Why are Malaysian businesses effectively footing the tax bill for foreign players like Facebook and Google when it comes to Withholding tax? We explore this and much more with Thanneermalai, Managing Director of Thannees Tax Consulting Services.
On this edition of P&L, we're zeroing in on Withholding Tax in Malaysia. We'll explore the foundational elements of withholding tax: what it is, why it's important, and its impact on various types of payments, including royalties, technical fees, and contract payments. Thanneermalai will guide us through the standard rates, the calculation methods, and the necessary documentation for compliance.
We’ll also spend time on the intricacies of withholding tax for foreign digital services, such as those provided by Meta and Google, and why their withholding taxes have unfortunately and essentially become a cost of doing business for Malaysia businesses.
We'll also delve into how Malaysia's Double Taxation Agreements affect withholding tax rates and the common interpretational challenges businesses face, especially around the definition of 'royalties.'
Presenter: Roshan Kanesan
Producer: Roshan Kanesan
Podcast Transcription
Roshan Ganesan:
I'm Roshan Ganesan, and welcome to PNL, the show where we help businesses navigate the financial frontier, from fundraising to cash flows and everything in between. Today, we are zeroing in on a crucial aspect of financial compliance: withholding tax in Malaysia, with Thanneermalai, Managing Director of Thannees Tax Consulting Services.
We'll explore the foundational elements of withholding tax—what it is, why it's important and its impact on various types of payments, including things like royalties. But Thannee will also guide us on the standard rates and calculations used, as well as the necessary documentation for compliance. That said, a significant focus of our discussion will also talk about the intricacies of withholding tax for foreign digital services, a rapidly growing area under the tax spotlight as digital transactions across borders become more important for businesses with the increased use of services such as those provided by Meta and Google.
We'll also dive into Malaysia's double tax agreements and how that affects withholding tax rates and the common interpretational challenges businesses face in this space. So, stay tuned as we unpack and provide you with the essential knowledge to navigate the complexities of withholding tax here in Malaysia.
Thannee, welcome to the show. It's good to speak to you on air again. It's been an age.
Thanneermalai:
Thank you very much for welcoming me back. I look forward to talking to you and explaining to your audience.
Roshan Ganesan:
Taking me back to my Ringgit & Sense days here.
So, let's talk a little bit about the basics here. Let's get a foundation here first. Now, from what I understand, withholding tax is imposed on income that is paid to a non-resident individual. Could you provide us a brief overview of what withholding tax is in Malaysia and why it's important to understand?
Thanneermalai:
Withholding tax is a concept that's available across the world. It's usually the tax that the source country—the payment is coming from Malaysia and therefore we call it the source country—imposes at the point of payment.
So, withholding tax is actually applicable whenever you make payments. You need to look at it and see whether you're making any payments to non-residents. It is not only individuals; it will be to corporates, individuals, or anybody, even trusts who are non-resident. The issue is it should be non-resident, and therefore you need to look at the Malaysian residency rules for each one of these categories.
And if you are dealing with a non-resident, then you have to look and find out whether withholding tax is applicable when you make the payment to the non-resident for the services that you are receiving. It doesn't apply to goods. So, it applies to services, it applies to financing, it applies to royalties and intangibles, payments that you make for the use of intangibles.
So, those are the kind of issues, but it doesn't apply to goods.
Roshan Ganesan:
So, any services that you pay a non-resident for, whether it's an individual, organisation or business?
Thanneermalai:
Services, interest, and payment for the use of intangibles and royalty payments in particular.
Roshan Ganesan:
So, if we could flesh that out a little bit further, when would withholding taxes be applicable and under what conditions? Could you give us some examples here?
Thanneermalai:
So, withholding tax applies as soon as you're making any payments for services in particular, or interest, or in royalties, then you look at it and ask yourself, is there withholding tax? Now, you break it up into two sets of withholding taxes.
One is a withholding tax where there are also local contractors. There's another fourth one if you are dealing with foreign non-resident contractors, say, for example, you're dealing with Hyundai, you're dealing with, say, Japanese companies, or you're dealing with Bechtel or someone like that who is actually a foreign company. So, you've got to ask yourselves, are you making a payment to a non-resident, a Singapore company, or a London company, or someone else overseas? That's the first question you've got to ask yourself.
Once you've determined they are a non-resident, then you've got to look at it. There are two types.
First, you're making payments. It's a tax on the non-resident. Don't forget, the payer only has to deduct the withholding tax, but the tax is being collected on behalf of the non-resident. So, the foreigner is the one who should actually be bearing the tax.
Then you break it up and you ask yourself: one type of tax is a payment on account, which means the foreign company has to file the tax return and the tax that has been deducted will be regarded as a tax on account. It's not a final tax.
There's another set of withholding taxes, which will be a final tax. That is, if you deduct the withholding tax, the foreign party, the non-resident, will not need to file any tax return. So, there is a final tax. So, you can break it up into two sets of categories.
Roshan Ganesan: So, in not all cases is it a final tax? That's the one takeaway.
Thanneermalai:
Not in all cases. And even with the final tax, if they wish to come back and reclaim, if they feel they've been deducted too much, they can still come back and file the returns and use what has been deducted as a payment on account and offset against the liability they may have and get a refund. You should get a refund.
Roshan Ganesan: Basically, what we all do with our filings.
Thanneermalai: Yes. You've overpaid your taxes, you get your refunds, but that takes a long time.
Roshan Ganesan:
Now, I want to just re-emphasise a point you made earlier. Although the withholding tax is done on the party that is paying that fee—that they deducted—it's actually a tax that should be borne by the foreign party, correct?
Thanneermalai:
It is being borne by the foreign party. It is their tax. But, in reality, Roshan, what happens is, if you're dealing with the big boys—the banks, Facebook, and the others—they don't care about it.
They say, fine, you have to deduct the withholding tax, but you bear the withholding tax. So, if you're paying RM100 to, say, Facebook, Facebook will say, I don't care what happens. You just pay me.
Actually, you should be paying them RM90. Let's say the 10% is a withholding tax on the services. But no, they won't accept it. They will just say, you pay me my RM100, which means you have to gross up, so you have to bear it. So, your tax will no longer be RM10. It'll be RM11.10, almost.
So, you gross up. And when dealing with big banks when you borrow from banks overseas, they too will say regarding the interest cost: you pay me my full net amount, net of taxes.
So, usually, the problem is, even though withholding tax is actually a tax on the non-resident, it depends on the situation and depends on the relationship. Usually, the big boys will say, you bear the taxes. And therefore, finally, it won't be RM100 that you'll be paying. You'll be paying RM111.
Roshan Ganesan:
And this is, I think, something that we're seeing a lot of businesses face, particularly with digital services like Facebook and Google, for example, and the prospective services there. And I think we'll get a little bit more clarity later on in this as well.
Now, when it comes to the types of payments that withholding tax in general impacts, could you give us a broad overview of that?
Thanneermalai:
The impact is, the problem is now that we are buying so many of our services. And the problem is, it's not services.
Let me be very clear upfront itself. Let me clear the air. Because if they are services, and they come under a special class of income, those services, if they are only performed in Malaysia, you deduct the withholding tax.
If they are performed overseas, like for example, if you have a head office in Singapore or London or say, Beijing, if they perform the services—they provide you HR support, accounting support and everything else—you do not pay any withholding tax because the services are performed in Beijing or in Singapore. But where Facebook and all come in, it's not under services; they catch you under another item called royalty.
Roshan Ganesan:
Yeah, this is quite interesting, right? The definition—they're defining this as a royalty as opposed to a service rendered.
Thanneermalai:
Right. They're saying you're using the software. They go on the basis because the use of software is under our domestic definition of royalty. They just inserted it a couple of years ago. And therefore, the problem is they're saying you are paying for royalty.
So royalty doesn't matter. Royalty is where the person owns the copyrights of the software. So they're saying if it is Facebook, Amazon or any one of them, basically, since they've given you the rights to action—they say they have given you, I don't agree with that, but they say they've given you the rights, etc.
Therefore, it falls within the royalty provisions. And therefore, withholding tax must be deducted. That's what they're saying under the royalty provisions, not under services.
If you came under services, you won't be paying withholding tax. But the problem is they plug it in. But, Roshan, there's a conflict with the double tax agreements.
Because if you really look at it, if there is a conflict between the double tax agreements and the domestic rules, the law of the land and internationally is that the double tax agreements will override the royalty. But don't forget, if you're dealing with the United States of America, we don't have a double tax agreement. So the countries without a DTA, which America is one of our biggest, but 75 countries have DTAs.
It's not a problem in the majority of countries. But the problem here is the Malaysian authorities don't accept that position. They still are of the view that you must pay the royalty despite the DTAs, unless you go to court and fight these issues.
So the problem is most taxpayers, because the amounts are not significant, it's not worth it. It's okay if you're in millions, but if you're in 10,000s and 50,000s and 100,000s, the legal fees will override this. So usually people pay up.
One more thing, Roshan, many people forget: they only think of withholding tax when you're dealing with Facebooks and all the others if they're not registered for the digital tax under customs.
These services, if you're buying Speedar, if you're buying databases from Singapore, etc., our customs authorities will say this is an imported service, and there is a 6% service tax on top of that. You are supposed to self-account for it.
So actually the real cost at the end of the day could be—you could be paying someone who's providing you a database of information not only the 10% withholding tax that you have to bear, because they'll usually say you have to bear it, but on top of that, there's a 6% service tax, imported service tax. So actually the real cost is something like 16%. So when you pay RM100, it actually adds on to business cost.
Roshan Kanesan:
And I think that's something I'm going to have to dedicate an entire show to, right? The use of services, foreign digital services, and the tax implications because of all the different definitions that we have.
Thanneermalai:
The sad part of it is these two authorities don't see it. One guy, customs, sees it as services; income tax sees it as royalty.
The two don't actually speak to one another. And that's a very sad part of this whole thing, because the two should be talking to one another. And I think since I'm on the show, if anybody from the Ministry of Finance is listening, they are the ones who should be arbiters on this and try to bring this matter together, so that we don't have a disjointed position.
Roshan Kanesan:
Yeah, as it is, there's already so much going on for businesses and business burden this year. Just last week, we were talking about the OSHA rules that are changing. I mean, that's a long time coming.
It's two years now, but between transfer pricing changes and capital gains tax and the service tax increase, and not to mention, I mentioned transfer pricing, but also things like withholding tax.
Thanneermalai:
No, there's low value goods tax, high value goods tax is coming in, changes to this, multilateral instruments—multilateral instruments, and all your DTAs have been changed automatically. I can tell you, there's so many things going on in tax.
And now you've got e-invoicing. Don't forget e-invoicing, that's going to be first August for the first 100 million.
And can you imagine, they have to take into account all these kinds of transactions also. So the complexity is there, sadly. It's become... actually, we were a very easy country to operate in. Now, our tax system was quite simplistic compared to India, China, and all those countries.
But now, we have brought in so many different taxes within the matter of about one or two years and the kind of changes we have had, and also the changes OECD has. And the next big thing for the big boys is a global minimum tax.
Roshan Kanesan: Yes, and that is a huge thing, global thing that's going on.
Thanneermalai:
But withholding tax itself, if we carry on, there's more complexity in the sense... so the royalty is an issue. So when you pay the Facebooks, etc., the revenue—the Inland Revenue—says that you should be deducting the royalty withholding tax, okay?
Roshan Kanesan:
Yeah, because they think of it, I guess, as intellectual property, right? It's a payment on intellectual property.
Thanneermalai:
They're basically saying you're using the software, because when you're actually putting your advert into Facebook, etc. But Facebook is extremely clear. They do not allow you—if you look at the agreements, if you look at Amazon, I've seen these agreements—they're very clear.
They don't give you the use of the copyrights at all. Nope, not at all. Absolutely clear on that.
But they inserted the words in our legislation: "the use of software". So until this matter gets totally debated or ventilated in the courts—
Roshan Kanesan: People have an extra 16% effectively on the—
Thanneermalai:
No, 10% for the tax, 6% is the customs. That's a different matter.
In totality, 16%. But the irony is, one person says it's services; the other person says it's royalty, you know? So that's where we stand.
Roshan Kanesan:
Thannee, we're going to go into a few messages. When we come back, we'll talk a little bit more about some of the payments that are impacted outside of royalty and services, as well as what other things that—and the other things that we need to be covering, including the rates, the double tax agreements, and much more.
Folks, this is PNL, the show where we help businesses navigate the financial frontier, from fundraising to cash flows and everything in between.
Thannee, we earlier talked about some of the basic elements here in an overview, but we also talked about some of the complexities that come from digital services being considered as royalties and effectively, if the service costs RM100 from Facebook, you end up paying RM110 because the big boys, or as you mentioned, like the Facebooks, don't recognise that withholding tax there.
Thanneermalai: It'll be RM111 because you're at 11.1%, you're not at 10, you know. So that's a little thing, yeah.
Roshan Kanesan: Yeah, I forgot, when you do it the other way.
Thanneermalai: You gross it up.
Roshan Kanesan:
Now, just as a recap here, we talked about some payments that are under the... that would have withholding tax. You've got royalties.
You've also got services provided by foreign players and also finance, so interest costs—interest costs and royalties. Is there anything else?
Thanneermalai:
No, there is also... you see, there's another withholding tax, which is called a contractor's withholding tax. If you have the foreign, the big construction people who are in infrastructure, EC, who come in and actually have a project in Malaysia.
Now, if you have a permanent establishment or a business presence—that permanent gives you permanence effectively—you have to file your returns. You need a branch in Malaysia. So if you're a foreign branch of a major American multinational, whether you're GE or anybody, and say that your company is in the US, you have a branch here.
You have to have a branch because under company law, you're operating a major infrastructure like Pengerang. If you're here for 18 months or two years to construct a big structure, so you've got people and things like that.
So if you operate that, you're a contractor. And so somebody who is actually paying you... let's assume it's one of the Petronas companies that is engaging these guys, and they're actually building this plant, refinery, whatever it is.
Now that foreign company has a presence here. He's a non-resident. He will be a branch of that... of your company.
Then when the Petronas company actually pays the money to them, they have to deduct what they call a Section 107A contractors withholding tax, which is 10% and 3%. The 10% is on account of corporate taxes. When he files his corporate tax, he deducts it.
The 3% is in respect of the expat employees. So the expat employees who are working on the project have to now pay all their Malaysian taxes. If they pay their Malaysian taxes, then they'll get back the 3% and the 10%.
So that's called a Section 107A. That was introduced in 1983. That's called the October 1983.
That is actually called the contract... in simple terms, I call it the contractors withholding tax.
There's another withholding tax, which is if you bring in public entertainers, and they entertain. There is also a withholding tax of 15%. You have to pay it upfront before the person comes in, whether it's A. R. Rahman or whether it is Bon Jovi or whoever it is.
Roshan Kanesan:
Yeah, I think Vir Das is coming to perform downstairs as a comedian.
Thanneermalai:
You have to deduct 15%. That's called an entertainer, a public entertainer.
Then there's another withholding tax, which is actually... they don't call it withholding tax. It's a deduction at source. This is domestic. This is the first time Malaysia has introduced it.
Normally you're talking non-resident. This one is also for residents: if you're dealing with agents, distributors, and people like that.
So if someone... if you're making payments, and if in the previous year they've earned RM100,000 for you—like, for example, all these people who sell wellness products, etc.—it doesn't need to be a non-resident. It has to be a resident.
Now, if you have paid them RM100,000 that they've earned last year, this year, now you've got to start deducting 2% upfront. That 2% is a payment on account of their normal taxes, whether it is an individual or whether they operate as a corporate—if they are agents, distributors, and dealers. So you also got to watch out for that because... so that's a tax on distribution. That's a domestic deduction at source. That's a deduction.
So there's a last withholding tax... so if you've escaped all these taxes, there's another one where actually if you make any payment... like, for example, if you make a one-off payment to somebody in Singapore, etc. You got to check if you make commission payments, for example. Someone gets you a deal—an individual or someone gets you a deal in Hong Kong—and you give him a commission. That's called other income.
So that's called a 4F income. And so that one also, there is another withholding tax. Usually it's 10% withholding tax. It's a final tax.
So there are lots of places, but in that case, you can get out of that tax if you can prove in Hong Kong or Singapore that individual or company is actually bringing it to tax. But normally they won't give you that kind of information.
That's where you're caught. So these are the different withholding taxes. I'm sorry, I'm giving you a cocktail.
Roshan Kanesan:
No, no, no. This is exactly what we wanted, right? All the different kind of examples as well. Obviously we will focus more on the more typical ones.
And in the more typical cases here, I mean, what does the process look like for payment?
Thanneermalai:
I mean, basically the payer is actually paying on behalf of the recipient, which is a payee. The responsibility is totally in the hands of the payer. The payer has to then fill up a form.
He pays the tax within 30 days of making the payment or crediting. Normally it'll be 30 days from the date of the payment. Say you make a payment today, then you calculate within 30 days, you must.
If you don't do that, then there will be a penalty. There'll be a 10% penalty on the outstanding withholding tax. And the thing that hurts most is actually not just the 10%.
If you're paying RM100, RM10 is a withholding tax, and you pay another 10%, which is RM1 penalty. You won't get a deduction on your corporate tax, the payer. So if he has paid the RM100—the whole RM100—he will not get a deduction because he hasn't deducted the withholding tax on time.
So unless he pays... so actually the tax cost will be 24%, plus another 10%. So if you think about it, plus something else, it's about 30-over percent—35, 36%.
So in totality, if you fail to pay, the tax cost is high because you'd be disallowed the whole RM100, which is 24%. Then on top of that, the 10%... you have to pay another penalty because you're late, another 10%. So that becomes 25%, you know.
So it is quite expensive. It's quite expensive. And in fact, the thing will jump even higher if you go under an investigation; they can even impose a penalty for non-declaration of information.
Roshan Kanesan:
I'm lucky I don't have a blood pressure machine attached to me. I can feel my BP going up.
Thanneermalai:
That's where it is. You've got to be just careful on that. And you fill up the forms.
There are some standard forms and all that. You've got to fill up the forms correctly. And that's where it comes from.
And then the foreign party may disagree with you also. They'll say, "I... you shouldn't be deducting because I'm actually bringing it as business income and it shouldn't come in." There's all sorts of problems because the foreign party will say, "I've already brought it in as business income in my country under the double tax agreement. Once it's a business income, there should be no withholding tax."
But here, we can also take a position saying that under the double tax agreement, this is a technical services article or royalty article. I will deduct.
So there'll be disputes on that also. And then matters have gone to court. So... those are complexities.
But in some instances, the taxpayers are warned saying that you shouldn't be deducting the withholding tax, but most developing countries and the Malaysian government will deduct, and you have to fill up the forms. You have to actually take that into account.
Roshan Kanesan:
Wow. And then, if people start acting like this is part of the cost of doing business, given how prevalent the use of Facebook ads and Google search ads are, it just makes things become more expensive.
Thanneermalai:
No, it's shifted. It's basically... if you think about it in the old days, we didn't use a digital... we didn't use digital means.
Now, practically, you have to use it. So actually, one, there's money outflow. Number two, it increases the cost because... so at the end of the day, you are moving money out, you are forced to pay.
So when you come to balance of payments, etc., nothing to do with taxes, actually. Your services account, you're actually paying a lot of money.
Roshan Kanesan:
Now, when we take a look at the tax rates for the standard withholding tax rates, we've talked about it being 10% for the most part. Is that—
Thanneermalai:
10% for royalties, 10% for technical services. Interest is 15%.
But many countries... like if you deal with Singapore, it can come down to 5% and 8%. You go to France, it's 8%. It can come down. It depends.
You must look at the treaty. But to enjoy the treaty, you must be a resident.
Malaysia... you must be a resident. The recipient must be a resident of France. So then you can use the Malaysian-French treaty.
And don't also do another thing that people do that now they're very diligent about, which is treaty shopping.
So what happens is if you're getting a dividend from Indonesia, you tend to... instead of coming straight from Indonesia to Malaysia, where the dividend withholding tax may be 15%, if you actually introduce an intermediate company in Singapore, the Singapore-Indonesia treaty will reduce the withholding tax. And then you flow through from Singapore to Malaysia without any tax. That's called treaty shopping.
So internationally, they're attacking it also. They're attacking it, saying that you are treaty shopping in the sense you're using a third country to enjoy the treaty. That's also not allowed under the new multilateral instrument.
Roshan Kanesan:
We're exploring the foundational elements of withholding tax here, the complexities when it comes to foreign digital services, such as those provided by Facebook and Google, among others, as well as the common challenges that businesses face. Thannee, I think one last question here in relation to... we talked about some of the basics. Now, when we take a look at... we talked a little about the tax rates earlier, how it's calculated.
And I remember earlier on in the conversation, you mentioned that... the document that needs to be filled, can you tell us a little about the documentation needed for withholding taxes in Malaysia, for the most part?
Thanneermalai:
There's specific forms; for different withholding taxes, there are different forms. They call that the Form CP37, CP37A, CP37C. So each one of them, you have these different forms.
If you can download it, if you go into the LHDN website, these forms are all available to you and they're not difficult to fill. The only thing is you've got to be careful when you're filling: please fill the dates correctly, because a 30-day calculation is done on when did you make the payment. So if you fill the wrong date, they will... and this is not something... this is automated.
So automatically, if you pass the 30 days because you filled in the wrong date, they'll calculate and impose an immediate penalty. And the headache we have in terms of removing that penalty is time-consuming.
Roshan Kanesan:
And just to repeat the consequences of not complying with withholding tax requirements, I think one of the things you mentioned earlier was not only do you get a penalty on top of that withholding tax that wasn't paid, you can't use that expense as a deduction.
Thanneermalai:
But if you pay it late, you can get the deduction. You can get the deduction. But the fact is, if you actually pay it late, you must usually pay it before you file your return.
But if you pay it late, say one year later, the problem is you can sit with another further penalty, which is like, because you gave an incorrect return, there could be another 45% penalty on the tax that you have under-declared. So in that sense, you end up... finally, the tax cost is not 24 plus 1, but it becomes actually another 13 to be added if you take 45% off the 24. So it keeps on adding, it keeps on adding to the bill.
So if you think about it, it comes close... if you took 24, that's about 37, 38, at the end of the day, for RM100, you're going to face that. So if you pay that, it's best that you be careful in filling the form.
The form part is important, but many people, because they don't track it, you will... you can fail.
Roshan Kanesan:
So when I pay for a service, when the service is consumed, and you pay for it... so when the service is paid for, within 30 days, I have to fill in the relevant form and pay for it with LHDN. And then on an annual basis, when I do my general filings, what do I have to do then?
Thanneermalai:
No, nothing.
Once you're good, you've got to keep that information and you've got to show that you've paid to the non-residents, who the non-residents are, the names, and the addresses, etc. And you also must have the receipts. Don't forget, you come back some years later and if you want to get a refund, because these withholding taxes, if you've overpaid, you should get back the withholding taxes, especially the 107A, the contractors withholding tax.
In fact, they have the information in the Inland Revenue, but trying to ask them to go back to their records is impossible. The onus will be totally on you, which I don't think is correct. But unfortunately, that's how it works.
So to get back that withholding tax, you must keep all the records yourself. Do not depend on the Inland Revenue keeping the records for you. They're good people and all that, but their systems are... exactly, they too have their own problems and they will not actually be assisting you to collect the data.
So be careful, because usually when you're talking about contractors withholding tax, because you have a presence in this country, where you are a non-resident, you'll be talking about lots of money. I can be telling you, it'll be in millions. It can be in hundreds of thousands. Usually it's in millions.
Roshan Kanesan:
Let's talk about double tax agreements and how it relates to withholding taxes.
As you mentioned earlier, the double taxation agreements are basically treaties that have been concluded between Malaysia and other countries, and basically it's designed to prevent, as the name suggests, double taxation on profits and income. With that in mind, tell us a little bit about how double tax agreements affect withholding tax rates and what companies should know about these kinds of agreements.
Thanneermalai:
The most important thing is you't got to find out what kind of a service or what kind of income the foreign party is receiving.
Then you go into the double tax agreement and you determine whether that's business income, interest income, royalty income, or special technical services income. Then you go into the double tax agreements and read the relevant provisions. If it is royalties, then see.
You look at your domestic. The first thing is you must be taxed. You don't look at the double tax agreements.
The double tax agreements are meant to relieve you from double taxation. But these days they've even added further, saying double tax agreements are also meant to ensure you do not avoid paying... they call it non-double taxation. That means you don't pay tax anywhere in the world because they want to catch people.
But the principal purpose of the double tax agreement is to relieve you. So if you have royalty payments, then you check. Are you first caught within the domestic rules? Say for example, is it... are you making the payment for the use of software or the use of copyrights, etc., which is in Section 2 of our Income Tax Act.
Once you answer the question, yes, then you go to the double tax agreement and say, does the double tax agreement give you a relief? Which means, will it be covered? So if it is not inside... for example, the use of software we say is inside royalty, but is not inside the double tax agreement. So technically, you shouldn't be paying the withholding tax. The other point is, let's say it is copyrights and those copyrights are being used.
So it is in the double tax agreements. The next question you're going to ask is, what is the rate? Because the rate here will be 10% under the domestic, whereas the country... say if it's another country, it could be 5%. So you deduct at 5%.
Now to get that also, the next step, the practical step, is not just sit there and leave it with a double tax agreement. You must make sure that the foreign party that you're now going to enjoy the reduction from 10 to 5 from has a certificate of residency. Because you are using the treaty, so you need to get a tax residence certificate.
That will be the best position. Because once you have that, then he's a resident of France. Let me use France as an example, or Singapore.
You must get a residency certificate, then you deduct it at 5%. You've done your job. So that's also important, that you try and get... then only you know that he's actually a resident of the country.
He may not qualify.
Roshan Kanesan:
So that's the importance of double tax agreements here, right? In terms of, it provides some clarity in terms of areas where we're not trying to double tax people. If you are...
Thanneermalai:
Double tax and also the areas where you shouldn't be taxed, and it tells you, okay, that doesn't cover it.
If the treaty says it's not covered, then you don't deduct the tax.
Roshan Kanesan:
Which brings us to one of the key conflicts that we're seeing, and we talked about it a little earlier, the digital services, right? Because the key thing here is the definition of using royalties as that mechanism to charge withholding tax on the services from Google and the Facebooks out there. Is realistically the only way for businesses to navigate this, to just use it as a cost of business?
Thanneermalai:
I'm afraid at the moment, the way it's going is it's actually... it is regarded as a cost of business unless you want to challenge it, because you can only bring these items into tax if you're using the copyrights, which clearly, if you read any of those agreements, which I have read many of them, and I can tell you, they usually will tell you that you cannot touch the copyrights.
The copyrights will belong to the Googles and the others, and they'll never allow you. So that's very clear. So the only thing that allows you in Malaysia is the use of software.
So they've inserted the words "use of software", and they're saying that because you're using their software, it comes within the royalty provisions. But it doesn't actually resonate into the words in the double tax. Most double tax agreements don't have that.
Some have it, majority do not have it. So technically, my view as an expert is there shouldn't be a deduction.
Roshan Kanesan:
So unless the government wants to go to the big players and say, "Hey, you all need to start... if you want to be operating in this country, you need to be paying these withholding taxes," the reality is, unless someone challenges it as the definition of royalty being used in this context, most businesses are just going to have to pay.
Thanneermalai:
Because the problem is, if you don't deduct, then these guys come in and actually disallow expenses. Very, very expensive.
So I can't afford it. If I've got to pay... if I'm paying RM30,000 or RM40,000 a year in withholding taxes, I'd rather pay the RM40,000, carry on with the business, than go to the courts. And the courts aren't exactly cheap, you know.
By the time you get into the courts and spend your years running around with the court process and also paying lawyers... they're good people, excellent lawyers. I'm not actually... please don't misunderstanding, I'm not running the legal profession down. But that cost may not be worth it; I may as well pay my RM20,000 or RM30,000 a year and get on with my life.
Roshan Kanesan:
It's0 exactly right. It's also easier. And the irony here is that we are essentially subsidising these big trillion-dollar companies that... their cash flows could make us... they make so much money, it's effectively printing money, yet we have small businesses who need these services to survive and make sales, and they're being charged this extra 11% tax on using these services, basically.
Thanneermalai:
You have no choice because... you're dealing with Apples and the others that are so, so big, they're even bigger than countries. In fact, countries can't do much about it.
Roshan Kanesan:
Have there been any recent changes or updates to withholding tax regulations that we haven't talked about that businesses should be aware about as we come to a close?
Thanneermalai:
No, not really. We've already talked about it and I think they should be aware of what it is, and I think it's best to comply.
My advice is, if you are reasonably small and you're a medium-sized business, I wouldn't want to challenge and I would just... I know this doesn't sound the right thing, but I'm looking at it pragmatically and from a business perspective. Let's carry on and move on with our business instead of finding conflicts with the Inland Revenue, because this is one of the first things... easy, when they come in and do an audit, this is one of the first things the tax auditors from Inland Revenue will look at. It is so simple to pick up.
Roshan Kanesan:
I guess we can hope for reforms, but don't expect them now when it comes to withholding tax, the key issues with withholding tax.
Thanneermalai:
In fact, withholding taxes may even grow even further because the source countries are actually quite upset—countries like Malaysia, quite rightfully, are saying, "You are taking away the income, we should have the right to tax." And now the OECD is beginning to recognise it.
I mean, I don't want to get into the complexity—that's called Pillar 1 and Pillar 2—so they are saying that we ought to give some of the taxes that these big boys are giving, those earning on a consolidated level of more than €750 million, which is about more than RM4 billion. Those corporations, they are saying, "Hey, the taxes you pay worldwide..." and that is why they are introducing the global minimum tax and they want also some part of the taxes to be given to the developing countries or the emerging markets.
Roshan Kanesan:
Last question, before we wrap up for today.
We've talked about many key challenges when it comes to withholding tax. Is there anything in particular that we didn't touch on that you want to highlight?
Thanneermalai:
Well, the point I want to make is don't assume it's entirely final withholding tax, because there's always an assumption if something has been wrongly done, you must go back to the authorities and get back your withholding tax, although there's a tendency for the authorities to find ways and means of challenging you. Legally, if you are entitled to it—like, for example, if you have been paying... if you have taken a loan, let's say from a Hong Kong company, which is a money lending company, where money is the stock in trade and you have wrongly withheld the withholding tax, thinking it is passive interest.
You go back and prove that it is actually business income to that guy, the withholding tax... you should go back to the authorities and claim back. Although the authorities will be reluctant and they'll give you all sorts of this thing, but you can get it back.
Don't give up on claiming back what has been wrongly paid.
Roshan Kanesan:
Because that would have been business income in the other territory as opposed to passive interest.
Thanneermalai:
That's right. So collect back whatever that is due to you, because rightfully, what you should be paying is what is under the law, not on someone's assumption. Your right is in the law.
Make sure you exercise your rights.