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Malaysia: Tax regulations(EIU Viewswire Via Thomson Dialog NewsEdge) COUNTRY BRIEFING FROM THE ECONOMIST INTELLIGENCE UNIT Corporations in Malaysia received some relief in 2007: the corporate income tax rate was reduced from 28% to 27% (and will be reduced to 26% in 2008), and the real-property gains tax was abolished effective April 1st 2007. The corporate tax burden for companies in Malaysia is comparable to that in neighbouring countries, given the range of credits and allowances that were broadened in recent budgets. The 2005 budget, which was released in September 2004, announced that the sales and service taxes would be replaced with a single consumption tax, the goods and services tax (GST), on January 1st 2007. However, the Ministry of Finance said on February 22nd 2006 that it had deferred the implementation of the GST to an unannounced later date; the GST is not expected before 2008. The introduction of the GST and the changes in the tax rates are part of a review of the present tax system being undertaken by the eight-member Taxation System Review Panel, which was installed following the reading of the 2005 budget. The Inland Revenue Board (IRB), a division of the Ministry of Finance, administers taxes. It is responsible for direct taxes under the Income Tax Act of 1967, Petroleum (Income Tax) Act of 1967, Real Property Gains Tax Act of 1976, Promotion of Investment Act of 1986, Stamp Act of 1949 and the Labuan Offshore Business Activity Tax Act of 1990. Income tax has been assessed since 2000 on income derived in the current year. Before 2000 the tax was assessed on income derived in the previous year. To accommodate the changing system, income received in 1999 was waived from income tax, and losses incurred in 1999 were allowed to be carried forward. The government initiated a move from the Official Assessment System to a Self-Assessment System in 2000. Under the Self-Assessment System, companies are required to provide estimates of tax payable for the current year; these estimates should not be less than 85% (reduced from 100% in the 2006 budget) of the estimates or the revised estimates of the preceding year. Companies are allowed to revise their estimates in the sixthand the ninth months of their financial year. In late 2004 the government established the Fund for Tax Refunds to expedite refunds for taxpayers who make excess payments under the Self-Assessment System. On January 1st 2006 the scope of the fund was extended to include refunds for petroleum income tax, real-property gains tax and stamp duty. In fiscal year 2006 (ended September 30th 2006) the government collected M$87.9bn in taxes, up by 9.0% from M$80.6bn the year before. Corporate income tax contributed M$28.4bn; special tax on petroleum-producing companies brought in M$20.4bn; individual income tax added M$9.6bn; excise revenues stood at M$8.8bn; and sales and service taxes contributed M$6.3bn. The government has targeted M$95.8bn in tax collections in fiscal year 2007. Tax morality is fairly high in Malaysia, among both corporations and individuals. Companies are subject to periodic audits, which have become more thorough in recent years. The Income Tax Act 1967 (Section 80) gives the IRB the right to search business premises and private residences without a warrant. Moreover, the government has become stricter on deadlines for submitting company accounts. To spur further corporate compliance, the 2006 budget allowed audit fees to be deducted from corporate income tax. As of June 2007 the IRB was reviewing its existing guide on tax audits and codifying its first framework on tax investigations. The 2007 budget, announced on September 1st 2006, lowered the basic corporate income tax rate for 2007 by 1 percentage point, to 27%, and the rate for 2008 by another percentage point, to 26%. These new rates apply to small and medium-sized enterprises with a paid-up capital of up to M$2.5m that had previously been subject to a corporate income tax of 20% on taxable income up to M$500,000, with the excess taxed at 28%. The rate cut is the first since the 1998 budget, when the tax rate was lowered from 30% to 28%. The 2006 budget introduced relief for companies within a group. The group relief allows 50% of a companys current-year losses to be offset against the profits of other companies in the same group. Tax is levied on petroleum income at the special rate of 38%. Insurance companies are taxed as follows: 8% on investment income and capital gains of life funds, and 28% on the income of shareholders funds (including surpluses actually transferred from the life fund). Co-operative societies are taxed on a sliding scale from 0% for the first M$20,000 to 28% for income exceeding M$500,000. No local taxes are levied on corporate income. There is no excess-profits tax (it was abolished in 1991). There is no alternative minimum tax, though companies in the offshore tax haven of Labuan may choose between paying a 3% rate on chargeable profits or a flat rate of M$20,000. Corporate taxes, 2007The following is a hypothetical calculation for a resident company with a net pre-tax accounting profit of US$2m.Pre-tax accounting profit2,000,000Additions: Non-deductible expenses(a)450,000 Interest income1,000,000 Malaysian dividend income400,000Subtotal3,850,000Deductions(b)(850,000)Taxable income3,000,000Income tax at 27% on US$3m810,000 Tax withheld on dividends (28% of US$400,000)112,000Net tax payment (excluding dividend withholding tax)698,000Total tax burden as a percent of taxable income23.3%(a) Includes unapproved donations, certain legal fees, expenses for entertainment and leave travel, depreciation charged in accounts, and certain legal provisions. (b) For example, profit on sale of fixed assets, expenditure charged against provisions, capital allowances and approved donations.Source: Ministry of Finance.Taxable corporate income includes all earnings derived from Malaysia, including gains or profits from any trade or other business, dividends, interest, rent, royalties, premiums or other current earnings. These rules apply to branches as well as to entities incorporated in Malaysia. Deductions are allowed for expenses incurred wholly and exclusively in the production of income, including interest, royalty payments and certain taxes. Recent budgets have expanded the scope of allowable deductions. Three new categories of deductible expenses have been in effect since 2002: costs of developing websites, at 20% annually for five years; expenses incurred in providing practical training to residents who are not employees of thecompany; and bonuses paid to employees. For five years from 2003, expenses incurred in the issuance of private debt securities that adhere to certain Islamic principles are deductible as well. The 2004 budget extended deductions to incorporation expenses of companies with authorised capital up to M$2.5m, up from M$250,000 previously. The 2005 budget allowed the payment of zakat, an Islamic religious tithe, as a deduction, up to a maximum of 2.5% of aggregate income. The 2006 budget, meanwhile, allowed audit fees to be deducted. The 2006 budget also allowed investment holding companies listed on Bursa Malaysia, the national bourse, to treat their income as business income and hence permit the expenses to be deducted fully. Previously, the income of an investment holding company was treated as passive income; therefore, only 25% of permitted expenses were deductible. However, losses and unabsorbed capital allowances may not be carried forward. An investment holding company is defined as a company that derives at least 80% of its gross income from investment holdings. Donations to approved organisations established exclusively for the protection and conservation of the environment are deductible. Other deductible items include certain expenses for fully furnished living accommodation; expenses for sponsoring any arts or cultural activity approved by the Ministry of Culture, Arts and Tourism (up to M$500,000); and contributions to equip libraries. The 2007 budget added contributions towards approved sports activities and sports bodies as deductible items, and increased the limit on deductions on contributions by companies for charitable activities from 5% to 7% of aggregate income. The cost of entertainment provided to employees is not deductible unless it is part of the provision of entertainment for clients or customers. There are no deductions for contributions to non-approved provident funds (allowable deductions for the employers contribution to the Employees Provident Fund is 19%, 7 percentage points over the 12% mandatory minimum contribution); preliminary or pre-operating costs, apart from a single deduction on pre-operational training expenses; capital expenditures; costs of flotation, registration, winding up or liquidation of a company; mortgages; or costs in connection with the protection of title to real property. Losses may be carried forward for an unlimited period but may not be carried back. They may offset income from all business sources. Foreign-sourced income of a resident company is not subject to tax in Malaysia, though tax is levied on worldwide income for a few activities, such as banking, insurance, and air- and sea-transport operations. Under the Income Tax Act 1967, unless profits or gains are attributed directly to activities conducted outside Malaysia, they are assumed to derive from Malaysia. Thus, the onus is on a branch to prove which part of its income is not attributable to a Malaysian source. The government sets depreciation rates for various assets, with favourable rates for some items to promote their sale or use. Since the year of assessment 2000, there have been three general classes of annual capital allowances for plant and machinery (down from 16 previously). For office equipment, furniture and fittings, an annual depreciation allowance of 10% over eight years is allowed. For general plant and machinery, it is set at 14% over six years. For heavy machinery and motor vehicles, it is 20% over four years. Certain types of plant and machinery such as computers, which have been given special annual allowances exceeding 20%, will continue at the higher rate. Under the standard rates, new industrial buildings (principally factories and warehouses, not office buildings) are depreciated 10% in the first year and 2% annually thereafter on a straight-line basis. This allowance also applies to buildings used for education and training. No initial allowance is given on purchased buildings but is granted on the construction cost of new buildings. Areinvestment allowance of 60% is granted to resident manufacturing companies that incur capital expenditures on qualifying plant, machinery and factory buildings. The 2003 budget extended the reinvestment allowance to pioneer companies, but they have to give up their pioneer status. Capital expenditures for constructing public roads qualify for an initial allowance of 10% and a subsequent annual allowance of 6%. There are no provisions for depreciating patents, trademarks, copyrights, goodwill or leases (except mining leases). The Inland Revenue Board (IRB) sends out annual tax assessments during the first half of the calendar year for the current year. Tax is due 30 days after issue of the assessment notice; people who fail to pay taxes within this time receive penalties. Companies must pay tax in monthly instalments based on estimates of tax payable. Instalments must be paid on or before the 10th of each month; late or insufficient instalments may incur a 10% penalty. From January 1st 2007, taxpayers (both corporations and individuals) have been allowed to apply for advance rulings from the IRB. Since 2001, companies have had to furnish a return in the prescribed form to the IRB within six months of the end of their accounting periods. This is used to report actual tax liabilities, and it may result in additional assessments or refunds from tax paid in the accounting period. The government has come down harder on firms that are late in filing their annual statements of accounts. Approvals for extensions are increasingly difficult to obtain. The onus is on company directors to ensure that their auditors finish the job on time to avoid fines. However, the 2005 budget extended the deadline for sole proprietors, partnerships, clubs and associations to file tax returns from April 30th to June 30th each year, beginning from year of assessment 2004. There are no capital taxes in Malaysia. Malaysia does not tax capital gains on portfolio investments, and it abolished the real-property gains tax (RPGT) effective April 1st 2007. The RPGT was scrapped in an effort to spur the property market. Malaysia does not impose withholding tax on dividends paid to residents, though dividend income is included in taxable income. Dividend payments are deemed to be received net of company tax; thus, the recipient may credit the assumed tax (that is, 28% of gross dividends) against tax due (which for a corporation is the same). Resident corporations or individuals with a tax rate of less than 28% may claim a refund. Dividend payments to a non-resident may be allowed as a deduction only if the 10% withholding tax has been paid. That exception (imposed in the 1997 budget) also requires a taxpayer that fails to withhold tax on payments made to non-residents to be subject to a 10% penalty on the total payments made. Corporate income that is tax exempt as a result of Malaysias many investment incentives remains tax exempt when paid out as dividends. Interest paid to resident companies is not subject to withholding tax but is included in year-end corporate income tax calculations, and taxed at the appropriate rate. Interest paid to resident individuals is subject to 5% withholding tax, which is credited against final income tax. Interest received from savings deposits held with the National Savings Bank or the Pilgrimage Board is exempt. Individuals are granted tax exemption on interest from government securities and bonds, and debentures (other than convertible loan stocks) approved by the Securities Commission (SC); and on Malaysian Saving Bonds issued by Bank Negara Malaysia (BNM), the central bank. To expand the domestic capital markets, as of September 11th 2004, the government exempted from income tax interest income derived by non-resident companies from (1) ringgit-denominated Islamic securities and debentures (other than convertible loan stocks) approved by the SC and; (2) government securities. Since 1999 the government has exempted from tax interest income received by resident unit trusts and property unit trusts. Interest paid to a foreign parent is subject to withholding tax of 15%, which may be waived or reduced under double-tax treaties. Interest paid to non-residents by commercial banks operating in Malaysia is exempt from the tax, except for interest paid to maintain net working funds, as prescribed by the central bank. The 2007 budget extended this exemption to profits received from Islamic banks operating in Malaysia. Interest on approved loans, as specified in Section 2 (1) of the Income Tax Act 1967, is exempt from tax. Approved loans include those made by non-residents for development projects and any loans to the government or guaranteed by the government. Royalties and contract service fees are subject to a 10% withholding tax, which may be waived or reduced under double-tax treaties. Profits, dividends, interest and royalties are subject to treaties, ensuring that taxes are levied only in the country where a business is situated. Such treaties allow for repatriating profits without subjecting them to double taxation. Under the OECD convention, companies residing in countries that have double-taxation agreements with Malaysia are subject to Malaysian income tax only if they have permanent establishments in the country. The following do not constitute permanent establishments: representative offices; offices maintained solely to buy goods or collect information; facilities for storage, display or delivery of goods; and places for advertising or scientific research. Withholding rates under double-tax treaties (%)Country of recipientInterestRoyaltiesTechnical-service feesCountry of recipientInterestRoyaltiesTechnical-service feesAlbania(a)101010Mongolia101010Argentina(b)151010Morocco151010Australia15100M yanmar(a)101010Austria151010Namibia1055Bahrain5810Netherlands1088Bangladesh15101 0New Zealand151010Belgium101010Norway151010Canada151010Pakistan151010Chile151010Papua New Guinea151010China101010Philippines151010Croatia101010Poland151010Czech Republic121010Romania151010Denmark151010Russia151010Egypt151010Saudi Arabia(c)151010Fiji151010Seychelles(a)151010Finland151010Singapore151010France15 1010South Africa151010Germany15100South Korea151010Hungary151010Sri Lanka101010India151010Sudan101010Indonesia151010Sweden151010Iran(a) 101010Switzerland101010Ireland10810Thailand151010Italy151010Turkey151010Japan101 010United Arab Emirates51010Jordan151010United Kingdom1088Kuwait151010United States(b)151010Kyrgyz Republic101010Uzbekistan101010Lebanon1088Vietnam101010Luxembourg101010Zimbabwe(a )101010Malta151010Non-treaty151010Mauritius151010Where the rate of tax of the above payment is not specifically stated in the respective double-taxation agreement, the normal applicable rate of tax is withheld. Where the rate of tax is lower than the maximum rate of tax as mentioned in the respective double-taxation agreement, the lower rate of tax applies. (a) Gazetted but not yet in effect in May 2006. (b) Limited to air and shipping transport. (c) Limited to air transport.Source: Inland Revenue Board.Intercompany charges properly classified as charges against income incurred in the production of gross income are considered business deductions, unless specifically excluded under the Income Tax Act 1967. However, a section of the act dealing with transactions between a resident and a non-resident with substantial control over the resident provides that if the resident produces little or no income, the resident is to be treated as an agent of the non-resident and charged tax on income as assessed by the tax authorities. The authorities have the power to base such assessment on income that the resident might reasonably be expected to have made on ordinary commercial terms. Usually, a fair and reasonable percentage of the business turnover is used as a way to assess income, if figures are not available. The authorities also have the general right to discount transactions deemed to result in substantial avoidance of tax liability. In July 2003 the Internal Revenue Board introduced five testing methods to determine if an intercompany transaction was priced at arms length. (An arms-length transaction is one involving two unrelated, independent parties.) Failure to demonstrate an arms-length consideration could subject a firm to hefty additional taxes and penalties. There is no special scrutiny of intercompany transactions except in suspicious circumstances, such as making agreements and documents retroactive. The 2006 budget introduced relief to companies within a group, with a minimum of 70% ownership between them. The group relief allows 50% of a companys current-year losses to be offset against the profits of another company in the same group. To be eligible, both companies need to have a paid-up capital of more than M$2.5m and have the same accounting period. Companies enjoying pioneer status, investment tax allowance, reinvestment allowance, or exemption of shipping profits (see Incentives) are not eligible for group relief. Malaysia offers qualified companies operational headquarters (OHQ) status as an investment incentive. It is designed to promote the country as a regional centre for management, technical and financial support services; tofacilitate technology transfer; and to create ready markets for Malaysian products (see General incentives). The2003 budget made OHQs exempt from income tax for ten years. Companies may also set up an international procurement centre, which offers centralised purchasing of manufacturing goods and services, or a regional distribution centrea collection and consolidation centre for finished goods, components and spare parts produced by its own group of companies for its own brand to be distributed to dealers, importers or its subsidiaries or to other unrelated companies inside or outside the country. Qualified centres are eligible for full tax exemption for ten years if certain turnover conditions are met (see Export incentives and zones). By end-April 2007 the government had not announced a new date for the introduction of the goods and services tax (GST). The 2005 budget, released in September 2004, announced that the present system of sales and service taxes will be replaced by the GST, a single consumption (value-added) tax, from January 1st 2007. However, the Ministry of Finance said on February 22nd 2006 that it had deferred implementation of the GST to an unspecified later date. To ensure that low-income groups will not be burdened by the implementation of the GST, goods and services considered to be basic needs will be either zero-rated or exempt. Small businesses also will be exempt from theGST. A general sales tax now applies at rates of 510% to local products and imported items (except those that are to be re-exported). A 5% rate applies to fruits, certain foods and building materials, alcoholic beverages, and cigarettes and other tobacco products. A 10% rate is charged on all other types of goods. Items exempt from sales tax include mobile libraries and clinics; computers; books, newspapers and other reading materials; and necessities such as certain essential food items and building materials. Sales tax is M$0.59 per litre for petrol, and M$0.20 per litre for diesel fuel. The sales tax that producers pay on imported raw materials and value-added items is deductible from the final sales tax for manufactured goods. Refunds are available only to exporters and manufacturers that produce goods subject to sales tax. Producers with sales turnover of less than M$100,000 can choose to be licensed, which lets them obtain their raw materials and components without paying a sales tax. They are then subject to sales tax on final goods produced. A service tax of 5% applies to the value of certain goods or services sold or provided by prescribed establishments throughout Malaysia (except on the islands of Labuan, Langkawi and Tioman, and in free zones). Prescribed businesses include the following: hotels with more than 25 rooms; restaurants, bars, snack bars, coffee houses and food courts; cabarets, dance halls, night-clubs, health centres, massage parlours, golf clubs and public beer houses; insurance companies, forwarding agents and telecommunications services firms (except Internet); motor-vehicle service/repair centres with annual turnover of M$150,000 or more; car-park operators, security guards or courier-service firms with annual turnover of M$150,000 or more; employment or private agencies with annual sales turnover of M$150,000 or more; private hospitals, dental clinics and veterinary clinics with annual turnover of M$150,000 or more; professional, consultancy and management services, including project management co-ordination services, having sales turnover of M$150,000 or more; advertising firms with annual turnover of M$300,000 or more; private clubs with annual turnover of M$300,000 or more; and car-hire services with annual sales turnover of M$300,000 or more.Professional services provided within the same group have been exempt since January 1st 2003 from the service tax. This exemption applies to services provided by public accountants, solicitors, engineers, architects, surveyors (including valuers, assessors and estate agents), consultants and management-service providers. Courier services provided from a point within Malaysia to a destination outside Malaysia also are exempt. Excise duties are levied on tobacco, beer and liquor, motor vehicles, playing cards and mah-jong tiles. The 2005, 2006 and 2007 budgets all increased the excise tax on all types of tobacco products and on most types of alcoholic beverages. Duties on imports are generally higher than the excise tax on similar items produced domestically. The 2002 budget abolished excise duties on the purchase of locally produced cars for car-rental companies. Taxi operators also are exempt on the purchase of locally produced cars. The national government charges stamp duties (varying ad valorem charges on certain instruments and documents) that can be significant, especially for disposal of properties and marketable securities. But there are many waivers and reduced rates. The 2002 budget made exempt from stamp duty all residential houses worth less than M$75,000; houses worth M$75,000150,000 enjoyed a 50% exemption. The 2003 budget made exempt the transfer of property between husband and wife or parents and children on the basis of love and affection from 50% of stamp duty. The 2000 budget had introduced a stamp duty for Islamic banking products, with a rate structure similar to that for conventional financial instruments. The 2003 budget amended this structure because Islamic banking products require additional agreements on sales and purchases of assets, causing higher stamp-duty payments than on conventional instruments. The 2006 budget further announced a stamp duty exemption on Islamic financial products approved by the sharia advisory council of either the Bank Negara Malaysia or the Securities Commission (SC) between September 2nd 2006 and December 31st 2007. The 2006 budget also reduced the stamp duty on loans of up to M$1m taken out by small and medium-sized enterprises. The government has used stamp-duty exemptions to encourage corporate restructuring. Mergers of stockbroking companies have been exempt from stamp duty on merger documents since January 1st 2001. Similar exemptions have been given to merging banks and insurance companies. The 2006 budget expanded the exemption to all companies listed on Bursa Malaysia, the national stockmarket. To be eligible for the exemption, which also covers real-property gains tax, mergers need to be approved by the Securities Commission, the markets supervisor, between October 1st 2005 and December 31st 2007, and be completed by December 31st 2008. Unimproved land is taxed at 10% of its estimated market value. A 10% withholding tax applies to income received by non-residents from the rental of movable property. There are export levies on logs, palm oil, base metals, live animals and a number of other products. An entertainment duty of 25% of admission price is charged, though many performances are exempt. Other taxes include a road tax (levied on vehicles, based on the type of vehicle and the type of fuel used) and gaming taxes. A windfall levy is imposed on crude palm oil and crude palm kernel oil when their prices exceed M$2,000 per tonne. Individual states levy real-property taxes at varying rates. Copyright 2007 Economist Intelligence Unit |