By Dezan Shira & Associates
Editor: Ellena Brunetti
Revised and Updated by Bradley Dunseith
Malaysia uses both progressive and flat rates for personal income tax, depending on an individual’s duration and type of work in the country. As expatriates may fall into either tax category depending on their work, it is important to understand Malaysia’s basic tax structure.
The Income Tax Act of 1967 structures personal income taxation in Malaysia, while the Malaysian government’s annual budget can change the rates and variables for an individual’s taxation.
In this article, we explain how expatriates should calculate their individual income tax in Malaysia. We highlight exceptions to tax rates and penalties for noncompliance.
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Source-Taxation Principle and its Exceptions in the Case of Malaysia
Malaysia adopts a territorial principle of taxation, meaning only incomes which have a source in Malaysia are taxable there, regardless of where the expatriate is paid. All types of incomes are taxable, including gains from employment or business activities and dividends.
While profits sourced elsewhere are not subject to Malaysia personal income tax there are three main exceptions.
- Malaysia has signed numerous Double Taxation Avoidance agreements. When addressing instances of double taxation, this wide bilateral tax treaties network can be an exception to the territoriality taxation principle, as it sometimes allocates the right to other countries to tax domestically earned income of Malaysian tax residents. In such instances, tax residents will be exempted from paying personal income tax in Malaysia.
- Expatriates may benefit from a special tax regime exemption on their income, if the following two conditions are verified:
- First, not being defined as a fiscal resident;
- Second, if the period of employment in Malaysia does not exceed 60 days per calendar year.
- Finally, for income derived from specific industries – including air transport and banking – Malaysia doesn’t apply the territorial basis, but instead employs a worldwide basis for taxation.
Tax Residency Status
Not all expatriate workers in Malaysia have to file personal income tax. Expatriates working in Malaysia for less than 60 days are exempt from filling out taxes.
The Malaysian government considers expatriates working in the country for more than 60 days but less than 182 days as “non-residents” and subjects them to a flat taxation rate of 28 percent. Non-residents are ineligible for tax deductions.
Expatriates working in Malaysia for longer than 182 days in a year are “tax residents.” Expatriates who qualify as “residents” for tax purposes pay progressive tax rates and are eligible for tax deductions.
Under Part II, Section 7 of the Income Tax Act, 1967, the Malaysian government considers an individual – regardless of their nationality – a tax resident if that individual fulfills one of the following criteria.
- The individual has been resident in Malaysia for 182 days of the tax year;
- The individual has been resident in Malaysia for less than 182 days of the tax year, but was resident in the country for a total of 182 consecutive days linked to days from the year immediately preceding or following that tax year;
- The individual has been resident in Malaysia for at least 90 days of the current tax year and was resident in Malaysia for at least 90 days in three of the four preceding years or;
- The individual will be resident in Malaysia in the year following and has been resident in Malaysia in the three years preceding the one being taxed.
Tax Rates in Malaysia
The Malaysian 2016 budget increased tax rates between 2015 and 2016, raising the maximum an individual could pay to 28 percent from its earlier 25 percent.
While the 2017 budget had several implications for personal income tax, tax rates were unaffected from the previous year.
Regarding the expatriates that qualify for tax residency, Malaysia has a progressive personal income tax system in which the tax rate increases as an individual’s income increases, starting at 0 percent, and capped at 28 percent.
The rates applicable to each bracket of the income are the following:
Tax Relief and Deductions:
The Malaysian government offers several tax deductions and benefits that expatriate workers who qualify as tax residents are eligible for.
Amongst those tax reliefs are:
- Tax relief for spouse (so long as the spouse does not earn income in or out of Malaysia);
- Tax relief for taxpayers who have to pay parental care;
- The tax relief for each child below 18 years old and;
- Tax Relief for Children Studying At Tertiary Level
Effective in the year of assessment 2017, existing tax relief for ‘lifestyle’ related goods such as books, computers, sporting equipment, and even smartphones has been combined into a new category called “lifestyle tax relief,” limited to RM2,500 per year.
The Malaysian government has also expanded its tax relief for child care centers and breast feeding equipment, effective in the year of assessment 2017.
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Compliance and payment
In Malaysia, the tax year runs in accordance with the calendar year, beginning on 1 January and ending on 31 December. All tax returns must be completed and returned before 30 April of the following year.
To file income tax, an expatriate needs to obtain an income tax number from the Inland Revenue Board of Malaysia (IRB). Typically, companies obtain income tax numbers for their foreign workers. However, if a company fails to obtain one, the worker can register for an income tax number at the nearest IRB office.
If an expatriate makes an incorrect tax return either by omitting or understating their income, the IRB has the right to fine that individual 100 percent of the undercharged tax.
Late income tax submissions may result in a disciplinary fee amounting to a 10 percent increment of the tax payable.
Editor’s Note: The article was first published on February 16, 2016 and has been updated on May 22, 2017 as per latest developments.
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An Introduction to Doing Business in ASEAN 2017 introduces the fundamentals of investing in the 10-nation ASEAN bloc, concentrating on economics, trade, corporate establishment, and taxation. We also include the latest development news for each country, with the intent to provide an executive assessment of the varying component parts of ASEAN, assessing each member state and providing the most up-to-date economic and demographic data on each.
Human Resources in ASEAN
In this issue of ASEAN Briefing, we discuss the prevailing structure of ASEAN’s labor markets and outline key considerations regarding wages and compliance at all levels of the value chain. We highlight comparative sentiment on labor markets within the region, showcase differences in cost and compliance between markets, and provide insight on the state of statutory social insurance obligations throughout the bloc.
A tax is a financial charge or other levy imposed upon a taxpayer that known as an individual or legal entity by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxation is a compulsory levy that the government of
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As for personal income tax, it need to be paid by the person who earns income up to certain amount and for corporate tax, it imposed on the corporate entity that makes profit from the businesses. In achieving the economic objective, government will take some action such as reduction in taxable person income by the amount paid as the interest on home mortgage loans which will generates more jobs, encourage public to purchase a local produce, reducing inflation and discourage the consumption of certain goods.
In Malaysia tax system, it comprises of corporate and personal income tax, custom duty and local tax. The personal income tax is liable for the individual who has income that derived from Malaysia or received in Malaysia from outside Malaysia for a year of assessment. The tax will be imposed to the resident and non-resident individual in different ways.
The resident individual will subject to income tax derived from Malaysia and income received in Malaysia for outside Malaysia whereas non-resident individual will be subject to income tax accruing in or derived from Malaysia. In contrast, non-resident is subject to tax at a flat rate of 25%. In additional, income that received by an individual in Malaysia which income is derived from outside Malaysia is exempted from tax with effect from the year of assessment 2004.
Under section 4 of Income Tax Act 1967, income that is subject to tax comprises of Section 4(1)(a) which
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subject to tax of the amount paid in consideration of a service rendered by the person or employee for the use of property of any plant, machinery or other apparatus purchased from such person. Under capital gains, it will be tax in the form of real property gains tax. This tax is arising from disposal of real property in Malaysia.
Real property gain tax is known as tax on disposal of shares in real property companies which owns shares defined value of such asset not less than 75% of the company’s total tangible assets.
Starting from 2010, disposal of real properties that are held for 5 years and below are subject to real property gain tax which the tax rate is 5%. In contrast, for the employment income, employer is required to deduct tax monthly from their employee’s remuneration and submit it to the Inland Revenue Board of Malaysia.
For corporate income tax, resident companies are subject to tax on income accruing in or derived from Malaysia. Income that received in Malaysia from outside Malaysia is exempted from tax except for the companies that involved on the business of insurance, banking, sea or air transportation.
Non-resident companies are subject to tax on income accruing in or derived from Malaysia only. Incomes that are derived from outside Malaysia which is foreign income will be non-taxable income. Business income of non-residents is subject to tax once it derived through a permanent establishment in Malaysia.
There is a self-assessment in the tax system in Malaysia which required individuals to file and pay their tax based on the time requirement. An individual must file and pay their tax if they has a chargeable income for a year of assessment and has no chargeable income for the year of assessment.
An individual who has a chargeable income for the year of assessment, they required to furnish a return for the immediately preceding year and have furnished a return for the immediate preceding year. Under Income Tax Act 1967 of Section 2 describe that royalty as any sums paid as right to use the artistic, patents, copyright, design, trademarks, films where such films are to be used in Malaysia. A person who is liable to pay a royalty that has a Malaysian source to an individual who is not known to him to be a resident in Malaysia and to a company, partnership or any other body of persons who does not carry a business in Malaysia.
Besides that, the royalty is said to be derived from Malaysia if the responsibility for the payment lies with a resident of Malaysia and the responsibility for the payment lies between the government and state government itself.
There is a term of local tax in Malaysia which refers to as the property tax collected by the local authorities for the provision of service to the residents. The property tax is levied on all property such as agricultural, factories, residential and shops located in the areas under jurisdiction of local authorities.
Furthermore, the rate of the tax collected is different from one local government to another and it is also different in form of the property rights. Question 1(B): Examine the taxation needs of the present times (locally and internationally).
So far Malaysia is using an income based direct tax for the purpose of taxation of goods and services in the country and with international transactions. So, isn’t it better for the country to switch to a consumption based indirect taxation?
First of all, what is the difference between direct and indirect tax. The difference between a direct and indirect tax is a challenging issue. It depends on whether it is viewed on the economic way or on the legal way. In this case the interest is given to the economic view only.
Based on economic perspective, a direct tax will refer to any levy that is both imposed and collected on a specific group of people or organizations. An example of direct taxation would be income taxes that are collected from the people who actually earn their income.
In the opposite, indirect taxes are collected from someone or some organization other than the person or entity that would normally be responsible for the taxes; in other words, an indirect tax is technically an income tax levied against people, corporations, and other legal entities.
A sales tax, for instance, would not be considered a direct tax because the money is collected from merchants, not from the people who actually pay the tax (the consumers). A goods and services tax in Malaysia (GST), a value added tax, was scheduled to be implemented by the government during the third quarter of 2011.
Its purpose is to replace the sales and service tax which has been used in the country for several decades. The government is seeking additional revenue to offset its budget deficit and reduce its dependence on revenue from Petronas, Malaysia’s state-owned oil company.
They estimated to four-percent the tax rate in order to replace a sales-and-service tax of between five and ten percent. The Goods and Services Tax Bill 2009 was tabled for its first reading at the Dewan Rakyat (the lower house of the Malaysian parliament) on 16 December 2009.
It was delayed amid mounting criticism. The government responded by asserting that the tax on oil income will not be sustainable in the future. National Consumer Complaints Centre head Muhammad Sha’ani Abdullah has said, “The government should create more awareness on what the GST is.
The public cannot be blamed for their lack of understanding, and thus, their fears”. Sha’ani says that the GST will improve accounting, reduce tax fraud, and facilitate enforcement of the upcoming Anti-Profiteering Act.
Muslim Consumer Association of Malaysia leader Datuk Dr. Ma’amor Osman said the GST could help end dishonest business practices, but expressed concern about how the tax would be applied to medical products and services. A group leading the campaign against the GST, Protes which objects to the GST because of concerns about its effects on low-income Malaysians, cancelled a planned protest but has stated that they will continue to agitate against the legislation Difference between Malaysian taxation and other countries, they need to harmonize.
Most of the countries in the world currently use income based taxation. Those countries use two systems for taxation purpose: territorial or residential. Malaysia is one of the few countries in the world using territory based taxation. The tax is applied mainly over local income, in other words, income from a source inside the country. Malaysia operates under a Self-Assessment System (SAS) and income is taxed on a territorial basis.
Income tax in Malaysia is imposed on income accruing in, or derived from, Malaysia except for income of resident companies carrying on a business of air or sea transport, banking or insurance, which are taxed on a worldwide basis. Foreign-source income received in Malaysia is not taxable.
In the residential system, residents of the country are taxed on their worldwide income (local and foreign). This difference of tax systems may overlap some time, giving rise to a taxation issue. Some taxpayer may be taxed more than once.
There is another group, the United States which applies tax based on citizenship. There will be taxation conflict at the international level. For instance Malaysia and Singapore have a tax agreement in order to avoid double taxation for the same person and the same income between the two countries.
Based on the preceding, the taxation system in Malaysia should be reviewed in order to simplify the international transactions as well as multinational operations between the country and others. This could help to ease the business transactions both locally and internationally.
Taxation used as a tool to attract investors which useful to note that the Malaysian Government, in trying to attract foreign direct investment, is amiable to consider pre-packaged incentives, Factors such as the size of investment, level of spin-off, employment opportunities, and technology transfer, whether of national and strategic importance will play a role for granting of the incentive. Malaysia is experiencing an increasing inflow of investors from around the world because of various reasons. One of the main reasons is the tax incentive provided by the government to attract foreign capital and know-how.
At this point the country is doing very well to gain competitive attractiveness. The tax legislature in Malaysia keeps updating the tax law very often to follow the country’s development need. Switch tax policy is a need as in a multi-stage, broad-based Goods and Service tax (GST) has been announced by the Malaysian Government to replace the existing single stage sales tax and service tax. The implementation date remains unannounced at this juncture. The Malaysian tax specialists deemed more beneficial to make this switch.
Experts also have argued that complexities due to timing and inflation adjustment should be avoided. To do so, the authorities need to switch the taxation system from an income based one to a consumption based one. Under such a system all business purchases would be deducted immediately.
Borrowing in excess of investment would be added to income, and lending would be subtracted; the resulting tax base would be consumption. Through the tax saving resulting from expensing, the government, in effect, becomes a partner in all investments; the revenues it subsequently receives are best seen as the return on its investment.
A consumption-based tax imposes no burden on income from marginal investments, because the private investor keeps all of the income relating to his share of the investment. As a result, such a tax does not favour present consumption over saving for future consumption, as the income tax does.
Some economists view the flat tax as an alternative that is even simpler than consumption-based taxation but would achieve similar economic effects. It works by exempting most capital income from taxation at the individual level that is, only labor income is taxed.
This proposal, like consumption-based taxation, suffers from the loss of progressivity those results when the tax on most capital income is eliminated. No country uses either of these consumption-based direct taxes. To sum up, the Malaysian authorities has some changes to make in order to improve its own tax system and support the economic growth of the country.
The current tax system is not bad or unproductive, but just to improve through the establishment of a tax policy that is more or less similar to at least the neighbouring countries or least extend the bilateral and multilateral tax agreement with the business partners, as well as the foreign investors.
It is also highly advisable deepen the analysis about the implementation of the consumption based taxation to determine whether the switch could be beneficial. Question 1(C): Discuss whether system of tax on goods and services is now timely and appropriate for Malaysia.
Goods and services tax (GST) is known as a consumption tax based on the value-added concept. It imposed on sales of goods and services in every production. The tax consumption which the indirect tax charged towards importations and on the value added to goods and services sold by one business to another, or to the end consumer.
The new tax system of GST is considered as more efficient tax system. The implementation of GST replaces the current Malaysian service tax and sales tax. Sales tax is a form of indirect taxation which imposed on consumers and collected by business entities while service tax is a form of indirect tax imposed on specified services called as taxable services when the services are provided to the consumer at the time. There are lots of arguments arrived on the introduction of GST in Malaysia especially from various parties who is the taxpayer whether it burden the peoples when being implement.
GST have more comprehensive, transparent tax system. It inclusive of the manufacturing and distribution stages as well as providing a tax credit claim for GST paid on business inputs while the sales tax is imposed only at the manufacturing stage when the goods are manufactured or imported.
Thus, the GST will overcome the various weaknesses inherent in the present consumption tax system such as double tax, leakages thru transfer pricing and more. The government implement GST as part of their tax reform programme.
The objective of this new system, GST is to enhance the capability, effectiveness and transparency of tax administration and management. GST covers all types of goods & services sold to Malaysian & non-Malaysian residents except for common commodities.
Government expected that the consumers will have benefit from the price reduction in most of the goods and services which has cheaper services. As a consumer, the GST will affect us as the prices of goods and services which currently have little or no taxes will increase slightly.
Although there will be slightly increase in term of pricing, the government also has decided that 40 basic goods and services will be exempted from the GST such as basic foodstuff, residential accommodation, education, health services, communication, water and electricity, public transportation, hardware and maintenance and more.
There are various types of businesses that charged to GST. GST is charged and collected on all taxable goods and services produced in the country including imports where they need to pay the GST at the time of importation.
To business supplying the good and services, they need to pay within one month at the end of taxable period, it depending towards the classification that done by the GST authorities. Thus, businesses registered under GST can charge and collect GST.
The social and pricing impact studies conducted by the Ministry of Finance indicated that the suitable GST rate is in the range of 4% of value added to good and services at each stage of production. Value added in this system basically is the mark-up in arriving at the selling price of a product and service.
The rate is indicated as a standard rate which is expected to give benefits and to reduce the unduly burden of the rakyat and consumers especially to whom that fall in the lower income group. A business that have annual turnover that is more than RM500, 000 needs to register for GST, this is to ensure that the small businesses are free from GST. The registration can be done by manually or online within 28days from the end of the month where the threshold is reached.
Towards businesses that are not reached the threshold, they can voluntarily apply to be registered under the GST and the businesses must remain in the system for at least 2 years followed in the policy. If the government implement it in Malaysia, they will provide a sufficient time for business and industries to make them ready as GST is the new tax system.
It will be around 18 to 24 months as various businesses have different types of primary activities in their businesses. Lots of preparation need to be done including preparing their business computer system, hardware and software to get ready for this implementation.
Who will responsible to handle the GST accounting and GST taxation as it involved setting up business records, calculation of GST taxes and more. Training is needed either done by the government or by sending the staff for external training as this will increase the rate of readiness towards this implementation.
In additional, the issues on transitional of GST tax need to be study as to avoid the double taxation and disruption. Therefore, they need to understand the detailed rules and consider how GST would apply to their own business operations to avoid any problems occur in future after the system is being implemented.
Corruption is not a rare thing in Malaysia as businesses has already included corruption prices in goods & services. How does that not reflect additional costs to consumers? Therefore, the government need to take step in controlling the prices.
They need to ensure that the businesses do not take advantage of the GST implementation to increase prices of goods to make excessive profits. A Heavier fines and penalties will be imposed to make sure that the businesses comply with the rules and procedures formulated. Towards dealing with the issues relating to non-compliance and fraud, various approaches will be used by the government.
A risk assessment programme will be used to identify types of businesses and persons with high tendency to commit non-compliance and fraud. Moreover, a comprehensive audit programmes is one of the programme that being used to all business and this programme also will be used in the system to fight non-compliance and fraud cases.
Thus, a business records and accounts need to be audit by independence auditor to give a true and fair view of the financial statement. Prime Minister has guaranteed that there is no inflation but with the introduction of GST, the chain of passing the cost will end up usually at the hands of consumers.
The multiple stage tax of GST would rise up the final consumption price which might lead to inflation in short while. Malaysia economic would be more conservatives and tided to move forward for low income workers with a high living cost that can be seen in present time.
A good approach can be seen when the government learn and get good references from countries that impose GST such as Singapore and Thailand before implemented the tax scheme. Last but not least, the result of GST implementation could not be seen in this current time but they need to ensure that the GST does not burden the people, especially the lower-income group.
As a business taxpayer they need to be alert and aware regarding this new implementation. Organised seminar or workshop need to be attend to have a better understanding and at the same time will reduce any conflict occur. GST awareness and education programmes need to be conducted on an on-going basis until the GST is implemented and the answer from the survey can help the government to make decision and a proper preparation need to be done as in computer system or in other medium that GST will be used in future. Therefore, the government need to give businesses ample time to be ready for GST implementation.
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