Corporate Income Tax

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:

^{* 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) is 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:

Non-resident companies are taxed at the following rates:

<sup>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.</sup>
 

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.

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.

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.
• W.e.f. from 1 January 2021, a fine ranging from RM20,000 to RM100,000 per year of assessment, or imprisonment not exceeding six months, or both, may apply to taxpayers who fail to furnish contemporaneous transfer pricing documentation. 
• For audits which commenced prior to 1 January 2021, taxpayers without transfer pricing documentation could also 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 transfer pricing adjustment made by the IRB would apply to transfer pricing adjustments made on audits which commenced on or after 1 January 2021. The surcharge and penalties are mutually exclusive.

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.

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.