MALAYSIA: An Introduction to Tax

“We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.” – Winston Churchill

The Ministry of Finance’s Budget 2022 has been optimistically titled “A Prosperous Malaysian Family” (Keluarga Malaysia, Makmur Sejahtera).

As with previous years, Budget 2022 makes the usual symbolic gestures of tax reliefs and incentives, particularly for individuals and small businesses (e.g. increase in tax reliefs for SOCSO & EPF contributions and medical treatment expenditure, and deduction of expenditure for child care & kindergarten fees, and the purchase of mobile phones, computers and tablets).

However, with great ‘prosperity’ comes great prosperity taxes. After all, with the ambitious aims of reducing fiscal deficit to 6% of the nation’s GDP and increasing government revenue to MYR234 billion in 2022, Budget 2022 could not be complete without an attempt or three to lift the metaphorical ‘bucket handle’.

We examine some of the latest trends and developments in tax disputes, including key areas of focus in tax audits & investigations, judicial trends in the Malaysian courts, and a few of the proposed tax measures outlined in Budget 2022.

Tax Audits & Investigations 

Audits & investigations by the tax authorities (Inland Revenue Board (IRB) and the Royal Malaysian Customs Department (RMCD)) are spiking up. For income tax, a key area of focus has been on taxpayers’ historical claims for tax incentives and exemptions. In some cases, disallowance of such incentives and/or exemptions due to alleged non-compliance with or differences in interpretation of the applicable conditions may lead to unexpected additional taxes being imposed on taxpayers.

Another frequent issue relates to taxpayers’ past disposals of real property and whether these should be subjected to income tax (at a higher rate) or real property gains tax (RPGT). Transactions which draw particular attention are those in exemption or waiver years where disposals result in no taxes being paid. Further, audits and investigations for time-barred years of assessment (YAs) (beyond 5 years) have become increasingly common, spurred perhaps by struggles in finding sufficient sources of revenue to meet the Government’s publicly declared tax collection target.

Taxpayers’ duties to keep records and documents under income tax legislation is only for a period of up to 7 years. Taxpayers facing audits & investigations may therefore find themselves facing difficulties in complying with requests by the tax authorities to provide documents for such years. Taxpayers should ensure that they are properly advised and represented by suitable professionals (whether tax consultants, agents or lawyers) in responding to such requests from the tax authorities.

Judicial trends in tax disputes 

Judicial review has become an increasingly common option for taxpayers to challenge the tax assessments by the IRB or bills of demand by the RMCD. Despite increasingly strenuous objections by lawyers for the tax authorities, the courts have consistently granted leave for taxpayers to commence judicial review, especially in cases where the tax authorities have acted contrary to prior decisions by the courts, or where their conduct results in a breach of natural justice.

In particular, the courts have increasingly recognised that public authorities (including tax authorities) have a duty to give reasons for their decisions, whether in making transfer pricing adjustments (Ensco Gerudi (M) Sdn Bhd v KPHDN) or in imposing penalties (Classic Japan (M) Sdn Bhd v KPHDN). Further, Section 103B of the Income Tax Act 1967 (ITA) enacted by the Finance Act 2020 has also not prevented the courts from granting stays against tax assessments.

However, judicial review may not be suitable in all cases and have been rejected particularly where there are factual disputes best resolved before the tax tribunal (the Special Commissioners of Income Tax (SCIT)). Taxpayers should seek proper representation on the best mode of disputing tax assessments by the tax authorities.

Prosperity Tax (Cukai Makmur) 

The capital gains tax anticipated by some quarters has not come to pass. Instead, the Government has proposed a special one-off ‘prosperity tax’ which is to be imposed on companies which have generated high income for YA 2022 only as follows:

a) Chargeable income up to the first MYR100 million to be taxed at 24%; and

b) Any remaining chargeable income to be taxed at 33%.

Market reaction to this unprecedented proposal was swift, with MYR33.8 billion of value being reportedly wiped off from Malaysia’s stock markets on the Monday immediately after Budget 2022 was announced.

It is hinted that this is meant to help increase the resilience of the nation’s health system. Issues with unsatisfactory employment terms for Malaysia’s contract doctors have been in the news recently. For their part, these contract doctors appear to be unimpressed with Budget 2022, believing that it “does not in any way address contract doctors’ struggles.”

Tax on Foreign Source Income 

Under the Malaysian ITA, foreign source income is subject to tax. With effect from 2004 however, foreign source income received in Malaysia (other than income derived from the business of banking, insurance or sea or air transport) has been exempted, primarily to promote the remittance of foreign source income for reinvestment in Malaysia.

As heralded by Budget 2022, the Finance Bill 2021 has proposed for this exemption to be limited only to non-Malaysian residents. In effect, Malaysian residents would be subjected to income tax for any income received in Malaysia from outside Malaysia from 1 January 2022.

This revenue-raising measure is presumably intended to address Malaysia’s inclusion in the European Union’s ‘grey list’ of non-cooperative jurisdictions. However, practical issues and legal issues may arise on the proper treatment of repatriation of such funds back to the country. Pragmatically speaking, taxpayers who maintain funds overseas may also now be more reluctant to remit funds back to Malaysia for reinvestment.

Withholding tax on payments made to agents, dealers or distributors

Payments made to agents, dealers or distributors will be subjected to 2% withholding tax with effect from 1 January 2022. The withholding tax is only applicable where the payments are made to resident agents, dealers or distributors who are individuals and who have received more than MYR100,000 of such payments in monetary form and/or non-monetary form from the same company in the immediately preceding year of assessment.

Reduction of RPGT rate for certain taxpayers 

It is proposed that the RPGT rate for disposals in the 6th year after acquisition or thereafter be reduced from 5% to 0%, i.e., the applicable rate prior to 1 January 2019. This reduction would apply only to taxpayers under Part I, Schedule 5 of the Real Property Gains Tax Act 1976, and notably excludes companies, non-citizens and non-permanent residents.

Finality of Stamp Duty assessments 

Currently, if the High Court decides that a stamp duty assessment is erroneous, any excess duty paid in conformity with the erroneous assessment together with any fine or penalty shall be ordered by the Court to be repaid to the taxpayer.

The Finance Bill 2021 now proposes to provide that the Collector of Stamp Duty would not be compelled to refund such excess until the assessment has become final and conclusive, i.e., in particular, where there is no right of further appeal. Perturbingly, the proposed amendment would effectively have the effect of denying a taxpayer the fruits of a successful appeal at the High Court until and unless all avenues of further appeals have been exhausted.

Indirect Tax 

Amongst the host of indirect tax measures proposed in Budget 2022 are:

a) The introduction of a Special Voluntary Disclosure Programme by RMCD for the remission of penalties in phases (100% in the first, and 50% in the second phase) and taxes.

b) The introduction of sales tax on low value goods (not exceeding MYR500) imported into Malaysia via air courier services with effect from 1.1.2023. Currently, low value goods are exempted from sales tax subject to the fulfilment of certain conditions.

c) In conjunction with the 12th Malaysia Plan for the country to achieve net zero carbon emission as early as 2050, the Government has proposed for import duty, excise duty and sales tax to be exempted for imported CBU Electric Vehicles (EVs) from 1 January 2022 to 31 December 2023.

d) The implementation of service tax on goods delivery services including E-Commerce platforms, but excluding food and beverages delivery services & logistics services.

e) Excise duties to be imposed on liquid or gel used for electronic cigarettes & vapes.

f) Expansion of the scope of excise duty on sugar sweetened beverages.