In Malaysia, adherence to tax laws is not merely a legal obligation but a critical element for maintaining business integrity and long-term sustainability. The Inland Revenue Board of Malaysia (IRBM), known locally as Lembaga Hasil Dalam Negeri (LHDN), is tasked with enforcing tax regulations and ensuring businesses meet their fiscal responsibilities. Non-compliance can result in severe financial penalties, legal ramifications, and reputational damage.
This guide outlines the key tax offences that businesses in Malaysia should avoid and provides practical strategies for ensuring compliance and reducing the risk of violations.
Understanding Malaysia’s Tax Framework
Before delving into the common tax offences, it’s essential for businesses to understand Malaysia’s tax framework. Some of the key taxes applicable to businesses include:
- Corporate Income Tax: Resident companies are taxed at a standard rate of 24%. However, from the Year of Assessment (YA) 2024, companies with a paid-up capital of RM2.5 million or less and gross business income not exceeding RM50 million are subject to a progressive tax scale:
Chargeable Income | Tax Rate (%) |
First RM150,000 | 15 |
RM150,001 to RM600,000 | 17 |
Exceeding RM600,000 | 24 |
- Non-resident companies are taxed at a flat rate of 24% for income sourced in Malaysia.
- Withholding Tax: This applies to payments made to non-residents, such as royalties, interest, and service fees.
- Stamp Duty: Imposed on legal documents related to property or share transfers.
- Real Property Gains Tax (RPGT): Imposed on profits from the disposal of real estate or shares in real property companies.
It is essential for businesses to stay updated on these taxes and any changes to the legislation to remain compliant.
5 Common Tax Offences Businesses Must Avoid
Malaysia’s Income Tax Act 1967, Goods and Services Tax Act 2014, and other relevant legislation outline specific offences and penalties. Below are some of the most critical offences businesses should avoid:
1. Failure to Submit Tax Returns
Consequences:
- Penalty: Fines ranging from RM200 to RM20,000.
- Additional Tax: A penalty of 10% on unpaid taxes if the return is not submitted by the due date.
- Further Surcharge: An additional 5% penalty if the tax remains unpaid after 60 days.
- Legal Action: The IRBM may initiate prosecution, potentially resulting in imprisonment of up to six months.
Example: If a business fails to file tax returns for multiple years, the IRBM can impose penalties for each year of non-compliance, leading to significant financial burdens.
2. Underreporting or Misreporting Income
Consequences:
- Penalty: Fines between RM1,000 and RM10,000, plus a penalty of 200% of the underreported tax amount.
- Severe Cases: The IRBM may impose a 200% penalty on the underreported tax amount.
- Legal Prosecution: In cases of fraudulent misreporting, the company and its directors could face legal action, which may include imprisonment of up to three years.
Example: A company hiding RM500,000 in revenue to reduce its tax liability may face penalties amounting to RM1,000,000, which includes unpaid taxes and fines.
3. Failure to Pay Taxes Owed
Consequences:
- Initial Penalty: A 10% penalty on the unpaid tax amount.
- Additional Surcharge: An additional 5% penalty if the tax remains unpaid beyond 60 days.
- Legal Enforcement: IRBM may issue a Warrant of Seizure to confiscate business assets to recover unpaid taxes.
- Blacklist and Restrictions: Business owners may be barred from leaving Malaysia until the outstanding taxes are settled.
Example: A company owing RM200,000 in taxes may face an additional RM20,000 (10%) penalty and if unpaid after 60 days, another RM10,000 (5%) surcharge, increasing the total liability to RM230,000.
4. Providing False Statements or Fraudulent Documents
Consequences:
- Penalty: Fines ranging from RM1,000 to RM20,000 per offence.
- Tax Penalty: A 200% penalty on the unpaid tax.
- Imprisonment: Up to three years for serious fraud cases.
Example: If a business falsifies invoices to inflate expenses and reduce taxable income, the IRBM may audit and impose double penalties plus potential criminal charges.
5. Failure to Keep Proper Records
Consequences:
- Fine: Up to RM5,000 per offence.
- Imprisonment: Up to one year in extreme cases of deliberate record destruction.
- Increased Audit Risk: Businesses without proper records are more likely to be audited by the IRBM, leading to potential tax adjustments and fines.
Example: If a business cannot provide records during a tax audit, the IRBM may estimate taxable income, often resulting in higher tax assessments and penalties.
Legal Enforcement Actions by IRBM
For severe tax offences, the IRBM has the authority to take the following enforcement actions:
- Freeze Bank Accounts: To recover unpaid taxes.
- Seize Assets: IRBM may seize company assets to settle outstanding tax liabilities.
- Blacklist Directors: Directors and business owners may be blacklisted from leaving Malaysia until taxes are paid.
- Criminal Prosecution: IRBM may initiate prosecution, which could lead to fines, imprisonment, or both.
Strategies for Ensuring Tax Compliance
To avoid tax offences and ensure smooth business operations, companies should adopt the following strategies:
- Stay Updated on Tax Regulations: Regularly consult IRBM updates or tax professionals to remain informed about new regulations and deadlines.
- Engage Qualified Tax Professionals: Hiring experienced consultants or accountants ensures your business remains compliant with all tax requirements and optimizes tax savings.
- Implement Robust Accounting Systems: A reliable accounting system helps track income, expenses, and financial transactions accurately.
- Conduct Regular Internal Audits: Internal audits help identify discrepancies before they become legal issues, ensuring financial transparency.
- Maintain Proper Documentation: Businesses must retain records for at least seven years. Having organized and accessible records simplifies the audit process and prevents non-compliance.
Recent Developments in Malaysian Tax Law
The Malaysian government has introduced several measures to enhance tax enforcement. The Special Voluntary Disclosure Programme (SVDP) encourages businesses to disclose undeclared income without facing severe penalties. Additionally, Malaysia’s participation in international frameworks like the Common Reporting Standard (CRS) and Base Erosion and Profit Shifting (BEPS) Action Plan shows its commitment to improving tax transparency and compliance.
Conclusion
Tax compliance in Malaysia is more than just a legal obligation; it’s a commitment to responsible business practices. Avoiding tax offences is critical for safeguarding your company’s reputation, financial stability, and long-term success. By staying informed, seeking professional advice, maintaining accurate financial records, and fostering a culture of compliance, businesses can mitigate the risk of penalties while contributing positively to Malaysia’s economic growth and development.
