FOUNDATIONS IN TAXATION (MYS) JULY 2012

INTRODUCTION TO THE MALAYSIAN TAX SYSTEM 1.0 Introduction The overall functions and purposes of taxation in Malaysia include: 1. Raising revenue to finance government expenditure. 2. Regulating the private sector of the economy to maintain the desired level of employment and increase economic development. 3. Ensuring that taxes are collected effectively and at minimum cost both to the government and taxpayers. 4. Regulating the activities of specific areas of the private sector so as to encourage activities which are beneficial to Malaysia and to discourage activities which are undesirable in the national interests. 5. Regulating the distribution of income and wealth as between different types and classes of citizens. 6. Regulating specific activities of citizens thought to be undesirable e.g. drinking, smoking, gambling. 7. Ensuring fairness and equity i.e. burden of tax is spread fairly and equitably among taxpayers. 2.0 Sources of revenue law Statute law Case law Informal law concessions and guidelines Public rulings Advance rulings 3.0 Overview of Malaysian taxation

MALAYSIAN TAXATION

DIRECT TAXES For example: Income tax Stamp duty Real property gains tax

INDIRECT TAXES For example: Sales tax Service tax

Direct taxes Taxpayer Pay Income Tax Tax collector

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Indirect taxes
Service Tax

Taxpayer

Collected and remit

Customer Scope of charge

Tax collector

4.0 Scope of Charge Income tax shall be charged for each year of assessment1 upon the income2 of any person3 accruing in or derived from Malaysia4 or received in Malaysia from outside Malaysia5. [Section 3 of the Income Tax Act 1967]

S4 (a) Business Income S4A Special classes of income (to be covered under Withholding Tax) S4 (b) Employment Income

S4 (f) Gains or profits not falling under (a) to (e)

Sources of Income

S4 (c) Dividend, Interest and Discount (DID)

S4 (e) Pension, Annuity and Other Periodical Payment not under (a) to (d) (PAPE)

S4 (d) Rent, Royalty and Premium (RRP)

Characteristics of income Repetitive, flow from a source and received in the ordinary course of business. Intention at the point of possession / ownership

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Year of Assessment Means calendar year With implementation of current year basis ('CYB'), the assessment of income tax is concurrent with the derivation of income. i.e. income earned in Malaysia during 2012 will be chargeable to tax for Year of Assessment 2012.

Income Periodical monetary returns coming in with a sort of regularity, from a definite source, excluding anything which is a mere windfall, i.e. lottery Income has not defined in the ITA. The receipt and gain which are income or revenue in nature, would be chargeable to tax under ITA. Capital gain is free from income tax. E.g. speculative gains, gamblings, gift and disposal of long term investment.

Person Defined to include, a company, a body of person, a corporation sole and an indiviidual. "body of person" - e.g. club, trade association, cooperative societies but exclude partnership. For partnership, the individual partner will be assessed to tax.

Accrued in / derived from Malaysia Based on modified territorial basis. Income accrued in or derived from Malaysia will be taxed at its time of its accrual / derivation even if not received in Malaysia. Accrued = unconditional right to receive it. Derived = to receive from a specific source.

Received in Malaysia from outside Malaysia refers to foreign source income received in Malaysia from outside Malaysia - is taxable but exempte under Para 28, Sch 6 If foreign source income is not remitted back into Malaysia, it is not taxable as it is not derived from Malaysia.

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INCOME

Accruing in or derived from Malaysia Malaysian Source Income (MSI)

Received in Malaysia from outside Malaysia Foreign Source Income (FSI)

Business

Employment Rental

Source Income S4 (a) What the tax payer has done to earn the profit The profit making activities carried on Place where services were rendered Original cause of it being received as income The place of discharging S4 (b) employment duties S4 (a) based on quantities Location of property Or S4 (d)

5.0 Basis Period Applicable for year 2004 and thereafter A person is chargeable to Income tax in respect of all his sources of income for a Year of Assessment. The income for a source is determined in relation to basis period for a YA.

Company, Trust Co-operatives

Others

All sources of income in accordance with financial year as the basis period 31 December; or non 31 December as year end

All sources of income is determined based on calendar year i.e. 31 December

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