Any company in Malaysia is required to comply with specific tax regulations to avoid penalties. When a company fails to comply with these laws, it may face tax penalties. These penalties can come from various violations, such as late tax payments, false tax returns or failure to submit necessary documentation. Understanding these penalties is crucial for businesses to operate efficiently and avoid additional costs.
What is the corporate tax penalty in Malaysia?
First off, corporate tax is also known as corporate income tax (CIT) in Malaysia. It is a tax on the profits of all companies operating in Malaysia, whether they are based here or not. Foreign companies are taxed on their profits from worldwide income, while local companies are taxed only on profits from income earned within the country.
Companies pay taxes based on their net profit in Malaysia. Net profit is the amount left of the company’s revenue after deducting all the expenses. The table below shows how the rate is determined for a company.
Corporate tax for already existing companies in Malaysia is to be paid on a monthly basis starting the second month of their fiscal year. New companies on the other hand are allowed to start paying their tax instalments from the sixth month of business onwards. By the 15th of each month, each company should have settled their tax instalment to Lembaga Hasil Dalam Negeri (LHDN).
Failing to pay the instalment rate by the due date will result in a penalty of 10% on the balance of the tax instalment not paid for the month. If the actual tax payable is more than 30% higher than the original or revised estimate, a 10% penalty will be added to the difference.
To put it simply, if the balance of the tax payable is not paid by the 15th of every month, a tax penalty of 10% will be imposed on top of the tax percentage that a company has to pay.
If a company disagrees with a late payment penalty imposed on them, they have the option to appeal within 30 days of receiving the statement of account. They can do this by submitting a written appeal to the Collections Unit in the HASiL Office. The appeal process does not exempt them from paying the taxes owed.
What are common tax penalties for companies in Malaysia?
In Malaysia, companies can face different types of tax penalties aside from missing deadlines as discussed above. These penalties can be different based on the nature of the violation, such as incorrect reporting or other compliance issues. Understanding these common tax penalties helps businesses be aware of potential risks and avoid unnecessary costs.
Payment of tax after the deadline
As mentioned above, failing to pay the outstanding taxes on time will result in an additional 10% penalty imposed on the existing tax payable. This is a violation of Section 107B(3) under the Income Tax Act 1967 (ITA 1967).
If the actual tax to be paid is 30% higher than the revised estimate of tax, then the company will have to pay a penalty of 10% on the difference. This is a violation of Section 107B(4) under ITA 1967.
Other offences, fines and penalties
A company can be charged up to RM20,000 or face imprisonment not more than 6 months or both if they fail to submit their Income Tax Return form or fail to inform the authorities of their tax payment obligations. This is a violation of Section 112(1).
If the company files the tax returns incorrectly, it is subject to a fine of up to RM10,000 and twice the tax amount that was failed to be reported or underpaid. Violation of Section 113(1)(a). Giving the wrong information about tax obligations could cost them the same too but is under Section 113(1)(b).
Purposefully avoiding paying taxes or helping someone or some other entity from doing so will cost a fine of up to RM20,000 or imprisonment not more than 3 years or both and thrice the amount of outstanding tax. Assisting or advising an entity to under-declare their income may cost a fine of up to RM20,000 or imprisonment not more than 3 years or both. These two violations are under Section 114(1).
Hindering an LHDN officer from carrying out their duties properly may cost a fine of up to RM10,000 or imprisonment not more than one year or both. (Violation: Section 116)
Failure to file proper records and documentation without reasonable excuses can cost a fine of up to RM10,000 or imprisonment not more than one year or both too. This violation is under Section 119(a).
On the other hand, failing to inform the authorities of a change of address within 3 months can cost a fine of up to RM20,000 or imprisonment not exceeding six months or both.
Finally, violation of Section 120(1). That means not following through with LHDN to provide specific information they need, without having a valid reason for not doing so. This can look like a fine of up to RM20,000 or imprisonment of not more than six months or perhaps both.
How to calculate tax penalty?
The penalty imposed for the late payment of taxes for that month is 10%. That means, let’s say your company is obligated to pay a tax of 24% from the net profit, you would have to add another 10% to the tax value. Now, you would have to pay a total penalty of 34%.
For companies that have a 30% tax payable than the estimated tax payments, the following is the formula you can use to figure out the amount to be increased.
How to pay a corporation tax penalty?
The company tax penalties can be paid through various methods of payment. First off, you can go to the LHDN website, then click on ‘Perkhimatan ezHASiL’ > ‘ByrHASiL’ and pay through FPX. For corporations, there is a transaction limit of RM100,000,000.
You can also pay your fines with a debit or credit card. However, there will be an extra 0.8% administration charge imposed if you use a credit card to settle your payments.
There are a bunch of other methods to pay your penalties and tax obligations. You can check them on the official LHDN website here and read our article that guides you through tax filing.
What is the penalty for tax audits in Malaysia?
If you remember reading above, leaving out income or underreporting it, can cost a penalty payment twice of tax payable. However, Tax Audit Framework from May 1, 2022, states that the penalties are of the following percentages for these offences:
First offence: 15%
Second offence: 30%
Third and subsequent offences: 45%
Sometimes, the LHDN may waive the penalty if the taxpayer can prove the understatement was due to technical reasons. However, it requires strong documentation and technical knowledge to defend the case. For intentional tax evasion, penalties can go up to thrice the tax payable.
How to avoid high tax penalties?
Tax penalties are not fun to be paying. There are certainly things you can do to avoid paying high tax penalties and keep more of your income.
Be Charitable
Make a generous donation to charity and keep the official receipt. When it's time to file taxes, enter the total amount of donations in the charity donations section. The donated amount will be subtracted from your taxable income, which means a percentage of it can be claimed.
Claim All Possible Tax Deductions
Tax deductions help you pay less tax by reducing your taxable income. When you subtract deductions from your total income, you end up with a smaller amount that gets taxed.
Using all the tax deductions you can save money. Make sure to keep good records of your taxes in case the LHDN audits you in the future.
Apply for Tax Incentives
The Malaysian government offers various tax incentives that can help reduce a company’s tax burden. Under the Income Tax Act 1967, there are incentives like reinvestment allowance, approved service projects, international procurement centres, regional distribution centres, biotechnology, and approved businesses.
On top of that, the Promotion of Investment Act 1986 provides incentives such as investment tax allowance, infrastructure allowance, and pioneer status for companies. These incentives can significantly lower the amount of tax your company needs to pay.
Consult a Tax Expert
Using a tax agent or accountant can save you time and potentially increase your tax refund or reduce what you owe. Tax experts stay updated with the latest tax laws and can identify deductions and offsets you might not know about.
We at Douglas Loh, can help you complete compliances and assist in tax savings wherever we possibly can legally. We can even audit your business to help you make better business decisions and avoid any unnecessary penalties!
FAQs
1. How is tax underpayment penalty calculated
For companies, penalties apply if the monthly tax instalment is not paid by the stipulated date. The penalty is typically 10% of the balance of the unpaid tax instalment for that month.
2. What is the penalty for driving without road tax
In Malaysia, driving without a valid road tax is a violation of the Road Transport Act 1987 and can result in penalties. If your road tax is expired, you can be fined RM 150.
If it has been expired for more than one month, an additional fine of RM 150 is imposed. Therefore, the total fine can be RM 300 if the road tax has been expired for more than a month.
3. Can companies appeal against tax penalties?
Under Section 99 of the Income Tax Act 1967, a company that disagrees with an assessment made by the Director General of Inland Revenue (DGIR) can appeal against that assessment.
This right applies to various assessments, including those made as a result of audits or investigations.
4. What happens if a company obstructs an LHDN officer?
If a company obstructs an LHDN (Inland Revenue Board) officer in Malaysia, it can face significant penalties. Under Section 116 of the Income Tax Act 1967, obstructing an authorized officer from carrying out their duties can result in a fine of up to RM10,000, imprisonment for up to one year, or both.
This is intended to ensure compliance and support the effective enforcement of tax laws in Malaysia
5. What tax incentives are available to reduce a company's tax burden in Malaysia?
Malaysia offers several tax incentives to reduce a company's tax burden, including Pioneer Status (PS) and Investment Tax Allowance (ITA), which provide significant tax exemptions and allowances for companies in promoted sectors.
The Reinvestment Allowance supports companies that reinvest to expand or modernize, offering allowances for qualifying capital expenditure.
Additional incentives are available for companies relocating to Malaysia, those involved in green technology, and those operating in designated economic corridors such as Iskandar Malaysia and the Northern Corridor Economic Region (NCER).
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