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WITHHOLDING TAX

Tax authority in Malaysia like other countries in

the world has imposed withholding tax in


taxation system. Although this concept has been
introduced a long time ago, many of us did not
understand especially to the peoples who do not
have basic knowledge on taxation. The word
withholding tax itself has made peoples get
confused. They do not understand whether they
are involved with this concept. What many
people does not know, withholding taxes is
basically involved with non-resident. It is a
mechanism to collect income tax from certain
groups of non-residents. Nevertheless, as a
resident, we also will be involved with this

concept. Therefore, we need to understand the


mechanism of withholding tax. In order to make
it clear with the concept, we should know the
keyword within it. The keyword of withholding is
the word hold which means grasp or seize.
Thus, applying in tax system, withholding tax is
a process where a resident person needs to
withhold some portions of amounts paid to nonresident at prescribed rate. The amount will be
treated as a tax on non-resident. Thus, as a
resident, we have a legal duty to withhold tax
when we make payments to non-residents.
Consequently, we have become tax collection
agent for the tax authorities.

egulations: Generally, withholding tax is related on special classes of income which


stipulated under Section 4A of Income Tax Act 1967. However, there are also other types
of income that are chargeable under withholding taxes. The other types of income
include royalty, interest, contract payments and remuneration that paid to the nonresident. Regarding Section 4A of Income Tax Act 1967, special classes of income can be divided
into three categories:

SECTION
4A (i)
SECTION
4A (ii)
SECTION
4A (iii)

It is involving the payment made by resident to non-resident for the


services carried out.
The services include the installation or operation of any plant
machinery or other equipment purchased from non-resident.
Examples of payment are installation fees or management fees.
It is involving the payment made by resident to non-resident for the
technical advice, assistance or services carried out.
The services purposely for technical management or administration of
any scientific, industrial or commercial venture or scheme.
An example of payment is technical service fees.
It is involving the rental payment made by resident to non-resident for
the use of any movable property under any agreement or arrangement.

ithholding Tax Rate: The gross amount paid for the three types of special classes of
income is said to be derived from Malaysia if the payment was made by the
Government, State Government, local authority or person who is resident in
Malaysia. Other than that, it is also income derived from Malaysia if the company
treated the payment as expenses in their accounts. The income received by non-resident under
paragraphs 4A(i) and 4A(ii) is consider derived from Malaysia if the services are carried out in
Malaysia. The amount of withholding tax imposed to the types of payment made by resident to nonresident can be summarized as below.

INSTALLATI
ON
FEES

10%
WHT
TECHNICAL
SERVICE
FEES

10%
WHT

Fees for services that


related to installation or
operation of any plant
machinery or other
machinery purchased
carried out in Malaysia.
It is a final tax.

Fees for the technical


advice, assistance or
services.
Services are related to
technical management
or administration of any
scientific or commercial
scheme carried out in
Malaysia.
It is a final tax.

MANAGEME
NT
FEES

10%
WHT
RENTAL
PAYMENT

10%
WHT

Fees for services carried


out in Malaysia that
related
to
management of any
business in Malaysia.
It is a final tax.

Payment for use of


movable
property
made under any
agreement
or
arrangement.
It is a final tax.

ther Incomes Subject to Withholding Tax: Besides special classes of income under
Section 4A of Income Tax Act 1967, there are other incomes that subject to withholding
tax. These include the contract payments, interest, remuneration and royalties made by
resident person to non-resident.

CONTRACT
PAYMENT

10%
Contractor

3%

Payments made for services related to a contract carried out in


Malaysia.
Withholding tax of 13 percent which 10 percent tax imposed to the
contractor and 3 percent to the employees of the contractors.
Withholding tax is not a final tax and will be refunded after finalize by
tax authority on return form submitted by contractor and employees.

Employees
INTEREST

15%

PUBLIC
ENTERTAINER
/SPORTSPERSO
N

Payment of interest to non-resident except for interest paid or


credited that related to a business carried on in Malaysia.
Withholding tax rate is 15 percent.
Remuneration or other income paid to a non-resident public entertainer
such as stage, radio or television artiste, musician, sportsperson or
other.
Withholding tax rate is 10 percent and it is a final tax.

15%
ROYALTIES

10%

Royalty payment for the use of scientific works, patents, designs,


plans, formulae, trademarks, tapes for radio or television board
casting, motion picture films that have been used or reproduced in
Malaysia.
It also includes use of know-how, information related to technical,
industrial, commercial, or scientific knowledge, experience or skill.
Withholding tax rate is 10 percent and it is a final tax.

onsequences: The tax authorities in Malaysia will impose several punishments if the payer
does not comply with the regulation of withholding tax. The consequences on the payer are
including all the three below.

10% penalty on unpaid


withholding taxes

Amount paid to nonresident cannot be claim by


payer as expenses in their
account.

Withholding tax and


penalty amount consider
as a debt to government

REFERENCES
Choong Kwai Fatt (2010), Malaysian Taxation Principle and Practices, 16th edition. Published by Info
World Malaysia.
Inland Revenue Board Malaysia (2014, January). Withholding Taxes On Special Classes of Income.
Public Ruling No. 1/2014.
Income Tax Act 1967

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