In Malaysia, employers have several tax responsibilities that contribute to the country's social security and employment benefit system.

Employees Provident Fund (EPF)

This is a mandatory retirement savings plan for Malaysian citizens and permanent residents. Employers contribute 12% (for salaries above RM5000) or 13% (for salaries below RM5000) of their employees' monthly wages to the EPF.

Social Security Organization (SOCSO)

Employers contribute to SOCSO, which covers two schemes:

• Employment Injury Insurance Scheme (EIIS): Providing compensation for work-related injuries and disabilities.
• Invalidity Pension Scheme (IPS): Offering financial support for employees who become disabled and unable to work.

Employer SOCSO contributions are capped at 1.25% of the employee's monthly salary.

Employment Insurance System (EIS)

This scheme provides financial assistance and re-employment support services to employees who have lost their jobs. Employers contribute 0.2% of an employee's monthly salary with a maximum cap.

Important Considerations

• Eligibility: Employer contributions apply to Malaysian citizens and permanent residents. Expatriates may be eligible for EPF contributions on a voluntary basis.
• Salary Thresholds: Some contribution amounts are based on salary thresholds or have maximum contribution limits.
• Registration: Employers must register with relevant authorities like EPF, SOCSO, and EIS to facilitate contributions.
• Contribution Rates: Rates are subject to possible changes, so employers must stay informed about the latest updates.
• Payment: Contributions are typically made via the Inland Revenue Board of Malaysia's online tax portal.

In Malaysia, a progressive income tax system is used, meaning the more you earn, the higher percentage of your income is taxed. Residents are taxed on their chargeable income at rates ranging from 0% to 30%, depending on their income bracket. Your taxable income includes employment income, business income, rental income, and other sources as defined by the Malaysian Income Tax Act 1967. The tax year in Malaysia follows the calendar year, from January 1 to December 31.

Key Tax Deductions for Employees

One of the key tax deductions for employees is the Monthly Tax Deduction (MTD) or Potongan Cukai Bulanan (PCB). This is a form of advance tax payment where employers withhold a portion of an employee's salary each month based on estimated annual income. MTD amounts are then submitted to the Inland Revenue Board of Malaysia (LHDNM / IRBM).

Another important deduction is the Employees Provident Fund (EPF), a mandatory retirement savings scheme for Malaysian citizens and permanent residents. Employees contribute 9% or 11% of their monthly salary to the EPF, depending on their chosen rate.

While employees are not required to contribute to the Social Security Organization (SOCSO), as it's an employer-paid scheme, it's important to be aware that it provides essential disability and employment injury benefits.

The Employment Insurance System (EIS) is another key deduction. Employees must contribute 0.2% of their monthly salary (with a maximum cap) to this program, which offers benefits in the event of job loss.

Tax Reliefs & Exemptions

Malaysian residents are eligible for numerous tax reliefs and exemptions. These can significantly reduce taxable income. Some common reliefs include:

• Personal Relief: A basic deduction on your chargeable income.
• Reliefs for Dependents: Spouse, children, parents.
• Lifestyle Reliefs: Expenses on books, computers, sports equipment, etc.
• Insurance and Medical Reliefs
• EPF Contribution Relief

VAT obligations in Malaysia encompass a wide range of services, including professional services, telecommunication services, food and beverage services provided by restaurants, hotel and accommodation services, certain entertainment and recreational services, and many other categories outlined by the Royal Malaysian Customs Department.

Scope of Taxable Services

The range of taxable services would likely remain similar if VAT were to be implemented in Malaysia, though some adjustments are possible.

Determining Tax Liability

Businesses providing taxable services with an annual turnover exceeding a specific threshold (currently RM500,000 for SST) are generally required to register for SST. This same principle would likely apply to VAT registration. Taxable services are subject to SST at a standard rate (currently 6%). Businesses charge and collect SST from their customers. VAT, if implemented, may have a similar charging mechanism. Businesses can claim credit for the SST (or potentially VAT) paid on their business inputs, reducing their overall tax burden. This mechanism is designed to avoid the cascading effect of taxes.

Special Considerations

Certain services, such as financial and medical services, might be exempt under a VAT system, similar to the existing SST exemptions. Potentially under VAT, some services vital for the economy, like exports, might be classified as zero-rated. This means that no VAT is charged, but businesses can still claim input tax credits. Services provided by a non-resident business to a Malaysian recipient may potentially be subject to VAT under a reverse charge mechanism. This ensures fair competition between local and overseas service providers.

Compliance

Businesses must file regular SST/VAT returns, typically on a monthly or quarterly basis, and remit the SST/VAT collected, less any eligible input tax credits. They must also maintain accurate and detailed records of all transactions, including invoices and receipts, to support SST/VAT calculations and claims.

Companies granted Pioneer Status enjoy income tax exemption for a set period, typically 5-10 years, on a significant percentage of their statutory income, usually 70% to 100%. This primarily focuses on manufacturing, agriculture, tourism, and other promoted activities. Businesses should be involved in the production of promoted products or activities as defined by the Malaysian Investment Development Authority (MIDA). Applications for Pioneer Status should be submitted to MIDA.

Investment Tax Allowance (ITA)

An alternative to Pioneer Status, ITA provides a 60% allowance on qualifying capital expenditures (e.g., factory, plant, machinery) incurred within five years. This allowance can be offset against 70% of statutory income each year, with unused allowances carried forward. It is open to businesses in various sectors, particularly those modernizing, automating, expanding, or diversifying operations. Applications for ITA should be submitted to MIDA.

Reinvestment Allowance (RA)

RA provides a 60% allowance on qualifying capital expenditure for a 15-year period to existing manufacturing companies that undertake expansion, automation, modernization, or diversification projects. It is primarily for established manufacturing companies looking to significantly upgrade their operations. Applications for RA should be submitted to MIDA.

Special Incentives for Specific Industries

Malaysia offers specialized incentives for targeted industries such as Information and Communications Technology (ICT), Biotechnology, Green Technology, and the Halal Industry. These include tax exemptions and allowances for MSC-status companies and other ICT-related ventures, incentives for companies involved in biotechnology-related activities, tax incentives for developing green technology or providing green technology services, and incentives and support programs for businesses developing halal products or services.

Incentives in Special Economic Zones (SEZs)

Several SEZs in Malaysia offer enhanced incentives. The Northern Corridor Economic Region (NCER) offers income tax exemptions, investment tax allowances, import duty exemptions, and other benefits for businesses in priority sectors. The East Coast Economic Region (ECER) offers similar incentives to the NCER.

Other Incentives

Various tax incentives and grants are available to support Small and Medium Enterprises (SMEs). There are also double deductions for Research and Development (R&D) expenses, grants, and other incentives to promote innovation. Incentives are also available for export-oriented businesses.