What is Withholding tax? A Comprehensive Guide to Withholding Taxes
Withholding tax is a crucial component of the Malaysian tax system, impacting various forms of income. It is a concept that both individuals and businesses should fully comprehend to ensure compliance with tax regulations. In this comprehensive guide, we will delve into the different types of withholding tax rates applicable in Malaysia, explore specific categories of income subject to withholding tax, discover how to calculate withholding tax with ease and highlight the benefits of opting for Prescon Hallmark’s expert withholding tax service.
Type of
Withholding Tax Rates in Malaysia
Malaysia has established a tiered system for withholding tax rates, which depend on the type of income being received. Understanding these rates is vital to accurately calculate the withholding tax. The different categories include:
Royalties Withholding Tax
When it comes to royalties, the withholding tax rate stands at 10%. Royalties typically arise from the use of intellectual property rights, such as trademarks, copyrights, patents, and industrial designs. For example, if a Malaysian company licenses its trademark to a foreign company for use in another country, the Malaysian company is entitled to receive royalties. The foreign company is required to withhold 10% of the royalty payment and remit it to the Malaysian tax authorities.
Interest Withholding Tax
Interest income is another category subject to withholding tax in Malaysia. The applicable rate is also 10%. This type of income often arises from fixed deposit interest, mutual funds, bonds, or dividends from unit trust funds. For instance, if an individual in Malaysia invests in a fixed deposit account and earns interest on their investment, the bank is required to withhold 10% of the interest payment and remit it to the tax authorities. This withholding tax rate helps ensure that individuals who earn interest income contribute their fair share to the country’s tax revenue.
Special Classes of Income
Special classes of income include technical fees, payments for services rendered, and lease rentals. The withholding tax rate for this category is 10% as well. It’s important to note that technical fees are payments made for services such as consultancy, engineering, or management. For example, if a foreign company hires a Malaysian consulting firm to provide technical services, the foreign company is required to withhold 10% of the payment and remit it to the tax authorities.
Contract Payment
Contract payments are subject to a withholding tax rate of 10% as well. This category covers payments to contractors, subcontractors, and other service providers. It is essential to ensure compliance with the withholding tax obligations to avoid potential penalties.
For instance, if a Malaysian construction company hires a subcontractor to complete a portion of a project, the construction company is required to withhold 10% of the payment made to the subcontractor and remit it to the tax authorities.
This withholding tax rate helps ensure that income earned from contract work is properly taxed, promoting transparency and accountability in the construction industry.
For instance, if a Malaysian construction company hires a subcontractor to complete a portion of a project, the construction company is required to withhold 10% of the payment made to the subcontractor and remit it to the tax authorities.
This withholding tax rate helps ensure that income earned from contract work is properly taxed, promoting transparency and accountability in the construction industry.
Real Estate Investment Trust
Real Estate Investment Trusts (REITs) also fall under the withholding tax regime. The withholding tax rate for REITs is 10%, making it imperative for investors to consider this when assessing the potential returns from their investments. For example, if an individual invests in a Malaysian REIT and receives distributions from the trust, the REIT is required to withhold 10% of the distribution and remit it to the tax authorities.
This withholding tax rate ensures that income earned from REIT investments is subject to taxation, contributing to the overall tax revenue of the country.
This withholding tax rate ensures that income earned from REIT investments is subject to taxation, contributing to the overall tax revenue of the country.
Interest (Except Exempt Interest) Paid by Approved Financial Institutions
Approved financial institutions, such as banks, are required to withhold tax on interest payments. The standard withholding tax rate for this category is 15%, except exempt interest. Exempt interest refers to interest income that is specifically exempted from withholding tax under Malaysian tax laws. This exemption is granted for certain types of interest income, such as interest earned on Malaysian government securities.
For instance, if an individual receives interest income from a fixed deposit account with a bank, the bank is required to withhold 15% of the interest payment and remit it to the tax authorities, unless the interest qualifies for exemption.
For instance, if an individual receives interest income from a fixed deposit account with a bank, the bank is required to withhold 15% of the interest payment and remit it to the tax authorities, unless the interest qualifies for exemption.
Income of Non-resident Public Entertainers
Performances by non-resident public entertainers are subject to a withholding tax rate of 15%. Organizers or individuals engaging non-resident entertainers must be aware of this obligation and fulfill the necessary tax requirements. For example, if a foreign singer is invited to perform at a concert in Malaysia, the concert organizer is required to withhold 15% of the payment made to the singer and remit it to the tax authorities.
This withholding tax rate ensures that income earned by non-resident entertainers in Malaysia is subject to taxation, promoting fairness and equity in the entertainment industry.
This withholding tax rate ensures that income earned by non-resident entertainers in Malaysia is subject to taxation, promoting fairness and equity in the entertainment industry.
Income under Section 4(f) ITA 1967
Under Section 4(f) of the Income Tax Act (ITA) 1967, certain types of income are subject to a withholding tax rate of 15%. It is crucial to consult the ITA and seek professional advice to determine if your income falls under this provision.
Section 4(f) of the ITA covers various types of income, including royalties, interest, technical fees, and lease rentals, which are subject to a higher withholding tax rate of 15% instead of the standard 10%.
For instance, if a Malaysian company receives royalties from a foreign company for the use of its intellectual property rights, the foreign company is required to withhold 15% of the royalty payment and remit it to the tax authorities.
This higher withholding tax rate ensures that certain types of income, as specified in the ITA, are subject to a higher level of taxation, reflecting their economic significance.
Section 4(f) of the ITA covers various types of income, including royalties, interest, technical fees, and lease rentals, which are subject to a higher withholding tax rate of 15% instead of the standard 10%.
For instance, if a Malaysian company receives royalties from a foreign company for the use of its intellectual property rights, the foreign company is required to withhold 15% of the royalty payment and remit it to the tax authorities.
This higher withholding tax rate ensures that certain types of income, as specified in the ITA, are subject to a higher level of taxation, reflecting their economic significance.
How to Calculate
Withholding Tax? (in 3 steps)
Calculating withholding tax may seem daunting at first, but it can be simplified into three straightforward steps:
Begin by determining the type of income, whether it’s salary from employment, a business loan payout, student loan interest, or other forms of income. This step is crucial as different rules may apply for federal tax, state tax, and other government tax accounts.
Identify the correct withholding tax rate, which varies based on factors such as income levels, employee withholding certificates, and withholding estimator results. This may include federal, state, and, in some cases, local tax rates. Ensure you’re using the latest rates provided by the government (gov) services or your employer’s human resources department.
Multiply the amount of income by the identified withholding tax rate. Use electronic filing systems or online calculators to request an overview of potential tax refunds or credits. This step will give you the withholding tax amount which, if withheld correctly, should lead to a balanced tax return, reducing the likelihood of owing significant money or expecting a large refund at the end of the fiscal year.
By following these steps and making use of tools like withholding calculators, as well as keeping abreast of the latest tax information and forms available on government websites, you can file your return accurately and efficiently. Remember to consider all possible withholdings, such as insurance premiums or retirement contributions, as these can affect your final tax liability.
Contact Us Right Now to Learn about Prescon Hallmark Withholding Tax Service
Managing withholding tax obligations can be challenging, especially for individuals and businesses with multiple income streams. Prescon Hallmark offers a comprehensive withholding tax service to ensure accurate calculations, timely submissions, and peace of mind. Contact us today for more information on how our expert team can assist you.
FAQ
What is withholding tax in Malaysia?
Withholding tax in Malaysia is a mechanism through which individuals and businesses are required to deduct a certain amount of tax directly from specific types of income and remit it to the relevant tax authority.
What is the withholding tax on contract payments?
The withholding tax on contract payments refers to the obligation to deduct and remit a specific amount of tax from payments made to contractors, subcontractors, or service providers.
Is withholding tax direct or indirect in Malaysia?
Withholding tax in Malaysia is considered a direct tax, as it is deducted directly from the income recipient before they receive the funds.
What expenses are subject to withholding?
Expenses such as royalties, interest income, special classes of income, contract payments, and income of non-resident public entertainers are subject to withholding tax in Malaysia.