The Malaysian Prime Minister announced Malaysia’s 2017 budget on 21 October 2016 highlighting some tax measures including corporate and personal income taxation changes. Highlighting proposals include important changes to the withholding tax rules, a temporary reduction of corporate income tax rates in certain circumstances, penalty provisions for failure to submit Country-by-Country (CbC) reports.

Removal of the withholding tax exemption in respect of interest

The Budget has proposed an exemption in respect of interest arising from an approved loan in Malaysia, or paid or credited to a non-resident company in the same group in respect of securities issued by the government, or in respect of ringgit-denominated Islamic securities and debentures, other than convertible loan stocks, approved by the Securities Commission. If enacted, the changes would apply from 2017.

Expansion of withholding tax on service fees and royalties

The Budget has proposed to amend the Malaysian withholding tax laws to apply a 10% withholding tax to all amounts paid or credited to nonresidents in consideration for services, even if such services are performed outside Malaysia.  In addition, the budget proposes to expand the definition of “royalty” to include any consideration paid for the use of or the right to use software. Accordingly, such amounts will be subject to the 10% domestic royalty withholding tax which may be reduced under tax treaties.

Reduction of corporate income tax rates

The Budget for 2017 proposed to reduce the corporate tax for the year of assessment 2017 and 2018. As per the proposal, the reduce tax rate will be between 1 and 4 percentage points for companies with the significant increase in taxable income for the year of assessment 2017 and 2018. Reduce tax rate from 19% to 18% will be applicable for SMEs with taxable income up to the first RM500,000.

The penalty rates for late return filing or late payment of GST

The Budget has proposed increasing the penalties for late return filing or late payment of GST as follows: 10% for 30 days or less; an additional 15% for 31 to 60 days and an additional 15% for 61 to 90 days. The provision providing for a maximum penalty of 25% of the GST owed would be removed. The proposed amendments would also clarify that the penalty applies to the GST wholly or partly owed.

Penalty provisions introduced for CbC reporting

The Budget also introduce penalties for the failure to furnish CbC reports, incorrect reporting or omission of information, and noncompliance with mutual administrative assistance. Failure to comply with the rules may subject a taxpayer to a fine of between RM20,000 (US$4,800) and RM100,000 (US$24,000), imprisonment for a maximum of 6 months, or both. The court may also issue a further order to the person to comply with the rules within 30 days or any other period as the court deems appropriate.