Withholding tax is a tax imposed on non-residents who has business dealings in Malaysia and received certain payments which are subject to Malaysian tax. Under the Income Tax Act, 1967 (‘The Act’) has appointed the payer as an agent responsible to collect income taxes on behalf of Inland Revenue Board from such non-residents to withhold a portion of the payment. Such portion of payment is known as “withholding tax”. The scope of withholding tax is restricted to the several types of payment made to non-resident. There are special classes of income under section 4A, royalty under section 15, interest under section 15, contract payment under section 107A and public entertainer under section 109A.
Contract payments was aimed to improve the tax compliance process and income tax collection from the increasing of number of non-resident contractors and employees of non-resident who were coming to Malaysia to undertake construction and development projects.
Provision of permanent establishment is included in Double Taxation Agreement (DTA). If the XYZ has a permanent establishment in Malaysia under the DTA, the business profit of the XYZ that attributable to the permanent establishment is taxable in Malaysia. Permanent establishment concept is used mainly to determine whether a non-resident is doing business in Malaysia. “A fixed place of business” in Malaysia is constituted a permanent establishment. Examples of fixed place are branch, factory, office, a workshop, a place of management, mine, oil or gas well, quarry and so on. Sometimes even through there is no fixed place in Malaysia, it is still a permanent establishment if:
i) A building site or construction, assembly or installation is 6 months period.
ii) Carrying on supervisory activities in connection with building site or construction project.
iii) Presence of an agent that is dependent and concluding contracts on the behalf of the XYZ in Malaysia.
The Singapore Company, XYZ is subjected to withholding tax under contract payments because XYZ will provide services under a contract by the Malaysian branch. The permanent establishment existed if the services are provided by Malaysian branch. By virtue of section 107A will be applied when a contract payment and permanent establishment occurs.
Section 107A stated that any person (in this section referred to as “the payer”) who is liable to make contract payment to XYZ in respect of any works or professional services in Malaysia under a contract project, and the total rates of withholding tax under section 107A are 13%. The 10% withheld is for the XYZ contractor’s tax liabilities while 3% is for the tax of the employees of the XYZ contractor.
The XYZ contractor would submit its tax computation in the normal manner in ascertaining the chargeable income when carrying on business in Malaysia. Income tax payable would be computed. XYZ contractor are allowed to set off the 10% withholding tax against his income tax payable and account for the different or claim the excess (refund) from the tax authorities.
However, if XYZ providing services without a permanent establishment in Malaysia then the payment will falls under section 4A and the withholding is applies under section 109B. The payer who is liable to account for withholding tax while tax is imposed on person deriving income falls under section 4A income. Special classes of income is any amount paid in consideration of technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme that falls under section 4A(ii)