There are some impending changes to the withholding tax regulations that will affect your business. Please pay close attention to this subject especially if your business has dealings with overseas service suppliers, and in the course of your business, there are payments for royalty, software, technical advice, and management services to overseas suppliers or foreign related companies.
Currently, Section 15A of the Income Tax Act 1967 (ITA) provides that special classes of income (e.g. payments made by a Malaysian resident for technical advice, assistance or services in connection with technical management or administration performed by a non-resident) under subsections 4A(i) and (ii) of the ITA shall be deemed to be derived from Malaysia if the services are performed in Malaysia. In other words, if the services are performed by a non-resident supplier to a Malaysian company and the services are not carried out in Malaysia, the Malaysian company is not required to withhold tax before paying the service fee to the supplier. However, if the services are carried out in Malaysia, the Malaysian company is required to withhold tax from the service fee – where the tax withheld has to be remitted to the Inland Revenue Board of Malaysia (IRBM) and balance of the fee (after deducting withholding tax) would be paid to the supplier.
Extract of ITA
4A. Notwithstanding section 4 and subject to this Act, the income of a person not resident in Malaysia for the basis year for a year of assessment in respect of—
(i) amounts paid in consideration of services rendered by the person 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, such persons.
(ii) amounts 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.
It is proposed in Budget 2017, special classes of income under subsections 4A(i) and (ii) of the ITA shall be deemed to be derived from Malaysia regardless of whether the services were performed in Malaysia or outside Malaysia. And that Section 15A of the ITA will be amended to give effect to this change. Upon the amendment of ITA, services carried by a non-resident irrespective of whether the services were performed in Malaysia or outside of Malaysia would be subjected to withholding tax under the new requirement.
The proposed amendment will come into effect upon the passing of the Finance Act 2017.
StanleyCo’s comment: It would be interesting to watch this space as the proposed amendments could contradict certain double tax agreements (DTA) that Malaysia has entered into with other countries. For example, the DTA between Malaysia and Singapore stated where technical fees are concerned, only those services performed in Malaysia would be subject to WHT.
Let’s talk: StanleyCo is a Licensed Tax Agent and GST Agent, please contact us if you need assistance with the topic above.
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.