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Malaysia Income Tax

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Malaysia operates a territorial basis of income taxation, where only income accruing in, derived from Malaysia, or received in Malaysia from outside Malaysia is subject to income tax. However, income sourced from outside of Malaysia and received in Malaysia is currently exempt from income tax except for resident companies in the business of banking, insurance, air and sea transport.

Malaysia operates a self-assessment (the SAS) tax basis for tax assessments, estimates and payments. That is, the Inland Revenue Board Malaysia (IRBM) requires taxpayers to determine and disclose their own taxable income honestly, compute the tax payable correctly, file tax return and voluntarily pay whatever is due by them on a timely manner.

Self-assessment for companies came into effect from 2001. Whilst for individuals, partnerships, businesses and cooperatives, this came into effect from 2004.

The main changes of SAS is that, the tax return form is deemed to be the notice of assessment replacing the Form J (Section 90(1B) ITA 1967), previously issued by the IRBM. The officer of IRBM will no longer review the tax return submitted by the taxpayer. All companies must file the tax returns within 7 months from the end of the accounting period (Section 77(1A) ITA 1967). For salaried individual, the tax returns must be filed not later than 30 April for each year and for sole proprietors, partnerships and co-operatives, the tax returns must be filed not later than 30 June for each year. Accordingly, any balance of tax payable have to be remitted to the IRBM together with the submission of these tax returns.

Effectively, this have shifted the obligation to assess the tax liability on the taxpayers. Thus, taxpayers must have sufficient tax knowledge in order to assess their tax liability correctly and to file tax return forms on time. If taxpayers fail to submit the tax return within the stipulated deadline, the IRBM pursuant to Section 90(3) ITA 1967, can derive their own assessment based on their estimation and issue notice of assessment including penalty under Section 112 (3) of ITA 1967. The taxpayer is required to settle the tax charge within 30 days from the date of issue of the Note of Assessment. Failure to do so will result in the IRB imposing a penalty equivalent to 10% on the balance of tax payable and if the tax is still not paid after 60 days, a further 5% penalty will be imposed.

In order to further increasing the voluntary tax compliance among the taxpayers, the IRBM has established the framework of tax audit and investigation with the conjunction of the SAS. The possibility of taxpayer being selected for tax audit is expected to be once in every five years. These audits are examination of a taxpayer’s records to ensure the declaration of income and tax liability to the IRBM in the tax return are true, correct and comply with the tax laws and rulings.

To be tax compliant, taxpayers need to be knowledgeable in taxation. It is important for taxpayers to acquire a practical understanding in the preparation and reporting of taxation. At a minimum, taxpayers need to possess some basic knowledge of taxation, with respect to the taxability of income, deductibility of expenses, entitlements, allowances and exemptions. This compliance can be confusing and demanding. Therefore, Malaysian tax law still has a large classification area as to how income of a person will be taxed. Before making any tax filing, do consult your Professional or Tax advisor for any complicated tax computation and tax issues.

* Author does not take any responsibility for misrepresentation or interpretation of act or rules. Neither the author nor the firm accepts any liability neither for the loss or damage of any kind arising out of information in this document nor for any action taken in reliance there on.