Masters of Financial PlanningTaxation Planning

WITHHOLDING TAXES

By: Associate Professor Dr. GholamReza Zandi

zandi@segi.edu.my

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.

2

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.

3

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• Contributions withdrawn from a private retirement scheme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.

6

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.

8

Penalty for Non-Compliance

9

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