The Prime Minister and Minister of Finance, YAB Dato’ Seri Mohd. Najib Tun Razak handed down his Budget 2016 on October 23. The Budget 2016 aims at enhancing the competitiveness of Malaysia’s economy by increasing productivity, innovation and green technology. Besides, some measures are implemented in order to empower human capital, and to ease the cost of living of the Rakyat.

The following measures are most noteworthy from an international tax perspective:

  1. Individual income tax

A.1 Increase of minimum salary

The minimum salary in Malaysia is increased:

  • from RM 900.00 to RM 1,000.00 per month for peninsular Malaysia; and
  • from RM 800.00 to RM 920.00 per month for Sabah, Sarawak and the Federal Territory of Labuan.

A.2 Changes in tax rates

Individual income tax rates are increased:

  • for non-resident: from 25% to 28%
  • for resident, with the creation of new bands on taxable incomes:
    • from 25% to 26% for income between RM 600,001.00 and RM 1,000,000.00
    • from 25% to 28% for income above RM 1,000,000.00

A.3 Tax reliefs

Tax reliefs are increased for resident supporting a child under the age of 18; a child pursuing post-graduate education; parental care; a spouse with no income and/or who pays alimony to a former spouse.

A.4 SOCSO Eligibility

Eligibility for mandatory contributions to the Social Security Organization (“SOCSO”) is increased from a monthly salary of RM 3000.00 to RM 4000.00. This measure will include 500,000 additional workers.

  1. Corporate income tax

B.1 Small and Medium Entreprises

SME [1] are now required to be incorporated in Malaysia to be eligible for 100% capital allowance deduction (special allowances) on small value assets [2].

In addition, SME are granted a preferential treatment for double deduction of R&D project expenditure. A double deduction for R&D project expenditure might be claimed up to an amount of RM 50,000.00 for each year of assessment with submission of a R&D project application to the Malaysian Inland Revenue Board (the “IRB”).

B.2 Deductions allowances

  • Deduction for expenditures incurred on issuance of “sustainable and responsible investment Sukuk [3]” approved or authorised by the Securities Commission of Malaysia, is given for 5 years. “Sustainable and responsible investment Sukuk” refers to the financing of project with the following objectives:
    • preserve and protect the environment and natural resources;
    • save the use of energy;
    • reduce the greenhouse gas emission; or
    • improve the quality of life.
  • Double deduction for additional costs incurred on issuance of retail bonds and retail Sukuk is extended for another 3 years
  • No industrial building allowances shall be given to a person for a building used for letting purpose
  • Input Tax not allowed for deduction (GST Act 2014). Where a person is liable but has failed to be registered to GST, any amount paid or to be paid in respect of GST as input tax by that person is not allowed for deduction. In addition, the corresponding amount of Input Tax will be excluded from the qualifying plant expenditure or qualifying building expenditure.

B.3 Deduction for Interest expense on Money Borrowed

When interest accrued during a basis period corresponding to a year of assessment is due to be paid in any following year of assessment, the taxpayer is required to make a claim in order to be eligible for tax deduction.

This notice must be given in writing to the IRB not later than 12 months from the end of the basis period for the year of assessment when the sum is due to be paid.

Accordingly, the IRB may give the deduction during the respective year of assessment when the interest is accrued and payable.

B.4 Penalties – Failure to Furnish Return or Give Notice of Chargeability

Penalties are increased for failure to furnish return or to give notice of chargeability and for failure to furnish correct particulars as required by the IRB.

  1. Investment incentives

C.1 Reinvestment allowances (RA), investment allowances (IA) and investment tax allowances (ITA)

The Budget 2016 proposed:

  • to entitle companies to make a claim for special RA for another 3 years to encourage reinvestments by companies that have exhausted their eligibility;
  • an exclusion of GST input tax as part of qualifying expenditure for RA, IA and ITA purposes; and,
  • adjustments of the related definitions for the qualification of capital expenditures for RA, IA, and ITA.

C.2 Export 

A decrease of the added-value threshold [4] is proposed to encourage manufacturing SMEs to increase their export market, as follows:

  • Income tax exemption equivalent to 10% of the value of the increased exports of manufactured goods where the goods exported attain at least 20% of added-value (instead of 30%); and,
  • Income tax exemption equivalent to 15% of the value of the increased exports of manufactured goods where the goods exported attain at least 40% of added-value (instead of 50%).

C.3 Tourism oriented companies

The income tax exemption of 100% granted for tour operating companies licensed under the Tourism Industry Act 1992 is extended for another 3 years, as follows:

  • 100% tax exemption statutory income derived from the business of operating tour packages within Malaysia with a volume of more than 1,500 local tourists per year; and,
  • 100% tax exemption statutory income derived from the business of operating tour packages to Malaysia with a volume of more than 750 foreign tourists per year.

C.4 Food production

The income tax exemption of 100% for food production project is extended for another 5 years and includes new products (planting of coconuts, mushrooms, rearing of deer etc.).

C.5 ICAB

A tax incentive is granted for establishment of Independent Conformity Assessment Bodies (ICAB) for 5 years:

  • 100% exemption for new ICAB
  • 60% exemption for existing ICAB

This measure is applicable in particular sectors (machinery and equipment, chemical etc.), for some activities (certification, inspection etc.) and upon obtainment of specific accreditations from relevant Governmental Bodies.

C.6 Islamic Finance

The income tax exemption of 100% is extended for 4 years for companies that provide Shariah-compliant fund management services.

  1. GST

D.1 Late payment penalty

Late payment penalty is introduced on taxable persons who fail to make payment of GST within the stipulated time frame;

  • within 30 days: 5% of the outstanding GST payment
  • from 31 to 60 days: 15% of the outstanding GST payment
  • from 61 to 90 days: 25% of the outstanding GST payment

D.2 Warehousing scheme

Payment of GST on imported goods is suspended when the goods are deposited in the ware-house, and supplies of goods made between the warehouses are disregarded.

D.3 Other measures related to GST

  • GST relief on re-importation of goods exported temporarily for the purpose of promotion, research or exhibition, or for the purpose of rental and lease
  • Expansion of list of zero rated food products
  • GST relief on procurement of goods by skills and vocational training centres

For a full list of the changes please refer to the following webpage: 2016 Budget | Prime Minister's Office of Malaysia