Malaysia Announces Corporate Tax, Sales Tax Reforms In Budget

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Malaysia’s 2019 Budget contains plans for an overhaul of sales and service tax rules and a corporate tax cut for small- and medium-sized enterprises.

The lower corporate tax rate of 18 percent will be reduced to 17 percent. This rate is offered to those companies with paid-up capital of up to MYR2.5 million (USD600,000) or limited liability partnerships with a total capital contribution of not more than MYR2.5 million. The 18 percent rate is charged on income up to MYR500,000. The rate will be cut starting the 2019 year of assessment. The remaining chargeable income is subject to an income tax rate of 24 percent, which remains unchanged in the Budget.

The Government has also announced a review of existing tax rules and incentives. It will place a time limit of seven years on carried forward business losses, unabsorbed capital allowances, unabsorbed reinvestment allowance, and pioneer losses, and it has announced plans to review group relief rules.

The Government will also carry out a “thorough review” of over 130 types of fiscal incentives that are intended to promote investment, with the intention of removing those incentives that are no longer relevant or overlap with others.

The Government has also announced changes impacting Labuan, the offshore international financial center. While the corporate tax rate of three percent will be maintained, the election to instead pay a flat tax amount of MYR20,000 under the Labuan Business Activity Tax Act 1990 will be repealed.

Many of the most significant changes announced concern the sales and service tax regime, which replaced the Goods and Services Tax regime in Malaysia on September 1, 2018.

The Budget announces that the provision of specific taxable services of a business to another business registered for the same service will be exempt from service tax beginning January 1, 2019.

Further, a credit system for Sales Tax deduction will be introduced from January 1, 2019. This is intended to assist manufacturers who purchase input materials and components from importers, instead of other registered manufacturers, and is intended to prevent cascading taxation and cut the cost of doing business, the Government said.

Next, the Government has announced that imported services will be subject to service tax from January 1, 2019, to ensure that domestic businesses are not at a competitive disadvantage to foreign competitors.

Currently, service tax is only imposed on services provided by service providers who are located in Malaysia.

The Budget proposes that services imported by businesses (B2B) be implemented from January 1, 2019; and services imported by consumers (B2C) will be implemented from January 1, 2020.

Foreign suppliers who provide such services will be obligated to register and charge service tax, from January 1, 2019, for services provided to taxable persons in Malaysia, and from January 1, 2020, for services provided to Malaysian consumers.

The Government has also announced in the Budget that it will launch an amnesty for taxpayers to regularize undisclosed income, including amounts in offshore accounts. The Special Voluntary Disclosure Program will be offered from November 3, 2018, until June 30, 2019. Taxpayers availing themselves of the opportunity to regularize their tax affairs will benefit from reduced penalty rates. If a disclosure is made by March 30, 2018, the penalty rate will be 10 percent of the tax payable. If a disclosure is made by June 30, 2019, the penalty rate will be 15 percent of the tax payable.

After the amnesty ends, penalties for taxpayers will range from 80 percent to 300 percent of the tax due, as provided for in current legislation, the Government said.

The Budget also includes plans to introduce a departure levy starting June 1, 2019, with a MYR20 charge for those departing to ASEAN countries and a MYR40 levy for fares to countries outside ASEAN.

Real property tax changes are also proposed in the Budget. A 10 percent rate will apply for real property companies disposing of property in the sixth year or subsequent years of holding an asset, up from five percent, for companies, non-citizens, and non-permanent residents. For Malaysian citizens and permanent residents, a new rate of five percent will be introduced, in place of the current zero percent rate. Property transactions valued below MYR200,000 will be exempt. Stamp duty on the transfer of property worth more than MYR1m will be hiked from three percent to four percent.

Finally, the Government has announced that a new tax will be introduced on sugar-sweetened beverages from April 2019, of MYR0.40 per liter.

Cambodia Approves Pending Tax Treaty with Malaysia

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On 6 October 2020, Cambodia’s National Assembly (lower house of Parliament) approved for ratification the pending income tax treaty with Malaysia.

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Audit and Compliance in Malaysia: A Guide for Foreign Investors

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  • All companies incorporated in Malaysia must have their accounts audited by a Ministry of Finance approved auditor as mandated by the Companies Act of 2016.
  • Under the Act, private companies are no longer obligated to hold annual general meetings (AGMs).
  • Most companies in the country choose to have their fiscal period end either on the last day of the year or on the last day of a quarter.
  • Malaysia operates a self-assessment tax system, and tax returns must be filed within seven months of the company’s year-end.
  • Certain companies are exempt from filing audited accounts. These companies must have no more than 20 members, and none of whom are corporations having a direct or indirect interest in its shares.

All companies incorporated in Malaysia must have their accounts audited by a Ministry of Finance approved auditor as mandated by the Companies Act of 2016. These companies are required to, under the Companies Act, keep their accounting books up to date.

 

Appointing auditors

During the filling process, companies must use the services of a professional accountant qualified under the Accountants Act 1967, which must confirm that the applicant’s statements comply with the approved accounting standards.

Private exempt companies are not required to file audited accounts; an exempt private company is defined as a private company having not more than 20 members, none of whom are corporations having a direct or indirect interest in its shares.

The criteria for audit exemption for certain private companies are:

  • The company is dormant – this means the business has no accounting transactions occurring and its operations have halted;
  • Zero-revenue companies – these are companies that do not generate any revenue during the current financial year, as well as the past two financial years. Further, its total assets do not exceed 300,000 ringgit (US$72,600) in the current financial year and the previous two financial years; and
  • Threshold-qualified companies – these are companies that have revenue that does not exceed 100,000 ringgit (US$24,200) during the current financial year as well as the previous two financial years. Secondly, its total assets do not exceed 300,000 ringgit (US$72,600) in the current financial year and the previous two financial years, and it ended the current financial year and the previous two financial years with no more than five employees.

However, an exempt private company, which is solvent, may still need to audit its accounts if it receives written notice from the Ministry of Finance.

Any company opting for audit exemption must submit to the Registrar together with the necessary certificate. In addition, the must be submitted with:

  • A written statement that the company is qualified for audit exemption; and
  • There have been no requests from shareholders demanding an audit.

The unaudited financial statements must be submitted together with the director’s report, and statements by other directors.

The certificate that substitutes the attachment of the audited accounts must either be in Bahasa Malaysia or English. If presented in any other language, a translation must be provided.

Fiscal periods

The Companies Act of 2016 does not specify a date for the fiscal year; this is left to the discretion of the company.

Private companies are obliged to prepare their financial statements not more than six months from the financial year-end. For public companies, financial statements are prepared within 30 days of an AGM (within six months from the company’s financial year).

Most companies in the country choose to have their fiscal period end either on the last day of the year or on the last day of a quarter.

Accounting standards

Companies doing business in Malaysia are required to prepare their financial reports in accordance with the following two sets of reporting standards:

  • The Malaysian Financial Reporting Standards (MFRS), designed for companies with public accountability; and
  • The Malaysian Private Entities Reporting Standards (MPERS), designed for private companies with annual periods beginning on or after January 1, 2016.

MFRS standards are almost on a word-by-word basis in alignment with IFRS and SMEs are permitted to use the MPERS standards.

It should be noted that foreign companies listed in Malaysia are able to apply either the Malaysian Accounting Standards Board approved accounting standards or acceptable internationally recognized accounting standards. Similarly, Malaysian companies are able to use IFRS in their financial statements if they wish to do so.

Annual reports

The documents required during an annual audit are similar for both foreign companies operating in Malaysia and Malaysia-incorporated companies. These include the following:

  • Director’s report;
  • Financial statements;
  • Principal business activities;
  • Statement by directors on the financial statements;
  • Total paid-up capital;
  • A statutory declaration by the director or officer primarily responsible for financial management; and
  • Auditor’s report.

Penalties for non-compliance

For private limited companies, non-compliance in relation to the late submission of financial statements could lead to a fine of up to 2,000 ringgit (US$478) while the non-submission of audited financial statements could lead to a 30,000 ringgit (US$7,180) or imprisonment of up to five years