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TAXATION

History• During the reign of Egyptian Pharaohs

• Scribes as tax collectors

• In Greece• A tax referred to as Eisphora was imposed only in times of

war

• In Athens• A monthly tax called Metoikon was collected to foreigners

• Ancient Greek Taxation• Taxation was used as an emergency power. Additional

resources gained from war were used to refund tax previously collected from the people

• Earliest taxes in Rome• Taxes known as Portoria were customs duties on imports

and exports• Augustus Caesar introduced the inheritance tax to provide

retirement funds for the military. The tax was five percent on all inheritances except gifts to children and spouses

• In England• Taxes were first used as an emergency measure• Taxes on income or capital were a recent development as a

result of increasing government intervention in the economy

• In the Philippines• The pre-colonial society, being communitarian, did not have

taxes

• In Modern Industrial Nations• The government designates a tax

base (such as income, property holdings, or a given commodity)

• A Tax Law is a body of rules passed by the legislature by which the government acquires a claim on tax payers to convey, transfer and pay to the public authority

• The system of compulsory contributions levied by a government or other qualified body on people, corporations and property in order to fund public expenditures.

• An inherent power of the state to raise income and to demand enforced contributions for public purposes.

Taxation

Purposes Taxation• to raise revenues for public needs so that

persons can live in a civilized society• The government increase taxes in order to

stabilize prices and stimulate greater production.

• An instrument of fiscal policy influences the direction and structure of money supply, investments, credits, production, interest rate, inflation, prices and in general, of the national economy

Characteristics of a sound Tax system

• Fairness• Clarity and Certainty• Convenience• Efficiency

Effects of Taxation• Personal Income Tax which is presumed to fall

entirely on the legal taxpayers influences decisions to work, save, and invest. These decisions affect other people.

• Corporate Income Tax may simply result to lower corporate profits and dividends. It may reduce their income of all owners of property and businesses. The company may move toward raising the prices of their products

Shifting the incidence of taxation

– Shifting taxation is the process of passing the burden of the tax to others.

– A tax can be shifted when the taxpayer is able to obtain a higher price for something he sells or when he pays a lower price for a commodity he purchases.

Tax Evasion• When there is fraud through pretension

and the use of other illegal devices to lessen one’s taxes, there is tax evasion– Under-declaration of income– Non-declaration of income and other items

subject to tax– Under-appraisal of goods subject to tariff – Over-declaration of deductions

Tax Avoidance• Is the legal utilization of the tax regime to one's own

advantage, to reduce the amount of tax that is payable by means that are within the law.

• The term tax mitigation is a synonym for tax avoidance. • Its original use was by tax advisors as an alternative to

the pejorative term tax avoidance. • Latterly the term has also been used in the tax

regulations of some jurisdictions to distinguish tax avoidance foreseen by the legislators from tax avoidance which exploits loopholes in the law.

TAXATION IN MALAYSIA

INTRODUCTION

In Malaysia, the law governing income taxation is the Income Tax Act 1967 (Act 53/1967).

The transaction must fall within the scope of section 3 of the Act in order to be liable to income tax.

SCOPE OF CHARGE

• Section 3 of the Act provides:“ Subject to and in accordance with this

Act, a tax to be known as income tax shall be charge for each YA upon the income of any person accruing in or derived from Malaysia or received in Malaysia from outside Malaysia.”

SECTION 3

it sets out two circumstances where income tax liability arises, namely:

a)The transaction must be ‘income’ in nature and such income is derived from Malaysia

ORb) The transaction must be ‘income’ in

nature and its received in Malaysia from outside Malaysia( foreign source income).

SOURCES OF ‘INCOME’

• The Act does not define the meaning of ‘income’ but merely categorizes the income under sec 4 and sec 4A

Classes of income on which tax is chargeable

• Sec 4 , subject to this act the income upon which tax is chargeable under this act is income in respect of:-

• gains and profits from a trade, profession and business•gains or profits from an employment (salaries, remunerations, etc.)•dividends, interests or discounts•rents, royalties or premiums•pensions, annuities or other periodic payments•other gains or profits of an income nature.

•

Cont.

• Chargeable income is arrived at after adjusting for allowable expenses incurred in the production of the income, capital allowances and incentives where applicable.

• Section 34 of the Income Tax Act 1967 allows specific provisions for bad or doubtful debts. However, no deduction for book depreciation is allowed although capital allowances are granted.

Cont.

• Unabsorbed business losses may be carried forward indefinitely to offset against business income including companies with pioneer status, provided that the cessation of the period falls on or after 30 September 2005.

RESIDENCE STATUS FOR INDIVIDUAL

Introduction

• The concept of ‘resident’ is important in the Income Tax Act 1967. an individual who is a tax resident in Malaysia would be given an overall preferential tax treatment as compared to a non resident individual.

• Non- resident individual suffers the maximum flat rate of tax at 28% as compared to the scaled rate ranging 0%- 28% for resident.

Determination Of Resident Status

• The ascertainment of an individual’s resident status in purely a quantitative test. It is determined by reference to the number of days an individual person is present in Malaysia during a particular calendar year.

SECTION 7

• Section 7(1) of the Act lays down FOUR circumstances where an individual can be regarded as tax resident in Malaysia:

He is in Malaysia in that basis year for a period or periods amounting in all to 182 days or more;

SECTION 7 (Cont.)

he is in Malaysia in that basis for a period of less than 182 days and that period is linked by or other period of 182 or more consecutive days throughout which he is in Malaysia in the basis year for the YA immediately preceding that particular YA or in that basis year for the year immediately following that particular YA:

SECTION 7 (Cont.)

Provided that any temporary absence from Malaysia:

i. Connected with his service in Malaysia and owing to service matters or attending conferences or seminars or study abroad.

ii.Owing to ill-health involving himself or a member of his immediate family

iii.In respect of social visits not exceeding 14 days in the aggregate.

SECTION 7 (Cont.)

It shall be taken to form part of such period or that period, as the case may be, if he is in Malaysia immediately prior to and after that temporary absence.

SECTION 7 (Cont.)

c) He is in Malaysia in that basis year for a period or periods amounting in all to 90 days or more, having been with respect to each any 3 of the basis years for the 4 immediately preceding that particular YA either:

resident in Malaysia within the meaning of this Act for the basis year or;

In Malaysia for a period amounting in all to 90 days or more in the basis year

SECTION 7 (Cont.)

d) He is resident in Malaysia within the meaning of this Act for the basis year for the YA following that particular YA, having been so resident for each of the basis years for the 3 YAs immediately preceding that particular YA.

MEANING OF TEMPORARY

ABSENCE

Temporary Absence…..

• Temporary absence from Malaysia is treated as ‘in Malaysia’ for the purpose of ascertaining the residence status in sec 7(1)(b). Prior to YA 2002, temporary absence is only allowed to form the consecutive 182.

Temporary Absence must be:

Connected with his service in Malaysia and owing to service matters or attending conferences or seminars or study abroad.

- This provision only applies to individual who is exercising employment in Malaysia. The Act recognizes that some individuals may be required to travel frequently outside Malaysia due to their employment nature.

Temporary Absence must be (Cont.)

owing ill-health involving himself or a member of his immediate family.

- From MIA dialogue with IRB (inland Revenue Board) on 4 November 2003, immediate family member would comprise spouse, children and parents. Brother and sisters are not within the ambit(scope) of “ immediate family”

Temporary Absence must be (Cont.)

in respect of social visit not exceeding 14 days in the aggregate.

- The 14 days absence for social visit need not be consecutive and it can relate to any one of the two YAs. It can be at any point of time in the period Cycle DiagramTableMarketing Diagram

Personal Income Tax

• All individuals are liable to tax on income accrued in and derived from Malaysia or received in Malaysia from outside Malaysia. Income remitted to Malaysia by a resident individual is exempted from tax. A non-resident individual will be taxed only on income earned in Malaysia.

Personal Income Tax(cont)

• The rate of tax depends on the individual's resident status, which is determined by the duration of his stay in the country as stipulated under Section 7 of the Income Tax Act 1967.

• Generally, an individual who is in Malaysia for at least 182 days in a calendar year is regarded as a tax resident.

Personal Income Tax(cont)

Resident Individual• A resident individual is taxed on his

chargeable income after deducting personal reliefs at a graduated rate from 0% to 26% with effect from the year of assessment 2010.

Personal Income Tax(cont)

• The tax charged on a resident individual is reduced by way of the following rebates:

• i.An individual with a chargeable income not exceeding RM35,000 enjoys a rebate of RM400 effective from year of assessment 2009. Where the wife is not working or the wife's income is jointly assessed, she also enjoys a further rebate of RM400.

Personal Income Tax(cont)

• Similarly, a wife who is assessed separately will also enjoy a RM400 rebate, provided her chargeable income does not exceed RM35,000.

• ii.Any fee paid to the government for the issue of an employment pass, visit pass or work permit.

Personal Income Tax(cont)

Non-Resident Individual• Effective from year of assessment 2010, a

non-resident individual is liable to tax at the rate of 26% without any personal relief. However, he can claim rebates in respect of fees paid to the government for the issuance of an employment work permit.

PERSONAL RELIEF

RELIEF RMSelf (with effect from year of assessment 2010) 9000

Further self relief - disabled 6000

Wife/husband 3000

Further wife/husband relief - disabled 3500

Medical expenses for parents 5000

Medical expenses for taxpayer, spouse or children on serious diseases (include RM500 for medical examination)

5000

Expenses on supporting equipment for disabled taxpayer, spouse, children or parent

5000

RELIEF RM

Expenses on supporting unmarried children:

i. Below 18 years of age 1000

ii. Disabled child 5,000

iii. Over 18 years old (pursuing tertiary education at university or college) 4,000

Life insurance premiums or approved fund contributions (with effect from year of assessment 2010)

7000

Insurance premiums for education or medical benefit

3000

RELIEF RMAnnuity premium on annuity purchased through EPF Annuity Scheme

1000

Fee of acquiring law, accounting (extended to Islamic finance), technical, vocational, industrial, scientific, technological skills or qualification.

5000

Purchase of books, journals and magazines and other similar publication (excluding newspapers).

1000

Purchase of computer for once every three years

3000

Broadband subscription fees applicable from the year of assessment 2010 until 2012

500