Chan Su-Li provides a summary of the withholding tax regime in Malaysia.
 
In Malaysia, the primary legislation in respect of the imposition of withholding tax is the Income Tax Act 1967 ("ITA").
 
The term "withholding tax" is not defined in the ITA but refers to a situation where the ITA requires the payer of certain types of payments to withhold or deduct tax at a prescribed rate and to remit the amount of such tax to the Director General of Inland Revenue Board ("DGIR").
 
In most situations, the withholding tax is imposed on payments to non-residents, as such persons generally do not file tax returns in Malaysia. A statutory obligation is imposed on the payer to deduct or withhold the tax due from the payee. If the payer fails to do so, the amount which he has failed to pay (and the applicable penalty) will be a debt due from him to the Government. The withholding tax regime is designed to minimise the opportunity for non-compliance as the tax is 'withheld' at source.
 
TYPES OF INCOME SUBJECT TO WITHHOLDING TAX
 
There are several types of income subject to withholding tax, some of which are as follows:
 
Contract payments to non-resident contractors
 
Contract payments made to non-residents in respect of services under a contract are subject to a withholding tax of 10% under Section 107A of the ITA.
 
For purposes of Section 107A:
 

 Where the non-resident has stationed employees in Malaysia who are involved in the contract, a further 3% withholding tax is to be deducted. This 3% is to account for any tax that may be payable by the employees for services rendered in Malaysia in connection with the contract. The 3% withholding tax will apply regardless of any arrangements that may exist for monthly deductions from the salaries of the relevant employees.
 
The withholding tax under Section 107A is not a final tax. Therefore, on the submission of the relevant returns to the DGIR, the non-resident or his agent in Malaysia can claim a refund of the tax overpaid by withholding, if any.
 
Interest payments
 
Section 109(1) of the ITA requires withholding tax to be deducted from interest payments derived from Malaysia and payable to a non-resident. The tax rate payable on interest payments is 15% of the gross amount.
 
However, certain interest derived by non-residents in Malaysia is not subject to withholding tax and these include the following:
 

 
Royalty payments
 
Section 109(1) of the ITA requires withholding tax to be deducted from royalty payments derived from Malaysia and payable to a non-resident. The tax rate payable for royalty payments is 10% of the gross amount.
 
"Royalty" is defined in Section 2 of the ITA and includes -
 
(a)     any sums paid as consideration for the use of, or the right to use –
 
(i)      copyrights, artistic or scientific works, patents, designs or models, plans, secret processes or formulae, trademarks, or tapes for radio or television broadcasting, motion picture films, films or video tapes or other means of reproduction where such films or tapes have been or are to be used or reproduced in Malaysia or other like property or rights;
 
(ii)     know-how or information concerning technical industrial, commercial or scientific knowledge, experience or skill;
 
(b)     income derived from the alienation of any property, know-how or information mentioned in paragraph (a) of this definition.
 
Special classes of income
 
Section 4A of the ITA provides for special classes of income on which tax is chargeable. Section 4A, read together with Section 109B of the ITA, means that payments of special classes of income to non-residents are subject to withholding tax at the rate of 10%.
 
The 3 categories of income of non-residents which are caught under Section 4A are as follows:
 
(i)      amounts paid in consideration of services rendered by the person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any plant, machinery or other apparatus purchased from, such person;
 
(ii)     amounts paid in consideration of technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme;
 
(iii)    rent or other payments made under any agreement or arrangement for the use of any moveable property.
 
Section 4A income must be derived from Malaysia in order to be chargeable to withholding tax. Section 15A of the ITA provides that Section 4A income shall be deemed to be derived from Malaysia if:
 
(a)     the Government, State Government or local authority is responsible for the payment;
 
(b)     the responsibility for payment lies with a resident; or
 
(c)     the payment is charged as an outgoing or expense in the accounts of a business carried on in Malaysia.
 
However, in respect of income under Section 4A(i) and (ii), Section 15A shall apply only to the amount attributable to services which are performed in Malaysia.
 
DOUBLE TAXATION AGREEMENTS
 
A double taxation agreement ("DTA") is an agreement signed between two countries with the purposes of eliminating, whether wholly or partially, the burden of double taxation (i.e. where the income derived by a person from a source is brought to charge in more than one tax jurisdiction) and to prevent or minimise tax evasion.
 
Malaysia has entered into more than 60 bilateral DTAs. These DTAs commonly provide for either an exemption or reduction in the prescribed rate for certain types of withholding taxes. For example, the DTA between Malaysia and Singapore reduces withholding tax rate in respect of royalties and technical fees to 8% and 5% respectively. In the event of any conflict between the ITA and a DTA, Malaysian case law has held that the provisions of the DTA will prevail.