Books and Records

It is the duty of every person carrying on a business to keep proper books and prepare regular accounts.  It is also essential to meet the requirements of Section 82 of the Income Tax Act, 1967 and also, in the case of limited companies, to meet the requirements of the Companies Act, 1965.

Every person carrying on a business is required:

·         To keep and retain in safe custody sufficient records to enable the income for each year of assessment, or the adjusted loss from the business for the basis period for any year of assessment, to be readily ascertained by the Director General or any authorised officer; and

·         To issue a printed receipt, serially numbered, for every sum received in each year of assessment in respect of goods sold or services performed in the course of, or in connection with the business and to retain a duplicate of every receipt so issued if the gross takings from the business for the basis year of assessment exceed RM150,000 from the sale of goods, or RM100,000 from the performance of services.  If in a calendar year, gross takings exceed the amount as mentioned, the printed receipts serially numbered are required to be used in that calendar year.  However, in the case of businesses, the basis year need not be the calendar year and the gross takings must exceed the above amount before the issuance of receipts is required.

However, if a machine is used for recording sales, the issue of receipts may be dispensed with unless the Director General is satisfied that such machine automatically records all sales, and that such totals are daily transferred to a sales record.

Where the Director General is not satisfied with the accounts produced by a person, he may give notice requiring such person to submit a fresh set of accounts, audited by a licensed accountant, together with the accountant’s report containing the matters set out in Section 174(1) and (2) of the Companies Act, 1965.

All business transactions should be made in proper records within 60 days of each transaction.  The keeping of temporary records on paper et cetera would not accepted.

Returns Of Income And Notice Chargeability

The Director General of Inland Revenue may, for any year of assessment, require a taxpayer, by notice in writing, to furnish a return within a time specified in the notice on the prescribed form, containing such particulars as may be required for the purpose of ascertaining the chargeable income (if any) of that person for that year.

Every taxpayer who has not been required within three months, after the beginning of that year, to submit a return for any particular year of assessment shall, within 14 days after the expiration of that period, give notice to the Director-General that he is so chargeable.

Resident Of Malaysia

For tax purposes, one becomes a resident if one resides in Malaysia for 182 days or more for an assessment year.

If the country concerned has a double taxation agreement with Malaysia, then he can apply for double taxation relief.

Definition Of Company

A company is a body corporate which includes any body of persons established with a separate legal entity by or under the laws of a territory outside Malaysia.

A company  carrying on a business or businesses is resident in Malaysia for the basis year for a year of assessment if at any time during that basis year the management and control of its business or of any of its businesses are exercised in Malaysia.

It is clear from the above definition that a company regardless of where it is incorporated, is resident for  a year of assessment if at any time during the basis period preceding the year of assessment, its management and control are exercised in Malaysia.  In other words, a company is deemed “resident in Malaysia” where its directors hold their board meetings in Malaysia (even if only one meeting is held in Malaysia).  Thus, a company incorporated in Malaysia has all its trading activities in Malaysia and yet can be non-resident if all its directors’ meetings are held outside Malaysia.

Preliminary Expenses

Preliminary or formation expenses are expenses incurred on the formation of a company.  Pre-operating or pre-trading expenses are incurred prior to commencement of trading.

All these expenses are not allowed for deductions from the gross income, as they are not wholly and exclusively incurred in the production of gross income.

However, under the Income Tax Rules, a company incorporated in Malaysia on or after 1 January 1973 with an authorised capital not exceeding RM250,000 is permitted to deduct certain incorporation expenses, deduction of which is otherwise prohibited by the Act.

The types of expenses allowable are:

·         The cost of preparing and printing the Memorandum, the Articles and the prospectus and of circulating and advertising the prospectus;

·         The cost of registering the company and the statutory documents together with fees and stamp duties, payable thereon;

·         The cost of drawing up the preliminary contracts and stamp duties thereon;

·         The cost of printing and stamping debentures (if any) and of share certificates and letters of allotment;

·         The cost of the seal of the company; and

·         Underwriting commission.

Any taxpayer wishing to make a claim on these expenses so as to be written off against the company’s gross income must furnish a detailed list of the types of preliminary expenses, otherwise the whole amount of such expenses will not be allowed.

Pre-operating or pre-trading expenses other than the above are not allowed for deductions from the gross income, nor can they be carried forward as a loss (where there is no income for a year of assessment) to be set off against future profits.

Basis Year Of Assessment

Beginning the year 2000, the assessment of income tax based on the income received in the preceding year will be charged to that of the current year i.e. the income earned in year 2000 will be assessed in the year 2000.

The present Official Assessment System (OAS) by the Inland Revenue Board will be changed to the Self Assessment System (SAS) in stages under different categories of taxpayers.

Under the SAS, the taxpayer are now responsible for determining their own chargeable income and income tax payable.  As such, they are responsible to furnish accurate and correct tax returns and assessments to the Inland Revenue Board.

The main objective of this new system is to ensure greater compliance from the taxpayers, simplify tax system as well as to accelerate tax collection.  As a result, the system would minimise cost incurred by both the government and the taxpayer.

Implementation Of Tax Laws

The Malaysia Inland Revenue Board is responsible for all policies relating to direct taxes, namely:

·        Income Tax,

·        Petroleum Income Tax,

·        Real Property Gains Tax, and

·        Stamp Duty.

In Malaysia, the law governing income tax is the Income Tax Act, 1967.  Income is only assessed if it is derived in Malaysia or remitted to Malaysia from abroad.  However, income that is remitted to Malaysia by a non-resident is wholly exempt.  Likewise, resident companies (except bank, insurance, sea and air transport companies) receiving foreign sourced income are also exempted from the income tax.  The taxation of income derived by banks, insurance, sea and air transport companies are based on a world income basis.

Broadly speaking, the taxable income of a company is computed in the same way as those of individuals except that no personal relieves are deductible.  Although the company income tax and personal income tax are governed by the Act, they are treated as distinct taxes.  A single rate tax is payable by all companies (currently 28%) on the taxable income determined for its accounting or financial year.   However, resident individuals are subject to income tax at graduated rates ranging from 0 to 29%.

Personal Income Tax

Under the ITA, a tax known as income tax is charged upon the income of any person.  There is no capital gains tax legislation in Malaysia other than the Real Property Gains Tax Act which specifically deals with transactions involving real property.  Hence, in order for a receipt to be subject to tax, it must be established that the receipt is of an income nature.  Otherwise, the receipt is not chargeable to Income Tax.

Several other consideration that have tax implications for the taxability of income are as follows:

·         Chargeability to income tax,

·         Residence status,

·         Classes of income, and

·         Exemptions.

In 1999, the Malaysian Government announced that a self-assessment system would be implemented in stages commencing with companies in 2001.  Commencing 1 January 2000, the IRB replaced the preceding year basis of assessment with a current year basis of assessment.

In Malaysia the total burden of income tax is determined by two factors i.e. first, the amount of income that is subject to tax and secondly, the rates of tax that apply to such income.

Business And Corporate Taxation

ITA provides that a company is resident in Malaysia for a particular year if at any time during that year the management and control of its business or of any one of its businesses is exercised in Malaysia.  Management and control generally refers to the place where the Board of Directors meets to make decisions.

The 28% corporate tax rate in Malaysia is one of the lowest in Asia.  Malaysia’s rate is lower than the Philippines, Brunei, Thailand, Indonesia and India.  The corporate tax rate must be viewed hand-in-hand with other fiscal incentives such as exemption on increased value-added products, availability of pioneer status and investment tax allowances.

Treatment Of Expenses: In Malaysia, the general rule on treating expenses is that expenses incurred in earning income from one source can only be deducted from that income and not against income from any other source.  Certain expenses are specifically disallowed, for example, entertainment expenses subject to certain limited exceptions, payments to non-residents from which withholding tax was not deducted and also capital expenditure.  ITA specifies certain deductible expenses and prohibits certain deductions.  For any type of expenditure which is neither, the above general rule regarding expenses incurred applies.

Treatment of Losses: Current year losses can be deducted from all sources of income in the current year of assessment.  But, if the current losses cannot be fully offset due to insufficient aggregate income, the unabsorbed portion will be carried forward indefinitely and be utilised only against the statutory income from all business sources.

Capital Allowances: Depreciation is not an allowable deduction but capital allowances on qualifying plant and machinery are granted instead at various specified rates.

Real Property Gains Tax

Real Property Gains Tax, RPGT for short, is charged under the RPGT Act, 1976 and a tax on capital gains arising from the disposal of any interest, option or other right in or over land situated in Malaysia.  With effect from October 1988 the gain on the disposal of shares held in a real property company (RPC) is also subject to RPGT.  A RPC for the RPGT purposes is a controlled company which owns real property or shares in another RPC or both, the value of which is not less than 75% of the value of its total tangible assets.

Indirect Taxes

The responsibility to administer indirect taxation in Malaysia lies with the Royal Customs and Excise Department.  The various types of indirect taxes are:

·        Customs duties,

·        Excise duty,

·        Sales tax and

·        Service tax.

Customs duties are levied on any goods imported in and exported from Malaysia.  Custom duty refers to any import duty, surcharge or cess imposed by or under the Countervailing and Anti-Dumping Duties Act and includes any royalty payable in lieu of an export duty under any written law, or a contract, lease or agreement to which the Federal Government has consented.

Excise Duty is form of taxation levied on locally manufactured goods of intoxicating liquors, tobacco product and by-products, petroleum and conversion of organic or non-organic materials into new products.

Sales Tax in Malaysia is a single stage ad valorem tax, imposed on taxable goods manufactured by any person or company in Malaysia.  Sales tax is a consumer tax.

Service Tax is charged and levied in respect of any taxable service provided by any taxable person or service except for exported taxable service which means service provided to a entity in a country other than Malaysia.  The rate is 5%.