BBFT 2013 TAXATION

CHAPTER 1: OVERVIEW OF MALAYSIAN TAX SYSTEM

Part 1: What Is Tax?

Definition:
• “compulsory exaction of money by public authority for public purposes
enforceable by law” (An Australian case)
• “part of our earnings is contributed to the Government to enable them to meet
expenditures for the benefit of the people, such as the construction of roads,
schools, hospitals and undertaking other development projects” (Tax Nasional
2001).

Part 2: Sources of Revenue Law

• Statute laws
Law enacted by parliament, e.g. Income Tax Act 1967, Real Property Gains
Tax 1976 and etc.
• Case laws (Judge made decisions / findings)
Law created by the decisions of courts.
• Informal laws
Inland Revenue Board’s guidelines, public ruling (interpretation of the Income
Tax Act by the Inland Revenue Board), income tax rules, income tax orders.

The principal statute governing the taxation of income in Malaysia is the Income Tax
Act 1967 (ITA 1967).
Tax laws have been designed to ensure a source of revenue for the government.

Part 3: Types of Taxes

Types of Taxes

Direct Taxes Indirect taxes

Taxes paid directly Taxes paid indirectly

Inland Revenue Royal Malaysian Customs

Board (IRB) (RMC)

Income tax,
Sales tax, Service tax
Real property gain tax,
Excise duty,
Petroleum income tax,
Stamp duty
Customs duties

C1 - 1
BBFT 2013 TAXATION

Direct taxes are those taxes that are paid directly to the Revenue authorities (e.g. Inland
Revenue Board)

Indirect taxes are generally paid to another person who then transmits the tax to the
Revenue authorities.

Direct tax (e.g. Income Tax)

A Salary Pay Income Tax

Sdn.
Bhd.
Taxpayer Inland Revenue Board
(e.g. Mr. X (IRB)
Director General of Inland
Revenue (DGIR)

Indirect tax (e.g. Service Tax)

Business Collect
Pay ST Entity (e.g. and
Taxpayer (6%) Restaurant)
Remit Royal Malaysian
(e.g. Mr. X) ST Customs (RMC)
Agent
Director General of
Customs (DGC)

Part 4: Scope of Charge to Income Tax (Section 3)

When is taxable?
What is taxable?
Who is taxable?
Income from where?

A person can only be charged to tax if he falls within the scope of the charge under the
provisions of the Act.

Section 3 of the Act provides:

“Subject to and in accordance with this Act, a tax to be known as income tax shall be
charged for each year of assessment upon the income of any person accruing in or
derived from Malaysia or received in Malaysia from outside Malaysia.”

C1 - 2
BBFT 2013 TAXATION

Section 3 sets out two circumstances where income tax liability arises, namely;

(a) the transaction must be “income” in nature and such income is accrued in or
derived from Malaysia (Malaysian source); [earned income from Malaysia] or

(b) the transaction must be “income” in nature and it is received in Malaysia from
outside Malaysia (foreign source) [income earned from overseas transferred /
remitted into Malaysia]

Income tax would be imposed by reference to year of assessment upon a person’s

income. Such person is known as a chargeable person.

Part 5: Year of Assessment (YA)

Definition: The year in which tax is assessed

With effect from 1 January 2000, the basis of taxation in Malaysia is on a current year of
assessment. Current year of assessment means income derived in a current year will be
assessed to tax in the same year.

• For Individuals
Year of assessment refers to calendar year from 1 January to 31 December.

Example 1 (Individual)
Basis Period (period you earn Year of Assessment (YA)
the income for the YA)
1/1/2019 – 31/12/2019 2019
1/1/2020 – 31/12/2020 2020
1/1/2021 – 31/12/2021 2021
1/1/2022 – 31/12/2022 2022

• For Companies
The year of assessment will follow the financial year-end.

Example 2 (Company with 31 December year-end)

Basis Period Year of Assessment (YA)

1/1/2018 – 31/12/2018 2018
1/1/2019 – 31/12/2019 2019
1/1/2020 – 31/12/2020 2020
1/1/2021 – 31/12/2021 2021
1/1/2022 – 31/12/2022 2022

Example 3 (Company with 31 August year-end)

Basis Period Year of Assessment (YA)
1/9/2017 – 31/8/2018 2018
1/9/2018 – 31/8/2019 2019
1/9/2019 – 31/8/2020 2020
1/9/2020 – 31/8/2021 2021
1/9/2021 – 31/8/2022 2022

C1 - 3
BBFT 2013 TAXATION

Part 6: Income
Receipts or gains, which are income in nature, would fall within the ambit (scope /
coverage) of the Income Tax Act 1967 (ITA 1967). (Income or revenue receipt is
taxable)

Capital gains / capital receipts are not subject to income tax.

Revenue Receipts / Revenue Gain / Income

Receipts /
Gains Capital Receipts / Capital Gain

Capital gains in respect of disposal of real property may be liable to tax under Real
Property Gains Tax Act, 1967.

The differences between “income” receipt and “capital” receipt are as follows:

Income or Revenue Receipt Capital Receipt or Capital Gain

• Regular (repeated / recurring) • Windfall (unexpected gain)
• Circulating capital (Current assets) • Fixed capital (Fixed assets)
• Being the yield (return) from a source • Being the source of income

Taxable under Exempted

ITA 1967 under ITA 1967

Not Taxable Not Taxable

under ITA under ITA 1967
scope)

Fruit (INCOME)

Tree (Source of Income is

CAPITAL)

C1 - 4
BBFT 2013 TAXATION

Example of income and capital receipts:

Income receipts Capital receipts
Chargeable to income tax Not chargeable to income tax
1. Provision of services 1. Gift
2. Sale of goods / trading 2. Profit from disposal of
stock long term investment
3. Trading or adventure in 3. Speculation, windfall
the nature of trade gains
4. Gambling
5. Sale of capital assets

Section 4 of the ITA 1967 provides the six classes of income on which tax is chargeable
as follows:
Section 4(a) Gains or profits from a BUSINESS, for whatever period of time carried
on
Section 4(b) Gains or profits from EMPLOYMENT
Section 4(c) DIVIDENDS, INTEREST or discounts
Section 4(d) RENTS, royalties or premiums
Section 4(e) Pensions, annuities or other periodical payments not falling under any of
the foregoing paragraphs
Section 4(f) Gains or profits not falling under any of the foregoing paragraphs (e.g.
commission)

Part 7: Chargeable Person (taxable person/taxpayer/person who pays tax)

Section 2 of the Act defines ‘person’ to include a company (Sdn Bhd or Bhd), a body
of persons (a group of persons) and a corporation sole (Individual).

‘Body of persons’ is further defined as an unincorporated body of persons (not being a

company), including a Hindu joint family but excluding a partnership. In the case of
partnership, it is the individual partner that will be assessed to tax. Examples of body
of persons would be trust, club, trade association, co-operative societies, etc.

‘Hindu joint family’ refers to any system of law prevailing in India. The use of the word
‘includes’ in Section 2 suggests that the definition of person is not exhaustive. The
categories of person are wider and are not limited to what is defined in the Act. An
individual is also included in ‘person’.

Pe rs on

Co mp an y
Bo d y of p erso ns
Individual
(corporation sole)

Hindu Joint Family, trust,

club, trade association, co-
operative societies, etc.

No t ex h au stive …….
14

C1 - 5
BBFT 2013 TAXATION

It is crucial to establish the concept of ‘person’ because:

• such person will be the chargeable person assessable to tax on his income
derived from taxable activities (we want to know “who” must pay tax)
• the tax rate applicable to each category of chargeable person varies, some are
taxed at FLAT RATE (fixed rate) while others are taxed at SCALED RATES
(tax rates vary from 0% to 30%)

Chargeable Person

Individual Company

Resident Resident Non resident

Non resident

Scaled Flat Rate

Rate (30%) SME Others
(0 – 30%)

Chargeable income: Flat rate (24%)

First RM600,000 = 17%
Excess of RM600,000 = 24%

The “SME” means a company resident and incorporated in Malaysia which has a
paid-up capital in respect of ordinary shares of ≤ RM 2.5m at the beginning of the
basis period for a year of assessment and having gross income from source or
sources consisting of a business of not more than RM50 million for the basis period
for a year of assessment.

Part 8: Derivation of Income (Where you earned your income?)

Derivation = > source / origin

How a source of income is determined? (how to determine whether is a “Malaysia

income” or “foreign source income”?)
Income How to determine the source of income?
Service rendered Place where the service was rendered

Activity of manufacturing Place where the profit making activity was carried on (e.g.
location of factory, operations etc.)

Letting of property Place where the property was let

Lending money Place where the money was lent

Dealing in commodities or Place where the contract of purchase and sale were made
securities

C1 - 6
BBFT 2013 TAXATION

Employment Place where the employment was exercised

(The derivation of business income is dealt with in Section 12 while the derivation of
employment income is dealt with in Section 13 in later chapters)

Derivation of Income Explanation

Income accruing in or Accrued means ‘right to receive’ while derived has been
derived from Malaysia defined in the Act according to the sources of income. A source
(Income earned from of income must be in Malaysia or must be located in Malaysia
Malaysia or Malaysian to be subjected to Malaysian tax, i.e. a Malaysian source
source) income. It is important to note that whether the income is
received in Malaysia or not is NOT RELEVANT.
Note:
Section 2(1) of the ITA 1967 defines ‘Malaysia’ to mean:

“the territories of the Federation of Malaysia, the territorial

waters of Malaysia and the sea-bed and subsoil of the
territorial waters, and the airspace above such areas and
include any area extending beyond the limits of the territorial
waters of Malaysia, and the sea-bed and subsoil of any such
area, which has been or may hereafter be designated under
the laws of Malaysia as an area over which Malaysia has
sovereign rights or jurisdiction for the purposes of exploring
and exploiting the natural resources, whether living or non-
living.”

Malaysia would therefore include:

• Peninsular Malaysia;
• East Malaysia (Sabah, Sarawak, Labuan);
• Territorial waters of Malaysia;
• Sea-bed and subsoil of the territorial waters;
• Airspace above Malaysia; and
• Any other area in which Malaysia has the sovereign
rights for the purpose of exploring and exploiting the
natural resources such as fishing and petroleum
extraction


Concept 1: Derived and Remittance Basis (As in Section 3) (the general law)
Generally, chargeable person’s income shall be taxed on:
• Income accruing in or derived from Malaysia (Income earned from Malaysia or
Malaysian source); and
• Income received in Malaysia from outside Malaysia (income earned from overseas
transferred / remitted into Malaysia).

Income from outside Malaysia but not received in Malaysia is not chargeable to tax
(NOT TAXABLE) as it is not within the scope (out of the scope) of Section 3 of ITA
1967.

C1 - 7
BBFT 2013 TAXATION

Income

Taxable

Within the scope of s 3 Out of the scope of s 3

With effect from 1.1.2022, foreign source of income received by a resident company
in Malaysia would be subject to tax.

A special rate of 3% would be charged on foreign source of income received in

Malaysia during the period from 1.1.2022 to 30.6.2022 [Part XX, Sch 1; s 6(1)(p)]

A resident company or a limited liability partnership (LLP) would be exempted from

tax on foreign source dividend income received in Malaysia. This applies from
1.1.2022 to 31.12.2026.

Foreign source of income received in Malaysia by a resident individual would be

exempted from tax. This applies from 1.1.2022 to 31.12.2026.

In summary,
Income derived from Income received in Before 1.1.2022 After 1.1.2022
Companies Individuals
Malaysia Yes Taxable Taxable Taxable
Malaysia No Taxable Taxable Taxable

Tax
exempted
Taxable (only (from
foreign dividend 1.1.2022 to
Overseas** Yes Tax exempted is exempted) 31.12.2026)
Overseas No Not taxable Not taxable Not taxable

Note**: A non-resident person (individual or company) would be exempted from tax

on foreign source of income received in Malaysia. [Schedule 6 Paragraph 28]
With effect from 1.1.2022, Schedule 6 Paragraph 28 of the ITA, 1967 is only applicable
to non-resident person in Malaysia

C1 - 8
BBFT 2013 TAXATION

Concept 2: World Scope Basis

RESIDENT COMPANY which carries on a specialised business such as banking,
insurance, sea or air transport (BISA), the income will be taxed on wherever derived.

As such, income derived from Malaysia will be taxed PLUS income derived overseas
will be taxed irrespective of whether it is received in Malaysia or not.

CONCLUSION

Chargeable
Person

Company Individual

Resident Non-Resident Resident Non-Resident

BISA Others

World Derived and Remittance Basis

Scope

Note:
BISA = Specialised industries (banking, insurance, sea or air transport)

C1 - 9
BBFT 2013 TAXATION

Example 4
The following chargeable person has Malaysian source of income and foreign source of
income.
Malaysian Foreign Foreign Source
Source Source Received in
Malaysia
RM RM
a) Adrian (non-resident) 10,000 20,000 Yes

b) Alex (Resident) 30,000 10,000 Yes

c) Advance Sdn Bhd 60,000 5,000 Yes

(Resident)

d) Achievement Pte Ltd 40,000 40,000 Yes

(Non-resident)
30,000 10,000 No
e) Anthony (Resident)

f) Insurance Sdn Bhd 900,000 100,000 No

(Resident)

Required:
Determine whether each of the income is chargeable to Malaysian income tax.

Malaysian Foreign Source Foreign

Source Source
Received in
Malaysia
RM RM
a) Adrian (non-resident) Taxable Exempted Yes
(Sch 6 Para 28)
b) Alex (Resident) Taxable Exempted Yes
c) Advance Sdn Bhd Taxable Taxable
(Resident) (except for Yes
dividend
income)

d) Achievement Pte Ltd Taxable Exempted Yes

(Non-resident) (Sch 6 Para 28)

e) Anthony (Resident) Taxable Not taxable No

(out of scope)

f) Insurance Sdn Bhd Taxable –

(Resident) Taxable world scope No
basis

C1 - 10
BBFT 2013 TAXATION

Example 5
Mr. Tanakura a Japanese national, is a non-Malaysian tax resident for year 2022. His
income for the year consists of dividends from an investment in Japan. The dividend
income was remitted back to Malaysia in the year of assessment concerned.

Issue: Determine whether the dividend income derived from Japan should be subject to
Malaysian income tax.

Guidelines:
3 steps to determine whether an income is taxable in Malaysia or not:
Step 1: Identify the person i.e. company or individual
Step 2: Determine the basis i.e. derived and remittance basis or world scope basis
Step 3: Determine the source:
Malaysian source (whether remitted or not remitted is not relevant)
Foreign source (remitted or not?)

Answer:

The dividend income derived from Japan is exempted from Malaysian income
tax.
The dividend income would also be exempted from Malaysian income tax if
Tanakura was a Malaysian resident for year 2022 in the event the foreign
dividend is remitted back to Malaysia between 1.1.2022 to 31.12.2026.

C1 - 11