Malaysia

Malaysia

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Residents and non-residents in Malaysia are taxed on employment income accruing in, or derived from, Malaysia. Residence status affects the amount of tax paid. Income tax in Malaysia is territorial in scope and based on the principle source, regardless of the tax residency of the individual in Malaysia. The source of employment income is the place where the employment is exercised, regardless where the employment contract is signed or remuneration is paid from.

Key message

Extended business travelers who are in Malaysia for more than 60 days are likely to be taxed on employment income attributable to their Malaysian assignments.

Income tax

Liability for income tax

Income derived from Malaysia by residents and non-residents is subject to Malaysian tax, irrespective of where the employment contract is made or where the remuneration is paid. Employment income is regarded as Malaysian-sourced income if the employment activities are exercised in Malaysia. Generally, an individual becomes a tax resident for the tax year if the aggregate number of days he stays in Malaysia during the basis year is 182 days or more.

Definition of source

Malaysian-sourced income is defined as income accruing in, or derived from, Malaysia. Employment income is generally treated as Malaysian-sourced compensation where the individual performs the services while physically located in Malaysia.

Tax trigger points

A non-resident individual who exercises employment in Malaysia for not more than 60 days is exempt from Malaysian tax. An individual whose employment period in Malaysia exceeds 60 days would be taxable unless he is able to seek exemption from Malaysian tax under the dependent personal services article of the relevant double tax treaty.

Types of taxable income

For extended business travelers, the types of income that are generally taxed are employment income and other Malaysian-sourced income.

Tax rates

A tax-resident individual would be subject to tax at graduated rates ranging up to 28 percent, after the deductions of personal reliefs (such as relief for oneself, a dependent spouse, life insurance premiums, etc.). The maximum tax rate is currently 28 percent (with effect from the tax year, commonly called the year of assessment (YA) 2016) on chargeable income above 1,000,000 Malaysian ringgit (MYR) for residents.

A non-tax-resident individual would be taxed at a flat rate of 28 percent (with effect from YA 2016). Non-tax-residents are not entitled to personal relief deductions.

Social security

Liability for social security

The Social Security Organization (SOCSO) is a scheme to provide certain benefits to employees in cases of employment injury, including occupational diseases and invalidity, and for certain other matters in relation to employment. With effect from 1 June 2016, any employee who is employed for wages under a contract of service or apprenticeship with an employer is compulsory to be registered and contributed to SOCSO and the maximum rate of contribution is based on monthly wages of salary of RM4,000. The current rates of contribution vary from MYR0.10 to MYR19.75 per month for the employee and from MYR0.40 to MYR69.05 per month for the employer. Foreign employees are not required to contribute to SOCSO. Employees of Malaysian nationality or of permanent residence status are required to contribute to the Employees Provident Fund (EPF). Effective 1 January 2012, the employer’s contribution for employees who receive monthly wages of MYR5,000 and below has been increased from 12 percent to 13 percent. The employee’s contribution rate remains at 11 percent. From March 2016 to December 2017, the employee’s contribution is reduced to 8% (however the employees have the option to elect to maintain at 11%) whilst the employer’s contribution for employees remain the same. Employer’s contributions for employees who received monthly wages of MYR5,000 and above remains at 12 percent and has been extended to the age of 60 years old.

For employees who are between 60 and 75 years old, the rate of EPF to be contributed is set at half the regular rate, i.e. at 5.5% (or 4%) for employee and at 6% (or 6.5%) for employer. Foreign employees have the option of becoming members of the EPF. A foreign employee makes a minimum statutory contribution of 11 percent of wages, while the employer contributes at least MYR5 per foreign employee.

Compliance obligations

Employee compliance obligations

The YA runs from 1 January to 31 December. Tax returns must be filed by 30 April of the following year. For individuals who derive business income, the filing deadline is 30 June of the following year.

Employees whose total income tax is equivalent to the total amount of Monthly Tax Deduction (“MTD”), is no longer required to submit tax returns. The amount of the MTD remitted represents as the final tax paid. This is only applicable if the following conditions are fulfilled:

  • Tax payer only has employment income;
  • MTD have been made by his employer in respect of such gains or profits from an employment;
  • Employed by the same employer for that year of assessment;
  • Taxes are not borne by the employer; and
  • If married, spouse has not elected for joint assessment.

Employer compliance obligations

An employer is required to notify the Malaysian Inland Revenue Board (MIRB) via Form CP22 of the commencement of employment of its employees in Malaysia within 1 month of the date of commencement of employment.

An employer must declare the total remuneration paid to employees for employment performed in Malaysia on Forms E and EA. This is regardless of whether the employee’s salary and/or allowance are paid in or outside of Malaysia. The deadlines for issuance of Forms E and EA are 31 March and the last day of February respectively in the following year. With effect from YA 2016 all Form E must be filed electronically.

An employer is also required to notify the MIRB of the cessation of employment of an employee who is liable for tax. In the case of an expatriate employee, the notification is required when the expatriate’s assignment in Malaysia ends or the expatriate ceases employment in Malaysia. The notification (via Form CP21) must be submitted to the MIRB not less than 1 month before the expected date of departure or date of cessation of employment, whichever is earlier.

The employer is required to withhold any money in the employer’s possession owing to the expatriate who has ceased or is about to cease employment until 90 days after the MIRB receives the Form CP21 or upon receipt of the tax clearance letter, whichever is earlier.

The employer can then release the balance of money withheld from the employee after the settlement of the outstanding taxes (if any) as shown in the tax clearance letter.

Employer reporting and withholding requirements

Under the MTD system, it is mandatory for an employer to deduct tax from an employee’s total gross monthly remuneration (which includes perquisites, Benefit-in-Kind and VOLA, etc) whether it is paid in or outside of Malaysia by the 15th of the following month. Payments must be submitted together with a Statement of Tax Deduction by an Employer (Form CP39). Further, it is mandatory for the employer to allow an employee to claim allowable deductions and rebate for not less than twice via a prescribed form.

It should also be noted that the MTD applicable to an employee who is not a resident or not known to be a resident shall be at the rate of 28 percent of the employee’s remuneration.

Immigration

Work permit / visa requirements

A visitor may or may not require a visa prior to entering Malaysia, depending on the issuance country of his/her passport. The Immigration officer at the point of entry to Malaysia usually grants the visitor (except for certain nationalities who require visas applied at their home country before entering Malaysia) a social visit pass for social visit purposes only. The duration of the social visit pass granted depends on the issuance country of the passport. A visitor is not allowed to work or render professional services under the social visit pass. An employment pass or professional visit pass is required for this purpose.

The employment pass is applied for the visitor who has an employment contract (minimum salary RM5,000) with the Malaysian Company. The duration ranges from 1 to 5 years.

As for the professional visit pass, the visitor is allowed to render professional services (e.g. training, technical expertise, internship). He/She will continue to be employed by the employer in the home country and the remuneration is paid by the employer in his/her home country. The maximum duration of the assignment under a Professional Visit Pass (“PVP”) is 12 months. Effective from 1 August 2016, the assignee is only entitled to apply one PVP in a lifetime. This is notwithstanding that he changes employer or renders services for other projects in Malaysia.

Other issues

Double taxation treaties

Malaysia has concluded double tax treaties with at least 76 countries. The treaties prevent double taxation and allow cooperation between Malaysia and overseas tax authorities in enforcing their respective tax laws. Qualification for treaty relief is not automatic.

An application must be made to the MIRB by providing proof that an individual is able to qualify for tax exemption under treaty relief.

Permanent establishment implications

A permanent establishment could potentially be created as a result of extended business travel, but this would be dependent on the type of services performed and the level of authority the employee has.

Indirect Taxes

Goods and Services Tax (“GST”)

Goods and Services Tax (“GST”) is a multi-stage tax which is charged on any taxable supply of goods and services made in the course or furtherance of business by a taxable person in Malaysia. GST is charged on all taxable supplies of goods and services (which includes imported goods and imported services into Malaysia) other than those specifically exempted, zero-rated or given relief. The payment of taxes are levied on all stages throughout the production and distribution process.

Transfer pricing (“TP”)

The Malaysian transfer pricing environment is regulated since 1 January 2009 upon the insertion of the arm’s length principle into the Income Tax Act, 1967. In 2012, the MIRB released the TP Rules and TP Guidelines as an indication that the Malaysian Government is determined in its enforcement of transfer pricing compliance by Malaysian taxpayers. In terms of personal taxation, transfer pricing and tax implications could arise where an employee is being paid by an entity in one jurisdiction but performing services for the benefit of another related entity. This would also be dependent on the nature and complexity of the services performed. Following from the release of the Based Erosion and Profit Shifting (“BEPS”) final action report on 5 October 2015 by the Organization for Economic Co-operation and Development (“OECD”), amongst others, Malaysia has recently issued rules on automatic exchange of financial account information as well as Country-by-Country reporting which come into operation on 1 January 2017 . It may have certain impact on personal taxation related matters.

Local data privacy requirements

Personal Data Protection Act 2010 (“PDPA”) has come into force on 15 November 2013 which seeks to regulate the processing of personal data of individuals involved in commercial transactions.

Exchange control

The present exchange control regime applies uniformly to transactions with all countries except Israel, against which special restrictive rules apply.

Non-deductible costs for assignees

Employment costs are generally deductible by the employer, except for certain prohibited costs such as those in relation to overseas leave passage, entertainment allowance, and the employer’s contribution to pension/provident funds that are not approved by the MIRB. Such costs are non-deductible. However, a 50 percent entertainment allowance is tax deductible.

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