WITHHOLDING TAXES By: Associate Professor Dr. GholamReza Zandi

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by a Takaful operator Gains or profits falling under sec 4(f) ITA ( income on which tax is chargeable) Contributions withdrawn from a private retirement scheme 4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