The Inland Revenue Board of Malaysia (IRB) has issued Practice Note 1/2018 – TAX TREATMENT ON DIGITAL ADVERTISING PROVIDED BY A NON-RESIDENT on 16 March 2018.
The Practice Note is to clarify that services, particularly advertising services, provided by a non-resident is subject to withholding tax under the following categories:
- Section 109 Income Tax Act 1967 – 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.
This Section covers Royalty fee paid to a non-resident where, based on the interpretation by IRB, if the payer is allowed to use the application to create their advertisement campaign, it falls under the definition of “Royalty” which was redefined to widen and cover “right to use software”.
- Section 109B Income Tax Act 1967 – if it does not involve the purchase or use of 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.
This section merely applies to services provided by the non-resident and if the service is performed outside Malaysia, it is exempt from withholding tax in accordance to INCOME TAX (EXEMPTION) (NO. 9) ORDER 2017.
This clarification would impact users who are used to paying and creating advertisement campaigns on social media platforms such as Facebook, Instagram, LinkedIn, etc. for promoting their businesses.
The Practice Note no doubt has helped clarify some uncertainties of which Section where withholding tax applies on digital advertising services provided by a non-resident. But it still leaves many uncertainties that are not cleared up.
Other digital services
The Practice Note has mentioned Digital Advertising Services but nowadays there are many digital services that allows for solutions e.g. event management, email blasting, etc. where the application can be provided by a non-resident that does not have a permanent establishment in Malaysia. If the approach of the interpretation by IRB is followed, most likely withholding tax would be applied under Section 109, regarded as “Royalty”.
If the payer is allowed to use the application which is covered as royalty and withholding tax is applied, the payer is required to withhold a certain percentage (generally 10%) from the payment and only pay the net amount to a non-resident recipient. The payer has to remit the withholding portion to IRB within 30 days from the payment.
Nowadays, for most application usage, payment is paid online and most of the payment is automatically paid via credit / debit cards or other approaches. To withhold the portion is practically not possible or difficult to carry out.
In view of this difficulty, most of the payers would bear the withholding tax and pay the full amount to the non-resident. However, they would not be getting tax deductions on withholding tax borne by them.
To determine the application of withholding tax, one of the factors is the status of the tax residence of the service provider and the existence of any business establishment in Malaysia. Again, due to the advancement of technology today, many of these can be done without any physical contact, particularly how payers are able to find out all these information before determining if withholding tax applies on the payment.
It is believed that more communication is needed with the IRB on highlighting practical issues and addressing difficulties on implementing this ruling. Some transitional plans and leniency on imposing penalty shall be in place to give taxpayers enough time to clarify any doubts.