WITHHOLDING TAX

INTRODUCTION
Imposed on non-residents on services rendered by them.
The payer as an agent, to withhold a portion of the payment
‘withholding tax’ and pay to the tax authorities.

Net payment

Non-resident

Withholding tax

Payer
Tax authorities

SCOPE OF WITHOLDING TAX
Withholding tax is only restricted to the following types of payment made to non-resident:
(a)
(b)
(c)
(d)
(e)
(f)

Special classes of income (S 4A)
Interest (S 15)
Royalty (S 15)
Contract payment (S 107)
Public entertainer (S 109A)’
Other income in S4(f) (S15B)

Type of Income

Charging Section

WT Section/Rate

Interest

3/4(c)

109 - 15%

Royalty

3/4(d)

109 - 10%

Contract payment

3/4(a)

Public Entertainer Rem.

3/4(a)/4(b)

109A - 15

Special classes of income

4f

109B - 10%

Non-Exempt Interest to individual 4(c)

109C - 5% resident

NR

R

107A - 10%+3%

Sec. 4A Income.
Interest.
Royalty.
Contract Payment.
Public Entertainer’s.
Remuneration.

Net Payment
Payer

NonResident

•Within 1 Month of
Paying or Crediting.
•Crediting means
“making available to” and not crediting in the accounting sense.

Tax
Authorities

SCOPE OF WITHOLDING TAX
The non-resident would only be liable for withholding tax if all the following factors are present:
(i) The recipient is a non-resident;
(ii) The income has to be one of the categories in the scope;
(iii) Such income has to be deemed derived from Malaysia;
(iv) The income is not attributable to a business carried on by the non-resident in Malaysia;
(v) The income is not exempted by Sch 6 of the Act or double taxation agreement between Malaysia and the non-resident’s home country.

RESPONSIBILITY OF THE TAX PAYER
The tax payer is the agent for the non-resident. When the payer:
a) Made payment to the non-resident; or
b) Credit such payment to the non-resident, he shall within one month after paying or crediting such payment, pay the amount of withholding tax to the DG.

ROYALTY
• Definition (Section 2)
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 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.

ROYALTY
• Derivation of income (Section 15)
Royalty income is deemed to be derived from
Malaysia:
a) if responsibility for payment of the royalty lies with the Government, a State Government or a local authority; or
b)
if responsibility for payment of royalty in the basis year for a YA lies with a person who is resident for that basis year; or
c)
if the royalty is charged as an outgoing or expense against any income accruing in or derived from Malaysia.

Royalty
Y
N

Received By NR
Y

Deemed Derived From Malaysia

N

Y

Not Attributable To A Business
Carried On In Malaysia

N

Y

Non-Exempt Income (As per ITA or DTA)
Y

Deduct WT- 10% (May Be Reduced Based
On DTA) - as Final Tax

N

No WT

ROYALTY
DEDUCTION OF WITHOLDING TAX (SECTION 109)
Non-resident will only receive the net royalty income
(90%).
Deduct 10% of the royalty as withholding tax, shall be paid within one month.
Withholding tax represents the final tax of the nonresident.

ROYALTY
• Withholding tax would not apply if the royalty income is attributable to a business carried on by the non-resident in Malaysia
• Non-resident branch is set-up in Malaysia.

Example
AB Sdn Bhd, a company resident in Malaysia, manufactures computers for export. On 14.2.2015, it entered into an agreement with XY Ltd., a foreign company for the transfer of technical know how and assistance. An amount of RM80,000 royalties will be payable on 10.12.2015 to XY Ltd.
Discuss the withholding tax requirement.
The recipient, XY Ltd is a NR and the royalty income is deemed derived from Malaysia because the responsibility for the royalty payment lies with a resident person, that is AB Sdn Bhd.
The WHT amount would be 10% of the royalty, which is RM8,000
On 10.12.2015, the amount payable to XY Ltd will be net of WHT, that is
RM72,000.

The WHT of RM8,000 must be paid to tax authorities not later than
9.1.2015.

Continue from example….
If the amount of royalty is paid to Malaysian branch of XY
Ltd, withholding tax does not apply as the royalty income is attributable to a business carried on in Malaysia.

ROYALTY
PENALTY FOR NON-COMPLIANCE
W.e.f. 2.9.2006, failure to pay the withholding tax (the 10% portion) within one month will cause a 10% penalty on the unpaid or outstanding withholding tax.

Gross royalty income
Less: WHT @ 10%
Net amount payable to NR
WHT payable to tax authorities
Penalty for late payment – after one month:
Increase in debt due (10% x RM100)/ (10% x RM1,000)
Debt due to Government

RM
1,000
(100)
900
100

10
110

Penalty For Non-Compliance
• Amount shall be a debt due to government.

• Late penalty interest may be imposed - 10% of the gross royalty.
• Gross royalty not deductible until WT + penalty is paid.

Deduction of Tax from Royalty/Interest to
Non- Resident Contractor ( S109)
Deduction at the Appropriate Rate & remit to
DG within 1 Month after Paying/crediting

N/B:
No deduction on Exempted Royalty

Exempted Royalty
• Royalties approved by MOF under sec. 127 of ITA.
• Approved Industrial Royalties.
 Approved by MOF.
 For the purpose of promoting industrial development in Malaysia.

 Payable by an enterprise engaged in the following sectors:
manufacturing, assembling, or processing;
construction, civil engineering, ship-building; and
electricity, hydraulic power, gas or water supply.

INTEREST
• What is Interest:
• Compensation for delayed payment.
• Payment by reference to time for the use of money.

• Charge for the use of a loan.

INTEREST
DERIVATION OF INCOME (Section 15)
Interest income is deemed to be derived from Malaysia:
(a) If responsibility for payment of the interest lies with the Government, a State Government or a local authority; or
(b) (i) if responsibility for payment of the interest in the basis year for a YA (the responsibility of any guarantor being disregarded) lies with a person who is resident for that basis year; and
(ii) it is payable in respect of money borrowed by that person and employed in or laid out on assets used in or held for the production of any gross income of that person derived from
Malaysia or the debt in respect of which the interest is paid is secured by any property or asset situated in Malaysia.
(c) If the interest is charged as an outgoing or expense against any income accruing in or derived from Malaysia.

Interest
Y
N

Received By NR
Y

Deemed Derived From Malaysia

N

Y

Not Attributable To A Business
On In Malaysia

N
Carried

Y

Non-Exempt Income (As per ITA or DTA)
Y

Deduct WT- 15% (May Be Reduced Based
On DTA) - Final Tax

N

No WT

INTEREST
ANALYSIS ON REASON OF BORROWINGS;
Employed in
(i) Money borrowed PAYMENT
BY RESIDENT
AND
PERSON

used

or

Laid out on assets held

For the production of
Malaysian
derived income (ii) The debt is secured by property/ asset situated in
Malaysia.

Example:
Springice Sdn Bhd (tax resident) is presently developing a theme park in
Sg. Buloh, Selangor. During the year ended 30.6.2015, the company made a payment of RM350,000 to Mr. Winstley, a resident of Australia, being interest on the RM10 million loan at the rate of 3.5% per annum. The loan is used as working capital of the company.
Discuss the WHT requirement.
Mr. Winstley is a NR, deriving interest income from Malaysia because the responsibility for paying the interest income lies with Springice (tax resident) who has used the loan in the production of Malaysian derived income. The WHT would be RM52,500 (15% of RM350,000) & Mr. Winstley will only receive the net amount, RM279,500. The WHT of RM52,500 must be paid to the tax authorities within one month after the payment is made or credited to Mr. Winstley.

INTEREST
DEDUCTION OF WITHHOLDING TAX
15% of the interest is the withholding tax, shall be paid within one month.
Non-resident will only receive 85% of the gross interest income Represents the final tax of the non-resident.

INTEREST
PENALTY FOR NON-COMPLIANCE
W.e.f. 2.9.2006, failure to pay the withholding tax (15% portion) within one month will cause a 10% penalty on the unpaid or outstanding withholding tax.
Example:
Interest Paid to NR =

RM 3,000

Tax: RM 3,000 @ 15%
Penalty: RM 3,000 @ 10%
Total Amount

= RM 450
= RM 300
= RM 750

PUBLIC ENTERTAINERS
REMUNERATION
DEFINITION

- A stage, radio or television artiste, a musician, athlete or an individual exercising any profession, vocation or employment of a similar nature.
- Includes benefits-in-kind from part of the fees paid to the public entertainer.

PUBLIC ENTERTAINERS REMUNERATION
DERIVATION OF INCOME (Section 13)
Gross income in respect of gains or profits from an employment of a public entertainer:
a) For any period during which the employment is exercised in
Malaysia;
b) For any period of leave attributable to the exercise of the employment in Malaysia;
c) For any period during which the employee performs outside
Malaysia duties incidental to the exercise of the employment in Malaysia,

Shall be deemed to be derived from Malaysia.

Public Entertainer’s
Remuneration
Y
N

Received By NR
Y

Deemed Derived From Malaysia

N

Y

Not Attributable To A Business
Carried On In Malaysia

N

Y

Non-Exempt Income (As per ITA or DTA)
Y

Deduct WT- 15% - Final Tax

N

No WT

PUBLIC ENTERTAINERS REMUNERATION
DEDUCTION OF WITHOLDING TAX

Deduction of 15% from gross amount
Payable within one month after paying or crediting such remuneration to the public entertainer.
PENALTY FOR NON-COMPLIANCE
W.e.f. 2.9.2006, failure to pay the withholding tax
(15% portion) within one month will cause a 10% penalty on the unpaid or outstanding withholding tax. Exempted Remuneration

• The 60-day exemption rule does not apply unless the visit is supported by the public funds of the government of a country outside Malaysia.

SPECIAL CLASSES OF INCOME
• Income falling under section 4A of the Income Tax Act
1967 (as amended)
– There are three sub-categories which must be clearly understood in the application of withholding taxes
– Very briefly the categories are:
• Payments for technical services
• Payment for technical advice
• Rent

Sec 4A
(i)
Any consideration for services rendered by him or his employee in connection with the use of property or rights belonging to, or the installation or operation of any plant, machinery or other apparatus purchased from the non-resident;
(ii)
Any consideration for technical advice, assistance, or service rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme;
(iii) Rent or other payments made under any agreement or arrangement for the use of any movable property.
*

Movable properties which include oil rigs, boats, ships, motor vehicles, aircraft or other plant and machinery.

Sec 4A
The following payments or charges do not attract WT provided that such payments or charges are incurred for ordinary day to day administration or management services:
Head office costs allocated to Malaysian branch.
Management fees paid by a Malaysian subsidiary to its parent company. Payments for share of costs by a Malaysian branch to its head office.
Payments for share of costs by a Malaysian subsidiary to its parent company. Sec 4(A) – Interpretations
‘Technical’ is interpreted to include all form of legal, professional and consultancy fees.
Routine day to day management and administrative services are not “technical in nature”, as thus do not attract WT.
Withholding tax will be imposed on s4A (i) and (ii) payment , if services are performed in Malaysia.

4A(i) and 4A(ii)
Y

Services Performed In Malaysia

N

Y
N

Received By NR
Y

Deemed Derived From Malaysia

N

Y

Not Attributable To A Business
Carried On In Malaysia

N

Y

Non-Exempt Income (As per ITA or DTA)
Y

Deduct WT- 10% - Final Tax

N

No WT

4A(iii)
Y
N

Received By NR
Y

Deemed Derived From Malaysia

N

Y

Not Attributable To A Business
Carried On In Malaysia

N

Y

Non-Exempt Income (As per ITA or DTA)
Y

Deduct WT- 10% - Final Tax

N

No WT

SPECIAL CLASSES OF INCOME
DEDUCTION OF WITHHOLDING TAX
10% withholding tax on the gross amount
Shall be paid to the tax authorities within one month
Represents final tax of the non-resident
The payment to non-resident includes non-refundable deposit and advance payment.

PENALTY FOR NON-COMPLIANCE
W.e.f. 2.9.2006, failure to pay the withholding tax (10% portion) within one month will cause a 10% penalty on the unpaid or outstanding withholding tax.

CONTRACT PAYMENT
Payment for services under a contract “Contract Payment In Respect Of Services
Rendered Under A Contract”.
Advisory,
consultancy, technical, industrial, commercial or scientific service.

Performing or rendering of work or professional service in
Malaysia.

Income Type: Contract Payment

Y

N

Received By NR
Y

Deemed Derived From Malaysia

N

Y

Non-Exempt Income
(As per ITA or DTA)

N

Y

Deduct WT - 10% (MSP) + 3% (MSP) Interim Tax

No WT

Note:
MSP= Malaysian Service
Portion

“If not attributable to operations of the business carried on outside Malaysia
i.e the services have to be performed in Malaysia”.

Sec 12 of ITA

WT Sec
107A

Service Portion

NonMalaysian

Cost of Materials &
Equipment

Malaysian

No WT Sec
107A

Design & drawing works

Offshore

Onshore

Installation &
Supervisory

Sec 107A
WT

CONTRACT PAYMENT
DERIVATION OF INCOME
Section 107A levy tax on the non-resident contractors Established permanent establishment in Malaysia (treaty partners)
Business presence in Malaysia (non-treaty countries). Contract services must be performed in
Malaysia

RATE OF WITHHOLDING TAX
10% - non-resident contractor’s tax liabilities
CONTRACT
PAYMENT

3% - tax of the employees of the non-resident contractor

* Remit To DGIR Within 1 Month After Paying or
Crediting.

CONTRACT PAYMENT
• The withholding tax paid (10% on nonresident contractor) is not a final tax
• Non-resident contractor needs to prepare a tax computation to ascertain the final tax liability based on corporate tax of 25% on the chargeable income)

Tax computation of non-resident contractor;
YA 2015

RM

Section 4(a) Construction business

Gross income

xx

Less: Revenue expenses wholly and exclusively incurred

(x)

Adjusted income

xx

Less: Capital allowance

(x)

Statutory income

xx

Less: Approved donation (restricted to 10% of aggregate income)

(x)

Chargeable income

xx

Income tax payable @ 25%

xx

Less: 10% tax deducted from contract payment

xx

Net income tax payable

xx

Permanent Establishment
•Fixed place of business.

•A place of management.
•An office.
•A factory.
•A workshop.
•A mine, oil or gas well, quarry or any other place of extraction of natural resources.

Permanent Establishment
•A building site or construction, installation or assembly project which exists for more than 6 months.
•Farm or plantation.
•Supervisory activities are carried on for more than 6 months in connection with a construction, installation or assembly project.

Agency Relationship

Agent is dependent?
Y

Appointment of agent establishes a PE.

•Can conclude contract in the name of enterprise; or
•Maintains a stock of goods from which he fills orders or delivers goods; or
•Manufactures or processes goods belonging to the enterprise for that enterprise.