Taxation In Malaysia

All income of companies and individuals accrued in, derived from or remitted to Malaysia, are liable to tax. However, income derived from outside Malaysia and remitted to 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 tax.

Effective from the year of assessment 2004, income remitted to Malaysia by a resident individual is exempted from tax.

To modernise and streamline the tax administration system, the assessment of income tax was changed to a current year basis of assessment from the year 2000. In 2001, the Self-Assessment System replaced the Official Assessment System for companies. This Self-Assessment System will be implemented for businesses, partnerships, cooperatives and salaried groups in 2004.

Apart from income tax, there are other direct taxes such as stamp duty and real property gains tax, and indirect taxes such as sales tax, service tax, excise duty, import duty and export duty.

Sources Of Income Liable To Tax

The following sources of income are liable to tax:

• gains and profits from a trade, profession and business

• gains or profits from an employment (salaries, remunerations, etc.)

• dividends, interests or discounts

• rents, royalties or premiums

• pensions, annuities or other periodic payments

• other gains or profits of an income nature

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. Unabsorbed business losses may be carried forward indefinitely to offset against business income, except for companies with Pioneer Status (other than contract R&D companies).

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.

A tax rate of 28% applies to both resident and non-resident companies. A company carrying on petroleum upstream operations is subject to a Petroleum Income Tax of 38%.

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 residing in Malaysia for more than 182 days in a year has resident status.

Effective from the year of assessment 2004, income remitted to Malaysia by a resident individual is exempted from tax.

Resident Individual

A resident individual is taxed on his chargeable income at a graduated rate from 0% to 28% after deducting tax reliefs.

Personal Reliefs

The chargeable income of a resident individual is arrived at after making several deductions. These include the personal reliefs for self (a further RM5,000 for that individual if he 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.

An amount limited to a maximum of RM5,000 on fees expended by the individual for any course of study up to tertiary level for the purpose of acquiring scientific, technical, vocational, industrial, and information and communications technology (ICT) skills at the local institutions of higher learning in Malaysia recognized by the Government is also allowed as a deduction..

Tax rebate

The tax liability of a resident individual is reduced by way of the following rebates:

(i) An individual with a chargeable income not exceeding RM35,000 enjoys a rebate of RM350. Where the wife is not working or the wife's income is jointly assessed, she also enjoys a further rebate of RM350. Similarly, a wife who is assessed separately will also enjoy a RM350 rebate, provided her chargeable income does not exceed RM35,000

(ii) The amount paid in respect of any zakat, fitrah or other obligatory Islamic religious dues

(iii) RM400 towards the purchase of a personal computer once every five years per family

(iv) Any fee paid to the government for the issue of an employment pass, visit pass or work permit

Non-Resident Individual

A non-resident individual is liable to tax at the rate of 28% without any personal relief. However, he can claim rebates in respect of levy paid to the government for the issuance of an employment work permit.

Witholding Tax

Non-resident individuals are subject to a final withholding tax of:

(i). 10% on special classes of income such as the use of moveable property; technical advice, assistance or services; installation services on the supply of plant, machinery, etc.; and personal services associated with the use of intangible property. Effective from 21 September 2002, payments to non-residents for services rendered abroad will not be liable to the withholding tax of 10%.

(ii) 10% on royalties

(iii) 15% on interest

(iv) 15% on the services of a public entertainer

An employee on a short-term visit to Malaysia enjoys tax exemption in respect of his income from an employment exercised in Malaysia when his presence does not exceed 60 days in a calendar year. However, the income of a non-resident individual who performs independent services such as consultancy services is not exempted from tax.

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%, cigarettes at 25% and liquor at 20%. Certain 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.

Import Duty

In Malaysia, import duty is mostly imposed ad valorem although some specific duties are imposed on a number of items. Nevertheless, over the last few years, Malaysia has abolished import duties on a wide range of raw materials, components and machinery.

Furthermore, Malaysia is committed to the ASEAN Common Effective Preferential Tariffs (CEPT) programme under which import duties imposed on most goods from ASEAN countries with a minimum 40% ASEAN content will be reduced to between 0% and 5% by the year 2003.

Excise Duty

Excise duties are levied on selected products manufactured in Malaysia, namely cigarettes, liquors, playing cards, mahjong tiles and motor vehicles.

To encourage the export of locally manufactured goods, companies with Licensed Manufacturing Warehouse (LMW) status that manufacture goods subject to excise duty are exempted from being licensed under the Excise Duty Act 1976.

Source: The Malaysian Industrial Development Authority