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Corporate Income Tax

Residence status

A company is tax resident in Malaysia if its management and control are exercised in Malaysia. Management and control are normally considered to be exercised at the place where the directors’ meetings concerning management and control of the company are held.

 

Income tax rates

Resident companies are taxed at the rate of 24% while those with paid-up capital of RM2.5 million or less*, and gross business income of not more than RM50 million are taxed at the following scale rates:

Chargeable income

Rate (%)

The first RM600,000

17

In excess of RM600,000

24

* The companies must not be part of a group of companies where any of their related companies have a paid-up capital of more than RM2.5 million.

For YA 2022 only, a special one-off tax (Cukai Makmur) will be imposed on companies, excluding companies which enjoy the 17% reduced tax rate above, which have generated high income during the COVID-19 pandemic, as follows:

Chargeable income

Rate (%)

The first RM100 million

24

In excess of RM100 million

33

W.e.f 1 January 2022 to 30 June 2022, foreign-sourced income of resident companies remitted to Malaysia will be taxed at 3% on gross income.

Non-resident companies are taxed at the following rates:

Type of income

Rate (%)

Business income

24

Royalties

10

Rental of moveable properties

10

Advice, assistance or services rendered in Malaysia

10

Interest

15*

Dividends

Exempt

Other income

10


Note: Where the recipient is resident in a country which has a double tax treaty with Malaysia, the tax rates for the specific sources of income may be reduced.
* Interest paid to a non-resident by a bank or a finance company in Malaysia is exempt from tax.
 

Collection of tax

An estimate of a company’s tax payable for a YA must be furnished by all companies to the DGIR not later than 30 days before the beginning of the basis period, except for the following:

  • A newly established company with paid-up capital of RM2.5 million and less is exempted from this requirement for 2 to 3 YAs, beginning from the YA in which the company commences operation, subject to certain conditions.
  • A company commencing operations in a YA is not required to furnish an estimate of tax payable or make instalment payments if the basis period for the YA in which the company commences operations is less than 6 months.

The estimate of tax payable is generally payable by 12 equal monthly instalments, beginning from the second month of the company’s basis period (FY).

The balance of tax payable by a company based on the return submitted is due to be paid by the due date for submission of the return.

In general, tax of a non-resident company on all income other than income from a business source is collected by means of withholding tax. The withholding tax is payable within one month of crediting or paying the non-resident company.

 

Profit distribution

Tax on a company’s profits is a final tax and dividends paid, credited or distributed are tax exempt in the hands of shareholders.

 

Losses

Business losses can be set off against income from all sources in the current year. Any unutilised losses can be carried forward for a maximum period of 7 consecutive YAs (10 consecutive YAs w.e.f YA 2019) to be utilised against income from any business source. Unutilised losses accumulated as at YA 2018 can be utilised for 7 consecutive YAs (10 consecutive YAs w.e.f YA 2019) and any balance will be disregarded in YA 2026 (disregarded in YA 2029 w.e.f YA 2019).

For a dormant company, the unutilised losses will be disregarded if there is a substantial change in shareholders. 

 

Group relief

Under the group relief provision, a company may surrender a maximum of 70% of its adjusted loss for a YA to one or more related companies for the first 3 consecutive YAs after having completed its first 12-month basis period from commencement of its operations. Conditions to be met by the claimant and surrendering companies include the following:

  • Resident and incorporated in Malaysia.
  • Paid-up capital of ordinary shares exceeding RM2.5 million at the beginning of the basis period.
  • Both companies have the same (12-month) accounting period.
  • Both companies are “related companies” as defined in the law, and must be “related” throughout the relevant basis period as well as the 12 months preceding that basis period.

Companies currently enjoying certain incentives such as pioneer status (PS), investment tax allowance (ITA), reinvestment allowance, etc. or which have unutilised ITA or unabsorbed pioneer losses upon the expiry of its ITA or PS incentives under the Promotion of Investments Act 1986, are not eligible for group relief.

 

Tax deductions

Generally, tax deduction is allowed for all outgoings and expenses wholly and exclusively incurred in the production of gross income.

Certain expenses are specifically disallowed, for example:

  • Domestic, private or capital expenditure.
  • Lease rentals for passenger cars exceeding RM50,000 or RM100,000 per car, the latter amount being applicable to vehicles costing RM150,000 or less which have not been used prior to the rental.
  • Employer’s contributions to unapproved pension, provident or saving schemes.
  • Employer’s contributions to approved schemes in excess of 19% of employee’s remuneration.
  • Non-approved donations.
  • 50% of entertainment expenses with certain exceptions.
  • Employee’s leave passages with certain exceptions.
  • Interest, royalty, contract payment, technical fee, rental of movable property, payment to a non-resident public entertainer or other payments made to non-residents which are subject to Malaysian withholding tax but where the withholding tax was not paid.
  • Payments made to a Labuan entity* – the percentage of non-deduction is 25% for interest and lease rental, and 97% for other payments.

*regardless of whether it meets the substantial activity requirements (w.e.f 1 January 2021)

 

Transfer pricing

1. Legislation

  • Malaysia’s transfer pricing legislation adopts the arm’s length principle espoused in the OECD Transfer Pricing Guidelines.
  • Under the Income Tax Act 1967, the DGIR is empowered to make adjustments on controlled transactions of goods, services or financial assistance based on the arm’s length principle or to disregard a structure which is commercially irrational (w.e.f 1 January 2021).
  • The definition of ‘control’ is:

    • common shareholding of 20% of shareholding or more; and

    • the operations of the affiliate depend on the proprietary rights of the shareholder of 20%, or its affiliate; or

    • the shareholder / affiliate is able to influence decisions relating to the business activities of the company, including the receipt of services, and the pricing of the acquisition of such services; or

    • one or more of the directors or members of the board of directors of a person are appointed by the shareholder / affiliate.

       

       

  • The following rules and guidelines have been issued by the IRB:

    • Income Tax (Transfer Pricing) Rules 2012 (“TP Rules”);
    • Malaysian Transfer Pricing Guidelines 2012 (“TP Guidelines”)
    • Income Tax (Advance Pricing Arrangement) Rules 2012; and
    • Advance Pricing Arrangement Guidelines 2012 (“APA Guidelines”).
  • The arm’s length requirement is included in the Labuan Business Activity Tax Act 1990 (“LBATA”). The same definition of control under the Income Tax Act 1967 (including the expanded definition which captures entities with common shareholding of 20% or more where certain additional conditions are met) is applied in LBATA.

2.   Documentation requirements

  • The TP Rules require taxpayers with intercompany transactions to prepare transfer pricing documentation on a contemporaneous basis.
  • Documentation should be in place by the time of filing of the tax return (seven months after the FY end). However, it does not need to be submitted with the tax return.
  • The TP Guidelines set out Malaysian documentation requirements, and apply to controlled transactions where at least one of the parties to the transaction is chargeable to tax in Malaysia.
  • Documentation requirements are broadly consistent with requirements under Action 13 of the Base Erosion and Profit Shifting (“BEPS”) Plan. 

    • Master file: Provides an overview of the multinational group’s business, value drivers, intangibles, financing arrangements, and supply chain. The master file is only required  if (i) the Group is headquartered in Malaysia and has consolidated revenue exceeding RM3 billion; and / or (ii) the Group is required to prepare a master file in any other location.

    • Local file: Local transfer pricing documentation which substantiates the arm’s length nature of intercompany transactions.

    • Country-by-country report: This is addressed under the Income Tax (Country-by-Country Reporting) Rules 2016.

3.   Thresholds

  • There is no de minimis rule in Malaysian transfer pricing legislation.
  • The TP Guidelines allows taxpayers to opt to prepare limited documentation if they fall below the following thresholds*:

-     Gross income exceeding RM25 million, and total amount of related party transactions exceeding RM15 million.

-     For financial assistance, the threshold is RM50 million.

* Not applicable to permanent establishments (PE)

  • Companies which are not assessable to tax due to tax incentives or losses are encouraged to prepare documentation if their related party transactions exceed the thresholds outlined above.
  • The TP Guidelines need not apply to controlled transactions between companies who are both assessable and chargeable to tax in Malaysia, and where it can be proven that any adjustments made under the TP Guidelines will not alter the total tax payable by both companies.

4.   Penalties for non-compliance

  • Taxpayers are required to submit documentation within 14 days of the IRB’s request. The IRB treats failure to submit documentation within the timeframe as non-compliance with the contemporaneous requirement under the TP Rules. Refer to “Offences & penalties” in the Income Tax chapter.
  • Taxpayers without transfer pricing documentation could be subject to up to 50% of penalties upon additional tax payable arising from transfer pricing adjustments.
  • Taxpayers not having comprehensive documentation as required under the TP Guidelines will be subject to 30% of penalties on additional tax payable. This assessment is subjective.
  • W.e.f. 1 January 2021 a surcharge up to 5% of the tax adjustment made by the IRB would apply to adjustments to disregard the structure or for transfer pricing

5.   Aligning transfer pricing outcomes with value creation

  • The Malaysian Guidelines reflect guidance under the updated OECD Guidelines and BEPS Action Points 8 to 10, which requires transfer pricing outcomes to be aligned to value creation within a multinational enterprise group’s value chain:

-     Actual business transactions (conduct) should be identified, and the transfer pricing arrangements should not be based on contractual arrangements which do not reflect reality

-     Contractual allocation of risks should be respected only when supported by actual decision-making

-     Capital without functionality will generate no more than a risk free return

-     The IRB may disregard transactions when exceptional circumstances of commercial irrationality occur

6.   High risk transactions

  • Transactions relating to intangibles – In line with the revised OECD Guidelines, the TP Guidelines outlines the following necessary steps in assessing intangibles transactions:

-     Identifying the intangible

-     Analysing contractual terms

-     Functional analysis (identifying economically significant functions related to the development, enhancement, maintenance, protection and exploitation (DEMPE) of the intangibles, and demonstrating control over these functions)

  • Commodity transactions – The TP Guidelines acknowledge that the comparable uncontrolled price method is generally the most appropriate method for intercompany commodity transactions. The TP Guidelines lay out comparability factors relevant to commodity transactions, and the importance of providing supporting documentation.

 

Country-by-Country Reporting (CbCR)

The Income Tax (Country-by-Country Reporting) Rules 2016 and Labuan Business Activity Tax (Country-by-Country Reporting) Regulations (collectively “CbC Rules”) require Malaysian multinational corporation (MNC) groups with total consolidated group revenues of RM3 billion and above in the financial year preceding the reporting financial year to prepare and submit CbC Reports to IRB no later than 12 months after the close of each financial year. 

Malaysian entities of foreign MNC groups will generally not be required to prepare and file CbC Reports as the obligation to file will be with the ultimate holding company in the jurisdiction it is tax resident in. However, the Malaysian entities of the foreign MNC group will have an obligation to inform/notify the IRB if it is the holding company or has been appointed as the surrogate holding company. If it is neither the holding company nor surrogate holding company, the Malaysian entities must notify the IRB of the identity and tax residence of the entity responsible for preparing the CbC Report.

Failure to comply with the CbC Rules may result in a fine of RM20,000 to RM100,000 or imprisonment of up to 6 months or both. In the case of Labuan entities, non-compliance with the CbC Rules may result in a fine of up to RM1 million or imprisonment of up to 2 years or both.

 

Advance pricing arrangement

1.   Background

  • Taxpayers with cross border transactions may apply for an Advance Pricing Agreement (APA) under the Income Tax Act 1967.
  • The requirements and process for APA applications are outlined in the APA Guidelines 2012.

2.   Thresholds

  • The APA Guidelines outline the following requirements for applying for an APA:

-     a taxpayer who is a company assessable and chargeable to tax under the Income Tax Act 1967 (also includes permanent establishment (PEs));

-     turnover value exceeding RM100 million; and

-     the value of the proposed covered transaction is

·    for sales, if it exceeds 50% of turnover;

·    for purchases, if it exceeds 50% of total purchases; or

·    for other transactions, if the total value exceeds RM25 million.

  • All covered transactions must relate to income that is chargeable and not income which is exempted.
  • In cases involving financial assistance, a threshold of RM50 million applies. 

Earning stripping rules (ESR)

The ESR applies on interest expense (of more than RM500,000 in a basis period) in connection with or on any financial assistance granted in controlled transactions (as defined), whether directly or indirectly, to a person. The ESR  guideline narrows the application of the prescribed rules to cross-border controlled transactions.

The prescribed rules specify that the maximum amount of interest deduction allowed is 20% of the Tax-EBITDA (Earnings Before Income Tax, Depreciation and Amortisation) from each of the sources of income consisting of a business. The interest expenses in excess of the maximum deduction allowed may be carried forward indefinitely to be deducted against future income. However in the case of a company, the carry forward of the above-mentioned interest expenses would not be allowed if there is a substantial change in the company's shareholders in the following year.

 


This publication is a quick reference guide outlining Malaysian tax information which is based on taxation laws and current practices. This booklet also incorporates in coloured italics the 2022 Malaysian Budget proposals based on the Budget 2022 announcement on 29 October 2021 and the Finance Bill 2021. These proposals will not become law until their enactment and may be amended in the course of their passage through Parliament.

This booklet is intended to provide a general guide to the subject matter and should not be regarded as a basis for ascertaining the liability to tax in specific circumstances. No responsibility for loss to any person acting or refraining from acting as a result of any material in this publication can be accepted by PricewaterhouseCoopers. Readers should not act on the basis of this publication without seeking professional advice.

 

Published by
PricewaterhouseCoopers Taxation Services Sdn Bhd (464731-M)
Level 10, 1 Sentral, Jalan Rakyat, Kuala Lumpur Sentral,
P.O. Box 10192, 50706 Kuala Lumpur, Malaysia
Tel: 03-21731188 Fax: 03-21731288


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