A guide to the Malaysia tax system for expatriates
Malaysia is one of Asia’s biggest business hubs. Its economy is the 35th largest in the world, and is the third largest in Southeast Asia. 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 in order to mobilise staff to the country, there are important tax laws to get to grips with.
Personal income tax in Malaysia uses both flat and progressive rates, depending on how long the employee will be working there and the type of work they’ll be carrying out. In order to know which category they fall into, expatriates and business owners will need to fully understand Malaysia’s tax structure.
In this guide, we’ll explain everything hiring managers and expatriates need to know about Malaysia’s tax principle and how to determine whether or not they should be paying tax when working there
Malaysia’s taxation principle
Malaysia’s taxation principle works on a territorial basis. This means that only incomes with a source in Malaysia are taxable, no matter where the expatriate gets paid.
Profits sourced elsewhere are not subject to personal income tax 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 in both countries on the same income, meaning they’ll be taxed twice in the same year. However, Malaysia has signed Double Taxation Agreements with more than 70 countries to avoid taxing people twice.
Worldwide basis for taxation - this 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 exemptions if they are not defined as a tax resident, or if the period of employment is shorter than 60 days.
Determining tax residency status
If an expatriate lives in Malaysia for 182 days or more in an assessment year, they will be considered a resident for tax purposes. Expatriates deemed residents for tax purposes pay progressive rates (between 0 and 28%, depending on their income). They are also eligible for tax deductions.
Expatriates working in Malaysia for less than 182 days a year are classed as “non-residents” for tax purposes. They are subject to a 28% flat taxation rate and do not qualify for tax deductions.
Monthly Tax Deduction
The Monthly Tax Deduction (PCB) is compulsory and there are strict laws in place to make sure 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 salary each month and pay directly it 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.
The tax year in Malaysia runs from from January 1st to December 31st. All tax residents subject to taxation need to file a tax return before April 30th the following year. Failure to do so can result in a 10% increment of the payable tax, or a disciplinary fee.
To complete a tax return, expats need to fill out a Yearly Remuneration Statement (EA form), which is issued by the end of February every year. In this form, they will need to detail the full amount they’ve been paid during the assessment year.
Tax returns can be filed either online or manually. If any of the information submitted is incorrect, the expatriate may be fined 100% of the undercharged tax.
Tax file number
To file a tax return, expatriate’s need to have a tax number. Generally, employers obtain income tax 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.
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 tax clearance letter, Airswift will release the balance of any money owed after outstanding taxes have been settled.
Arranging taxes for expats moving to Malaysia for work can be a difficult job, as there is a lot to consider. Working with a global mobility team takes that burden from you, so you can focus on other aspects of your business. To find out more about how Airswift can help, visit our global mobility page.
This post was written by: Nic Taylor, Malaysia Country Manager