Mastering the tax system is vital for businesses aiming to succeed in Malaysia. Understanding the tax system ensures tax compliance and reveals opportunities for financial optimisation. This involves adhering to current tax laws while planning for future liabilities and benefits

This guide equips finance managers and small business owners with insights into Malaysia’s tax landscape, covering corporate income tax and recent legislative updates.

By examining these areas, readers can make informed decisions to enhance their financial health and growth. A glossary of essential tax terms is included at the end.

Overview of Malaysia’s Tax System

Malaysia operates a comprehensive set of tax regulations to support its economic framework while ensuring fair revenue collection. The tax systems include various types of taxes, such as income tax, corporate tax, sales and service tax (SST), import duties, etc., each affecting individuals and businesses differently.

These taxes are administered by the Inland Revenue Board of Malaysia (IRBM), also known as Lembaga Hasil Dalam Negeri (LHDN), which ensures compliance and enforces tax laws to maintain the country’s fiscal health.

Importance of Understanding Taxation for Businesses

For businesses, a thorough understanding of the tax systems is pivotal. Not only does it help in fulfilling legal obligations, but it also enables strategic planning, cost savings, and efficient resource allocation.

Proper tax planning can yield significant financial benefits, including lower tax liabilities and optimised cash flow. Moreover, being well-versed in tax regulations helps businesses avoid penalties and interest charges, ensuring smooth operations and fostering long-term growth.

Types of Taxes in Malaysia

Corporate Income Tax

Corporate income tax in Malaysia is imposed on the taxable income of domestic and foreign companies doing business within the country. The standard corporate tax rate is set at 24%, applicable to most companies.

However, small and medium enterprises (SMEs) may benefit from lower rates on the first RM600,000 of chargeable income, making it more manageable for smaller businesses to thrive.

This tiered tax structure aims to support the growth and sustainability of SMEs, which are vital to the Malaysian economy.

Additionally, companies must comply with various tax regulations and reporting standards to ensure proper tax assessment and payment.

Sales and Service Tax (SST)

Malaysia transitioned from GST to SST in 2018 as part of its tax reform initiatives. SST comprises two parts: a sales tax ranging from 5% to 10% and a service tax of 8%.

Sales Tax applies to taxable goods manufactured in or imported into Malaysia, while Service Tax is imposed on specific services provided by businesses within the country.

Businesses must determine the applicability of these taxes based on their activities and revenue. Filing taxes accurately and punctually is crucial to remain compliant with regulations.

Withholding Tax

Withholding tax is a crucial aspect of Malaysia’s tax system. An amount is deducted by the payer from the income of a non-resident payee, which is then remitted to the Inland Revenue Board of Malaysia. The rates of withholding tax vary depending on the nature of the payment.

The ‘Payer’ is an individual or entity operating a business in Malaysia, obligated to withhold tax on payments for services rendered, technical advice, rental, or other payments for the use of movable property made to a non-resident payee.

The ‘Payee’ is a non-resident individual or entity receiving these specified payments within Malaysia. It is essential to determine the applicability of withholding tax and comply with the relevant reporting requirements.

Personal Income Tax

Although primarily affecting individuals, personal income tax can impact businesses through employee remuneration structures. The progressive rates range from 0% to 30% based on various income brackets.

This means that higher income levels are taxed at higher rates, which can influence how businesses approach salary and bonus structures to optimise tax efficiency.

Additionally, understanding these tax implications is crucial for financial planning for individuals and the companies they work for.

Capital Gain Tax

Starting on 1 January 2024, Malaysia imposed Capital Gains Tax (CGT) on profits from the disposal of capital assets, following the amended provisions of the Income Tax Act 1967 [Act 53] through the Finance Act (No. 2) 2023 [Act 851].

This new CGT policy includes gains from the disposal of foreign capital assets received in Malaysia by residents, aligning with Malaysia’s commitment to international tax best practices.

Until 1 January 2024, these gains from foreign capital assets received in Malaysia remain untaxed.

Understanding these nuances can help businesses make informed investment decisions and minimise potential tax liabilities in the long run.

Double Tax Agreements (DTAs) in Malaysia

Malaysia has signed DTAs with numerous countries to avoid double taxation. These agreements provide relief for income that may otherwise be subject to tax in both the country of residence and source.

DTAs also aim to prevent tax evasion, promote bilateral trade relations, and stimulate foreign investments in Malaysia.

Businesses operating internationally or having transactions with foreign entities should carefully review the applicable DTAs to optimise their tax liabilities and avoid potential disputes.

Recent Updates

E-invoicing

Effective August 1, 2024, e-Invoicing will become mandatory for taxpayers with an annual turnover exceeding RM100 million. The phased implementation will be completed for all companies by July 1, 2025.

An e-Invoice is a digital transaction record between a supplier and a buyer, replacing traditional paper or electronic documents such as invoices, credit notes, and debit notes.

Related Read: e-Invoicing in Malaysia

Taxation Authorities and Regulations

The Inland Revenue Board of Malaysia (IRBM)

The IRBM is Malaysia’s main tax authority overseeing law enforcement and compliance. It offers guidance, processes tax returns, and conducts audits to prevent tax evasion, aiming for a more efficient and transparent tax system.

Relevant Tax Legislation and Regulations

Key legislation includes the Income Tax Act 1967, which outlines income tax’s imposition, assessment, and collection.

The Real Property Gains Tax Act 1976 governs the taxation of gains derived from the disposal of real property. Additional regulations cover corporate tax, VAT, and stamp duty.

Staying abreast of regulatory changes is crucial for maintaining compliance, as these laws are frequently updated to reflect economic conditions and policy adjustments.

Compliance Requirements and Filing Deadlines

Businesses must adhere to strict compliance requirements, including the timely filing of tax returns, accurate record-keeping, and staying updated with ever-changing regulations.

Failure to meet these obligations can result in severe penalties, including hefty fines, potential audits, and damage to the business’s reputation. Ensuring compliance avoids legal repercussions and contributes to the company’s financial health and stability.

Tax Residency and Nexus

Determining Tax Obligations for Resident and Non-Resident Entities

Tax residency status in Malaysia is determined by the number of days an entity operates within the country. Resident companies with management and control exercised in Malaysia are taxed on their worldwide income.

Conversely, non-resident entities are only liable to pay taxes on income derived from sources within Malaysia. This distinction is crucial for international businesses as it affects their overall tax strategy.

Resident Companies

Non-Resident Companies

Nexus

Nexus signifies the connection or link between a business and a tax jurisdiction that justifies the imposition of tax obligations by that jurisdiction. It determines whether a business has a substantial presence in a region, thereby subjecting it to local tax laws. Nexus can be established through various means, including physical presence, economic activity, or sales.

Types of Nexus:

Physical Nexus: Created through a physical presence, such as offices, employees, or warehouses within the jurisdiction.

Economic Nexus: Formed through economic activities, such as reaching sales or revenue thresholds, even without a physical presence.

Affiliate Nexus: Established through relationships with affiliates or related entities within the jurisdiction.

Click-Through Nexus: Arises when a business generates sales through referrals from affiliates or partners in the jurisdiction.

Permanent Establishment (PE) Rules and International Tax Treaties

Permanent Establishment (PE) rules are used to determine the tax obligations of foreign entities under double taxation agreements. These rules specify the conditions under which a foreign enterprise’s activities in Malaysia create a taxable presence.

Understanding these treaties is vital as they help minimise tax liabilities by providing mechanisms to avoid double taxation. Furthermore, these agreements often include provisions for reduced tax rates on dividends, interest, and royalties, which can benefit international businesses.

Familiarity with these treaties and PE rules can lead to more efficient tax planning and compliance.

Taxable Income and Deductions

Understanding Taxable Income for Businesses

Taxable income is calculated after deducting allowable expenses from gross revenue. Accurate income reporting is essential for fair tax liability assessment.

Allowable Deductions and Exemptions

Businesses can claim deductions on wholly and exclusively incurred expenses for generating income. Standard deductions include operational costs, wages, and certain capital expenditures.

Depreciation and Capital Allowances

Depreciation of assets and capital allowances play a significant role in reducing taxable income. Malaysia offers initial and annual allowances for qualifying expenditures.

Tax Planning Strategies

Legal Tax Optimisation Techniques

Engaging in legal tax planning is crucial for minimising liabilities and maximising savings. Standard techniques include income splitting, which involves distributing income among family members to utilise lower tax brackets.

Common strategies include utilising various tax credits such as education or child care credits and making strategic investment allocations to take advantage of tax-advantaged accounts and deductions.

Timing of Income Recognition and Expense Deductions

Proper timing of income recognition and expense deductions can lead to substantial tax savings for individuals and businesses. This involves understanding the nuances of tax periods and identifying deferment opportunities.

For example, deferring income to the next tax year or accelerating expenses into the current year can optimise tax outcomes. Detailed knowledge of tax laws and regulations is essential for effective planning.

Investment Incentives and Tax Relief Schemes

Malaysia offers a range of incentives designed to stimulate investment and promote economic growth in specific sectors. Among these, Pioneer Status and Investment Tax Allowance are notable.

Pioneer Status provides tax exemptions for companies in designated industries for a stipulated period, reducing their taxable income. Investment Tax Allowance offers deductions on qualifying capital expenditures, encouraging businesses to invest in new equipment or technology.

Understanding and leveraging these incentives can significantly enhance a company’s financial health and competitive edge.

Compliance and Reporting

Record-Keeping Requirements

Maintaining accurate and detailed records is mandatory. Records should support all entries in the tax returns and be kept for a minimum of seven years.

Tax Returns and Forms

Filing tax returns involves submitting specific forms based on business structure and types of income. Ensuring accuracy and completeness is critical.

Penalties for Non-Compliance

Non-compliance can result in penalties, including fines and imprisonment. Understanding the consequences underscores the importance of adhering to tax laws.

Recent Developments and Reforms

Updates in Tax Legislation and Policies

Stay informed about recent amendments to tax laws and policies. Changes can impact tax rates, deductions, and filing requirements.

Impact of Digitalisation on Tax Administration

Digitalisation is transforming tax administration, making processes more efficient. E-filing and digital submissions are becoming the norm, streamlining compliance efforts.

Conclusion

Summarising the essential aspects of Malaysia’s tax system, this guide emphasises the significance of understanding and adhering to tax compliance in Malaysia for business success.

Importance of Proactive Tax Planning and Compliance Efforts

Proactive tax planning and compliance ensure financial health and sustainability. Businesses are encouraged to stay informed and adaptable continuously.

Resources for Further Assistance and Guidance

If you need more help, please consider consulting with tax professionals or leveraging online resources. Proactive support can facilitate seamless navigation of Malaysia’s tax system.

Businesses can enhance operational efficiency, achieve compliance, and unlock new growth opportunities by understanding and strategically engaging with Malaysia’s tax framework.

For more insights, expert advice, and free resources, consider signing up with InCorp Malaysia today!

Glossary

• Income Tax: Tax levied on the income of individuals, companies, and other legal entities in Malaysia.
• Resident: A person who resides in Malaysia for at least 182 days in a calendar year, or 90 days for three consecutive years.
• Non-Resident: A person who does not meet the criteria to be considered a resident for tax purposes in Malaysia.
• Tax Resident Status: Determination of whether an individual or entity is subject to Malaysian tax laws as a resident or non-resident.
• Taxable Income: The total income earned by an individual or entity, subject to taxation after deductions, exemptions, and reliefs.
• Tax Rate: The percentage at which income is taxed based on the income tax bracket.
• Tax Bracket: Different income ranges with corresponding tax rates applied to each range.
• Tax Relief: Deductions allowed by the Malaysian government to reduce taxable income, such as for medical expenses, education fees, and lifestyle expenses.
• Tax Exemption: Certain incomes or entities may be exempt from taxation under specific conditions, such as certain types of investment income or charitable organisations.
• Withholding Tax: Tax deducted at the source from payments made to non-residents, such as interest, royalties, and dividends.
• Sales and Service Tax (SST): A consumption tax levied on selling goods and certain services in Malaysia.
• Tax Audit: Examination of taxpayer records and financial information by the Inland Revenue Board of Malaysia (IRBM) to ensure compliance with tax laws.
• Tax Evasion: Illegal practice of deliberately not paying taxes owed by underreporting income, overstating deductions, or other fraudulent means.
• Tax Avoidance: Legitimate use of tax planning strategies to minimise tax liability within the boundaries of tax laws.
• Tax Assessment: Evaluation of taxpayer records and declarations by the tax authorities to determine the amount of tax owed.
• Tax Refund: Return of excess tax paid by a taxpayer, often resulting from overpayment or tax credits.