Introduction to Malaysian Taxation

1. In Malaysia, there are 2 types of tax systems in operation, which are, direct and indirect taxation. Direct taxation involves paying taxes on income or gains generated from a venture and indirect taxes is imposed by way of tariffs, custom duties, sales tax, services tax and the soon to be implemented Goods and Services Tax better known as GST.
   
   
2. Direct taxes come under the purview of the Inland Revenue Board whereas indirect taxes come under the purview of the Royal Malaysian Customs Department. Ultimately, both these agencies come under the Ministry of Finance.
   
   
3. The focus of these articles would be on the direct taxation system, which is legislated by the Income Tax Act, 1967 (henceforth referred to as the Act). However, we would post articles on indirect taxation and other tax related matters from time to time.
   
   
4. For many, taxation is a very complicated subject, with many rules and regulations to be adhered to. But in reality, the 'complication' actually boils down to only 3 matters. Once these 3 matters are identified, computation of the income tax can be done by applying the appropriate tax rate. The 3 matters of consideration are "Scope of Charge", "Residence Status" and "Deductions".
   
   
5. The "Scope of Charge" determines the chargeability of the income. Section 3 of the Act sets out 2 conditions for income to be taxed in Malaysia. First, the income must be accrued or derived, i.e. earned in Malaysia. The second condition is that the income must be received in Malaysia from outside Malaysia, i.e. foreign sourced income.
   
   
6. However, with effect from year 2004, foreign sourced income which are repatriated back to Malaysia is no longer subject to tax by way of the exemption granted under Para 28, Schedule 6 of the Act. As such, the second condition mentioned above is no longer applicable for everyone except, companies in the business of banking, insurance, sea or air transport.
   
   
7. The "Residence Status" would determine the applicable tax rates, whether tax reliefs are available (for individual tax) and/or whether the income derived would be subject to withholding tax and in some cases, whether income would be exempted from tax. In the context of the Act, citizenship does not determine the Tax Residence status. A person would be deemed to be a Tax Resident so long as the individual (whether citizen or not) satisfies the conditions (i.e. the number of days stay in Malaysia) as set out in Section 7 of the Act, and Section 8 for Companies.
   
   
8. The "Deductions" comprise of expenses and reliefs which may be claimed against the income to reduce the taxable income. These 'deductions' come in the form of expenses, capital allowances, double deductions, and personal reliefs which are allowed under various provisions of the Act, the specifics of which, will be discussed in future articles.
   
   
9. If there are only 3 matters of consideration to taxation, how can it get complicated? The complication arises due to the interpretation of the law. Naturally, the tax payer would like to interpret the law to his or her benefit and pay as little tax as possible whereas the Inland Revenue Board would take the view of maximising tax collection for the government coffers. This differing view ultimately leads to tax disputes, and where no resolution can be found between the tax payer and the authorities, the matter would need to be referred to the courts to interpret and resolve.
   
   
10. This concludes our Introduction to Malaysian Taxation article. Our future articles would be a further discussion on the topics of "Scope of Charge", "Residence Status" and "Deductions". If you have any queries on this article or any other tax related questions, kindly feel free to post it on the comments or email us at dason@dason.com.my. Thank you.