Immigration and tax laws in Malaysia – What should employers know before deploying employees to Malaysia?

04 June 2018

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

Imagine this, you’re a Londoner waiting in line at the immigration counter in Kuala Lumpur International Airport (KLIA) for your flight back home. You have just completed your assignment with ‘Malaysian Company X’. To your surprise, the immigration officer scrutinises your passport, and tells you that you can’t leave Malaysia.

The reason? You have not settled outstanding taxes to the Malaysian Inland Revenue Board (IRB) since 2010. There’s only one way you’ll be allowed to leave the country: settle your unpaid taxes first. You panic – worried you’ll miss your flight and be trapped in Malaysia with limited funds.

What should you do now? Call your ex-employer in Malaysia?

Now imagine you’re the Human Resources rep for ‘Malaysian Company X’. What should you do if you’re on the receiving end of that call?

An overseas assignment could easily turn into a nightmare (like the scenario above) if employers aren’t able to navigate the complexities of immigration and tax laws when employees work abroad.

In this blog post, we’ll look at how employers can comply with these laws prior to the employee arriving in Malaysia.

Understanding the different immigration passes

Currently, the Immigration Department of Malaysia (MID) issues three main types of immigration passes to foreigners entering Malaysia. They are:

Social Visit Pass
Employment Pass
Professional Visit Pass

Overview of types of immigration passes

How should employers choose the right pass?

Before making any decisions, it is important for employers to:

Identify the correct immigration pass to apply for based on the nature and duration of the assignment. A foreign employee entering Malaysia for employment on a Social Visit Pass is strictly against the law. Foreign employees, especially business travelers, who do so could risk being detained and deported from Malaysia.

Understand the tax implications under the different passes. This would include:
- Evaluating the individual tax implications under the different passes and any domestic or treaty exemptions that these foreign employees can claim;
- Understanding the applicable individual tax rates for residents versus non-residents, and;
- Determining whether these foreign employees’ presence in Malaysia under the different passes could create permanent establishment risks for the foreign entity in Malaysia.

Identifying who sponsors the work passes

A foreign entity without any presence in Malaysia cannot sponsor a work pass on behalf of its employees. So it would have to rely on its related Malaysian entity or joint-venture partner in Malaysia, which must meet the minimum paid up capital requirements (pictured in the table below) before it can proceed with the sponsorship.

The work pass sponsor is perceived as the employer, and is required to comply with the employer tax obligations under Section 83 of the Act, even though that sponsor may not be the actual employer. When the employer does not comply with these tax obligations, the Inland Revenue Board (IRB) may collect any penalties and past outstanding taxes directly from the employer.

In conclusion

It’s important for employers to plan upfront and understand the crucial tax and immigration issues from the beginning. This helps ensure that all areas of their global mobility programme including tax and immigration processes are effective and compliant to mitigate risks for the business and the foreign employees. Plus, a compliant and effective tax and immigration process will allow employers to enjoy a smoother process of mobilising foreign employees to Malaysia.

In part 2 of this blog post, we’ll look at some of the tax and immigration issues that may arise during and after a foreign employee’s assignment in Malaysia. What else must businesses and employees themselves do to stay compliant?

Stay tuned to find out.