Question

Bintara Sdn. Bhd., a company resident in Malaysia, manufactures microchip. Recently,
Prestige Pte. Ltd., a foreign company, discovered a new way of processing data at a faster speed.
Bintara Sdn. Bhd. approaches Prestige Pte. Ltd. for the transfer of technical know-how. Prestige
Pte Ltd agreed to this and demand a payment of RM500,000. This amount is payable on 15 June
2019 and to be paid as follows:
I. RM200,000 to be paid to Prestige Pte Ltd branch in Malaysia
II. RM300,000 to be remitted to Prestige Pte Ltd in foreign country
To transfer the technology, Bintara Sdn. Bhd. needs to purchase a new machine and borrows
RM1 million from a foreign bank in France to acquire the new machine. The interest for the
sum borrowed amounted to RM120,000 and its payable on 30 September 2019.
Required:
State with reason whether the above payments made by Bintara Sdn. Bhd. are subject to
withholding tax. State the rate(s) imposed and the amount of withholding tax (if
applicable), and the due date payable to Inland Revenue Board.

Answer 1

Let us first understand what 'Withholding Tax' means. If a business based in Malaysia procures services from a Non Resident business (not residng in Malaysia) and makes a payment for these specified services, it needs to withhold or deduct an amount as tax before making the payment to the Non resident payee. This tax is to be paid to the Director General of Inland Revenue within 1 month of paying/crediting the payment to the NR payee.

The Income Tax Act, 1967 has prescribed for what services and at what rates withholding tax is applicable,

Section 109
Interest

Interest paid to a NR payee is subject to withholding tax of 15% (also subject to double taxation agreement between Malaysia and Non Resident Country in question)

Check for the following conditions:

Interest is deemed to be received from Malaysia if:
1.The responsibility to pay lies with Govt. or State Govt.
2. The responsibility to pay lies with resident of Malaysia
3. Interest is charged as an expense against income earned in Malaysia

Interest is not subject to withholding tax if:
1. Interest is for an approved loan
2. Interest is paid by licensed bank/ licensed finance company in Malaysia (provided the interest does not go to the NR payee's business in Malaysia and interest on funds required to maintain net working funds by Bank Negara.)

Now,
Bintara Sdn. Bhd. is a business based in Malaysia (resident). It takes a foreign loan in France (Non resident payee) of RM 1 mn with interest payable RM 120,000. This is subject to witholding tax as it is an interest payment payable by a resident of Malaysia.
Amount calculated as interest
120,000 * 15% = RM 18,000
Assuming the amount will be paid on 30 Sep 2019, the tax should be deducted before that and paid to Inland Revenue Board by 29 October 2019.

Royalty

According to The Act, 'know how or information concerning technical, industrial, commercial, or scientific knowledge, experience or skill' is considered as royalty. Hence, payment made for transfer of technical know how from Presitige Pte. Ltd. to Bintara Sdn. Bhd. is considered as royalty.

The gross amount payable to NR payee is subject to withholding tax of 10% (subject to double taxation Agreement between Malaysia and NR country)

Check for the following conditions:

Royalty is said to be derived from Malaysia if:
1.Responsibility to pay lies with Govt. or State Govt.
2. Responsibility to pay lies with resident of Malaysia
3. Royalty is charged as expense against income derived in Malaysia

Here there is no distinction made between where the payment is received and tax is charged on gross amount. Hence, tax payable is RM 500,000* 10% = RM 50,000. Assuming that the amount is paid on 15 June 2019, the tax has to be deducted before that and paid to Inland Revenue Board by 14 July 2019.

Hope this satisfies. Pls reach out to me for further clarifications :)