MALAYSIA Law and Practice Contributed by: Janet Toh, Irene Yong, Krystle Lui and Boo Cheng Xuan, Shearn Delamore & Co.
Digital services provided in relation to matters outside Malaysia are exempt from service tax as are those provided by a company to any compa - ny within the same group of companies provided certain conditions are met. Withholding Tax A 10% withholding tax (subject to any exemp - tion or reduced tax rate available under the applicable double tax treaty (DTA)) is also levied on payments to a non-resident in consideration of any advice given, or assistance or services rendered, in connection with the management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme which are derived or deemed derived from Malaysia. However, no withholding tax applies if such technical advice, assistance or services are rendered outside of Malaysia. Where the provision of the digital service or product involves a royalty payment, withholding tax obligations may arise upon the payment of “royalties” derived from Malaysia to a non-res - ident person (unless attributable to a business of the non-resident carried on in Malaysia). The payer must deduct and withhold tax at 10% of the gross amount (subject to any exemption or reduced tax rate available under the applicable DTA). Royalties would be deemed to be derived from Malaysia if, among other things, responsibility for payment lies with a person who is tax-resi - dent in Malaysia for that basis year. “Royalty” is given a very broad definition under the Income Tax Act 1967 (ITA), being deemed to include any sums paid as consideration for, or derived from:
• the use of, or the right to use in respect of, any copyrights, software, artistic or scientific works, patents, designs or models, plans, secret processes or formulae, trade marks or other like property or rights; • the use of, or the right to use, know-how or information concerning technical, industrial, commercial or scientific knowledge, experi - ence or skill; • the alienation of any property, know-how or information mentioned in the foregoing para - graphs. Where a DTA has been concluded between Malaysia and the jurisdiction in which the non- resident is tax-resident, the treaty provisions will prevail over the ITA in the event of a conflict. That is to say, the treaty definition of “royalty” will apply in such circumstances rather than the broad definition of the same under the ITA so that the payment in question may not be subject to Malaysian withholding tax. Challenges One of the challenges is the differing views which the payer and service provider may take with regard the characterisation of the payment as royalty or a payment for services. As the withholding tax liability (if any) is imposed upon the payer, some payers may subject pay - ment of the fees for such digital services or goods to withholding tax since the Malaysian Inland Revenue Board is likely to regard pay - ments relating to software as constituting royalty and will penalise the payer if the payments to the non-resident are not subjected to withhold - ing tax. As such, parties should ensure that the contracts are clearly drafted and indicate who should bear the withholding tax, in the event it is applicable.
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