Malaysia currently adopts the self-assessment (SAS) tax scheme in which taxpayers calculate their tax liability and its disclosure. Under the SAS tax scheme, tax audits are done by the authorities and any discrepancy or non-compliance would result in penalties on tax adjustments.
The tax authorities in Malaysia are the Inland Revenue Board and the Royal Malaysian Customs. Based on their rules and regulations, taxable income includes those that are obtained locally and those earned abroad but received in Malaysia. However, incomes received in Malaysia from banks, insurance companies, air and sea transportation companies operating outside Malaysia are exempt from taxes. To date, Malaysia has signed income tax treaties with 70 countries to avoid double taxation.
Tax or Mandatory Contributions
Small to medium scale companies pay the following taxes and contributions: corporate income tax, employer-paid Provident Fund and Social Security contributions, vehicle tax, property tax, interest tax, sales tax, and stamp duty.
Corporate taxes apply to companies in Malaysia. The Inland Revenue Board (IRB) requires 20% on the first RM 500,000 of a company's taxable profit and 25% of taxable profit in excess of RM 500,000. Employer-paid Provident Fund and Social Security contributions are variable because they are based on the gross income of the employee. Vehicle tax is fixed at RM 8,545. Property tax may be imposed by local authorities on resident companies for services provided. Stamp duty is rated depending on the value of the transaction. Sales tax is 10% of total sales or computed based on the value of taxable goods sold, imported, used, or disposed.
The tax season in Malaysia is from March 1 to April 30. Companies and individuals alike are on edge at this time due to the numerous financial, legal, and technical considerations and challenges in connection with their filing of income taxes at Lembaga Hasil Dalam Negeri (LHDN).
Business Accounting in Malaysia
Accounting procedures are necessary to trace cash flow of income and expenses, manage a company's payroll, compute for the required tax payments, and produce the necessary financial reports. Correct bookkeeping is not for the untrained. Small companies may be able to manage their books by using accounting software; however, calculating tax requires more than an accounting application and willingness to learn. A seasoned accountant knows the numerous deductions, tax exemptions, and tax reliefs available for small companies that a business owner might not know. The services of a bona fide accountant, who is also a member of the Malaysian Institute of Accountants, is highly recommended.
An accountant has the knowledge and skills to analyze the cost of operations, projects, and products. This entails budgeting and preparing financial reports such as cash flow, profit and loss statement, balance sheet, and payroll. It is the accountant's duty to identify errors and make the necessary amendments, ensure accurate recording of financial activity, and prepare the correct statements.
Accounting Tips for Small Business Owners
Most small business owners have the tendency to intertwine personal and business finances. It is vital that these two are handled separately even if a business is just starting out.
It is best to maintain separate checking accounts for personal and business use. This way, payment for personal and business bills would be done separately, as well. A separate credit card for business use is highly recommended. Having two accounts will greatly improve the management of income and expenses.
It is easy enough to keep tabs on cash payment, but receivables are often left out or marked uncollected. The ideal action is to collect the unpaid bill and mark it as ‘paid' at the soonest time possible.
There are small business owners who fail to save or keep copies of their business expense receipts, which could result to problems in accounting, cash flow, and taxes. It is crucial to save expense receipts no matter how small the price is to avoid possible accounting problems.
It is also imperative for small business entrepreneurs to track all expenses incurred in running their business. These costs are deductible from the total income of the business during tax season. Keeping tabs of expenses allows a better view of the company's profitability. Payments paid through business checks, debit cards, or credit cards are easy to track, but it is often easy to forget expenses paid in cash.
Small business entrepreneurs have a mindset that they save more money by doing their own taxes. The fact is that failing to acquire the services of a professional accountant can cost them more in the end. Business exemptions might not be applied as they do not know about it. There is also the possibility that some calculations may be incorrect, with business owners overpaying or underpaying their taxes.
Hiring an expert to take care of a small business's accounting and company payroll and payment processes is money well spent. A professional accountant will keep you updated on changes and modifications on existing tax laws in Malaysia.
If you are set on establishing a small business in Malaysia, consider hiring a professional accountant. But, first, you need to have a serious discussion on the ways and means of establishing a small company in Malaysia. Call Servcorp now for free consultation.