By the book: A look at the country’s tax code

The Inland Revenue Board (IRB) collected a record RM109.7bn ($35.4bn) in direct taxes in 2011. Under its Corporate Plan 2012-15, launched in July 2012, the IRB is targeting an annual tax revenue growth of 15%. The IRB is working towards identifying newer opportunities in expanding the tax base and areas of tax revenue which were not fully explored previously. With the focus on strengthening its administration, the IRB will also be fine-tuning existing procedures and practices.

SELF-ASSESSMENT: The onus is on the taxpayer in computing tax liability under the self-assessment system, which is based on the concept of “file and pay”. Tax returns filed are deemed assessed and the taxpayer is responsible for remitting the necessary payments to the tax authority within the stipulated timeline. A detailed review of the returns is only conducted by the tax authority if the taxpayer is selected for auditing.

Generally, a company’s accounting period determines the basis period for assessment. For non-corporate taxpayers, income is assessed by calendar year.

CORPORATE TAX: Taxes are levied on chargeable income, which is arrived at after allowable deductions, capital allowances and tax losses. Tax exemptions are available for certain types of income, including that arising from tax incentives. Special tax rules are applicable to certain specialised industries and activities.

Reporting requirements: Under the self-assessment system, every company must submit an estimate of the tax payable for a year of assessment (YA) in a prescribed form to the tax authority within 30 days prior to the commencement of the basis period. A new business is required to submit the form within three months from the date it begins operations.

The estimated tax payable shall not be less than 85% of that in the immediately preceding YA. A company qualified as a small and medium-sized enterprise (SME) is exempted from submitting the estimate for two years from the YA in which it commences operations.

The estimated tax is payable in 12 equal monthly instalments beginning in the second month of the basis period. Revisions to estimated tax payable are allowed in the sixth and ninth month of the basis period.

Corporate tax returns must be lodged ( conventionally or through electronic means) with the tax authority seven months after the close of the accounting year. Any balance of tax payable after accounting for the instalments becomes due and payable to the tax authority on the lodgement due date.

Residence status: A company is a tax resident if the management and control of its business or affairs are exercised in Malaysia.

SMES: An SME is a resident company with a paid-up ordinary share capital of RM2.5m ($806,500) or less at the beginning of the basis period for the relevant YA, as long as the said company does not control or is not controlled directly or indirectly by another company, or is not under common control directly or indirectly with a company that has a paid-up ordinary share capital exceeding RM2.5m ($806,500).

Capital allowances: Capital allowances are accorded to qualifying capital expenditures incurred by a company. The value of a qualifying asset is recoverable in a period of two to eight years.

Expenditure incurred on assets valued at less than RM1000 ($323), “small value assets”, qualifies for capital allowance at the rate of 100%, subject to a maximum qualifying expenditure of RM10,000 ($3,230) for each YA. SMEs are not subject to the limitation.

Accelerated capital allowances to be fully claimed within one to two years are given to certain types of qualifying capital expenditure incurred.

Capital allowances are only available to set off against the same source of taxable income that the capital allowances relate to. Any unabsorbed capital allowances can be carried forward to future YAs until such allowances are fully utilised.

Tax losses: A current year loss which arises in a basis period can be set off against other sources of income, such as interest, rental and royalty income. Any unabsorbed losses may be carried forward indefinitely until they are fully used. Group relief is available for companies other than SMEs within the same group subject to certain qualifying criteria. A surrendering company may surrender up to 70% of its adjusted loss in a basis period to the claimant company.

Tax rates: The current corporate tax rate is 25%. A preferential tax rate is accorded to SMEs whereby the first chargeable income of RM500,000 ($161,300) is taxed at 20% and the balance at the normal 25% rate. The petroleum income tax rate is fixed at 38%.

Single-tier tax system: The single-tier dividend system replaces the tax imputation system on dividend payments to shareholders with effect from YA 2008.

Prior to YA 2008, distribution of dividends is subject to the available credits in the dividend franking account. Dividends received are taxable in the hands of the recipients and tax credits on such dividends are available to be set off against the recipients’ tax liability.

Under the single-tier tax system, the income tax payable by a company is regarded as the final tax. Any distributions of dividends to the shareholders are exempted from tax in the hands of the recipients. Consequently, deductions are not allowed on expenses incurred by the recipients in generating dividend income. A company may elect for an irrevocable option to switch to the single-tier tax system during the transitional period that ends on December 31, 2013, when the tax imputation system is discontinued.

INDIVIDUAL TAX: Individuals are taxed on their income received for that calendar year, which generally includes salary, bonuses, gratuity, perquisites, benefits-in-kind, living value of accommodation and compensation for loss of employment. The resident status of an individual determines his applicable tax rates and whether or not he is entitled to personal relief. Business income of individuals is taxed in the same manner as that of corporations, where allowable deductions, capital allowances and tax losses are considered.

Reporting requirements: Individuals are not obliged to submit estimates of tax payable. The tax authority may issue an instalment scheme setting out the estimated tax payable to an individual who derives income from sources other than employment income. This scheme is based on the individual’s tax position in the preceding year. The tax is payable in six bi-monthly instalments that commence in the month of March. The taxpayer may apply to the tax authority for a variation to the instalment scheme no later than June 30.

For income arising from employment, tax is deducted from the monthly remuneration of the employee under the scheduler tax deduction scheme.

Individual tax returns are due for filing ( conventionally or through electronic means) with the tax authority by April 30 for cases without business income and for cases with business income by June 30, of the following year. Any balance of tax payable after taking into account the instalment payments and scheduler tax deductions becomes due and payable to the tax authority on the respective filing due dates.

Residence status: The taxable residency of an individual is based on the duration of his or her physical presence in Malaysia under the following circumstances:

• He or she is physically present in Malaysia during that calendar year, amounting to 182 days or more; or

• He or she is in Malaysia for a period of less than 182 days, but that period is linked by or to another period of 182 or more consecutive days in the calendar year preceding or succeeding that year; or

• He or she is in Malaysia for 90 days or more in that calendar year and in any three out of four immediately preceding calendar years he was either resident or in Malaysia for 90 days or more; or

• With reference to a particular calendar year, he or she is resident in the immediately following calendar year and was resident for the three preceding years. Individuals that derive income from Malaysia are required to file individual tax returns to the tax authority irrespective of tax residence status. The exception to this is on income of non-residents, for whom tax has been deducted at the source.

Common exemptions: Interest income received by individuals from money deposited in all approved institutions is fully exempted from tax. For employment tax, exemptions are given on certain allowances, perquisites and benefits-in-kind, while compensation for loss of employment received by an employee is exempted up to RM10,000 ($3,230) per completed year of service.

Personal relief and rebates: Various types of personal relief are available to individual tax residents. These include personal, spouse, children, life insurance, medical and educational insurance, as well as contributions to the Employees Provident Fund and private retirement scheme. The amount of each relief varies according to circumstances and depends on certain criteria.

A tax rebate of RM400 ($130) is available to individuals with a chargeable income less than RM35,000 ($11,300) for each YA. Unabsorbed relief or unused rebates are not available for subsequent YAs.

Tax rates: Individual residents are taxed at scaled rates ranging from 0% to 26% depending on chargeable income level. Non-resident individuals are taxed at a flat rate of 26%. An individual who is a knowledge worker residing in Iskandar Malaysia and is employed with a person carrying on a qualified activity is taxed at 15% of his chargeable employment income. The employment income of an approved individual under the Returning Expert Programme is taxed at a flat rate of 15% for a period of five years.

TAX AUDITS: Under the self-assessment system, tax audits are the tax authority’s key enforcement tool for ensuring tax returns are true, correct and comply with the tax laws and rulings. The audits of income tax are carried out at recurring and regular intervals. Special audits on the areas of withholding tax, tax incentives, transfer pricing and employees’ tax deductions are conducted from time to time. The selection of audits is based on various criteria, such as business performance, financial ratios, type of industry, past compliance records and third-party information. A framework for tax audit was issued by the tax authority to maintain and enhance public confidence in the tax administration. This framework outlines both the rights and the responsibilities of audit officers, tax payers and tax agents during an audit. The tax audit framework also sets out penalties for offences/errors noted in an audit.

WITHHOLDING TAX: Withholding tax is imposed on non-residents who have business dealings in and derive income from Malaysia. Generally, withholding tax at specified rates is levied on interest income (15%), royalty income (10%), special classes of income (inclusive of both technical and non-technical services and rental of moveable properties, 10%), contract payment (10% + 3%), income of public entertainer (15%) and other types of income, such as commissions, guarantee fees and introducer fees (10%). Preferential rates may be levied in accordance with the double tax agreements between Malaysia and its respective trading partners. No withholding tax is imposed on dividends in Malaysia. Withholding tax is due to the tax authority within one month of paying or crediting non-residents.

REAL PROPERTY GAINS TAX (RPGT): RPGT is a capital gains tax imposed on gains from the disposal of real property (RP) and shares in a real property company (RPC). RPGT is imposed on the gains arising from disposal of RP or RPC shares at the rate of 15% (holding period of less than two years) and 10% (holding period of between two and five years) respectively. Generally, the acquirer of RP or RPC shares is required to withhold 2% of the purchase consideration and remit the same to the tax authority within 60 days from the transaction date pending RPGT assessment.

TAX INCENTIVES: Malaysia offers tax incentives with the objective of promoting investments in selected industry sectors. The trend for such incentives, which were previously directed to manufacturing and agriculture, has shifted in recent years to the services sector, which now plays a bigger role in the economy, and the green technology sector, which is attracting a fair share of attention internationally.

These incentives appear in various forms and include, among others, partial or full tax exemption on income, additional allowances on incurred capital expenditures, additional deductions on certain expenses and preferential tax treatment for specific promoted sectors.

Some of the major tax incentives available in Malaysia are detailed below: Pioneer Status (PS): PS is available to companies engaged in promoted activities or the production of promoted products. Tax exemption of 70% (or up to 100%, if certain criteria are fulfilled) of a company’s statutory income for a period of five years is granted to PS companies. (It may be extended for five more years.) The list of promoted products and activities is reviewed and updated from time to time, keeping it in line with the government’s current investment policies.

The unabsorbed capital allowances and unutilised tax losses that arise during the pioneer period of a PS company may be carried forward to the post-pioneer period for an indefinite period of time.

Investment Tax Allowance (ITA): ITA, which is also available to companies engaged in promoted activities or producing promoted products, comes in the form of an allowance (in addition to capital allowance) calculated at the rate of 60% (or up to 100%, if certain criteria are fulfilled) on qualifying capital expenditures incurred during a five-year tax relief period. It is used to set off against 70% (or 100% under certain circumstances) of a company’s statutory income. The initial tax relief period of five years may be extended for another five years if certain conditions are met. ITA and PS are mutually exclusive. Any unutilised ITA claimed during the ITA period may be carried forward for an indefinite period to be set off against the future business income that it relates to. The ITA incentive is preferred over the PS incentive for projects which are capital intensive and that have a lengthy gestation period.

Reinvestment Allowance (RA): RA is an option that is available to companies that carry out manufacturing activity or agricultural projects, and which reinvest their capital to embark on a project for expansion, modernisation, automation or diversification. This incentive is available for 15 consecutive years from the initial year that the claim is made by a company.

RA is claimed at the rate of 60% on qualifying capital expenditure, or up to 100% if certain specific criteria are fulfilled, and is to be set off against 70% of the company’s statutory income (or up to 100% under certain circumstances). Any unused RA may also be carried forward indefinitely. A company that enjoys the PS or ITA incentive is not allowed to claim RA during the PS or ITA period. However, unlike PS and ITA, the RA incentive does not require any prior authority approvals.

MULTIMEDIA SUPER CORRIDOR (MSC): MSC status is granted to companies that set up their operations in the MSC-designated cyber-cities or cyber-centres.

These companies must meet certain criteria:

• The company must be a provider or heavy user of multimedia products and services; and

• The company must employ a substantial number of knowledge workers; and

• The company must provide either technology transfer and/or knowledge to Malaysia, contribute to the development of MSC, or support Malaysia’s knowledge-economy initiatives; and

• The company cannot be engaged in non-qualifying activities such as manufacturing, trading and general consultancy. Financial incentives for MSC-status companies include 100% income tax exemption on statutory income for five years, extendable for another five years, or 100% ITA on qualifying capital expenditures for five years. Nonresident companies are exempt from income tax on income from MSC-status companies with respect to payments for technical advice or services, licensing fees in relation to technology development and interest on loans for technology development. MSC-status companies also enjoy non-financial incentives, such as unrestricted employment of foreign knowledge workers, freedom of ownership, and exemption from exchange controls and foreign currency regulations.

REGIONAL DEVELOPMENT CORRIDORS: The five regional development corridors launched by the government to facilitate economic development in the coming decades are Iskandar Malaysia, the Northern Corridor Economic Region, the East Coast Economic Region in Peninsular Malaysia, the Sabah Development Corridor and the Sarawak Corridor of Renewable Energy in East Malaysia. Incentive and support packages have been released and the relevant authorities have been established with the purpose of acting as the facilitators, providing directions and guidance. Some of the incentives available in these corridors include income tax exemptions, grants, freedom to source capital globally, unrestricted employment of foreign employees and the relaxation of certain government requirements.

INDIRECT TAXES: Indirect taxes in Malaysia generally cover service tax, sales tax, import and export duties as well as excise duties.

Service tax: Service tax at the rate of 6% is a single-stage consumption tax levied on consumers enjoying specified services rendered by specified group of persons. Service tax is applicable throughout Malaysia except in designated free zones.

Generally the scope of service tax covers the services provided under the hospitality, medical, insurance, professional, telecommunication services, paid television broadcasting services and consultancy sectors.

Service tax is due when payment is received for the taxable service rendered. Any service tax that falls due during a taxable period of two calendar months is payable to the Customs authority within 28 days after the end of the taxable period.

Sales tax: Sales tax, at rates ranging broadly from 5% to 10%, is an ad-valorem tax imposed on certain taxable goods manufactured locally or imported. Sales tax is applicable if the taxable goods are consumed in Malaysia. It does not apply to exported goods. Free zones and licensed manufacturing warehouses are deemed to be places outside Malaysia and do not fall within the ambit of the tax.

Being a consumption tax, the onus is on the local manufacturers of taxable goods to levy, charge and collect sales tax from their customers. For imported goods, sales tax is collected from the importer upon the release of taxable goods from Customs control. Where sales tax is paid with respect to goods that are then re-exported, a return of the sales tax is allowed. As in the case of service tax, the payment of sales tax to Customs authority is within 28 days from expiration of the defined taxable period of two calendar months.

Goods and services tax (GST): The GST Bill has been tabled since December 2009 for its first reading in the Malaysian parliament. The second reading has been deferred. GST will replace the existing sales and service taxes and the proposed standard rate is 4%. It is anticipated that the proposed exempted supplies will include public transportation, highway tolls, residential properties, land for agricultural and general use, as well as private health and educational services.

Import and export duties: The ad-valorem rates of import duties range from 0% to 60% on imported dutiable goods. Export duties for crude petroleum are charged at a flat rate of 10%, while those of the other commodities are based on cost-plus concept. The country’s main commodities are subject to export duties.

Excise duties: The rates of excise duties vary for each excisable product. Goods, both those locally manufactured and imported, that are subject to excise duties include motor vehicles, liquors and cigarettes. Excise duties are not applicable on dutiable goods that are to be exported. As a general rule, duties are payable at the time the goods leave the place of manufacture or any other place under excise control.

Licensed manufacturing warehouse (LMW): Manufacturers that export 80% or more of finished products can apply for LMW-status. Raw materials, components and machinery used in the manufacturing process by a LMW-status company are exempted from import duties and sales tax subject to conditions imposed.

Free zones: A free zone is deemed to be a place that is not subject to Customs jurisdiction. Generally, goods and services can be brought into or provided in many designated free zones without payment of import and excise duties, sales tax and service tax. By virtue of special provisions, Labuan, Langkawi and Tioman are excluded from the scope of such duties and taxes.

STAMP DUTY: A stamp duty is chargeable on certain instruments and documents. The rates of the duty charged vary according to the nature and transaction value of the instruments or documents. Stamp duty remissions and exemptions are available for certain instruments and documents for the purposes of facilitating growth in certain economic sectors of the country, such as property and Islamic financial services. Common instruments/documents upon which a stamp duty is levied are conveyance, assignment or transfer of properties (at a rate of 1% on the first RM100,000, or $96,780, 2% on the next RM400,000, or $129,00, and 3% above RM500,000, or $161,300), stock, shares or marketable securities (at 0.3% of the value), and loan and service agreements (at a rate of 0.1% of value).

OBG would like to thank Russell Bedford LC & Company for their contribution to THE REPORT Malaysia 2012