Recently the Inland Revenue Department has issued a new directive that specialists can no longer form a private limited company (Sdn Bhd) and declare their income via this mode. They must declare their earnings under personal income. Corporate taxes have always been lower by up to 6% which is substantial. After years of approving this, IRB has now made an about turn, forcing specialists to declare their income under the personal income category.
It is going to be speculative to understand why after decades of this practice, that IRB has had a change of heart. Perhaps the sluggish economy is to be blamed and taxing the upper echelons of society may be a way to relieve some of this pressure. Or maybe, IRB thought that enough is enough. They had been closing an eye on this way of avoiding higher tax rates, compared to their counterparts within the same income bracket under employment.
Most specialists are not employed directly under the hospital where they work. Their services are based on a contract basis. So as individuals, they form a Sdn Bhd, providing their specialist services to the various hospitals. So the contract is between the Sdn Bhd and the hospitals, rather than the individual him or herself. Technically, it doesn’t contravene any laws.
Unfortunately, IRB now interprets this as a way of tax evasion and thus has outlawed this practice.
It is clear that IRB has the upper hand here and their points are not fully without merit. But as this writer suggested, it is only proper that they provide time and guidance as specialists shift to this new method of tax reporting.