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 contributing approximately 66% of the total amount, inclusive of corporate tax and personal income tax.
Tax Laws in Malaysia
The primary law governing income tax in Malaysia is the Income Tax Act, enacted in 1967. 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
- Applicable tax deductions
Established with the enactment of the Inland Revenue Board of Malaysia Act 1995, Inland Revenue Board (IRB) is the only entity which is legally authorized to impose taxes in Malaysia.
From time to time, the IRB issues guidelines to 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 and may make amendments if they deem it necessary.
| Technical guidelines | Operational guidelines |
|---|---|
Information regarding subjects such as:
advance pricing arrangements | Contains details on the proper procedures in a given circumstance. Recent operational guidelines issued are about:
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Territorial Scope of the Malaysian Tax System
The tax system in Malaysia is territorial with the income tax charged for each year of assessment. 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 specialised businesses, which includes:
- Banking
- Sea & air transport
- 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:
- Location of the passing of ownership and risk of trading stocks
- Location of conclusion of contracts
- Location of services rendered
- Location of proceeds of sales
- Location where stocks from which orders are fulfilled are maintained
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
- Gains or profits not falling under any of the prior descriptions
The Income Tax Act also divides income into five different categories:
- Gross Income
- Adjusted income
- Statutory income
- Aggregate Income
- Chargeable Income
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.
| Tax Resident | Anyone who has lived and worked in Malaysia for at least 182 days of a given calendar year |
| Non-residents | Those who have lived and worked in Malaysia for between 60 and 182 days of a given calendar year |
| Tax-exempted | Anyone who has lived and worked in Malaysia for fewer than 60 days of a given calendar year |
Entities may also be granted tax resident status in Malaysia. 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.
What are Tax Rates in Malaysia
The tax rates for both individuals and companies are listed below:
| Type of Individuals/Companies | Tax Rates |
|---|---|
| Residents |
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| Non-residents |
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| Corporations |
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| SMEs – total capital valued below RM2.5 million |
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What are the Tax Exemptions, Deductions, Reliefs, and Rebates Available
There are instances where certain incomes are exempted from taxation, with most taxpayers in Malaysia eligible for at least one exemption. Some of these tax-exempt incomes include:
- Pension
- Scholarships
- Interest
- Royalties
- Dividends
- Income remitted from outside of Malaysia (even if it is received in Malaysia)
Tax deductions are only available to those who are tax residents in Malaysia, it reduces one’s chargeable income and can be used by people who have given certain gifts or made certain donations.
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)
- Life insurance
Tax rebates are deducted from the actual taxed amount. There are two tax rebates offered:
| For married taxpayers |
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| Related to tithes |
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Thinking of setting up a business in Malaysia or would like a tax agent to help with all tax-related services? Reach out to us for a free consultation today.
FAQs
Generally, there are 4 types of tax preparers:
- A Certified Public Accountant (CPA)
A person who is licensed to offer accounting services to the public. Some CPAs specialise in tax planning and preparation and are allowed to represent clients on any tax matters. - Enrolled Agents
A person trained in federal tax matters and is licensed by the Internal Revenue Board and are allowed to represent clients on any tax matters. - Tax Attorney
A person licensed by the state to practice law and are allowed to represent clients on any tax matters. - Non-credentialed Tax Preparers
A person who prepares taxes without any professional credentials or certifications from an external organisation.
Amendments can be made to a submitted tax return form depending on when the amendments are/ can be submitted:
Submitting amendment before tax deadline: Submit a letter detailing the mistake(s) made with supporting documents (receipts, invoices, statement, etc) to the responsible branch that handles your tax file.
Submitting amendment within 6 months from tax deadline: Make a self-amendment by submitting an Amended Return Form (ARF) to the responsible branch that handles your tax file. Only taxpayers who submitted their tax returns on time can make a self-amendment.
No later than the last day of February the following year: Delivery of Form EA by employers to employees.
By 30 April the following year: Deadline for filing of Forms BE, BT, M, MT by the person not carrying a business (employees).
By 30 June the following year: Deadline for filing of Form B by the person carrying a business e.g. a sole proprietor.
By 30 June the following year: Deadline for filing of Form P by a partnership excluding limited liability partnerships (LLPs)
It is extremely crucial that tax returns be done properly, accurately, timely and with careful consideration. If errors are detected, the Inland Revenue Board may impose fines of up to 200% of uncharged tax. Late submissions may result in fines of up to 45% of payable tax.
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