anytime It is important to note that where payments are made to non-residents, the paying entity (whether a company or not) is required to deduct tax at source.
Failure to withhold tax can have serious consequences, including the payer being denied a tax deduction for the expenditure and being assessed a 10% late fee, as well as penalties for under-reporting tax.
Effectively, if there is a 10% withholding tax to be deducted on an expenditure of RM100, failure to deduct could result in additional tax and penalties of about RM45.If the payer pays the withholding tax after the due date, his or her liability is limited to about RM21.Not deducting withholding tax can be costly.
The importance of deducting the correct withholding tax
The majority of withholding taxes in the Malaysian tax system are 10%, except for payments to non-resident contractors with a place of business in Malaysia, which are 13%, and interest payments to non-residents, which are 15%. The 10% withholding tax applies to special types of income such as royalties, payments for services provided in Malaysia, and rental of movable property. The rate may be reduced under tax treaties.
Services and Contract Payments
There is a lack of understanding to differentiate between 13% withholding tax and 10% withholding tax because if you read the law superficially, it looks like there is an overlap. If you look carefully at the law and basic principles, there is no overlap.
The answer lies in the fact that where services are provided in Malaysia for a period of time and business activities are carried out in Malaysia, the establishment of a business base or permanent establishment in Malaysia will be triggered under the double taxation treaty.
Where the business location or permanent establishment is triggered, the withholding tax deductible is the contractor’s 13% withholding tax under section 107A, which is collected as payment of the contractor’s and its foreign employees’ tax liability in Malaysia. Foreign contractors are required to file tax returns in Malaysia for the activities they carry out in Malaysia.
If a foreign contractor does not have a place of business or permanent establishment in Malaysia, services provided in Malaysia are subject to a 10% withholding tax, which is generally considered a final tax and does not require the filing of a tax return in Malaysia.
From a payer’s perspective, if they deduct 10% withholding tax instead of 13% withholding tax, the Inland Revenue Board (IRB) may reject the full payment on the grounds of misdirection and impose the associated penalties.
Loyalty and Service
If the payment falls within the definition of royalties, such as payments for the use or right to use copyrights, patents, software, trademarks, designs, models, secret processes, know-how, etc., there is a 10% withholding tax on each payment made to a non-resident.
The payee will be an overseas payee and the IRB’s position at present is that royalty withholding tax applies when payments are made to digital services such as Facebook, Google and Amazon.
However, if these services are considered pure services that do not involve the use or copyright of software and the services are provided from outside Malaysia, the payer is not required to deduct tax at source.
Currently, taxpayers are at odds on this issue. Unless these matters are litigated in Malaysia’s Supreme Court, the IRB will likely have the upper hand on this issue and insist on collecting royalty withholding tax.
This article was contributed by SM Thanneermalai, managing director of Thannees Tax Consulting Services Sdn Bhd (www.thannees.com).
