1. Taxation in Malaysia
For Residents of Malaysia, income of any person including a company, accruing in or derived from Malaysia or received in Malaysia from outside Malaysia is subject to income tax.. This section is divided into salaried employees and business owners because both of these categories files different types of tax returns. Salaried employees will have to provide personal income tax returns while business owners have to file business income tax returns. This section also explains what type of businesses are applicable in which type of returns as there are various categories of businesses like sole proprietorship, private limited companies as well as partnerships, among many.
However, income received in Malaysia by any person other than a resident company carrying on business of banking, insurance or sea or air transport for a year of assessment derived from sources outside Malaysia is exempted from tax.
2. Sources of Income Liable to Tax
The below sources of income are liable to tax:
Chargeable income is arrived at after adjusting for allowable expenses incurred in the production of the income, capital allowances and incentives where applicable. Section 34 of the Income Tax Act 1967 allows specific provisions for bad or doubtful debts. However, no deduction for book depreciation is allowed although capital allowances are granted.
3. Company Tax
A company, whether resident or not, is assessable on income accrued in or derived from Malaysia. Income derived from sources outside Malaysia and remitted by a resident company is exempted from tax, except in the case of the banking and insurance business, and sea and air transport undertakings. A company is considered a resident in Malaysia if the control and management of its affairs are exercised in Malaysia.
Effective from the year assessment of 2007, the corporate tax rate is reduced to 27%. The tax rate is further reduced to 26% in 2008 and 25% in 2009. These rates are also applicable to the following entities:
A company carrying on petroleum upstream operations is subject to a Petroleum Income Tax of 38%.
With effect from the year of assessment 2007, deduction for payment of zakat made by a company, cooperative society or trust body shall not exceed 2.5% of its aggregate income in the relevant year of assessment.
Deductions are allowed for contributions made to:
The contributions in respect of ii, iii, and iv shall not exceed 7% of the aggregate income of the company in the relevant year of assessment. With effect from the year of assessment 2009 this limit shall be increased to 10%.
4. Personal Income Tax
All individuals are liable to tax on income accrued in, derived from or remitted to Malaysia. However, a non-resident individual will be taxed only on income earned in Malaysia. 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 who is in Malaysia for at least 182 days in a calendar year is regarded as a tax resident. Income remitted to Malaysia by a resident individual is exempted from tax.
4.1 Resident Individual
A resident individual is taxed on his chargeable income after deducting personal reliefs at a graduated rate from 0% to 27%. In year 2009 the maximum rate shall be reducefrom 27% to 26%.
The tax charged on a resident individual is reduced by way of the following rebates:
4.2 Non-Resident Individual
A non-resident individual is liable to tax at the rate of 27% without any personal relief. But, he can claim rebates in respect of fees paid to the government for the issuance of an employment work permit. In year 2009, the rate shall be reduced from 27% to 26%.
5. Withholding Tax
Non-resident individuals are subject to a final withholding tax of:
10% on special classes of income such as:
Withholding tax will not be applicable for income received in respect of the services (a) and (b) rendered or performed outside Malaysia.
Effective from 30 August 2008 until 31 December 2012, withholding tax exemption is given to non-residents experts on income received by providing technical training services in the following fields:
Effective from 1 January 2009, to reduce the cost of technical services provided by non-residents, reimbursements relating to hotel accommodation in Malaysia will not be included in the computation of gross technical fees for the purpose of withholding tax.
In respect of withholding tax not paid, a penalty of 10% is imposed on the total payment made to a non-resident. However, effective on 2 September 2006, the 10% penalty on withholding tax be imposed only on the amount of unpaid tax and not on the total payment made to a non-resident.
Claims should be submitted to the Inland Revenue Board (IRB).
6. Real Property Gain Tax
Capital gains are generally not subject to tax in Malaysia. Real property gains tax is charged on gains arising from the disposal of real property situated in Malaysia or of interest, options or other rights in or over such land as well as the disposal of shares in real property companies.
Malaysians and permanent residents are subject to a 30% tax if they sell the property within first years, with a reducing rate until 5% in the sixth year and thereafter. For non-citizens and non-permanent residents, on the other hand, pay a flat rate of 30% if they sell within five years, and thereafter at the rate of 5%.
However, with effect from 1st April 2007, all persons are exempted from the provisions of the Real Property Gains Tax Act 1967.
7. Sales Tax
Sales tax is a single stage tax imposed at the import or manufacturing levels. In Malaysia, manufacturers of taxable goods are required to be licensed under the Sales Tax Act 1972. Companies with a sales turnover of less than RM100,000 and companies with Licensed Manufacturing Warehouse(LMW) status are exempted from this licensing requirement. However, companies with a sales turnover of less than RM100,000 have to apply for a certificate of exemption from licensing.
Licensed manufacturers are taxed on their output while manufacturers that are not licensed or exempted from licensing need to pay tax on their inputs. To relieve small-scale manufacturers from paying sales tax upfront on their inputs, they can opt to be licensed under the Sales Tax Act 1972 in order to purchase tax-free inputs. With this, small-scale manufacturers can opt to pay sales tax only on their finished products.
Sales tax is generally at 10%. However, raw materials and machinery for use in the manufacture of taxable goods are eligible for exemption from the tax, while inputs for selected non-taxable products are also exempted.
Certain non-essential foodstuffs and building materials are taxed at 5%, general goods at 10%, liquor at 20% and cigarettes at 25%. Some primary commodities, basic foodstuffs, basic building materials, certain agricultural implements and heavy machinery for use in the construction industry are exempted. Certain tourism and sports goods, books, newspapers and reading materials are also exempted.
8. Service Tax
A service tax applies to certain prescribed goods and services in Malaysia including food, drinks and tobacco; provision of rooms for lodging and premises for meetings, conventions, and cultural and fashion shows; health services, and provision of accommodation and food by private hospitals.
The tax also applies to professional and consultancy services provided by accountants, advocates and solicitors, engineers, architect, surveyors (including valuers, assessors and real estate agents),advertising agencies, consultancy firms, management service provider, insurance companies, motor vehicle service and repair centres, telecommunication services companies, security and guard services agencies, recreational clubs, estate agents, parking space services operators and courier service firms.
Professional services provided by a company to companies within the same group will be exempted from the current service tax of 5%. Courier services provided from a point within Malaysia to a destination outside Malaysia will also be exempted from the service tax of 5%.
Commonly, the imposition of service tax is subject to a specific threshold based on an annual turnover ranging from RM150,000 to RM500,000 such as those;
