The Malaysian government made a shocking change to the tax law in the 2017 Budget announcement whereby withholding tax is now also imposed on service fee paid to non-residents where the services are rendered offshore. Some may say that this is nothing new as many countries will impose the same BUT do remember, unlike other countries, the Malaysian government will not agree on tax treaty exemption on such service fee on the basis that it is not a "business profit" but a "special" classes of income under the domestic tax law.
This is unbelievable! Just by reclassifying a certain income under a special domestic tax law, the government thinks they have excluded those income from tax treaty exemption. Just imagine if every country is to do the same, it will make a mockery of the tax treaties signed with other countries. Worse still, it will make our local companies look like a bunch of hypocrites for asking the same tax exemption under the tax treaty from foreign tax authorities when our government is not honouring the same.
Having said the above, my main concern is, this withholding tax will only make our service exporters even less competitive. The reason is because that withholding tax cost is likely have to be borne by the Malaysian companies as the foreign service providers will not agree to pay tax imposed by a country that they never even set foot on. Some may think this will not be an issue if we only engage Malaysian service providers. Unfortunately, in the world of contracting business, it is always the case where you are required to engage service providers based in the host country (sometime a list will be given) if you wish to win that contract. Our government is equally good in imposing the same requirement on foreign contractors so expect the same in any country that our service exporters wish to penetrate.
With every line if service expenses being bumped up by 10% right now due to the withholding tax cost, our service exporters will have difficulty in winning new contracts in foreign country. So much for moving up the value chain with such regressing tax law.
This is unbelievable! Just by reclassifying a certain income under a special domestic tax law, the government thinks they have excluded those income from tax treaty exemption. Just imagine if every country is to do the same, it will make a mockery of the tax treaties signed with other countries. Worse still, it will make our local companies look like a bunch of hypocrites for asking the same tax exemption under the tax treaty from foreign tax authorities when our government is not honouring the same.
Having said the above, my main concern is, this withholding tax will only make our service exporters even less competitive. The reason is because that withholding tax cost is likely have to be borne by the Malaysian companies as the foreign service providers will not agree to pay tax imposed by a country that they never even set foot on. Some may think this will not be an issue if we only engage Malaysian service providers. Unfortunately, in the world of contracting business, it is always the case where you are required to engage service providers based in the host country (sometime a list will be given) if you wish to win that contract. Our government is equally good in imposing the same requirement on foreign contractors so expect the same in any country that our service exporters wish to penetrate.
With every line if service expenses being bumped up by 10% right now due to the withholding tax cost, our service exporters will have difficulty in winning new contracts in foreign country. So much for moving up the value chain with such regressing tax law.
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