Individual Income Tax in Malaysia for Expatriates
By Dezan Shira & Associates
Posted: 25th February 2016 09:41
Personal Income taxation in Malaysia is laid out in general terms under the Income Tax Act of 1967. While this is the principal piece of legislation covering taxation in Malaysia, further legislation has since been introduced in order to supplement and clarify existing policy.
Enacted on an annual basis, the Malaysian budget is one of the most readily available tools to governing authorities with respect to the alteration of existing taxation policy taxation – allowing for yearly clarification of the income tax regimes’ application.
The passage of Malaysia’s 2016 budget on October 23rd 2015, has predictably brought along with it changes to taxation policy. Under the theme “Prospering the Rakyat”, the 2016 budget, although expected, has resulted in substantial changes to existing policy. This is partly a result of it being the first budget issued under the 11th Malaysia Plan – which it aims to gradually reduce the nation’s fiscal deficit, increase the purchasing power of average citizens, and ease the costs of living within Malaysia.
In light of the more activist approach to budgeting that has been taken by governing officials, ASEAN Briefing will use the following article as an opportunity to outline the issue of income taxation within Malaysia. In addition to the specific changes brought about by the 2016 budget, the paragraphs below will highlight the subjects of Malaysian Income tax as well as the rates of taxation that should be expected in 2016.
Incomes subjects to Income Tax in Malaysia and Exemptions
Source-Taxation Principle and its Exceptions in the Case of Malaysia
Malaysia adopts a territorial principle of taxation, meaning only incomes which have a source in Malaysia are taxable there, regardless of where the expatriate is paid. All types of income are taxable, including gains from employment or business activities, dividends, ects
Consequently, profits sourced elsewhere are not subject to Malaysia personal income tax. However, this principle of taxation is subject to three mains exceptions:
- First off, Malaysia has signed numerous Double taxation agreements. When addressing instances of double taxation by allocating taxing rights to the contracting states, this wide Bilateral tax treaties network is in some ways an exception to the territoriality taxation principle, as it sometimes allocate the right, to others countries, to tax the income of their tax residents, even though this income has a source in Malaysia. Thus, in this case, the Malaysia-sourced income, thanks to a tax relief stated by the treaty, will be exempted from paying personal income tax in Malaysia.
- Also, expatriates may benefit from a special tax regime exemption on their incomes sourced in Malaysia, if the two following conditions are verified:
- First of, not being defined as a fiscal resident
- Second, if the period of employment in Malaysia does not exceed 60 days per calendar year.
- Finally, for the incomes that derived from some sensible industries amongst which air transport and banking, Malaysia doesn’t apply the territorial basis, but the worldwide basis of taxation.
Tax Residency Status
Even though Malaysia has adopted a territoriality principle when it comes to taxation of the incomes, knowing which individuals qualify for residency for tax purposes is still useful to determine the tax regime applicable to individuals perceiving incomes sourced in Malaysia. Indeed, a non-resident expatriate that is liable for income tax in Indonesia will be taxed, but on a different taxation legal regime than residents are.
Residency for Tax Purposes in Malaysia is defined by the part II section 7 of the 1967 law. If an individual, regardless of its nationality, fulfills of one the following criterion, he must thus be considered as a tax resident of Malaysia:
- The individual has been resident in Malaysia for 182 days of the tax year
- The individual has been resident in Malaysia for less than 182 days of the tax year, but was resident in the country for a total of 182 consecutive days linked to days from the year immediately preceding or following that tax year
- The individual has been resident in Malaysia for at least 90 days of the current tax year and was resident in Malaysia for at least 90 days in three of the four preceding years
- The individual will be resident in Malaysia in the year following and has been resident in Malaysia in the three years preceding the one being taxed.
Tax System in Malaysia
Increased Rates in Individual Income Tax Rates in 2016
To determine which kind of rate (progressive or flat) and which tax percentage is applicable to an income, the taxpayer must determine whether or not he qualify as a resident for tax purposes in Malaysia, as different regime apply.
Indeed, expatriates who do not qualify for tax residency in Malaysia are taxed on all their Malaysia sourced income at a flat rate of 26% before 2016, and at a flat rate of 28% from the 2016 assessment year onwards.
Regarding the expatriates that qualify for tax residency, Malaysia has a progressive personal income tax system in which the tax rate increases as an individual’s income increases, starting at 0%, and capped at 25% before the assessment year of 2016, and 28% from 2016 onwards.
Tax Relief and Deductions:
Several tax deductions are available for individual income taxpayers in Malaysia. However, non-residents expatriates are not eligible to benefit from those tax reliefs, unlike expatriates that qualify for the resident for tax purposes status. Amongst those tax reliefs are:
- The tax relief for spouse
- The tax relief for taxpayers who have to pay parental care
- The tax relief for each child below 18 years old
- Tax Relief for Children Studying At Tertiary Level
In a effort to reduce the living costs of its citizens, and the financial burden of taxpayers that have to take care of their parents, or raise children, deductible amounts pertaining to these and other activities have been increased from 2016 onwards.
Beside, a new tax relief has been created by the 2016 Budget: the tax Relief on Employees Contribution to Social Protection. Currently, there is indeed no tax relief for contributions made by the employees to Social Security Organization (SOCSO).
Compliance and payment
In Malaysia, the tax year runs in accordance with the calendar year, beginning on 1 January and ending on 31 December. All tax returns must be completed and returned before 30 April of the following year.
Regarding expatriates that are considered as residents, that income tax is withheld from their salary by their employer and the balance must be settled at the end of the financial year upon filing of a tax return.
In case of late payment or incorrect returns compliance that can be discovered through tax audits penalties will be applied.
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