Extended business travelers who are in Malaysia for more than 60 days are likely to be taxed on employment income attributable to their Malaysian assignments.
Liability for income tax
Generally, an individual becomes a tax resident for the tax year if the aggregate number of days the individual stays in Malaysia during the basis year is 182 days or more. Income derived from Malaysia by residents and non-residents is subject to Malaysian tax, irrespective of where the employment contract is made or where the remuneration is paid. Employment income is regarded as Malaysian-sourced income if the employment activities are exercised in Malaysia.
Definition of source
Malaysian-sourced income is defined as income accruing in, or derived from, Malaysia. Employment income is generally treated as Malaysian-sourced compensation where the individual performs the services while physically located in Malaysia.
Tax trigger points
A non-resident individual who exercises employment in Malaysia for less than 60 days is exempt from Malaysian tax. An individual whose employment period in Malaysia exceeds 60 days would be taxable unless the individual is able to seek exemption from Malaysian tax under the dependent personal services article of the relevant double tax treaty.
Types of taxable income
For extended business travelers, the types of income that are generally taxed are employment income and other Malaysian-sourced income.
A tax-resident individual would be subject to tax at graduated rates ranging up to 26 percent, after the deductions of personal reliefs (such as relief for oneself, a dependent spouse, life insurance premiums, etc.). The maximum tax rate is currently 26 percent (with effect from the tax year, commonly called the year of assessment (YA) 2010) on chargeable income above 100,000 Malaysian ringgit (MYR) for residents.
A non-tax-resident individual would be taxed at a flat rate of 26 percent (with effect from YA 2010). Non-tax-residents are not entitled to personal relief deductions. It was proposed that the maximum tax rate be reduced to 25% and applicable on chargeable income above RM400,000 with effect from YA 2015.
Liability for social security
The Social Security Organization (SOCSO) is a scheme to provide certain benefits to employees in cases of employment injury, including occupational diseases and invalidity, and for certain other matters in relation to employment. Employees covered by this scheme are those whose wages do not exceed MYR3,000 per month. The current rates of contribution vary from MYR0.10 to MYR14.75 per month for the employee and from MYR0.40 to MYR51.65 per month for the employer. Foreign employees are not required to contribute to SOCSO.
Employees of Malaysian nationality or of permanent residence status are required to contribute to the Employees Provident Fund (EPF). Effective 1 January 2012, the employer’s contribution for employees who receive monthly wages of MYR5,000 and below has been increased from 12 percent to 13 percent. The employee’s contribution rate remains at 11 percent. Employer’s contributions for employees who received monthly wages of MYR5,000 and above remains at 12 percent and has been extended to the age of 60 years old.
For employees who is between 60 and 75 years old, the rate of EPF to be contributed is set at half the regular rate, i.e. at 5.5% for employee and at 6% (or 6.5%) for employer.Foreign employees have the option of becoming members of the EPF. A foreign employee makes a minimum statutory contribution of 11 percent of wages, while the employer contributes at least MYR5 per foreign employee.
Employee compliance obligations
The YA runs from 1 January to 31 December. Tax returns must be filed by 30 April of the following year. For individuals who derive business income, the filing deadline is 30 June of the following year.
With effect from YA 2014, employees whose total income tax is equivalent to the total amount of MTD, is no longer required to submit tax returns. The amount of the MTD remitted represents as the final tax paid. This is only applicable to employees:-
- Who only receive employment income and not provided with benefits-in-kind and living accommodation;
- Who are subject to MTD;
- Employed by the same employer for a period of 12 months in that year of assessment;
- Whose MTD are not borne by the employer; and
- Who have not elected for joint assessment.
Employer compliance obligations
An employer is required to notify the Malaysian Inland Revenue Board (MIRB) via Form CP22 of the commencement of employment of its employees in Malaysia within 1 month of the date of commencement of employment.
An employer must declare the total remuneration paid to employees for employment performed in Malaysia on Forms E and EA. This is regardless of whether the employee’s salary and/or allowance are paid in or outside of Malaysia. The deadlines for issuance of Forms E and EA are 31 March and the last day of February respectively in the following year.
An employer is also required to notify the MIRB of the cessation of employment of an employee who is liable for tax. In the case of an expatriate employee, the notification is required when the expatriate’s assignment in Malaysia ends or the expatriate ceases employment in Malaysia. The notification (via Form CP21) must be submitted to the MIRB no less than 1 month before the expected date of departure or date of cessation of employment, whichever is earlier. The employer is required to withhold any money in the employer’s possession owing to the expatriate who has ceased or is about to cease employment until 90 days after the MIRB receives the Form CP21 or upon receipt of the tax clearance letter, whichever is earlier. The employer can then release the balance of money withheld from the employee after the settlement of the outstanding taxes (if any) as shown in the tax clearance letter.
Employer reporting and withholding requirements
Tax withholdings from employment income are covered by the monthly tax deductions (MTD) system. Under the MTD system, it is mandatory for an employer to deduct tax from an employee’s monthly cash remuneration (whether it is paid in or outside of Malaysia) and perquisites of each of the employees, based on the MTD schedule issued by the MIRB. The tax deducted during a calendar month must be remitted to the MIRB no later than the 10th day of the following calendar month via the Statement of Tax Deduction by an Employer (Form CP39). Employees may submit certain completed prescribed forms to elect for claim of deduction and rebates in the relevant months, or to include benefits-in-kind and value of living accommodation as part of the monthly remuneration to be subject to MTD. Both elections are subject to the approval of the employer.
It should also be noted that the MTD applicable to an employee who is not a resident or not known to be a resident shall be at the rate of 26 percent of the employee’s cash remuneration and perquisites.
Work permit/visa requirements
An individual entering Malaysia may or may not require a visa, depending on their nationality. The type of work permit required will depend on the purpose of the individual’s entry into Malaysia.
The Malaysian Immigration Officer at a point of entry to Malaysia would usually grant a Social Visit Pass (“SVP”) depending on the nationality of the individual (i.e. A British national would be granted a 3 months SVP). Working or training is not a permissible activity under the SVP.
There are two types of work permit namely the Employment Pass (EP) and the Professional Visit Pass (“PVP”).
There are 2 categories of EP. Category 1 is for an employment period of 2 years and above while category 2 is for a period of employment of 1 year or less.
A PVP is applied when an expatriate is expected to be on assignment in Malaysia for a period of less than a year. The remuneration continues to be paid and borne by the home country.
Double taxation treaties
Malaysia has concluded double tax treaties with at least 75 countries. The treaties prevent double taxation and allow cooperation between Malaysia and overseas tax authorities in enforcing their respective tax laws. Qualification for treaty relief is not automatic. An application must be made to the MIRB by providing proof that an individual is able to qualify for tax exemption under treaty relief.
Permanent establishment implications
A permanent establishment could potentially be created as a result of extended business travel, but this would be dependent on the type of services performed and the level of authority the employee has.
Service tax is chargeable on taxable services provided by a taxable person. The general rate was increased from 5 percent to 6 percent effective 1 January 2011. The tax applies throughout Malaysia except for Langkawi, Labuan, Tioman, the Joint Development Area, and the Free Zones.
The government in the 2014 budget had announced that the goods and services tax (GST) of 6% will be implemented starting from 1 April 2015. The GST would replace the current sales and service tax regimes.
Transfer pricing (“TP”)
The Malaysian transfer pricing environment is regulated. In 2012, the MIRB released the TP Rules and TP Guidelines as an indication that the Malaysian Government is serious in its enforcement of transfer pricing compliance by Malaysian taxpayers, In terms of personal taxation, transfer pricing and tax implications could arise where an employee is being paid by an entity in one jurisdiction but performing services for the benefit of the entity in another jurisdiction. This would also be dependent on the nature and complexity of the services performed.
Local data privacy requirements
Personal Data Protection Act 2010 (“PDPA”) has come into force on 15 November 2013 which seeks to regulate the processing of personal data of individuals involved in commercial transactions.
The present exchange control regime applies uniformly to transactions with all countries except Israel, against which special restrictive rules apply.
Non-deductible costs for assignees
Employment costs are generally deductible by the employer, except for certain prohibited costs such as those in relation to overseas leave passage, entertainment allowance, and the employer’s contribution to pension/provident funds that are not approved by the MIRB. Such costs are non-deductible. However, a 50 percent entertainment allowance is tax deductible.