MALAYSIA Introduction TAX PRACTICE GROUP Multi-Jurisdictional Survey TAX DESK BOOK CONTACT INFORMATION Chen Kah Leng Skrine Unit No. 50-8-1, 8th Floor, Wisma UOA Damansara, 50 Jln Dungun, Damansara Heights, 50490 Kuala Lumpur 60.320.813.999 ckl@skrine.com 1. Please give a brief overview of the types of taxes imposed in your jurisdiction (i.e., direct and indirect taxes and their components.) The basic taxation system in Malaysia is territorial in nature. All income of companies and individuals accrued in, derived from or received in Malaysia from outside Malaysia, are liable to income tax. However, foreign sourced income received in Malaysia from outside Malaysia by resident companies (except those involved in the banking, insurance, air and sea transportation business), non-resident companies and non-resident individuals are exempted from income tax in Malaysia. The Malaysian taxation system comprises of direct and indirect imposition of taxes. The forms of direct taxes are income tax, real property gains tax and petroleum income tax. Indirect taxes come in the form of excise duty, customs duties, sales tax, service tax, stamp duty and quit rent and assessments on realty. There is no capital gains tax in Malaysia apart from real property gains tax. However, effective from 1 April 2007, the Real Property Gains Tax (Exemption)(No. 2) Order 2007 exempts all
persons from all provisions of the Real Property Gains Tax Act 1976 in respect of any disposal of property after 31 March 2007. INCOME TAXES AS APPLIED TO BUSINESS ENTITIES AND INDIVIDUALS Calculation of Income/ Profit Taxes 2. How is the taxable base determined? Income tax is imposed on a territorial basis whereby residents of Malaysia are taxed on all income derived from Malaysia as well as income received in Malaysia from outside Malaysia. However, income arising from sources outside Malaysia and received in Malaysia by resident companies is exempt from income tax. Notwithstanding this, residents carrying on banking, insurance and air transportation businesses are taxed on a worldwide basis. With effect from the year of assessment 2004, a resident individual is also exempt from income tax on income received in Malaysia from sources outside Malaysia. Non-residents are taxed on Malaysian derived income only. 3. What revenues are included? The Income Tax Act 1967 governs the taxation of income tax in Malaysia. Under the Income Tax Act 1967 the classes of income chargeable to income tax are as follows: gains or profits from an employment (salaries, remunerations, etc.); gains and profits from a business which includes profession, vocation and trade and every manufacture, adventure or concern in the nature of trade; dividends, interests or discounts; rents, royalties or premiums; pensions, annuities or other periodic payments; and other gains or profits of an income nature not falling under any of the above. 4. What deductions are allowed? Personal income tax deductions The chargeable income of a resident individual is arrived at after making several deductions. These include the personal reliefs for self (a further deduction will be given if the taxpayer is a disabled person), spouse and unmarried children below 18 years of age; parents medical expenses; medical expenses on serious diseases including medical examinations for individual, spouse or child; expenditure for
purchase of basic support equipment for the individual, spouse, child or parent who is disabled; and contributions to the Employees Provident Fund (EPF), life insurance premiums, and insurance premiums for education or medical benefits, etc. In addition, expenses wholly and exclusively incurred in the production of an individual s income qualify for deduction (section 33 of the Income Tax Act 1967). Examples are such as entertainment expenses, motor vehicle expenses and subscription to professional institutions. Corporate income tax deductions Generally, a deduction from a company s assessable income is allowed for all outgoings and expenses wholly and exclusively incurred in the production of income (section 33 of the Income Tax Act 1967). It must also be in the nature of a revenue expenditure and not in the nature of a capital expenditure. Examples of business deductions include business operating expenses, donations to approved institutions, gratuities to employees, legal expenses, bad debts (in the year written off or incurred) and repairs to and replacement of assets. 5. What are the major expenses that are not deductible? Section 39 of the Income Tax Act 1967 sets out all outgoings and losses which do not rank for deduction from assessable income. Examples include domestic or private expenses, expenses not wholly and exclusively incurred for the purpose of acquiring income, any capital withdrawn or any sum employed as capital or used in improvements, 50% of entertainment expenses (except in very limited circumstances) and leave passage. 6. What are the applicable federal rates? Personal income tax rates The rate of tax depends on the individual s resident status, which is determined by the duration of his stay in the country as stipulated under section 7 of the Income Tax Act 1967. Generally, an individual residing in Malaysia for more than 182 days in a year has tax resident status. A resident individual is taxed on his chargeable income at a graduated rate from 0% to 27% after deducting tax reliefs. A non-resident individual is not eligible for any personal tax relief and is subject to 27% tax on the chargeable income accruing in or derived from Malaysia unless there are double tax treaties. Other sources of income received by a non-resident individual are subject to withholding tax.
Corporate income tax rates A company, whether resident or not, is assessable on income accrued in or derived from Malaysia. A company is considered a resident in Malaysia if the control and management of its affairs are exercised in Malaysia. The corporate tax rate is 25% for the year of assessment 2009 and subsequent years of assessment. Resident companies with a paid up capital of RM2.5 million and below will be charged at a tax rate of 20% for the first RM500,000 of chargeable income and any subsequent chargeable income is taxed at 25%. For resident companies with paid up capital above RM2.5 million, the tax rate is 25%. Non-resident companies are taxed at the rate of 25% for business income and are subject to withholding tax for other types of income. Where the non-resident company is resident in a country which has a double tax treaty with Malaysia, the tax rates for specific sources of income may be reduced. 7. What are the applicable state and/ or other local rates? Income tax is administered at the federal level. Therefore, there are no state and/or local income taxes. 8. What are the applicable capital gains rates and base, if different and concessional tax treatment in case of business re-organization such as amalgamation, slump sale, demerger, etc? There is no capital gains tax in Malaysia. 9. How are operating losses handled? Losses suffered in a business, profession or vocation may be set-off against income from other sources for that assessment year. Where there is insufficient income to absorb the losses, the unabsorbed losses can be carried forward indefinitely for set-off against future business income, not necessarily from the same business, until the entire loss has been utilised. However, with effect from the year of assessment 2006, the unabsorbed business losses will be subject to a continuity of ownership test. Companies will only be allowed to carry forward unabsorbed business losses if more than half of the shareholders of the company for that assessment year are the same as at the end of the basis period for the prior assessment year in which the loss was initially ascertained. The Ministry of Finance has issued guidelines to state that this rule restricting carry forward losses based on the continuity of ownership test will only apply to dormant companies.
10. How are capital losses handled? For a loss to be deductible, it must arise from the carrying on of a trade, business, profession or vocation. The nature of the loss must also be such that, if it had been a profit, it would have been taxable. As such, losses incurred on capital account a Territorial Rules 11. What are the residence rules? Residence rules for individuals The resident status of an individual for tax purposes is determined by his physical presence in Malaysia. Generally, an individual qualifies as a resident for the basis year for a particular assessment year if he is in Malaysia in the basis year for a period for a period or periods totalling 182 days or more. Residence rules for companies A company (regardless of where it was incorporated) is a resident for an assessment year if at any time during the basis year for an assessment year it is managed and controlled in Malaysia. Generally, a company is regarded as being managed and controlled in the place where its directors meetings are held. 12. Is worldwide income taxed? Worldwide income is taxed only on residents carrying on banking, insurance and air transportation businesses. 13. Tax credits - Are there tax credits relating to legal dispositions other than provisions in Double Taxation Treaties, on the possibility of deducting taxes paid abroad, or any others? Tax credits are only available by way of tax relief under the provisions of Double Taxation Treaties. Withholding Taxes 14. What are the rates on dividends for withholding taxes? There is no withholding tax on dividends paid by Malaysian resident companies.
15. What are the rates on royalties for withholding taxes? The rate of withholding tax which is based on the gross amount of royalty paid or credited is 10% of gross income. However, a double taxation treaty may provide for a reduced rate. 16. What are the rates on interest for withholding taxes? The rate of withholding tax which is based on the gross amount of interest paid or credited is 15% of gross income. However, a double taxation treaty may provide for a reduced rate. 17. What are the rates of withholding tax on profits realized by a foreign corporation? The rate of withholding tax applicable will depend on the category of income received by the foreign corporation. For example, technical or management service fees are subject to a withholding tax of 10%. 18. Please list any other rates on withholding taxes that we should be aware of. Withholding tax is applicable for contract payments to a non-resident contractor in respect of services under a contract performed in Malaysia. When the payer is paying or crediting the contract payment, he should deduct tax on the service portion at the rate of 10% of the contract payment to cover the tax liability of the non-resident contractor and 3% of the contract payment to ensure the tax liabilities of the employees of the non-resident contractor are settled. Technical or management service fees for services performed in Malaysia are subject to a withholding tax of 10%. Income from the rental of moveable properties is subject to a withholding tax rate of 10%. Any other income received by a non-resident which is not specifically covered is subject to a withholding tax rate of 10%. Tax Returns and Compliance
19. What is the taxable reporting period? In respect of individuals, the taxable reporting period is the calendar year. In respect of companies, the taxable reporting period is the accounting period. 20. What are the due dates for the filing of tax returns? In respect of individuals without business income, the due date for filing of the tax return is 30 April in the year following the year of assessment. In respect of individuals with business income, the due date for filing of the tax return is 30 June in the year following the year of assessment. In respect of companies, the due date for filing of the tax return is within 7 months from the date following the close of its accounting period. 21. What are the key compliance requirements? The official assessment system has been changed to the self assessment system whereby the burden of computing the taxpayer s liability is shifted from the Inland Revenue Board ( IRB ) to the taxpayer. Accordingly, the taxpayer is expected to compute his tax liability based on the tax laws, guidelines and regulations issued by the IRB. The tax returns submitted will no longer be subject to a detailed review by the IRB. The main objective of the self assessment system is to inculcate a practice of voluntary compliance by taxpayers and at the same time reduce the workload of the IRB so that they may focus on areas which have a high tax risk and a potentially significant loss in revenue. Under the self assessment system, tax audits will be the IRB s key enforcement tool in order to ensure that the tax returns submitted are correct and were prepared in accordance with the applicable rules and regulations. The tax audit is an examination of a taxpayer s records to ensure that the income and tax liability declared to the IRB in the tax return are true, correct and comply with the tax laws and rulings.
22. Are there any other requirements that we should be aware of regarding tax returns and compliance? There are various other requirements under the self assessment system, such as the submission of estimates of tax payable by companies to the IRB. However, we do not propose to go into such detail for the purposes of this tax survey. INDIRECT TAXES 23. Are there any indirect taxes in your jurisdiction? Indirect taxes in Malaysia consist of sales tax, service tax, customs duties, stamp duties, excise duties and local rates such as assessment and quit rent. 24. How does it operate? Is it a VAT or a sales tax? The various indirect taxes operate in accordance with the applicable governing legislation. 25. How is the taxable base determined? Sales tax Sales tax is a one stage tax levied on taxable goods imported for local consumption and on taxable goods manufactured and sold locally. Manufacturers of taxable goods are required to be licensed under the Sales Tax Act 1972. Service tax Service tax applies to taxable goods and services, including food and drinks; provision of rooms for lodging and premises for meetings; health services and the provision of accommodation and food by private hospitals, certain professional and consultancy services, provided by taxable persons. Any taxable person carrying on taxable services must apply for a licence under the Service Tax Act 1975. Customs duties Customs duties (include import duty and export duty) are imposed under the Customs Act 1967. Import duty is payable on imported goods at the time of clearance from Customs control. Export duty is generally imposed on depletable resources to discourage the export of such commodities.
Stamp duty Stamp duty is imposed on certain instruments and documents under the Stamp Act 1949. In general, stamp duty is payable on instruments executed in Malaysia or if executed outside Malaysia, when brought into Malaysia. Excise duties Excise duties are levied on selected products manufactured in Malaysia for local consumption and selected imported goods. Manufacturers that manufacture goods subject to excise duties have to be duly registered with Customs for charging and remittance of excise duties to Customs. Excise duty is generally levied on alcoholic beverages, tobacco products, motor vehicles and playing cards. Local rates Local rates such as assessment and quit rent are imposed by state governments and local authorities on real property located within the jurisdiction of such authorities. 26. What are the applicable rates? Sales tax Sales tax is generally at 10% but certain non-essential foodstuffs and building materials are taxed at 5%. Service tax The rate of service tax is 5%. Customs duties The rates of customs duties vary based on the types of goods. The rates and exemption of customs duties are prescribed in subsidiary legislation made under the Customs Act 1967. Stamp duty The rate of stamp duty chargeable depends on the nature of the instrument involved and varies from a fixed charge, ad valorem or a certain percentage of the value of the subject matter of the transaction. Excise duties
The rate of tax to be levied varies and would depend on the nature of the goods manufactured. Local rates Assessment rates are based on the annual value of properties and the percentage charged thereon may differ substantially between one location and another. Quit rent is calculated with reference to the area of the land and its charge depends on the location and usage of the land. 27. Are there any exemptions? Sales tax Manufacturers whose annual sales turnover does not exceed RM100,000 in the preceding year and is not expected to exceed RM100,000 during the next 12 months may apply for a certificate of exemption from licensing. Sales tax does not apply to the Joint Development Area, Labuan, Langkawi, Tioman, Free Zones and Licensed Manufacturing Warehouses. Service tax As of 1 January 2003, certain professional services provided by a company to companies within the same group are exempted from the current service tax of 5%. Generally, the imposition of service tax is subject to a specific threshold based on an annual turnover ranging from RM150,000 to RM300,000. With effect from 1 January 2008, the threshold of RM150,000 sales turnover within a period of 12 months or part thereof for professional, consultancy and management services is abolished. Service tax does not apply to Free Zones, Langkawi, Labuan, Tioman and the Joint Development Area. 28. Are there any other taxes such as debit or financial transactions taxes enforced in you jurisdiction? No.
PARAFISCAL CONTRIBUTIONS 29. Are there any parafiscal contributions (i.e. social security, science and/ or technology)? There is an Employees Social Security Fund which is governed by the Employees Social Security Act 1969. There is also an Employees Provident Fund (EPF) which is governed by the Employees Provident Fund Act 1991. 30. How do they operate? Employees Social Security Fund The Social Security Organisation (SOCSO) administers the following schemes: (i) Employment Injury Insurance Scheme; and (ii) Invalidity Pension Scheme. The schemes are aimed at providing cash and medical benefits to employees in case of temporary or permanent disablement/invalidity, death and employment injury, including occupational diseases. Employees Provident Fund The EPF is a compulsory savings scheme established to provide a measure of security for old age retirement to its members. Both the employer and employee is required to contribute monthly a percentage of the employees wages to the EPF. 31. How is the taxable base determined? Employees Social Security Fund All industries with one or more employees are required to insure their employees whose wages do not exceed RM3,000 a month. Employees who have become liable to contribute continue to be entitled to be insured even if their salaries exceed RM3,000 per month. Employees Provident Fund
Malaysian citizens and permanent residents are required to contribute to the EPF. Expatriates and foreign workers are not required to contribute to the EPF, although they may elect to do so. 32. What are the applicable rates? Employees Social Security Fund The rates of contribution are as follows: (i) The first category (Employment Injury Insurance Scheme and Invalidity Pension Scheme) of contribution is about 2% to 2.5% of the employee's wages, shared by the employer and employee with the employer taking the larger share. (ii) The second category (Employment Injury Insurance Scheme only) is solely by the employer for an employee who is not eligible for coverage under the Invalidity Pension Scheme and is about 1% of the employees' wages Employees Provident Fund In general, for employees (until the age of 55), the employer is required to contribute 12% and the employee is required to contribute 11% of the employee s monthly wages. 33. Are there any exemptions? No. INHERITANCE AND GIFT TAXES 34. Are there inheritance taxes, gift taxes or any other taxes like Wealth Tax, etc.? No 35. If you answered yes to the question above, please describe what triggers the requirement for the tax, what the rate of tax is, and what is included in the taxable base. N/A
OTHER MATTERS 36. Are there any tax incentives granted for various matters such as research and development, investment in certain industries/ areas, etc.? Yes 37. If so, please indicate if there are any of the following: anti-deferral regimes; transfer pricing provisions; tax avoidance measures like legislated General Anti- Avoidance Rules, etc.; controlled foreign companies regulations; thin capitalization rules Transfer Pricing The IRB has issued Transfer Pricing Guidelines which provide information to companies concerned with related party transactions on the methodologies acceptable to the IRB in respect of the determination of arms length prices. In addition, there have been recent amendments to the Income Tax Act 1967 which empowers the Director General of the IRB to substitute the price on certain transactions where the Director General is of the opinion that the transactions were not entered into on an arms length basis and which also allows for companies to apply for Advance Pricing Arrangements ( APA ) to the Director General. APA is a mechanism to predetermine the prices of goods and services to be transacted in the future between a company and its related companies for a specified period. Anti-Avoidance Section 140 of the Income Tax Act 1967 is a general anti-avoidance provision whereby the Director General of IRB, where he has reason to believe that any transaction has the direct or indirect effect of: (a) altering the incidence of tax which is payable or suffered by or which would otherwise have been payable or suffered by any person; (b) relieving any person from any liability which has arisen or which would otherwise have arisen to pay tax or to make a return; (c) evading or avoiding any duty or liability which is imposed or would otherwise have been imposed on any person by the Income Tax Act 1967; or (d) hindering or preventing the operation of the Income Tax Act 1967 in any respect, may, without prejudice to such validity as it may have in any other respect or for any other purpose, disregard or vary the transaction and make such adjustments as he
thinks fit with a view to counteracting the whole or any part of any such direct or indirect effect of the transaction. Thin capitalisation In respect of thin capitalisation, under Section 140A of the Income Tax Act 1967, where the Director General, having regard to the circumstances of the case, is of the opinion that in the basis period for a year of assessment the value or aggregate of all financial assistance granted by a person to an associated person who is a resident, is excessive in relation to the fixed capital of such person, any interest, finance charge, other consideration payable for or losses suffered in respect of the financial assistance shall, to the extent to which it relates to the amount which is excessive, be disallowed as a deduction. 38. List the countries in which there are tax treaties. This could impact the withholding taxes on various distributions and to the extent possible, please itemize them below. Please include the impact upon withholding on compensation, interest, dividends or other distributions for each country listed. There are over 60 double taxation treaties signed between Malaysia and other countries. A table summary of the withholding tax rates are as follows: No. Country Dividends (%) Interest(%) Royalties(%) Fees for Technical Services(%) 1 Albania NIL 10 10 10 2 Argentina NIL 15 10 10 3 Australia NIL 15 10 NIL 4 Austria NIL 15 10 10 5 Bahrain NIL 5 8 10 6 Bangladesh NIL 15 10 10 7 Belgium NIL 10 10 10 8 Bosnia and Herzegovina NIL 10 8 10 9 Canada NIL 15 10 10 10 Chile NIL 15 10 5 11 China NIL 10 10 10 12 Croatia NIL 10 10 10 13 Czech Republic NIL 12 10 10 14 Denmark NIL 15 10 10 15 Egypt NIL 15 10 10 16 Fiji NIL 15 10 10 17 Finland NIL 15 10 10 18 France NIL 15 10 10 19 Germany NIL 15 10 NIL
No. Country Dividends (%) Interest(%) Royalties(%) Fees for Technical Services(%) 20 Hungary NIL 15 10 10 21 India NIL 10 10 10 22 Indonesia NIL 15 10 10 23 Iran NIL 15 10 10 24 Ireland NIL 10 8 10 25 Italy NIL 15 10 10 26 Japan NIL 10 10 10 27 Jordan NIL 15 10 10 28 Kazakhstan NIL 10 10 10 29 Kyrgyz NIL 10 10 10 30 Kuwait NIL 10 10 10 31 Lebanon NIL 10 8 10 32 Luxembourg NIL 10 8 8 33 Malta NIL 15 10 10 34 Mauritius NIL 15 10 10 35 Mongolia NIL 10 10 10 36 Morocco NIL 10 10 10 37 Myanmar NIL 10 10 10 38 Namibia NIL 10 5 5 39 Netherlands NIL 10 8 8 40 New Zealand NIL 15 10 10 41 Norway NIL 15 10 10 42 Pakistan NIL 15 10 10 43 Papua New Guinea NIL 15 10 10 44 Philippines NIL 15 10 10 45 Poland NIL 15 10 10 46 Romania NIL 15 10 10 47 Russia NIL 15 10 10 48 Saudi Arabia NIL 5 8 8 49 Seychelles NIL 10 10 10 50 Singapore NIL 10 8 5 51 South Africa NIL 10 5 5 52 South Korea NIL 15 10 10 53 Spain NIL 10 7 5 54 Sri Lanka NIL 10 10 10 55 Sudan NIL 10 10 10 56 Syria NIL 10 10 10 57 Sweden NIL 10 8 8 58 Switzerland NIL 10 10 10 59 Thailand NIL 15 10 10 60 Turkey NIL 15 10 10 61 United Arab Emirates NIL 5 10 10
No. Country Dividends (%) Interest(%) Royalties(%) Fees for Technical Services(%) 62 United Kingdom NIL 10 8 8 63 United States of America NIL 15 10 10 64 Uzbekistan NIL 10 10 10 65 Venezuela NIL 15 10 10 66 Vietnam NIL 10 10 10 67 Zimbabwe NIL 10 10 10 Source: The Inland Revenue Board s website at http://www.hasil.org.my