Complying with immigration and tax laws whilst in Malaysia – what should employers and employees do?

18 June 2018

By Lim Phing Phing (Director) & Cynthia Wong (Senior Manager), Global Mobility Services, PwC Malaysia

In Part 1 of our blog post, we talked about several key Malaysian immigration and tax implications that employers need to understand before mobilising their foreign employees to Malaysia.

Now let’s explore how an employer and foreign employee can ensure that they comply with their respective obligations under the tax and immigration laws during the Malaysian assignment, and before the foreign employee’s repatriation from Malaysia.

Responsibilities of the employer and foreign employee while on assignment in Malaysia

So now that the foreign employee has secured the much awaited work pass to work in Malaysia, what happens next?

As shared in Part 1, from a tax perspective, the employer needs to adhere to their tax obligations towards the foreign employee during the assignment period. Similarly, the foreign employee needs to ensure that they file their individual tax returns correctly and settle the taxes accordingly with the Inland Revenue Board (IRB) by 30 April of each year.

From an immigration perspective, it is important that the employer and foreign employee adhere and comply with these tax obligations respectively as:

The Malaysian Immigration Department (MID) will require tax documentation such as previously filed individual tax returns and tax payment receipts before they can approve the renewal of the foreign employee’s work pass; and
The IRB and the MID co-operate and share information of foreigners working in Malaysia via the HASIL My EXPAT system, which matches the information obtained from the MID with a foreign employee’s tax position. Hence, settling taxes in a timely manner is crucial to prevent foreign employees from being barred from leaving the country at any point in time during their Malaysian assignment.

Another important point to note, if the foreign employee is running short of passport pages, or if their passport is expiring soon, they must renew their passport, and the employer must remember to transfer their work permit to their new passport.

If this isn’t done, and the foreign employee decides to exit the country at any point in time during the Malaysian assignment, immigration officers at Malaysian airports can stop them from leaving, on the basis that the work permit endorsed in the old or expired passport is no longer valid.

Repatriation: Responsibilities of the employer and employee

When it is time for the foreign employee to leave and say goodbye to Malaysia, is there anything else that needs to be taken care of apart from the relocation process?

The work permit sponsor or employer must see to it that all the exit immigration and tax formalities have taken place. This includes:

Cancelling the employee’s work permit. If the work permit isn’t cancelled and the foreign employee has left Malaysia for good, two things can happen:

i. From the immigration perspective, the MID can impose penalties on the employer. Plus, cancelling a work permit without the foreign employee’s passport can be a tedious process, as it would require the employer to lodge a police report and produce a statutory declaration to the MID, stating they’re aware the foreign employee has left the country without cancelling their work pass. This is not a recommended practice, as the foreign employee could potentially breach immigration laws when they re-enter Malaysia with the passport that has their old work pass – the one that still hasn’t been physically cancelled by the MID.

What about foreign employees who refuse to have their work permit cancelled because their kids are studying in Malaysia, and the school term is still underway? Regardless, the employer has to cancel the work permit. The employer can, however, apply to the MID for the foreign employee’s dependent passes to be converted to student passes and a guardian visa, which would allow their family to remain in the country legally.

ii. From a tax perspective, if the foreign employee has left Malaysia for another foreign assignment, the IRB could claim that the foreign employee is effectively exercising employment in Malaysia via the extension of their overseas duties. They could then potentially seek to tax the foreign employee throughout the period of their new, unrelated overseas assignment in a different country.

Before leaving Malaysia, the employer has to notify the IRB that the foreign employee is ceasing their Malaysian assignment, and the foreign employee has to seek tax clearance from the IRB. As part of the tax clearance process, the foreign employee’s passport has to be surrendered to the MID for them to shorten the work pass period (which should coincide with the foreign employee’s last working day in Malaysia). In addition, the IRB would also require the foreign employee to present the final individual tax return filed and their passport to verify their residency status during their assignment in Malaysia. This is necessary in order to finalise the foreign employee’s tax position and facilitate the issuance of the tax clearance letter. Once the tax clearance letter is issued by the IRB, all that’s left for the employer to do, is to make sure the foreign employee settles any outstanding taxes they may have before leaving the country.

In conclusion

To ensure both compliance and a positive overseas assignment experience, employers and foreign employees alike need to understand the intersecting tax and immigration implications throughout the assignment cycle in Malaysia.

It is important to note that the ramifications of the non-compliance risks are not just limited to fines and penalties. It could lead to substantial financial and reputational damage to the employer as well as render them unable to continue being a work permit sponsor for existing and future assignees to Malaysia. For foreign employees, they could be deported unceremoniously from the country for holding the incorrect pass or worse still, be prevented from leaving Malaysia due to unpaid taxes as shared in Part 1 of this blog post.

Stay tuned for our next blog post titled ‘Tips on how to survive a Payroll Tax Audit’.