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:
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:|
- taxation of electronic commerce
- mutual agreement procedures
- transfer pricing
advance pricing arrangements
|Contains details on the proper procedures in a given circumstance.|
Recent operational guidelines issued are about:
- The recently-introduced Special Program for Voluntary Disclosure
- Reduction of tax penalties and the elimination of a tax rise
- Procedures to apply for the Tax Solicitation Approval (SPC) for individuals
- Applications for tax settlement letters for companies, limited liability partnerships, and Labuan entities
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:
Sea & air transport
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