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CHAPTER 8

TAXATION OF NON
RESIDENT PERSON
(WITHHOLDING TAXES )

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Learning Outcome
1. Scope of charge
2. 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
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Withholding Taxes 3

INTRODUCTION
Withholding 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
4 taxes in Malaysia:

Sections Nature of Payments


(ITA)
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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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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With 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 Msia.

3. Income must not be attributable to a business carried on by the


NR in Msia (except for contract payment).

4. Income not exempted under the DTA between Msia and the
NRs home country (treaty country).

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1.0 Contractors and Professional (Sec.107A)
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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 Msia.
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:

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Actual Tax Payable
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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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Example 2
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% RM750k
10% RM2.5m
Compute the tax liablility (if any for the company for
YA2011)

Answer:

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Waiver of WHT under Sec. 107A
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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 Msia and the treaty country


specially exempt that income.

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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 Msia.
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. 6
4) Interest paid to non resident banks which do not have a
place of business in Malaysia.
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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 Msia and paid by any
person who carrying on business of banking and finance in
Msia licensed under BAFIA - exempted from WHT.

Exemption does not apply to interest paid by the branches


of foreign bank carrying on business in Msia.

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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 Msia issued by the Central Bank of Msia.

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 Msia, other
than convertible loan is exempted from tax if:
issued in any currency other than the Ringgit
Approved by the Securities Commission

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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 Msia by residents of Belgium, Japan


or UK are subject to 10% WHT.

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Royalty (Sec. 109)
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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 Msia (S15).

He will receive the net royalty income, after deduction of


WHT (10%).

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Royalty (Sec. 109) cont.
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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
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Vidya Bhd is a company resident in Msia, 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.
Answer:

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Double Tax Agreement
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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 Msia.
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)
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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 Msia.
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4.0 Payment For Technical Services And Rental
Payment (Section
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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)
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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
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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 with
Inst. 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)
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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
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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
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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
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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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THANK YOU

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