Malaysia payroll & tax overview.

Malaysia is one of the most populous countries in southeast Asia, and one of its most prominent economies. Malaysia is separated into two landmasses by the South China Sea: the western landmass, known as Peninsular Malaysia, is bordered to the north by Thailand and to the south by Singapore, while the eastern landmass, East Malaysia, is bordered by Brunei and Indonesia. An important gateway to lucrative regional markets, Malaysia has a developed economy that has grown over the past half century at an annual rate of around 6.5%. In 2019, that trend continued as Malaysia’s GDP reached an estimated $365.3 billion with 4.3% growth. Malaysia industrialised rapidly over the 20th century as it transitioned from a reliance on traditional mining and agricultural sectors to modernise its business infrastructure. With a wealth of natural resources, such as crude oil, gas, timber, and palm oil, 21st century Malaysia’s major industries include electronics, automotive manufacturing and construction - with a growing trend towards high technology products. A constitutional elective monarchy, with a robust parliamentary system friendly to foreign investment interests, Malaysia was a founding member of ASEAN, EAS and the OIC. In 2019, Malaysia was ranked 12 on the World Bank’s Ease of Doing Business Survey.

Why Invest in Malaysia?

Investment in Malaysia has been increasing for over 50 years, with the government pushing to transform the country into a major financial hub. Some of the main reasons to invest in Malaysia include:

• Financial initiatives: The Malaysian government is engaged in a number of initiatives to bring foreign direct investment into the country, including the Malaysian Investment Development Authority (MIDA), and the Malaysia External Trade Development corporation MATRADE, which work to help both companies set up and find markets.
• Business opportunities: Currently ranking 23rd on the World Bank’s Ease of Doing Business survey, Malaysia offers businesses opportunities in a range of sectors. In 2015 it ranked 4th on the World Bank’s Doing Business investor protection index, and 3rd on the 2016 A.T Kearney Global Services Location Index.
• Market diversity: Malaysia’s thriving industries include many innovative, high technology sectors. Popular investment targets include electronics manufacturing, biotech, research and development and photovoltaics.
• Location advantage: Malaysia’s location at the heart of southeast Asia, offers its businesses access to a range of valuable markets, and a consumer base of over 600 million people. Around 5000 companies from over 40 countries have established premises in Malaysia - and benefit from excellent communication and transport links (air and sea) to neighbouring regions.
• Skilled workforce: 20,000 graduates enter the Malaysian labour pool each year, offering businesses a wide range of highly-skilled potential employees. The Malaysian workforce tends to be young and productive - ideal for roles in research and manufacturing sectors. Workers also tend to have strong grasp of English.

Foreign Investment in Malaysia

The Malaysia Investment Development Authority (MIDA) is a subsidiary of the Government. It is focused on attracting inward investment in Malaysia from foreign multinational companies. Incentives to invest are focused on the High Technology; Machinery & Equipment; Automotive and the Oil Palm Biomass industries however there are additional opportunities.

Registering a Company and Establishing an Entity in Malaysia

Companies are required to register as an employer for tax, Employee Provident Fund (EPF), Social Security Funds, Employee Insurance Scheme (EIS) and HRDF (Human Resources Development Fund, if applicable based on the industry).

Employers must register with the Employee Provident Fund (EPF) and Social Security Organization (SOCSO) when the first employee begins at the company. The principal and immediate employer who employs one or more employees is required to register and contribute monthly to EPF and SOCSO. Employers must register at the EPF and SOCSO office within 7 days and 30 days respectively from the date the new employee was employed.

There are currently no specific legal data protection requirements with regards to payroll data in Malaysia. For the time being, companies with a payroll function in Malaysia either in-house or outsourced will have to rely on internal or external company policies to ensure data protection principals are upheld.

Typical implementation timeline will be two months including a one-month payroll parallel run. However, implementation duration will vary depending on the complexity of payroll requirements and the headcount to be implemented.

Business Banking in Malaysia

It is not mandatory to make payments to both employees and the authorities from an in-country bank account. Generally, banks are open to the public from 09:00AM to 4:30PM, and closed on Saturdays and Sundays.

What Are the Working Days and Working Hours in Malaysia?

The working week in Malaysia is Monday to Friday. The normal number of hours worked per day in a commercial office is eight hours.

Basic Facts about Malaysia

General Information

Bordered by Thailand to the north, and Singapore to the south, and separated into two territories by the South China Sea, Malaysia is one of southeast Asia’s most diverse and populous countries. Established in 1946 as the Malay Union, the country went through a series of territorial restructurings to become Malaysia in 1963. Malaysia’s population spans many ethnicities and cultures, including Malays, Chinese, Indians and indigenous peoples. Although it is an elective monarchy, with the current king chosen from a hereditary line, Malaysia operates under a parliamentary government, based on the UK’s Westminster system. The diversity of Malaysia is reflected in its geography and climate: hot tropical regions see cooler periods and monsoon rainfall at periods throughout the year, while the South China Sea brings humidity and changeable weather to both territories.

Full name: Federation of Malaysia

Population: 31.62 million (World Bank, 2017)

Capital: Kuala Lumpur

Major languages: Malay (official), English, Chinese dialects, Tamil, Telugu, Malayalam

Monetary unit: 1 ringgit = 100 sen

Main exports: Electronic equipment, petroleum and liquefied natural gas, chemicals, palm oil, wood and wood products, rubber, textiles

GNI per capita: US $10,460 (World Bank, 2018)

Internet domain: .my

International dialling code: +60

The tax year in Malaysia runs from 1st January to 31st December.

Income Tax in Malaysia

For employment income, a monthly tax deduction (MTD) system is in operation, whereby employers deduct monthly tax payments from the employment income of their employees. Employers, who do not use computerised payroll software, can calculate the MTD using the Schedule of Monthly Tax Deductions, issued by Inland Revenue Board of Malaysia (IRBM). Moreover, it can be calculated using Computerised Calculation Method, computerised payroll system, or in-house/customise payroll system, which has been verified by the IRBM. Employers rely on employee’s personal data, submitted in order to compute monthly MTDs. Therefore, these monthly deductions are net of personal relief, relief for spouse with no income, child relief, EPF relief and zakat payments (if any).

Employers are responsible for submitting a monthly withholding tax return, and make MTD payments to the Inland Revenue Board of Malaysia by the 15th day of following the month of payroll. Failure to do so will result in a penalty fine of RM200 – RM 20,000 or 6-months imprisonment or both.

Malaysia follows a progressive tax rate, from 0% to 28%. A non-resident individual is taxed at a maximum tax rate of 28% on income earned/received from Malaysia. An individual is a non-resident, under Malaysian tax law, if he/she stay less than 182 days in Malaysia in a year, regardless of his/her citizenship or nationality.

Effective from January 2020, resident individuals who earn more than 2 million annually will be taxed at 30%. It is proposed that the tax rate for non-resident individuals earning more than 2 million will also be taxed 30%.

Each employee will need to do his/her own tax filing (BE Form) for the calendar year which has to be submitted before 30th April (without business income) and before 30th June (with business income) of the sub year.

With effect from January 2016, all Malaysian employers must allow their employees to claim allowable deductions and rebates via form TP1, resulting in lower tax deductions, at least twice a year. Please note that it is the employee’s responsibility to ensure the accuracy of these claims and keep records and receipts for up to 7 years. The employer is obliged to process the amount submitted by the employee and is not responsible for the veracity or accuracy of figures submitted by the employee.

For more information, please refer to website http://www.hasil.gov.my

Social Security and Employee Provident Fund (EPF) in Malaysia

There are three mandatory statutory contributions:

SOCSO

The Social Security Organisation (SOCSO) is an organisation set up to administer, enforce and implement the Employees’ Social Security Act, 1969 and the Employee’ Social Security Regulation 1971. The organisation provides social security protection by social insurance including medical and cash benefit, provision of artificial aids and rehabilitation to employees to reduce the suffering and to provide financial guarantees and protection to the family.

SOCSO administer two types of social protection schemes:

• Employment Injury Insurance Scheme
• Invalidity Pension Scheme

An employer who employs one or more employees is required to register and contribute monthly to SOCSO for all employees under the Employees’ Social Security Act, 1969 (henceforth refer as Act). From January 2016, there is an income tax relief of MYR 250.00 per annum for SOCSO contribution. From January 2019, all the foreign employees are liable to contribute SOCSO.

The employer is liable to pay monthly contributions within 15 days of the following month. For example, January contributions should be paid not later than February 15th. Interest on the late payment of contributions will be charged at the rate of 6% per annum for each day of late payment contributions. If late payment interest is calculated to be less than RM5, then interest is charged at RM5 per month.

For more information, please refer to website http://www.perkeso.gov.my

EPF

The Employees Provident Fund manages the compulsory savings plan and retirement planning for employees in Malaysia. Membership of the EPF is mandatory for Malaysian citizens, and voluntary for non-Malaysian citizens. The EPF is a social security institution formed according to the Laws of Malaysia, Employees Provident Fund Act 1991 (Act 452) provides retirement benefits for members through management of their savings in an efficient and reliable manner and that such contributions are payable to the employees in full on reaching the age of 55.

The EPF also provides a convenient framework for employers to meet their statutory and moral obligations to their employees. Expatriates; domestic servants – who are from the private account of the employers, self-employed persons, and employees under age of 16 are excluded from the above. A pension fund is available for civil servants and some private voluntary schemes for employees.

A contribution constitutes the amount of money credited to members' individual accounts in the EPF. The amount is calculated based on the monthly wages of an employee. The current contribution rate is in accordance with wage/salary received. For employees who receive wages/salary of RM5,000 and below, the portion of employee's contribution is 11% of their monthly salary while the employer contributes 13%. For employees who receive wages/salary exceeding RM5,000 the employee's contribution of 11% remains, while the employer's contribution is 12%.

For more information, please refer to website https://www.kwsp.gov.my

Employment Insurance Scheme (EIS) in Malaysia

An Act to provide for the Employment Insurance Scheme implemented from 1 January 2018, administered by the Social Security Organization to provide certain benefits and a re-employment placement programme for insured persons in the event of loss of employment which will promote active labour market policies, and for matters connected therewith. The EIS doesn’t just provide money upon retrenchment, it also comes with a number of benefits such as:

• Job-hunting assistance
• Re-employment allowance
• Reduced income allowance
• Training allowance
• Career counselling

An employer who employs one or more employees is required to register and contribute monthly to EIS for all employees aged 18 to 60 years old under the Employee Insurance System (Act 800) (Henceforth refer as Act).

Contribution of EIS

Employers and employees will contribute 0.2% each of an employee’s salary, this means that the total contribution would be 0.4% of an employee’s monthly salary.

The minimum eligible monthly salary can be as low as RM30, the contribution is RM0.10 monthly. On the other hand, the maximum eligible monthly salary contribution is capped at RM4,000. So even if you’re earning more than RM4,000 a month, the contribution from you and your employer is fixed at RM4,000, leading to the maximum amount of contribution capped at RM15.80 per month.

Reporting Tax in Malaysia

Monthly

Income Tax – Deadline 15th of the following month

• CP39 – Statement of Monthly Tax Contribution
• CP22 – Notification of New Employee (applicable for new joiner of the month)

Retrenchment / Retirement / Leaving Country

• CP21 – Notification of Departure from Country
• CP22A – Notification of termination / retrenchment / lay-off being paid a substantial termination amount

EPF – Deadline 15th of the following month

• I-account is mandatory if the abovementioned met

1. new employer: register for I-account with filing up a form of KWSP1 (i) when registration of employer
2. existing employer: register for i-account with filing up a form of KWSP1 (i)

SOCSO – Deadline 15th of the following month

• Perkeso Assist Portal https://assist.perkeso.gov.my/employer/login

Fill up SOCSO Portal ID Registration Form and send to nearest SOCSO branch

• Form 2 – Notification of New Employee (need to enclose a copy of Identity Card of new hire)

EIS – Deadline 15th of the following month

• Perkeso Assist Portal https://assist.perkeso.gov.my/employer/login
• SIP2A Form: Notification of Employee (applicable for the new joiner of the month)

Yearly

Income Tax

Employer – Deadline 31st March of the following year

Form E – Employer Year End Tax (Year-end)

• This is used to report annual returns to the government for all employees. This must be submitted to the Inland Revenue Department by 31st March via the tax authority portal. Visit https://ez.hasil.net.my for more details.
• Employee – Deadline 30th April of the following year

Form 8A (EA) – Employee Year End Tax Filing

• Used to facilitate employee tax filing and provided to each individual by the 28th February of each year. Electronic copies are provided and do not require employer signatures.

New Employees in Malaysia

To set up a new employee, the employer must submit SOCSO Form 2, Form EIS 2A, and Form CP22 to inform SOCSO, EIS and Inland Revenue Board (IRB) on the new hire.

The following information is required when setting up a new start:

• Personal details form
• A copy of Identity Card
• TP3 if employed in Malaysia within commencing year

Leavers in Malaysia

Employee final payment should be withheld by the employer for tax clearance purpose. The employer will release the money upon receiving a tax clearance letter from IRB.

The employee is required to complete tax clearance prior to leaving the country by submitting Form CP21. Upon receiving the clearance from the tax authority, the employer will be given an approval to release all the monies (final payment) after deducting the tax clearance amount (if any) to the employee.

Payroll in Malaysia

Payroll processing in Malaysia normally takes place on a monthly basis. Payroll administration should take the following into account:

• Mandatory Benefits: In Malaysia, mandatory payroll benefits include paid annual leave, statutory holidays, maternity or medical leave, and benefits for termination or unemployment.
• Optional Benefits: Optional payroll benefits in Malaysia may include payment for Long Service, allowances for housing and transport, medical insurance schemes, commission and bonuses, and any retirement or pension schemes.
• Statutory Contributions: Both employer and employee make statutory social security contributions to the EPF retirement and SOCSO scheme. Employees may also have to make PTPTN repayments (Malaysia’s student funding scheme), or Zakat donations (Muslim employees only).
• Schedular Tax Deduction: Monthly tax deductions in Malaysia are governed by the STD mechanism - which reduces the need for employees to pay tax in one lump sum.
• Payslip: All employees in Malaysia should be issued with a payslip when they are paid, including information such as wages earned and deductions made.
• Employee Records: Employers must maintain an employee register, with relevant payroll information for each staff member.

Employers in Malaysia must withhold employees monthly tax contributions - at rates ranging from 0%-28% depending on salary amount. The complexity of Malaysia’s tax regulations means it may be advisable for foreign businesses to outsource their payroll administration to a global payroll provider to benefit from compliance expertise and that ensure pay is delivered efficiently to their international employee populations. The standard payroll process in Malaysia includes the following steps:

• Pay-day: Payments must be made by the 7th of each month.
• Payment method: Cash, cheque, or credit to bank account.
• Calculation of salary: incorporating overtime, sick pay etc.
• Issue of payslips: Manual or automated/computerised distribution
• Statutory contributions/deductions: EPF, SOCSO, etc.
• Remittance of payment to authorities: Necessary to know deadlines and methods of payment