Corporate Tax Penalty in Malaysia: Causes, Types, and How to Avoid

In Malaysia, companies must follow specific tax regulations to avoid penalties.

If a business fails to meet these obligations, it may face various penalties.

These penalties are imposed for different violations, including late tax payments, submitting inaccurate tax returns, or failing to provide necessary documentation.

Knowing about these penalties is essential for your business to operate smoothly and avoid extra costs.

What is the Corporate Tax Penalty in Malaysia?

Corporate tax, also known as corporate income tax (CIT), applies to all companies operating in Malaysia, whether local or foreign.

Foreign companies are taxed on global income, while local companies are taxed only on profits earned within Malaysia.

Companies must pay taxes based on their net profit, which is the amount left after deducting expenses.

The rate is determined by a tax table set by the government. For existing companies, taxes must be paid monthly starting from the second month of their fiscal year.

New companies begin paying taxes starting from the sixth month. Taxes must be settled by the 15th of each month.

If a company fails to pay by the due date, a 10% penalty is imposed on the unpaid amount.

If the actual tax payable is more than 30% higher than the estimate, an additional 10% penalty is applied to the difference.

Common Tax Penalties for Companies in Malaysia

When it comes to complying with Malaysia’s tax laws, companies must understand the potential penalties for violations.

The Income Tax Act 1967 (ITA 1967) outlines several sections that impose penalties for non-compliance.

Below is a detailed explanation of these penalties, with examples for clarity.

1. Late Payment Penalty (Section 107B(3))

If a company fails to pay its taxes by the due date, it will incur a 10% penalty on the outstanding tax.

This penalty applies regardless of the reason for the delay.

Example:

Suppose your company owes RM100,000 in taxes. If you fail to make the payment on time, you will be penalized RM10,000 (10% of RM100,000). The total amount payable will then be RM110,000.

Violation: This penalty is in violation of Section 107B(3) of the Income Tax Act 1967.

2. Underestimated Tax (Section 107B(4))

If a company submits a revised estimate of tax, but the actual tax payable is more than 30% higher than the revised estimate, a 10% penalty will be applied to the difference between the revised estimate and the actual tax owed.

Example:

A company estimates RM50,000 as its tax liability. However, after filing the returns, the actual tax due is RM70,000, which is 40% higher than the estimate. In this case, the penalty will be calculated on the RM20,000 difference (RM70,000 - RM50,000).

The penalty will be RM2,000 (10% of RM20,000).

Violation: This penalty falls under Section 107B(4) of the Income Tax Act 1967.

3. Failure to Submit Income Tax Return (Section 112(1))

Companies are required to submit their income tax returns by the due date.

If a company fails to submit its returns or notify the tax authorities of its tax obligations, it can face a fine of up to RM20,000, imprisonment for up to 6 months, or both.

Example:

If a company fails to submit its tax return for two consecutive years, they may face a penalty of RM20,000 or a jail term, depending on the severity of the violation.

Violation: This is in violation of Section 112(1) of the Income Tax Act 1967.

4. Incorrect Tax Returns (Section 113(1)(a))

Submitting incorrect or misleading tax returns can result in a fine of up to RM10,000 or a penalty of double the amount of the underreported or unpaid tax.

This ensures that companies accurately report their tax liabilities.

Example:

If a company reports an income of RM500,000 but its actual income is RM600,000, resulting in an underreported tax of RM5,000, the penalty could be RM10,000 (double the underreported tax of RM5,000), in addition to the unpaid taxes.

Violation: This penalty falls under Section 113(1)(a) of the Income Tax Act 1967.

5. Tax Evasion (Section 114(1))

Deliberately evading taxes or assisting others in doing so can result in a penalty of up to RM20,000, imprisonment for up to 3 years, or both.

Additionally, the company must pay three times the amount of the unpaid tax.

Example:

If a company intentionally underreports its income to avoid taxes and the unpaid tax amounts to RM100,000, the penalty could be RM300,000 (three times the unpaid tax) plus the unpaid tax.

Violation: This is a violation of Section 114(1) of the Income Tax Act 1967.

6. Obstructing LHDN Officers (Section 116)

If a company obstructs or hinders a tax officer from carrying out their duties, it could face a fine of up to RM10,000, imprisonment for up to 1 year, or both.

Example:

A company refuses to allow a tax officer to inspect its financial records during an audit, leading to a penalty of RM10,000 and possible imprisonment.

Violation: This penalty is in violation of Section 116 of the Income Tax Act 1967.

7. Failure to Keep Proper Records (Section 119(a))

Under the Income Tax Act, companies are required to maintain proper records of their financial transactions.

Failure to do so can result in a fine of up to RM10,000 or imprisonment for up to 1 year, or both.

Example:

If a company fails to keep records for expenses, it may be penalized up to RM10,000. In severe cases, this could lead to a criminal conviction and a prison sentence.

Violation: This is in violation of Section 119(a) of the Income Tax Act 1967.

8. Failure to Update Address (Section 120(1))

Companies must notify the tax authorities within 3 months if there is a change in the registered address.

Failing to do so can result in a fine of up to RM20,000, imprisonment for up to 6 months, or both.

Example:

If a company moves to a new office but fails to inform the tax authorities within 3 months, it could face a fine of RM20,000 or imprisonment.

Violation: This penalty falls under Section 120(1) of the Income Tax Act 1967.

9. Non-Compliance with LHDN Requests (Section 120(1))

Companies are required to comply with requests made by the LHDN for information related to tax matters.

Failure to comply could lead to a fine of up to RM20,000, imprisonment for up to 6 months, or both.

Example:

If the LHDN asks for a company’s financial records or tax documents for an audit, and the company fails to provide them without a valid reason, the company could face penalties as high as RM20,000.

Violation: This penalty is also covered under Section 120(1) of the Income Tax Act 1967.

How to Calculate Tax Penalty?

The tax penalty for late payments is generally 10%.

For example, if your company owes 24% tax, the penalty will increase to 34% (24% + 10%).

If the tax payable is more than 30% higher than the estimated tax, the penalty is added to the difference.

How to Pay a Corporate Tax Penalty?

Penalties can be paid through several methods:

Online Payment: Visit the LHDN website and use the "Perkhimatan ezHASiL" > "ByrHASiL" option for payments via FPX (with a transaction limit of RM100 million).
Credit or Debit Card: Payments can be made using a credit or debit card, but a 0.8% additional administration fee applies to credit card payments.
Other Methods: Other payment options are available on the official LHDN website.

Penalty for Tax Audits in Malaysia

Tax audits in Malaysia may lead to penalties if underreporting or failure to report income occurs. The penalties for such offences are:

First Offence: 15% penalty
Second Offence: 30% penalty
Third and Subsequent Offences: 45% penalty

LHDN may waive penalties in some cases if the taxpayer can prove that the error was due to technical reasons, but this requires proper documentation.

Intentional tax evasion can lead to penalties up to three times the tax owed.

How to Avoid High Tax Penalties?

To reduce the risk of incurring high tax penalties, consider the following:

Be Charitable: Donations to charity can reduce your taxable income. Ensure you keep receipts and report them correctly when filing taxes.
Claim Tax Deductions: Use all available tax deductions to reduce your taxable income, helping you pay less tax.
Apply for Tax Incentives: Malaysia offers several tax incentives, such as reinvestment allowances and regional distribution centres, that can lower your tax burden.

Frequently Asked Questions (FAQs)

1. What happens if my company doesn’t pay taxes on time?

If your company doesn’t pay taxes on time, a 10% penalty will be imposed on the outstanding tax. If the tax payable exceeds the estimate by more than 30%, an additional 10% penalty is applied to the difference.

2. How do I appeal a tax penalty in Malaysia?

If you disagree with a tax penalty, you can appeal within 30 days by submitting a written appeal to the Collections Unit at the LHDN office. However, this does not exempt you from paying the tax due.

3. Are there any exemptions for paying tax penalties?

In certain cases, LHDN may waive penalties if the taxpayer can prove that the underreporting was due to technical reasons. Strong documentation and proof are required to support this claim.

4. What other penalties can my company face besides late payments?

Companies can face fines and penalties for failing to submit income tax returns, providing incorrect tax information, or intentionally evading taxes. The penalties can include fines, imprisonment, or both.

5. How can I calculate the tax penalty for my company?

To calculate your tax penalty, add 10% to the amount of tax owed for late payments. If the tax payable is more than 30% higher than the estimate, an additional 10% penalty is applied to the difference.

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