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What Is Considered Withholding Tax in Malaysia?

Malaysia Withholding Tax GuideWithholding taxes are withheld by the party making payment (payer) on income earned by a non-resident (payee) and paid to the Inland Revenue Board of Malaysia (LHDN). Withholding taxes are taxes that are deducted from the source. The source would usually be other countries. Withholding taxes are withheld by the party making payment (payer) on income earned by a non-resident (payee) and paid to the Inland Revenue Board of Malaysia (LHDN). Withholding taxes are taxes that are deducted from the source. The source would usually be other countries.

 

What Are the Types of Income That Will Be Liable for Withholding Tax?

The following are payments that will have withholding taxes imposed on them:

  • Special classes of income: Technical fees, payments for services, rent/payment for use of movable property (10%)
  • Contract payments (10%, 3%)
  • Royalties (10%)
  • Interest (15%)
  • Real Estate Investment Trust (REIT)
  • Family funds/Takaful Family Fund/Dana Am
  • Income under Section 4(f) ITA 1967 (10%)
  • Income of non-resident public entertainers (10%)

All withholding tax payments (other than for non-resident public entertainers) must be made with the relevant payment forms, duly completed, together with copy of invoices issued by the NR payee and copy of payment documents as proof of date of payment /crediting to the NR payee.

 

Consequences Of Not Deducting And Remitting Tax

Failure to deduct and pay over such tax to the IRB within one month of the earlier of paying or crediting the non-resident would result in the following to the payer:

  • the IRB may impose late payment penalties at the rate of 10% of the amount of unpaid tax;
  • expense will be disallowed as a deduction and no capital allowances shall be available on the qualifying capital expenditure paid to a non-resident; and
  • the IRB can recover the withholding tax and penalties from the payer as a debt due to the Government.

With effect from 1.1.2011 for year of assessment 2011, in addition to the late payment penalty mentioned in above, the Director General of Inland Revenue is empowered to impose a penalty under subsection 113(2) of the Income Tax Act, 1967 if –

  1. the withholding tax deduction is made or paid after the due date for the furnishing of an Income Tax Return Form for a year of assessment that relates to the payment, and
  2. a deduction for expenses related to the such payment is made in the Income Tax Return Form furnished or claimed in the information given to the Director General of Inland Revenue in arriving at the adjusted income of the payer [proviso to paragraph 39(1)(j) of the Income Tax Act, 1967].

This is regardless that the withholding tax together with the penalty for failure to withhold is subsequently paid to the Director General of Inland Revenue.
 

Withholding tax on payment made to resident individual agents, dealers or distributors

Effective from YA 2022, payment made by a company in monetary form to its agents, dealers or distributors (ADDs) arising from sales, transactions or schemes carried out would be subjected to 2% withholding tax.

The IRB has issued a FAQ on deduction of 2% withholding tax and salient points from the FAQ are as follows:-

 

Scope of payment

All types of payments arising from sales, transactions or schemes carried out by ADDs of the company such as commissions and incentives in the form of cash.

Scope of agents, dealers or distributors (ADDs)

Includes sole proprietors and individual partner of a partnership but excludes payments made to a partnership.

Threshold

Applicable in the current year for ADDs who receive payments from paying companies that exceed the threshold value in the previous year. The threshold is RM100,000 in monetary form and/or non-monetary form from one paying company only.

The threshold value must be determined each year by the paying company.

Payment and reporting

The payer company is required to deduct the 2% tax from payments to ADDs for every transaction on an accumulated basis by month.

The above-mentioned 2% tax deduction amount is required to be remitted to the IRB latest by the end of the following month.

Example:

2% Tax Deduction Accumulated by Month Deadline to Remit to IRB
1 July 2022 – 31 July 2022 31 August 2022
1 August 2022 – 31 August 2022 30 September 2022
1 September 2022 – 30 September 2022 31 October 2022

 

The payer company must complete the latest Form CP107D – Pin 2/2022 in PDF format and Appendix CP107D(2) in excel format and submit them via email to the payment centres as listed below before making the payments. This email submission is necessary for payments made via payment counters or post. The respective email addresses of the payment centres are as follows:

Payment Centre Email Address
Kuala Lumpur Payment Centre pbkl-cp107d@hasil.gov.my
Kuching Branch pbkc-cp107d@hasil.gov.my
Kota Kinabalu Branch pbkk-cp107d@hasil.gov.my

 

If the above-mentioned email submission is sent to the Kuala Lumpur Payment Centre, payment can be made at the Kuala Lumpur Payment Centre only.

A copy of the email submission sent to IRB payment centres must be presented by the payer company for verification and checking purposes when making payment at the payment centres, before the receipt is issued.

Payer company would need to ensure that the number of recipients, the amount of the 2% tax deduction and the cheque number in the Form CP107D – Pin 2/2022 and Appendix CP107D (2) are the same and accurate.

Before filling out the Appendix CP107D(2), the payer company needs to ensure that the recipient has an income tax number. If the recipient does not have an income tax number, registration may be made online through e-Register at https://edaftar.hasil.gov.my/.

Other reporting

Form CP 58 has been amended to allow the 2% tax deduction amount to be reported.

Tax treatment for ADDs

The 2% is treated as payment of the tax payable.

Malaysia Withholding Tax Guide

 

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