Petroleum Income Tax: A Separate Regime from Corporate Tax

An oil company drilling off Terengganu and a factory in Shah Alam both pay tax to Malaysia — but they do not pay it under the same law. Upstream petroleum income lives in a walled-off regime of its own, with its own rate, its own return, and its own rulebook.

Why is petroleum taxed under a separate law?

Since 1967, Malaysia has taxed income from winning petroleum under a dedicated statute rather than the ordinary business-income code. The Petroleum (Income Tax) Act 1967 (PITA) is, in its own words, “An Act to impose a tax upon income from the winning of petroleum in Malaysia.”

So a company with petroleum operations — defined in Section 2 as “searching for and winning or obtaining of petroleum in Malaysia” — is assessed under PITA on that income. Any non-petroleum activity it runs is taxed separately under the ordinary Income Tax Act 1967. The two streams do not mix, and PITA’s ring fence stops upstream profits from being sheltered by unrelated losses.

The definition deliberately stops at the wellhead-to-market chain. Section 2 excludes transporting petroleum outside Malaysia and any process of refining or liquefying it — those downstream activities fall back under normal corporate tax.

What is the rate?

38%. Section 23(1) of PITA states the chargeable tax “shall be an amount equal to thirty-eight per cent of his chargeable income for that year of assessment.” That is markedly higher than Malaysia’s standard corporate rate of 24%.

Upstream activity	Effective petroleum income tax rate
Standard petroleum operations	38%
Qualifying marginal fields	~25%
Qualifying late-life asset PSCs	25%

How do the reduced rates work?

The 38% headline is not the whole story. Two targeted reliefs pull the effective burden down for harder-to-produce fields:

• Marginal fields. An exemption of a portion of chargeable income reduces the effective rate from 38% to about 25%, encouraging development of smaller or costlier discoveries.
• Late-life assets (LLA). Contractors that sign a late-life asset production-sharing contract between 1 January 2020 and 31 December 2029 get a 25% rate, plus an accelerated capital allowance (a 20% initial allowance and a 40% annual allowance on qualifying plant) and the ability to carry decommissioning losses back to the two preceding years of assessment.

Both reliefs sit inside PITA rather than the corporate code — they change the size of the taxable base or the pace of allowances, not the fundamental fact that this is petroleum tax.

Who actually pays it?

The “chargeable person” under PITA is typically the production-sharing contractor (PSC) or Petronas-linked entity actually winning petroleum, filing its own petroleum return and computing capital allowances on qualifying petroleum expenditure. That upstream income is charged at the 38% PITA rate rather than the ordinary corporate rate.

What’s next

If you also need the ordinary side of the ledger, read the companion note on Malaysia’s standard corporate income tax. For upstream planners, the exact marginal-field and LLA conditions are set out in the PITA subsidiary regulations and PETRONAS guidelines — confirm eligibility and filing deadlines with LHDN and a licensed tax adviser before relying on any reduced rate.