Completing Form EA and Form E - is it really just another paper pushing exercise?

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13 April 2018
By Wee Lay Har, Senior Manager, International Assignment Services, PwC Malaysia

The 31 March 2018 statutory deadline for the filing of the 2017 Form e-E has just passed. Is it too late now to file? Don’t panic just yet.

The good news is that based on the Income Tax Return Form Filing Programme for the year 2018, the Malaysian tax authorities have allowed for a one-month grace period (until 30 April 2018) for the submission of the 2017 Form E via e-filing. So, you still have a small window to catch before the deadline.

Most people think that preparing the Form EA (annual income statement) and Form E together with the CP 8D (Return of Remuneration by an Employer) is just a click of a button in the payroll system. For those involved, you know that this is not always the case. As an employer, how comfortable are you with your company’s Form EA and Form E reporting process?

Let’s test your understanding of the process.

1. Salaries, bonuses, allowances which are processed through the overseas payroll and paid into Joe’s overseas bank account do not need to be reported in his Form EA and company’s Form E.

Oh no, this is a myth.

As long as Joe is exercising his employment in Malaysia, his income (regardless of the location of the payroll or bank account or employment contract), would be regarded as derived from his employment with the company in Malaysia. Hence, the employer would need to report the income in the Form EA and Form E.

You are right - this is a myth.

As long as Joe is exercising his employment in Malaysia, his income (regardless of the location of the payroll or bank account or employment contract), would be regarded as derived from his employment with the company in Malaysia. Hence, the employer would need to report the income in the Form EA and Form E.

2. Reimbursements to employees are not taxable and therefore, there’s no need to report in the Form EA and Form E.

Oh no, you are only partly right.

The taxability and reporting of reimbursements made to employees would depend on the type of expenses. Only expenses which are fully incurred for business purposes are not considered income. All other reimbursements for the employee’s personal expenses/ liabilities (e.g. children’s school fees, travelling allowance between home and office, etc.) would need to be reported in the Form EA and
Form E.

Oh no, you are only partly right.

The taxability and reporting of reimbursements made to employees would depend on the type of expenses. Only expenses which are fully incurred for business purposes are not considered income. All other reimbursements for the employee’s personal expenses/ liabilities (e.g. children’s school fees, travelling allowance between home and office, etc.) would need to be reported in the Form EA and
Form E.

You are right.

The taxability and reporting of reimbursements made to employees would depend on the type of expenses. Only expenses which are fully incurred for business purposes are not considered income. All other reimbursements for the employee’s personal expenses/liabilities (e.g. children’s school fees, travelling allowance between home and office, etc.) would need to be reported in the Form EA and
Form E.

3. Non-resident directors are not employees as they only attend board meetings and their director fees and meeting allowances are not paid to them through payroll.

Oh no, this is not true.

A directorship is an office and in Malaysia, it is treated similar to employment. Non-resident directors who attend board meetings several times a year are also treated like to employees, even though they are not based in Malaysia and only travel to Malaysia to attend Board Meetings. In such cases, director fees and meeting allowances paid to a director of a resident company in Malaysia is considered as income derived from a Malaysian employment and subject to tax deduction under the Monthly Tax Deduction (MTD) system.

You are right - this is a myth.

A directorship is an office and in Malaysia, it is treated similar to employment. Non-resident directors who attend board meetings several times a year are also treated like to employees, even though they are not based in Malaysia and only travel to Malaysia to attend Board Meetings. In such cases, director fees and meeting allowances paid to a director of a resident company in Malaysia is considered as income derived from a Malaysian employment and subject to tax deduction under the Monthly Tax Deduction (MTD) system.

4. Independent consultants are not my employees.

You are right.

However, care needs to be taken when assessing the company’s tax reporting obligation for this group of individuals. Currently, the law defines employment to be where a master and servant relationship subsists. It also goes on to say that any person who benefits from a service which is rendered or performed by another person could be deemed to be the employer of that person, whether or not he employs that other person or is responsible for paying remuneration to that other person. Therefore, the company may be deemed to be an employer even though the individuals are appointed as “consultants”.

This is not a myth.

However, care needs to be taken when assessing the company’s tax reporting obligation for this group of individuals. Currently, the law defines employment to be where a master and servant relationship subsists. It also goes on to say that any person who benefits from a service which is rendered or performed by another person could be deemed to be the employer of that person, whether or not he employs that other person or is responsible for paying remuneration to that other person.  Therefore, the company may be deemed to be an employer even though the individuals are appointed as “consultants”.

5. Only payments which are processed through payroll need to be reported in the Form EA and Form E. In fact, the payroll system auto-generates the Form EA. Simple!

Oh no, this is a myth.

There could be off-payroll items such as reimbursements, benefits-in-kind, equity income (e.g. stock options, Restricted Stock Unit, Employee Stock Purchase Plan), payment from overseas, which is subject to MTD, and included in the Form EA and Form E.

You are right - this is a myth.

There could be off-payroll items such as reimbursements, benefits-in-kind, equity income (e.g. stock options, Restricted Stock Unit, Employee Stock Purchase Plan), payment from overseas, which is subject to MTD, and included in the Form EA and Form E.

6. Dormant companies are not required to file a Form E.

Oh no, this is not true.

Dormant companies (e.g. companies which has not commenced operations since the time it was incorporated or companies which has now ceased operations/ business) are still required to electronically file a Form e-E.

You are right - this is a myth.

Dormant companies (e.g. companies which has not commenced operations since the time it was incorporated or companies which has now ceased operations/ business) are still required to electronically file a Form e-E.

Your next steps

These are just some of the common statements that we hear. If we were to do a deeper analysis on each individual income item, that, would be a lengthy story for another day.

So, what now? Just like how you would arrange for an annual medical check-up, it is perhaps time for the company to do a health-check to see how tax-healthy you are as an employer (especially before the tax authorities turn up at your door step for a tax audit).

Start by taking a step back and look at your company’s current processes and systems to ensure that information is being captured correctly and nothing is falling through the cracks. All the best!

Stay tuned for our future blog post on Tips on how to survive a Payroll Tax Audit.

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Contact us

Wee Lay Har
Senior Manager, International Assignment Services, PwC Malaysia
Tel: +60 (3) 2173 1641
Email

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