Accordingto Income Tax Act 1967, withholding tax is a sum withheld by the taxpayer onincome earned by payee and paid to the Inland Revenue Board of Malaysia.Payments of royalties and service feesderived from Malaysia and paid or credited to non-residents are subject towithholding tax at the rate of 10%, which may be reduced under an applicabledouble taxation agreement (“DTA”). Generally, such payments would be deemed to bederived from Malaysia if: – Responsibility for paymentlies with a Malaysian tax resident, the Government, a State Government or alocal authority; or- The payment ischarged as an outgoing or expense:a) Against any incomeaccruing in or derived from Malaysia (for royalties); orb) In the accounts ofa business carried on in Malaysia (for service fees). The payer is responsible for withholdingthe tax and remitting the same to the Malaysian Inland Revenue Board (“MIRB”)inside 1 month of paying or crediting the non-resident. In spite of the factthat WHT is imposed on the non-resident beneficiary, non-compliance with theWHT arrangements would allow rise to penalties and adverse tax implications forthe payer.
The proposed royalty definition isextensive and differs considerably from the prevailing domestic and DTAdefinitions, as well as guidance on royalties in the Organisation for EconomicCooperation and Development’s Commentary (which looks for to aligninternational tax practices and is by and large utilized as a reference by manyother jurisdictions). Evenin situations where payments are not regarded as royalties, withholding may beapplicable where payments fall within the “Special Classes of Income” underSection 4A of the Income Tax Act, 1967 (“the ITA”). Exampleof royalty case is the case between Inland Revenue Board of Malaysia and AlamMaritim Sdn Bhd. The appealing party of this case is Inland Income Revenue ofMalaysia and the respondent is Alam Maritim Sdn Bhd.
The address of this caseor explanation of appeal is with respect to whether the payments of charterfees for the time charter of ships and groups to non-resident companies aresubject to withholding tax under section 109B of pay Tax Act. The respondentrequested to withhold tax on settlement of charter fees that given tonon-resident companies. The non-resident company has no lasting establishmentin Malaysia. The respondent is not fulfilling with the choice of Inland RevenueBoard of Malaysia, so the respondent records a request in High Court of Malaya.The request was permitted and case favoured to respondent. The appealing party(Inland Revenue Board of Malaysia) was disappoint with the choice and requestat the Court of Appeal but still the appealing party fizzled.
Presently theappealing party request the case at the Government Court of Malaysia. Theappealing party take off application with a question: ‘whether the timecharter payment made by a resident company in Malaysia to non-residentcompanies in Singapore is subject to withholding tax under subsection 109B(1)of Income Tax Act 1967 (“the”) read together with subsection 4A(iii) and 24 (8)of the Act and therefore, such non-resident companies are not entitled forrelief under Article IV of the Agreement For the Avoidance of Double Taxation,and the Prevention of Fiscal Evasion with Respect to Taxes onIncome(Malaysia-Singapore) (“DTA”)’ Alam Maritim Sdn Bhdis a private company in Malaysia who is resident here having business actionowning vessels, enlisting and overseeing vessels with third party charterers.The case of the third party is Petroleum Nasional Berhad.
The respondentsmarked into a contract which is Uniform Time Constitution Party for SeawardBenefit Vessels contract (UTC) with the non-resident company particularly withSingapore. The non-resident company locks in out vessels, administrations andgroups to the Alam Maritim Sdn Bhd and in thought that the installment willmade with the UTC contract. As conviction that the non-resident companies willsubject to Singapore Law, the respondent pay the amount (full installment )without deducting any withholding charge beneath the segment 109 B of the Act. On 16 August 2005,the respondents lawful professional bring up the issues once more and hand inan appeal to Inland Revenue Board of Malaysia for the choice that had been madeprior which says under area 109 B of the Act, the taxpayer has to withhold taxon the payment but the Inland Revenue Board of Malaysia, the appealing party ofcurrent appeal case, says that those sum was a special lesson of pay under area4A (III) of the Act the evasion of double taxation understanding (DTA) managedno help to the respondent (Alam Maritim Sdn Bhd). In Government Courtof Malaysia, the appealing party won the case.
The appeal was allowed. Thereason expressed was the classes to tax a chargeable or non-chargeable item isbased on Pay Tax Act and not Double Taxation Agreement. Double Tax collectionAscension is a component to kill double tax and allow help in the event thatrequired. The income from the worldwide activity “takes noticeable quality overArticle IV, hence the Malaysian government can charge on non-residentcompanies.
As per that, under area 4(III) of the ITA, the court finds out thatthe government may burden non-resident companies under the special classes ofincome. The instalment made by respondent under the UTC contract, where the payderived to non-resident company as extraordinary classes of income. As it wasthe deliberate of parliament to assess non-resident companies from Singapore inthe circumstances of the case and with Article IV being inapplicable to paygotten under Area 4 A (iii), the payments received by the non-residents werethe therefore taxable.
As under section 109B of the Income tax Act, thenon-resident company is taxable and the respondent is bound to withhold aportion of the payments as tax. Therefore, the case favoured to appellant. As per the case, the judge as specifythat .As under area 109B of the Income tax Act, the non-resident company istaxable and the respondent is bound to withhold a portion of the payments as atax.