Malaysia: Tax

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This country-specific Q&A provides an overview to tax laws and regulations that may occur in Malaysia.

It will cover witholding tax, transfer pricing, the OECD model, GAAR, tax disputes and an overview of the jurisdictional regulatory authorities.

This Q&A is part of the global guide to Tax. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/tax

  1. How often is tax law amended and what are the processes for such amendments?

    Tax law is amended every year in Malaysia. The amended is made via a Finance Act which will be tabled before the Parliament usually in the month of October or November each year.

    Most of the proposed changes are made public in the Budget Speech that the Finance Minister will table before Parliament in end October. Most tax amendments are not subject to public consultation with industry. In recent years, the only exception was the Goods & Services Act 2014, which involved a considerable amount of discussions with some selected industry players.

  2. What are the principal procedural obligations of a taxpayer, that is, the maintenance of records over what period and how regularly must it file a return or accounts?

    A taxpayer is required to maintain their business records for a period of 7 years. As regards to the filing of tax returns, it must be done annually within 7 months upon the closing of accounts.

    Meanwhile, companies are required to file their audited accounts every year with the Companies Commission of Malaysia.

  3. Who are the key regulatory authorities? How easy is it to deal with them and how long does it take to resolve standard issues?

    The key tax regulatory is the Inland Revenue Board of Malaysian which oversees income tax, petroleum income tax, stamp duty and real property gains tax.

    The Royal Malaysian Customs Department oversees goods and services tax, customs duty and excise duty.

    By contacting the appropriate officer, it can take between 3 to 6 months to resolve a standard issue.

  4. Are tax disputes capable of adjudication by a court, tribunal or body independent of the tax authority, and how long should a taxpayer expect such proceedings to take?

    Ordinary, tax disputes are heard before the Special Commissioners of Income Tax, who are independent of the Inland Revenue Board of Malaysia. An appeal proceedings before them takes about 12 months to be completed.

  5. Are there set dates for payment of tax, provisionally or in arrears, and what happens with amounts of tax in dispute with the regulatory authority?

    Notwithstanding a tax appeal, all taxes including disputed taxes must be settled in full within 30 days upon the issuance of the tax assessments. In most cases, the Inland Revenue Board of Malaysia may exercise administrative concession and grant taxpayers a 6 to 24 month installment period to settle their taxes. There is no provision under the existing tax laws to postpone tax liabilities under dispute.

  6. Is taxpayer data recognised as highly confidential and adequately safeguarded against disclosure to third parties, including other parts of the Government?

    The tax laws recognise that information with regard to taxpayer’s data are highly confidential and there are adequate safeguards both in law and in practice to prevent any form of unauthorised disclosure.

  7. Is it a signatory (or does it propose to become a signatory) to the Common Reporting Standard? And/or does it maintain (or intend to maintain) a public Register of beneficial ownership?

    Malaysia is a signatory to the Common Reporting Standard as it has signed the Model Competent Authority Agreement. At the moment, there is no plan to maintain a public register of beneficial ownership.

  8. Are there any plans for the implementation of the OECD BEPs recommendations and if so, which ones?

    In 2017, Malaysia has amended its domestic tax law to implement OECD BEPS recommendation on Action 13, which is on Country by Country Reporting.

  9. Is there a GAAR and, if so, how is it applied?

    Malaysia has a general anti-avoidance provision (i.e. Section 140 of the Income Tax Act 1967). This provision confers the Director General of Inland Revenue vast authority to disregard or vary a transaction and make such adjustment as it thinks fit. This is done with a view to counteracting the effect of the transaction if the Director General of Inland Revenue has reason to believe that the transaction has the effect of:

    1. altering the incidence of tax which is payable or suffered by or which would otherwise have been payable or suffered by any person;
    2. relieving any person from any liability which has arisen or which would otherwise have arisen to pay tax or to make a return;
    3. evading or avoiding any duty or liability which is imposed or would otherwise have been imposed on any person by this Act; or
    4. hindering or preventing the operation of the Act in any respect.

    If the dominant purpose of a transaction has no commercial purpose, that transaction will be disregarded or varied on the basis of tax avoidance by the tax authority. Therefore, the objective of the exercise must be to achieve a commercial purpose and not to enjoy tax efficiency without any other commercial purpose for the transaction. However, if tax savings arise by the manner in which the commercial transaction is implemented or structured, that is to be regarded in law as tax mitigation.

    As Section 140 covers a very extensive and wide-ranging number of transactions carried out by taxpayers, the Malaysian Courts have examined the extent of enforceability of this anti-avoidance provision on taxpayers. Analysis of case law suggests that the Malaysian Courts appear to have taken the view that transactions whose dominant purpose lacks any commercial goal will be labelled as tax avoidance schemes and disregarded or varied by the tax authorities. In order to fall outside the ambit of the general anti-avoidance rule, taxpayers must demonstrate that a transaction has a commercial purpose and is not undertaken for the sole purpose of reducing tax.

  10. Does the tax system broadly follow the recognised OECD Model?

    Does it have taxation of; a) business profits, b) employment income and pensions, c) VAT (or other indirect tax), d) savings income and royalties, e) income from land, f) capital gains, g) stamp and/or capital duties.

    If so, what are the current rates and are they flat or graduated?

    Unlike its double taxation agreements, the Malaysian domestic tax system is not modelled after the OECD Model. However, most of the aspects contained in the OECD Model are covered under the Malaysian domestic law. Current tax rates have both flat and graduated elements.

    a. Taxation of business profits
    Flat rate of 24%.

    b. Taxation of employment income and pensions
    Progressive rate ranging from 0% to 28%.

    c. VAT (or other indirect tax)
    6%.

    d.Taxation of royalties
    Flat rate of 24%.

    e. Taxation of income from land
    Flat rate of 24%.

    f.Taxation of capital gains
    There is no capital gains tax in Malaysia except for real property gains tax which ranges from 0% to 30%.

    g.Stamp
    Flat duty of RM10 or ad valorem rate depending on the instrument.

  11. Is the charge to business tax levied on, broadly, the revenue profits of a business as computed according to the principles of commercial accountancy?

    Broadly yes though in some certain specific circumstances, the domestic tax law departs from the principles of commercial accountancy.

  12. Are different vehicles for carrying on business, such as companies, partnerships, trusts, etc, recognised as taxable entities?

    Yes.

  13. Is liability to business taxation based upon a concepts of fiscal residence or registration?

    It can be the combination of both as the domestic tax law examines whether the effective management and control of the business are in Malaysia.

  14. Are there any special taxation regimes, such as enterprise zones or favourable tax regimes for financial services or co-ordination centres, etc?

    Yes. Among others, investments in the Northern Corridor Economic Region (NCER), East Coast Economic Region (ECER), Sabah Development Corridor, Sarawak Corridor of Renewable Energy (SCORE) and Iskandar Malaysia enjoy various forms of tax incentives.

  15. Are there any particular tax regimes applicable to intellectual property, such as patent box?

    No.

  16. Is fiscal consolidation employed or a recognition of groups of corporates for tax purposes and are there any jurisdictional limitations on what can constitute a group for tax purposes? Is a group contribution system employed or how can losses be relieved across group companies otherwise?

    There is no consolidated groups of corporates for tax purposes except that the domestic tax law allows for group relief for companies. Group relief is available to all locally incorporated resident companies subject to the terms and conditions as provided under Section 44A of the Income Tax Act 1967 effective from the year of assessment 2006. The provision of group relief allows a company in a group to surrender (referred to as surrendering company) not more than 70% of its adjusted loss in the basis period for a year of assessment to one or more related companies (referred to as claimant company) within the same group.

  17. Is there a CFC or Thin Cap regime?

    Yes, whereby via Section 140A(4) of the Income Tax Act 1967, Malaysia has introduced a thin capitalisation regime in 2009. However, this provision was suspended indefinitely by the Minister of Finance.

  18. Is there a transfer pricing regime and is it possible to obtain an advance pricing agreement?

    Malaysia’s transfer pricing law and policy are largely modelled after the OECD Transfer Pricing Guidelines with some variations. Section 140A of the Income Tax Act 1967 is the provision that introduced transfer pricing law in Malaysia. Section 140A(2) states that where a person in the basis period for a year of assessment enters into a transaction with an associated person for that year for the acquisition or supply of property or services, then, for all purposes of the ITA, that person shall determine and apply the arm's length price for such acquisition or supply.

    Meanwhile, Section 140A(3) adds that where the Director General of Inland Revenue has reason to believe that any property or services referred to Section 140A(2) is acquired or supplied at a price which is either less than or greater than the price which it might have been expected to fetch if the parties to the transaction had been independent persons dealing at arm's length, he may in determination of the gross income, adjusted income or adjusted loss, statutory income, total income or chargeable income of the person, substitute the price in respect of the transaction to reflect an arm's length price for the transaction.

    The transactions or the financial assistance referred to in Sections 140A(2) or (4) respectively, shall be construed as a transaction or financial assistance between:

    1. persons one of whom has control over the other;
    2. individuals who are relatives of each other; or
    3. persons both of whom are controlled by some other person.

    The Income Tax (Transfer Pricing) Rules 2012 supplement the primary legislation in Malaysia. Among others, these Rules prescribe the following:

    1. how and when to prepare contemporaneous transfer pricing documentation;
    2. the method to determine arm’s length price;
    3. comparability of transactions;
    4. transfer price for separate and combined transaction;
    5. transfer price for intra group services and cost contribution arrangement;

    Advance pricing arrangement is something that is rather new in Malaysia. It is governed under Section 138C of the Income Tax Act 1967 was took effect from the year of assessment 2009. Essentially, the advance pricing arrangement in Malaysia involves an application made to the tax authority (i.e. the Inland Revenue Board) by any person who carries out a cross border transaction with an associated person. An advance pricing arrangement shall be made in the prescribed form and shall contain particulars required by the tax authority. The application of advance pricing arrangement seems to be confined to transfer pricing arrangement although no such restriction is expressed by law.

    Upon receiving such application, the tax authority is empowered to:

    1. Enter into an advance pricing arrangement with the person who carries out a cross border transaction with an associated person; or
    2. The tax authority may enter into an advance pricing arrangement with a competent authorities may enter into an advance pricing arrangement. This is in order to determine the transfer pricing methodology to be used in any future apportionment or allocation of income or deduction to ensure the arm’s length transfer prices in relation to that transaction.

    The advance pricing arrangement shall apply in respect of a transaction between:

    1. persons one of whom has control over the other;
    2. individuals who are relatives of each other; or
    3. persons both of whom are controlled by some other person.

    The unfortunate position is that the tax authority does not share with the public any data pertaining to the type and number of private ruling, advance ruling and advance pricing arrangement handled by them in a year. Such sharing of information would enable both businesses and practitioners to understand the tax authority’s approach in these matters and gauge their effectiveness.

  19. Are there any withholding taxes?

    Malaysia has a number of withholding tax provisions, whereby among others the following payments to a non-resident attract withholding tax:

    1. Interest;
    2. Royalty;
    3. Consideration for services rendered by the non-resident person or his employee in connection with:

      (i) the use of property or rights belonging to him, or
      (ii) the installation or operation of any plant, machinery or other apparatus purchased from him;

    4. Consideration for technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, scheme;
    5. Rent or other payments made under any agreement or arrangement to a non-resident person for the use of any moveable property;
    6. Contract payment to a non-resident contractor in respect of services under a contract. Services under a contract in relation to any non-resident contractor, means the performing or rendering of any work or professional service in Malaysia, being work or professional service in connection with, or in relation to, any contract project.

    There is no withholding tax on dividend payments in Malaysia.

  20. Are there any recognised environmental taxes payable by businesses?

    No. It is worth mentioning that tax incentives are available for green building initiatives.

  21. Is dividend income received from resident and/or non-resident companies exempt from tax? If not how is it taxed?

    Since the introduction of the single tier dividend regime in the year of assessment 2008, dividend income is no longer taxable in Malaysia.