What Employers Need To Know Before Agreeing To Pay An Employee's Tax

Income tax remains a personal liability of an employee under Malaysian law, and this does not change simply because an employer agrees to pay it on the employee's behalf. Such arrangements are common in remuneration packages, particularly for foreign talent, but they carry tax and compliance consequences that employers should understand before making that commitment.

When an employer bears an employee's income tax, whether in full or in part, the amount paid is treated as a benefit received by the employee, known as a perquisite, under paragraph 13(1)(a) of the Income Tax Act 1967. This forms part of the employee's taxable income, effectively creating an additional layer of tax on the amount paid by the employer. Since the actual tax liability for a year can only be determined after that year ends, the benefit is taxable only in the following year.

Where a company bears only part of an employee's tax, only that portion is treated as taxable. If an assessment is subsequently revised, whether reduced because of a previously unclaimed relief or increased following an audit, the benefit previously recognised may need to be recalculated. Any additional tax borne by the employer becomes a fresh perquisite in the year the revised assessment is raised. Likewise, any late filing penalties borne by the employer are treated in the same manner as the tax itself.

If the employee eventually leaves Malaysia permanently, special timing rules apply. The final year's employment income and tax benefit may be brought forward into the year of departure, potentially having a significant impact on the employee's final tax computation.

None of this removes the employer's own compliance obligations. The appropriate monthly tax deduction must be applied to any perquisite through payroll. Where an employee is leaving Malaysia, the employer must notify the tax authority in advance and withhold the employee's final monies until tax clearance is obtained. Regardless of who bears the cost, the employer remains responsible for ensuring that the tax is settled, and failure to comply may result in the employer becoming personally liable for the outstanding tax as a debt due to the Government.

A tax-borne arrangement is therefore never a one-off cost, but a recurring obligation that requires proper annual budgeting and ongoing tax compliance.

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