The Malaysian parliament has recently passed ‘Finance Bill 2021’. This bill was gazetted as “Finance Act 2021” (Act 833) on Dec. 31, 2021. The Finance Bill 2021 is a way to implement the fiscal measures that were previously announced on October 29, 2021, in Budget 2022.
The Finance Act (FA) 2021 has made a wide range of changes to the taxation system of Malaysia. A few of the most prominent of such changes are discussed as under.
Withdrawal of Foreign-Sourced Income (FSI) Tax-Exemption
The Foreign Sourced Income (FSI) was tax-exempted since 1995. However, with the introduction of FA amendments, the foreign-sourced income has been taxed w.e.f Jan. 1, 2022. Initially, the FSI will be taxed at a flat rate of 3% on the gross amount that is received in Malaysia. After June 30, 2022, current income tax rates will be applicable to FSI.
But the unexpected press release by the Ministry of Finance has stopped the implementation of the FSI amendment. The press release was issued on the day when the FA 2021 obtained Royal Assent. This was done with a view to curtailing the unpleasant impacts of the FSI amendment.
Below are the relevant sections of MOF press release:
- All types of Foreign Sourced Income (FSI) received by a tax-resident individual in Malaysia would be tax-exempted from Jan. 1, 2022 to Dec. 31, 2026. However, the FSI shouldn’t be used for carrying out the operations of a partnership business.
- For tax-resident Limited Liability Partnerships (LLP) and companies, the FSI is tax-exempted if the income has been received in the shape of dividends. This type of tax exemption is available from Jan. 1, 2022 to Dec. 31, 2026. However, any other type of FSI received by the above entities would remain taxable.
Nevertheless, the exemption in both of the instances mentioned above is based on the compliance of certain conditions that are still not been issued by the Inland Revenue Board. So, one can’t be sure about the practical implication of the FSI exemption.
Extending the Carry Forward Period of Unabsorbed Losses
Since 2019, the unabsorbed losses used to be carried forward for seven consecutive assessment years. By the introduction of the Financial Act 2021, the carry-forward period is extended to 10 years.
Imposition of Withholding Tax on Payments to Agents
A 2% withholding tax has been imposed on the payments made by companies to their authorized dealers, distributors, or agents. Besides, such payment should have been raised through transactions, sales, or schemes offered by the agents.
This amendment will be effective from Jan. 1, 2022. However, the withholding tax is applicable only if the agent is a tax-resident individual and the payment exceeds 100,000 Malaysian ringgits during the current fiscal year.
Key Tax Incentives
The Budget 2022 has introduced a wide range of tax incentives such as the “Digital Ecosystem Acceleration Scheme”. This scheme is applicable to the following service providers in the digital sector:
- Digital Technology Providers
- Digital Infrastructure Providers
The above companies should have applied to the “Malaysian Investment Development Authority (MIDA)” from Oct. 30, 2021 to Dec. 31, 2025. The tax incentives include a lower tax rate (0% to 10%) for 10 years (For technology providers).
Tax incentives for the petroleum industry include:
- 25% petroleum income tax rate
- Accelerated capital allowance within two years
- Carry-back of losses
- Export duty exemption on petroleum products
The exemption of import duty on the parts of the locally assembled electric vehicles (EVs) is another tax incentive included in the Financial Act 2021. In addition, the completely knocked down EVs are also exempted from sales tax and excise duty.
These incentives are applicable to the imports made from Jan. 1, 2022 to Dec. 31, 2025. In addition, the excise and import duty exemption on imported EVs will be available from Jan. 1, 2022 to Dec. 31, 2023.
The green technology sector has also been offered tax incentives. The qualifying Rainwater Harvesting System activities are applicable for green investment tax allowance.
In addition, the Rainwater Harvesting Services activities that are verified by the “Malaysian Green Technology Corporation” are eligible for the green investment tax exemption. The applications under this scheme should be made to MIDA from Jan. 1, 2022 to Dec. 31, 2023.
Tax Deductions for Businesses
During the Covid-19 pandemic, both the Financial Act and Budget 2022 have offered maximum tax deductions for a variety of businesses operating in Malaysia. These tax measures include:
- Extension of the double deduction on expenses (qualified) that were incurred in lieu of the internship programs.
- Expansion of the incentives for the students at different academic levels i.e. professional certificate, Malaysian skills certificate (levels 1 or 2), and master’s degree.
Discussed below are some other tax deductions that are worthy of mentioning.
- Introduction of the tax deduction for those landlords who have granted rental reductions (at least 30%) to their tenants. This particular tax deduction is available till June 2022.
- The scope of double deduction has also been expanded. This provides scholarships to those Malaysian students who meet the criteria. This expansion relates to almost all fields and is available to certain academic levels for assessment years (YAs) 2022 to 2025.
- The tax deduction associated with the refurbishment or renovation of business premises has also been extended. This period is now extended to Dec. 31, 2022. However, the tax deduction is limited to 300,000 Malaysian ringgits.
- Extension in the tax deduction period for businesses associated with the companies offering manufacturing or manufacturing-related services. The tax deduction is available on rental expenses that were incurred on offering accommodation to the employees. The amount of tax deduction shouldn’t exceed 50,000 Malaysian ringgit.
Tax Relief for Individual
The Budget 2022 also offers maximum tax relief for individuals in the shape of tax deductions for a range of expenses. A few of them are listed below:
- Expenses incurred on upskilling or self-enhancement of an individual.
- The social security contributions are deductible (up to 350 Malaysian ringgits).
- Expenses incurred on domestic tourism are also deductible (from Jan. 1, 2021 to Dec. 31, 2022).
- Childcare fees continue to be deductible for YAs 2020 to 2023 (not exceeding 3,000 ringgit)
- Expenses incurred on the installation of rental/purchased business equipment are deductible for YAs 2022 to 2023 (Maximum limit 2,500 ringgit).
- Payment made for buying the subscription of electric vehicle charging facilities (for personal vehicles) is treated as a valid tax deduction.
- The amount spent on buying a smartphone, tablet, or computer (for personal use) can also serve as a tax deduction. However, this type of tax deduction shouldn’t exceed 2,500 ringgit.
Stamp Duty Relief/Exemptions
Following are the instruments that are exempted from stamp duty:
- Financial or loan agreements that were executed from Jan. 1, 2022 to Dec. 31, 2026 are exempted from stamp duty.
- Rescheduling or restructuring of loan/financing agreements is relieved from stamp duty.
- Instruments executed for merger or acquisition schemes from July 1, 2020 to Dec. 31, 2022 are also exempted from stamp duty.
Sales Tax
In the past, imported goods were not subject to sales tax if the value of each consignment didn’t exceed 500 Malaysian ringgit. After the introduction of FA 2021, this exemption won’t be available from Jan. 1, 2023.
Service Tax
The companies offering brokerage services associated with the shares trading are not subject to service tax. This exemption is available from Jan. 1, 2022. However, e-commerce platforms are bound to pay 6% service tax.
Real Property Gains Tax
The real property gain obtained through the disposal of property by the Malaysian citizen or PR holder is exempted from tax (from Jan. 1, 2022). The property should have been held by the owner for a period not less than five years.