Vertical Limit Consulting - Malaysian Tax System

Malaysian Tax System

Tax System

Tax Legislation

Individual Taxation

Corporate Taxation

Self Assessment System

Real Property Gains Tax

Witholding Tax

Indirect Taxes

Investment Incentives

2006 Important Income Tax Filing Datelines

2006 Other Important Income Tax Filing Datelines

Tax Legislation

In Malaysia, the law governing income tax is the Income Tax Act, 1967(Act 53). A transaction must fall within the ambit of "scope of charge"(Section 3) in order to be liable to income tax.

Section 3 sets out 2 circumstances where income tax liability would arise, namely:

The transaction must be "income" in nature and such income is accrued in or derived from Malaysia; or

The transaction must be "income" in nature and it is received in Malaysia from outside Malaysia (foreign source income)

A number of tax incentives have been introduced by the Government to promote foreign investments and priority industries, particularly projects which are capital intensive, with high value added content and involving new and emerging technologies. These incentives are available to investors under the Promotion of Investments Act, 1986.

Indirect taxes include import and export duties, sales and service tax, excise duties, property taxes, entertainment tax and road tax. There are no payroll, turnover or state taxes in Malaysia.

Individual Taxation

Malaysia adopts the territorial scope of charge. This means that it charges tax on income of any person for each year of assessment accruing in or derived from Malaysia or remitted to Malaysia from overseas.

The resident status of the taxpayer is important due to the following reasons:

Scope of charge - A resident is subject to tax on income derived in Malaysia and income remitted to Malaysia from overseas whereas, a non-resident individual will only be subject to tax on income derived in Malaysia.

Relief - No relief will be given to a non-resident individual.

Tax rates - A resident individual is taxed on scaled rates whereas a non-resident will be taxed at a flat rate of 28%.

Generally, an individual is a resident if he is physically within Malaysia for 182 days or more in a tax year (which runs from 1 January through 31 December).

Rates of Taxation

Benefits-In-Kind

Rates of Taxation

The taxable income of a resident individual in Malaysia is subject to tax at a scaled rate ranging from 0% to 28%. Personal reliefs are deductible in computing taxable income.
However, the income of a non-resident individual is taxed at a flat rate of 28%. He is not entitled to personal reliefs.

Tax reliefs that are available to a resident taxpayer include the following:

.	a personal relief of RM8,000 (a further relief of RM8,000 if the taxpayer is disabled);

.	wife relief of RM3,000 if the wife is living with the husband and has elected to be assessed jointly with the husband

.	child relief of RM1,000 per child (RM5,000 for a disabled child);

.	maximum deduction of RM6,000 for life insurance premium and contribution to approved pension and provident funds;

.	maximum deduction of RM3,000 for premiums paid for education and medical insurance;

.	maximum deduction of RM5,000 on medical expenses incurred on the taxpayer's parents; and

.	maximum deduction of RM5,000 on expenditure incurred for the purchase of supporting equipment for the taxpayer, his wife, child or parent who is disabled;

Benefits-In-Kind

Most employers provide employees with fringe or non-cash benefits. Benefits-in-kind enjoyed by an employee are either taxed on the employee at prescribed values which are generally low or totally exempt from tax. The taxation of some benefits are briefly outlined below:

.	Accomodation - Where a house is provided by the employer, the taxable value is based on the lesser of 30% of the gross cash remuneration or the rental paid for the unfurnished premises.

.	Motor Vehicle - The cost of a motor vehicle and its maintenance are taxable to the employee based on the value of the motor vehicle. These rates range from RM1,200 to RM25,000 per annum.

Relocation, medical and dental costs that are borne by the employer are not taxable to the employee.

Corporate Tax

A limited company can either be a privately owned or a public limited company.

A company is deemed to be resident in Malaysia for the basis year if at any time during the basis year the management and control of its business or businesses is exercised in Malaysia.

A resident company (other than a company carrying on the business of banking, insurance, sea and air transport) will not be subject to income tax on income arising from sources outside Malaysia.

The foreign source income exempted will be credited into an exempt income account which can be used to declare exempt dividends( 2 tiers).

As for non-residents, income arising from sources outside Malaysia and remitted to Malaysia is exempted from tax.

Investment income such as interest and dividend income are assessed in accordance with the financial year of the company.

Residence

A company is considered to be resident for tax purposes if the control and management of its business or one of its businesses is exercised in Malaysia. As a general rule, the place of control and management is exercised where the Board of Directors holds its meetings to make important corporate decisions, i.e. where the real and effective control and management is carried out.

Allowed business expenses

Disallowed business expenses

Tax Rates

Resident companies

.	Tax chargeable on all limited companies under the Income Tax Act 1967 is at 28% on all chargeable income

.	With effect from Y/A 2004, the chargeable income on the first RM500,000 for all companies with a paid-up capital of RM2.5 million and below is subject to a tax rate of 20% (as compared to the current rate of RM100,000). Income above RM500,000 is subject to a tax rate of 28%.

.	Savings !!! This translates into a net saving of up to RM40,000.

.	Tax rates of other ASEAN countries: Singapore 22%(GST 5%-year 2004), Indonesia 35%, Thailand 30%, Brunei 30%, Philippines 35%.

Non-Resident companies

Malaysia imposes withholding tax on the following types of payment made to a non-resident company:

	Rate %
Royalties, Rental of moveable properties	10
Technical or management service fees	10
Interest	15
Dividends	28
Business and other income	28

Business profits

.	Business profits are computed on the basis of normal accounting principles as modified by certain tax adjustments.

.	Generally, deduction is allowed for all expenses wholly and exclusively incurred in the production of income.

Losses

.	Business losses can be set off against income from all sources in the current year. Any unutilised losses can be carried forward indefinitely to be utilised against income from any business source.

Depreciation

Capital expenditure and depreciation is not an allowed business deduction. Alternatively, companies are allowed to deduct their capital expenditure or depreciation costs in the form of Capital Allowances(CA).

Summary CA rates are as follows:

	Annual Allowance %
Plant and machinery	14
Computers and IT software	40
Office equipment, furniture and fittings	10
Motor vehicles *	20

* Restriction on maximum qualifying expenditure for motor vehicles:

	Maximum RM
New vehicles purchased after 28/10/00 where on the road price is RM150,000 or less	100,000.00
Other vehicles	50,000.00

Allowed business expenses

A summary of allowed business expenses available are detailed as follows:

.	Cost of sales - purchase of stock in trade, direct labour, direct materials, sales tax and import duties for raw materials and other incidental costs incurred.

.	Incorporation expenses - allowable for companies with authorised share capital not exceeding RM2.5 million w.e.f. YA 2004 (previously only for companies with share capital not exceeding RM250,000)

.	Entertainment expenses - 100% for expenses wholly related to sales of the business/sales promotion w.e.f. YA 2004 (previously totally disallowed)

.	Entertainment expenses - 50% for all other expenses

.	Advertisements

.	Staff entertainment - annual dinner

.	Training expenses

.	Upkeep of office equipment and office

.	Repair and maintenance - motor vehicles, premises and machinery

.	Interest on borrowing used in production of income

.	Trade debts written off and specific provisions for doubtful debts

.	Legal fees - renewal of banking facilities, renewal of tenancy agreement, defending of business, defending of ownership rights

.	Compensation due to negligence of taxpayer's employees

.	Compensation for loss of remuneration

.	Free samples with logo

.	Medical expenses for employees

.	Retrenchment payments

Disallowed business expenses

A summary of disallowed business expenses available are detailed as follows:

.	Domestic and private

.	Capital expenditure

.	Depreciation and amortisation

.	General provisions

.	Interest expenses attributable to non-business investments

.	Employer's contributions to unapproved pension or saving schemes

.	Employer's contributions to approved pension or saving schemes in excess of 19% of employee's remuneration

.	Donations to non approved bodies

.	Employee leave passages (except where incurred for local trips during one-year period from 1 June 03)

.	Lease rentals for passenger cars exceeding RM50,000 or RM100,000 per car, the latter amount being applicable to vehicles costing RM150,000 or less which have not been used prior (new) to the rental

Self Assessment System

Malaysia practices the self assessment system in the computation, disclosure and payment of taxes

Self assessment for companies came into effect from 2001

Self assessment for individuals, partnerships, businesses and cooperatives came into effect from 2004

What is self assessment ?

Under the self assessment system, taxpayers assess their own tax liability and pay taxes based on disclosed figures as they are earned. Taxes are paid in the financial period in which profits are earned. The responsibility of correctly assessing a person's tax liability is transferred from the Inland Revenue Board (IRB) to the taxpayer

The main objective of SAS is to inculcate a practice of voluntary compliance by taxpayers and at the same time, reduce the workload of the IRB to enable them to focus on tax audits and increase collection revenue

Real Property Gains Tax (RPGT)

Real property gains tax (RPGT) is a form of capital gains tax. RPGT is charged on gains arising from the disposal of real property which is defined as:

.	Any land situated in Malaysia or any interest, option or other right in or over such land; or

.	Shares in a Real Property Company (RPC)

Real Property Company (RPC)

A RPC is a controlled company holding real property or shares in another RPC as a major asset (i.e. defined value not less than 75% of the value of its total tangible assets)

Chargeable persons

Every person whether or not resident in Malaysia is chargeable to RPGT in respect of any gains accruing on the disposal of real property or RPC shares in Malaysia

Chargeable gains and losses

A chargeable gain arises if the disposal price exceeds the acquisition price and an allowable loss is incurred if the disposal price is less than the acquisition price. Allowable losses are available to be carried forward for relief against future RPGT liabilities. A loss arising from the disposal of RPC shares does not qualify as an allowable loss.

RPGT Rates

Rates of tax	Companies %	Individuals %
Disposal within 2 years	30	30
Disposal in 3rd year	20	20
Disposal in 4th year	15	15
Disposal in 5th year	5	5
Disposal in 6th and subsequent years	5	NIL

Disposal of assets by an individual who is not a citizen or permanent resident are subject to tax at the following rates:

Category of disposal	Rate %
Disposal within 5 years	30
Disposal in 6th and subsequent years	5

Relief from RPGT

Relief from RPGT may be available where assets are transferred:

.	for greater efficiency of operations in a group;

.	under a scheme of reorganisation, reconstruction or amalgamation between companies;

.	By a liquidator and the liquidation of the company was made under a scheme of reorganisation, reconstruction or amalgamation

Exemptions

Exemptions from RPGT are available under the following circumstances:

.	An amount of RM5,000 or 10% of the chargeable gain, whichever is greater, accruing to an individual;

.	Gain accruing to an individual who is a citizen or a permanent resident in respect of the disposal of one private residence;

.	Gain arising on disposal as a result of compulsory acquisition of property under law;

.	Gain arising from disposal of any chargeable asset from 1 June 2003 until 31 May 2004

Withholding Tax ( WT )

The Income Tax Act 1967 requires a person who is liable to make payment to a non-resident person/company, to deduct a tax known as withholding tax at the prescribed rate. The amount deducted must be remitted to the IRB within one month after payment has been paid or credited to the non-resident payee. WT is levied on the gross payable amount

Other than contract payments, withholding tax is a final tax. Non-residents would not be liable for any further taxes once withholding taxes have been complied with

The withholding tax rates are as follows:

Services	Rate %
Interest, Public entertainers	15
Royalty	10
Contract payments	10 + 3
Technical advice or services	10
Rental of moveable property	10

The penalty for late or non payment is 10% of total payment subject to the withholding tax deduction

WT is applicable only to the service portion of contract payments paid to a non-resident contractor. The cost of materials and plant and machinery must be excluded for the purposes of calculation of such WT

However, at times the Double Taxation Agreement(DTA) will affect the above withholding tax rates

Indirect Taxes

The responsibility to administer indirect taxation in Malaysia lies with the Royal Customs and Excise Department. The various types of indirect taxes are:

Custom duties

Custom duties are levied on goods imported in and exported from Malaysia. Custom duty refers to any import duty, surcharge or cess imposed by or under the Countervailing and Anti-Dumping Duties Act and includes any royalty payable in lieu of an export duty under any written law, or a contract, lease or agreement to which the Federal Government has consented.

Excise duty

Excise Duty is a form of taxation levied on locally manufactured goods of intoxicating liquors, tobacco products and by-products, petroleum and conversion of organic or non-organic materials into new products.

Sales tax

Sales Tax in Malaysia is a single stage ad valorem tax, imposed on taxable goods manufactured by any person or company in Malaysia. Sales tax is a consumer tax.

Service tax

Service Tax is charged and levied in respect of any taxable service provided by any taxable person or service except for exported taxable service which means service provided to a entity in a country other than Malaysia. The rate is 5%.

Investment Incentives

The Malaysian Government provides a host of tax incentives to encourage direct foreign investment in Malaysia. Applications for tax incentives should be made to the Malaysian Industrial Development Authority (MIDA), a division of the Ministry of International Trade and Industry, which controls the promotion and coordination of all industrial activities in Malaysia.

In Malaysia, investment incentives are designed to grant total or partial relief from taxes in various forms. The Income Tax Act, 1967 and the Promotion of Investments Act, 1986 provide a range of incentives for investments in the manufacturing, agricultural and tourism sectors.

A summary of the investment incentives provided are explained below:

Pioneer Status

Investment Tax Allowance (ITA)

Companies with Multimedia Super Corridor (MSC) status

Pioneer Status

Companies which intend to participate in 'promoted activities' or engage in the manufacture of 'promoted products' are eligible to apply for pioneer status.

100% exemption from income tax may be given to strategic projects of national importance. Such projects involve heavy capital investment and high technology, which can generate extensive linkages to Malaysian industries and transfer or develop technological processes to Malaysia.

A company engaged in a promoted activity or the manufacture of a promoted product in areas of new and emerging technologies (such as automation, bio-technology, electronics, building material sciences, information technology and renewable energy technology) qualifies for 100% exemption on statutory income for a period of five years.

Other companies granted pioneer status are given a tax holiday for five years. Only 70% of the statutory income from the pioneer business for each of the five years will be exempted from tax. The balance of the statutory income will be taxable. Further, no extension of the pioneer period will be granted to such companies.

Investment Tax Allowance (ITA)

Companies producing promoted products or engaged in promoted activities are eligible to apply for the investment tax allowance instead of a tax holiday. A company granted ITA is permitted to set off an amount equal to a percentage of the capital expenditure incurred on a factory and the provision of plant and machinery against its taxable profits. The amount that is set off against the taxable profits is available for distribution as tax exempt dividends.

ITA is given on qualifying capital expenditure incurred within five years from the date of approval. A company which applies for and is granted ITA on or after 1 November 1991 may be granted ITA of 60% of the qualifying expenditure incurred within a period of five years. The maximum amount that can be abated for each year is 70% of the statutory income (i.e. profits after deduction of capital allowances).

Any ITA that cannot be utilised against taxable income may be carried forward indefinitely for set-off against future taxable income derived from the same project. A company enjoying pioneer status is not eligible to apply for ITA.

Companies with Multimedia Super Corridor (MSC) status

The MSC is set to become the centre for state-of-the-art products and services whereby eight special areas will be promoted, including telemedicine, research and development and electronic government.

Companies with MSC status will enjoy special incentives, which are backed by the Malaysian Government's Bill of Guarantees, including the following:

.	Tax free holiday for a period of up to 10 years or Investment Tax Allowance of 100%;

.	No duties on the import of multimedia equipment;

.	Freedom of ownership of companies;

.	Unrestricted employment of knowledge workers from overseas;

.	Freedom of sourcing capital globally and freedom of borrowing funds;

2006 Important Income Tax Filing Datelines

Type of return	Form	Due date
Income tax return(YA 2006)
All taxpayers - notification of change of address	No prescribed form	Within 3 months of change
Individuals - submission of income tax return
Resident Non-resident	Form B or BE Form M	By 30 April/June 2006
Partnership	Form P	As above

Type of return	Form	Due date
Income tax return(YA 2006)
Company
-Income tax return	Form C	Within 7 months from the date following the close of its accounting period
-submission of Section 108 statement	Form R

Type of return	Form	Due date
Employer
- return of remuneration by an employer	Form E	31 March 2006
- monthly tax deduction by employer under Scheduler Tax Deduction Scheme (PCB)	CP39	Within 10 days after month end
- notification of employee's commencement of employment	Form CP22	Within one month of commencement of employment

Type of return	Form	Due date
Tax estimates & revisions
All companies (including companies with nil estimates ) are required to furnish the IRB with an estimate of tax payable
- new companies	CP204	Within 3 months from date of commencement of operations
- existing	CP204	Not later than 30 days before the beginning of the basis period
Submission of revised estimate of tax payable	CP204A	In the 6th & 9th month of the basis period

2006 Other Important Income Tax Filing Datelines

Type of return	Form	Due date
Withholding tax
Tax withheld on amounts paid or credited to non-residents - Royalty / Interest - Contract payments - Technical & management fees,rental of moveable properties	CP37 CP37A CP37D	Within one month of paying or crediting the non-resident, whichever is earlier.
Interest payments	CP37C	Bi-annual

Real property gains tax
Return of disposal of chargeable asset Return of acquisition of chargeable asset Notification of becoming a Real Property Company(RPC)	CKHT 1 CKHT 2 CKHT 19	Within 1 month of date of disposal of asset Within 1 month of date of acquisition of asset When company becomes a RPC

Type of return	Form	Due date
Sales tax - Submission of tax return	ST 3	Within 28 days after end of each taxable period
Service tax - Submission of tax return	CP 3	Within 28 days after end of each taxable period
SOCSO - Submission of remittance form	Form 8A	Within 30 days after month end
EPF - Schedule of monthly contributions together with cheque	Form 8A	Within 15 days after month end