IRBM’s Response to CTIM on 2% tax deducted under Section 107D of the Income Tax Act 1967
The Inland Revenue Board of Malaysia has issued their responses dated 29 December 2022 to CTIM members’ issues dated 21 September 2022 on the following:-
2% tax deducted under Section 107D of the Income Tax Act 1967
Amended Guidelines dated 17 August 2022 on Deduction for Secretarial & Tax Filing Fees from YA 2022
Tax rebate under Section 6D of the Income Tax Act 1967
Gazette Order - Income Tax (Deduction for the Sponsorship of Scholarship to Malaysian Students Pursuing Studies at Technical and Vocational Certificate, Diploma, Bachelor’s Degree, Master’s Degree or Doctor of Philosophy Levels) Rules 2022 [P.U. (A) 49/2022] – w.e.f. YA 2022
In this article, we will focus on item No 1, the 2% tax deducted under Section 107D of the Income Tax Act 1967, while items No 2 to 4 will be discussed in the following articles.
1. LHDNM Media Release dated 9 July 2022 on submission of 2% tax deducted by payer companies from payments to resident agents, dealers or distributors from July 2022
According to the Inland Revenue Board of Malaysia’s Media Release dated 9 July 2022, the 2% tax deducted by payer companies from payments to individual resident agents, dealers or distributors (ADDs) under Section 107D of the Income Tax Act (ITA) 1967 are to be submitted as follows effective July 2022:
The payer company must deduct the 2% tax from payments to ADDs for every transaction on an accumulated basis by month.
The 2% mentioned above tax deduction amount must be remitted to LHDNM by the end of the following month at the latest.
Example:
CTIM Comments:
Based on the above, for payments to ADDs in January, the 2% tax deduction must be remitted to LHDNM by the end of February.
In view that February consists of less than 30 days, generally for payments to ADDs on, say, 30 January and 31 January, the 2% tax deduction amount would be required to be remitted to LHDNM within less than 30 days.
Notwithstanding the above, please confirm our understanding that the provision in Section 107D(1) of the ITA 1967 that provides that the 2% tax deduction amount shall be remitted to LHDNM within 30 days of paying/crediting the payment to the ADD will prevail in the following cases:
Note: February 2023 consists of 28 days
LHDNM Feedback: Referring to the Media Release dated 9 July 2022, the 2% tax deduction amount must be remitted to the Director General of Inland Revenue (DGIR) by the last day of the following month.
Therefore, for cases 1 and 2 above, the 2% tax deduction must be remitted to the Director General of Inland Revenue (DGIR) by 28 February 2023.
2. 2% tax borne by payer companies instead of deducted from payments to agents, dealers or distributors
107D. (1) Where a company, in this section referred to as the payer, is liable to make payments in monetary form to an agent, a dealer or a distributor at any time in a basis year for a year of assessment arising from sales, transactions or schemes carried out by that agent, dealer or distributor, the payer shall upon paying or crediting such payments deduct therefrom tax at the rate of two per cent of the payments on account of tax which is or may be payable by that agent, dealer or distributor for any year of assessment and, whether or not that tax is so deducted, shall within thirty days after paying or crediting such payments render an account and pay the amount of that tax to the Director General:CTIM Comments (In blue wording):
Q 1: In the case where the payer company has agreed with the agent, dealer or distributor (ADD) that the payer company will bear the 2% tax under Section 107D(1) and makes payment to the ADD without deduction of the 2% tax, we seek LHDNM’s response on the following:
Please confirm whether the 2% tax paid by the payer company to LHDNM is allowed a deduction in view of the following:
Section 107D(1) states that the 2% tax is “on account of tax which is or may be payable by that ADD …. and, whether or not that tax is so deducted, ….”.
The 2% tax is part of the payment to the ADD as the payer company has agreed with the ADD that the payer company will bear the 2% tax.
LHDNM Feedback: Section 107D of the ITA 1967 was introduced to ensure tax compliance among taxpayers involving ADD. This provision requires paying companies to make a 2% tax deduction on cash payments made to ADD.
This 2% tax deduction represents the tax on income received by ADD.
Therefore, if the paying company bears the 2% tax deduction, the amount of the 2% tax deduction is not an allowable expense under subsection 33(1) ITA.
(b) Please confirm whether the 2% tax paid by the payer company to LHDNM is equivalent to 2/98 or 2/100 of the payment by the payer company to the ADD.
LHDNM Feedback: 2/100 of the payment amount made by the paying company to ADD means that the paying company must make a 2% tax deduction from the payment made to ADD.
(c) In view of items (a) and (b) above, please confirm whether the ADD who receives the payment from the payer company will be:
Taxed on 100/98 of the payment received from the payer company; and
Allowed a claim for tax credit set-off of 2/98 of the payment received from the payer company.
LHDNM Feedback: ADD will be subject to tax on the income received from the paying company. ADD is eligible to claim a tax credit for the 2% tax deduction that has been remitted by the paying company to LHDNM.
Q 2. Where the withholding tax is not yet due for payment because no payment or crediting is made to the ADD on or before the due date of submission of the income tax return form (ITRF), kindly confirm the payer will not be required to disallow the expense in the ITRF on the basis that the payment to ADD is yet to be made.
This position is in line with the provisions of Section 131A(1)(c), which presently does not include Section 107D in its scope.
LHDNM Feedback: The paying company cannot claim a deduction for the expenses as long as the 2% tax deduction is not remitted to LHDNM.
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