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Tax Computation for Companies

1.0 Introduction
Malaysian taxation system has moved into self assessment regime for companies with
effect from year of assessment 2001, which will be followed by sole proprietors,
partnerships, trusts, co-operatives and employees with effect from year of assessment
2004 with the recent legislation of Income ax !"mendment# "ct 2002$2%& 'nder the
self assessment regime, taxpayers must be familiar with the operation of the Income
ax "ct 1()*$+% and its interpretation, Inland ,evenue -ublic ,ulings and guidelines
as they are now placed with the onerous responsibilities to estimate the income tax
payable for each year of assessment, voluntary payment of income tax to the
collection branches or via ban.s and to submit the income tax return on time& ax
audits couple with monetary penalties and imprisonment will serve as deterrence to
taxpayers from the non- compliance to the Malaysian "ct&
/ompanies directors must ensure the tax computation of companies are prepared in
accordance to the current law and practices& his will certainly facilitate the tax audit
later on as well as minimi0e any possible tax penalties& he tax computation ranges
from trading, manufacturing to service companies and this article aims to provide the
step by step guidance that are essential in preparing a tax computation for company
and hopefully to assist the company to comply with the self assessment re1uirements&
2.0 The beginning
ax computation begins with the profit and loss account of the company, add in the
tax ad2ustments re1uired by the Income ax "ct 1()* !the "ct# to arrive at chargeable
income for the computation of income tax payable at the rate of 234&
he first step is to compute business income under section 4!a# of the "ct, which
begins with the 5net profit6 or 5net loss6 as shown in the audited profit and loss
account !-78# of the company& he -78 is categori0ed into income section and
expenses section, and has to be dealt with it separately& Insurance compensation on
trading stoc., compensation received from trade creditors, interest income from trade
debtor is assessed as business income, thus no ad2ustment is re1uired&
he "ct re1uires each source of income such as business income, investment income
to be computed separately& herefore investment income and its related expenses is
excluded first when computing business income& his normally refers to interest
expense in ac1uiring the investment source and it will be added bac., shown in the
positive column&
he "ct imposes tax on transactions that are income in nature& /apital gain from
reali0ation of long term investment or capital assets is not within the ambit of income
tax as it is tax free& In the same vein, capital loss is not tax deductible&
he initial tax ad2ustment will be as follows9
:emuning ;dn <hd
/omputation of /hargeable Income for the year of assessment 2012
- =
-rofit before taxation xx
Investment income !as per -78#
9 ,ental income xx
9 Interest income xx
1
9 >ividend income xx
Investment expenses
9 Interest expense xx
/apital gain
9 gain on disposal of shares, motor vehicle,
plant and machinery
xx
Insurance compensation on damages to fixed
assets
xx
9 trading stoc. nil
/apital loss
9 loss on disposal of shares, motor vehicle,
plant and machinery
xx
3.0 Expenses in the P/L
?xpenses in the -78 broadly can be divided into deductible and non deductible
expenses& "llowable expenses are expenses wholly and exclusively incurred in the
production of income or alternatively allowed under section +4 of the "ct&
@on deductible expenses refers to the expenses that are specifically prohibited under
section +( of the "ct or capital expenses such as improvement on capital asset or
capital asset expensed off to -78& hese non allowable expenses have to be shown in
the positive !=# column !not allowed#&
he list of prohibited expenses as provided in section +(!1# is as follows9
a& domestic or private expensesA
b& disbursement or expenses that are of 5dual6 purposes !both private and
business#A
c& capital withdrawn or sum employed as capitalA
d& contribution to an unapproved pension and provident schemeA
e& 1ualifying mining, agriculture, forest, prospecting, and farm
expenditureA
f& interest and royalty expenses where applicable withholding tax are not
deducted and paidA
g& payment for the use of licence or permit to extract timber from a forest
in Malaysia other than to Bovernment or statutory bodiesA
h& !deleted#A
i& contract payment to non-resident where applicable withholding tax are
not deducted and paidA
2& special classes of income paid to non-resident where withholding tax
are not deducted and paidA
.& lease rental for motor vehicles in excess of ,M30,000 or ,M100,000
!in certain cases# per vehicle, computed on aggregate basisA
l& entertainment expensesA
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m& leave passage for employees within and outside Malaysia&
/apital expenses are not tax deductible and it include9
i& cost of printing and distribution of annual reportsA
ii& stamp duty and secretarial fees for increased share capitalA
iii& stoc. listing expensesA
iv& pre-commencement business expensesA
v& entrance fees to clubA
vi& legal and professional fees relating to violation of laws, capital
structure of company, ac1uisition of loan or assetsA
vii& donations !irrespective of whether approved or unapproved donations#A
viii& lump sum payment for early termination of leaseA
ix& loan written off in relation to that of employees6 or suppliers6A
x& fine imposed for violation of lawA
xi& penalty on withholding taxA
xii& foreign exchange gain 7 loss on ac1uisition of plant and machinery,
repayment of foreign loanA
xiii& registration of trademar.A
xiv& fees for designing company logoA
xv& compensation to competitor to restrict competition !restrictive
covenant#&
?xpenses that are not incurred in the production of income such as provision of
expenses or capital asset expensed off to -78 is not tax deductible and will be added
bac., shown in the positive column& hese are9
?xpenses that are not incurred9
i& general provision for bad and doubtful debtsA
ii& provision for gratuity 7 retirement benefitsA
iii& provision for warranty cost, stoc. obsolescenceA
iv& depreciationA
v& amortisation for renovation of premises, lease amortisationA
vi& unrealised exchange loss in relation to ac1uisition of raw materialsA
vii& provision for repair and maintenanceA
viii& preliminary expenses written off&
/apital asset expensed off to -789
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i& renovation of factory, office premisesA
ii& improvement for repairsA
iii& small value capital items e&g& chairs, calculators etcA
iv& installation cost of machines charged in repair and maintenance
accountA
v& cost of stand used in advertisingA
vi& deposits paid for telephone or utilitiesA
vii& replacement of electrical alarm system&
.0 !oub"e deduction
he "ct provides incentives such as double deduction of revenue expenses in arriving
at ad2usted income of a business& hese revenue expenses would be allowed under the
"ct but an additional tax deduction is given to encourage or to relieve the tax burden
of business enterprises&
?xpenses 1ualified for double deduction are normally ga0etted as -' orders,
legislated in the Income ax "ct 1()* or in -romotion of Investments "ct 1(C) !-I"
1(C)#& hese include9
a& revenue expenses for promotional of export $section 41!+#, -I" C)% A
b& revenue expenses for approved training $-&'&!"# )17(2% A
c& overseas expenses incurred by resident company carrying on a hotel or
tour operating business for promotion of tourism $-&'&!"# 4127(1%
d& research expenditure
>ouble deduction of expenses would be granted in respect of any
allowable research expenditure9
i& approved research pro2ects underta.en by a company either in-
house or contracted to external research companies or
institutionsA
ii& the company is participating in industrial ad2ustment approved
under section +1" of the -romotion of Investments "ct 1(C)
and such expenses were incurred within 10 years !section +4"#A
iii& expenses incurred by companies for the use of facilities and
services provided by approved research companies or
institutionsA or research and development companies or a
contract research and development companies !section +4<#A
iv& contributions in cash to approved research companies 7
institutions !section +4<#A
v& approved research expenditure by the Minister !section +4"#&
e& remuneration of handicapped employees $-&'&!"# *+7C2%
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D remuneration paid to an employee who is physically or
mentally disabled and is not able to perform the wor. of a
normal person& ;uch remuneration must be allowable under
section ++&
b& insurance premium paid for the import of cargos $-&'&!"# *27C2%
D provided the ris.s are insured with an insurance company
incorporated in Malaysia&
c& export credit insurance premium $-&'&!"# 32)7C3%
D provided it is paid to the Malaysian ?xport /redit Insurance
<hd !M?/I<#&
d& insurance premium paid for export of cargo insured with a local
insurance company $-&'&!"# *(7(3%
D provided the insurance premium must be allowable deduction
under section ++ of the "ct and the ris.s are insured with an
insurance company incorporated in Malaysia&
e& approved international trade fair $-&'&!"# +)17(1%
D expenses incurred for participation in an approved international
trade fair held in Malaysia for the promotion of exports& he
trade fair must be approved by the Minister of International
rade and Industry& he expenses must be allowable under
section ++ of the "ct but excludes the cost of exhibits&
f& interest payable on loans to small scale business $-&'&!"# (07C2%
D employer needs to produce certificate of approval from
authority and interest must first be deductible by virtue of
section ++&
g& promotion of export of services by service sector such as
transportation, communication and utility sector $-&'&!"# 1(+7((%
D eligible expenses incurred pertaining to the promotion of export
of services&
h& advertising on Malaysian brand name goods $-&'&!"# )272002%
D expenditure incurred on advertising Malaysian brand name
goods locally provided9
a& company is at least *04 Malaysian ownedA
b& brand name is owned by the company and is registered
in Malaysia or outside MalaysiaA and
c& company6s product must achieve export 1uality
standard&
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i& freight charges incurred for the export of rattan and wood based
products $-&'&!"# 4227(1%
D the person claiming the deduction must be engaged in the
manufacture of rattan and wood based products& !?xcluding
veneer and sawn timber#&
2& ship freight charges for shipping goods from ;abah and ;arawa. to
-eninsular Malaysia $-&'&!"# 3072001%
D provided it was incurred by manufacturer and used ports in
-eninsular Malaysia&
#.0 $ad and doubtfu" debts
<ad debts written off relating to business income is allowed as tax deduction&
Eowever, general provision for bad debts is not allowed as these expenses are mere
contingency expenses, which are not incurred in the production of income&
;ection +4!4# of the "ct permits specific provision for trade debts to be tax
deductible& o 1ualify as trade debts, the individual debtor and the specific reasons for
such provision must be specifically defined as provided by -ublic ,uling 172002 to
include one of the following circumstances9
a& the debtor has died without leaving any assets from which the debt can
be recoveredA
b& the debtor is a ban.rupt or in li1uidation and there are no assets from
which the debt can be recoveredA
c& the debt is statute-barredA
d& the debtor cannot be traced despite various attempts and there are no
.nown assets from which the debt can be recoveredA
e& attempts at negotiation or arbitration of a disputed debt have failed and
the anticipated cost of litigation is prohibitiveA or
f& any other circumstances where there is no li.elihood of cost effective
recovery&
@on trade debts such as loan given to employees, advance given to related company
or suppliers is not tax deductible even though the debts are written off& hese debts
are not incurred in the ordinary course of business and are relating to the business
structure of the business source, which are capital in nature&
,ecovery from the specific provision is assessable as income as provided in ;ection
+0!+# of the "ct& @o tax ad2ustment is re1uired as the amount already shown as
income in the -78 account&
,ecovery from non trade debts would be a capital receipts and not be taxed&
herefore, the recovery has to be excluded from the tax computation& !shown in
negative column#
%.0 &ection 3'%( specific expenses
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hese expenses although not related to the income production activity, nonetheless
they are deductible as it is specifically allowed under ;ection +4!)#& he Malaysian
Bovernment encourages the incurring of these as expenses as to fulfill the social
responsibility of the taxpayer& ;ome of the specific expenses has a threshold for
deduction, therefore any excess of the limit will be disallowed !added in the positive
column#& he full list of ;ection +4!)# is as follows9
a& Mining expenses by the mining operator as computer in sch 2 of the
"ctA
b& ,eplanting expenditures
c& -rovision of e1uipment for disable person necessary to assist the
disabled employees in carrying out their dutiesA
d& ranslation or publication in <ahasa Malaysia of cultural, literary,
professional, scientific or technical boo.s approved by >ewan <ahasa
dan -usta.aA
e& provision of library facilities, which are accessible to the publicA or
contributions to public libraries, libraries of schools and institution of
higher education provided the amount shall not exceed ,M100,000A
f& provision of services, public amenities and contributions to a charity or
community pro2ect pertaining to education, health, housing,
infrastructure and information and communication technology as
approved by the MinisterA
g& provision and maintenance of a childcare centre for the benefit of
employees !restricted to revenue expenses#A
h& ?xpenditure incurred in establishing and managing a musical or
cultural group approved by the MinisterA
i& ?xpenditure incurred for sponsoring any arts or cultural activity
approved by the Minister of /ulture, "rts and ourism is deductible
sub2ect to a limit of ,M200,000 for a year of assessment&
2& /ompanies providing scholarship to a student for any course of study
leading to an award of a diploma, degree !including master and
doctorate# would be given a tax deduction provided9
1& the student is receiving full time instructionA
2& the student has no means of his ownA and
+& the total monthly income of whose parents or guardian does not
exceed ,M3,000&
he scholarship expense refers to the course fees and
reasonable living expenses of such student& he educational
institution must be established or registered in Malaysia&
.& /ompanies incurring expenditure !restricted to revenue expense# for
the purpose of obtaining certification for recognised 1uality systems
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and standards, and halal certification, as evidenced by certificate issued
by a certification body determined by the MinisterA
l& ?xpenditure incurred by a business person on the provision of practical
training in Malaysia to a resident individual who is not his employee&
).0 *d+usted income and statutor, income from business
"d2usted income is the first tax concept in the tax computation of a company& he "ct
provides business income to claim capital allowances on any 1ualifying capital
expenditure used in the business& <alancing ad2ustment would need to compute when
there is a disposal of 1ualifying asset& <alancing charge is added to ad2usted income
while balancing allowance is deducted from ad2usted income& he ad2usted income
less out all capital allowances would be statutory income&
he computation format is as follow9
- =
@et profit before tax xx
Investment income xx
Investment expense xx
/apital gain xx
/apital loss xx
;ection +( prohibited expenses xx
/apital expenditure xx
>ouble deduction 9 "dditional deduction xx
<ad and doubtful debts 9 general
provision
9 opening balance !b7f# xx
9 closing balance !c7f# xx
@on trade debts written off xx
,ecovery of
9 trade debts @I8
9 non trade debts xx
;ection +4!)# expenses @I8
"mount in excess the threshold as
provided in sec +4!)#
xx
xxx xxx
!xx#
"d2usted income xx

"dd9
<alancing charge x
xx

8ess9
/apital allowances
'nabsorbed x
/urrent year x
<alancing allowances x !x#
;tatutory income xx
-.0 In.estment income
8
Investment income such as dividend, interest, rental has to be computed individually
to arrive at ad2usted income of each investment source& @o capital allowance is
available to investment income&
Malaysian dividend income is assessed at gross amount despite it is received at net
amount of *34 of the gross dividend& he tax credit on dividend !234# is available as
a set off against income tax payable of the company&
"ll foreign source income such as overseas dividend, interest income, rental income is
exempted when received in Malaysia by virtue of the Income ax ?xemption Frder
@o 4C& $I?F @F 4C71((*% It is therefore excluded form the tax computation&
/.0 *ggregate income
"ggregate income is arrived by combining the statutory income from the business and
the investment income computed&
;tatutory income - 4!a# xx
Investment income
;ec 4!c# >ividend income !gross# xx
- Interest expense !x#
"d2usted income x
Interest income !gross# xx
- Interest expense !x# x
;ec 4!d# ,ental income !gross# xx
- ,ental expense !x# x
"ggregate income xx
10.0 !onation
/ash >onation to Bovernment, ;tate Bovernment or local authority is fully deductible
against aggregate income& In relation to cash donation to approved institution or
organisation !charitable institution#, the amount deductible is restricted to 104 of
aggregate income&
>onation in .ind is not tax deductible except for the following9
a& gift of artifact, manuscript or painting to Bovernment or ;tate
BovernmentA
b& cash donation restricted to ,M20,000 for the provision of public
library facilities, school or higher institutionsA
c& gift of painting to @ational or ;tate Ballery&
11.0 Current ,ear business "oss and unabsorbed business "oss
<usiness income is given preferential tax treatment as ad2usted loss is discreetly
available to it is not available to investment income& In the event the total in negative
column !-# exceeds the total in positive !=# column, ad2usted loss is said to exist&
ad2usted income will then be nil&
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/urrent year business loss is available as a set off at the aggregate income before the
deduction of approved donation& ;hould this amount exceeded the amount of
aggregate income, the excess is .nown as 5unabsorbed business loss6, only deductible
against statutory income from the business source in the following year of assessment
until the amount being fully set off&
12.0 0ina"
/hargeable income is computed by ta.ing the aggregate income less the current year
business lossA less out approved donations& "ny excess donation over the aggregate
income is permanent lost and not available to be carried forward to the following year
of assessment&
Income tax payable at 234 will be levied at the chargeable income&
"ggregate income xx
8ess9 donation !x#
/hargeable income xx
Income tax payable at 234 x
8ess9 tax credit on dividend
!section 110 set off# !x#
@et income tax payable xx
1ear *ssessment 200/ on2ards3
/ompany with paid up capital not more than ,M2&3 million
o Fn first ,M300,000
o ;ubse1uent <alance
204
234
/ompany with paid up capital more than ,M2&3 million 234
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