Thinking beyond borders
Extended business travelers who are in Malaysia for more than 60 days are likely to be taxed on employment income attributable to their Malaysian assignments.
Income derived from Malaysia by residents and non-residents is subject to Malaysian tax, irrespective of where the employment contract is made or where the remuneration is paid. Employment income is regarded as Malaysian-sourced income if the employment activities are exercised in Malaysia. Generally, an individual becomes a tax resident for the tax year if the aggregate number of days he stays in Malaysia during the basis year is 182 days or more.
Malaysian-sourced income is defined as income accruing in, or derived from, Malaysia. Employment income is generally treated as Malaysian-sourced compensation where the individual performs the services while physically located in Malaysia.
A non-resident individual who exercises employment in Malaysia for not more than 60 days is exempt from Malaysian tax. An individual whose employment period in Malaysia exceeds 60 days would be taxable unless he is able to seek exemption from Malaysian tax under the dependent personal services article of the relevant double tax treaty.
For extended business travelers, the types of income that are generally taxed are employment income and other Malaysian-sourced income.
A tax-resident individual would be subject to tax at graduated rates ranging up to 28 percent, after the deductions of personal reliefs (such as relief for oneself, a dependent spouse, life insurance premiums, etc.). The maximum tax rate is 28 percent.
A non-tax-resident individual would be taxed at a flat rate of 28 percent . Non-tax-residents are not entitled to personal relief deductions.
What Malaysia have is a compulsory savings scheme (EPF) and an employee protection scheme (SOCSO) for Malaysian employees but these schemes is optional for foreign employee.
The EPF is a mandatory approved pension and welfare scheme for all employees who are Malaysian citizens / permanents residents in Malaysia. However, an foreign employee is given an option whether he wishes to contribute to the EPF. The foreign employee may elect to make the contributions at 11% of his monthly wages, with employer’s contributions of RM5 per month.
The SOCSO is a protection scheme introduced to provide certain benefits to the employees in cases of employment related injury such as occupational diseases and disability as well as other matters in relation to the employment. However, it is not mandatory for foreign employees to contribute to SOCSO. The current rates of contribution varies from RM0.10 to RM19.75 for the employee and RM0.40 to 69.05 for the employer.
The YA runs from 1 January to 31 December. Tax returns must be filed by 30 April of the following year. For individuals who derive business income, the filing deadline is 30 June of the following year.
Employees whose total income tax is equivalent to the total amount of Monthly Tax Deduction (“MTD”), is no longer required to submit tax returns. The amount of the MTD remitted represents as the final tax paid. This is only applicable if the following conditions are fulfilled:
An employer is required to notify the Malaysian Inland Revenue Board (MIRB) via Form CP22 of the commencement of employment of its employees in Malaysia within 1 month of the date of commencement of employment.
An employer must declare the total remuneration paid to employees for employment performed in Malaysia on Forms E and EA. This is regardless of whether the employee’s salary and/or allowance are paid in or outside of Malaysia. The deadlines for issuance of Forms E and EA are 31 March and the last day of February respectively in the following year. With effect from YA 2016 all Form E must be filed electronically.
An employer is also required to notify the MIRB of the cessation of employment of an employee who is liable for tax. In the case of an expatriate employee, the notification is required when the expatriate’s assignment in Malaysia ends or the expatriate ceases employment in Malaysia. The notification (via Form CP21) must be submitted to the MIRB not less than 1 month before the expected date of departure.
The employer is required to withhold any money in the employer’s possession owing to the expatriate who has ceased or is about to cease employment until 90 days after the MIRB receives the Form CP21 or upon receipt of the tax clearance letter, whichever is earlier.
The employer can then release the balance of money withheld from the employee after the settlement of the outstanding taxes (if any) as shown in the tax clearance letter.
Under the MTD system, it is mandatory for an employer to deduct tax from an employee’s total gross monthly remuneration (which includes perquisites, Benefit-in-Kind and VOLA, etc) whether it is paid in or outside of Malaysia by the 15th of the following month. Payments must be submitted together with a Statement of Tax Deduction by an Employer (Form CP39). Further, it is mandatory for the employer to allow an employee to claim allowable deductions and rebate for not less than twice via a prescribed form.
It should also be noted that the MTD applicable to an employee who is not a resident or not known to be a resident shall be at the rate of 28 percent of the employee’s remuneration.
A visitor may or may not require a visa prior to entering Malaysia, depending on the issuance country of his/her passport. The Immigration officer at the point of entry to Malaysia usually grants the visitor (except for certain nationalities who require visas applied at their home country before entering Malaysia) a social visit pass for social visit purposes only. The duration of the social visit pass granted depends on the issuance country of the passport. A visitor is not allowed to work or render professional services under the social visit pass. An employment pass or professional visit pass is required for this purpose.
The employment pass is applied for the visitor who has an employment contract with the Malaysian Company. The duration ranges from 1 to 5 years.
As for the professional visit pass, the visitor is allowed to render professional services (e.g. training, technical expertise, internship). He/She will continue to be employed by the employer in the home country and the remuneration is paid by the employer in his/her home country. The maximum duration of the assignment under a Professional Visit Pass (“PVP”) is 12 months. Effective from 1 August 2016, the assignee is only entitled to apply a PVP for a duration of 12 months (maximum) per sponsoring Company in Malaysia.
Malaysia has concluded double tax treaties with at least 76 countries. The treaties prevent double taxation and allow cooperation between Malaysia and overseas tax authorities in enforcing their respective tax laws. Qualification for treaty relief is not automatic.
An application must be made to the MIRB by providing proof that an individual is able to qualify for tax exemption under treaty relief.
A permanent establishment could potentially be created as a result of extended business travel, but this would be dependent on the type of services performed and the level of authority the employee has.
Goods and Services Tax (“GST”) is a multi-stage tax on domestic consumption. It is charged on any taxable supply of goods and services made in the course or furtherance of business by a taxable person in Malaysia. GST at 6% is charged on all standard-rated supply of goods and services (which includes imported goods and imported services into Malaysia) other than those specifically exempted, zero-rated or given relief. The payment of taxes are levied on all stages throughout the production and distribution process and it is ultimately passed on to the final consumer.
The Malaysian transfer pricing environment is regulated since 1 January 2009 upon the insertion of the arm’s length principle into the Income Tax Act, 1967. In 2012, the MIRB released the TP Rules and TP Guidelines as an indication that the Malaysian Government is determined in its enforcement of transfer pricing compliance by Malaysian taxpayers. These TP Guidelines has recently been updated in July 2017 to align the local TP requirements with that of Based Erosion and Profit Shifting Action 13 documentation requirements. In terms of personal taxation, transfer pricing and tax implications could arise where the company gave interest-free loan with no fixed repayment terms to its directors. The Public Ruling on loans or advances to director by a Company published on 30 November 2015 states that if a Company obtains a loan from third party to make loans or advances to directors who are also employees, then the director would be deemed to have a perquisite amounting to the interest costs incurred by the employer to fund the loan.
Personal Data Protection Act 2010 (“PDPA”) has come into force on 15 November 2013 which seeks to regulate the processing of personal data of individuals involved in commercial transactions.
The present exchange control regime applies uniformly to transactions with all countries except Israel, against which special restrictive rules apply.
Employment costs are generally deductible by the employer, except for certain prohibited costs such as those in relation to overseas leave passage, entertainment allowance, and the employer’s contribution to pension/provident funds that are not approved by the MIRB. Such costs are non-deductible. However, a 50 percent entertainment allowance is tax deductible.