Withholding Tax on Foreign Service Provider in Malaysia
As business owners, we want the best for our businesses. Therefore, sometimes we may enlist the services of foreign providers who are known to be the cream of the crop in their respective industries. When we make payments to these non-resident service providers, something called “withholding tax” applies.
The withholding tax (WHT) is an amount withheld by the party making payment (payer) on income earned by a non-resident (payee) and paid to the Malaysian Inland Revenue Board (HASiL). The payer should be an individual/body other than individual carrying out a business in Malaysia, while the payee refers to a non-resident individual/body other than individual in Malaysia who receives the payments.
Payments that are subject to WHT pursuant to the Income Tax Act (ITA) 1967 include:
i) Contract payment (s.107A (1) (a) & 107A (1) (b) ITA 1967)
ii) Interest (s.109 ITA 1967)
iii) Royalty (s.109 ITA 1967)
iv) Public entertainer (s.109A ITA 1967)
v) Special classes of income (s.109B ITA 1967)
vi) Income under s.4(f) ITA 1967 (s.109F ITA 1967)
Determining the Amount of Withholding Tax to Be Paid
Firstly, the sum to be paid to the payee should be converted to Malaysian Ringgit first.
The exchange rate can be based on:
i) Telegraphic Transfer (TT) rate;
ii) IRBM exchange rate; or
iii) Bank Negara Malaysia exchange rate if payment is done via a foreign bank account.
After we have determined how much that sum is in Malaysian Ringgit, we can then multiply it with the corresponding withholding tax rate depending on the payment type. Different tax rates apply to the different types of payments listed above. However, most of them are at a rate of 10%. Depending on the payment type, the respective form should be submitted along with the amount that should be remitted to IRB.
(https://www.hasil.gov.my/en/legislation/withholding-tax/)
When Should the Payment for WHT Be Remitted to IRB?
Payer should remit the WHT to IRB within one month after such payment has been made or credited to the payee. The “date of crediting” can refer to the following:
i) the date the amount is paid;
ii) the date the amount is credited to the bank account of the recipient; or
iii) the date of a contra entry.
Which Party Bears the WHT?
The WHT is borne by either the payee or the payer. Before 5 December 2018, if the WHT is borne by the payer, the WHT has to be computed based on the gross amount paid to a non-resident using the regrossing method. To put it simply, the regrossing method would result in a higher amount of tax to be paid by the payer.
What happens if I exceed the timeframe to remit the WHT? If our country has a double taxation agreement (DTA) with the payee’s country, is there a preferential tax rate?
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