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What is the 2% withholding tax on payments to Agents, Dealers, and Distributors (“ADD”)?
The 2% withholding tax under Section 107D of the Income Tax Act, 1967 (referred to as “the Act”) is a compliance requirement introduced in Malaysia effective 1 January 2022. Under this rule, companies must withhold 2% of monetary payments, such as commissions, incentives, or bonuses, made to their appointed Agents, Dealers and Distributors (ADDs) when the total payment to an ADD exceed RM100,000 in the previous year.
The withheld amount must then be remitted to the Inland Revenue Board of Malaysia (“IRBM”) within the prescribed timeline. The measure is intended to:
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Strengthen tax compliance among individuals earning substantial income as ADDs.
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Ensure income from commissions and similar payments is properly reported.
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Facilitate early tax collection without affecting the ADD’s obligation to file annual income tax returns.
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Who is the payer obliged to deduct 2% withholding tax under Section 107D?
The obligation to deduct and remit 2% withholding tax lies with a company that makes monetary payments, such as commissions, incentives or bonuses, to its ADDs.
“Company” is defined in Section 2 of the Act to includes:
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A body corporate incorporated under the Company Act 1965 or 2016;
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A body corporate established under the law of any territory outside Malaysia with a separate legal identity; and
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A business trust.
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Entities such as sole proprietors, partnerships and limited liability partnerships do not fall within this definition and therefore are not subject to the payer obligation under Section 107D.
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Who qualifies as an ADD for the purposes of this withholding tax?
An ADD refers to a resident individual authorised by a company to act on its behalf in selling products, distributing goods, or conducting transactions, and who receives payments from such activities.
The following are included:
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Sole proprietors acting in their individual capacity.
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Individual partners of a partnership (only if the payment is made directly to the individual partner).
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The following are excluded:
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Partnerships (when payment are made to the partnership entity).
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Limited Liability Partnerships (LLPs)
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Companies
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Associations or other non-individual entities.
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In short, the withholding tax applies strictly to individuals, not corporate or non-individual entities.
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What type of payments to ADDs are subject to the 2% withholding tax?
The withholding tax applies to all cash payments to ADDs arising from sales, transactions or schemes conducted by the ADD under company authorisation.
This includes, but is not limited to:
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Commissions earned by ADDs for promoting or selling the company’s products.
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Incentives or bonuses paid in cash for achieving specific sales targets.
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Payments represented by credit notes, if the substance of the transaction indicates a cash commission or incentive.
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The substance of the payment is what matters. If it effectively represents cash earned from sales or transactions, it is subject to Section 107D withholding tax, regardless of the payment label.
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What is the income threshold that determines whether the 2% withholding tax applies?
The 2% withholding tax applies to ADDs whose total payments from a single company in the previous year exceeded RM100,000.
Key points:
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Payments received from multiple companies are considered separately.
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Companies must assess the threshold annually to determine withholding applicability for the current year.
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The ADD’s residency status does not affect threshold calculation. Prior year payments are considered even if the ADD became a resident in the current year.
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When and how should companies deduct and remit the 2% withholding tax to the IRBM?
Timing of remittance
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For payments made between 1 January 2022 and 30 June 2022, companies must remit the 2% withholding tax within 30 days from the date of payment.
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For payments made from 1 July 2022 onwards, remittance must be made no later than the last day of the following month.
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Method of remittance
Companies can remit the withholding tax by submission of Form CP107D either manually or electronically:
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For manual submission, payers can email the form to IRBM and make payment at the counter or via post.
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For online submission, payers can use the e-107D service via MyTax portal at https://mytax.hasil.gov.my/
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Payers must ensure accurate reporting of both payments to ADDs and the 2% tax to avoid penalties or disallowance of expenses.
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How is the 2% withholding tax treated in the ADD’s own income tax filing?
The 2% withholding tax deducted is not an additional tax, but an advance payment of income tax on the ADD’s earnings. This amount is credited against the ADD’s overall income tax liability when filing their annual income tax return (Form BE / B / BT) for the relevant year of assessment.
If the ADD us already subject to CP500 instalment payments, the 2% withholding still applies. CP500 represents the ADD’s own responsibility, while the withholding is the payer’s responsibility. Both are considered when determining the ADD’s final tax calculation.
For commissions or other payments related to a prior year but paid in the following year, the payment is subject to 2% withholding in the year it is actually paid and which is reported in Form CP58 for that year of assessment.
In short, the 2% withholding tax does not replace the ADD’s own income tax obligations, it is credited against their annual tax liability.
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What are the compliance obligations and consequences for companies if they fail to deduct or remit the 2% withholding tax?
Companies are required to deduct 2% withholding tax on payments made to ADDs and remit the amount to the IRBM within the stipulated deadlines. Failure to comply with these obligations will result in:
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A 10% penalty imposed on the amount that was not deducted or remitted on time.
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The gross payment to ADD will not be allowed as a deductible expense under paragraph 39(1)(s) of the Act.
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For further information, please visit the official website of the Inland Revenue Board of Malaysia at
KNOWLEDGE
