Malaysia is one of Asia's most prominent business hubs. It ranks 35th largest globally and the third largest Southeast Asian economy. Malaysia's oil and gas industry is one of the world's most competitive, and with that in mind, it's no surprise that so many businesses are expanding their operations there.
But to mobilise staff to the country, there are essential Malaysian income tax laws to get to grips with.
To locate the topic relevant to you, refer to the table of contents below:
An expert guide to the Malaysian tax system for expatriates
Malaysia’s taxation principle
Determining tax residency status
Monthly tax deduction
Tax returns in Malaysia
Tax file number
Tax clearance
How can Airswift help?
An expert guide to the Malaysian tax system for expatriates
Taxable income in Malaysia uses flat and progressive rates, depending on how long the employee will work there and the type of work they'll be doing.
To know which category their taxable income falls into, expatriates and business owners must fully understand Malaysia's tax structure.
In this guide, we'll explain everything hiring managers and expatriates need to know about Malaysia's tax principles and how to determine whether or not they should be paying taxes when working there.
Malaysia’s taxation principle
Taxation in Malaysia works on a territorial basis; i.e. only incomes from Malaysian resident companies are taxable, regardless of where the expatriate is paid.
Foreign-sourced income is not subject to personal income tax rates in Malaysia, but there are three main exceptions:
- Double Taxation Agreements - if an expat is a tax resident of two different countries, they may have to pay taxes on the same income, meaning they'll be taxed twice in the same year. However, the Malaysian government has signed Double Tax Treaties with more than 70 countries to avoid taxing people twice.
- The worldwide basis for taxation applies to income from specific industries, such as banking and air transport, where Malaysia does not use a territorial tax system.
- Tax regime exemptions - expatriates may benefit from tax exemptions if they are not defined as tax residents in Malaysia or if the period of employment is shorter than 60 days.
Determining tax residency status
An expatriate living in Malaysia for 182 days or more in an assessment year will be considered taxable. Expatriates deemed residents for tax purposes pay progressive rates (individual income tax rates range between 0 and 30%, depending on their income). Malaysian tax residents are also eligible for tax deductions.
Expatriates who worked in Malaysia between 60-182 days are considered "non-residents" for tax purposes. Non-resident individuals are subject to a 30% flat rate and do not qualify for tax deductions.
Monthly tax deduction
The Monthly Tax Deduction (PCB) is compulsory, and strict laws are in place to ensure that all employers and employees comply. This seems daunting, which is why we're here to help.
Airswift will deduct a portion of the expatriate's statutory income each month. Tax payment is made to the Taxation Department of the Inland Revenue Board of Malaysia (IRB), so you can rest assured your business abides by the law. The amount of tax deducted depends on the employee's tax residence status and income.
Tax returns in Malaysia
The tax year in Malaysia runs from January 1st to December 31st. All resident individuals subject to taxation must file an annual income tax return before April 30th of the following year to qualify for tax relief.
Failure to do so by the filing deadline can result in a 10% increment of the payable tax or a disciplinary fee.
To complete a tax return, expats must fill out a Yearly Remuneration Statement (EA form) issued by the end of February every year. In this form, they must detail the total amount paid during the calendar year.
Tax return forms can be filed either online or manually. If incorrect information is submitted, the expatriate may be fined 100% of the undercharged tax.
Tax file number
To file an income tax return, expatriates must have a tax number. Generally, employers obtain income tax reference numbers from the IRB on behalf of their expat employees. However, it is also possible for individuals to get their tax file numbers from the IRB within two months of their arrival date.
Tax clearance
If an expat comes to the end of their contract, resigns or leaves Malaysia for longer than three months, they will need to apply for tax clearance. This determines whether or not they owe tax.
We can help with the tax clearance process; once the employee has received their letter, Airswift will release the balance of any money owed after outstanding taxes have been settled.
How can Airswift help?
Arranging taxes for expats moving to a Malaysian company for work can be difficult, as there is much to consider.
Working with a global employment and mobility team takes that burden from you so that you can focus on other aspects of your business.
This post was written by: Nic Taylor, Malaysia Country Manager