[NgauNgau38]

Hi, I'm a Malaysian. It is said that a company should pay double taxation because corporate income is taxed and the dividend paid is also taxed under personal income. But I don't understand, how could it be double taxation? I'll give an example to illustrate:
A company makes an annual profit of RM100,000,000, tax rate 25%, hence profit after tax is RM75,000,000.
Say, the company has only one shareholder and the company utilize all of its profits as dividends. The shareholder received RM75,000,000. To compute tax, the dividend is calculated at gross (RM100,000,000). Say, his tax rate is 20%. He is supposed to pay RM20,000,000 (RM100,000,000 x 20%). But since the company had already paid RM25,000,000 as tax, the shareholder can claim for refund of RM5,000,000 from the government. Hence, in the end, the govt only receive RM20,000,000 tax revenue (which is the tax that is supposed to be paid by the shareholder). How could it be double taxation then? In the end, the govt. only receives the shareholder's dividend tax revenue but not the company.
I would be so grateful if somebody would help me to solve my problem. Thank you.

[morgaine300]

I don't know if you're confused or if that's a Malaysia thing. That isn't the way it works in the U.S.

Assuming this shareholder is an individual, the tax on the dividend is going to be on the 75,000,000, or 15,000,000. There is no refund. The government gets 40,000,000. (Of course, the rates aren't right, but you get the idea.)

So the 75,000,000 in dividends that the shareholder has to pay tax on was already part of the taxable income the corporation paid tax on. Hence, double taxation. Obviously, it's not literally "double." I just did an example using 2010 rates, with the taxable income being $1,000,000. This was not taking into consideration any special exemptions or anything, but the total tax between corporation and individual added up to 54% total. See, our government is taking all the money. (And that was only federal.)

I've never really thought of it in this same sort of way though. Yes, the corporation pays tax, then the shareholder pays tax on a bit smaller portion. That's just concentrating on that one situation. There's tax all over the place. I have tax taken out of my income, the company has to pay extra taxes on me, I go spend my money and pay sales tax, and I'm giving that money to yet another company that has to pay tax yet again, and pay employees who all have taxes taken out. It just goes around in a big circle, with money being taxed a billion times anyway.

With the government finding more and more ways to try to tax people. (And trust me, it isn't just the rich.)

[NgauNgau38]

I don't know if you're confused or if that's a Malaysia thing. That isn't the way it works in the U.S.

Assuming this shareholder is an individual, the tax on the dividend is going to be on the 75,000,000, or 15,000,000. There is no refund. The government gets 40,000,000. (Of course, the rates aren't right, but you get the idea.)

So the 75,000,000 in dividends that the shareholder has to pay tax on was already part of the taxable income the corporation paid tax on. Hence, double taxation. Obviously, it's not literally "double." I just did an example using 2010 rates, with the taxable income being $1,000,000. This was not taking into consideration any special exemptions or anything, but the total tax between corporation and individual added up to 54% total. See, our government is taking all the money. (And that was only federal.)

I've never really thought of it in this same sort of way though. Yes, the corporation pays tax, then the shareholder pays tax on a bit smaller portion. That's just concentrating on that one situation. There's tax all over the place. I have tax taken out of my income, the company has to pay extra taxes on me, I go spend my money and pay sales tax, and I'm giving that money to yet another company that has to pay tax yet again, and pay employees who all have taxes taken out. It just goes around in a big circle, with money being taxed a billion times anyway.

With the government finding more and more ways to try to tax people. (And trust me, it isn't just the rich.)

Thanks for your answer. Erm, it's the Malaysian way to compute tax this way. That's why I don't understand, how could it be double taxation? I've always thought double taxation was this way, I mean, the way you compute it, taxing the shareholder on the taxable income, until I learnt this way (the way in my example) in my Basic Taxation recently.

About you thinking, haha, I guess you're right, that's how govt. earns anyway...

[ArcSine]

It appears that Malaysia, until recently, had a sort of 'modified' double-tax arrangement. The government would indeed take two bites; once at the corporate level, and then another tax on the after-tax corporate profits as they were distributed to shareholders as dividends.

The 'modification' was an mechanism to mitigate the double-tax hit, by allowing the shareholder to claim a credit for the tax that had been originally paid at the corporate level (just as NgauNgau described in the first post). In essence, there'd first be a corporate-level tax, then a shareholder-level tax, then finally a shareholder-level credit that reversed the corporate tax. End result: Single layer of tax.

But apparently (here... http://www.micpa.com.my/micpastudent...1-10112008.pdf ) this arrangement was deemed too clumsy, and Malaysia went to a simpler single-tier (corporate-level-only) tax system.

[morgaine300]

I read that first post over again and realized I completely missed something. The company was first taxed 25,000,000. Then the stockholder was taxed 20,000,000 but then gets a refund of 5,000,000. So the net amount the stockholder pays is 15,000,000, PLUS the original 25,000,000 the company paid.

That in fact, comes out exactly the same as how we'd do it, except it's more convoluted. The difference is the stockholder is paying on the entire pre-tax income but then getting a refund of the tax expense portion of it. i.e. that 5,000,000 refund is the tax on the original corporation tax. Which comes out exactly the same is if they just taxed the 75,000,000 to begin with.

Instead of really looking at the math, I was paying attention to that "gov't only gets 20 million" thing, plus the weird way they go about it -- just sort of went over my head.

(And "clumsy" is certainly what it is!)