On March 16, 2018, the Inland Revenue Board of Malaysia (IRBM) issued Practice Note No. 1/2018 to clarify the tax treatment for digital advertising services provided by non-residents. This note serves as guidance on withholding tax requirements for income derived from such services. The tax treatment depends on the specific circumstances of each case.
If a non-resident has a permanent establishment (PE) or business presence in Malaysia, the payment received is considered business income derived from Malaysia and is taxable under paragraph 4(a) of the Income Tax Act, 1967 (the Act). If the non-resident lacks a PE or business presence in Malaysia, the payment is subject to withholding tax under Section 109 (for royalty income) or Section 109B (for income under paragraph 4A(ii) of the Act).
The key factors determining the application of withholding tax under Section 109 or 109B are:
- Section 109 applies if the payment is for the purchase or use of an application (e.g., Apps) that enables the payer to create their own advertising campaign.
- Section 109B applies if the payment is for a service provided by the non-resident that does not involve the purchase or use of Apps, where the payer relies entirely on the service provider for all aspects of digital advertising.
In essence, if the payer simply receives the service and relies on the provider for managing all aspects of the advertising campaign, the payment falls under the scope of services. Payments made for the right to use an application, platform, advertising campaign management system (such as Google Ads or Facebook Ads), or software purchases fall under the category of royalties and are subject to withholding tax if the non-resident provider lacks a PE or business presence in Malaysia.
Additionally, the IRBM issued a Revised Guideline on Taxation of Electronic Commerce Transactions on May 13, 2019, to further clarify the tax treatment of e-commerce transactions. This guideline defines e-commerce transactions, identifies common e-commerce business models, and outlines the tax liabilities for e-commerce business income, transactions under special classes of income, and those considered royalties.
https://phl.hasil.gov.my/pdf/pdfam/guidelines_e_commerce_13052019.pdf
The guideline also provides examples to distinguish between expenses classified under special classes of income (Section 109B) and royalties (Section 109).
- Special Classes of Income (Section 109B): According to Example 2, payments for online services via a platform to non-residents are subject to withholding tax under Section 109B if the services are performed in Malaysia. However, if the services are proven to be performed outside Malaysia, withholding tax on services is exempt under the Income Tax (Exemption)(No.9) Order 2017.
- Royalties (Section 109): Based on Example 3, payments made to a social media company that allows users to create their own advertisement campaigns using the company’s platform are classified as royalties and are subject to withholding tax under Section 109. Example 4 indicates that payments to non-residents for software use or licensing fees are also considered royalties and subject to withholding tax under Section 109. Example 5 further explains that subscription fees for the right to use an application are classified as royalties, whereas service transaction fees are subject to withholding tax under Section 4A (special classes of income).
Refer to the full guideline and IRBM’s Practice Note 1/2018 for further clarification.
http://lampiran1.hasil.gov.my/pdf/pdfam/DTA_WHT_Rates_DEC_2017.pdf
Withholding Tax Rate:
| Payment Type | Income Tax Act 1967 | Withholding Tax Rate | Payment Form |
| Royalty | Section 109 | 10% | CP37 |
| Special classes of income under paragraph 4A(ii) – service (Note) | Section 109B | 10% | CP37D |
Note: The Ministry of Finance issued the Income Tax (Exemption)(No.9) Order 2017, effective from September 6, 2017, exempting non-residents from withholding tax under Section 109B for technical and other services rendered and performed outside Malaysia. Services rendered in Malaysia remain subject to withholding tax.
Double Taxation Agreement (DTA):
If a Double Taxation Agreement (DTA) exists with another country, the preferential withholding tax rate specified in the DTA applies. To qualify for this rate, a letter from the relevant country’s Revenue Authority confirming the payee’s resident status must be submitted.
For instance, under the DTA between Malaysia and Singapore/Ireland, royalty payments are subject to a preferential withholding tax rate of 8% instead of the standard 10% under Section 109. You can check the DTA withholding tax rates for more information.
Calculation of Withholding Tax:
Effective December 5, 2018, as per Public Ruling No. 11/2018, when withholding tax under Section 109B is borne by the payer, it is calculated on the gross amount paid to the non-resident. There’s no need to regross the payment to determine the withholding tax amount. This rule also applies to other withholding tax provisions under Sections 109, 109A, and 109F.
Example: If a royalty payment of RM1,000 is made for Facebook ads, subject to an 8% withholding tax under the DTA:
- Withholding tax = RM1,000 x 8% = RM80
Penalties for Non-Compliance:
Payers are required to remit withholding tax to the IRBM within one month of payment to the non-resident. Failure to do so results in a 10% penalty on the unpaid tax, and the expense will be disallowed as a tax deduction until the withholding tax and penalty are settled.
From 2011 onwards, the IRBM can impose penalties under Section 113(2) of the Act for incorrect returns if tax deductions on expenses related to non-resident payments are claimed without paying the applicable withholding tax and penalty by the due date.
Additionally, the IRBM has highlighted in Public Ruling No. 11/2018 that penalties can be imposed under Section 113(2) for filing incorrect returns, even if the company has “NIL” income tax payable during the assessment year.
