Topic: Tax On Non-Resident and Double Taxation Agreement
Topic: Tax On Non-Resident and Double Taxation Agreement
Non-resident
9 and Double
Taxation
Agreement
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Discuss the scope of tax on the income of a non-resident;
2. Compute withholding tax and application;
3. Evaluate the administration of a Double Taxation Agreement; and
4. Compare unilateral and bilateral tax relief and its computation.
INTRODUCTION
In this topic, we will introduce you to the concept of non-resident (NR) for taxation
purposes. The discussion starts with the scope of charge for an NR person in
comparison with any other person. The five types of income that are subject to
withholding tax are discussed in this topic. The types of income involved are
Special Classes of Income, Interest Income, Royalty Income, Contract Payment and
Public Entertainer. The topic will also expose you to the penalty on non-
compliance and relief or exemption to the NR.
The second part of the topic continues with the same theme but the emphasis is on
Double Taxation Agreement (DTA) between countries. The relationship to
withholding tax is that Double Taxation Agreement will sometimes affect the rates
of withholding tax charge on the relevant income. The topic involves the
discussion of two types of relief, namely, unilateral and bilateral relief which will
avoid double taxation of the same income.
The principle of a withholding tax is that the payer withholds a certain percentage
of his money and gives it directly to the taxation authorities. The payee who is the
NR will only receive the balance. The DTA between countries will normally reduce
the withholding tax rates. The topic will discuss this in detail.
The scope of charge for different persons or businesses are stated in Table 9.1.
Specifically, the scope of charge of withholding tax would focus on the income
assessable to the NR. Withholding tax will be liable if:
(a) The recipient of income is an NR,
(b) The income is one of the categories stated,
(c) The income is derived or deemed to be derived from Malaysia,
(d) The income is not attributable to a business carried on in Malaysia by NR
(except for contract payment), and
(e) It is not an exempted income or under double taxation agreement.
For example, an accounting firm resident in the United Kingdom was engaged
by a Malaysian company to provide technical advice on matters regarding tax
planning on how to legally minimise payment of income tax. The services were
performed wholly in Malaysia. Payment for tax services will be subject to
withholding tax as the services are wholly performed in Malaysia. In other
words, the payments fall under the scope of charge for withholding tax.
In contrast, if the services were performed wholly in the United Kingdom, the
payment for the legal services will not be sub jected to withholding tax in Malaysia
as the services are wholly performed outside Malaysia. Therefore, the income does
not fall into the Malaysian scope of charge.
SELF-CHECK 9.1
Other than contract payments, withholding tax is a final tax. NRs would not be
liable for any further taxes once withholding taxes have been complied with.
The income liable to withholding tax is then multiplied by the withholding tax
rates to reach the amount of money that the payer needs to withhold. The
respective rates for each type of income are shown in Table 9.2:
Interest 15%
Royalty 10%
Amounts paid for services rendered by TNB Bhd purchases an industrial plant from
the NR person or his employee in YSL Ltd, a Singaporean company. The terms
connection with: of the purchase include installation of the
plant by YSL Ltd. YSL Ltd sends its engineers
• The use of property or rights to Malaysia to supervise the installation. The
belonging to him; or fee paid to YSL Ltd for the services is
RM888,000.
• The installation or operation of any
plant or machinery purchased from The fee paid to an NR company for the
him. supervisory services is subject to 10%
withholding tax (WT) on the gross amount:
RM
Amounts paid to an NR person for PTA (M) Bhd entered into an agreement with
technical advice, assistance or services PEA Pte Ltd, a company from Korea. PEA
rendered in connection with technical would provide technical personnel to carry
management or administration of any out engineering inspection and rectification
scientific, industrial or commercial works in Malaysia. The fee agreed upon was
undertaking, venture, project or scheme. RM300,000.
Time charter
Voyage charter
EXERCISE 9.1
GMAT Zone Pte Ltd, a consultancy company in Singapore was engaged
by the Business Faculty of University Malaya to conduct GMAT courses
and provide technical advice specially tailored to the needs of the
lecturers who will pursue their PhD in the United States. The courses and
technical advice were conducted only in Malaysia. The total cost of the
training and technical advice is RM40,000.
Example:
Cybernetic Sdn Bhd, a Malaysian company, signed an agreement with
SQSS Ltd, a Sri Lankan company, to provide a specialist service on
upgrading the information technology system. The preliminary
discussion was done through the Internet followed by programming
work by SQSS that took 30 days. A consultant from SQSS Ltd then
performed the upgrading work in Malaysia for 60 days. Another 30 days
were given to Cybernetics for any problem regarding the new system. The
consultancy was done via the Internet from Sri Lanka. The total fees paid
for the project amounted to RM120,000.
The proportion of the project value attributable to the services performed
in Malaysia is computed on time cost as follows:
All of these expenses are regarded as being part of the contract value.
Therefore, it is income of the payee and is subject to withholding tax at the
rate of 10% on the gross amount.
Deposit paid on the signing Projek Sdn Bhd signed a technical service
of an agreement for technical agreement with Professional Pte Ltd, a German
services which is refundable company to perform the services in Malaysia.
upon completion of the According to the agreement, Projek Sdn Bhd is
service required to pay a deposit of 10% which amounts
to RM100,000 upon signing the agreement. The
deposit will be refunded upon completion of the
service and full payment of RM1 million for the
technical service provided.
Testing services for the JC Safety Products Sdn Bhd made payments to
provision of test results on Inspec Ltd, a company based in Switzerland, in
finished products to meet consideration for providing testing services. The
required standards which do testing services involved providing test results for
not involve technical advice the purposes of certification of JCÊs finished
or consultation. products.
Where a payer is liable to pay interest to an NR, the payer needs to deduct
15% of the interest income as withholding tax. The NR will only receive the
net interest income after deduction of withholding tax. The withholding tax
shall be paid to the IRB within a month. The withholding tax is the final tax
imposed on the non-resident company.
SELF-CHECK 9.2
Change the question in the example above to „⁄royalty is paid to a
Malaysian branch of Brad Ltd⁄.‰ Will withholding tax apply to the
royalty income attributable to a business carried on in Malaysia?
The payer is regarded as the agent for the NR. Hence, he will have to pay the
withholding tax to the IRB within a month after making the payment.
Withholding tax is only applicable to the service portion of contract
payments paid to an NR contractor. The cost of materials and plant and
machinery must be excluded from the calculation of withholding tax.
In contrast with other types of income, the withholding taxes for contract
payments are not final taxes but are rather, advance taxes. As the NR is
basically carrying on business in Malaysia, the person would submit his tax
computation in the same manner as a resident person in ascertaining the
chargeable income.
The NR contractor would then be allowed to set off the 10% withholding tax
against the income tax payable. If the amount is more than the tax payable,
the NR will be refunded by the tax authorities. Figure 9.2 shows the tax
payable computation when there is withholding tax on contract payment.
For example, Indra Ltd, an Indonesian tax resident, provided technical services
to Ceria Sdn Bhd and the whole service was performed in Malaysia. Indra Ltd
issued an invoice dated 14 May 2018 amounting to RM70,000 for the services
provided. Ceria Sdn Bhd settled the invoice on 15 June 2018.
IRB Requirement:
Ceria Sdn Bhd is required to deduct 10% withholding tax from the gross value
of technical service fee of RM70,000 and remit to the IRB within one month from
the date of crediting to Indra Ltd, that is, on 15 June 2018. Therefore, the
withholding tax payable in this case is RM7,000 and must be remitted to the IRB
by 15 July 2018.
Penalty on non-compliance:
If Ceria Sdn Bhd fails to deduct and remit tax of RM7,000 on a payment of
RM70,000 which is subject to withholding tax within the 30 days, a penalty of
10% on the gross amount will be imposed on Ceria Sdn Bhd. The amount of
penalty is RM700 which is 10% of RM7,000. The total sum of RM7,700
(withholding tax of RM7,000 + penalty of RM700) will be a debt due to the
Government. Such payment will be disallowed as an expense in the
computation of the adjusted income from any source of the payer until the payer
pays the withholding tax together with the penalty.
Exemption
However, at times, the Double Taxation Agreement (DTA) will affect the above
withholding tax rates. Where a DTA has been signed with a particular country, the
preferential rate in the DTA would apply. To be eligible for the preferential rate, a
letter from the Revenue Authority of the relevant country confirming the resident
status of the payee should be submitted.
We will now cross the bridge between withholding tax and double tax
agreement. The correlation between the two elements is that DTA will affect the
withholding tax rates. Have a look at the illustration below:
Under the arrangement, the foreign tax payable under the laws of foreign tax
territory is to be allowed as a credit against tax payable in Malaysia. Objectives of
double tax agreements include the following:
(a) To reduce the burden of double taxation of the same income derived by the
taxpayer;
(b) To facilitate world trade with the scope of taxation clearly spelt out;
(c) To promote the transfer of technology and scientific knowledge to Malaysian
companies;
(d) To create a favourable climate for both inbound and outbound investments;
(e) To make MalaysiaÊs special tax incentives fully effective for taxpayers of
capital exporting countries; and
(f) To prevent tax evasion and avoidance.
The unilateral relief allowed in respect of any foreign income for a YA shall not
exceed one-half of the foreign tax payable on that income for that year. In other
words, unilateral relief is restricted to the lower of:
EXERCISE 9.2
For YA2018, Ginny Sdn Bhd reported a total taxable income of
RM80,000 that included RM1,000 of foreign-sourced income. The
company income tax liability was RM18,000. A foreign income tax paid
on the foreign income was RM200. Malaysia does not have DTA with
the foreign country. Calculate the tax relief available to Ginny Sdn Bhd.
Currently, the tax treaties between Malaysia and the following countries (by
alphabetical order) below are in force as at 28 July 2018:
Indonesia Qatar
Iran Romania
Ireland Russia
The bilateral credit is only available to Malaysian tax residents. The claim for
bilateral credit for a YA must be made in writing to the Director-General of IRB
within two years. The maximum bilateral credit allowed is a sum equal to
Malaysian tax payable for the YA. In other words, bilateral relief is restricted to the
lower of:
EXERCISE 9.3
In 2018, Waja Berhad, a Malaysian tax resident, reported a total taxable
income of RM84,000 that included RM2,000 of foreign-sourced interest.
The company tax liability for the YA amounted to RM23,520. The
company paid foreign tax of RM600 on the foreign income. Malaysia has
a DTA with the foreign country. Calculate the tax relief available to Waja
Berhad.
• To ensure efficient tax collection, the Income Tax Act 1967 has appointed the
payer as an agent responsible to collect income taxes from NR.
• The person will withhold a portion of the payment (withholding tax) and pay
to the tax authorities.
• Special Classes of Income are divided into interest income, royalty income,
contract payment and public entertainer.
• NR receiving the income would be liable for withholding tax if such income is
deemed derived from Malaysia.
• NR will only receive the net income after deduction of withholding tax.
• The withholding tax shall be paid to the IRB within one month; otherwise, a
penalty will be imposed amounting to 10% of the withholding tax amount.
• The intention is to avoid double taxation in relation to tax by the Malaysian tax
authority and tax of foreign territory of the same income.
• Unilateral tax relief is a tax credit when there is no tax treaty between Malaysia
and the foreign country.
• The unilateral relief allowed in respect of any foreign income for a YA shall not
exceed one-half of the foreign tax payable on the income for that year.
• Bilateral tax relief is a tax credit given when there is a tax treaty between
Malaysia and the foreign country.
• The maximum bilateral credit allowed is a sum equal to Malaysian tax payable
for the YA.
2. What are the types of special classes of income payable to NR that are
chargeable to withholding tax?
3. State the rate of withholding tax on special classes of income and when the
tax should be collected.
8. Discuss conditions that need to be satisfied before the IRB allows bilateral tax
relief for a taxpayer.
9. Explain the operation of the foreign tax credit limitation that is based on
foreign income.
10. Pahlawan Sdn Bhd reported foreign income tax of RM1,500 on foreign
income of RM8,500. The companyÊs Malaysian taxable income inclusive of
the foreign source income was RM95,000 and the tax liability was RM26,600.
What is the amount of foreign tax credit allowed? Malaysia has a DTA with
the foreign country. What would be the allowed credit if PahlawanÊs foreign
taxable income was RM25,000 and the foreign tax liability was RM7,000?
RM
Required:
(a) State the amount of withholding tax that Hijaz Sdn Bhd is required to
deduct from each of the above payments that are applicable to
withholding tax deduction requirement (ignore the provisions of
DTAs).
(b) State the payment that is not applicable to withholding tax and give
reasons.
Required:
(a) State the amount of withholding tax which Raihan Sdn Bhd is required
to deduct from each of the payments mentioned in the scenario (ignore
any double taxation agreement.)
(b) State, with reasons, when Raihan Sdn Bhd is required to deduct the
withholding tax in (a) above.
(c) State the stipulated period during which the taxes withheld must be
remitted to the IRB.
3. Star Agency Sdn Bhd engaged the service of Teri, an NR specialist designer
for a fee of RM220,000. The design was prepared in Holland and sent by
courier to Kuala Lumpur. The fee was paid on 1 August 2018.
Required:
Explain the withholding tax implications with regard to the expenditure
incurred by Star Agency Sdn Bhd in respect of the services rendered by Teri
and Mayer.
4. (a) List the factors under ITA that determine whether or not interest
payable to an NR person is subject to withholding tax.
(b) State the tax compliance required of the payer of interest which is
subject to withholding tax.
(c) State, with reasons, whether or not the interest payable to each of the
following non-resident persons is subject to withholding tax:
(i) Interest payable to a Belgium company by the Perak State
Government.
(ii) Rooney, a resident of New Zealand, is liable to pay interest on a
loan he has taken out to buy a property situated in Malaysia for
use as a holiday home for himself and his family.
5. Attap Berhad signed an agreement with Junyi Ltd, a Korean company, for
the construction of a building in Kuala Lumpur. Junyi set up a project
management office in Kuala Lumpur. The total value of the contract is RM10
million of which RM4 million is the service portion and RM6 million, the cost
of materials.
Required:
(a) Explain the withholding tax obligation of Attap Bhd with regard to
these payments and determine the amount to be withheld (ignore any
DTAs).
(b) Calculate the tax liability of Junyi Ltd assuming that the construction
project was started and completed in the year of assessment 2018 and
the chargeable income is RM3.3 million.
(c) State the two features that distinguish withholding tax applicable to an
NR contractor from other withholding taxes.
State whether, and if so, when and how, the 3% withholding tax in respect of
the employees' tax will be recoverable.