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CHAPTER 8

TAXATION OF NON RESIDENT PERSON

(WITHHOLDING TAXES )

TAXATION OF NON RESIDENT PERSON

(WITHHOLDING TAXES )

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Learning Outcome

1. Scope of charge2. WHT tax provision(a) Contract payment(b) Interest and royalty(c) Public Entertainer(d) Services(e) Interest payment to residents in Malaysia(f) Distribution of income by a Real estate Investment

Trust/property Trust Fund(g) Distribution of a Takaful operator(h) Gains and profits falling under sec 4(f) ITA

3. Double tax agreement

Withholding Taxes

INTRODUCTIONWithholding tax is the tax to be withheld by the payer on

payment to non-resident (NR) person so that the NR person receives only a net sum.

The payer is required to remit the amount of tax so withheld to IRB within 1 month from the date of paying or crediting the NR person.

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Scope of Charges

An outline of the existing withholding taxes in Malaysia:

Sections (ITA)

Nature of Payments

Sec. 107A Contracts payment to non-resident contractors in respect of service under a contract

Sec. 109 Payment of interest and royalty to NR

Sec. 109A Payment to NR public entertainer

Sec. 109B Payment to NR for services in connection with use of property, technical services and rents for use of movable property

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Continue..

An outline of the existing withholding taxes in Malaysia:

Sec. 109C Interest payment to residents in Malaysia by bank, finance company/similar institutions

Sec 109D Distribution of income by a Real Estate Investment Trust

Sec 109E Distribution of a Takaful operator

Sec 109F Gains and profits falling under sec 4(f) ITA

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ContinueWith effect from year of assessment 2009, payment to

NR under S4(f) of the Act would be subject to withholding tax of 10%.

Income from S4(f) refers to gains and profits not covered under S4(a) to (e) of the Act.

Such income includes commissions, guarantee fees and introducer fees.

The relevant legislation is found in Sec 109F of the Act.

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The NR would only be liable for WHT if all the following factors are present:

1. The income has to be one the categories stated above.

2. Such income has to be deemed derived from M’sia.

3. Income must not be attributable to a business carried on by the NR in M’sia (except for contract payment).

4. Income not exempted under the DTA between M’sia and the NR’s home country (treaty country).

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1.0 Contractors and Professional (Sec.107A)

Sec.107A stipulates that a 10% WHR is to be deducted from all payments made to NR contractor in respect of services under a contract.

The payment to fall under Sec.107A, it must be in respect of service performed or rendered in M’sia.

Cost of material and equipment are excluded from WHT computation.

When NR has employees from abroad involved in contract payment, a further 3% of WHT is to be deducted.

Example 1 (page 407)

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Example 1

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Raim Highway, a NR Korean company was awarded a contract to build a bridge in Selangor for a total value of RM130m (Service portion RM25m & material portion RM105m)Explain whether the whole sum would attract WHT under Sec 107A.

Answer:

Actual Tax Payable

The WHT is not final tax.

The NR contractors need to furnish his annual tax returns in the following year and the actual tax payable would then determined.

If final tax liability > WHT deducted – debt due to govt

If final tax liability < WHT deducted – refund to NR

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Jonas Company (NR company) makes a chargeable income of RM8m in 2011. Breakdown of WHT deducted on gross payment are as follows: (tax deducted at source)3% RM750k10% RM2.5mCompute the tax liablility (if any for the company for YA2011)

Example 2

Answer:

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IRB may grant a waiver from compliance of Sec. 107A for the following circumstances:

1. The project undertaken by the NR contractors is likely to incur substantial losses.

2. There is sufficient unutilised CA or losses to set off the profit arising the project taken.

3. Where DTA between M’sia and the treaty country specially exempt that income.

Waiver of WHT under Sec. 107A

2.0 Interest (Sec.109)

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Not defined in the act – often describe as a compensation for delayed payment.

NR received the interest income would be liable for WHT if such income deemed derived from M’sia.

The WHT for interest income is 15%.However the WHT would not apply if the interest income:

1) Attributable to a business carried on by NR in Malaysia.2) An approved loan (by Minister of Finance).3) Exempted by virtue of para 33 or 35 Sch. 64) Interest paid to non resident banks which do not have a

place of business in Malaysia.

Interest received by NR from bank or finance company (Para 33)

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Income of any NR person in Malaysia for the basis year in respect of interest income derived from M’sia and paid by any person who carrying on business of banking and finance in M’sia licensed under BAFIA - exempted from WHT.

Exemption does not apply to interest paid by the branches of foreign bank carrying on business in M’sia.

Interest on Securities and Bond (Para 35, Sch 6)

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Interest paid or credited to any individual, unit trust in respect of : Securities or bond issued by the government Debentures approved by SC Bon Simpanan M’sia issued by the Central Bank of M’sia.

With effect from year of assessment 2008, interest paid or credited to a NR individual in respect of Islamic securities, other than such interest accruing to a place of business in M’sia, other than convertible loan is exempted from tax if: issued in any currency other than the Ringgit Approved by the Securities Commission

Double Tax Agreements

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To minimize WHT of interest income for NR person, DTA between Malaysia and some treaties country.

Interest received from M’sia by residents of Belgium, Japan or UK are subject to 10% WHT.

Royalty (Sec. 109)

Royalty – most commonly used in connection with agreement for the use of patents and copyrights, technical know-how.

NR receiving the royalty income would liable for WHT if such royalty income is deemed derived from M’sia (S15).

He will receive the net royalty income, after deduction of WHT (10%).

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Royalty (Sec. 109) cont….

The WHT represent the final tax of the NR.

WHT would not apply if the royalty income is attributable to a business carried on by NR in Malaysia – payer will pay gross royalty to NR person.

Royalty may be exempted from WHT if such royalty is approved by Minister of Finance or for the franchised education schemes approved by the Ministry of Education.

Refer Example 3 (page 411)

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Example 3

Vidya Bhd is a company resident in M’sia, manufactures computers for export. On Jan 2009, they entered an agreement with Wise Ltd, a foreign company to transfer the technical know-how and assistance. An amount of RM80,000 royalties paid to Wise.

Discuss the WHT requirement.

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Answer:

Double Tax Agreement

In most DTA, such as Malaysia /Australia, approved industrial royalties shall be exempted from tax.

Approved industrial royalties has been defined to mean royalty which has been: Approved and certified by Minister of Finance For the purpose of promoting industrial development in M’sia. Payable by a company which is engaged in activities in the

sectors of: Manufacturing, assembling and processing Construction, civil engineering or ship building Electricity, hydraulic powers, gas, water supply

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3.0 Public Entertainer (Sec 109A)

Public entertainer – a stage, radio or television artiste, a musician, athlete or an individual exercising any profession of a similar nature.

The WHT is 15% which is calculated on the gross sum received by NR person.

It represent final tax liability on entertainer.

60 days exemption – if the public entertainers’ visit Malaysia by the public funds of government of country outside M’sia.

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4.0 Payment For Technical Services And Rental Payment (Section 109B)

Sec 4A is read together with Sec 109B.

Income under Sec 4A are not to be considered as business income.

The permanent establishment concepts would not apply to such income.

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Special Classes of Income (Sec 4A)

It include: Services rendered in connection with the use of property or

rights, or the installation or operation of P&M Technical advice, assistance or services rendered in

connection with technical mgt. or administration Rent or other payments for the use of any moveable

property (exclude land and building but will include equipment, machinery, ship and others).

The rate for WHT is 10%. Income is deemed to be derived from Malaysia is liable for

WHT (Sec. 15).

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Example 4

Angel Bhd, a company resident in Malaysia manufactures precision tools for export. In 2012, the company entered into agreement with company resident in Australia for transfer of technical supplies and supply cum installation of equipment. The company incurred the following expenses:

Technical advice fees RM60,000 (paid on 1/6/12)Supplies of eq. by Aus. Co RM700,000(paid on 30/5/12)service in connection withInst. of the above equipment RM75,000 (paid on 15/12/12)

Explain with reasons, whether each of above stated amount is subject to WHT.

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Answer

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5.0 Interest Received By Individuals (Section 109C)

Withholding rate is 5% on interest paid to residents with savings and fixed deposit with bank and financial institutions.

The withholding tax on the gross income is a final tax.

Refer page 427 (Summary of the WHT)

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Responsibility of Payer

Deduct & pay WHT to IRB within 1 month of paying/crediting the payments to the NR

Penalty for non-compliance: IRB shall impose penalties based on 10% of the gross

payment paid/credited to NR The gross payments would not be allowed as deductions

in arriving at the adjusted income of the payer Only allowed if the WHT & penalty were paid to IRB

Amount due (WHT & penalty) would be a debt from the payer to the govt.

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Computation Penalty for Non-compliance

Example : Penalty for interest income

Gross interest income 1,000

(-) WHT (15%) (150)

Net amount payable to NR 850

WHT payable to IRB 150

Late payment penalty (10%) 100

Debt due to govt 250

The total sum of (15% + 10%) shall be debt due to govt and shall be payable to IRB.

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Double Tax Agreement

Definition: Agreement between 2 countries seeking to avoid double taxation by defining the taxing rights of each country with regard to cross-border flows of income & providing for tax credits or exemptions to eliminate double taxation.

Objectives: Facilitate world trade Promotion of technology transfer Prevention of tax avoidance & evasion

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