Withholding tax is an amount withheld by the party making payment (payer) on income earned by a non-resident (payee) and paid to the IRB.
In short, if you are paying non-local (foreign) vendors, you need to withhold a certain percentage of the invoiced amount and pay to IRB as a form of tax, and the remaining balance to be paid to your foreign vendor.
The withholding tax in Malaysia is not new and has been in existence since Income Tax Act 1967 (ITA) and it covers payment such as:
- Contract payment
- Interest
- Royalty
- Special classes of income: Technical fees, payment for services, rent/payment for use of moveable property
- Interest (except exempt interest) paid by approved financial institutions
- Income of non-resident public entertainers
Each type of payment will have different withholding tax rates and may enjoy preferential tax rates if there is a double taxable agreement between Malaysia and the country where the non-resident (foreign party) is a tax resident. See IRB withholding tax table.
IRB’s Practice Note on Digital Advertising
The IRB has issued Practice Note No. 1/2018 – Tax Treatment on Digital Advertising by a Non-Resident (PN 1/2018) to provide guidance on the tax treatment on payments in relation to digital advertising made to non-residents (NR).
| Purpose of Payment | Tax Treatment |
| Purchase or use of (for example) an application (Apps) by the payer that allows the payer to create their own advertisement campaign | Treated as royalty income of NR. Subject to withholding tax (WHY) under Section 109 of the Income Tax Act 1967 (Act) |
| Not for the purchase or use of an Apps but merely a provision of service by the NR (payer solely relies on the service provider to deal with all aspects of digital advertising) | Treated as a special class of income under Section 4A (ii) of the Act. Subject to WHT under Section 109B of the Act |
The above guidance applies where the NR has neither a permanent establishment (PE) nor a business presence in Malaysia. In cases involving NR with either a PE or a business presence in Malaysia, the payment is treated as the NR’s business income under Section 4(a) of the Act.
Withholding Tax Rate
The withholding tax rate for both services and royalties is 10% but depending on the tax treaty between Malaysia and the respective countries, the rate may be further reduced. Malaysia has signed tax treaties with over 75 countries, including most countries in the European Union, the United Kingdom, China, Japan, Hong Kong, Singapore, Australia, etc. to name a few. Certain tax treaties provide for the withholding tax rate on services and royalties to be as low as 5%.
On this note, the double taxation agreement between Malaysia and the United States of America is of limited scope and does not address double tax issues relating specifically to services and royalties. Thus, the 10% rate shall be applicable for both service and royalty payments to a US resident.
Withholding tax is usually payable to the IRB within one (1) month of crediting or paying the non-resident.
AdrianYeo tax team will help you go smoothly through the process in assisting you from preparations of required withholding tax forms, certificates and statements, remittance of withheld tax amount up to filing the of obligatory documents to the tax department. We will be your best ally to avoid financial and legal liabilities and to secure regulatory compliance.
Reaching Us
Managing a business can be challenging enough without having to wonder if the tax planning process is on track. All businesses should work with a firm that can provide reassurance that they are in the best tax position possible. If you are looking for assistance tax planning and compliance, AdrianYeo can help. For additional information call us at +60 3-7802 3333 or request for a callback to speak to one of our audit managers.