What is Withholding Tax?
What is Withholding Tax ?
- Withholding tax is an amount that is withheld by the payer on income earned by a payee who is not a resident in Malaysia.
- The amount is then paid to the Inland Revenue Board of Malaysia (IRBM).
- Definition : Payer – individual that conducts business in Malaysia.
- Definition : Payee – non-resident individual in Malaysia that receives the payments.
- Withholding tax is required on payments for services rendered/technical advice/rental or other payments made under any agreements for the use of any movable property and paid to a payee.
Withholding Tax Breakdown
How to Calculate Withholding Tax?
- Based on the Income Tax Act 1967
- Payer will deduct withholding tax at the rate listed regardless if the text has been deducted or not, the payment of tax has to be made to the Director General of Inland Revenue within one month after such payment types has been paid/ credited to the Non-Resident payee
- A person (the payer) is accountable to make the payments listed in the table below:
| Payment Type | Income Tax Act 1967 | Withholding Tax-Rate | Payment Form |
|---|---|---|---|
| Contract Payment | Section 107A (1) (a) & 107A (1) (b) | 10%, 3% | CP 37A |
| Interest | Section 109 | 15% | CP 37 |
| Royalty | Section 109 | 10% | CP 37 |
| Special classes of income: Technical fees, payment for services, rent/payment for use of moveable property | Section 109B | 10% | CP 37D |
| Interest (except exampt interest) paid by approved financial institutions | Section 109C | 5% | CP 37C |
| Income of non-resident public entertainers | Section 109A | 15% | Payment memo issued by Assessment Branch |
Real Estate Investment Trust (REIT)
|
Section 109D | 10%, 25%, 10% | CP 37E |
Family Fund/Takaful Family Fund/Dana Am
|
Section 109E | 8%, 25% | CP 37E(T) |
| Income under Section 4(f) ITA 1967 | Section 109F | 10% | CP 37F |
- All payments must be made with the relevant completed forms, along with a copy of invoices issued by the non-resident payee and copy of payment documents as proof of payment date/crediting date
- Forms must be completed with the correct Malaysian Tax Reference Number for the payer, payee, as well of payee’s country of origin
- Reference number for payee can be acquired from:
Director
Non Resident Branch
Customer Services Unit
3rd Floor Left, Block 8
Government Office Complex
Jalan Duta, 50600 Kuala Lumpur,
what happens if i do not pay withholding tax?
- Payer fails to pay withholding tax at the instructed rate
- Payer pays withholding tax late (not within the one month period)
- Payer fails to pay increase tax imposed for late payment or for failure to pay withholding tax
- When payer fails to pay the withholding tax or pays it late, an increase in tax is imposed upon him
- Payer pays withholding tax late (not within the one month period)
Interest paid to NR payee on 03/08/2006 = RM20,000
Withholding tax received by IRBM on 10/09/2006 later than 02/09/2006 = RM2000
Increase in tax imposed on payer (2000 @ 10 %) = RM200
Effective from 02/09/2006
Digital Advertising Tax
8% Withholding Tax For Google And Facebook Advertising
In January 2017, the government made a change in the Withholding Tax Scope. As of January 2017, both onshore and offshore payment services like advertising on Google and Facebook. This means that withholding tax is imposed on these services regardless of where these services are physically performed.
The definition of royalty has also been expended to include software product and satellite communication services.
But the main confusion is regarding digital advertising. Digital advertising falls under the class of “payment for service” which makes the withholding tax rate:
- 0% rate for Google Singapore (DTA exemption with Singapore)
- 10% rate for Facebook Ireland. (no DTA exemption with Ireland)
However, Google and Facebook should pay an 8% Digital Advertising Tax, because it is classified as royalty, not as payment for services. This is because it is considered a “self-service software.”
According to LHDN, royalty is defined by any sums paid for the right to use:
- Copyrights, artistic, scientific works, patents, plans, formulas, trademarks for broadcasting or reproduction of other property.
- Know-how or information related to technical, industrial, commercial, and scientific knowledge.
- Income obtained from the use of any property, know-how or information related to technical, industrial, commercial, and scientific knowledge
Google Adwords lets advertisers to create their own advertising campaign and run it themselves, making it “self-service”.
Meaning , Google and Facebook does not serve you directly but the ad software does.
Therefore, payment for Google and Facebook is now defined as royalty for the use of self-service Google AdWords and Facebook Business Manager respectively.
Referring back to the Double Taxation Agreement (DTA), royalties are charged at 8% withholding tax for both Facebook and Google.
A DTA is an agreement between two counties allowing the administration to eliminate double taxation. In this scenario the DTA is to avoid revenues generated by Google in Malaysia form being taxed by the IRB in Malaysia and also Singapore.
You can check the DTA table at the LHDN website to find out that rate of withholding tax that you have to pay.
- The invoice issued by Google & Facebook are not allow to withhold 8% when you are making payment, therefore you need a formula to calculate the withholding tax by google & facebook as below :
Withholding tax = Invoice amount / 0.92 x 0.08 - Example:
Withholding tax = Invoice Amount (RM 100,000) / 0.92 x 0.08 = RM 8695.65
- 10% late payment penalty
- Ineligibility to claim advertising cost as your business expenses in your annual return
- At least 45% penalty on tax avoidance, according to Section 113(2) of ITA 1967
Types and Rates of Payment
- 1) Contract Payments to non-resident Contractors (payee)
- 10% on the service portion of the contract payments on account of tax payable by the payee
- 3% of service portion of the contract payments on account of tax payable by employees of the payee
- 2) Interest Paid to Non-Resident Person (Payee)
Interest paid to NR Payee is subject to withholding tax at 15%. Or any other amount as instructed under the Double Taxation Agreement between Malaysia and the payee’s country of origin .
- 3) Interest is taken from Malaysia if:
- Responsibility for payment is within the Government or State Government
- Responsibility of payment is on the Malaysian resident
- Interest charged as an outgoing expense against any accruing income from Malaysia
- 4) Interest not subject to withholding tax
- Interest paid to payee on approved loan
- Interest paid to payee by a licensed bank or a licensed finance company in Malaysia
- 5) Royalty Paid to Non-Resident Payee:
Definition – Royalty : Payments made for the rights to use:
- Copyrights
- artistic/scientific work,
- patents, designs, 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.
- Information concerning technical, industrial, commercial or scientific knowledge, experience or skill.
- Income gained from the alienation of any property, information mentioned in above paragraph of this definition.
- 6) Non Resident’s Special Classes of Income
Payment for services provided by non-resident payee or his employee:
Payments for:
- technical advice
- use of property
- installation of operation / machinery purchased from the non-resident payee
- 7) Non -Resident Public Entertainers
- Definition : Public Entertainers – stage, radio, television artist , musician, athlete, or any individual exercising any profession of a similar nature.
- Withholding tax at 15% for non-residents in Malaysia for these services performed.
- A 15% withholding tax is required by the sponsor of a non-resident public entertainer before an entry permit can be obtained from the immigration Dept.
- 8) Double Taxation Agreement and Protocols
- Malaysia has 69 effective Double Taxation Agreements (DTA).
- For withholding tax refund, due to DTA, payee must forward application for refund to the Director, Non Resident Branch together with the following details:
- Tax resident certificate of the payee from the tax authority of the country where the payee is resident.
- Evidence to prove that the conditions stipulated in the DTA are met.
- Proof of payment of withholding tax.
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