Tax deduction at source explained

BUDGET 2022 announced a new concept within the Malaysian tax regime, which imposes withholding tax on payments to domestic transactions. In the past, withholding tax generally applied to cross-border transactions.

The intention here is to ensure that self-employed individuals are brought into the tax net, and to ensure that such individuals declare their full income. This is done by imposing the responsibility to deduct the tax of 2% in the hands of the payer. The tax collected is deducted as a payment on account of the recipient which requires the recipient to file a tax return to reclaim any excess tax deducted.

The deferment of the tax comes to an end on March 31, 2022

The implementation of the 2% deduction at source was originally intended to effective from Jan 1, 2022. However, the authorities deferred the remittance of the tax to Inland Revenue Board (IRB) until April 1, 2022 to allow the payers to get ready and provide proper notification to their agents, dealers, and distributors.

The deduction from the payers to the recipients should have commenced from Jan 1, 2022. The deferment only applies to the remittance of the tax by the payer to IRB. The tax deducted or should have been deducted between Jan 1, 2022 to March 2, 2022 can be remitted to IRB on April 1, 2022 without incurring any late payment penalties. Thereafter, any deduction made by the payer needs to be remitted to the IRB within 30 days from the date of the payment or crediting the payment.

If you have made the payments and have not deducted the tax from the recipient and will be remitting the tax to IRB by April 1, 2022, you can thereafter recover the 2% tax from the recipient.

Who should deduct?

Persons who should deduct are confined to companies established locally or overseas and business trusts. It does not include limited liability partnerships, trusts, sole proprietorships, associations, etc.

Affected recipients?

The recipients who are affected by this new provision must be individuals resident in Malaysia, and this will only apply if in the previous tax year they have received more than RM100,000 (both in cash and in kind) acting as an agent, dealer or distributor from a payer.

If the resident individual is receiving payments from different payers, only the payers who have paid him more than RM100,000 in the previous tax year need to deduct the 2% which is only on the monetary portion (cash or cheque).

Payments made to partnerships is not subject to the 2% deduction rule. However, payments made to sole proprietors, individual partners and individuals will be subject to the 2% deduction rule.

Areas to watch out for

There may be instances where you have persons who are dealing with your products or services and in the minds of the payers, they do not fall within the category of “agents, dealers or distributors” and this may give rise to disputes. To avoid these disputes, it is best for the payers to have agreements between themselves and the agents, dealers and distributors clearly acknowledging the relationship, or agreements or correspondences that eliminates this relationship.

The tax deducted has to be paid to the IRB within 30 days of making the payment, otherwise there will be a late payment penalty of 10%, and the payer will not be able to claim a tax deduction on the amounts paid. Subsequent payment of the tax together with the penalties will allow the payer to claim the tax deduction.

This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).

Source: The Sun Daily

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