The Inland Revenue Board recently uploaded its revised Guidelines on Taxation of Electronic Commerce Transactions on its website.
The Guidelines can be downloaded here.
As there are currently no specific provisions under the Income Tax Act, 1967 governing taxation of electronic commerce transactions, the Inland Revenue Board seeks to provide some guidance on the income tax treatment in respect of electronic commerce transactions via the Guidelines.
The following are some of the salient points in the Guidelines:
(a) any income in relation to electronic commerce transactions is deemed to be derived from Malaysia if it is associated to any activities in Malaysia, regardless of whether that income is received in Malaysia or otherwise;
(b) any amount paid in consideration of any advice given or assistance or services rendered in connection with the management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme in relation to electronic commerce transactions can be classified as a special class of income under section 4A and will be subject to withholding tax under section 109B if derived from Malaysia; and
(c) any royalty paid to a non-resident in relation to electronic commerce transactions will be subject to withholding tax under section 109.
Points (a) and (c) are particularly controversial.
Guidelines issued by the Inland Revenue Board have no force of law but merely contain the interpretation of the Inland Revenue Board on particular provisions of the law. In the determination of whether an item is subject to income tax, one should look at the relevant provisions of the Income Tax Act, 1967.
The Guidelines deem “income associated to any activities in Malaysia” as being derived from Malaysia. This appears to be an attempt to expand the territorial basis of income tax.
In relation to point (b) above, sections 4A and 109B have been amended by the Finance Act, 2018. With the amendment, any type of services can fall under section 4A read together with section 109B. This appears to be in line with the position taken by the Inland Revenue Board all along that withholding tax applies to any services. However, one should nonetheless bear in mind that the services, whether technical or non-technical, must still be rendered in connection with “the management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme”.
Finally, in relation to point (c), under the Finance Act 2017, the definition of the term ‘royalty’ has been amended to specifically include any sums paid as consideration for, or derived from the use of, or the right to use in respect of, any software. In light of this amendment, it would appear that when a payment is made for the use of or right to use software, that payment could be caught. As such, if a payment is made for the licence to use software, such payment could be deemed as ‘royalty’. Withholding tax therefore could apply to such payment when it is deemed to be derived from Malaysia under section 15. The Inland Revenue Board currently appears to apply this in as wide as possible a manner and even views payments made to social media companies for advertising as ‘royalty’ because the advertiser has access to the social media companies’ systems (see Example 4 in the Guidelines).
In our view, a distinction should be drawn between a payment made for the right to use a software and a payment made for services. Any payment made on the basis of the latter should not be seen as royalty.
In other words, there is no ‘royalty’ if a software is used to provide services, as opposed to the software being provided.
Furthermore, the definition of ‘royalty’ under the relevant double taxation agreement (if any) will prevail over that of the Income Tax Act, 1967. Malaysian Courts have accepted that double taxation agreements take precedence over the Income Tax Act, 1967. Most double taxation agreements have a narrower definition of what is royalty and do not cover sums paid as consideration for the use of or the right to use software. Subject to the relevant double taxation agreement, payments for the use of or the right to use software may not attract withholding tax.
Please do not hesitate to contact any of the following persons if you require any clarification:
Vijey M. Krishnan (Partner)
(T): 603 – 2632 9868
William Wong (Senior Associate)
(T): 603 – 2632 9905
Nicholas Mark Pereira (Senior Associate)
(T): 603 – 2632 9911