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-3rd-edition/

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

    Tax laws in Malaysia typically undergo amendments every year after the annual Budget announcement.

    Generally, primary legislation in Malaysia are amended by way of a Bill proposed by the House of Representatives, which is read and subsequently passed by them and endorsed by the House of Senate. Once the Bill is passed by both Houses, it will be presented to the Yang Di-Pertuan Agong (the King) for royal assent.

    On top of that, persons authorised such as the Minister of Finance and Director General of Inland Revenue under the Income Tax Act 1967 (“ITA”) are empowered to make subsidiary legislation such as rules, regulations and orders.

  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?

    Under the self-assessment tax system (SAS), taxpayers who has income accruing in or derived from Malaysia are required to disclose their taxable income, furnish their returns for each year of assessment, pay taxes and maintain the relevant documents and records.

    Salaried individuals must submit their income tax return forms and pay the balance of tax liability by 30 April every year whilst individuals with business income are to submit their returns by 30 June every year. A company has to file its tax return 7 months after the end of its financial year.

    Taxpayers are also required to keep and retain in safe custody sufficient records which any income from that business relates, give receipts in respect of goods sold or services performed in the course of or in connection with the business, retain a duplicate of every receipt issued if the gross takings from the business for the basis year for any year of assessment exceeded a certain threshold and keep sufficient documents for ascertaining chargeable income and tax payable for a period of 7 years from the end of the year of assessment in question.

  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 regulatory authority in Malaysia is the Inland Revenue Board (“IRB”). The IRB is a body corporate established pursuant to the Inland Revenue Board of Malaysia Act 1995. Its functions include, inter alia, acting as agent of the Government and to provide services in administering, assessing, collecting and enforcing payment of income tax, petroleum income tax, real property gains tax, estate duty, stamp duties and advising the Government on matters relating to taxation.

    Taxpayers’ experiences with the IRB are quite subjective and may vary depending on the complexity of issues, quantum of taxes in dispute as well as financial key performance indicators imposed on IRB collection officers.

    Ordinarily tax audits and tax investigations may take up to 6 to 18 months to be resolved.

  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?

    The Special Commissioners of Income Tax (“SCIT”) is a tribunal to hear and determine the appeals of taxpayers who are aggrieved by assessments raised by the Director General of Inland Revenue (“DGIR”). The SCIT is appointed by the King and is a body created under the ITA.

    Taxpayers intending to appeal to the SCIT are required to file a notice of appeal (i.e.: Form Q) along with the grounds of appeal to the DGIR within 30 days from service of the assessment in question (or if it is an advance assessment, within the first three months of the year of assessment following the year of assessment for which the assessment was made).

    On receipt of the notice of appeal, the DGIR has 12 months to review the assessment (DGIR may apply to the Minister of Finance for an extension should the DGIR requires more than 12 months) and if there is no reasonable prospect of coming to an agreement with the taxpayer, the DGIR will send the appeal forward to the SCIT; where he sends an appeal forward, he shall give the taxpayer written notice that he has done so. The appeal will then be registered before the SCIT and heard by 3 members of the SCIT. The entire tax appeal process typically takes around 1 to 1.5 years (excluding the review period by DGIR).

    In exceptional circumstances, taxpayers may file a judicial review application before the High Court. Such an application typically takes around 6 months to 1 year to be disposed before the High Court.

    In exceptional circumstances, especially in cases involving a large sum of taxes, some taxpayers have been successful in pursuing judicial review application against the IRB. This mode of proceedings has an advantage as the taxpayer may be able to obtain a stay order against the payment of the disputed taxes.

  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?

    Taxes payable under an assessment for a year of assessment are due and payable on the due date whether or not that person appeals against the assessment.

    Taxpayers are required to make payment of taxes for the amount raised by the IRB within 30 days from service of the assessment in question. Failure to make payment of taxes on time would result in imposition of additional penalties.

    In exceptional cases, however, a taxpayer may apply for judicial review, where the High Court may grant a stay order against the payment of the disputed taxes.

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

    Under Section 138 of the ITA, every classified person must regard and deal with classified material as confidential; and, if he is an official, make and subscribe a declaration that he will do so.

    A "classified person" is defined to include officials (i.e.: a person having an official duty under or employed in carrying out the provisions of the ITA); any person advising or acting for a person who is or may be chargeable to tax, and any employee of a person so acting or advising if he is an employee who in his capacity as such has access to classified material; or any employee of the IRB.

    However, there are some qualifications to the rule, as no classified material shall be produced or used in court or otherwise except for the purposes of the ITA or another tax law; in order to institute or assist in the course of a prosecution for any offence committed in relation to tax or in relation to any tax or duty imposed by another tax law; or with the written authority of the Minister or of the person or partnership to whose affairs it relates.

    Further, the law does not prevent the production or disclosure of classified material to or the use of classified material by the Auditor-General where necessary or expedient for the proper exercise of the functions of his office, or the DGIR from publicising, from time to time in any manner as he may deem fit, particulars in respect of a person who has been found guilty or, convicted of any offence or dealt with pursuant to certain sections under the ITA unless voluntary disclosure has been made before any investigation or inquiry has been commenced.

    Any classified person who communicates to another person or allows another person to have access to classified material in contravention of the Act shall be guilty of an offence and shall, on conviction, be liable to a fine not exceeding four thousand ringgit or to imprisonment for a term not exceeding one year or to both.

    Under the Convention on Mutual Administrative Assistance in Tax Matters, Malaysia has joined over 100 other countries in agreeing to automatic exchange of information relating to financial accounts (AEOI). As on 7.8.2018, the intended first information exchange for Malaysia is on September 2018.

    Pursuant to the Common Reporting Standards (“CRS”), information to be collected and reported by financial institutions of participating jurisdictions includes the financial account information, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions. Through the operation of legislation, the Malaysian tax authorities has set down timelines for implementation of the CRS, with special provisions for pre-existing individual accounts which are high value accounts.

    Presently, Malaysia does not maintain a public register of beneficial ownership, nor is there any indication of any intention to maintain such a register. Nonetheless, under various provisions and guidelines, regulatory authorities mandate relatively high level of disclosure of control and ownership by taxpayers.

  7. What are the tests for residence of the main business structures (including transparent entities)?

    The main test would be the “management and control test”.

    Under Section 8 of the ITA, a company or a body of persons carrying on a business or businesses is resident in Malaysia for the basis year for a year of assessment if at any time during that basis year the management and control of its business or of any one of its businesses, as the case may be, are exercised in Malaysia; and any other company or body of persons is resident in Malaysia for the basis year for a year of assessment if at any time during that basis year the management and control of its affairs are exercised in Malaysia by its directors or other controlling authority.

  8. Have you found the policing of cross border transactions within an international group to be a target of the tax authorities’ attention and in what ways?

    Yes, there has been an increase in transfer pricing audits conducted by the IRB, especially where there is great volume of related-party transactions and inconsistent profit margins. IRB’s special focus seems to be on intra-group services and purchases.

  9. Is there a CFC or Thin Cap regime? Is there a transfer pricing regime and is it possible to obtain an advance pricing agreement?

    In anticipation of the introduction of thin capitalisation rules, Section 140A(4) of the ITA was introduced and came to force on 1.1.2009, though the subsequent introduction of the rules has not taken place to date. This provision has since been repealed effective this year.

    During the announcement of the 2018 Budget, the Malaysian Government stated that in lieu of the thin capitalisation rules, and in line with the BEPS Action Plan: Action 4, a new set of rules known as Earning Stripping Rules (ESR) to restrict deduction of interest expenses and other payments by entities is expected to be introduced and take effect from 1.1.2019 instead.

    Under the ITA, taxpayer could make an application under Section 138B of the ITA for an advance ruling in respect of arrangements that are seriously contemplated by the taxpayer.

  10. Is there a general anti-avoidance rule (GAAR) and, if so, in your experience, how would you describe its application by the tax authority? Eg is the enforcement of the GAAR commonly litigated, is it raised by tax authorities in negotiations only etc?

    Yes, Section 140(1) of the ITA provides vast powers for the DGIR to disregard or vary transactions where there is reason to believe that any transaction has the direct or indirect effect of altering the incidence of tax, relieving any person from any tax liability, evading or avoiding any duty or liability, or hindering or preventing the operation of the ITA. Section 140 is commonly relied upon by the IRB during audits and frequently used as a basis for raising assessments and enforcement of the same is commonly litigated.

    Section 140A further provides specifically on transfer pricing that where the DGIR has reason to believe that property or services are 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 substitute the price in respect of the transaction to reflect an arm's length price for the transaction. Notwithstanding that there has been an increase in the volume of assessments raised by the IRB for audits conducted, there appears to be a trend for disputes whereby the IRB relied on Section 140A to be resolved amicably out of court.

  11. Have any of the OECD BEPs recommendations been implemented or are any planned to be implemented and if so, which ones?

    Malaysia is the signatory to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI); it recently joined the OECD Inclusive Framework on Base Erosion and Profit Shifting (BEPS) Package as an Associate Member and has implemented various regulations in line with the BEPS Action Plans, especially on the following:

    Action 5: Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance
    Action 6: Preventing the Granting of Treaty Benefits in Inappropriate Circumstances
    Action 13: Guidance on Transfer Pricing Documentation and Country-by-Country Reporting
    Action 14: Making Dispute Resolution Mechanisms More Effective

    On top of participation in the Convention on Mutual Administrative Assistance in Tax Matters, Malaysia is also a signatory to the Multilateral Competent Authority Agreement (MCAA) on Common Reporting Standards and Country by Country Reporting and is scheduled to start its automatic exchange of information with the other participating jurisdictions in September 2018.

  12. In your view, how has BEPS impacted on the government’s tax policies?

    Participation in the BEPS Framework has propelled Malaysia’s drive to adhere to the global commitment to improve global transparency, identify the movement of global wealth flows and eliminate tax avoidance.

    Through legislation, Malaysia has enacted various provisions setting out the information to be collected and reported by financial institutions of participating jurisdictions, which include financial account information, financial institutions required to report, the different types of accounts and taxpayers covered, implementation timelines as well as common due diligence procedures to be followed by financial institutions to promote and encourage disclosure.

  13. 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?

    Whilst Malaysia is not an OECD member country, Malaysia’s territorial tax system broadly follows the recognised OECD DTA Model, save that under Malaysian laws, other than gains from disposal of real property or from sale of shares in a real property company, capital gains are not subject to income tax.

    Under the Malaysian tax laws, taxes are imposed as follows:

     

    Rates

    Flat/Graduated

    Business Profits

    24% (standard corporate tax)

     

    For companies resident and incorporated in Malaysia which has a paid-up capital in respect of ordinary shares of two million five hundred thousand ringgit and less at the beginning of the basis period for a year of assessment:

    18% on first RM500k and balanced taxed at 24%

    Flat

    Employment income

    0-28%

    Graduated

    Sales Tax

    5% or 10%

    Flat

    Service Tax

    6%

    Flat

    Customs duty/tariff rates

    0%-50%

    Flat

    Tourism tax

    RM 10/room per night

    Flat

    Royalty

    Regular tax rates (subject to qualified exemptions under Schedule 6)

     

    10% withholding tax on payments to non-residents falling under Section 4A of the ITA

    Flat

    Income from land

    Regular tax rates

    Flat

    Capital gains

    0%- 30% (Only for gains from disposal of real property or from sale of shares in a real property company)

     

     

    Flat

    Stamp duty

    Varies (See First Schedule of the Stamp Act 1989)

    -

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

    Yes. Taxable corporate income in Malaysia comprises income of any person accruing in or derived from Malaysia or received in Malaysia from outside Malaysia and includes, on top of gains or profits from a business, dividend, interest, discounts, rents, royalties, premiums and other current earnings.

  15. Are different vehicles for carrying on business, such as companies, partnerships, trusts, etc, recognised as taxable entities? What entities are transparent for tax purposes and why are they used?

    Under the ITA, income tax is charged upon the income of any person accruing in or derived from Malaysia or received in Malaysia from outside Malaysia.

    “Person” is defined under the Act to include a company, a body of persons, a limited liability partnership and a corporation sole. It is noted that though partnerships, trusts and foundations are not expressed as “person” under the Act, the definition is not exhaustive.

    In respect of trusts, the ITA provides that any source forming part of the property of the trust, any source of a trustee of the trust, being a source of his or hers by virtue of specific provisions of the ITA and any income from any such source, save that gains arising from the realisation of investments from unit trusts, are all treated as income of the trust body of the trust. The income of the trust body of a trust is assessed and taxed separately from the income of a beneficiary from any source. Hence, income tax can only be charged once, either in the hands of the trustee or the beneficiary when it is paid out to the latter.

    The Act also accords deductions at specific rates for gifts of money made to an organisation or institution approved by the relevant authorities. The Act further accords tax exemption to approved institutions, organisations or funds or religious institutions, organisations or funds that are not operated or conducted primarily for profit and that are established in Malaysia exclusively for the purposes of religious worship or the advancement of religion.

    For partnerships, its partners, not the partnership itself, are liable to pay personal income tax for profits earned under the partnership. Conversely, the establishment of a limited liability partnership (LLP) is governed by the Limited Liability Partnerships Act 2012. An LLP is treated as a separate taxable person for the purposes of the ITA.

  16. Is liability to business taxation based upon a concepts of fiscal residence or registration? Is so what are the tests?

    Malaysia adopts a territorial tax system and liability to business taxation is posited upon the concept of fiscal residence.

    Under Section 8 of the ITA, a company or a body of persons carrying on a business or businesses is resident in Malaysia for the basis year for a year of assessment if at any time during that basis year the management and control of its business or of any one of its businesses, as the case may be, are exercised in Malaysia; and any other company or body of persons is resident in Malaysia for the basis year for a year of assessment if at any time during that basis year the management and control of its affairs are exercised in Malaysia by its directors or other controlling authority.

    Any LLP carrying on a business is resident in Malaysia for the basis year for a year of assessment if at any time during that basis year the management and control of its business or of any one of its businesses, as the case may be, are exercised in Malaysia. An LLP will also be considered a resident in Malaysia for the basis year for a year of assessment if at any time during that basis year the management and control of its affairs are exercised in Malaysia by its partners.

    A business trust is resident in Malaysia for the basis year for a year of assessment if the trustee manager of that business trust is resident in Malaysia and a trustee manager of a business trust is resident for the basis year for a year of assessment if the trustee manager in his capacity as such carries on such business trust in Malaysia; and the management and control of the business of such business trust is exercised in Malaysia.

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

    The Federal Territory of Labuan is a federal territory of Malaysia best known as an offshore International Business and Financial Centre posed to enhance the attractiveness of Malaysia among international investors as well as Malaysian companies.

    Under the Labuan Business Activity Tax Act 1990, Labuan entities (including Labuan companies, Labuan foundations established and registered under the Labuan Foundations Act 2010, Labuan Islamic foundations established and registered under the Labuan Islamic Financial Services and Securities Act 2010, Labuan Islamic partnerships as defined in the Labuan Islamic Financial Services and Securities Act 2010, Labuan limited partnerships and LLPs established and registered under the Labuan Limited Partnerships and Limited Liability Partnerships Act 2010, Labuan Islamic trusts as defined in the Labuan Islamic Financial Services and Securities Act 2010, Labuan trusts as defined in the Labuan Trusts Act 1996) carrying on a Labuan business activity are subject to tax at the rate of 3 per cent for a year of assessment. Alternatively, taxpayers may elect to be charged to tax 20,000 ringgit or to be charged to tax in accordance with the ITA.

    Several special economic regions (Northern Corridor Economic Region, East Coast Economic Region, Iskandar Malaysia, Sabah Development Corridor and Sarawak Corridor of Renewable Energy) are also established in line with the government initiative to spur economic growth and qualified persons in these regions enjoy specific tax incentives.

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

    There are specific tax incentives for principal hubs, pioneer statuses, investment tax allowances and special tax incentives such as that for research and technology initiatives, biotechnology industries (bionexus status incentives) and MSC Malaysia status incentives.

    However, it is noted that the time of writing, in line with BEPS Action 5, Malaysia has identified and is presently reviewing several intellectual property regimes to assess if these regimes would lead to a harmful tax practice where there is ring-fencing, lack of transparency and no effective exchange of information.

  19. 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?

    Malaysian laws allows for group relief for a group of companies. Subject to the statutory requirements, a surrendering company may surrender not more than 70 per cent of its adjusted loss in the basis period of a year of assessment to one or more related claimant companies if both are tax residents in the basis year for that year of assessment and incorporated in Malaysia.

  20. Are there any withholding taxes?

    Yes. Subject to the country of non-resident in question and whether there are Double Taxation Agreements in questions, withholding tax is imposed on payments made to non-residents for:

    (a) Contract payments;

    (b) Interest;

    (c) Royalty;

    (d) Non-resident public entertainers in respect of services performed or rendered in Malaysia;

    (e) Special classes of income deemed to be derived from Malaysia (services rendered in connection with the use of property or rights belonging to, or the installation or operation of any plant, machinery or other apparatus purchased from non-resident; technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme; rent or other payments made under any agreement or arrangement for the use of any moveable property);

    (f) Interest paid by approved institutions (e.g.: banks, Islamic banks, co-operative society);

    (g) Income of certain unit trusts;

    (h) Profits distributed or credited out of family fund, family re-takaful fund or certain general funds;

    (i) Where payer is liable to make payments to non-resident for gains or profits falling under Section 4(f) derived from Malaysia.

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

    As of April 2018, there are no recognised environmental taxes payable by businesses.

    However, a series of tax incentives are in place to encourage waste management, green technology, energy conversation and environmental protection.

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

    In 2008, Malaysia moved away from the imputation system and adopted the single-tier tax system, which took effect from year of assessment 2008.

    Thus, pursuant to paragraphs 12A and 12B of Schedule 6 of the ITA, the following are exempt from tax in the hands of shareholders:

    (a) dividend paid, credited or distributed to any member by a co-operative society; and

    (b) dividend paid, credited or distributed to any person where the company paying such dividend is not entitled to deduct tax under the Act and any deductions in relation to such dividend shall be disregarded for the purpose of ascertaining the chargeable income of the person.

    Between 1.1.2008 to 31.12.2013, companies with tax credit balances could still pay dividend under the imputation system and shareholders receiving such dividends are entitled to set-off against their payable taxes.

  23. If you were advising an international group seeking to re-locate activities from the UK in anticipation of Brexit, what are the advantages and disadvantages offered?

    Malaysia is one of the UK’s largest trading partners in the region and the Malaysian government has consistently introduced and maintained a large gamut of attractive tax incentives to encourage new investments in various sectors, especially in respect of research and development, high-technology and green technology.

    Malaysia also has in place multiple special economic regions offering different tax incentives and the Labuan taxation regime in place to boost and attract investment.

    As an Associate Member to the BEPS Package, and in light of the recent introduction and enaction of various legislations in line with the BEPS Action Plans, Malaysia is expected to continue to improve on transparency and accountability to bolster the economic and financial infrastructure that are in place.