Having received several queries on whether the changes to the Withholding Tax provisions in the Budget 2017 proposals (mentioned in our previous article) have already taken effect, we have decided to provide an update.
Section 6 of the Finance Act 2017 deletes the proviso contained in s15A of the Income Tax Act on the coming into operation of the Finance Act 2017. The Finance Act 2017 received Royal Assent on 9 January 2017 and was gazetted on 16 January 2017. As a quick recap, the proviso had confined the withholding tax to only services which are performed by non-residents in Malaysia (ie. onshore).
We have reproduced in its entirety below the now amended s15A “Derivation of special classes of income in certain cases”, which reads as follows (italics/emphasis are ours):
“Gross income in respect of-
(a) amounts paid in consideration of services rendered by a 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;
(b) 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;
(c) rent or other payments made under and agreement or arrangement for the use of any moveable property
shall be deemed to be derived from Malaysia-
(i) if responsibility for payment of the above or other payments lies with the Government, a State Government or a local authority;
(ii) if responsibility for the payment of the above or other payments lies with a person who is a resident for that basis year; or
(iii) if the payment of the above or other payments is charged as an outgoing or expense in the accounts of a business carried on in Malaysia.
Provided that in respect of paragraphs (a) and (b) , this section shall apply to the amount attributable to services which are performed in Malaysia.”
The removal of the deleted proviso above effectively means that payments made by Malaysian residents to non-residents for technical services that are performed both onshore and now offshore will be subject to withholding tax under section 109B of the Income Tax Act. This includes situations even where the non-resident does not have a permanent establishment in Malaysia, which may result in double taxation in some cases where the double tax treaty does not have a specific article for “Technical Fees / Technical Services”.
Moving forward, Malaysian tax residents that effect payments offshore for technical services should:
- Revisit all on-going agreements with non-residents which provide technical services, to determine whether the contractual clauses contain any express provision on withholding taxes and consider re-negotiating who bears the economic burden of the withholding tax given the absence of any transitional provisions.
- Negotiate new contracts within the withholding tax provisions in mind, and to ensure that there are clear provisions to provide for the withholding mechanism (amount and timing) and also which party ultimately bears the economic burden of the withholding tax.
- To check the applicable double tax treaty for any specific articles which may shelter the payment from double tax or vary the withholding tax rate.
- Put in place instructions and procedures to ensure that withholding tax is paid to the Malaysian Inland Revenue Board within the correct timeframe failing which penalties will apply.
Do feel free to contact us if you require clarification or our assistance on the above.