Taxation in Malaysia - Assignment Example

Taxation Taxation Question Speech Today, mates and colleagues, as we are in the process of studying different aspects of life through education, we have to acknowledge contributions of tax and taxation in our lives. Taxes are capable of affecting economy in various ways ranging from how people manage personal finances to local and national economic growth. However, much debate lies on the fact that taxation itself can have both negative and positive effects on the economic condition of a country, and in this case, Malaysia. Perhaps, dear colleagues, all of us are aware of how our country-Malaysia-has transformed over the years to become a middle-income economy. The transformation process is attributable to taxation measures that the government put in place. Taxation has the potential of fostering economic growth. Business creation, job creation or any other positive economic enhancers are connected to taxation policies initiated by the government to steer its economy. Attaining the middle-income economic status for Malaysia follows standard prescriptions put by the government to act against recession by reducing taxes. Tax reduction creates an environment where individuals have money in their pockets, thereby increasing spending. Proper taxation measures have helped Malaysia to create jobs for its population, and the fact that employment rates are rising, is a living example. We need to take a moment to understand how taxation measures boil down to increased rate of economic growth in Malaysia. When the government decides to cut taxes and citizens, on the other hand, comply by filing their returns, more money becomes available for spending on goods and services. High spending will induce companies and businesses to higher more employees. With increase in spending by new hires, manufacturing companies and businesses produce elevated numbers of goods and services to restock inventories. More hiring will be realized and a positive trend of steady increase in economic activity will be the overall result. Tax incentives in Malaysia are clearly directed towards achieving investment goals. Income of companies or people accrued in or received in or derived outside Malaysia are subject to taxation. The taxes are not meant to harm or harass investment; they are employed in driving forward development goals (Malaysian Investment Development Authority, 2014). Classmates and friends, sometimes we are inclined to believe that increasing taxes reflects to high rates of economic growth. However, this is not the case. In every economy, including Malaysia, there is a well-defined optimal tax rate. That is, there is a certain percentage of Gross Domestic Product derived from taxes to ensure maximum growth for the economy. In case tax burden surpasses that level, the overall result is a slow growth in economy (Taylor & Weerapana, 2011). The question to be answered is perhaps whether increased rates of taxation affect the speed of economic growth. If local governments rate income and other taxes highly, people take pressures to abscond completing the required filing and the country’s economy, determined by the GNP (Gross National Product), will not diversify or expand significantly. Without denying crucial facts concerning life, we need to agree on the point that high rates of taxes reduce productivity of a people. Increasing even by an insignificant percentage result in people getting to save less than half of their earnings, making them to limit efforts put in the workplace (Gwartney et al., 20). High rates of taxes in Malaysia are likely to have adverse effects on the speed of capital formation in addition to its efficient use. Foreign investors tend to look for other investment destinations avoid effects of high tax rates on capital formation structures. As a result, employment avenues close, Gross Domestic Product declines, and market volatility reduces, thereby harming the country’s economic growth. Reduction in purchasing power of citizens affects rates of goods and services consumption. Living standards will also be affected negatively. However much scholars try to compare reduced tax rates to increased tax rates, it is difficult concluding that a government can increase its tax revenues by employing the latter. People need motivation to be productive, and good tax policies will help in achieving the same. Finally, high marginal rates of taxes result to people falling under high taxes to shift to cheap tax-deductible expenditures (Mc, 2009). To sum up this session, dear classmates, the information I have discussed have enabled us to understand different aspects of taxation. Overall, implications of taxation depends on how it is applied towards investments, employment creation, and steering the growth of economy. Thank you for your time and have a blessed day. Question 2 Report This report will outline tax issues in the family and document ways of how Hanson should proceed with filing tax returns in addition to his wife and son. Firstly, it is important to note that Section 7 of Malaysian Income Tax Act 1967 states that citizens need to file taxes on accrued income, remitted to or derived from Malaysia. Tax rate also depends on an individual’s resident status determined by the amount of time he or she has stayed in Malaysia. The client (Hanson and his family) happens to be a resident of the country, thus the requirement to comply with income tax rates mandated to resident individuals. Considering no family members are in any form of formal employment, graduated tax rates of between 2% and 30% after deducing tax relief will not apply. In addition, Hanson, his wife and son are entitled to enjoying zero rates on income below RM 2500. To understand how the family can maximize saving money in relation to taxes, each member’s income generation endeavors will be analyzed. Hanson First, the gratuity amounting to RM 200,000 was a form of compensation for Hanson’s early retirement. Tax treatment in relation to gratuity (ITA 1967 section 25(6)(a)) states that the amount given qualify for tax exemptions (LHDN Malaysia, 2013). This full exemption follows the fact that Hanson has worked for over 10 years in the same industry (film) or with a single employer. The effective tax rate for RM 200,000 paid as gratuity is 10.25% for every RM100, 000 income. Therefore, payable tax is 20.5% of gratuity amount less relief. The reliefs will amount to RM 16,000 (RM 9000 for dependent and self + RM 6,000 for EFP + RM 1,000 for ordinary child). Therefore, from the total gratuity, taxable amount is RM 184,000. Second, RM 200 charged per magic trick performance need to be analyzed to determine whether it falls under taxable income. Malaysian Airports (Sepang) Sdn Bhd and Another v Federal Express, [Rayuan Sivil No. 02(F)-72-10/2012 (W)] tried to determine whether the Ministry of Finance, according to Act 1990 of Free Zones, had the mandate to levy charges on activities conducted for services and facilities by the same Act-that is whether these charges could result to taxable amounts (Chartered Tax Institute of Malaysia, 2014). The court ruled in favor of the Federal Express. ITA 1967 section 4(f) states that any income (profits or gains) not falling under the main sections (foregoing) paragraphs are taxable. However, since Hanson only performance magic as a pastime, the annual income accruing from this activity may not meet the taxable threshold of RM 20,000. Therefore, RM 200 from performances is not chargeable. Third, there are tax charges levied on the property held by the client. Since the property he invested in are bringing income that can replace his previous salary, the accrued income is liable to tax (AGC, 2006). Act 169 section 3(1) demands ascertaining income generated by each disposed rental based on the period for a taxable year (AGC, 2006). Juliana First, handmade cakes bring an income of RM 100 per cake. Since her mainstream customers are social gatherings, Juliana possibly earns RM 20,000 per occasion given that social gatherings may have populations of over 200. Multiplying this value by three (3) for the number of times social gatherings are conducted in a year (gatherings are held on a quarterly basis). Similar to her husband, IAT 167 section 5(1)(b) apply. Her deductions will be RM 60,000 (income accrued in a year) less personal relief (RM 9,000). Since Juliana is not formally employed, she is entitled to EPF relief of RM 3,000. Second, in Sepang Sdn Bhd and Another v Federal Express Brokerage Sdnn Bhd and 2 Others [Rayuan Sivil No. 02(F)-72-10/2012 (W)], the Federal Court tried to determine whether the ministry of finance (following the Free Zones Act of 1990) had the jurisdiction to levy charges on activities performed for services and facilities provided by the Act, that is distinction between a fee and taxable income (Chartered Tax Institute of Malaysia, 2014). The court ruled in favor of the company. Juliana is involved in exporting her services in terms of recommendations to countries such as India and Singapore, excluding Malaysia. It is difficult to determine the taxable amount from this activity since the case provides no information concerning income accruing from recommendations and referrals. Henry First, Henry’s taxable amounts are derived from two sources: contract signed with the gaming company Selecto Sdn.Bhd and investment income from forex investment. IAT 167 section 5(b) outlines the taxable income from the money received for game programming services. However, the two-phase payment of contract wages may spell confusion to Henry on what value needs taxation. Evaluating contract period, 6 months (lifespan of the contract) will be characterized by 2 payment phases. Therefore, both first and second payments need to be added to determine taxable amount. It would not be right to tax each payment. Considering this, Henry will be paying 1.42% (tax rate) of total contract amount (RM 50,000) less personal relief (RM 9,000). This reflects a tax of RM 582.20 for the income from contract. Second, losses incurred by investing in Forex need to be carried forward (Deloitte, 2014). Finally, determining the taxable rate and amount of profits generated by forex investment cannot be determined because of limited facts concerning the same. References Malaysian Investment Development Authority. (2014). Invest in Malaysia: taxation. Retrieved June 3, 2014, from http://www.mida.gov.my/env3/index.php?page=taxation-in-malaysia Mc, V. (2009). Essentials Of Macroeconomic Management, 1E. Vikas Publishing House. Taylor, J., & Weerapana, A. (2011). Principles of economics. Cengage Learning. LHDN Malaysia. (2013). Inland Revenue Board of Malaysia: Gratuity (Public ruling no. 8/2013). Retrieved June 3, 2014, from http://www.hasil.gov.my/pdf/pdfam/PR8_2013.pdf Deloitte. (2014). International tax: Malaysia highlights 2014. Retrieved June 3, 2014, from http://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-malaysiahighlights-2014.pdf AGC. (2006). Laws of Malaysia: Real property gains tax (ACT 1976). Retrieved June 3, 2014, from http://www.agc.gov.my/Akta/Vol.%204/Act%20169.pdf Chartered Tax Institute of Malaysia. (2014). Malaysian tax: Judgments. Retrieved June 4, 2014, from, http://www.malaysiantax.com/judgments/federal-court-malaysia-airports-sepang-sdn-bhd-and-another-v-federal-express-1054.html Chartered Tax Institute of Malaysia. (2014). Malaysian tax: Judgments. Retrieved June 4, 2014, from, http://www.malaysiantax.com/judgments/federal-court-malaysia-airports-sepang-sdn-bhd-and-another-v-federal-expresses-brokerage-sdn-bhd-and-2-others-1142.html Read More