I. Income Tax
Malaysia operates a self-assessment system of income tax. This requires taxpayers to be responsible for computing the correct amount of taxes as the tax returns filed are deemed to be the official notice of assessment. The Inland Revenue Board (IRB) through regular tax audits carries out enforcement. To ensure that the tax audits are carried out in a fair, transparent and impartial manner, the IRB has issued the 2013 tax audit framework that went into effect on April 1, 2013.
As of January 1, 2014, the time bar for a tax audit on back years of assessment has been reduced from six years to five years from the date the assessment is made (barring cases of fraud, wilful default or negligence). Malaysia also has an advance tax ruling system wherein taxpayers may seek advance tax rulings from the IRB on the tax treatment of an arrangement that is to be undertaken.
A. Corporate Income Tax
Malaysia operates a territorial system of taxation, whereby only income derived from Malaysia is subject to Malaysian taxes, with the exception of resident companies engaged in banking, insurance, shipping or air transport, which are taxable on their worldwide income. Tax residence: An enterprise or company is resident in Malaysia if at any time in the year its management and control are exercised in Malaysia. The place of incorporation is irrelevant. Computation of corporate income tax: Income tax is imposed on chargeable income accrued in or derived from Malaysia in the basis period for that year of assessment. The year of assessment is the calendar year, but companies may adopt their accounting year as the basis period for a year of assessment. There are various types of income that are exempt from tax and these include foreign-source income remitted to Malaysia.
Broadly, (taxable) gross corporate income is reduced by allowable deductions, capital allowances and tax losses to arrive at the chargeable income. Deductions & capital allowances: Deductions are allowed for expenses incurred wholly and exclusively in the production of income and for bad debts. No deduction is allowed for the book depreciation of fixed assets, but statutory depreciation, or capital allowances, is granted. Business losses & excess capital allowances: Business losses may offset all other chargeable income of the same year. Unused losses may be carried forward indefinitely for offset against chargeable income from business sources. Excess capital allowances may not be offset against other chargeable income of the same year, but may be carried forward indefinitely for offset against income from the business that generated the capital allowances.
The carrying forward of losses and excess capital allowances is subject to the shareholders remaining substantially (50% or more) the same at the end of the year in which the losses or capital allowances arose and on the first day of the year of assessment in which relief is claimed. If the shareholder of the loss company is another company, the loss company is deemed to be held by the shareholders of that other company. Under an administrative concession, the tax authorities have decided not to enforce the shareholding test except in the case of dormant companies (the immediate shareholding of the dormant company will be examined). As a result, unused losses may continue to be carried forward indefinitely even if a substantial change in shareholders occurs. Groups of companies: Under group relief provisions, one company may transfer 70% of current-year adjusted losses to another company in a group. A group consists of a Malaysian-incorporated parent company and all of its Malaysian-incorporated subsidiaries. Two Malaysian-incorporated companies are members of the same group if one is at least 70% owned by the other, or both are at least 70% owned by a third Malaysian-incorporated company. In order to obtain group relief, the recipient of the losses and the transferor of the losses must have the same accounting period and each must have a paid-up capital exceeding RM2.5m ($780,250). Corporate income tax rate: Under the Income Tax Act 1967 (ITA), the corporate income tax rate is imposed on chargeable income. For resident and non-resident companies, the rate is 25% on chargeable income. A concessionary tax rate is given to small and medium-sized enterprises (SME), i.e. a resident company that has a paid-up ordinary capital of RM2.5m ($780,250) or less and the company does not control nor is controlled, directly or indirectly, by another company that has a paid-up ordinary capital of more than RM2.5m ($780,250).
The concessionary tax rate is 20% on the first RM500,000 ($156,050) of chargeable income, and the balance is taxed at 25%. The rate will decrease by one percentage point to 24% from the year of assessment 2016. SMEs will be taxed at a rate of 19% on the first RM500,000 ($156,050) of chargeable income and the remaining chargeable income will be taxed at 24%. This proposed decrease in rates was announced by Prime Minister Najib Tun Razak in the 2014 budget speech delivered on October 25, 2013 in line with the introduction of the goods and services tax, which will go into effect on April 1, 2015 (see analysis). Companies carrying on petroleum operations are taxed at the rate of 38% under the Petroleum (Income Tax) Act 1967. Withholding taxes: Withholding taxes apply on certain payments to non-residents, such as interest (15%) and royalties (10%), which may be reduced by provisions in the relevant double tax treaties. A 10% withholding tax also applies on technical fees and installation fees for services performed in Malaysia and rent of moveable property. In addition, contract payments (for services) to non-resident contractors are subject to a total withholding tax of 13% (10% for the Malaysian tax payable by the non-resident contractor and 3% for the Malaysian tax payable by the contractor’s employees).
This does not represent a final tax on the non-resident contractor and the withholding tax suffered can be set off against the actual Malaysian tax liability of the non-resident contractor. Effective from January 1, 2009, withholding tax is also imposed on “other income”, which includes payments such as commissions and guarantee fees. The withholding tax is due to the IRB within one month of paying or crediting the non-resident. Dividends & single-tier system: Malaysia does not impose withholding tax on dividends, and effective from the year of assessment 2008 a single-tier system of taxation replaced the full imputation system. Under the single-tier system, income tax on a company’s chargeable income is a final tax, and dividends paid, credited or distributed by a firm are exempt from tax in the hands of shareholders. However, a transitional rule that ended on December 31, 2013 allowed firms to continue to pay franked dividends to shareholders under the imputation system by using corporate income tax that has been paid or deemed paid up to December 31, 2007. Reporting requirements & tax payments: Firms are required to file their tax returns within seven months after the end of their accounting period. As mentioned at the outset, Malaysia has a self-assessment regime under which a tax return is deemed to be an assessment made on the date of filing the return. In effect from the year of assessment 2014, the tax return must be based on audited accounts. In addition, the return must be filed in the prescribed form on an electronic medium or by way of electronic transmission, thus removing the manual filing option.
Companies are required to provide an estimate of their tax payable no later than 30 days before the beginning of their basis period. The estimated tax is payable in 12 equal monthly instalments by the 10th day of each month beginning in the second month of the basis period, and companies are required to settle any balance of tax due by the tax filing deadline. Companies may also revise their estimate of tax payable in the sixth and ninth months of their basis period. SMEs are exempt from the requirement to pay their tax by instalments in the year in which they commence business and in the following two years. They are required only to settle the tax due when they file their income tax returns. Tax treaty network: Investors may also benefit from current regulations in Malaysia, which has an extensive tax treaty network. To date, the country has treaties in force with 72 countries. Foreign tax relief: Malaysian law allows both bilateral and unilateral foreign tax relief. However, because Malaysia generally does not tax foreign-source income, foreign tax relief is usually not applicable, except for resident companies engaged in banking, insurance, shipping or air transport. These companies are taxed on their worldwide income and may also claim foreign tax relief with respect to foreign taxes imposed on their foreign-source income. Transfer pricing: The tax authorities have issued transfer pricing legislation, rules and guidelines requiring taxpayers to determine and apply an arm’s length price in their inter-company transactions. The transfer pricing rules also require the preparation of contemporaneous transfer pricing documentation to substantiate the arm’s length contention. The guidelines provide a detailed list of information, documentation and records with respect to related-party transactions that need to be compiled to meet the contemporaneous documentation requirement.
Companies carrying out cross-border transactions with associated persons may apply for an advance pricing arrangement from the tax authorities subject to conditions. Specific measures in the tax law also address thin capitalisation adjustments although the implementation of these provisions has been deferred to December 31, 2015. Labuan IBFC: Unique to the Malaysian tax and commercial landscape is the Labuan International Business and Financial Centre (IBFC), which is located in East Malaysia. Labuan IBFC has a separate income tax regime under the Labuan Business Activity Tax Act 1990, which provides preferential tax treatment for Labuan-incorporated companies carrying on business activities with a cap on income taxes at either a small fixed sum of RM20,000 ($6242), or 3% of net audited profits. Income derived from wholly non-trading activities, such as dividends, interest and rent, are tax-exempt. Labuan companies may alternatively elect to be taxed under the ITA. Tax incentives: Malaysia offers an extensive array of tax incentives under the Promotion of Investments Act 1986 and ITA, which cover a variety of industries. These range from manufacturing services to targeted services and segments, such as environmental management, education and medical tourism, as well as regional services, information and communication technology (ICT), biotechnology, Islamic products and customised incentives for SMEs.
Typically, the tax incentives are structured as a full or partial tax holiday (Pioneer Status) or as additional tax allowances based on qualifying capital expenditure incurred (Investment Tax Allowances). There are also double deductions offered on certain expenditure, such as those incurred by qualifying research and development (R&D) and the promotion of exports. There could also be indirect tax incentives in the form of exemptions from import duty, sales tax and excise duty under the Customs Act 1967, Sales Tax Act 1972, Excise Act 1976 and the Free Zones Act 1990. Broadly, the incentive package granted depends on the type of activity, location, the size of investment, the level of value-add, technology used, industrial links and other local benefits. To further enhance the attractiveness of the country as an investment location, incentive packages can also be customised according to the company’s requirements under the pre-packaged incentive scheme. A pre-packaged incentive scheme involves direct application to the Ministry of Finance for incentives which are tailored for the particular investment.
In general, this incentive scheme is targeted at investments that could serve some strategic importance or goal for the nation. Some of the considerations include the level of technology transfer, whether it would serve as a catalyst for attracting other investments and whether it can generate high-income and skilled job opportunities. The following is a highlight of some of the broad areas in which tax incentives may be of special interest. It is advisable to seek detailed advice on specific investments. Manufacturing sector: The current focus in the manufacturing segment is on advanced technologies, and capital-intensive and knowledge-driven industries, such as alternative biotechnology, energy resources, industries that manufacture intermediate goods and resource-based industries. The major tax incentives are Pioneer Status and Investment Tax Allowance. A manufacturing company may be granted either of these incentives if it participates in what is known as a “promoted activity” or produces a “promoted product”. A full list of these activities and products is available from the Malaysian Industrial Development Authority (MIDA), an agency under the purview of the Ministry of International Trade and Industry. Established in 1967, MIDA is the principal government agency that promotes the manufacturing and services sector in Malaysia. Briefly, these incentives can be described as follows:
- Pioneer Status, which offers a general exemption on 70% of statutory income (income after deduction of allowable expenses and capital allowances) for a period of five years. For high technology companies and enterprises that engage in projects of national and strategic importance, a full tax holiday for 10 years is given. Any unutilised or unabsorbed tax losses or capital allowances that arise during a company’s time under Pioneer Status may be carried forward.
- Investment Tax Allowance is an alternative to Pioneer Status that offers an additional deduction on qualifying capital expenditure (QCE) at a rate of 60% of QCE incurred within five years of the investment in order to shelter 70% of the statutory income. Again, for companies undertaking certain activities, a 100% deduction of QCE incurred within five years is available to shelter up to 100% of the statutory income. Any unutilised investment tax allowance may be carried forward.
- Reinvestment allowance is another incentive that is available to companies that carry out manufacturing or agricultural projects which reinvest capital for expansion, modernisation, automation or diversification. The reinvestment allowance incentive operates similarly to the investment tax allowance wherein the reinvestment allowance offers a 60% deduction on QCE to shelter 70% of statutory income (or 100% if the enterprise satisfies a certain level of production, known as process efficiency). Unlike Pioneer Status or the Investment Tax Allowance, this incentive does not require prior approval and can be claimed through the submission of the annual corporate tax return. However, this incentive cannot be claimed during the period a company is enjoying Pioneer Status or the Investment Tax Allowance. Regional services: There has been an increased emphasis on promoting Malaysia as the regional services sector hub within ASEAN and East Asia, particularly in manufacturing support services, management services and logistics services. Malaysia offers the following regional services incentives, which allow tax exemption for a period of 10 years and certain Customs duty exemptions:
- International Procurement Centre status defines a company that undertakes the procurement and sale of raw materials, components and finished products to its group of related and unrelated companies in and outside of Malaysia;
- Regional Distribution Centre status defines a company that serves as a collection and consolidation centre for finished goods, components and spare parts produced by its own group of companies for its own brand to be redistributed to dealers, importers or its subsidiaries or other unrelated companies in and outside of Malaysia; and
- Operational Headquarters status includes companies that provide qualifying services (e.g. general management and administration, business planning and coordination, procurement of materials and products, technical support and maintenance, marketing and information management, and processing) to its offices or related companies outside Malaysia. The following regional service qualifies for 70% tax exemption on statutory income for five years:
- Treasury Management Services status cover companies that provide qualifying services, e.g. cash management services, current account management services and investment services, to related companies in and outside Malaysia. Eligible firms may submit an application to the MIDA. MSC & five economic corridors: Companies involved in ICT-related activities may qualify for Multimedia Super Corridor (MSC) status. An MSC company will enjoy Pioneer Status with full tax exemption for 10 years or an investment tax allowance of 100% of capital expenditure for five years, along with a basket of other non-fiscal incentives, including 100% foreign ownership, flexibility to source funds globally without any restrictions, R&D grants for local SMEs and duty-free importation of multimedia equipment.
The government has also launched five economic corridors or zones, namely Iskandar Malaysia, East Coast Economic Region, Northern Corridor Economic Region, Sabah Development Corridor and Sarawak Corridor of Renewable Energy. To encourage the development of these areas, various tax incentives are available similar to the MSC status. The government has relaxed certain requirements to encourage development, such as employing foreigners. Research-related activities: The government has always encouraged R&D activities, and companies undertaking R&D may apply for tax incentives such as Pioneer Status or the Investment Tax Allowance. Double deduction of expenses will also be granted in respect of any approved R&D projects.
B. Personal Income Tax
Resident and non-resident individuals are subject to Malaysian income tax on income accrued in and derived from Malaysia. This would include employment income (such as salaries, wages, commissions, bonuses, gratuities, perquisites and stock options), business income and contract payments. There are various types of income which are not taxed or are exempted from tax, including foreign-source income remitted to Malaysia, leave passage (with limitations) provided to the employee and certain expenses borne by the employer (such as the cost of moving, contributions to approved pensions and medical or dental treatment). Individuals are also exempted from tax on employment income earned from employment in Malaysia, if the period of employment does not exceed 60 days. Individuals carrying out business activities may also claim capital allowance and tax loss relief. Tax Residence: Under domestic laws, an individual becomes a tax resident in Malaysia for a particular year of assessment if he or she fulfils the following conditions or circumstances:
- He or she is physically present in Malaysia for 182 days or more during that calendar year;
- He or she is physically present in Malaysia for less than 182 days in that calendar year, but was physically present in Malaysia for at least 182 days consecutively in the immediately preceding calendar year;
- He or she is present in Malaysia for at least 90 days in the calendar year and has been resident or present in Malaysia for at least 90 days in any three of the four preceding years; or
- He or she has been a resident in Malaysia for the three preceding calendar years. Personal income tax rates: Residents are taxed at graduated rates ranging from 0% to 26%, depending on the level of their taxable income after deducting personal tax reliefs. A variety of tax reliefs are available, such as a personal tax relief of RM9000 ($2808), spouse relief of RM3000 ($936) and child relief of RM1000 ($312) for each child below the age of 18. A non-resident individual for tax purposes is not entitled to personal tax reliefs and is taxed at a flat rate of 26%. The 2014 budget proposes a percentage point reduction in tax rates of between 1 and 3 in most of the chargeable income bands and proposes an increase in the maximum chargeable band from RM100,000 ($31,210) to RM400,000 ($124,840), which would go into effect for year of assessment 2015.
For non-residents, the individual tax rate has been reduced from 26% to 25%. Knowledge workers in the Iskandar Malaysia economic corridor and skilled professionals working under the Returning Expert Programme (REP) are also eligible for lower tax rates. A knowledge worker is defined as an individual who is a foreign national residing in the Iskandar Malaysia zone and is employed in certain qualifying activities by a designated company on or after October 24, 2009, but no later than December 31, 2015, and is taxed at 15% of his or her chargeable employment income. Effective from year of assessment 2012, the employment income of an approved skilled Malaysian professional under REP is taxed at a flat rate of 15% for a period of five years. Tax treaty network: As with corporate tax residents, resident individuals enjoy benefits under Malaysia’s wide-ranging tax treaty network. Reporting requirements & tax payments: Individuals in Malaysia are taxed on income for the calendar year. An individual must submit his tax return by April 30 in the year following the year of assessment. The submission deadline for individuals carrying on a business in Malaysia is June 30.
For employees, tax payment is made through mandatory monthly withholdings under the Monthly Tax Deduction (MTD) scheme. Employers are responsible for these monthly withholdings and must deduct tax from cash remunerations, including wages, salaries, overtime payments, commissions, allowances and bonuses, based on a prescribed MTD table. These amounts are to be paid to the IRB within 10 days after the end of each month. Employers must withhold tax at a rate of 26% from wages paid to non-resident employees.
For individuals carrying out business activities, the IRB will issue a prescribed form, setting out the tax instalments payable. This is generally based on the tax assessed in the preceding year. The individual is required to pay the estimated tax payable in six bimonthly instalments commencing from the month of March. The individual will have to pay any balance of tax payable by the tax-filing deadline, which is April 30 for individuals with employment income and June 30 for individuals with business income.
II. Capital Gains Tax
Capital gains are not taxed in Malaysia, except for gains on disposal of real property or shares in closely controlled companies (not more than 50 members and controlled by no more than five persons) with substantial real property interests. Gains on disposal of shares in listed entities are therefore not taxed in Malaysia unless the disposer is in the business of share dealing or share trading. The real property gains tax (RPGT) rate under the Real Property Gains Tax Act of 1976 ranges from 0% to 30% for Malaysian citizens and permanent residents and 5-30% for firms and individuals who are not Malaysian citizens nor permanent residents, depending on the period of ownership (see table). It should also be noted that there are several RPGT exemptions available for both firms and individuals.
III. Indirect Taxes
Currently, the main types of indirect taxes in Malaysia are sales tax and service tax. A sales tax ranging from 5% to 25% is imposed on certain imported goods and on certain locally manufactured goods, including cigarettes and liquor. A service tax of 6% is imposed on the performance of specified services in Malaysia. The country also imposes other indirect taxes, such as import, export and excise duties. There are special facilities granted by the Malaysian government, such as licenced manufacturing warehouse status, which exempt companies from import duties and sales tax, and free zones, which generally exempt firms from Customs and excise duties, and sales and service tax. Goods & services tax: Currently there is no goods and services tax (GST) in Malaysia. However, as of April 1, 2015, both the sales and service taxes will be replaced by a GST – a broad-based 6% tax on consumption similar to the value-added tax implemented in other countries. This was announced by Prime Minister Najib in October 2013. Following the passage of the 2014 Goods and Services Tax Bill by the lower house of parliament, the Dewan Rakyat, in April 2014, the GST Act was gazetted in June 2014.
The GST is a multi-stage consumption tax applicable to the taxable supply of goods and services made in Malaysia, as well as the imports of goods and services into Malaysia. Input tax credits can be claimed against output tax collected on supplies of goods and services, which are standard rated or zero-rated. However, input tax credits will not be available for supplies that are exempt, which include transport, residential property, private education and health care. The Royal Customs of Malaysia will be the authority responsible for the implementation of GST, and has issued draft guidelines, as well as updates, relating to the GST regime.
IV. Stamp Duty
Stamp duty is chargeable on certain instruments and documents in Malaysia, and the rate of duty varies according to the nature of the instruments, documents and transacted values. The more common instruments and documents subject to stamp duties include those for conveyance, assignment or transfer of shares (subject to a rate of 0.3% of the value) or property and assets (at a graduated scale of 1-3%). There are, however, a number of statutory exemptions available on stamp duties on various types of instruments and documents, for example, inter-company transfers and transfers conducted in the context of corporate reorganisation.
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