My Civil Procedure lecturer would always say this: There are 2 things that are certain in this world– death and tax, even when you die, you still need to pay tax. Now, most of us would know that there are certain types of taxes we need to pay to the country i.e. Income tax, Goods and Services Tax (GST), Capital Gains Tax (CGT) but the lesser few know about Withholding tax (WHT). Withholding tax isn’t one of those tax you might incur on a daily basis but it’s good to know about it to determine whether it applies to you (or risk IRB penalties)
- What is withholding tax
Withholding tax is an amount withheld by the party making payment (payer) on income earned by a non-resident (payee) and paid to the IRB. For example, A engages B who is a foreign consultant to give consultation on a project and pays $100,000. Under the S109B Income Tax Act 1967, A would need to withhold 10% of that amount as withholding tax, paying B only $90,000. (unless otherwise agreed)
Failure to withhold by the payer would have to pay an increase in tax of a sum equal to ten percent of the amount and no deduction is given for the payment made to a non-resident payee against business income in the income tax computation of the payer
WHT only applies to services/ income and not goods. Goods would incur import duty or GST instead. Under the Income Tax Act, the various types of services that would incur withholding tax and their respective rates are (accurate at the time of writing)
2. How do I determine if I need to pay withholding tax
I’ll explain this via examples of some types of payments taxable.
i) Contract Payments
Under the Income Tax Act, it reads 107A.
(1) Where any person (in this section referred to as “the payer”) is liable to make contract payment to a non-resident contractor in respect of services under a contract, he shall upon paying or crediting such contract payment deduct therefrom tax at the rate of—
(a) 10% of the contract payment on account of tax which is or may be payable by that non-resident contractor for any year of assessment; and
(b) 3% of the contract payment on account of tax which is or may be payable by employees of that non-resident contractor for any year of assessment,
This provision was included to allow the collection at the source of tax due by non-resident contractors and professional firms engaged in services under a contract. This tax is not a final tax and will be refunded to the contractor upon finalization by the tax authorities.Payments made by Malaysian residents to non-resident contractors for services under a contract carried out and performed in Malaysia are subject to withholding tax of 13% (10% + 3%) on the service portion of the contract.
This would be akin to the example I gave above where A engages B, a foreign consultant for consultation services.
ii) Royalties and interest
Both come from the same statutory provision which is s109A of the Act.
However, the Finance Act 2017 has expanded the definition of Royalties. General understanding of the word “royalty” would encompass from common copyrights and trademarks i.e. payment to McDonald HQ for carrying out business in Malaysia using the brand “McDonald”.
Now, the definition includes any consideration for the right to use software, the reception of or the right to receive visual images or sounds transmitted to the public by satellite, cable, fibre optic or similar technology or in connection with television or radio broadcasting. Further, royalties paid for the use of or the right to use radio frequency spectrums. This is a much more comprehensive list and to my mind, would include everything and anything related to the use of others’ assets.
iii) Technical services
Amount paid in consideration of technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme is subjected to WHT. However, day to day administrative work, such as bookkeeping and other routine services (no specialized knowledge, skills or expertise are needed) does not fall under the category “administration”; those amounts are not subject to WHT.
The definition of what amounts to “technical services” has also been enlarged and increased by the Finance Act 2017. Previously, the WHT provisions for service fees, WHT would only be applicable to service fees falling within Sections 4A(i) and (ii) where the services are rendered in Malaysia. From the enactment of the Act onwards, all payments made by a Malaysian resident taxpayer to a non-resident taxpayer for technical services are subject to 10 % WHT regardless where the services are physically performed.
For example, A UK based consulting firm provides consulting services to a Malaysian taxpayer, the services have been wholly performed in Singapore. Previously, the service fee paid to the legal firm was not subject to WHT. Under the new rules, the Malaysian service recipient has to withhold 10 % WHT on the whole amount.
Now, you might be thinking why I said “unless otherwise agreed” in para 1 (and if you did, Good Job!!) and no, you cannot contract out of the Income Tax Act. This is because sometimes, especially with online advertising platforms, they ask that whatever price they name is the price you’ll pay them, and you’ll have to top up that amount as withholding tax.
As stated in Google’s Advertising Program Terms:
7. Payment. Customer will pay all charges incurred in connection with the Program… Charges are exclusive of taxes… Customer will pay (i) all taxes and other government charges ….
The formula works like this: if the advertising cost was $100,000, you would need to divide it by 0.9 and then multiply it by 0.1 and the withholding tax payable to the IRB would be $11,111. Hence, you are not entitled to say that from the $100,000, you would withhold 10% making it $10,000 but you would need to spend additional resources for the payment, making an additional burden because you’ve agreed to take on the supplemental cost.
If you’re interested more about taxing on online advertisement, you can read more here and here which talks more about Facebook and Google adverts where it is unclear whether the WHT is under royalties or technical services.
Teaser: next week I’ll be writing on the largest fine the EU Competition Commission has ever imposed on a single entity so stay tune!
- HLB Malaysia, Malaysia Understanding Withholding Taxes
- Techmonitor, Understanding Withholding Tax
- Azmi & Associates, Withholding tax in Malaysia
- Deloitte, International Tax Malaysia Highlights 2017
- Malaysia Luther News, Malaysia Enacts Finance Act 2017 – Expanded Scope of Withholding Tax
- KPMG: Malaysia: Withholding tax, royalty and service fee payments to non-residents