WHENEVER there are payments being made to non-residents, the paying enterprise, whether or not it’s a firm or in any other case, ought to be aware of the necessity to deduct withholding taxes.
If there’s a failure to deduct withholding taxes, there are extreme penalties which might outcome within the payer being denied a tax deduction for the expenditure, along with late fee penalty of 10% being imposed, and probably an extra penalty for underdeclaring your tax legal responsibility.
Effectively, if there was a ten% withholding tax that ought to have been deducted on a RM100 expenditure, any failure to accomplish that might end in extra taxes and penalties amounting to about RM45. If the payer settles the withholding tax after the due date, his legal responsibility will likely be capped at about RM21. Failure to deduct withholding taxes is an costly affair.
Importance of deducting the correct withholding taxes
The majority of withholding taxes beneath the Malaysian tax regime are 10%, apart from payments to non-resident contractors with a enterprise presence in Malaysia, which is 13%, and curiosity payments to non-residents, which is 15%. The 10% withholding tax is relevant to royalties, particular courses of revenue akin to fee for providers carried out in Malaysia, and rental of movable tools. The charges will be decreased based mostly on tax treaties.
Services versus contract payments
There is a scarcity of understanding in differentiating the 13% withholding tax versus the ten% withholding tax as a result of studying the regulation on the floor, there seems to be an overlap. There isn’t any overlap for those who take a look at the regulation and the underlying ideas fastidiously.
The reply lies in the truth that if the providers are supplied in Malaysia over a interval of time, and there may be enterprise exercise in Malaysia, it would set off a enterprise presence in Malaysia or a everlasting institution beneath the double taxation treaties.
If a enterprise presence or a everlasting institution is triggered, then the withholding tax to be deducted is the contractor’s 13% withholding tax beneath Section 107A, and it’s collected as a fee on account of the contractor’s and its expatriate workers’ Malaysian tax legal responsibility. The overseas contractor should file a tax return in Malaysia for actions carried out in Malaysia.
If the overseas contractor doesn’t have a enterprise presence or everlasting institution in Malaysia, then the providers rendered in Malaysia will appeal to 10% withholding tax, which is generally considered the ultimate tax and doesn’t require the submitting of a tax return in Malaysia.
From a payer’s perspective, for those who deduct the ten% withholding tax as opposed to the 13% withholding tax, the Inland Revenue Board (IRB) can disallow the overall fee and apply the related penalties on the grounds you have got misdirected your self.
Royalties versus providers
If the payments are caught throughout the royalty definition akin to payments to be used of or proper to use copyrights, patents, software program, emblems, designs, fashions, secret processes, knowhow, and many others. Withholding tax of 10% kicks in everytime you make payments to the non-residents.
The recipients will likely be abroad recipients and, in the mean time, the IRB is of the view that for those who pay for digital providers akin to Facebook, Google, Amazon, and many others, the royalty withholding tax is relevant.
However, if these providers are seen as purely providers since there isn’t any involvement of the use of software program or copyrights, and if the providers are supplied from outdoors Malaysia, the payer needn’t deduct the withholding tax.
Currently, taxpayers are at loggerheads on this difficulty. Unless these issues are litigated on the highest courtroom in Malaysia, IRB has an higher hand on this matter and can insist on amassing the royalty withholding tax.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).
