What is withholding tax?
Withholding tax is an amount withheld by the 3 rd party making payment (payer) on income earned by non-resident (payee) and paid to the Inland Revenue Board of Malaysia (IRBM).
The Income Tax Act, 1967 provides that where a person (referred herein as “payer”) is liable to make payment as listed below (other than income of non-resident public entertainers) to a non-resident person (NR payee), he shall deduct withholding tax at the prescribed rate from such payment and (whether such tax has been deducted or not) pay that tax to the Director General of Inland Revenue within one month after such payment has been paid or credited to the NR payee.
|PAYMENT TYPE||INCOME TAX ACT 1967||WITHHOLDING TAX RATE||PAYMENT FORM|
|Contract Payment||Section 107A(1)(A)||10%||CP 37A|
|Interest||Section 109||15%||CP 37|
|Royalty||Section 109||15%||CP 37|
|Special classes of income||Section 109B||CP 37D|
|Interest (except exempt interest) paid by approved financial institutions||Section 109C||5%||CP 37C|
|Income of non-resident public entertainers||Section 109A||15%||Payment memo issued by Assesment Branch|
|Real Estate Investment Trust (REIT)||Section 109D||CP 37E|
|Effective from 01.01.2007|
|Family Fund/ Takaful Family Fund/ Dana Am||Section 109E||CP 37E(T)|
|Income under section 4(f) ITA 1967||Section 109F||10%||CP 37F|
Among the above stated types of withholding taxes, the most common withholding taxes incurred among companies are:-
- RoyaltyAccording to IRBM, royalty is defined as “any sums paid as consideration for the use of or the right to use:
- Copyrights, artistic or scientific works, patents, designs or models, plans, secret processes or formulae, trademarks or tapes for radio or television broadcasting, motion picture films, films or video tapes or other means of reproduction where such films or tapes have been or are to be used or reproduced in Malaysia or other like property or rights.
- Know-how or information concerning technical, industrial, commercial or scientific knowledge, experience or skill.
- Income derived from the alienation of any property, know-how or information mentioned in above paragraph of this definition.”
The gross amount of royalty paid to a NR payee is subject to withholding tax at 10% (or any other rate as prescribed under the Double Taxation Agreement between Malaysia and the country where the NR payee is tax resident). This is a final tax.
- Special class of incomeAccording to IRBM, “special classes of income include:
- Payments for services rendered by the NR payee or his employee in connection with the use of property or rights belonging to or the installation or operation of any plant, machinery or apparatus purchased from the NR payee.
- Payments for technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme or
- Rents or other payments (made under any agreement or arrangement) for the use of any moveable property.
Provided that in respect of paragraph (a) and (b), this section shall apply to the amount attributable to services which are performed in Malaysia.”As defined, only technical services are imposed with withholding tax. Thus, any material/ purchase imported or exported is not subject to withholding tax.The gross amount of “Special Classes of Income” paid for the above services rendered by a NR payee is subject to withholding tax at 10% (or any other rate as prescribed in the Double Taxation Agreement between Malaysia and the country in which the NR payee is tax resident). This is a final tax.However, since 17 th January 2017, withholding tax for technical services is no longer limited to services performed in Malaysia. Thus, income derived by a non-resident under Section 4A (i) and (ii) of the ITA 1967 deemed derived from Malaysia irrespective whether the services were performed in Malaysia or outside Malaysia.
Remittance of withholding tax
The payer must, within one month after the date of payment / crediting of the payment to the NR payee, remit the withholding tax (whether deducted or not) to the Inland Revenue Board Malaysia. Failure to pay withholding tax within the stipulated period will be imposed an increase in tax of a sum equal to 10% of the amount he fails to pay.
Besides, there will be no deduction given for the payment made to NR payee against the business income incurred by him.
Double Taxation Agreement (DTA)
DTA is an agreement or a contract regarding double taxation or, more correctly, the avoidance of double taxation. It is an agreement signed by 2 countries to avoid or alleviate territorial double taxation of the same income by the 2 countries.
Below are some of the examples of DTA for royalties and technical fees:
|COUNTRY||WITHHOLDING TAX RATE (%)|
|France||10 or N/A||10|
Does withholding tax impose on Facebook and Google advertising?
What made most taxpayer confused is whether Facebook and Google advertising is chargeable with withholding tax. After some debates and confusions, it is then been concluded by IRBM that Facebook and Google advertisement fall under the scope of royalty and is subject to section 109 of the ITA 1967. This is because, Facebook and Google advertising is more like the usage of self-service software. The user does not need to manually serve and it’s all done by the software, hence, it should be classified under royalty instead of services.
Instead of the standard 10% withholding tax for royalty, DTA does applied for this. Facebook is billing from Ireland whereas Google is billing from Singapore. Thus, only 8% withholding tax is imposed for both Facebook and Google advertisement:
Does withholding tax imposed for online payment made to NR payee?
Yes. Any withholding tax incurred by taxpayer must be remit to IRBM within the stipulated period even though payment is made through online banking.