Malaysia Tax System

Introduction

Malaysia’s tax framework plays a pivotal role in shaping its economic landscape. As the backbone of the national economy, the system encompasses a range of taxes that fund public services and development projects. Understanding the intricacies of this system is essential for anyone navigating the Malaysian financial environment.

Malaysia Tax System: Types of Taxes in Malaysia

The Malaysian tax regime comprises both direct and indirect taxes.

Direct taxes, levied directly on individuals and corporations, are based on income or profits. These include income tax for individuals, corporate tax for businesses, and other specific taxes such as capital gains tax and real property gains tax. Direct taxes are significant in that they are tied to the financial capacity of taxpayers, ensuring a progressive contribution to the nation’s revenue.

On the other hand, indirect taxes are applied to the consumption of goods and services. The most prominent forms of indirect taxation in Malaysia are the Sales and Service Tax (SST) and customs duties. These taxes are not directly levied on income but rather on spending behaviors, making them an essential tool for regulating the economy and providing a more balanced and diversified revenue stream.

Corporate tax rate

The corporate tax rate in Malaysia is competitive and designed to attract foreign investment while ensuring fair contributions from domestic entities. The standard rate for corporate tax is 24%. However, for resident small and medium enterprises (SMEs), a lower rate is applied to the first MYR 600,000 of chargeable income, reflecting the government’s commitment to supporting SME growth.

Moreover, different sectors and types of businesses may be subject to specific tax rates or incentives. These special rates are part of Malaysia’s broader economic strategy to stimulate growth in key industries and to encourage innovation and development.

Malaysia IRB has proposed the income tax rate for Small and Medium Enterprise (SME) from year assessment 2023, subject to the income tax rate on the first RM150,000 of chargeable income will be reduced from 17% to 15%, and the income tax rate for the remaining chargeable income band be maintained at 17% and 24% as follows:

Chargeable income	Tax Rate
First RM150,000	15%
RM150,001 to RM600,000	17%
RM600,001 and above	24%

The definition of an SME in Malaysia often depends on factors such as annual sales turnover, the number of full-time employees, and the percentage of foreign shareholders in a company. Companies exceeding these thresholds are categorized as non-SMEs and are subject to the standard corporate tax rate which is 24%.

Third revision to estimate of tax payable under an instalment payment scheme

Form CP204, is a crucial tax form in Malaysia used for estimating and paying corporate tax in advance. This form must be submitted by companies operating in Malaysia, except for those under the exempt category, like newly incorporated companies in their first year of operation.

Presently, a corporation is required to submit Form CP204 and be allowed to amend the tax estimates payable by submitting CP204A in either the 6^th or/and 9^th month in the basis period for a year of assessment. Effective from the year of assessment 2024, additional tax estimates payable is allowed, which is in the 11^th month of the assessment.

Income Tax for Individuals

In Malaysia, individual income tax operates on a progressive scale, effectively aligning tax rates with the income level of the taxpayer. This structure ensures an equitable distribution of tax burdens. Individuals are categorized into various tax brackets, with rates escalating in tandem with their income. This system not only ensures fairness but also promotes fiscal responsibility among citizens.

Taxation rates and regulations in Malaysia also differ between residents and non-residents. An individual is considered a resident for tax purposes if they are in Malaysia for 182 days or more in a calendar year. Residents are subject to a progressive tax rate ranging from 0% to a maximum of 30%, and eligible for various deductions and tax reliefs, such as personal relief, spousal relief, child relief, and education expenses. Non-residents are taxed at a flat rate of 30% and do not qualify for most of the tax deductions and reliefs available to residents.

Sales and Service Tax (SST)

The Sales and Service Tax (SST) in Malaysia is a fundamental component of the country’s indirect tax regime, introduced as a replacement for the Goods and Services Tax (GST) in September 2018. SST is designed to be less burdensome for consumers and simpler for businesses to manage compared to its predecessor. It consists of two elements: the Sales Tax and the Service Tax, each with its own rates and mechanisms.

The Sales Tax is a single-stage tax imposed on the importation and manufacturing of goods within Malaysia. It is charged at the point of sale by manufacturers or upon importation of goods. The standard rate for Sales Tax is 10%, but a reduced rate of 5% or specific rates for certain goods may apply. Essential items, such as basic foodstuffs and pharmaceutical products, are often exempt to ease the burden on consumers.

The Service Tax is levied on specific services provided in Malaysia, including but not limited to food and beverage services, hotels, and professional services. The Service Tax is generally charged at a rate of 6% but in the recent budget 2024, the government proposed an increase of rate to 8%. However, this increased rate does not apply for certain essential services such as food and beverages, telecommunication as well as parking and logistics. The new rate will be effective starting on 1 March 2024.

Withholding tax

Withholding tax in Malaysia is a critical aspect of the country’s tax regime, particularly in the context of international transactions. It acts as a method for the Malaysian government to collect income tax in advance from non-residents on various types of income earned within its jurisdiction. This system ensures that non-residents comply with the Malaysian tax obligations on income sourced from Malaysia.

Withholding tax is applicable to specific types of payments made to non-residents, including but not limited to fees for services rendered, interest, royalties, and lease rentals. It is the responsibility of the payer (a resident entity or individual) to withhold a percentage of the payment and remit it to the Malaysian Inland Revenue Board (IRB).

The rates of withholding tax vary depending on the type of income and the agreements between Malaysia and the country of residence of the non-resident. As of the last update, typical rates range from 10% to 15%, but these can differ based on specific Double Taxation Agreements (DTAs) Malaysia might have with other countries.

Foreign income Tax

Malaysia IRB have also amend the definition of foreign tax under Section 2 and foreign income under Schedule 7 of The Income Tax Act 1967.Effective from year of assessment 2024, it is proposed that ‘foreign tax’ be amended as any tax on income (any other tax of a substantially similar character) chargeable or imposed by or under the laws of a territory outside Malaysia in which the same income arose.

In addition, it is proposed that ‘foreign income’ means in relation to :-

• Unilateral credit, income derived from outside Malaysia changed to foreign tax;
• Bilateral credit, income derived from outside Malaysia and from Malaysia, charged to foreign tax.

Conclusion

The Malaysian tax system, with its multifaceted structure and evolving nature, is a critical component of the nation’s economy. While it faces challenges, its continuous adaptation and the government’s commitment to improving compliance and fairness bode well for the future. As Malaysia strides forward, its tax system will undoubtedly play a key role in shaping its economic destiny.