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Tax Treatment on Digital Advertising Provided by A Non-Resident

The Inland Revenue Board of Malaysia (IRBM) has on 16 March 2018, issued Practice Note No. 1/2018: Tax Treatment on Digital Advertising Provided by A Non-Resident. This Note is issued to provide guidance regarding withholding tax on income from digital advertising provided by a non-resident. The tax treatment on payment to non-residents in relation to digital advertising is dependent on the facts of each particular case.

If the non-resident has a permanent establishment (PE) or a business presence in Malaysia, payment received constitutes a business income which is derived from Malaysia and will be taxed under paragraph 4(a) of the Income Tax Act, 1967 (the Act). If the non-resident has no PE or a business presence in Malaysia, payment is subject to withholding tax under Section 109 of the Act (if the payment received is a royalty income) or under Section 109B of the Act (if the payment received is an income within the scope of paragraph 4A(ii) of the Act).

The main criteria that determine whether withholding tax under section 109 or 109B of the Act applies are as follows –

• Subject to section 109 of the Act, if it is for the purchase or use of (for example) an application (Apps) by the payer that allows the payer to create their own advertisement campaign; or
• Subject to section 109B of the Act, if it does not involve the purchase or use of an Apps but merely a provision of service by the non-resident. In this case, the payer solely relies on the service provider to deal with all aspects of digital advertising.

Based on the above, if the payer merely receives the service and solely relies on the service provider to deal with all aspects of the transactions, it should fall under the scope of service.

Payments made for the right to use of application, platform, advertising campaign management system (such as Google ads and Facebook ads) or purchase of software should fall under the scope of royalty, instead of payment for services and is subjected to withholding tax if the transaction is provided by a non-resident who has no PE or a business presence in Malaysia.

The IRBM has also issued a Revised Guideline on Taxation of Electronic Commerce Transactions on 13 May 2019 to provide guidance on the tax treatment of e-commerce transactions.  The guideline defines what is meant by an “e-commerce” transaction and identifies the common e-commerce business model is now in existence.  The guideline also covers the scope of tax liability for e-commerce business income, transactions falling under special classes of income and transactions regarded as “royalty”.

The guideline has also provided examples as below to distinguish the expenses under special classes of income under Section 109B of the Act and royalty under Section 109 of the Act.

Special Classes of Income [Section 109B of the Act)

Based on Example 2 of the guidelines, payment for online service via a platform to non- resident is subject to withholding tax under Section 109 of the Act if the services are performed in Malaysia.  However, if it is proven otherwise the withholding tax on services is exempted under Income Tax (Exemption)(No.9) Order 2017.

Royalty [Section 109 of the Act]

Based on example 3, payment made to the social media Company where the user is allowed to create its own advertisement campaign using the platform provided by the social media Company is classified as royalty and it is subject to withholding tax under Section 109 of the Act.

According to example 4, payment made to non-resident for the use (purchase of software) or right to use software (annual licensing fee) is viewed as royalty and is subject to withholding tax under section 109 of the Act. 

Based on Example 5, monthly subscription fee related to the right to use application would fall under the category of payment for the use or right to use software and it is considered as royalty. Whilst transaction fee on the services rendered is subjected to withholding tax under Section 4A (special classes of income).

Please refer to the full guideline above and IRBM’s Practice Notes 1/2018 on Tax Treatment on Digital Advertising Provided by a Non-Resident for more clarifications.

 

Withholding Tax Rate

Payment Type	Income Tax Act 1967	Withholding Tax Rate	Payment Form
Royalty	Section 109	10%	CP37
Special classes of income under paragraph 4A(ii) – service (Note)	Section 109B	10%	CP37D

 

Note: The Ministry of Finance released an exemption order namely Income Tax (Exemption)(No.9) Order 2017 (the Exemption Order), which exempts non-residents from withholding tax under Section 109B of the Act in respect of fees for technical and other services rendered and performed by the non-residents outside Malaysia. The Exemption Order was gazetted on 24 October 2017 but is effective from 6 September 2017. Technical and other services rendered and performed by non-residents in Malaysia remain subject to withholding tax.

 

Double Taxation Agreement (DTA)

Where a Double Taxation Agreement (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.

For example, pursuant to the DTA between Malaysia and Singapore / Ireland, payment for royalty is subject to a preference withholding tax rate of 8% instead of 10% under Section 109 of the Act. For more information on the reduced rate under the Double Taxation Agreement (DTA), you can check withholding tax rate under DTA.

 

Calculation of Withholding Tax

In a lot of cases, the service provider might not allow you to withhold the withholding tax whenever you make payment.

Effective from 5 December 2018, the date of publication of Public Ruling No.11/2018, where withholding tax under Section 109B of the Act is borne by a payer, the withholding tax is be computed on the gross amount paid to a non-resident.  This means that the payment made to the non-resident need not be regrossed to determine the amount of withholding tax. 

Besides that, IRBM has confirmed that no regrossing of payment made to the non-resident also applies to other WHT provisions which fall under section 109, 109A and 109F of the Act.

Example: Payment of royalty of RM1,000 for Facebook ads (WHT of 8% under the DTA)

The withholding tax is computed as follows: –

Withholding tax = RM1,000 x 8%

                             = RM80

 

Penalties for Non-Compliance

Where withholding tax is applicable, the payer is required to remit the withholding tax to the IRBM within 1 month of paying or crediting the non-resident payee.

Failure to remit the withholding tax to the IRBM will result in the imposition of a penalty of 10% on the amount of unpaid tax.  In addition, the expense will be disallowed as a tax deduction until such time that the withholding tax and the penalty have been settled.

Further, with effect from 1 January 2011 for YA 2011, the IRBM is empowered to impose a penalty for incorrect returns under Section 113(2) of the Act if a tax deduction on the expenses in relation to the payment made to the non-resident where withholding tax is applicable is claimed and the withholding tax and penalty are not paid by the due date for submission of the tax return.

In addition, IRBM has also highlighted in the Public Ruling No.11/2018 whereby they have the right to impose penalty under Section 113(2) of the Act for filing an incorrect return although the Company has “NIL” income tax payable during the year of assessment.