Income Liable to Tax
the Avoidance of Double Taxation
1. Taxation in Malaysia
Generally, all income of companies and individuals accrued in, derived from
or remitted to Malaysia are liable to tax. However, income remitted to Malaysia
by resident companies, non-resident companies (other than companies carrying on
the business of banking, insurance, air and sea transportation) and non-resident
individuals are exempted from tax.
Apart from income tax, there are other direct taxes such as real property
gains tax, and indirect taxes such as sales tax, service tax, excise duty and
Currently, income tax is assessed on the income earned in the
preceding year according to the Offifical Assessment System.
As a measure to modernise and streamline the tax administration
system, the assessment of income tax will be changed to the current year
assessment from the year 2000. The present Official Assessment System will be
changed to the Self-Assessment System in stages as follows:-
||Year of Implementation|
|Business, partnerships and cooperatives
To facilitate the changeover, all income received in 1999 will be waived from
income and losses incurred in 1999 will be allowed to be carried forward.
2. Sources of Income Liable to Tax
Sources of income which are liable to income tax are as follows:
- 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
- Other gains or profits of an income nature not mentioned above.
Chargeable income is arrived at after adjusting for expenses incurred wholly
and exclusively in the production of the income. Specific provisions or reserves
for anticipated losses or contingent liabilities are not tax deductible. No
deduction for book depreciation is allowed although capital allowances are
granted. Unabsorbed losses may be carried forward indefinitely to offset against
3. Company Tax
A company, whether resident or not, is assessable on income accrued in or
derived from Malaysia. Income derived from sources outside Malaysia and remitted
by a resident company is not subject to tax, except in the case of banking and
insurance business and sea and air transport undertakings. A company is
considered a resident in Malaysia if the control and management of its affairs
are exercised in Malaysia. Places of control and management are considered on
the basis of where meetings of the Board of Directors are held.
A tax rate of 28% is applicable to both resident and non-resident companies.
In the case of a company carrying on petroleum production, the applicable tax
rate is 38%.
4. Personal Income Tax
All individuals are liable to tax on income accrued in, derived from or
remitted to Malaysia. 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).
4.1 Resident Individual
A resident individual is taxed on his chargeable income at graduated rates
from 2% to 29%* after the deduction of tax reliefs. However, an individual
with chargeable income of RM2,500 or less, the tax rate is zero.
* Proposed in the 2000 Budget
4.1.1 Personal Reliefs
The chargeable income of an individual resident is arrived at by deducting
from his total income the following personal reliefs:
(a) Personal = RM8,000* (a further relief of RM5,000 if the taxpayer is a
* effective from Year of Assessment (YA) 2000 (current year basis) as
proposed in the 2000 Budget.
(b) Wife = RM3,000 (a further relief of RM2,500 if the wife is a disabled
(c) Medical expenses of parents up to a maximum of RM5,000. Medical
expenses for serious illnesses for individual, wife or child up to a maximum
(d) Expenditure for purchase of basic support equipment for the individual,
his wife, child or parent who is disabled the up to a maximum of RM5,000
(e) Unmarried children below the age of 18 = RM800 per child
The maximum relief for unmarried children receiving full-time education in
universities and institutions of higher education in Malaysia is four times
the normal relief.
(f) Incapacitated children RM5,000 per child
(g) Contributions to the Employees Provident Fund (EPF) and insurance or
takaful premiums for life policies are allowed a maximum total tax relief of
RM5,000. Effective from YA 2000 (current year basis), a further tax
relief for insurance or takaful premiums with respect to medical and
educational purposes is increased from RM2,000 to RM3,000. In addition,
a separate relief for annuity premium up to RM1,000 will be given to taxpayers
who purchase annuity through the EPF annuity scheme*.
A married woman whose income is separately assessed generally has her
overall tax liability reduced, although this may not always be the case. The
separate assessment covers all her income sources. She may, however, elect for
joint assessment, in which case, the husband is given a wife relief of
* Proposed in the 2000 Budget
4.1.2 Tax rebate
Tax liability of a resident individual is reduced by rebates which are
granted as follows:
(a) For an individual with a chargeable income not exceeding RM10,000, a
rebate of RM110 is given. A further rebate of RM60 is given for his wife. A
wife who is assessed separately will be entitled to a rebate of RM110 if her
chargeable income does not exceed RM10,000.
(b) The equivalent of amount paid in respect of any zakat, fitrah or other
Islamic religious dues which are obligatory.
(c) A sum of RM400 for the purchase of a computer by an individual or wife.
(d) The amount of fee paid to the government for the issue of an employment
pass, visit pass or work permit.
4.2 Non-resident Individual
Effective from YA 2000, a non-resident individual is liable to tax at the
rate of 29%* and he is not entitled to any personal relief. He is entitled to
claim tax rebate only for item (d) as stated in para 4.1.2 above. However, for
the following types of income, non-resident individuals are subject to a
withholding tax which is a final tax:
||Special classes of income
- use of moveable
- technical advice, assistance
- installation services on the
plant, machinery, etc.
- personal services associated
with the use of intangible
||Services of a public entertainer
An employee on a short-term visit to Malaysia enjoys tax exemption in
respect of his income from an employment exercised in Malaysia when his
presence does not exceed 60 days in a calendar year.
However, the income of a non-resident individual who performs independent
services such as consultancy services is not exempted from tax.
* Proposed in the 2000 Budget
5. Real Property Gains Tax
Capital gains are generally not subject to tax in Malaysia. Real
Property Gains Tax is charged on gains arising from the disposal of real
property situated in Malaysia or of interest, options or other rights in or over
such land as well as the disposal of shares in real property companies. The
rates of tax are as follows:
|Disposal within 2 years
|Disposal in the 3rd year
|Disposal in the 4th year
|Disposal in the 5th year
|Disposal in the 6th year
For individuals who are citizens or permanent residents, gains from disposal
of real properties after five years are not subject to this tax. They are also
entitled to an exemption of RM5,000 or 10% of the gains, whichever is the
greater. In addition, they also enjoy a one-time tax exemption on the gains
arising from the disposal of one private residence.
For non-citizens and non-permanent resident individuals, gains from the
disposal of real property within 5 years are subject to tax at a flat rate of
30%. However, disposal in the sixth year and thereafter will be taxed at 5%.
6. Sales Tax
This is an ad valorem single stage tax imposed at the import and
manufacturing levels. Manufacturers are required to be licensed under the Sales
Tax Act 1972. Manufacturers whose annual sales turnover do not exceed RM100,000
are exempted from licensing. These companies are taxed based on their inputs.
However to alleviate the burden of small manufacturers from paying sales tax up
front on their inputs, these companies can be licensed under the Sales Tax Act
1972 in order to purchase tax-free inputs. With this option, manufacturers will
only have to pay sales tax at the final stage of the manufacturing process.
The general rate for sales tax is 10%. However, raw materials and machinery
for use in the manufacture of taxable goods are eligible for exemption from the
tax. Inputs for selected non-taxable products are also exempted. Certain
non-essential foodstuffs and building materials are taxed at 5% while cigarettes
and liquor are taxed at 15%. Primary commodities, basic foodstuffs, basic
building materials, certain agricultural implements and heavy machinery for use
in the construction industry are exempted. Certain tourist and sports goods,
books, newspapers and reading materials are also exempted.
7. Service Tax
This tax is imposed on certain goods and services provided in certain
prescribed establishments. The goods include food, drinks and tobacco, while the
main services are provision of rooms for lodging, provision of premises for
meetings, conventions, and cultural and fashion shows; health services, and
professional and consultancy services provided by legal, engineering, surveyor,
architectural, accounting, advertising, consultancy firms, insurance companies,
motor vehicles service and repair centres, telecommunication services, security
and guard services, recreational clubs, estate agents, parking space services,
courier service firms, dentists, veterinary doctors, provision of accommodation
and food by private hospitals and credit cards companies. The tax base has been
widened to include services provided by the car rental agencies licensed under
the Commercial Vehicles Licensing Board Act 1987 and having an annual sales
turnover of RM300,000 and above; employment agencies having an annual sales
turnover of RM150,000 and above; and companies providing management services
including project management/coordinating services having an annual sales
turnover of RM300,000 and above. Currently, all large hotels having more than 25
rooms and restaurants within or outside hotels are subject to this tax.
Generally, the imposition of service tax is subject to a specific threshold
based on annual turnover ranging from RM150,000 to RM500,000.
8. Excise Duty
Excise duties are levied on selected products manufactured locally, namely,
cigarettes, liquors, playing cards, mahjong tiles, petrol, diesel and motor
vehicles. To encourage linkages between companies in LMW/FIZ with companies in
the Principal Customs Area (PCA) effective from 17 October 1997, LMW companies
manufacturing goods subject to excise duties are exempted from being licensed
under the Excise Duty Act 1976.
9. Import Duty
Import duties are levied on a large number of imports and are imposed either
at an ad valorem or specific rates. The ad valorem rates of import duties vary
from 2% to 300% (CBU motorcars). Over the last few years, import duties on a
wide range of raw materials, components and machinery have been abolished.
Under the Common Effective Preferential Tariff (CEPT) import duties imposed
on most goods from Asean countries will be reduced to 0 - 5% by the year 2003.
10. Agreement for the Avoidance of Double
Agreements for the Avoidance of Double Taxation provide for the
avoidance of incidence of double taxation on income such as business profits,
dividends, interest and royalties that are derived in one country and remitted
to another country. To-date, Malaysia has signed such tax treaties with the
following countries (by alphabetical order):
(limited to shipping and
Korea, Republic of Kuwait
Namibia, Republic of
Papua New Guinea
(limited to shipping and air transport)
United Arab Emirates
United States of America (limited to shipping and air transport)
Malaysia has also signed the Agreement for the Avoidance of Double Taxation
with the Malaysia Friendship and Trade Centre in Taipei (MFTC) and Taipei
Economic and Culture Office in Malaysia (TECO).