The Federal Constitution provides that tax shall only be levied by, or under the authority of, federal law, meaning that the general body of tax law is to be found in tax statutes, supplemented by other legislative instruments thereunder, such as subsidiary legislation and ministerial orders. The director general of Inland Revenue and the Inland Revenue Board (Revenue) are responsible for administrative functions, such as the care and management of direct tax matters, but have issued numerous public rulings and guidelines which are, strictly speaking, not legally binding upon taxpayers before the year of assessment (YA) 2007. Such conduct may be open to challenge, particularly for public rulings and guidelines issued prior to YA 2007.
The Income Tax Act, 1967, (ITA) is the principal legislation for taxing income, mainly on a territorial basis. It is a question of fact as to what constitutes income: gains or profits from a business or employment, dividends, interest, discounts, rents, royalties, premiums, pensions, annuities or other periodical payments, and other gains or profits.
Withholding tax is applicable in Malaysia if a non-resident payee derives, or is deemed to derive, from Malaysia interest, royalty, rent for use of moveable property, contract payments for projects carried out in Malaysia, miscellaneous income under section 4(f) of the ITA, technical fees for services performed in Malaysia and other similar types of fees. The Revenue takes the view that even non-technical service fees are subject to withholding tax. With effect from December 28, 2018, the word "technical" has been deleted vide the Finance Act 2018 (Act 812) so that payments for "any advice given, or assistance or services rendered in connection with the management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme" are subject to withholding tax.
The limitation period for income tax matters is five years from expiry of that YA. With effect from December 30, 2014, the limitation period for transfer pricing cases has been increased from five to seven years. There is no time bar in the event of fraud, wilful default or negligence by the taxpayer.
The Revenue has a general power to invoke anti-avoidance provisions in transactions with little or no commercial purpose, apart from tax avoidance.
Transfer pricing legislation imposing the arm's-length principle took effect from January 1, 2009, and thereafter, the Income Tax (Transfer Pricing) Rules 2012 were passed. Under section 138C of the ITA, taxpayers may enter into advance pricing arrangements to determine the prices in cross-border transactions with associated persons.
Thin capitalisation provisions introduced in 2009 have been revoked and replaced by earnings stripping rules, which restrict deductibility of interest incurred on loans between related parties to a specified percentage of the taxpayer's profit before tax. With effect from January 1, 2019, Section 140C of the ITA was inserted by the Finance Act 2018 (Act 812) and restricts the tax deduction for "interest expense in connection with or on any financial assistance in a controlled transaction" granted to that person, to a maximum limit as determined by the Income Tax (Restriction on Deductibility of Interest) Rules 2019 (P.U.(A) 175/2019) which came into operation on July 1, 2019. Any interest expense in excess of such limit is not deductible.
There is no general capital gains tax in Malaysia. RPGT is levied on capital gains accruing from the disposal of real property and shares in a real property company. Real property is defined as "any land situated in Malaysia, and any interest, option or other right in or over such land". The holding or grant of a lease may also amount to an interest in land.
Malaysia imposes stamp duty on prescribed instruments, defined to include any written document. In a business or asset sale, ad valorem stamp duty is charged on all instruments conveying the assets, meaning movable or immovable property. Loans, services and equipment lease agreements are also subject to ad valorem stamp duty. There are other rates of stamp duty on other classes of instruments, which are generally lower than the rates above.
The Royal Customs and Excise Department Malaysia (Customs) has the care and management of indirect taxes, namely customs duties, excise duties and the goods and services tax (GST). Implemented on April 1, 2015, to replace the previous sales tax and service tax regime, GST was abolished and replaced by a new sales tax and service tax regime with effect from September 1, 2018.
Malaysia has an aggressive and progressive approach towards the granting of special tax incentives to attract foreign direct investments. This includes many promoted activities, products and areas (such as free zones, Iskandar Development Region, Northern Corridor Economic Region, East Coast Economic Region, Sabah Development Corridor, Sarawak Corridor of Renewable Energy and the Multimedia Super Corridor) and a wide-ranging network of double taxation treaties with numerous jurisdictions.
Labuan has specific laws applicable only to "Labuan entities", that is Labuan foundations, Islamic foundations, Islamic partnerships, limited partnerships, limited liability partnerships, trusts, Islamic trusts and financial institutions established in Labuan. A Labuan entity carrying on Labuan trading activities enjoys a lower tax rate of 3%. With effect from January 1, 2019 the option to pay a flat tax of RM20,000 has been removed. Income from Labuan non-trading activities carried on in Labuan is not taxable. There are withholding tax exemptions on specified payments to non-residents and other tax exemptions and incentives available to Labuan entities.
Malaysian courts have a robust and objective approach to adjudicating tax disputes and taxpayers are increasingly prepared to challenge the Revenue and Customs.
Taxpayers may challenge the Revenue's assessment or notification of non-chargeability by lodging a notice of appeal (Form Q) within 30 days of the disputed assessment or notification. The Special Commissioners of Income Tax (SCIT) would hear the appeal, with further rights of appeal to the High Court and, thereafter, to the Court of Appeal. A taxpayer's right to appeal against his own deemed assessment (under the self-assessment system) is more limited and he can only do so where he is aggrieved by a public ruling made by the Revenue under section 138A of the ITA, or any practice of the director general of Inland Revenue generally prevailing at the time when the assessment is made. Taxpayers may also appeal to the SCIT within 30 days from the date the supposed withholding tax is due to be paid to the Revenue.
The High Court has original jurisdiction to hear tax disputes proceeding by way of an application for judicial review or for declaratory relief. Appeals from the High Court's decision would be heard by the Court of Appeal and, with leave, a final appeal can be made to the apex court, the Federal Court.