The Inland Revenue Board of Malaysia (IRBM) has issued a practice note entitled “Practice Note 1/2018 – Tax Treatment on Digital Advertising Provided by a Non-resident” on 16 March 2018
Practice notes are the views and interpretation of IRBM on applicable tax legislations. As such, they may pose tax and other implication for your business.
Summary of tax treatment
For digital advertising service payments from a Malaysian entity to a non-resident who do not have a permanent establishment and business presence in Malaysia, the following tax treatments are applicable:
Where the payment is to a non-resident who has a permanent establishment or business presence in Malaysia, the payment is a S.4(A) income to the non-resident. In this case, the withholding tax is 10% + 3% under S.107A.
1. As a background - the Income Tax Act (ITA) has been amended in January 2017 to include any payment in regards to software as royalty to widen the tax net.
And it appears that the IRBM would consider computer and smartphone Apps (application) as software. And if so, payments for Apps would be considered as royalty payments too.
2. Through this practice note, the IRBM make known their stance that that they would consider payment for the use of a non-resident’s App to create own advertisement campaign as royalty payment, and therefore subject such a payment to withholding tax.
If the royalty payment is made from a Malaysian entity to an entity who is a non-resident (e.g. the entity is based in Singapore), the Malaysian entity (the payer) is required to withhold 10% of the payment and remit it to the IRBM.
The withheld amount is the final tax that the non-resident entity has to pay as it is earning an income from Malaysia.
Withholding tax is not required if the royalty payment is made from a Malaysian entity to another Malaysian entity.
3. In applying these rules, consideration must also be given to applicable double tax treaties (DTA) to which Malaysia is a party. Some DTAs
do not recognise payment for software as royalty as such withholding tax may not be required (e.g. DTA between Malaysia and Singapore), while some do (e.g. DTA between Malaysia and Japan). And established tax cases and the IRBM have confirmed that DTAs provision prevails over ITA.
Where withholding tax for royalty is applicable, certain DTAs provide relief or reduce rate (e.g. DTA between Malaysia and Ireland, withholding tax for royalties is 8%, instead of 10% under ITA).
4. IRBM officers have also indicated that they do not subscribe fully to the interpretation of the OECD (Organisation for Economic Co-operation and Development) in regards to tax treatments for software payments.
According to OECD, payments for merely accessing or using a software without the right to adapt or exploit the software should not be considered as royalty payments.
5. Are Facebook and Google advertising services subject to withholding tax? The tax treatment has to be determined based on the facts of each case, one has to determine where is the service provided from, is there any applicable DTA, what are the services involved, etc.
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Disclaimer: Every effort has been made to provide accurate information. However, the information and regulations contained in this article are subject to changes and amendments by the relevant authority at any time. As such, the information in this article may not be current.
And the information provided in this article is general commentary only and shall not be considered as advice or recommendation. As all tax situations are specific to their facts and will differ from the situations in this article - if you have specific tax questions you should consult a licensed tax agent.