Malaysia: 2016 Budget announcement and its impact on employers and individuals

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1 from Global Mobility Malaysia: 2016 Budget announcement and its impact on employers and individuals December 10, 2015 In brief The recent 2016 Budget tabled by the Malaysian Government with the theme Prospering the People focuses on expansionary strategic measures to stimulate and boost domestic demand amid a challenging external environment next year. A Goods and Services Tax (GST) was implemented in April 2015 at 6% and therefore there was an expectation from taxpayers that the personal tax rates will be reduced to compensate for the increased cost of living. However, an unprecedented step was announced to increase the individual tax rates by introducing two additional highest income bands, impacting employers of globally-mobile employees. This Insight will explain the implications of the proposed changes to employers and individuals, and suggest actions that employers may need to consider with respect to their globally mobile employees. Employers with mobile individuals working in Malaysia should consider certain actions to sustain cost effectiveness while still achieving strategic business and talent development objectives. In detail Individual income tax rates Proposed changes for 2016 Currently, the highest marginal tax rate for an individual in Malaysia is 25%. This applies to tax residents earning chargeable income above 400,000. To institute a more progressive tax structure, with effect from 2016, it has been proposed that two new chargeable income bands be added above the existing highest income band exceeding 400,000: For every ringgit in excess of For every ringgit in excess of 600,000 26% 1,000,000 28%

2 With the above change, the new tax rate schedule for resident individuals with effect from Year of Assessment 2016 (calendar year 2016) will be as follows: Chargeable Income Rate % Tax Payable On the first 5,000 0 On the next 15, On the first 20, On the next 15, On the first 35, On the next 15, ,500 On the first 50,000 2,400 On the next 20, ,200 On the first 70,000 5,600 On the next 30, ,300 On the first 100, ,900 On the next 150, ,000 On the first 250,000 47,900 On the next 150, ,750 On the first 400,000 84,650 On the next 200, ,000 On the first 600, ,650 On the next 400, ,000 On the first 1,000, ,650 Above 1,000, Consistent with the above change, the tax rate for non-tax resident individuals is increased by 3%, from 25% to 28% from Taxes remain one of the largest expenses related to an overseas assignment; as such employers should review their cost projections in relation to tax equalized assignees in Malaysia and factor these costs into their mobility programs. Additionally, depending on the assignee population in Malaysia and the potentially significant cost increase expected in 2016 and beyond, on a going forward basis, employers would need to consistently review and develop more tax effective compensation packages to manage cost effectiveness of their global mobility programs in the long run. Employers should also ensure that the new tax rates and income bands are incorporated into their payroll system to ensure that the latest changes are effected in the monthly tax deductions process. 2 pwc

3 Individual tax reliefs Increases for 2016 The tax reliefs will be increased as follows with effect from 2016: Types of Relief Maximum Allowed 2015 (2016 onwards) Spouse 3,000 4,000 Parental care (new) N/A 1,500 (each parent of the individual) Children below 18 years of age 1,000 2,000 Children studying at tertiary 6,000 8,000 Disabled child studying at tertiary 12,000 14,000 Fee for tertiary education (self) 6,000 7,000 Contribution to Social Security Organisation (SOCSO) N/A 250 Employers should consider whether a process should be implemented to collate information and documentation in relation to these reliefs for globally mobile employees as the reliefs would partially reduce the tax liability increases spurred by the higher tax rates even though the tax savings may only be marginally significant. Gratuity payments Proposed expansion of exemption A new exemption is introduced in Schedule 6 to expand the exemption for gratuity payments. It is proposed that sums received by way of gratuity on retirement from an employment under any written law or termination of a contract of employment, other than the current retirement gratuity which is fully exempted (provided certain conditions are met), will be 3 exempt up to 1,000 per completed year of service of that individual. There is no change in the current legislation that exempts gratuity received at retirement at 55 years old and above provided the employee has completed 10 years with same employer. The proposed change enhances the current exemption available on gratuity payments received by an employee by way of retirement from an employment under any written law or termination of a contract of employment as it is specifically aimed at those who do not qualify for the current exemption for gratuity payment. Employers should review the severance or retirement packages of globally mobile employees who are expected to retire or be terminated while on assignment in Malaysia. They will have to determine if the lump sum payments qualify as gratuity in order to take advantage of the above enhanced exemption which does not require further satisfaction of any other conditions attached to the exemption. Basis period to which gross income from an employment relates Proposal to simplify Currently, only bonuses and directors fees are taxed in the year the payments are received, regardless of the period to which they are attributed. It has been proposed that all employment income receivable for any particular period will be assessed in the year of receipt. However, any employment income receivable by an employee who has left or will be leaving Malaysia, will be treated as deemed received in the year of

4 departure from Malaysia. The income would be taxed in the year of departure regardless of when it is paid thereafter. The proposal aims to simplify the reporting and payment of taxes for employment income as it is now recognised as income in the year in which it is paid unless the amount is paid after the cessation of the Malaysian employment and subsequent departure of the individual from Malaysia. Consequently, this removes the requirement for an additional assessment to be raised to assess the prior year income for the relevant year to which these payments are attributed unless it relates to a payment made after the cessation of the Malaysian employment and subsequent departure of the individual from Malaysia. Employers should review the robustness of their internal processes in tracking these trailing liabilities, even though there is no change in the reporting of trailing liabilities for globally mobile employees who have departed Malaysia. In particular, the vesting of equity-based income should be reviewed to ensure correct reporting in Malaysia as and when they crystalize. This is a critical issue if the costs of such trailing liabilities are subsequently charged back to a Malaysian entity. Eligibility for mandatory contributions to SOCSO and payments made to eligible dependents Enhanced benefits The eligibility for mandatory contribution will be increased from a monthly salary of 3,000 to 4,000 to enable more employees to benefit from the Employees Social Security Fund (SOCSO). In addition to the above, it has been proposed that upon the death of the contributor, during the term of employment, the next of kin will receive a monthly payment from SOCSO of up to 90% of his last drawn salary. The above change is not expected to impact the majority of the globallymobile employees in Malaysia as contributions to SOCSO are not mandated for foreign employees and employees earning above 4,000 per month who have never previously registered as members of SOCSO. However, global companies employing local Malaysians need to be mindful of these changes. The takeaway The changes described above as part of the 2016 Budget announcement are expected to become law within the next few weeks; employers should expect them to be effective as of the start of 2016 and thus consider the actions suggested. Overall, many of the proposed changes are favorable to mobile individuals and their employers. However, the major change is the increase in the personal income tax rate for higher income individuals, which will likely negatively impact the employer s cost of having individuals work in Malaysia if they tax-equalize. 4 pwc

5 Let s talk For a deeper discussion of how this issue might affect your business, please contact your regular Global Mobility Services engagement team or one of the following team members: Global Mobility Services - Malaysia Hilda Liow Wun Chee hilda.liow.wun.chee@my.pwc.com Quinnie Low quinine.low@my.pwc.com Lim Phing Phing phing.phing.lim@my.pwc.com Wee Lay Har lay.har.wee@my.pwc.com Global Mobility Services United States Peter Clarke, Global leader peter.clarke@pwc.com Stay current and connected. Our timely news insights, periodicals, thought leadership, and webcasts help you anticipate and adapt in today's evolving business environment. Subscribe or manage your subscriptions at: pwc.com/us/subscriptions SOLICITATION 2015 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. PwC helps organisations and individuals create the value they re looking for. We re a network of firms in 157 countries with more than 195,000 people who are committed to delivering quality in assurance, tax and advisory services. Find out more and tell us what matters to you by visiting us at 5 pwc