7 Taxation

7.1 How are companies in the IDR taxed?

Companies, both resident and non-resident, are taxed on a territorial basis, i.e. on
income accruing in and derived from Malaysia. Foreign sourced income received
in Malaysia is tax exempt. However, resident companies engaged in the business
of banking, insurance, shipping and air transport are taxable on their world-wide
income.

Companies enjoying tax incentives will be exempt on a percentage or all of their

income depending on the incentive granted to the company

7.2 How is tax residence determined?

A company is tax resident in Malaysia where the control and management of the
company is exercised in Malaysia. Such control and management is determined
through the place where the board of directors meetings are held.

7.3 What is the corporate income tax rate in Malaysia and in the IDR?

The rate of corporate income tax in Malaysia is 27% for the year of assessment
2007 and will be reduced to 26% for the year of assessment 2008.

However, resident companies with a paid up share capital (comprising ordinary

shares) of RM2.5 million or less are subject to tax at a rate of 20% on the first
RM500,000 of chargeable income. The remainder is subject to the prevailing
corporate tax rate.

However, depending on tax incentives available to companies in the IDR, the

effective rate of tax may be significantly lower; where a company enjoys a 100%
tax holiday, which means that the net business profits (adjusted for tax purposes)
will be exempt from income tax. Other non-business income (e.g. interest,
dividends and rent) will likely be subject to the usual corporate tax rate. Again,
this will depend on the type of incentive granted

7.4 Is business income taxed differently from investment income?

Income from each type of business source/activity is taxed separately as is each

source of investment income. Investment income is treated as passive income
and only expenses directly incurred in earning such income will be deductible
for tax purposes
7.5 What expenses are deductible for tax purposes?

Expenses that are revenue in nature and ‘wholly and exclusively incurred in the
production of gross income’ are deductible for tax purposes. This would
typically include salaries, costs of running an office and overheads, maintenance
costs, etc.

Depreciation is not deductible, but capital allowances (or tax depreciation) can be
claimed instead on qualifying capital expenditure (refer to 7.6 below). Bad debts
and provisions for bad debts may be deductible if these are reasonably expected
to be unrecoverable.

Entertainment expenses only enjoy a 50% deduction although in certain

instances, a 100% deduction is available (e.g. staff entertainment).

The costs of leave passages provided to employees are generally not deductible,
except where the leave passage is a yearly leave passage within Malaysia
involving the employer, employee and immediate family members of the
employee.

Provisions are generally not deductible as such expenses are not viewed as
having been incurred.

Finance expenses (i.e. interest) are deductible against business income where the
funds (on which the interest costs are incurred) are utilized for business purposes
or on assets used or held for business purposes. Where interest costs are incurred
on funds used for investment purposes, the interest costs will only be deductible
against attributable investment income and not against the business income. The
deductibility of other finance costs such as guarantee fees, etc. will depend on the
facts of each case. Where the costs are viewed as costs incurred in securing
finance rather than in maintaining finance facilities, these costs will be capital in
nature and not deductible.

Only revenue expenses are deductible for tax purposes.

7.6 Are capital costs/expenses deductible?

Capital expenses are not deductible. However, capital allowances are available
on capital expenditure incurred on plant and machinery (i.e. qualifying assets)
used for the purposes of the business. An initial allowance of 20% (in the first
year) and an annual allowance ranging from 10% - 20% (in the first year and
thereafter) can be claimed until the relevant assets have a nil tax residual value
(or tax written down value).

Capital allowances are computed on a straight line basis based on the cost of the
asset. The allowances are deducted against the adjusted income from a business
 source (i.e. Gross income less deductible expenses). Capital allowances in respect
of a qualifying asset used in a specific business source can only be deducted
against the income generated from that business source.

Where assets are sold within a 2 year period, the allowances claimed to-date may
be withdrawn (unless there was a proper commercial rationale for the disposal).
Balancing allowances and charges are also computed on the sale of assets upon
which capital allowances have been claimed. A balancing allowance arises where
the sales proceeds are less than the tax written down value of the asset and such
an allowance will be deductible. Where the sales proceeds are greater than the
tax written down value of the asset, a balancing charge will arise and this is
taxable.

Unabsorbed or unutilized capital allowances can only be carried forward and

offset against the same business source of income provided the shareholders on
the first day of the year of assessment (in which the allowances are being
utilized) are substantially the same as the shareholders on the last day of the
period in which the unabsorbed capital allowances arose. Therefore if there is a
substantial change in the company’s shareholding, the unabsorbed capital
allowances will be lost.

7.7 How are business losses treated?

Unutilized business losses may be utilized as follows:-

• Current year business losses may be offset against any income source for that
year; and
• Prior year business losses can only be offset against income from all business
sources in the subsequent years.
• As with unabsorbed capital allowances, unabsorbed business losses can only
be carried forward and deducted in future years if the shareholders on the
first day of the year of assessment (in which the losses are being utilised) are
substantially the same as the shareholders on the last day of the period in
which the losses arose.
• Currently, there are no provisions for loss carry back in Malaysia.

7.8 Can losses be group relieved?

Yes, to a certain extent. 50% of the current year adjusted loss of a company will
be available for set off against the total income of another company within the
same group subject to the following conditions:-
• Both the claimant and surrendering company must have a paid up capital of
more than RM2.5 million;
• Both the claimant and surrendering company must have the same accounting
period;
 • The shareholding in both the claimant and surrendering company whether
direct or indirect must not be less than 70%; and
• The 70% shareholding must have been continuous for the relevant year and
the immediately preceding year.

However, group relief will not be available for the companies which enjoy
certain incentives, such as pioneer status, investment tax allowance, reinvestment
allowance, etc. Therefore, group relief is unlikely to be available for companies
enjoying tax incentives in the IDR. Group relief is also not available to a company
which is exempt from tax as a Malaysian shipping company or via a Ministerial
order.

7.9 Are there thin capitalisation rules in Malaysia?

No, there are no thin capitalisation rules in Malaysia.

7.10 Does Malaysia have transfer pricing regulations?

Yes, there are transfer pricing regulations in Malaysia which essentially require
that related party transactions should take place on an arm’s length basis. These
are in the form of guidelines issued by the Inland Revenue Board (IRB). These
rules are enforced through the anti-avoidance provisions in the Income Tax Act,
1967.

7.11 What tax incentives are available to companies in the IDR?

The Government has announced that the following tax incentives will be
available to companies located in the IDR. Note however, that the enabling
legislation will be released at a later date.

a) Pre-packaged incentives will be available to certain categories of investors

which are subject to specific conditions being met.

b) IRDA status companies which undertake approved activities within the IDR
for clients located in the IDR and outside Malaysia will enjoy a 100% tax
exemption for 10 years provided operations commence before the end of
2015. These companies will also be exempt from withholding tax on
payments for technical services (falling within section 4A of the Income Tax
Act, 1967) and royalties to non-residents. There are six categories of service-
based industries which will qualify for these incentives, these being:
ƒ Creative industries
ƒ Educational Services
ƒ Financial Advisory and Consulting services
ƒ Health services
 ƒ Logistics Services
ƒ Tourism and related activities
A list of qualifying services within the above industries will be issued by the
Iskander Regional Development Authority (IRDA)
Note that the above can only be confirmed when the enabling legislation is
gazetted.

c) Companies which do not qualify for (a) and (b) above should still be able to
enjoy existing tax incentives under current legislation in the form of pioneer
status, the investment tax allowance, where they undertake promoted
activities. Pioneer status generally provides a tax exemption on 70% of
statutory income (i.e. gross income after deduction of tax deductible expenses
and capital allowances) for a period of 5 years. The investment tax allowance
generally provides an allowance of 60% of qualifying capital expenditure to
be offset against 70% of statutory incomes) However, in certain instances,
for both the pioneer status and investment tax allowance, exemptions of up
to 100% of statutory income may be available, depending on the industry
involved or activity undertaken by the company. For example, projects
designated as being of national and strategic importance will enjoy the 100%
exemption.

Where companies come out of their tax exempt periods, other incentives may be
available, such as the reinvestment allowance which grants an allowance of 60%
of capital expenditure against 70% of statutory income for manufacturing
companies which expand, diversify or automate their production. In some areas,
the allowance is given against 100% of statutory income. In addition, certain
expenses may enjoy double deductions and/or accelerated allowances, etc.

7.12 When do companies have to file tax returns?

Companies are required to file their tax returns within 7 months from the end of
the financial year. The financial year will generally make up the basis period (the
tax year) for the year of assessment. For example, the financial year commencing
on 1 January 2007 and ending on 31 December 2007 will make up the basis
period for the year of assessment 2007. The tax return for the year of assessment
2007 will be due for filing by 31 July 2008. Tax returns are filed on a self-
assessment basis.

7.13 Are there any penalties for late filing of tax returns?

Where tax returns are filed late, penalties will be imposed. In addition, the late
filing of a tax return constitutes an offence under the tax law and upon
conviction, a penalty of up to RM2,000 and/or an imprisonment term of up to six
months may be imposed. In practice, the imprisonment term is rarely invoked
for such an offence.
7.14 How are tax returns verified?

Under the self assessment system, the tax return is deemed to be an assessment.
The IRB will verify the tax return through a tax audit.

7.15 When are companies required to pay their taxes?

Tax is paid on an installment basis. All companies are required to provide the tax
authorities with an estimate of their tax payable at least one month before the
start of the relevant financial year. The estimate cannot be less than 85% of the
previous year’s estimate or revised estimate.

Installments (equal installments) are paid on a monthly basis and commence in

the 2nd month of the financial year and must be paid by the 10th day of each
month. Installments can be revised in the 6th and 9th month of the financial year.
For companies which commence business, an estimate must be submitted within
3 months from the date of commencement of operations and installment
payments will become payable from the 6th month of the basis period. The
balance between the final tax liability and the total installments paid for a
particular year must be settled by the last day of the 7th month following the
close of the financial year (i.e. by the due date for filing of returns)

7.16 Are there penalties for under-estimation of taxes?

Where there is an under-estimation of tax, and the difference between the actual
tax liability and the estimate varies by more than 30% of the actual tax payable,
the difference in excess of 30% will be subject to a 10% penalty.

7.17 Are there penalties for late payment of taxes?

Where monthly installments are paid late, a penalty of 10% will be imposed.
Where the final tax liability (i.e. difference between instalments and the actual
tax liability) is paid late, a penalty of 10% will be imposed. Where the tax
together with the 10% penalty remains unpaid for a further 60 days, the amount
outstanding will be subject to a further penalty of 5%.

7.18 Does Malaysia impose withholding taxes on payments to non-residents and

will companies in the IDR be subject to the withholding tax provisions?

Payments of interest, royalties, and service fees for services performed in

Malaysia (for both technical and non-technical services, other than routine day-
 to-day administrative services between a parent and subsidiary or head office
and branch) and rental payments for movable property to non-residents will
attract withholding tax. In addition, contract payments to non-residents for
contract projects undertaken in Malaysia (typically, where the non-resident has a
permanent establishment in Malaysia) will attract withholding tax. The rates of
tax are as follows:
• Interest 15% on the gross payment
• Royalties 10% on the gross payment
• Service fees 10% on the gross payment
• Rental for movable property 10% on the gross payment
• Contract projects 13% on the gross payment (i.e.10% on account of the non-
resident and 3% on account of the employees)

Double tax agreements may provide reduced rates of withholding tax,.

IRDA status companies should be entitled to withholding tax exemptions on

technical fees and royalties based on the Government’s announcements.
However, the enabling legislation for this has not been released as yet.

7.19 Who is obliged to withhold the tax on payments to non-residents?

The payer is obliged to withhold the tax, and non-compliance will result in
penalties of 10% of the payment subject to withholding tax. Where the tax and
penalties remain unpaid, the payer will be denied a tax deduction for the
expense.

7.20 Can companies repatriate their profits to foreign shareholders?

Repatriation of profits can be done in several ways.

Companies can distribute dividends to shareholders. There is no withholding tax

on dividends. However, Malaysia operates a dividend imputation system and
hence the payment of dividends is subject to the availability of dividend franking
credits, in the absence of which a tax charge will arise to the company paying the
dividends. The payment of dividends is also subject to the availability of retained
earnings. Where companies enjoy certain tax exemptions, the exempt income
may be paid out as tax-free dividends, without the need for franking credits.
Further, where the shareholder of the company is a Malaysian resident company,
the latter will also be entitled to flow the exempt dividend income to its
shareholders. This is known as a 2-tier exempt dividend flow.

Aside from dividends, profits can also be repatriated in the form of fees, interest,
royalties, etc. These amounts will be subject to withholding tax unless
specifically exempted.
 Further, the payment of interest, royalties, service fees etc. would have to be on
an arm’s length basis.
Upon liquidation of a company or upon a capital reduction exercise (which must
be sanctioned by a court of law), capital can be returned to shareholders without
any tax implications.

7.21 Are there capital taxes and transfer taxes in Malaysia?

There is no capital gains tax in Malaysia. Real Property Gains Tax (RPGT) which
used to apply on chargeable gains arising from the disposal of real property or
shares in real property companies is no longer imposed. With effect from 1 April
2007, gains arising from the disposals of real property after 31 March 2007 will
not suffer RPGT.

Stamp duty is imposed on instruments of transfer giving rise to the transfer of

property. The rates of stamp duty vary, but typically, for the transfer of real
property and other property (excluding shares), stamp duty is computed on an
ad valorem basis. Stamp duty at 3% is payable on a value in excess of RM500,000.
Where shares are transferred, stamp duty is charged at the rate of 0.3% of the
value of the shares transferred.

7.22 How are individuals taxed?

Individuals are taxed on income accruing in and derived from Malaysia. Foreign
sourced income is exempt from tax.

Employment income and the benefits-in-kind arising from employment are

taxable. The value at which the benefits-in-kind are taxable are determined by
the IRB and laid out in several Public Rulings issued by the IRB.

The rate of tax suffered by individuals depends on their tax residence status. Tax
residence depends on the number of days of physical presence in Malaysia. The
general tax residence rule requires a 182 day physical presence test. Individuals
who are resident are taxed at scale rates from 0% - 28%. The 28% rate applies on
chargeable income of RM250, 000 and above. Residents also enjoy various
personal relieves. Non-residents are taxed at a flat rate of 28%.

7.23 What are the tax filing requirements for individuals?

Individuals who are employees and do not have a business source of income are
required to file their tax returns by 30th April of the year following the relevant
year of assessment. The basis year for a year of assessment is the calendar year.
For example, the basis year for the year of assessment 2007 will be the calendar
year 2007, and returns must be filed by 30th April 2008. Individuals who have
 business sources of income are required to file their tax returns by 30th June of
the year following the relevant year of assessment.

7.24 How do individuals pay their taxes?

Individuals in employment are subject to a schedular tax deduction scheme.

Under this scheme, the employer is required to deduct taxes from the
individual’s payroll. This is done on a monthly basis and the individual receives
his employment income net of tax. The tax deduction is based on the quantum of
income, the individual’s marital status, number of children, etc. Non-residents
are subject to a 28% tax deduction. Any balance of tax outstanding at the due
date for filing of returns must be paid on that date.
Individuals in business are taxed under an installment scheme issued by the tax
authorities.

7.25 What indirect taxes are there in Malaysia?

Malaysia imposes the following indirect taxes:

• Customs duties – this comprises mainly import duties and some export
duties,
• Sales tax – this is a single stage ad valorem tax imposed on imports and
goods manufactured in Malaysia,
• Excise duties – this is a form of duty imposed on a limited range of locally
manufactured goods, namely alcoholic beverages and spirits, cigarettes,
passenger motor vehicles (excluding buses), etc.
• Service tax – this is a tax on services provided by a taxable person but
excludes exported taxable services

7.26 Are there any areas excluded from indirect taxes and does the IDR enjoy such
exclusion?

Indirect taxes are imposed in the ‘Principal Customs Area’ (PCA) which covers
all of Malaysia with the exception of the islands of Labuan, Langkawi, Tioman,
and various designated Free Zones within the PCA. The IDR is not designated as
a free zone.

The Government has announced that foreign knowledge workers living in the
IDR and working in IRDA status companies will be entitled to import or
purchase one car per person free of import duties/excise duties and sales taxes
subject to conditions.

The enabling legislation for this has not been released yet.
7.27 How are goods valued for the purposes of imposing duties?

As a signatory to the WTO Agreement, Malaysia adopts the WTO valuation

system. The customs value is therefore the transaction value of the imported
goods. Generally, this is taken to be the price actually paid or payable for the
goods, with adjustments for certain items not actually included in the price.

7.28 Who is required to impose sales tax?

Every person carrying on business as a manufacturer of taxable goods in

Malaysia is obliged to register as a licensed manufacturer for sales tax purposes.

7.29 Who is required to charge service tax?

Service tax is chargeable and payable by any person who provides taxable
services or taxable goods. Depending on the nature of the services/goods
provided, there are different turnover thresholds which must be reached before
service tax is imposed. For example, the turnover threshold for restaurants is
RM300, 000 over a 12 month period, while the threshold for the provision of
courier services is RM150, 000. When a taxable person’s turnover reaches the
prescribed threshold, they are required to apply for a service tax license and to
charge service tax thereafter.

7.30 Do sales/service tax returns need to be filed with the tax authorities?

Yes, sales/service tax returns must be filed with the Customs Department.
Returns must be filed within 28 days after the end of the relevant taxable period.
A taxable period is a period of two calendar months. Upon filing the return,
payment of service tax must also be made. Late filing of returns/payment of
service tax will result in the imposition of penalties.

7.31 Does Malaysia have plans to impose a Goods & Services Tax (GST) or Value
Added Tax (VAT) regime?

Malaysia does have plans to impose a GST regime, but these plans have recently
been deferred. The GST regime was to have commenced on 1 January 2007, but
the Government has deferred the commencement of this system of taxation to a
later date (which is unknown at present) to allow taxpayers more time to prepare
and plan for the implementation of a GST system.