Personal Income taxation in Malaysia is laid out in general terms under the Income Tax Act of 1967. While this is the principal piece of legislation covering taxation in Malaysia, further legislation has since been introduced in order to supplement and clarify existing policy.
Enacted on an annual basis, the Malaysian budget is one of the most readily available tools to governing authorities with respect to the alteration of existing taxation policy - allowing for yearly clarification of the income tax regimes’ application.
The passage of Malaysia’s 2016 budget on 23 October 2015 has predictably brought along with it changes to taxation policy. Under the theme ‘Prospering the Rakyat’, the 2016 budget, although expected, has resulted in substantial changes to existing policy. This is partly a result of it being the first budget issued under the 11th Malaysia Plan, which aims to gradually reduce the nation’s fiscal deficit, increase the purchasing power of average citizens and ease the cost of living within Malaysia.
In addition to the specific changes brought about by the 2016 budget, we will highlight the subjects of Malaysian Income tax as well as the rates of taxation that should be expected in 2016.
Incomes subject to income tax in Malaysia and exemptions
Source-taxation principle and its exceptions in the case of Malaysia Malaysia adopts a territorial principle of taxation, meaning only incomes that have a source in Malaysia are taxable there, regardless of where the expatriate is paid. All types of incomes are taxable, including gains from employment or business activities, dividends, etc.
Consequently, profits sourced elsewhere are not subject to Malaysia personal income tax.However, this principle of taxation is subject to three mains exceptions:
• Firstly, Malaysia has signed numerous double taxation agreements. When addressing instances of double taxation, this wide bilateral tax treaties network can be an exception to the territoriality taxation principle, as it sometimes allocates the right to other countries to tax domestically earned income of Malaysian tax residents. In these instances, tax residents will be exempted from paying personal income tax in Malaysia.
• Expatriates may benefit from a special tax regime exemption on their income, if the two following conditions are verified:
- Not being defined as a fiscal resident
- If the period of employment in Malaysia does not exceed 60 days per calendar year.
Finally, for income derived from specific industries, including air transport and banking, Malaysia doesn’t apply the territorial basis rule, but instead employs a worldwide basis for taxation. Tax residency status Even though Malaysia has adopted a territoriality principle when it comes to taxation of incomes, knowing which individuals qualify for residency for tax purposes is still useful to determine the tax regime applicable to individuals receiving incomes sourced in Malaysia.
Indeed, a non-resident expatriate that is liable for income tax in Indonesia will be taxed, but on a different taxation legal regime than residents are. Residency for Tax Purposes in Malaysia is defined by part II, section 7 of the 1967 law. If an individual, regardless of their nationality, fulfils one of the following criteria, they must be considered as a tax resident of Malaysia:
• The individual has been resident in Malaysia for 182 days of the tax year
• The individual has been resident in Malaysia for less than 182 days of the tax year, but was resident in the country for a total of 182 consecutive days linked to days from the year immediately preceding or following that tax year
• The individual has been resident in Malaysia for at least 90 days of the current tax year and was resident in Malaysia for at least 90 days in three of the four preceding years
• The individual will be resident in Malaysia in the year following and has been resident in Malaysia in the three years preceding the one being taxed.
Tax system in Malaysia
Increased rates in individual income tax rates in 2016
To determine which kind of rate (progressive or flat) and which tax percentage is applicable to a given income, taxpayers must determine whether or not they qualify as a resident for tax purposes in Malaysia, as different regimes apply.
Indeed, expatriates who do not qualify for tax residency in Malaysia are taxed on all their Malaysia sourced income at a flat rate of 26 per cent before 2016, and at a flat rate of 28 per cent from the 2016 assessment year onwards.
Regarding the expatriates that qualify for tax residency, Malaysia has a progressive personal income tax system in which the tax rate increases as an individual’s income increases. This tax rate starts at zero per cent and is capped at 25 per cent before the assessment year of 2016, and 28 per cent from 2016 onwards. The rates applicable to each income bracket are as follows:
Tax relief and deductions
Several tax deductions are available for individual income taxpayers in Malaysia. However, nonresident expatriates are not eligible to benefit from those tax reliefs, unlike expatriates that qualify for the resident-for-tax purposes status. Among those tax reliefs are:
• Tax relief for spouses
• Tax relief for taxpayers who have to pay parental care
• Tax relief for each child below 18 years old
• Tax relief for children studying at tertiary level
In an effort to reduce the living costs of citizens and the financial burden of taxpayers that have to take care of their parents or raise children, deductible amounts pertaining to these and other activities have been increased from 2016 onwards.
A new tax relief has been created in the 2016 budget - tax relief on employees’ contribution to social protection. Currently, there is in fact no tax relief for contributions made by employees to the Social Security Organisation (SOCSO).
Compliance and payment
In Malaysia, the tax year runs in accordance with the calendar year, beginning on 1 January and ending on 31 December. All tax returns must be completed and returned before 30 April of the following year.
Regarding expatriates that are considered as residents, their employer withholds that income tax from their salary and the balance must be settled at the end of the financial year upon filing a tax return.
If late payment or incorrect returns are discovered through tax audits, penalties will be applied.
- This article was first published on Asia Briefing.
Dezan Shira and Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile fullservice consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States. For further details or to contact the firm, please email info@dezshira.com or visit www.dezshira.com.
Personal Income taxation in Malaysia is laid out in general terms under the Income Tax Act of 1967. While this is the principal piece of legislation covering taxation in Malaysia, further legislation has since been introduced in order to supplement and clarify existing policy.
Enacted on an annual basis, the Malaysian budget is one of the most readily available tools to governing authorities with respect to the alteration of existing taxation policy - allowing for yearly clarification of the income tax regimes’ application.
The passage of Malaysia’s 2016 budget on 23 October 2015 has predictably brought along with it changes to taxation policy. Under the theme ‘Prospering the Rakyat’, the 2016 budget, although expected, has resulted in substantial changes to existing policy. This is partly a result of it being the first budget issued under the 11th Malaysia Plan, which aims to gradually reduce the nation’s fiscal deficit, increase the purchasing power of average citizens and ease the cost of living within Malaysia.
In addition to the specific changes brought about by the 2016 budget, we will highlight the subjects of Malaysian Income tax as well as the rates of taxation that should be expected in 2016.
Incomes subject to income tax in Malaysia and exemptions
Source-taxation principle and its exceptions in the case of Malaysia Malaysia adopts a territorial principle of taxation, meaning only incomes that have a source in Malaysia are taxable there, regardless of where the expatriate is paid. All types of incomes are taxable, including gains from employment or business activities, dividends, etc.
Consequently, profits sourced elsewhere are not subject to Malaysia personal income tax.However, this principle of taxation is subject to three mains exceptions:
• Firstly, Malaysia has signed numerous double taxation agreements. When addressing instances of double taxation, this wide bilateral tax treaties network can be an exception to the territoriality taxation principle, as it sometimes allocates the right to other countries to tax domestically earned income of Malaysian tax residents. In these instances, tax residents will be exempted from paying personal income tax in Malaysia.
• Expatriates may benefit from a special tax regime exemption on their income, if the two following conditions are verified:
- Not being defined as a fiscal resident
- If the period of employment in Malaysia does not exceed 60 days per calendar year.
Finally, for income derived from specific industries, including air transport and banking, Malaysia doesn’t apply the territorial basis rule, but instead employs a worldwide basis for taxation. Tax residency status Even though Malaysia has adopted a territoriality principle when it comes to taxation of incomes, knowing which individuals qualify for residency for tax purposes is still useful to determine the tax regime applicable to individuals receiving incomes sourced in Malaysia.
Indeed, a non-resident expatriate that is liable for income tax in Indonesia will be taxed, but on a different taxation legal regime than residents are. Residency for Tax Purposes in Malaysia is defined by part II, section 7 of the 1967 law. If an individual, regardless of their nationality, fulfils one of the following criteria, they must be considered as a tax resident of Malaysia:
• The individual has been resident in Malaysia for 182 days of the tax year
• The individual has been resident in Malaysia for less than 182 days of the tax year, but was resident in the country for a total of 182 consecutive days linked to days from the year immediately preceding or following that tax year
• The individual has been resident in Malaysia for at least 90 days of the current tax year and was resident in Malaysia for at least 90 days in three of the four preceding years
• The individual will be resident in Malaysia in the year following and has been resident in Malaysia in the three years preceding the one being taxed.
Tax system in Malaysia
Increased rates in individual income tax rates in 2016
To determine which kind of rate (progressive or flat) and which tax percentage is applicable to a given income, taxpayers must determine whether or not they qualify as a resident for tax purposes in Malaysia, as different regimes apply.
Indeed, expatriates who do not qualify for tax residency in Malaysia are taxed on all their Malaysia sourced income at a flat rate of 26 per cent before 2016, and at a flat rate of 28 per cent from the 2016 assessment year onwards.
Regarding the expatriates that qualify for tax residency, Malaysia has a progressive personal income tax system in which the tax rate increases as an individual’s income increases. This tax rate starts at zero per cent and is capped at 25 per cent before the assessment year of 2016, and 28 per cent from 2016 onwards. The rates applicable to each income bracket are as follows:
Tax relief and deductions
Several tax deductions are available for individual income taxpayers in Malaysia. However, nonresident expatriates are not eligible to benefit from those tax reliefs, unlike expatriates that qualify for the resident-for-tax purposes status. Among those tax reliefs are:
• Tax relief for spouses
• Tax relief for taxpayers who have to pay parental care
• Tax relief for each child below 18 years old
• Tax relief for children studying at tertiary level
In an effort to reduce the living costs of citizens and the financial burden of taxpayers that have to take care of their parents or raise children, deductible amounts pertaining to these and other activities have been increased from 2016 onwards.
A new tax relief has been created in the 2016 budget - tax relief on employees’ contribution to social protection. Currently, there is in fact no tax relief for contributions made by employees to the Social Security Organisation (SOCSO).
Compliance and payment
In Malaysia, the tax year runs in accordance with the calendar year, beginning on 1 January and ending on 31 December. All tax returns must be completed and returned before 30 April of the following year.
Regarding expatriates that are considered as residents, their employer withholds that income tax from their salary and the balance must be settled at the end of the financial year upon filing a tax return.
If late payment or incorrect returns are discovered through tax audits, penalties will be applied.
- This article was first published on Asia Briefing.
Dezan Shira and Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile fullservice consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States. For further details or to contact the firm, please email info@dezshira.com or visit www.dezshira.com.
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