Topic: Tax On Non-Resident and Double Taxation Agreement

Topic  Tax on
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
Copyright © Open University Malaysia (OUM)

160  TOPIC 9 TAX ON NON-RESIDENT AND DOUBLE TAXATION AGREEMENT
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.
9.1 SCOPE OF CHARGE

A transaction must fall within the ambit of scope of charge in order to be liable to
income tax. Circumstances where income tax liability would arise are:
(a) The transaction must be income in nature;
(b) Such income is accrued in or derived from Malaysia; and
(c) It is received in Malaysia from outside Malaysia (foreign source income).
The scope of charge for different persons or businesses are stated in Table 9.1.
Table 9.1: Scope of Charge
Person or Businesses Income Assessable
Resident Individual • Income derived from Malaysia and income received

in Malaysia from outside Malaysia (until YA1994)
• Income derived from Malaysia (from YA1995
onwards)
Non-Resident Individual Income derived from Malaysia
Resident Company • Income derived from Malaysia and income remitted

to Malaysia from outside Malaysia (until YA1994)
• Income derived from Malaysia (from YA1995
onwards)
Banking, Insurance, World income scope

Shipping and Air Transport
Non-Resident Company • When it carries on a business through a permanent

establishment in Malaysia
• Is assessable on income derived only from sources
within Malaysia.

TOPIC 9 TAX ON NON-RESIDENT AND DOUBLE TAXATION AGREEMENT  161
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
What is the primary motivation for withholding tax? Is it something to

do with reducing tax evasion?
9.2 WITHHOLDING TAX PROVISION

The Income Tax Act 1967 requires a person who is liable to make payment to an
NR person to deduct a tax known as withholding tax at a prescribed rate. The
amount deducted must be remitted to the IRB within one month after payment has
been paid or credited to the NR payee. Withholding tax is levied on the gross
payable amount.
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.

9.2.1 Income Liable to Withholding Tax

The types of income liable to withholding tax are restricted to a few types of
payments to NR that has business dealings in Malaysia as shown below in
Figure 9.1.
Figure 9.1: Types of income
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:
Table 9.2: Rates of Withholding Tax
Types of Income Rate
Special Classes Of Income 10%
Interest 15%
Royalty 10%
Contract Payment 10% + 3%
Public Entertainer 15%

(a) Special Classes of Income

In accordance with Inland Revenue Public Ruling No. 4/2005, the income of
an NR person from the following special classes of income is chargeable to
tax in Malaysia if it is derived from Malaysia. See Table 9.3 for examples.
Table 9.3: Examples for Special Classes of Income of Non-Resident Person
Special Classes Of Income Example
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
Technical service fee 888,000.00
Less: WT (10%) 88,800.00
Payment due to YSL 799,200.00
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.
The fee of RM300,000 is subject to

withholding tax at 10% [10% x RM300,000 =
RM30,000].
Rent or other payments made under any Examples are:

agreement or arrangement to an NR
person for the use of any moveable Slot hire
property. Leasing of ships
Time charter
Voyage charter

Special classes of income shall be deemed to be derived from Malaysia if:

(i) The responsibility for the payment lies with the Government or a State
Government;
(ii) The responsibility for the payment lies with a person who is a resident
in Malaysia for that basis year;
(iii) The payment is charged as an outgoing or expense in the accounts of a
business carried on in Malaysia; and
(iv) Services are performed in Malaysia [SCI part (a) and (b)].
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.
In connection with the example given above, what if:

(a) The courses are conducted both in Malaysia and Singapore?
(b) The courses are wholly conducted outside Malaysia?
If a contract requires performance of services both within and outside

Malaysia, the contract value is apportioned between the countries. The
method of apportionment is not specified but it must be fair and justifiable.
Only the portion of contract value that is attributable to services performed
in Malaysia is subject to withholding tax.

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:
Total fees for the project RM120,000
Total number of days spent 120 days
Time cost in Malaysia [60/120 × RM120,000] = RM60,000
Withholding Tax 10% × RM60,000 = RM6,000
Other expenses subject to withholding tax include out-of-pocket expenses,

non-refundable deposits and advance payments paid to the NR in connection
with the services rendered.

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.
For example, an NR consultant, Mr Hatcher, was engaged to conduct a

training on advertising for a fee of RM301,000. Mr Hatcher stayed in Kuala
Lumpur for two weeks to conduct the hands-on training. Mr HatcherÊs
hotel room charges of RM8,300 during his stay in Kuala Lumpur were paid
by the company on 6 July 2014 along with the training fee of RM301,000.
The consultantÊs fee is subject to withholding tax at the rate of 10% on the
gross amount in view of the fact that the service was performed in Malaysia.
The payment for hotel room charges is also subjected to withholding tax as
it is an out-of-pocket expense.
In contrast, there are a few payments to NR which are not subject to

withholding tax. These types of payment and examples are given in
Table 9.4.
Table 9.4: Payments which are not subject to withholding tax
Types of Payment Example
Commission paid to an NR Matrix Inc, a general commission agency,

general commission agent canvassed sales in Japan on behalf of a Malaysian
for sales made on behalf of company. The Malaysian company paid
the Malaysian company or commission to the NR company based on the sales
individual made.
Guarantee fees connected Promissory Pte Ltd provides a guarantee to a loan

with: taken from a bank in Singapore by a Malaysian
company. In return for that guarantee, the
• Loan
Malaysian company paid a sum of money as
• Indebtedness guarantee fees to Promissory Pte Ltd.
• Commission for the

letters of credit
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.
Source: Inland Revenue Public Ruling No. 4/2005
(b) Interest Income

Section 109 of the Income Tax Act 1967 provides for a withholding tax on
interest paid to any person who is an NR in Malaysia. The NR receiving the
interest income would be liable for withholding tax if such interest income is
deemed to be derived from Malaysia. Interest income shall be deemed to be
derived from Malaysia if:
(i) The responsibility for the payment lies with the Government or a State
Government;
(ii) The responsibility for the payment lies with a person who is resident in
Malaysia for that basis year;
(iii) The interest is payable in respect of money borrowed for the
production of gross income derived from Malaysia;
(iv) The interest is payable in respect of money borrowed which is secured
by any property or asset situated in Malaysia; and
(v) The interest is charged as an outgoing or expense against any income
accruing in or derived from Malaysia.
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.

For example, a company resident in Vietnam grants a loan of RM2.5

million at an interest rate of 3% to its subsidiary company, a tax resident
in Malaysia. The loan is to finance the purchase of a plant for the business
of the subsidiary company. The payment, being interest income, is subject
to Malaysian tax as it is deemed derived from Malaysia. This is because
the payer (the subsidiary company) is a tax resident of Malaysia and the
loan is used to finance an asset used in the production of the gross income
of the payer derived from Malaysia. Withholding tax at the rate of 15%
must be deducted from the interest upon paying or crediting such interest
to the non-resident company.
However, if the NR person carries on a business in Malaysia and the interest

payable by the Malaysian payer is attributable to the business carried out in
Malaysia, then the withholding tax is not applicable. Such interest income
would be subject to income tax at the prevailing tax rates for that person.
(c) Royalty Income

Any NR receiving royalty income would be liable for withholding tax if such
royalty income is deemed derived from Malaysia. NR will only receive the
net royalty income after deduction of the withholding tax. Where a payer is
liable to pay royalty to NR, the payer needs to deduct 10% of the royalty
payment as withholding tax. The withholding tax shall be paid to the IRB
within a month. Withholding tax does not apply when business is carried out
in Malaysia by NR, for instance, if a branch is set up in Malaysia.
City Sdn Bhd, a company resident in Malaysia, manufactures rubber

gloves for export. On 1 January 2018, the company entered into an
agreement with Brad Ltd, a foreign company, for the transfer of technical
know-how and assistance. Royalty amounting to RM55,000 will be
payable on 31 December 2018 to Brad Ltd.
The payment of royalty income is deemed derived from Malaysia as the
responsibility for the royalty payment lies with the resident person, City
Sdn Bhd. On 31 December 2018, RM49,500 [RM55,000 – RM5,500] is
payable to Brad Ltd. A withholding tax of RM5,500 [RM55,000 x 10%] is
payable to the IRB by 31 January 2019.

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?
(d) Contract Payment

The development of many mega projects in Malaysia such as the Kuala
Lumpur International Airport, Petronas Twin Towers, Sepang International
Circuit and many more result in an increasing number of foreign NR
contractors and employees providing services in this country. Accordingly,
the tax authorities have legislated s107A of the ITA which provides ruling on
withholding tax for contract payment.
Contract payment is defined as any payment made for services under a

contract to an NR contractor. NR contractors must have a permanent
establishment or business presence in Malaysia. The total rate of withholding
tax is 13% whereby 10% withheld is for the NR contractorÊs tax liabilities
while the remaining 3% is meant for the NR contractorÊs employees.
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.

Figure 9.2: Tax computation with withholding tax on contract payment
(e) Public Entertainer

Public entertainer is defined as a stage, radio or television artiste, a musician,
athlete or an individual exercising any profession, vocation or employment
of a similar nature. Remuneration paid to the NR public entertainer in respect
of services performed or rendered in Malaysia would attract withholding tax.
The mechanics of withholding tax calculation are similar to royalty and
interest income.
A public entertainerÊs income shall be deemed to be derived from Malaysia if:

(a) For any period during which the employment is exercised in Malaysia;
(b) For any period of leave attributable to the exercise of the employment
in Malaysia; and
(c) For any period during which the employee performs outside Malaysia
duties incidental to the exercise of the employment in Malaysia.
9.2.2 Penalty on Non-compliance

A payer, normally a person carrying on a business in Malaysia, is responsible for
deducting and remitting the withholding tax payment to the Director-General and
paying the recipient (an NR person) the balance. The payer must, within one
month upon paying or crediting the recipient, pay the withholding tax that has
been deducted to the Director- General.

The consequences of failure to comply with withholding tax regulations are as

follows:
(a) A 10% penalty on the withholding tax amount will be imposed on the payer;
(b) The amount that should have been deducted as withholding tax and the
relevant penalty will be a debt due to the Government by the payer;
(c) The gross amount of expenses would not be allowed as a deduction in
ascertaining the adjusted income of the payer if the withholding tax and 10%
penalty are not paid.
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.
9.2.3 Exemption of Withholding Tax to Non-resident

Income derived by NR persons from the following sources is not subject to
withholding tax as it is exempted (refer to Table 9.5).

Table 9.5: Exemption of Withholding Tax to Non-Resident
Exemption
• Income from rental of International Standards Organization (ISO) containers

by a Malaysian shipping company
• Income from an approved Multimedia Super Corridor (MSC) status.
• Approved industrial royalties through double taxation agreement
• Franchised education schemes approved by the Ministry of Education
• Labuan offshore companies
• Income from providing training to Malaysians
• Income from rental of ships of transporting passengers or cargo
• Income for Iskandar Development Region (IDR) in respect of the following:

− Special classes of income received from a developer, development
manager or IDR status company
− Royalty received from a developer or IDR status company
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:
A Mongolian firm entered into an agreement with the Malaysian Ministry of

Defence to provide specialist and technical personnel to carry out inspections
and rectification works on army equipment. The fees agreed upon were
RM500,000. Without the DTA, the fees of RM500,000 are subject to withholding
tax at 10% on the gross amount. However, pursuant to the DTA between
Malaysia and Mongolia, the withholding tax rate is only 8% on the gross
amount. In short, with DTA, the withholding tax rates normally will be lower.

9.3 DOUBLE TAXATION AGREEMENT

Double Taxation Agreement is an arrangement made by the Malaysian
Government with the government of any territory outside Malaysia with the
intention of avoiding double taxation in relation to tax by the Malaysian tax
authority and tax of foreign territory of the same income. Agreements for the
avoidance of double taxation prevent incidences of double taxation on income
such as business profits, dividends, interest and royalties that are derived in one
country and remitted to another country.
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.
Relief from double taxation of foreign sourced income is available through

unilateral and bilateral tax relief.
9.3.1 Unilateral Tax Relief

Unilateral tax relief means a tax credit in respect of foreign tax payable under the
laws of a territory outside Malaysia. Unilateral relief is given when there is no tax
treaty between Malaysia and the foreign country. The credit is available to a
Malaysian tax resident as well as the non-tax resident.
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.
9.3.2 Bilateral Tax Relief

Bilateral tax relief means tax credit in respect of foreign tax which, by virtue of any
arrangements, is to be allowed as a credit against Malaysian tax. Bilateral credit
shall be allowed in the same way as unilateral credit. However, bilateral credit is
given when there is a tax treaty between Malaysia and a foreign country. The
amount of Malaysian tax payable for a YA shall be reduced by the amount of any
bilateral credit.
Currently, the tax treaties between Malaysia and the following countries (by
alphabetical order) below are in force as at 28 July 2018:
Table 9.6: Double Taxation Agreement
Albania Italy San Marino
Argentina Japan Saudi Arabia
Australia Jordan Senegal
Austria Kazakhstan Seychelles
Bahrain South Korea Singapore
Bangladesh Kyrgyz Republic Slovak Republic
Belgium Kuwait South Africa
Bosnia Herzegovina Laos Spain

Brunei Lebanon Sri Lanka
Canada Luxembourg Sudan
Chile Malta Sweden
China Mauritius Syria
Croatia Mongolia Switzerland
Czech Republic Morocco Thailand
Denmark Myanmar Turkey
Egypt Namibia Turkmenistan
Fiji Netherlands United Arab Emirates
Finland New Zealand United Kingdom
France Norway United States of America
Germany Pakistan Uzbekistan
Hungary Papua New Guinea Venezuela
Hong Kong Philippines Vietnam
India Poland Zimbabwe
Indonesia Qatar
Iran Romania
Ireland Russia
Source: Jeyapalan Kasipillai (2019)
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.
• Withholding tax is imposed on a non-resident (NR) who has business dealings

in Malaysia.
• An NR does not have a business presence in Malaysia but merely renders

services from his home country (trading in Malaysia).
• 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.
• Income liable to withholding tax is only restricted to a few types of payments

to NR.
• 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.
• There are a few exemptions available to the income subjected to withholding

tax.

• Double Taxation Agreement is an arrangement made by the Malaysian

Government with the government of any territory outside Malaysia.
• 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.
Bilateral credit Person

Contract payment Professional services
Contract project Reimbursements
Date of Crediting Resident company
Disbursements Resident person
Foreign income Services under a contract
Leasing of ships Slot hire
Malaysian tax Time charter
NR contractor Unilateral credit
NR person Voyage charter

1. Explain the term „withholding tax‰ as applied to payments due to NR under

the ITA, 1967.
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.
4. State the consequences if a person fails to comply with withholding tax

provisions.
5. State two types of interest income derived from Malaysia by a non-resident

person which are tax exempted.
6. Brussel Iron Ltd, a company resident in Germany, sold five furnaces to

Perwira Sdn Bhd, a steel manufacturer in Malaysia, at the price of
RM900,000. It was agreed that an additional sum of RM50,000 was payable
to Brussel Iron Ltd for the service of installation and commissioning of the
furnaces. Are there any withholding tax implications?
7. State the objectives of double taxation agreement.
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?

1. Hijaz Sdn Bhd is a construction company. During the year ended 31

December 2018, Hijaz made the following payments to NRs:
RM
Royalties to architects in France for the use of copyright designs 720,000
Technical fees to Irish structural engineers for work performed 360,000

solely from Ireland
Technical fees to Irish structural engineers for work performed in 590,000

Malaysia
Commission to a Thai company for introducing the supplier of 133,000

certain building materials
Contract payments to a Japanese sub-contractor for the 2,150,000

construction of a bridge in Penang
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.
2. Raihan Sdn Bhd purchased some high-tech equipment from a non-resident

company for installation in its factory in Kuala Lumpur. The agreement
provides for an NR employee of the supplier to carry out the installation and
render related consultancy services to Raihan Sdn Bhd in Kuala Lumpur. The
amounts stipulated in the agreement are an installation fee of RM240,000 and
a consultancy fee of RM170,000. The installation and consultancy fees were
paid on 1 April 2018 and 1 September 2018 respectively. The applicable rate
of withholding tax is 10%.

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.
An NR consultant, Mayer, rendered training services to Star Agency. The

services were performed in Malaysia. Mayer issued an invoice for the value
of RM16,000 which included reimbursements such as cost of airfare and hotel
charges of RM4,000 incurred by him.
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.

Topic: Tax On Non-Resident and Double Taxation Agreement

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Copyright © Open University Malaysia (OUM)

9.1 SCOPE OF CHARGE

Table 9.1: Scope of Charge

Person or Businesses Income Assessable

Resident Individual • Income derived from Malaysia and income received

Non-Resident Individual Income derived from Malaysia

Resident Company • Income derived from Malaysia and income remitted

Banking, Insurance, World income scope

Non-Resident Company • When it carries on a business through a permanent

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What is the primary motivation for withholding tax? Is it something to

9.2 WITHHOLDING TAX PROVISION

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9.2.1 Income Liable to Withholding Tax

Figure 9.1: Types of income

Table 9.2: Rates of Withholding Tax

Types of Income Rate

Special Classes Of Income 10%

Contract Payment 10% + 3%

Public Entertainer 15%

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(a) Special Classes of Income

Table 9.3: Examples for Special Classes of Income of Non-Resident Person

Special Classes Of Income Example

Technical service fee 888,000.00

Less: WT (10%) 88,800.00

Payment due to YSL 799,200.00

The fee of RM300,000 is subject to

Rent or other payments made under any Examples are:

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Special classes of income shall be deemed to be derived from Malaysia if:

In connection with the example given above, what if:

If a contract requires performance of services both within and outside

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Total fees for the project RM120,000

Total number of days spent 120 days

Time cost in Malaysia [60/120 × RM120,000] = RM60,000

Withholding Tax 10% × RM60,000 = RM6,000

Other expenses subject to withholding tax include out-of-pocket expenses,

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For example, an NR consultant, Mr Hatcher, was engaged to conduct a

In contrast, there are a few payments to NR which are not subject to

Table 9.4: Payments which are not subject to withholding tax

Types of Payment Example

Commission paid to an NR Matrix Inc, a general commission agency,

Guarantee fees connected Promissory Pte Ltd provides a guarantee to a loan

• Commission for the

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Source: Inland Revenue Public Ruling No. 4/2005

(b) Interest Income

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For example, a company resident in Vietnam grants a loan of RM2.5

However, if the NR person carries on a business in Malaysia and the interest

(c) Royalty Income

City Sdn Bhd, a company resident in Malaysia, manufactures rubber

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(d) Contract Payment

Contract payment is defined as any payment made for services under a

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Figure 9.2: Tax computation with withholding tax on contract payment

(e) Public Entertainer

A public entertainerÊs income shall be deemed to be derived from Malaysia if: