Essential Guide to Financial Compliance and Auditing in Malaysia

Contents

Accounting and Financial Compliance

1. Overview of Malaysian Financial Reporting Standards (MFRS)

2. Financial Year-End and Circulation of Financial Statements

2.1 Fixing Financial Year-End

2.2 Extension of Time

Tax Compliance

1. Tax Implications for Foreign Companies

2. Sales and Services Tax (SST) Registration and Compliance

3. Record-Keeping Requirements

4. Tax Agent: Appointment, Termination, and Perspectives

Annual Returns and Audits

1. Filing Annual Returns

2. Audit Requirements for Private and Public Companies

2.1 Auditor Appointment and Management

2.1.1 Appointment of First Auditor

2.1.2 Summary Process

2.1.3 Terms of Office for Private and Public Company Auditors

2.1.4 Resignation of Auditor

2.1.5 Summary Process

2.1.6 Change of Auditor

2.1.7 Summary Process

2.1.8 Removal of Auditor

2.1.9 Summary Process

Outsourcing and Hiring Professionals

1. Hiring an Accountant or Outsourcing Services

Introduction

Malaysia's corporate landscape is both dynamic and complex, with a regulatory environment designed to promote transparency and economic growth. Whether you're a domestic entrepreneur or a foreign investor, understanding accounting, tax compliance, and corporate governance is vital. Navigating the regulatory environment effectively is crucial for long-term success. This guide delves into the essential aspects of business compliance, enriched with references to authoritative Malaysian resources to provide clarity and actionable insights.

Accounting and Financial Compliance

1. Overview of Malaysian Financial Reporting Standards (MFRS)

The Malaysian Financial Reporting Standards (MFRS) are a set of accounting standards adopted in Malaysia, aligning with the International Financial Reporting Standards (IFRS). MFRS ensures businesses adopt consistent financial practices, enabling better comparability and fostering investor trust.

Key Features:

• Accrual Accounting: Recognising revenues and expenses when they are earned or incurred, regardless of when cash is received or paid.

• Going Concern Assumption: Assuming a company will continue operating in the foreseeable future.

• Fair Value Measurement: Determining the value of assets and liabilities based on their current market prices.

• Materiality: Focusing on information that is significant enough to influence the decisions of users of financial statements.

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Explore More: Visit the Malaysian Accounting Standards Board (MASB) for detailed guidelines, updates, and application notes on MFRS.

2. Financial Year-End and Circulation of Financial Statements

2.1 Fixing Financial Year-End

Choosing a financial year-end is more than a regulatory requirement—it’s a strategic decision that impacts taxation, audits, and operational planning. Businesses typically set their year-end to align with their financial cycles or regulatory reporting deadlines.

2.2 Extension of Time

In unavoidable circumstances, companies may request an extension to submit their financial statements. Applications must be made through the Companies Commission of Malaysia (SSM), supported by valid reasons and required documentation. SSM allows for extensions in certain situations, such as unforeseen delays in audit completion or exceptional circumstances beyond the company's control.

Application Process:

• Submit a formal application to SSM, clearly stating the reasons for the extension.

• Provide supporting documentation to substantiate the request.

• Ensure timely communication with auditors and other relevant parties.

  
  

Pro Tip: Early engagement with auditors and financial advisors can streamline compliance and minimise disruptions.

Tax Compliance

1. Tax Implications for Foreign Companies

Foreign investor companies operating in Malaysia are subject to various tax obligations, including corporate income tax, withholding tax, and other relevant taxes. The tax implications depend on factors such as the nature of their business operations, residency status, and the applicable tax treaties between Malaysia and their home country.

Key Considerations:

• Corporate Income Tax: Taxable income is generally subject to corporate income tax at a progressive rate.

• Withholding Tax: Tax withheld at source on payments made to non-residents for services rendered in Malaysia.

• Double Taxation Agreements (DTAs): Malaysia has entered into numerous DTAs to mitigate double taxation for foreign companies.

  
  

Where to Find More Information: Consult the Inland Revenue Board of Malaysia (LHDN) for detailed guidance on tax rates, treaties, and compliance for foreign owned entities.

2. Sales and Services Tax (SST) Registration and Compliance

Although GST was replaced with Sales and Services Tax (SST) in 2018, businesses must still understand its implications, especially for historical compliance or audits. Current SST obligations involve proper registration, accurate invoicing, and timely submission of SST returns.

Key Aspects of GST (Historical):

• Registration Threshold: Businesses exceeding a certain annual turnover were required to register for GST.

• Input Tax Credit: Businesses could claim input tax credits on GST paid on business purchases.

• Output Tax: GST charged on the supply of goods and services to customers.

  
  

Current SST Regime:

• The SST is a two-tier tax system consisting of Sales Tax and Services Tax.

• Businesses must comply with the relevant SST regulations based on their type of business and the nature of their transactions.

Where to Find More Information: Visit the Royal Malaysian Customs Department for updates on SST policies and procedures.

3. Record-Keeping Requirements

Accurate and accessible record-keeping is fundamental for regulatory and operational success. Malaysian businesses must retain records for a minimum of seven years, encompassing financial statements, tax documents, and payroll details.

Key Record-Keeping Requirements:

• Financial Records: Accounting journals, ledgers, invoices, receipts, bank statements, and other financial documents.

• Tax Records: Tax returns, supporting documents for tax deductions and claims, and records related to withholding taxes.

• Payroll Records: Employee records, payroll registers, and records related to employee benefits and deductions.

Retention Periods:

• Businesses are generally required to retain records for a minimum of seven years from the date of the transaction.

Benefits of Good Record-Keeping:

• Improved Accuracy and Efficiency: Streamlines tax calculations and financial reporting.

• Enhanced Compliance: Reduces the risk of penalties and audits.

• Better Decision-Making: Provides valuable data for business planning and analysis.

4. Tax Agent: Appointment, Termination, and Perspectives

Tax agents bridge the gap between businesses and tax authorities, offering expertise in navigating Malaysia’s tax framework. Engaging a certified agent can save costs and prevent compliance missteps.

Steps to Engage a Tax Agent:

1. Verify certifications through LHDN's directory of approved agents.

2. Define clear engagement terms, including fees and scope.

3. Establish transparent communication for ongoing tax management.

Engaging a reputable tax agent is highly recommended for businesses of all sizes. A strong working relationship with a trusted tax agent can provide valuable insights and support throughout the year.

Resource: Access the LHDN Approved Tax Agent Directory to find qualified professionals.

Annual Returns and Audits

1. Filing Annual Returns

Annual returns provide a snapshot of a company's corporate information, ownership structure, and compliance with relevant regulations. Submission to SSM must be timely and accurate to avoid penalties.

Required Information:

• Details of directors and shareholders.

• Corporate information.

• Compliance declarations.

Platform: Use the SSM Portal to submit annual returns online.

2. Audit Requirements for Private and Public Companies

2.1 Auditor Appointment and Management

2.1.1 Appointment of First Auditor

For a newly established company, the initial appointment must be completed at least 30 days prior to the deadline for submitting the first set of financial statements to the SSM.

• Appointment: The Board of Directors (BOD) typically carries out the appointment. However, if the BOD fails to do so, the shareholders of a private company can step in to appoint the auditor through an ordinary resolution.

• Qualifications: Must be a member of Malaysian Institute of Accountants (MIA) with a valid practicing certificate, successfully pass an audit interview conducted by the Accountant General's office, and secure approval from the Ministry of Finance (MOF) in accordance with the Companies Act 2016.

• Timeline: Appointed within 30 days before the first financial statement submission deadline. Should the company still fail to appoint an auditor, any member of the company has the right to request the Registrar to make the appointment on their behalf.

• Cessation: Term ends 30 days after financial statement circulation unless re-appointed.

2.1.2 Summary Process

1. Appointment by the BOD or shareholders.

2. Submission of financial statements to the SSM.

3. Automatic cessation or reappointment of the auditor’s term.

2.1.3 Terms of Office for Private and Public Company Auditors

• Private: Automatically re-appointed unless shareholders object 30 days before statement circulation.

• Public Companies: Remains in office until the next AGM.

BOD appoints replacements for casual vacancies. A previously serving auditor is not automatically re-appointed unless appointed by the BOD or through a lawful process without objections from shareholders.

2.1.4 Resignation of Auditor

Auditors may resign from their position, but the resignation must follow a structured process to ensure compliance:

• Auditor submits resignation notice to the company.

• Filing of circumstances statement (private company) or explanation (public company) within 7 days.

• Termination 21 days after receiving the notice.

2.1.5 Summary Process

1. Notice of resignation submitted to the company.

2. Filing of the statement of circumstances or explanations with relevant authorities.

3. Termination of office 21 days after the resignation notice.

2.1.6 Change of Auditor

Changing an auditor requires careful compliance with corporate laws to ensure a smooth transition:

• Initiated by shareholders or BOD.

• Appointment of a new auditor.

• Documentation with the Registrar.

2.1.7 Summary Process

1. Termination/resignation of the existing auditor.

2. Appointment of a new auditor.

3. Documentation with the Registrar.

2.1.8 Removal of Auditor

The removal of an auditor requires adherence to statutory requirements to maintain transparency:

• Shareholders can remove the auditor through an ordinary resolution at a general meeting.

• Written notice must be provided to the auditor, and the Registrar must be informed of the decision.

2.1.9 Summary Process

1. Notice of resolution by shareholders.

2. Communication with the auditor.

3. Reporting the removal to the Registrar.

Key Note: Familiarise yourself with the Companies Act 2016 to ensure compliance in managing auditors.

Outsourcing and Hiring Professionals

1. Hiring an Accountant or Outsourcing Services

Outsourcing accounting tasks can be cost-effective for small and medium-sized enterprises (SMEs), enabling access to specialised expertise without the need for full-time staff.

Factors to Consider:

1. Professional certifications (MIA membership).

2. Industry-specific experience.

3. Technological compatibility for digital accounting

Conclusion

Navigating Malaysia’s business compliance framework requires precision, strategic planning, and expert support. With the right knowledge and resources, businesses can thrive in Malaysia's vibrant economy. By leveraging the insights shared in this guide and utilising official platforms, you can confidently meet regulatory requirements while fostering growth and innovation.

Disclaimer: This guide provides general information. Always consult with local legal professionals for personalised advice tailored to your specific business needs.