Tax Administration

1. INTRODUCTION

Malaysia tax system has changed from Official Assessment System to Self- Assessment System in two
stages as follows:

2. RESPONSIBILITIES OF TAXPAYERS

Under the self-assessment system, the taxpayers (i.e. company, trust body, co-operative society) are
expected to:

a) Estimate the tax payable for each Y/A

b) Pay the monthly tax installments based on the amount estimated.
c) Revise their tax payable when during the predetermined period.
d) Submit the tax computation in accordance with the Income Tax Act, 1967 and Promotion of I
I Investment Tax Act, 1986 and any Public Rulings.
e) Make the final payment of income tax, if necessary.

2.1 Responsibilities of Individuals

Section 82 of the income Tax Act (ITA), 1967 requires the followings:

An individual carrying on a business is required:

a) To keep and retain sufficient records for a period of 7 years.

b) To keep printed receipts with serial numbers for sale of goods exceeding RM 150,000 or for
provision of services exceeding RM 100,000 in value.

Individuals with employment or investment income are required to keep sufficient relevant documents
for a period of 7 years. [S82A (1)]

The reason to retain the documents as stated above is to facilitate field audit. The objective of field audit
is to ensure that the tax liability estimated and the amount paid has been properly accounted for.

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An individual is required to submit his / her tax return (Form BE) by 30 April (i.e. without business
income) of the following year or (Form B) by 30 June (i.e. with business income) of the following year.
The income tax return submitted will be deemed assessment of the Director General. In addition, an
individual is required to settle by the same day any balance of income tax payable. Railing which, the
Inland Revenue Board will impose the relevant late payment penalty on the tax due.

2.2 Responsibilities of Companies

i) Estimate the income tax payable (CP 204)

The estimation of tax payable is required to be submitted not later than 30 days before the beginning
of the basis period through Form CP204. The estimation of tax payable for a Y/A must not be less than
the estimation or revised estimation of income tax payable for the previous Y/A. However, with effect
from Y/A 2006, companies are allowed to furnish estimates of tax payable for a Y/A of not less than 85%
of the estimates or revised estimate tax payable for the immediately preceding Y/A.

ii) Make the monthly tax payment (CP 205 & CP 207)

Upon submission of the tax estimate CP 204 to the IRB, the IRB will issue the notice of installment
payment CP 205 together with the installment remittance slip CP 207 to the company to make the
installment payment. Companies must pay the tax estimated in equal monthly installment determined
according to the number of months in the basis period. The monthly installment must be paid by the
10th of every month commencing from the second month of the basis period. Failure of compliance, a
penalty of 10% on the amount unpaid will be imposed. [Section 107C of ITA 1967].

iii) Revise the tax estimate (CP 204A & CP 206)

Pursuant to Section 107C(7) of the Income Tax Act, 1967 companies are allowed to revise its estimate of
tax payable by using Form CO 204A in the 6 th month and / or 9th month of the basis period. The company
may proceed to make the revised installment payments without waiting for the IRB to issue the revised
installment scheme CP 206 to comply with.

In the event, if there is an underestimation of the original estimate or the revised estimate of tax
payable which exceeds the allowed ‘margin of error’ (30%) it be would subject to a penalty of 10%.

iv) Submit the income returns

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Companies are required to submit the income tax returns in the 7 th months from the financial year end
through Form C.

v) Final payment of income tax

The excess between the actual income tax payable and the total installments paid have to be settled in
the 7th month from the financial year end. Failing which would subject to a penalty of 10% plus 5%.
[S103(12)(a) of ITA 1967].

3. ASSESSMENT

The following are types of assessment the IRB can issue to taxpayers:

3.1 Original Assessment (Notice of Assessment)

An original assessment is issued to the taxpayers when the IRB accept the amount stated in the returns
submitted by the taxpayer. With effect from Y/A 2001 (companies) and Y/A 2004 (others than
companies), the original assessment will not b e issued to the taxpayer anymore.

The Director General will, under the following circumstances, exercise his judgment to estimate the
chargeable income of a taxpayer and make its own assessment accordingly when:

i) The taxpayer fails to submit any returns. In this case, the taxpayer will be liable to a penalty
for non-submission of returns; or
ii) The Director General refuses to accept the returns submitted by the taxpayer.

3.2 Additional Assessment

An additional assessment is issued to the taxpayers when:

i) Additional income is not included in the original assessment; or

ii) Omission of income discovered by the Director General after issuing the original assessment

3.3 Reduced Assessment

A reduced assessment is issued when there is an appeal made by the taxpayer against an original or
additional assessment which resulting in a reduction of the original or additional assessment.

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3.4 Advanced Assessment

An advanced assessment is issued for the following situations:

i) When a person is about to leave Malaysia

ii) When a person ceases to possess a source consisting of a business.
iii) When a person commences to receive employment income or Section 4 (e) income.
iv) When a person ceases to possess a source of income.
v) When a person is chargeable to tax in connection to income derived from the business of
transporting passengers or cargo by sea or air.
vi) When the basis period of a business does not coincide with the calendar year.

3.5 Protective Assessment

A protective assessment is issued by the IRB to avoid assessment becoming time barred. Based on the
Income Tax Act, 1967, there is a ‘time bar’ for the issuance of original or additional assessment. Both of
these assessments must be issued by within 6 years after the end of the relevant Y/A. However, when
the Director General is able to prove any fraud, willful default or negligence on the part of the taxpayer,
the IRB can issue the protective assessment at any time.

3.6 Composite Assessment

A composite assessment is issued to the taxpayers when the taxpayer:

i) Fails to furnish a return to the IRB;

ii) Fails to provide a ‘notice of chargeability’ to the IRB;
iii) Fails to give make a correct return through omission or understatement of income;
iv) Fails to provide correct information affecting his own chargeability.

A composite assessment is normally issued to a taxpayer after tax investigations or field audits. When a
composite assessment is issued, the amount of tax payable (tax undercharged and penalties due) is final
and conclusive. No further appeal will be allowed.

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4. TAX COLLECTION - OTHERS THAN COMPANIES

4.1 Schedular Tax Deduction System (STD / PCB) (Section 107)

STD is a system where tax is collected from the employees on the monthly basis through the employers
under section 107 of the Income Tax Act, 1967.

The employers are required to remit the amount of monthly tax deducted to the IRB by the 10 th of the
following month. A penalty of 10% of the unpaid amount shall be imposed on the employers if they fail
to comply with the deadlines.

When the monthly tax deduction is overpaid, employees may request the IRB for a tax refund. If the
employees do not request for the refund, the excess amount, will be used to offset the future tax
liabilities of the employees.

4.2 Scheduler Tax Deduction System (Section 107)

Notice of installment payment (CP 500)

Pursuant to S107B, non-corporate and individual taxpayers with business, partnership, rental or royalty
income, the IRB will issue a prescribed form/notice of installment payment (form CP 500). Form CP 500
will state the 6 bi-monthly installment amount and the respective due dates for each of the installment
payment. The installment amount in the current year is based on the amount of tax paid in the
immediate preceding YA.

Remittance Slip (CP 501)

Taxpayers under S107B are required to make 6 bi-monthly installments directed by the Director
General. For each of the bi-monthly installment payment made it must be accompanied by a remittance
slip (form CP501) to be paid to the IRB within 30 days from the due date. Failing to comply with the
payment deadline it will subject to a penalty of 10% on the unpaid installment amount without any
further notice.

Application for variation/revised installment payment (CP502)

Taxpayers can apply to vary/revise the installment payment after received the notice of installment
(CP500) not later than 30 June each year by completing form CP 502. However, after a variation of

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installments is made, if the actual tax liability exceeds the total installment payments by more than 30%,
the taxpayer will subject to a penalty of 10% on the excess. If no application has been made to vary the
installment amount, the taxpayer would not be subject to any penalty even though the actual tax
payable exceeds the total installment amount by more than 30%.

Variation of installment payment scheme (CP503)

If the application for variation is successful, the IRB will issue a revised notice of installment payment
(CP503) for taxpayer to continue to comply with the revised installment payment.

Rejection of application for variation of installment payment (CP504)

However, if the application for variation is not successful, the IRB will issue form CP 504 to notify the
taxpayer.

5. RECOVERY

5.1 Recovery from Persons Leaving Malaysia

When the Director General has any reasons to believe that any person is likely to leave Malaysia without
settling his tax liabilities, the Director General may issue a certificate containing particulars of tax and
debts due to any Commissioner of Police or Director of Immigration to request for that person to be
prevented from leaving Malaysia until such tax and debts are settled (Section 104).

5.2 Refusal of custom clearance

When tax payable by a person who carries on business of transporting passengers or cargo by air or sea
and his tax liabilities has remained unpaid for more than 3 months, the Director General may, with the
approval of the Minister, issue to the customs authority a certificate containing particulars of a person
and tax in default to allow the customs authority to refuse clearance from any port or airport in
Malaysia to any ship or aircraft owned or chartered by that person until the tax is paid (Section 105).

5.3 Recovery by Suit

A ‘statement of claim’ will be issued to taxpayer to demand the tax payable and its related penalties to
be paid within one month, failing which, the Director General may sue in the court for the debt due to
the Government (Section 106).

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6 APPEALS AGAINST AN ASSESSMENT

6.1 Company

When a taxpayer is dissatisfied with an assessment, the taxpayer can file an appeal by submitting an
appeal letter or Form Q within 30 days of the assessment being served on him, i.e. within 30 days of the
date of submission of the tax return. Special ground of appeal should be stated in the appeal letter.

In the event the IRB is unable to reach an agreement with the taxpayer, the case will be forwarded to
Special Commissioners. If the appeal was done by way of the letter, a Form Q must be submitted by the
taxpayers.

6.2 Individuals

When a taxpayer is dissatisfied with an assessment which deemed to be served on him, he should file an
appeal within 30 days from the date of submission of the tax return. Special details and the grounds of
appeal should be stated in the appeal to the IRB.

In the case where a notice of additional assessment is issued because of an audit inspection by the IRB,
the appeal should be submitted within 30 days after the service of the notice of the additional
assessment.

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