Global Tax Alert | 9 April 2018
Malaysia issues practice note on tax treatment of digital advertising provided by nonresidents
On 16 March 2018, the Malaysian Inland Revenue Board (IRB) issued Practice Note No. 1/2018 (the Note), which outlines the tax implications of income earned by a non-Malaysian tax resident from the provision of digital advertising. The one-page Note briefly discusses whether such payments are subject to Malaysian income tax as business income or withholding tax as royalty income or income under Section 4A(ii) of the Income Tax Act 19671 [Section 4A(ii)].
This Alert summarizes key issues raised in the Note.
Nonresident’s presence in Malaysia
The tax treatment in Malaysia would depend on whether the nonresident has a permanent establishment (PE) (where a tax treaty applies) or a business presence (where no treaty applies) in the country. The tax treatments are:
- If the nonresident has neither a PE nor a business presence, the payments may be subject to withholding tax as either royalty income or services income under Section 4A(ii).
- If the nonresident has a PE or a business presence in Malaysia, the payments constitute Malaysian-source business income and are subject to tax under Section 4(a). However, the Note is silent on the withholding tax treatment (if any) in such an instance.
Royalty vs. Section 4A(ii) income
The Note explains that the main criteria that determine whether the payment would be considered a “royalty” or Section 4A(ii) income to the nonresident are:
- If the payment is for the purchase or use of (for example) an application (App) by the payor to create their own advertisement campaign, then it is considered royalty income.
- If the payment is for the provision of services by the nonresident and does not involve the purchase or use of an App, since the payor solely relies on the service provider to deal with all aspects of digital advertising, then it is considered Section 4A(ii) income.
While the IRB has provided some form of clarification, taxpayers should also consider the following:
- The 10% domestic withholding tax rate applies to both royalty and Section 4A(ii) income; however, tax treaties may grant a reduced withholding tax rate, which may differ for royalties and for “technical services” income.
- Income of a nonresident under Section 4A(ii) for services performed outside Malaysia on or after 6 September 2017 is exempt from Malaysian withholding tax. Therefore, if the payment from Malaysia is treated as services income of the nonresident, taxpayers would need to consider where such digital advertising services are rendered.
As illustrated above, the income characterization (e.g., as royalty or services income) may have a significant impact on the tax treatment. Further clarification from the IRB is anticipated in due course.
1. Income under Section 4A(ii) refers to fees paid for technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Tax Consultants Sdn Bhd, Kuala Lumpur
- Amarjeet Singh
- Anil Kumar Puri
Ernst & Young LLP, Malaysian Tax Desk, New York
- Meng Hui Chua
Ernst & Young LLP, Asia Pacific Business Group, New York
- Chris Finnerty
- Kaz Parsch
- Bee Khun Yap
EYG no. 02077-181Gbl