The Finance Bill 2021—implementing the fiscal measures announced in the Budget 2022 on October 29, 2021—was recently passed in the Malaysian parliament and gazetted on Dec. 31, 2021 as the Finance Act 2021 (Act 833).
The Finance Act (FA) has introduced significant changes to the Malaysian taxation system, some of which are discussed below.
Tightening of Foreign-Sourced Income (FSI) Exemption
Since year of assessment (YA) 1995, the income of any person derived from sources outside Malaysia and received in Malaysia has been tax-exempt (the FSI exemption). Only tax-resident companies carrying on banking, insurance, or sea or air transport businesses were excluded from the FSI exemption.
One of the FA amendments (the FSI amendment) seeks to tax tax-resident persons on their foreign-sourced income remitted to Malaysia and to restrict the FSI exemption to non-resident persons, with effect from Jan. 1, 2022— marking a significant departure from the entrenched position .
As such, tax-resident persons, whether individuals or corporations, would be taxed on their foreign-sourced income received in Malaysia, initially at a flat rate of 3% on gross amount received from Jan. 1, 2022 to June 30, 2022 and thereafter at prevailing income tax rates.
However, at the eleventh hour, and unexpectedly, a press release was issued by the Ministry of Finance (MOF press release) the same day on which the FA received Royal Assent, with a view to ameliorating the potentially far-reaching detrimental effect of the FSI amendment.
Pursuant to the MOF press release:
- all categories of foreign-sourced income received in Malaysia by tax-resident individuals from Jan. 1, 2022 to Dec. 31, 2026 would be tax-exempt provided that no partnership business was carried on by the individual;
- for tax-resident companies and limited liability partnerships, only foreign-sourced dividend income received in Malaysia by them from Jan. 1, 2022 to Dec. 31, 2026, is tax-exempt, and all other types of foreign-sourced income remain taxable.
However, in both instances, the exemption is subject to compliance with conditions which have yet to be issued by the Inland Revenue Board. Hence, it remains uncertain as to how the FSI exemption will operate in practice.
The MOF press release also clarified that the “prosperity tax” or “cukai makmur” would not apply to foreign-sourced income received in Malaysia by small or medium-sized enterprises (SMEs) which are taxed under paragraph 2A of Schedule 1 to the Income Tax Act 1967. The prosperity tax was introduced through the FA to tax companies (other than SMEs) earning chargeable income in excess of 100 million Malaysian ringgit ($23.8 million), so that the first 100 million Malaysian ringgit of its chargeable income would be taxed at 24%, and any excess would be taxed at a higher rate of 33%. The prosperity tax is imposed for YA 2022 only.
Carry Forward of Unabsorbed Losses
With effect from YA 2019, unabsorbed losses could only be carried forward for up to seven consecutive YAs, and any balance thereof would be disregarded. The FA has extended the carry-forward period to 10 years with effect from YA 2019.
Withholding Tax on Payments to Agents
With effect from Jan. 1, 2022, a 2% withholding tax will be imposed on monetary payments made by companies to their authorized agents, dealers or distributors (collectively “Agents”), arising from sales, transactions or schemes (collectively “sales”) carried out by the Agents.
Companies will have to withhold tax if the Agent is a tax-resident individual and the aggregate amount of the payments (in monetary form or otherwise) received by the Agent from the company arising from the sales exceeds 100,000 Malaysian ringgit in the immediately preceding basis year. Going forward, companies need to determine whether this threshold has been exceeded in respect of each Agent.
Several new tax incentives have been introduced in the Budget 2022, including the Digital Ecosystem Acceleration Scheme.
Applicable to digital technology providers and digital infrastructure providers that apply to the Malaysian Investment Development Authority (MIDA) between Oct. 30, 2021 and Dec. 31, 2025, these incentives are in the form of a lower tax rate of 0%–10% for a 10-year period in the case of technology providers, and a 100% investment tax allowance on capital expenditure incurred on qualifying activities within a 10-year period, which may be offset against 100% of the taxpayer’s statutory income in the case of infrastructure providers.
Tax incentives for late-life assets projects for the upstream petroleum industry were also introduced, including a 25% petroleum income tax rate, accelerated capital allowance within two years, carry-back of losses from decommissioning activities to be set-off against the income for two consecutive immediate preceding YAs, and export duty exemption on petroleum products. The relevant production sharing contracts must be awarded between Jan. 1, 2020 and Dec. 31, 2029.
Other incentives include import duty exemption on components for locally assembled electric vehicles and excise duty and sales tax exemptions for completely-knocked-down electric vehicles, applicable in both cases for the period from Jan. 1, 2022 to Dec. 31, 2025; while imported completely-built-up electric vehicles are granted import duty and excise duty exemptions from Jan. 1, 2022 to Dec. 31, 2023.
To boost the green technology sector, qualifying rainwater harvesting system activities and services activities verified by the Malaysian Green Technology Corporation are eligible for the green investment tax allowance and green investment tax exemption respectively, at the specified rates. Applications must be made to MIDA from Jan. 1, 2022 to Dec. 31, 2023.
Under Budget 2022, the additional reinvestment allowance for YA 2020 to YA 2022 introduced under the National Economic Recovery Plan (PENJANA), will be extended to YA 2024 for existing companies in Malaysia that have exhausted their reinvestment allowance and special reinvestment allowance eligibility.
Tax Deductions For Businesses
Amid the pandemic, the Budget 2022 and FA have enhanced tax deductions for businesses. Such measures include extending the double deduction on qualifying expenditure incurred in respect of approved internship programs to YA 2025, and expanding the incentive to include students at various academic levels, such as master’s degree, professional certificate and Malaysian skills certificate, levels 1 and 2.
Other enhanced/extended tax deductions include:
- introducing a tax deduction for landlords on the amount of rental reduction granted to tenants, where the former have reduced the rental by at least 30% from the original amount. This deduction has been extended to June 2022;
- expanding the scope of double deduction in providing scholarships to qualifying Malaysian students, to encompass all fields of study at specified academic levels for YAs 2022 to 2025;
- extending the tax deduction available for renovating and refurbishing business premises incurred for the period commencing March 1, 2020 to Dec. 31, 2021, until Dec. 31, 2022. The maximum amount of deduction is maintained at 300,000 Malaysian ringgit; and
- extending the tax deduction for manufacturing and manufacturing-related service companies on rental expenses incurred on premises used as employees’ accommodation for the period commencing Jan. 1, 2021 to Dec. 31, 2021, until Dec. 31, 2022. The maximum amount of deduction is maintained at 50,000 Malaysian ringgit.
Individual Tax Relief
Tax relief for individuals was enhanced under Budget 2022 owing to the adverse economic impact of the Covid-19 pandemic, and includes relief and deductions for the following expenses:
- fees incurred on courses undertaken for the purpose of upskilling or self-enhancement conducted by a recognized body, to be tax-deductible for YAs 2022 and 2023, up to an increased limit of 2,000 Malaysian ringgit for each YA;
- contributions made to the social security organization under the Employees’ Social Security Act 1969 are deductible up to a maximum of 350 Malaysian ringgit, increased from 250 ringgit. The relief has been extended to include contributions under the Employment Insurance System Act 2017, with effect from YA 2022;
- payments for accommodation at premises registered with the Commissioner of Tourism and entrance fees to tourist attractions made in the period commencing March 1, 2020 continue to be deductible up to a maximum of 1,000 ringgit, until Dec. 31, 2022. Expenditure incurred on domestic tour packages purchased through licensed travel agents from Jan. 1, 2021 to Dec. 31, 2022 is also deductible;
- childcare fees paid to a registered childcare center or kindergarten for an individual’s child aged six years and below continue to be deductible up to a maximum amount of 3,000 ringgit for YAs 2020 to 2023;
- payments for the installation, rental, purchase, including hire-purchase, of equipment or subscription for the use of electric vehicle charging facilities for the individual’s own vehicle and which is not used for business purposes, are deductible for YAs 2022 to 2023, up to a maximum amount of 2,500 ringgit for each basis year; and
- the purchase of a personal computer, smartphone or tablet not intended for business purposes and solely for the taxpayer’s own use or that of his/her spouse or child, is deductible up to a maximum amount of 2,500 ringgit. The deduction has been extended to Dec. 31, 2022.
Stamp Duty Exemptions/Relief
Exemption from stamp duty will be available for the following instruments, among others:
- loan/financing agreements executed from Jan. 1, 2022 to Dec. 31, 2026 in respect of peer-to-peer financing made through a registered peer-to-peer platform;
- the restructuring/rescheduling of loan and financing agreements executed from Jan. 1, 2022 to Dec. 31, 2022 entered into between borrowers and financial institutions, provided that the original loan/financing agreement has been duly stamped and the restructuring or rescheduling does not increase the original loan/financing amount; and
- specified instruments executed from July 1, 2020 to Dec. 31, 2022 in respect of merger or acquisition schemes carried out by micro, small and medium-sized enterprises, for merger or acquisition applications received by the Ministry of Entrepreneur Development and Cooperatives from July 1, 2021 to June 30, 2022.
The MOF press release has also confirmed that the maximum stamp duty on contract notes for the sale/purchase of shares listed on Bursa Malaysia would be capped at 1,000 ringgit per contract note, for the period from Jan. 1, 2022 to Dec. 31, 2026.
Real Property Gains Tax
Gains from the disposal of real property and shares in real property companies held by a Malaysian citizen or permanent resident are tax-exempt with effect from Jan. 1, 2022, where the said asset has been held for more than five years.
The provision of brokerage services relating to the trading of shares listed on Bursa Malaysia will be exempt from service tax with effect from Jan. 1, 2022. However, delivery services provided by service providers, including e-commerce platforms, for delivering goods other than food and beverages, are subject to 6% service tax with effect from July 1, 2022.
Previously, goods imported into Malaysia via air courier services through the specified international airports in Malaysia were not subject to sales tax if their total value did not exceed 500 Malaysian ringgit per consignment. However, this exemption has been removed with effect from Jan. 1, 2023.
The Budget 2022 sought to ameliorate the economic impact of the Covid-19 pandemic through the grant of numerous tax deductions and relief to taxpayers.
However, given such objectives, the FSI amendment is surprising, as it disincentivizes the repatriation and injection of foreign funds into the economy. The ongoing lack of clarity, consistency and certainty in this area continues to pose problems for taxpayers and investors alike and may curtail the country’s economic recovery in the long run.
This column does not necessarily reflect the opinion of The Bureau of National Affairs Inc. or its owners.
Irene Yong is a partner with Shearn Delamore & Co.
The author may be contacted at: firstname.lastname@example.org