Case study on Withhlding Tax at Malaysia

Employer is defined as a manager, agent or person responsible for the payment of salary or wages to an employee, for example manager of company, sole proprietor and partnership. An employer also defined as anybody of persons, whether or not statutory incorporated, such as an association. An employer can also be Statutory Board, Federal and State Government. In this case, the employer was a Singapore Company, XYZ which is a non resident company in Malaysia that currently negotiating a service contract with a Malaysian company to provide management services. In regard to provide the services, XYZ would send their employees to Malaysia.
S13(2) provides that “gross income in respect of gains and profits from an employment for any period during which the employment is exercised in Malaysia shall be deemed to be derived from Malaysia and subject to Malaysian income tax. Therefore, XYZ will have the tax responsibilities in relation to their employees who coming to and leaving Malaysia. Non-resident employees of XYZ Company is subject to Malaysian due to they have exercised employment in Malaysia and employment income is deemed derived from Malaysia.

Under S83 (1), ITA 1967 stated that an employer required to furnish the tax return form within 30 days (Form E). Thus, XYZ Company needs to submit the tax return form in order to determine the final tax to be paid. Under S83 (2), an employer is required to notify the Director-General in writing of a new employee. In this case, XYZ Company required notifying the Director-General in relation to the new employees who came to and left Malaysia.

Moreover, the employer is responsible to withheld 10% withholding tax and the tax withheld will be set off against the final tax liability. As long as the non resident has performed a contract services in Malaysia, the non resident is subject to withholding tax provisions and need to withhold 10% of the withholding tax. While non resident employees is subject to 3% withholding tax of the services contract sum for the services that have performed in Malaysia. The excess of 10% withholding tax under S107A which is the 3% withholding tax supposed to be paid by the non resident employees will be refunded upon full settlement of all of the employee’s tax liability.

In addition, the tax paid under S107A is not a final tax. The payee which is XYZ Company required filing of tax return. XYZ Company also entitled to claim tax credit for the withholding tax withheld. Withholding tax that has been paid by the non resident, XYZ Company can be used to offset against his final tax liability. Any excess of credit will be refunded to the payee, XYZ Company if the actual tax payable is less than the withholding tax paid. Any additional tax is to be paid by payee, XYZ Company if the actual tax payable calculated is more than the withholding tax paid.

Generally, a non resident individual is liable to tax at the rate of 30% and he is not entitled to any personal relief. However, there are possible exemptions which apply for the employees sent by the XYZ, Singapore Company. Employees from XYZ, Singapore Company can enjoy tax exemption on employment income even they have exercised employment in Malaysia if all the following conditions are met.

First, an employee having a short-term visit to Malaysia will enjoy tax exemption in respect of his income from an employment exercised in Malaysia when his presence in Malaysia does not exceed 60 days in a calendar year. This tax exemption is not applicable to public entertainers but applicable to non-resident individual only.

An employee also exempted from tax in Malaysia when the employer who pays is not a resident of Malaysia. In this case, XYZ, Singapore Company paid the remuneration to the employees who exercised the employment in Malaysia. Thus, XYZ is considered as an employer. As refer to the information provided, it stated that XYZ is a non resident in Malaysia, thus the employees of XYZ are eligible to apply for the tax exemption.

Additionally, if the remuneration paid to employee is not borne by permanent establishment in Malaysia, an employee can apply for the tax exemption. In this case, if the XYZ is considered to provide management services without establishing a permanent establishment in Malaysia, then the remuneration received by the employees is also not borne by permanent establishment in Malaysia. Hence, an employee is entitled to tax exemption.

On the other hand, an employee is also exempted from Malaysian tax if the remuneration of the non resident employee is taxed in country of residence. In this case, if the XYZ’ employee is a resident in Singapore, he or she will be subjected to Singapore tax. While he or she is exercising an employment in Malaysia, he or she can apply for tax exemption in Malaysia for the income derived since the employment income that received has been taxed in Singapore. Thus, he or she will not be taxed again in Malaysia in order to avoid double taxation on the employment income derived in Malaysia.

Lastly, employee who is on board of Malaysian ship( seagoing ship registered under Merchant Shipping Ordinance 1952 but not included a ferry, barge, tugboat, supply vessel, crew boat, lighter, dredger, fishing boat or other similar vessel) can also enjoy exemption on the employment income they derived.