Scope of taxation
Income tax in Malaysia is imposed on income accruing in or derived from Malaysia except for income of a resident company carrying on a business of air / sea transport, banking or insurance, which is assessable on income from wherever derived (world income scope). Income that is attributable to a place of business (as defined) in Malaysia is also deemed derived from Malaysia.
With effect from (W.e.f.) 1 January 2022, income derived from outside Malaysia and received in Malaysia by tax residents will be subject to tax. However, subject to conditions, the following foreign-sourced income received in Malaysia from 1 January 2022 to 31 December 2026 qualify for tax exemption:
- Dividend income received by resident companies, limited liability partnerships (LLP), and individuals (in respect of dividend income received through a partnership business in Malaysia)
- All classes of income received by resident individuals (excluding a source of income from a partnership business in Malaysia, which is received in Malaysia from outside Malaysia)
The exemption is not applicable to resident companies carrying on a business of air / sea transport, banking or insurance, which will continue to be assessable to tax on a world income scope.
Income attributable to a Labuan business activity of a Labuan entity including the branch or subsidiary of a Malaysian bank in Labuan is subject to tax under the Labuan Business Activity Tax Act 1990 (LBATA). A preferential tax rate of 3% will apply to the Labuan entity on its net profits from Labuan business activities if it meets the substantial activity requirements, otherwise it will be subject to a tax rate of 24% on its net profits. A Labuan entity can make an irrevocable election to be taxed under the Income Tax Act 1967 in respect of its Labuan business activity.
Classes of income
Income tax is chargeable on the following classes of income:
a) gains or profits from a business;
b) gains or profits from an employment;
c) dividends, interest or discounts;
d) rents, royalties or premium;
e) pensions, annuities or other periodical payments not falling under any of the foregoing classes;
f) gains or profits not falling under any of the foregoing classes.
Basis of assessment
Income is assessed on a current year basis. The year of assessment (YA) is the year coinciding with the calendar year, for example, the YA 2022 is the year ending 31 December 2022. The basis period for a company, co-operative or trust body is normally the financial year (FY) ending in that particular YA. For example the basis period for the YA 2022 for a company which closes its accounts on 30 June 2022 is the FY ending 30 June 2022. All income of persons other than a company, limited liability partnership, co-operative society or trust body, are assessed on a calendar year basis.
Malaysia adopts a self-assessment system which means that the responsibility to determine the correct tax liability lies with the taxpayer.
Returns & assessments
- Taxpayers are required to submit their income tax returns to the Inland Revenue Board (IRB) within the prescribed time frame. Refer to the “Important filing dates” section for further information.
- Companies are required to prepare the income tax returns based on the financial statements as required by Companies Act 2016. W.e.f YA 2022 this requirement is extended to limited liability partnerships, trust bodies and co-operative societies which are required to prepare financial statements in accordance with any written law.
- A tax return submitted by the prescribed due date is deemed to be an assessment made on the taxpayer on the date of submission.
- The IRB is allowed to issue an additional assessment if it thinks that the original assessment is not sufficient. Such assessment can only be issued within 5 years (or 7 years for transfer pricing issue) from the end of that particular YA.
- The above time frame is not applicable in situations of fraud, wilful default or negligence.
- W.e.f YA 2024, all categories of taxpayers will be required to submit tax returns via electronic filing.
Appeals
- Where a taxpayer is aggrieved by an assessment made by the IRB, he may submit an appeal. If the taxpayer and the IRB cannot come to an agreement, the appeal may be escalated to the Special Commissioners of Income Tax (SCIT) within a certain period.
- Appeal against assessments raised by the IRB can be made within 30 days after the date the notice of assessment has been served.
- Taxpayers can also appeal against its own assessment (self-assessment made based on the return submitted by the taxpayer). However, the scope of appeal is restricted only to disagreement (but conceded in its return) with the IRB’s known stand and rules prevailing at the time when the return was submitted. Examples of such known stand and rules include:
- Public rulings
- Private rulings or advance rulings
- Guidelines issued by the IRB
- Decided tax cases
- Other written evidence
Relief for error or mistake, or inaccurate tax returns
Application for relief can be made to the Director General of Inland Revenue (DGIR) for tax returns which are incorrect due to the following reasons:
Reasons |
Time frame |
Error or mistake made by the taxpayer. |
In cases involving overpayment of tax for a YA, within 5 years from the end of that YA. In cases where there is no tax liability for a YA, within 6 months from the date the return is furnished. |
Exemption, relief, remission, allowance or deduction granted for that YA under the Income Tax Act 1967 or any other written law published in the Gazette after the YA in which the return is furnished. |
Within 5 years after the end of the year the exemption, relief, remission, allowance or deduction is published in the Gazette. |
Approval for exemption, relief, remission, allowance or deduction is granted after the YA in which the return is furnished. |
Within 5 years after the end of the year the exemption, relief, remission, allowance or deduction is approved. |
Tax deduction not claimed in respect of expenditure incurred that is subject to withholding tax which is not due to be paid on the day the return is furnished. |
Within 1 year after the end of the year the payment of withholding tax is made. |
Offences & penalties
Offences under the Income Tax Act 1967 and the penalties thereof include the following:
Offences |
Penalties |
Failure to furnish Income Tax Return |
RM200 to RM20,000 or imprisonment or both [on conviction]; or 300% of tax payable [in lieu of prosecution] |
Failure to furnish Income Tax Return for 2 YAs or more |
RM1,000 to RM20,000 or imprisonment or both, and 300% of tax liability [on conviction]; or 300% of tax payable [in lieu of prosecution] |
Make an incorrect tax return by omitting or understating any income, or providing incorrect information |
RM1,000 to RM10,000 and 200% of tax undercharged [on conviction]; or 100% of tax undercharged [in lieu of prosecution] |
Wilfully and intentionally evade tax or assist any other person to evade tax |
RM1,000 to RM20,000 or imprisonment or both and 300% of tax undercharged [upon conviction] |
Attempt to leave the country without payment of tax |
RM200 to RM20,000 or imprisonment or both [on conviction] |
Late payment of tax liability under an assessment for a YA |
10% of tax payable |
Late payment of tax instalment |
10% of outstanding tax instalment amount |
Underestimation of tax estimate for a YA by more than 30% of actual tax payable |
10% of the difference exceeding 30% of the actual tax payable |
Failure to furnish Country-by-Country Report (CbCR) |
RM20,000 to RM100,000 or imprisonment or both [on conviction] |
Incorrect return or information for Mutual Administrative Assistance Arrangement and for CbCR |
RM20,000 to RM100,000 or imprisonment or both [on conviction] |
Failure to furnish transfer pricing documentation |
RM20,000 to RM100,000 or imprisonment or both [on conviction]; or RM20,000 to RM100,000 [in lieu of prosecution] |
| Failure to comply with IRB’s request for taxpayer’s bank account information for purposes of garnishee order (w.e.f 1 January 2022) | RM200 to RM20,000 or imprisonment or both [on conviction] |
Public rulings and advance rulings
- To facilitate compliance with the law, the DGIR is empowered to issue public rulings and advance rulings.
- Public rulings are voluntarily issued by the IRB whereas advance rulings are issued upon application made by a taxpayer.
- Tax treatment prescribed in the public rulings that are adopted by a taxpayer shall be binding on the DGIR.
- Tax treatments prescribed by the DGIR in its advance rulings are binding on both the DGIR and taxpayer except for the following circumstances:
a) the arrangement is materially different from the arrangement stated in the advance ruling;
b) there was material omission or misrepresentation in, or in connection with the application of the ruling;
c) the assumptions made by DGIR when issuing the advance ruling are subsequently proved to be incorrect; or
d) the taxpayer fails to satisfy any of the conditions stipulated by the DGIR.
Tax Compliance Certificate (TCC)
TCC will be a prerequisite for taxpayers to tender for Government projects with effect from 1 January 2023.
Tax Identification Number (TIN)
The implementation of TIN is effective from 1 January 2022. The TIN will be used for purposes of income tax, real property gains tax and stamp duty. The following persons will be required to have a TIN:
- Any person who is assessable and chargeable to tax;
- Any person who is required to furnish an income tax return; or
- Any person who is a citizen and permanent resident (w.e.f 2023) aged 18 years old and above.
Persons who have been assigned a tax reference number on or before 1 January 2022 are deemed to have been assigned a TIN.
Contact us
