Malaysia Announces Corporate Tax, Sales Tax Reforms In Budget

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the election to instead pay a flat tax amount of MYR20,000 under the Labuan Business Activity Tax Act 1990 will be repealed.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.