Overview of Malaysian Taxation By: Associate Professor Dr. GholamReza Zandi

Main Objectives of Taxation Taxes are used to fund government development and social expenditure. Taxes are to be collected efficiently and at minimum cost to government and to taxpayers. Taxes can be used as a fiscal tool to maintain the desired level of employment and increase economic development and growth. Taxes are used as policy measures to encourage activities beneficial to the country and to discourage those which are not (for example smoking and consuming alcohol) 2

Basic Requirements for an Efficient Tax System Principles of taxation (Adam Smith) Equitable and fair tax burden Minimal economic distortion Low compliance cost Simplicity and certainty Flexibility to provide adequate revenue to Government 3

Administration of Taxation Administration of tax in Malaysia is the responsibility of the Ministry of Finance. It is done through the Inland Revenue Board of Malaysia. The direct responsibility of managing taxation lies with the Director General of the Inland Revenue (DGIR). 4

Sources of Revenue Law Formal Sources of law (i) Statute law or legislation (ii) Case law (judge made laws) Informal source of law Practice of the Inland Revenue Board 5

Types of Taxation 6 Direct taxesIndirect taxes Income tax (Including corporate tax)Customs duties Petroleum income taxExcise duty Stamp dutyService tax Real property gains taxSales tax

Self Assessment System Self-assessment system (SAS) was implemented on companies from year of assessment 2001 and on individuals and other taxpayers from the YA Under the SAS, taxpayers determine their taxable income, compute tax liability and submit tax returns. 7

Self Assessment System (cont’d) Companies under the SAS Provide estimate of the tax payable one month prior to the commencement of the business Estimates shall not be less than 85% of its previous year’s estimate May revise estimates in the sixth and ninth month of the relevant basis period File tax return within seven months of the close of the financial year end 8

Tax Rates Resident individual taxpayers Graduated scale of rates from 0% (on the first RM2,500) to a maximum of 26% (for income exceeding RM100,000) Non-resident individual taxpayer Flat rate of 26% with no personal reliefs 9

Tax Rates (cont’d) Companies Paid-up capital ≤ RM2.5 million -20% on the 1 st RM500,000 chargeable income -25% on the subsequent chargeable income exceeding RM500,000 Paid-up capital > RM2.5m -Fixed rate of 25% 10

Section 3: Charging Section Income tax shall be charged for each year of assessment (YA) upon the income of any person: accruing in or derived from Malaysia; or received in Malaysia from outside Malaysia. 11

Classes of Income Section 4 of the Income Tax Act 1967 (as amended) [ITA]: Tax is chargeable under the ITA on income in respect of: (a)Gains or Profits from a Business; (b)Gains or Profits from an Employment; (c)Dividends, Interest or Discounts; (d)Rents, Royalties or Premium; (e)Pensions, Annuities or other periodical receipts; (f)Gains or Profits not falling under any of the above. 12

According to sec 5 ITA, ‘chargeable income’ of a person is ascertained in 6 stages: (i)Determine Basis Period (ii)Compute Gross Income from each source (ii)Compute Adjusted Income (iv)Statutory Income (v)Aggregate Income (vi)Chargeable Income 13 Determination of Chargeable Income

Hierarchy of Malaysian Courts Federal Court Court of Appeal High Court Sessions Court Magistrates Court 14

Hierarchy of Income Tax Appeal Process The Director General of Inland Revenue Special Commissioners of Income Tax High Court Federal Court 15

The End