MALAYSIAN TAXATION

Early History Of Tax Administration

Before any Western powers ever set foot in this land, a tax administration system had actually existed, that is during the heyday of the Melaka and Johor-Riau Sultanate.

 In the era of the Melaka Sultanate, maritime and harbour laws existed along with matters pertaining to a tax structure involving the foreign and local merchants. During that period the tax collector and all tax-related matters were the responsibility of the Chief of the Exchequer The portfolio in charge of tax collection was the Harbour Master. He was entrusted by the king with the power to enforce rules and Harbour Laws.

 With the establishment of the Straits Settlements (which consisted of Singapore, Penang, Melaka, Labuan and Dinding in Perak) in 1826, tax administration were supervised by a Governor and a Council directly answerable to the Governor General in Calcutta, India who was in turn controlled by the Board of Governors of the East India Company.

Tax Administration In The Straits Settlements And Federated Malay States

 Even though the Straits Settlements had been established, a few tax structure and practices applied by the Malay chieftains were retained, for example the Tax Farming system. In this system, a lessee with the highest bid had the authority to collect tax. The lessee was given a license and was subject to specific rules. This facilitated the process of obtaining Excise Duty revenues.

 To prevent smuggling, particularly opium, from 1861 onwards the number of police personnel were reinforced and new recruits swelled the ranks. Even though a Customs and Excise Department had yet to exist, all customs activities were operated by a body called the Government Monopolies. This body was authorised to grant import license and process and sell certain goods such as opium, tobacco, arrack, cigarettes and matches.

 At that time, excise duty were imposed on such goods as rice-wine (samsu), toddy and locally made opium whilst customs tax was imposed on opium imported from China, tobacco, cigarettes, liquor and fire crackers.

 Government Monopolies, the body that controlled these customs and excise activities existed until 1937 whereby in that year the Straits Settlement Customs and Excise Department was officially launched as H.M. Customs and Excise. Following that, a Revenue Collection Branch and a Preventive Branch were set up to oversee customs and excise activities until 1937.

 Income tax (Income Tax Ordinance 1947) was introduced by the British into Fed of Malaya with effect from 1/1/48 Based on designed for the British Columbia Repealed and replaced by Income Tax Act 1967. wef 1/1/68

Income Tax Act 1967

Residents were taxed on a world income basis (YA1974, this basis was abolished and replaced by the derived and remittance basis) Business losses suffered in any year are deductable against income from all sources for that year and able to carry forward subsequent years. Wider powers to counter tax avoidance.

Malaysian Tax System

In Malaysia, the law governing income taxation is the Income Tax Act 1967 (Act 53/1967). The Inland Revenue Board Malaysia (IRB) act as an agent to provide services in assessing, administering, collecting and enforcing the payment of income tax and other taxes that are under the board's jurisdiction

 Malaysian taxation is territorial in scope, whereby income derived from sources in Malaysia and income received in Malaysia from outside Malaysia is subject to tax. With effect from year of assessment (YA) 2004, income received in Malaysia by any person other than a resident company carrying on the business of banking, insurance, sea or air transport derived from sources outside Malaysia is exempted from tax. Malaysia has signed tax treaties with over 70 countries.

 Malaysia is currently under a Self-Assessment tax regime (SAS), where taxpayers have the responsibility to assess the extent of their tax liability and bear the onus of disclosure and representation of information. Under the SAS, the tax authorities will conduct tax audits on taxpayers to ensure proper compliance in respect of returns submitted, failing which penalties will be imposed on tax adjustments made.

 Taxable income of companies is generally subject to corporate tax at the rate of 25% (with effect from YA 2009). Small and Medium Enterprises (SMEs) which fulfill the conditions set will be subject to tax at the following rates: For the first RM500,000 taxable income 20% Balance of taxable income thereafter 25%

INTRODUCTION
The transaction must fall within the scope of section 3 of the Act in order to be liable to income tax.

SECTION 3
it sets out two circumstances where income tax liability arises, namely: a) The transaction must be income in nature and such income is derived from Malaysia OR b) The transaction must be income in nature and its received in Malaysia from outside Malaysia( foreign source income).

SCOPE OF CHARGE
Section 3 of the Act provides: Subject to and in accordance with this Act, a tax to be known as income tax shall be charge for each YA upon the income of any person accruing in or derived from Malaysia or received in Malaysia from outside Malaysia.

SOURCES OF INCOME
The Act does not define the meaning of income but merely categorizes the income under sec 4 and sec 4A

Classes of income on which tax is chargeable

Sec 4 , subject to this act the income upon which tax is chargeable under this act is income in respect of: gains and profits from a trade, profession and business gains or profits from an employment (salaries, remunerations, etc.) dividends, interests or discounts rents, royalties or premiums pensions, annuities or other periodic payments other gains or profits of an income nature.

INTRODUCTION
All individuals are liable to pay tax on income accrued in, derived from or remitted to Malaysia. Sources of income which can be taxed includes gains and profits from trade, profession and business, salaries, remunerations, gains and profits from an employment, dividends, interests or discounts, rents, royalties or premiums, pensions, annuities or other periodic payments and other gains or profits of an income nature not mentioned above.

INTRODUCTION
Taxable income is arrived at after adjusting for expenses incurred wholly and exclusively in the production of the income. The rate of tax depends on the resident status of the individual which is determined by the duration of his stay in the country (as stipulated under Section 7 in the Income Tax Act 1967). A resident individual is taxed on his chargeable income at graduated rates from 2% to 26% after the deduction of tax relief

RESIDENCE STATUS FOR INDIVIDUAL

Introduction
The concept of resident is important in the Income Tax Act 1967. an individual who is a tax resident in Malaysia would be given an overall preferential tax treatment as compared to a non resident individual. Non- resident individual suffers the maximum flat rate of tax at 26% as compared to the scaled rate ranging 0%- 26% for resident.

Determination Of Resident Status

The ascertainment of an individuals resident status in purely a quantitative test. It is determined by reference to the number of days an individual person is present in Malaysia during a particular calendar year.

SECTION 7
Section 7(1) of the Act lays down FOUR circumstances where an individual can be regarded as tax resident in Malaysia: He is in Malaysia in that basis year for a period or periods amounting in all to 182 days or more;

SECTION 7 (Cont.)
he is in Malaysia in that basis for a period of less than 182 days and that period is linked by or other period of 182 or more consecutive days throughout which he is in Malaysia in the basis year for the YA immediately preceding that particular YA or in that basis year for the year immediately following that particular YA:

SECTION 7 (Cont.)
Provided that any temporary absence from Malaysia: i. Connected with his service in Malaysia and owing to service matters or attending conferences or seminars or study abroad. ii. Owing to ill-health involving himself or a member of his immediate family iii.In respect of social visits not exceeding 14 days in the aggregate.

SECTION 7 (Cont.)
It shall be taken to form part of such period or that period, as the case may be, if he is in Malaysia immediately prior to and after that temporary absence.

SECTION 7 (Cont.)
c) He is in Malaysia in that basis year for a period or periods amounting in all to 90 days or more, having been with respect to each any 3 of the basis years for the 4 immediately preceding that particular YA either: resident in Malaysia within the meaning of this Act for the basis year or; In Malaysia for a period amounting in all to 90 days or more in the basis year

SECTION 7 (Cont.)
d) He is resident in Malaysia within the meaning of this Act for the basis year for the YA following that particular YA, having been so resident for each of the basis years for the 3 YAs immediately preceding that particular YA.

Personal Income Tax

All individuals are liable to tax on income accrued in and derived from Malaysia or received in Malaysia from outside Malaysia. Income remitted to Malaysia by a resident individual is exempted from tax. A nonresident individual will be taxed only on income earned in Malaysia.

Personal Income Tax(cont)

The rate of tax depends on the individual's resident status, which is determined by the duration of his stay in the country as stipulated under Section 7 of the Income Tax Act 1967. Generally, an individual who is in Malaysia for at least 182 days in a calendar year is regarded as a tax resident.

Personal Income Tax(cont)

Resident Individual A resident individual is taxed on his chargeable income after deducting personal reliefs at a graduated rate from 0% to 26% with effect from the year of assessment 2010.

Personal Income Tax(cont)

Non-Resident Individual Effective from year of assessment 2010, a nonresident individual is liable to tax at the rate of 26% without any personal relief. However, he can claim rebates in respect of fees paid to the government for the issuance of an employment work permit.

PERSONAL RELIEF
RELIEF RM

Self (with effect from year of assessment 2010) Further self relief - disabled
Wife/husband Further wife/husband relief - disabled Medical expenses for parents Medical expenses for taxpayer, spouse or children on serious diseases (include RM500 for medical examination)

9000 6000
3000 3500 5000 5000

Expenses on supporting equipment for disabled taxpayer, spouse, children or parent

5000

RELIEF
Expenses on supporting unmarried children:

RM

i. ii. iii. Life insurance premiums or approved fund contributions (with effect from year of assessment 2010)

Below 18 years of age Disabled child Over 18 years old (pursuing tertiary education at university or college)

1000

5,000 4,000 7000

RELIEF Annuity premium on annuity purchased through EPF Annuity Scheme Fee of acquiring law, accounting (extended to Islamic finance), technical, vocational, industrial, scientific, technological skills or qualification. Purchase of books, journals and magazines and other similar publication (excluding newspapers). Purchase of computer for once every three years Broadband subscription fees applicable from the year of assessment 2010 until 2012

RM 1000

5000

1000

3000 500

REAL PROPERTY GAINS TAX

The Real Property Gains Tax (RPGT) has been re-introduced with effect from 1 January 2010. Gains arising from the disposal of real property and any interest, option, or other right in or over such land or shares in real property companies (collectively known as chargeable assets) would be subject to RPGT.

Date of Rates Provided Under Schedule 5 Effective Rates Disposal From of RPGT Act 1976 (Exemption Date of Order) Acquisition Old Rates With Effect From 1.1.2010

Budget 2012

WEF 1.1.2012

Companies

Individuals &
Non Corporate Entities

All categories of All categories of Owners Owners

Within 2 years 3rd Year 4th Year 5th year 6th Year

30% 20% 15% 5% 5%

30% 20% 15% 5% Nil

5% 5% 5% 5% Nil

10% 5% 5% 5% Nil

LOCAL AUTHORITIES
Property or Assessment Tax is levied on all property holdings, including shops, factories, residential, agricultural and others, situated in the areas under the jurisdiction of local authorities

INDIRECT TAXES
Service tax and sales tax are currently the two major types of consumption taxes levied and charged on taxable services and taxable goods. It has been proposed by the Malaysian government that Goods and Service Tax (GST) be introduced to replace the service tax and sales tax; however the implementation of the GST system has been deferred by the government to a later date which has yet to be announced.

SERVICE TAX
Service tax is a single stage tax applicable to certain prescribed services in Malaysia. The tax also applies to professional and consultancy services as prescribed by the Royal Malaysian Customs Department. Professional services provided by a company to companies within the same group will be exempted from service tax, subject to meeting certain terms and conditions.

 Generally, the imposition of service tax is subject to a specific threshold based on an annual turnover ranging from M150,000 to RM300,000, subject to the types of taxable services and taxable person. The threshold would not be applicable for certain prescribed professional and consultancy services.

 With effect from 1 January 2010, service tax to be imposed on credit cards and charge cards including those issued free of charge as follows: RM50 per year on the principal card RM25 per year on the supplementary cards. With effect from 1 January 2011, the rate of service tax on all taxable services has been increased from 5% to 6%. With effect from 1 January 2011, service tax on paid broadcasting services will be charged on the monthly subscription fees on these services.

SALES TAX
Sales tax is a single stage tax imposed on taxable goods manufactured locally and/or imported. Taxable goods means goods of a class or kind not for the time being exempted from sales tax. Generally, all exports are exempted from sales tax. Manufacturers of taxable goods are required to register with the Royal Malaysian Customs Department and to levy, charge and collect the tax from their customers. For imported goods, sales tax is collected from the importer upon the release of taxable goods from customs control.

 Sales tax is an ad valorem tax and can be computed based on the value of taxable goods sold, used, disposed of, or imported. Ordinary mobile phones will be exempted from sales tax effective from 15 October 2010

IMPORT DUTIES
Import duties are levied on goods that are subject to import duties and imported into the country. Import duties are generally levied on an ad valorem basis but may also be imposed on a specific basis. The ad valorem rates of import duties range from 0% to 60%. Raw materials, machinery, essential foodstuffs, pharmaceutical products and certain tourism related and daily use products are generally non-dutiable or subject to duties at lower rates.

 Full exemption of import duty and excise duty on new completely-built-up hybrid and electric cars has been given to franchise holders for the period of a year i.e. from 1 January 2011 to 31 December 2011 and the exemption has been extended for another two years (i.e. effective for applications received by the Ministry of Finance from 1 January 2012 to 31 December 2013 in Budget 2012).

EXCISE DUTIES
In Malaysia, excise duties are imposed on a selected range of goods manufactured in Malaysia and selected imported goods, including motor vehicles. Goods which are subject to excise duty include: Beer, stout and other intoxicating liquors (e.g. cider and perry,
rice wine, mead, brandy, whisky, rum and tafia, gin) Cigarettes containing tobacco Motor vehicles, Playing cards.

Budget 2013
Themed Prospering The Nation, Enhancing WellBeing of the Rakyat: A Promise Fullfilled,

Education and Labour

RM1bil to improve school infrastructure RM1.2bil for pre-schools under government programmes including Permata RM10,000 launching grants for private preschool operators Five-year tax holiday and building allowance for pre-school operators

Education and Labour

Six pilot pre-schools for the disabled, RM3.7bil for vocational training Additional allocation of RM500 million for training of teachers in core subjects: Bahasa Malaysia, English, Science and Math Free health checks twice a year for Perkeso members

Crime-Fighting
RM591mil for crime prevention 1,000 motorcycles for polices neighborhood patrol unit Additional 10,000 volunteer police 496 CCTV in 25 local councils RM10,000 grants for neighborhood associations for patrols New uniforms for 300,000 Rela members

 Incentives for companies that install security systems Additional 150 staff for the Malaysian AntiCorruption Commission (MACC) RM20mil for the National Legal Aid Foundation

Youth and Sports

Velodrome to be built in Seremban, Negri Sembilan and a badminton academy in Bukit Kiara, Kuala Lumpur Subsidy of two per cent of interest rate business loans for young entrepreneurs for loans up to RM100,000 RM200 rebate for smart phone purchase for those aged 21 to 30 years earning less than RM3,000 monthly

Public Transport
Half price KTM Komuter fares for those earning less than RM3,000 a month Formation of RapidKuantan

Housing
Affordable housing - 123,000 units to be built in areas such as Sungai Buloh and Seremban First home scheme income cap raised from RM3,000 to RM5,000. Joint income limit is RM10,000. Applies only for houses below RM400,000 Up to 50 per cent stamp duty exemption for first home owners until Dec 14, 2014

 Real property gains tax (RPGT) for properties sold within two years of purchase raised to 15 per cent; 2-5 years 10 per cent. No RPGT for properties sold five years after purchase Tax breaks and incentives for contractors and banks who offer loans to contractors to revive abandoned housing projects. Original buyers of abandoned projects will be exempted from stamp duty for loan refinancing or ownership transfer agreements

Students
RM10,000 rebates and 2 per cent interest subsidy on loans to purchase new school buses, to replace buses which are 25-years-old or more. (Capacity 12 to 18 seats) RM2.6bil in welfare aid for schoolchildren One-off payment of RM100 for each primary and secondary school student

RAKYAT
continuation of the 1Malaysia People's Aid (BR1M) of RM500 to households earning not more than RM3,000 a month. extended the aid under the BR1M 2.0 to cover a payment of RM250 for single unmarried individuals aged 21 and above, earning not more than RM2,000 a month. increased the 1Malaysia book voucher for students studying at institutions of higher learing to RM250 from RM200 previously.

 RM200 one-off rebate for purchase of 3G smartphone for persons aged from 21 to 30 with monthly income of RM3,000 or below

 50% discount on KTM Komuter fares extended to all Malaysians with a monthly income of RM3,000 and below and who travel by KTM Komuter. Reduce sugar subsidy by 20 sen per kg from 29 Sept 2012.

 Individual income tax rate to be reduced by 1 percentage point for the first RM50,000 of chargeable income. Child tax relief be increased from RM4,000 to RM6,000 per child for children aged 18 and above and receiving receiving full-time tertiary education.

 PTPTN loans: Incentive repayment of full loan from 1 October 2012 until 30 September 2013, a discount of 20% will be given on their loan. PTPTN: Regular repayment gets a 10% discount. My First Home Scheme income limit for individual loans raised from RM3,000 to RM5,000 per month.

 Retired civil servants who had served the Government for at least 25 years will now see their pension raised to a minimum of RM820 per month from the previous RM720. one-and-half month's bonus for civil servants a reduction in income tax of one percentage point for the first RM50,000 of chargeable income