar year is neither a resident nor a non-resident because such people are exempt from taxation in Malaysia. Those who are tax residents are subject to different tax rates to those who are not. One major advantage of being a tax resident in Malaysia is the ability to claim tax deductions, something non-residents are not allowed to do.
Entities may also be granted tax resident status in Malaysia. Under Malaysian tax laws, the term “entity” may refer to any of the following: a body of persons, a Hindu joint family, a company, or a corporation sole. Partnerships are not to be considered as tax residents because tax liability with regard to a partnership is to be assessed based on the income of each member of the partnership.
A company or body of persons carrying on a business is considered a tax resident in Malaysia for the basis year for a year of assessment if, at any time during the basis year, the management and control of its business or of any one of its businesses are exercised in Malaysia. “Management and control” refers to the controlling authority which determines the policies to be followed by the company. Management and control is regarded to be carried out where the company’s directors meet to conduct business affairs regardless of where the company is incorporated. If a company is regarded as a tax resident for a particular year of assessment, it will remain so for each subsequent year of assessment unless it can definitively be proven that the company no longer qualifies as a tax resident.
A Hindu joint family is a tax resident in Malaysia for the basis year for a year of assessment if its manager or karta is a resident for that basis year. The converse is also true: if the manager or karta is a non-resident, the Hindu joint family is deemed a non-resident in Malaysia.
Any other company or body of persons other than a Hindu joint family is to be considered a tax resident in Malaysia for the basis year for a year of assessment if, at any time during the basis year, the management and control of its affairs are exercised in Malaysia by its directors or other controlling authorities.
Although many foreign companies have incorporated subsidiaries or registered branches in Malaysia, these subsidiaries and branches are not regarded as tax residents. However, if it can be proven that the management and control of at least one of its businesses is exercised in Malaysia, the subsidiary or branch will be deemed to be a resident.
Tax Rates in Malaysia
Malaysia’s individual income tax rates imposed on tax residents are based on the progressive tax system. A progressive tax is a tax that mandates that the higher the income of a person, the higher the percentage of earnings the person is required to pay. The first RM5,000 per year earned by a taxpayer is not subject to taxation. The progressive tax rate then increases to the highest possible resident tax rate of 28%, which is imposed on tax residents who earn a minimum of RM1 million per year. Thus, a taxpayer’s average tax rate and marginal tax rate also increase as income does. Non-residents must pay taxes at a flat tax rate of 28%. Other rates apply to other forms of income, such as interest or royalties.
Malaysia’s standard corporate income tax rate has steadily fallen over the years. The current standard corporate income tax rate in Malaysia is 24%, well below the all-time high of 30% which was set in 1997. However, for the 2017 and 2018 tax years, companies whose taxable income increased by at least 5% from the previous year were eligible for a deduction of between 1% and 4%. This deduction was to be applied to the part of the income that represents the increase. Resident companies, non-resident companies, and subsidiaries of foreign companies are all taxed in the same manner. Capital gains from the sale of investments or capital assets besides those related to land and buildings are not taxed.
Some companies are not taxed at the standard rate of 24%. Among these are resident small and medium-sized enterprises (SMEs), which are defined as companies whose total capital is valued below RM2.5 million. The first RM500,000 earned by a resident SME is taxed at a rate of 18%. Any revenue in excess of this amount, however, is taxed at the standard 24% rate. Companies that originate in and conduct business operations in Labuan are also taxed at non-standard rates. Such companies are taxed at either 3% of their audited income or at a total amount of RM20,000.
Tax Exemptions, Deductions, Reliefs, and Rebates
Malaysia’s tax system contains a number of tax exemptions, deductions, reliefs, and rebates that play significant roles in reducing taxpayers’ respective tax burdens. In Malaysia, certain forms of income are exempt to taxation. Most of Malaysia’s taxpayers are eligible for at least one tax exemption. Among the most notable forms of tax-exempt income include pensions, scholarships, interest, royalties, dividends, and income remitted from outside Malaysia, even if this income is received in Malaysia.
Tax deductions are only available to those who are tax residents in Malaysia. Tax deductions reduce one’s chargeable income and can be used by people who have given certain gifts or made certain donations. Only donations made to charities approved by the Malaysian government or to the government itself are tax-deductible. Furthermore, the donor must also keep the receipt of the donation to qualify for the deduction. Further qualifying criteria for tax deductions include a minimum chargeable income of RM55,000 and a minimum donation of RM2,500. If all of the preceding criteria are true of a donor, the donor may then deduct 7% from the donor’s aggregate income, thus reducing chargeable income.
Approved monetary donations may go to any of the following: the government; any approved institutions, organizations, sports bodies, healthcare facilities, or projects of national interest; or facilities to increase accessibility for the disabled. Approved donations of physical objects may go to any of the following: any approved sports bodies or healthcare facilities; facilities to increase accessibility for the disabled; or paintings for the National Art Gallery or any State Art Gallery. A donor who qualifies for more than one tax deduction may claim them all.
Tax reliefs are set by the IRB. Eligible taxpayers may use tax reliefs to deduct a certain amount of money from their total annual income. Tax reliefs are given to offset the costs of activities which the Malaysian government deems necessary, beneficial, or both. Among the most common tax reliefs include self and dependent tax relief, the Employees’ Provident Fund (EPF), deferred annuity, contributions to the Social Security Organisation (SOCSO), and life insurance.
Tax rebates are deducted from the actual taxed amount. In Malaysia, there are two tax rebates offered. One is for married taxpayers who have a chargeable income which is less than RM35,000. This rebate is worth RM400. The other is related to tithes, which Muslims are required to pay as part of their religious duties. This rebate allows Muslim taxpayers to avoid having to make an additional mandatory payment every year.
Territorial Scope of the Malaysian Tax System
Malaysia’s tax system is territorial. This means that, according to Section 3 of the Income Tax Act, income tax is charged for each year of assessment upon the income tax of any person accruing in or derived from Malaysia. Most income sourced from abroad is not liable to tax even if it is received in Malaysia. However, an exception is made in the case of resident companies which carry out specialized businesses including banking, sea and air transport, and insurance. Such companies have their income taxed regardless of the source of the income.
Several factors determine the location of the source of income. These factors include but are not limited to the following: the location of the passing of ownership and risk of trading stocks, the location of conclusion of contracts, the location of services rendered, the location of proceeds of sales, and the location where stocks from which orders are fulfilled are maintained. The nature of profits generated and any related transactions must also be taken into consideration.
If a branch or company is incorporated in Malaysia, it will help establish the fact that business operations are being carried out in Malaysia. This is because incorporation brings about the direct physical presence of a person in Malaysia.
Like other Southeast Asian countries, Malaysia is a country attempting to rise to the level of a developed nation. Malaysia may use its tax system to achieve this goal. The enactment of the Income Tax Act in 1967 revolutionized the Malaysian tax system. Ever since then, the Malaysian government has done all it could to improve the country’s tax system and thereby boost the economy. The government’s efforts appear to have been fruitful, as the Malaysian economy has grown in all but three years since 1967. Malaysia’s tax system has done much good for the country and its economy and should continue to do so in the future.
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Here, you will find detailed information about Malaysia’s Corporate Tax System. Paul Hype Page & Co helps companies with strategic tax planning, tax advisory, and accountancy services.
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IRB (Inland Revenue Board) governs Malaysia’s tax system, helps develop a stronger economy, better environment and a more vibrant economy. All companies, regardless of industry, have a legal duty to pay taxes.
Malaysia attracts investments from around the world by reducing its corporate income tax rate and introducing different tax incentives. Malaysia has one of the lowest corporate tax rates in the world.
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