SESSION 1 — BASICS OF THE MALAYSIAN TAX SYSTEM

What is Taxation?

• Taxation as an economic tool used by Government to regulate the economy and fund public expenditure
• Direct taxes: tax on income, paid directly by the taxpayer to the Revenue Authorities
• Indirect taxes: collected through a third party (taxable person) and remitted to the Revenue Authorities

Types of Taxes in Malaysia

• Direct taxes: Income Tax Act 1967, Real Property Gains Tax 1976, Petroleum Income Tax 1967, Stamp Act 1949
• Indirect taxes: Sales Tax Act 2018, Service Tax Act 2018

Tax Administration

• Ministry of Finance — overall control of tax policy
• Inland Revenue Board Malaysia (IRBM) — assessment and collection of direct taxes (personal and corporate), headed by the Director General
• Royal Malaysian Customs and Excise Department — assessment and collection of indirect taxes

SESSION 2 — SCOPE OF CHARGE

Section 3 of the Income Tax Act 1967

• The charging provision: income tax is charged for each YA on income of any person accruing in or derived from Malaysia, or received in Malaysia from outside Malaysia
• Breaking down Section 3 into its component questions: year of assessment, income, person, source, and receipt

Year of Assessment

• Current year basis (effective 1 January 2000) vs the former preceding year basis
• For individuals: YA follows the calendar year; for companies/trusts/co-operatives: YA follows the financial year-end

What is Income?

• The ITA 1967 does not define ‘income’ — it is categorised under Section 4 (classes of income) and Section 4A (special classes of income)
• Revenue vs capital receipts: circulating capital (revenue) vs fixed capital (capital); capital receipts are not taxable
• Chargeable vs non-chargeable examples: service fees, sale of trading stock, licensing fees, dividends/interest/rent (chargeable) vs sale of fixed assets, sale of shares in investment companies, compensation for factory fire damage, gifts (not chargeable)
• Section 4 classes of income: 4(a) business, 4(b) employment, 4(c) dividends/interest /discounts, 4(d) rents/royalties/premiums, 4(e) pensions/annuities, 4(f) other gains
• Section 4A special classes: payments for services connected with use of property/plant, technical advice/ management assistance, and rental of movable property

Who is a ‘Person’?

• Section 2 definition: includes a company, body of persons (trust, club, trade association, co-operative), LLP, and corporation sole
• Why it matters: determines the chargeable person and the applicable tax rate structure
• Income tax rates for YA 2023: SME company tiered rates (15%/17%/24%), non-SME/non- resident company (24%), resident individual (scaled 0–30%), non-resident individual (30% flat), trust body (24%)

Accruing In, Derived From, or Received In Malaysia

• ‘Accrue’ = passive income (e.g. interest); ‘derive’ = active involvement (e.g. employment)
• Deeming provisions: S12 business, S13 employment, S14 dividend, S15 interest and royalty, S15A special classes of income
• ‘Received in Malaysia from outside Malaysia’ — meaning of ‘received’ and the Schedule 6 Paragraph 28 foreign-source income exemption

Foreign-Sourced Income — Recent Changes

• Pre-2022 exemption vs the narrowed exemption from 1 January 2022 (resident companies in banking, insurance, sea/ air transport excluded; individuals and non-business income also affected)
• Transitional tax rate (3%) from 1 January to 30 June 2022, then prevailing rates from 1 July 2022
• MOF announcement (30 December 2021): 5-year exemption (2022–2026) for specified categories of foreign-sourced income, including dividend income for companies and LLPs, subject to conditions in the Exemption Order gazetted 19 July 2022

SESSION 3 — RESIDENCE STATUS

Residence Status for Individuals — Section 7

• Residence is based on physical presence (days in Malaysia), not citizenship or permanent residence status
• S7(1)(a): physically present for 182 days or more (single or multiple periods, need not be consecutive) — worked examples (Dr. Thomas; Mr. John) - S7(1)(b): less than 182 days but linked by or to a period of 182 or more consecutive days, with permitted temporary absences (PTA) — service matters, ill health of self/ immediate family, social visits not exceeding 14 days in aggregate ? - Multiple worked examples: linked-by vs linked-to scenarios, PTA computations, and years straddling residence status changes
• S7(1)(c): present 90 days or more in the basis year, plus resident or present 90+ days in 3 of the 4 immediately preceding YAs — worked example (Alice Ace) • S7(1)(d): resident in 3 immediately preceding YAs and resident in the immediately following YA (no physical presence required in the gap year) — worked example

Resident vs Non-Resident: Key Distinctions

• Tax rate (scaled 0–30% vs flat 30%), personal reliefs, rebate for chargeable income below RM35,000
• Employment income treatment, royalties from literary/artistic/musical work, income from approved cultural performances
• Withholding tax exposure on contract payments, interest, royalty, technical fees, and S4A payments
• Treatment of non-exempt interest income from financial institutions

Residence Status for Companies — Section 8

• Test: management and control of any one business or affair exercised in Malaysia at any time during the basis year
• What constitutes ‘management and control’: directors’ meetings, where the real business is centrally managed — Memorandum and Articles of Association are not conclusive
• Factors NOT relevant: place of incorporation, location of business, shareholder control, directors’ residence status
• IRBM’s practical approach: reviewing Articles of Association, AGM location/minutes, board meeting locations and minutes, company letterhead

SESSION 4 — CORPORATE TAX COMPUTATION: ‘PASATC’

The PASATC Framework

• Profit before tax ? Adjusted income ? Statutory income ? Aggregate income ? Total income ? Chargeable income
• Starting point: net profit/(loss) before taxation per the P&L, adjusted to arrive at adjusted income

Step 1: Ascertaining the Basis Period (Sections 20 & 21)

• Basis period generally follows the accounting period; effective YA 2014, the first accounting period is the basis period for the first YA when accounts are closed
• Worked examples: 12-month and shorter first accounting periods

Step 2: Gross Income From Each Source (Sections 22–32)

• Business, employment, dividend, interest, rental, and other income sources under Section 4(a)–(f)

Step 3: Adjusted Income From Each Source (Sections 33–41)

• Gross income less allowable expenses (S33), double deductions, and special deductions
• Alternative approach: accounting profit less other income, plus non-deductible expenses (S39), less double/special deductions
• Section 39 non-deductible expenses — comprehensive list: domestic/ private expenses; expenses not wholly & exclusively incurred; capital expenditure; non-approved pension/fund payments; qualifying mining/agriculture/forest expenditure; interest/royalty without WHT; timber licence payments; contract payments without WHT; S4(f) payments without WHT; motor vehicle rental caps (RM50,000/ RM100,000); 50% entertainment restriction; leave passage; non-compliant LLP partner remuneration; GST input/output tax issues; public entertainer remuneration without WHT; payments to Labuan companies

Step 4: Statutory Income (Section 42)

• Adjusted income + balancing charges - capital allowances and balancing allowances (business sources only)

Step 5: Aggregate Income & Total Income (Sections 43 & 44)

• Aggregate income = statutory income from all sources, less unabsorbed business losses b/f, pioneer/investment tax allowance exemptions, and reinvestment allowances
• Total income = aggregate income less current year business losses, prospecting expenditure, pre-operational business expenditure (Sch 4B), permitted expenses for investment holding companies, approved donations/zakat (capped at 10% of aggregate income), and group relief

Step 6: Chargeable Income & Tax Payable (Sections 45–51)

• Worked example: total income = chargeable income = RM100,000; tax payable at 24% = RM24,000

Current Year & Unabsorbed Business Losses

• Current year business losses (S40): computed via tax adjustments to accounting loss; may be set off against other income sources in the same year (S44(2)); unutilised losses carried forward against business income only
• Unabsorbed business losses (S44(5A) & (5B)): subject to the 50% continuity of shareholding test (with MOF concession limiting this to dormant companies)
• Carry-forward limited to a maximum of 10 YAs (S44(5F), effective YA 2019)

SESSION 5 — FULL WORKED COMPUTATION, RECAP & Q&A

Full Illustrative Corporate Tax Computation

• From net profit/(loss) before tax ? add- backs (depreciation, non-business interest, 50% disallowed entertainment, capital items expensed, renovation) ? less double deductions/capitalised revenue expenses/ non-taxable income ? Adjusted Income
• Adjusted Income ? add balancing charge ? less capital allowances (b/f and current year) and balancing allowance ? Statutory Business Income less unabsorbed losses b/f ? Total Business Income • Add Section 4(c)/(d) interest, rental, and exempt single-tier dividend income ? Aggregate Income • Aggregate Income ? less current year business loss, approved donations (capped 10% of AI), zakat perniagaan (capped 2.5% of AI) ? Total/Chargeable Income ? apply tiered (17%/24%) or flat 24% tax rate

Wrap-Up

• Recap of key sections covered: S3 (scope of charge), S4/4A (classes of income), S7/ S8 (residence), S33/S39 (deductions), S40/ S44 (losses)
• Open discussion, practical computation exercises, and Q&A