Tax System in Malaysia
Increased Individual Income Tax Rates in 2016
To determine the type of rate (progressive or flat) and which tax percentage is applicable to an item of income, the taxpayer must determine whether he qualifies as a resident for tax purposes in Malaysia, as different regimes apply.
Indeed, expatriates who do not qualify for tax residency in Malaysia are taxed on all of their Malaysia-sourced income at a flat rate of 26% before 2016, and at a flat rate of 28% from the 2016 assessment year onward.
Regarding expatriates who qualify for tax residency, Malaysia has a progressive personal income tax system in which the tax rate increases as an individual’s income increases, starting at 0% and being capped at 25% before the assessment year of 2016, and 28% from 2016 onward. See the rates applicable to each income bracket in Table 1.
Tax Relief and Deductions
Several tax deductions are available for individual income tax payers in Malaysia. However, non-resident expatriates are not eligible to benefit from these tax-relief methods, unlike expatriates who qualify for resident status for tax purposes. Some of these tax-relief provisions are:
- For spouse
- For taxpayers who have to pay parental care
- For each child below 18 years old
- For children studying at tertiary level (post-secondary education)
In an effort to reduce the living costs of its citizens and the financial burden of taxpayers who have to take care of their parents or raise children, deductible amounts pertaining to these and other activities have been increased from 2016 onward.
In addition, the 2016 Budget created a new tax relief provision: the Tax Relief on Employees’ Contribution to Social Protection. Currently, employees receive no tax relief for contributions to the Social Security Organization (SOCSO).
Compliance and Payment
In Malaysia, the tax year parallels the calendar year, beginning on 1 January and ending on 31 December. All tax returns must be completed and returned before 30 April of the following year.
Regarding expatriates who are considered residents, employers withhold that income tax from their salaries, and the balance must be settled at the end of the financial year upon filing of a tax return.
In case of late payment or incorrect returns, and non-compliance that can be discovered through tax audit, penalties will be applied.
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