EUMCCI forms task force to help members understand the Finance Bill 2016
27 Feb 2017
EUMCCI have formed a task force to help us understanding the technicalities and repercussions of recent rulings included in the Finance Bill 2016. We met yesterday and we tackled at length the issues related to withholding tax with the help of KPMG Corporate Tax team. The discussion led me to the conclusion that the repercussions to the business community may be greater than what is currently perceived, partly because the matter at hand is not understood to a sufficient level of depth.
The new withholding tax regulations became effective on 17th January 2017 and involve a 10% withholding tax to all amounts paid or credited to non-residents in consideration for services, even if such services are performed outside Malaysia. The Malaysian tax authorities take the position that service income of a non-resident is a “special class of income”, distinct from business profits and widespread treaty protection may not be available. Certain bilateral tax treaties may still provide relief or reduce withholding tax rates, however, the current position of Inland Revenue Board Malaysia doesn’t seem to be friendly towards these treaties and several controversies are emerging.
In addition, the Bill proposes to expand the definition of “royalty” to include any consideration paid for the use of or the right to use software. Accordingly, such amounts will be subject to the 10% domestic royalty withholding tax.
The new ruling states that withholding tax is now due for technical and non-technical services rendered outside Malaysia. The inclusion of non-technical services and “outside Malaysia” are the new elements. Furthermore, the definition of non-technical services basically may include at present any type of service you can think of.
Below are some real examples and business sectors that may be affected by the new ruling:
- The intercompany services that a Malaysian branch have to pay to a global business centre located abroad and part of the same company require the Malaysian branch to withhold 10% of the total owed to the foreign entity. This is likely to result in the foreign entity to be forced to increase intercompany charges to the Malaysian branch, which will be effectively hit by a 10% indirect taxation increase.
- Hotel management service and marketing services charges provided by a non-resident company to a local Hotel are now subject to withholding tax.
- The bank charges charged by a foreign bank to a Malaysian bank may be subject to withholding tax and any other type of similar financial service for that matter
- The intermediary booking charges by any web/e-commerce type of service located abroad should be subject to withholding tax this may include transactions related to hotel booking, car rental, air tickets, etc.
- Reinsurance premiums paid to non-resident companies by local insurance companies
- Fees paid by a resident company for intercompany R&D, design and similar services
- Seconded personnel into Malaysia invoiced by non-resident partner company.
Despite the new legislation having been effective for over a month now, it is felt that a large number of companies may be unaware of the ruling, its scope and its implications.
As it stands, if a company gets caught non-complying, further to pay what it is owed from January 17th 2017 to date, there is 10% penalty charge on the whole amount owed and the company will not be able to claim this cost for tax deduction.
In light of the above and considering the opportunity given by the forthcoming “IN CONVERSATION WITH” event on March 1st with the presence of the Secretary General Ministry of Finance, Tan Sri Dr. Ridwan Seriga and the private appointment EUMCCI has been granted on March 28th with the Ministry of Finance II, YB Datuk Johari, I would urge you to discuss this topic with your members and let me know of companies that may be affected by this new ruling. In order to take advantage of these forthcoming dialog opportunities with Malaysian policy makers, I believe it is of paramount importance to present real facts and figures if we want to be heard.
Chief Executive Officer
EU-Malaysia Chamber of Commerce and Industry (EUMCCI)
Suite 10.01, Menara Atlan, 161B Jalan Ampang, 50450 Kuala Lumpur, Malaysia
Tel. +603-2162 6298