Masters of Financial PlanningTaxation Planning
WITHHOLDING TAXES
By: Associate Professor Dr. GholamReza Zandi
Withholding Taxes
• Withholding tax is the amount withheld by a resident payer from
payment made to a non-resident person so that the non-resident
only receives a net sum.
• The payer is required to remit the amount withheld to the Inland
Revenue Board within one month from date of paying or crediting
to the non-resident person.
• It is a compliance management technique used to collect revenue
for the Government from non-resident persons.
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Income Subject to Withholding Tax
Withholding tax is required to be deducted from the following
payments:
• Payments to non-resident contractors and professionals in respect
of services under a contract,
• Interest and royalty payments to non-residents,
• Remuneration and other income of non-resident public
entertainers,
• Payment for technical services and rental payments, and
• Interest paid to resident individuals.
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Income Subject to Withholding Tax (Cont’d)
• Distribution of income by a Real Estate Investment
Trust/Property Trust Fund
• Distribution of profits by a Takaful operator
• Gains or profits falling under sec 4(f) ITA ( income on which
tax is chargeable)
• Contributions withdrawn from a private retirement scheme
4
Payments to Non-Resident Contractors and Professionals
• Any person liable to make a contract payment to a non-resident
contractor in respect of services under a contract, on paying or
crediting such contact payment, is required to deduct withholding
tax at 10% on service portion of the contract payment; and another
3% of the service portion in respect of the taxes of the employees
of the non-resident.
• No taxes to be deducted from payments made for the purchase of
materials, plant and machinery (often referred to as the non-
service portion).
5
Interest and Royalty Payments to Non-Residents
• Interest payment made by any banking or finance institutions
licensed under the Banking and Financial Institutions Act
1989 to any non-resident persons would be liable to a
withholding tax of 15% on the gross (sec 109) ITA.
• Royalty payments to non-residents are subject to 10%
withholding tax.
• Exemptions may apply in certain cases.
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Payments to Non-Resident Entertainers
• Specific provisions apply to remuneration and other income
of a non-resident public entertainer in respect of services
performed or rendered in Malaysian (sec 109A).
• The withholding tax is 15% of the gross sums received by
the non-resident public entertainer. The taxes are usually
deducted by the agents of the entertainer and remitted to the
Inland Revenue Board.
7
Payment for Technical Services and Rental Payments
• This category of income is commonly known as ‘special
class of income’ (sec 4A ITA).
• The withholding tax on this category of income is deemed as
final tax.
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Penalty for Non-Compliance
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If the payer fails to deduct or withhold taxes from the payments made
to the non-resident, penalties may be imposed as follows:
• A 10% penalty payable on the gross amount of the payment liable to
withholding tax. The penalty is charged on the unpaid portion of the
withholding tax.
• Payer is also penalized under sec 39 by being denied a tax deduction
on the payment made to the non-resident. The deduction will be
allowed only when the withholding tax and the penalty related thereto
is subsequently paid.
The End