GENERALLY, when withholding taxes come to your mind, it will only be on payments made to non-residents. Normally withholding taxes are paid over to the tax authorities within one month from the payment date or the amount is credited as payable to the recipient in the books of the payer in Malaysia.
Withholding taxes covers payments made by non-residents for interests, royalties, special classes of income, and gains or profits not taxed under Section 4(a) to 4(e) of the Income Tax Act 1967. The tax rate is normally 10-15%, but you need to look at the double tax agreements for reduced rates.
There is another class of income paid to non-resident contractors who carry out projects in Malaysia and established a business presence in Malaysia which also attract withholding tax (at 13%) which is a payment on account used to offset against the non-resident contractors’ final tax liability and used to cover the taxes of their expatriates.
What are the issues?
This is a tax imposed on the non-resident and collected and paid over by the payer in Malaysia.
If there is a failure to pay the tax, the burden is entirely on the Malaysian payer. The non-resident is not held responsible for his tax.
The penalty provisions are penal if there is a failure to comply: The payer will not be given any tax deduction and the amount due will still be collectable from the payer with a late payment penalty of 10%.
There are many technical interpretational issues surrounding the royalty provisions due to the conflict between the domestic legislation and double tax agreements. This is an ongoing saga.
There is an incorrect assumption that other than the non-resident contractor’s withholding tax, all the other withholding taxes are final taxes.
It is a final tax if the non-resident accepts the tax and there is no overpayment. In the event there is an overpayment, the law allows the non-resident to apply and file a tax return for the refund.
The payer cannot apply on behalf of the non-resident, although he can work together with the non-resident to assist with the refund.
In most cases, you can anticipate that such a request will result in a tax audit on the non-resident.
The common issue that will be challenged is the head office expenditure charged to the Malaysian accounts of the company, which is also a transfer pricing issue.
If the non-resident wishes to apply for a refund, be prepared to engage in a debate with the IRB on your eligibility for the refund.
Foreign contractors tend to circumvent or reduce the withholding tax by fragmenting the contracts between materials supply, labour supply, and commissioning and installation work done in Malaysia.
This will be done by supplying and invoicing the materials from the overseas company, and using a tax resident subsidiary or local connected third parties to provide the work that is done in Malaysia. This way, the withholding tax will be avoided since it is paid to resident parties, and the supply of goods will not attract withholding tax.
Such arrangements can be challenged by the IRB under the anti-avoidance legislation.
Trying to get refunds from tax authorities is a cumbersome process, and sometimes obtaining refunds could take you up to 2-3 years. The problem is that the tax authorities keep asking the taxpayer for proof that the withholding tax has been deducted and numerous other questions when in fact the records are available in the IRB.
On this area, the IRB needs to improve its internal protocols and working arrangements such that the burden of providing documents which have already been provided many years earlier should not be requested again from the taxpayers. The internal procedures must be improved so that refunds can be made to taxpayers quickly.
The headache of obtaining refunds has been going on far too long. It is time to improve.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).