Question 1: Compare and contrast the three categories of scope of charge to income tax A modern form of income tax was introduced into Federation of Malaya in 1947 by using the derived and remittance basis. Income Tax Act (ITA) 1967 came into effect has imposed world income basis on the resident company involved in specialized industries. Malaysia adopted a territorial and remittance. With effect of year of assessment of 2004, taxation basis amended to exempt income remitted into Malaysia from oversea.
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Until now, Malaysia income tax imposed on territorial basis that tax on income accrued in or derived from Malaysia. The revolution of these three taxation basis has different scope of charge to resident person and non-resident person. The individual and company residence status and also the sources of income are examined under three basis to determine which kind of income received by taxable person should be taxed. Resident status is determined by the number of day physically presence within the country where generally individual stay in Malaysia total 182 days or more will be a resident.
Territorial basis: Under territorial basis which Malaysia is applying currently, taxable person such as individual, company or bodies of person is chargeable only on income accruing in or derived from Malaysia. Income arising within Malaysia borders means the territories of the Federation of Malaysia, the territorial waters of Malaysia and the sea-bed and sub-soil of territorial waters and any area extending beyond the limits of the territorial waters of Malaysia are subjected to tax.
In this scope of charge, resident and non resident individual and company are all taxable on its income derived from Malaysia only. Non resident company taxed on income accrued or derived from Malaysia if it has permanent establishment in Malaysia. Derived and Remittance Basis: This scope of charge provided that resident person is chargeable on income accruing in or derived from Malaysia and also income received in Malaysia from oversea.
Prior to year of assessment of 2004, only non-resident are exempted from tax on foreign source income received in Malaysia. Income remitted into Malaysia from oversea by resident person is taxable before 2004 until the effective year of assessment in 2004, a revised paragraph 28 Schedule 6 ITA exempts the income of any person including resident person received in Malaysia except those resident company carrying business on specialized industry that will be discussed later in world income basis.
World income basis Resident company and non-resident company are taxed on territorial basis except for resident company carrying on business in specialized industries such as banking, insurance, sea and air transport. Under Section 60C of ITA, 1967, business sources income from these industries are taxed on world income basis. This means that business income of resident company will be imposed on tax regardless of wherever the income derived even if income arises outside the country where individual resides.
Question 2: Discuss the relevance of the three categories on the types of income received by a taxable person. These three categories of taxation basis imposed on different kind of income received by taxable person. Territorial or derived Basis In the scope of territorial basis, taxable person such as resident and non-resident individual and company excluded company carrying in specialized industry such as banking, insurance, sea and air transporter are taxed on income derived in Malaysia.
Non-resident individual and company do not taxed on income received in Malaysia from oversea. Under section 4(a) ITA, income tax is imposed on gains and profit of a business. Resident and non-resident company that earn profit from their normal business activity in Malaysia are liable to tax as in accordance to the territorial basis stated that any income accrued and derived in Malaysia must be taxed. Business income for resident company are generally taxable but non-resident company only taxable provided they has permanent establishment in Malaysia.
For example, business profit gained from Hwa Tai Industries Berhad, local biscuit manufacturer company that does not fall under special industry is taxable based on resident company tax rate of 25%. Another example for non-resident company cases such as company Seesaw ltd carrying business of clothing manufacturer, it will be taxed only on business source income from clothing in Malaysia. Besides, this basis provided that employment income derived from Malaysia for resident and non-resident individual under section 4(b) of ITA 1967 is hargeable to tax. For examples, Mr. Erick Lund from Sweden who is a non-resident works in Shell company is liable to tax for his employment income. However for non-resident individual, they are also subjected to tax on the income of employment exercised in Malaysia but they are exempted if they satisfied the 60 day rule under paragraph 21 and 22 Schedule 6. Although tax liability arise when income accrued in or derived from Malaysia in territorial basis, there are numerous types of income are exempted from tax in the hand of resident individual.
Resident individual can enjoy the benefit of tax exemption such as pension income paid for Malaysian employment for approved scheme (paragraph 30, Schedule 6 of ITA) , royalties for literary and artistic (paragraph 32, 32A, 32B), income for cultural performance approved by minister (paragraph 32C), income for musical composition (paragraph 32D) and also interest income from financial institution with effect from 30 August 2008.
Other types of investment income that did not listed fall in Section 4 (c), (d), (e), (f) are generally taxable for resident individual. Revenue income that is assessable to tax includes interest received for Islamic securities, other than convertible loan stock, approved by securities commission and rental income. For examples, Mrs Lim who works as a clerk in accounting firm also received income from renting her apartment to few people.
Apart from employment income as clerk is taxable under section 4 ( b), her rental income also liable to tax under section 4 ( d). For non-resident individual, they are subjected to tax on the income of employment exercised in Malaysia as mentioned above and also exempted for pension income paid for Malaysian employment for approved scheme, interest received Islamic securities and also interest from financial institution.
However, they are taxable on royalties, income for cultural performance, income for musical composition. royalties for literary and artistic, income for cultural performance approved by minister, income for musical composition and also interest income from financial institution in paragraph 33, Schedule 6. References: 1. Inland Revenue Board Malaysia, 2011. Residence Status of Companies and Bodies of Persons. [online] Inland Revenue Board Malaysia. Available at:<