Stamp Duty Treatment on Service Agreement Instruments in Malaysia

The Inland Revenue Board of Malaysia (hereinafter referred to as “IRBM”) issued the Guideline on the Imposition of Stamp Duty on Service Agreement Instruments, which takes effect from the date of issuance. The Guideline clarifies how duty is imposed on service agreement instruments under the Stamp Act 1949 (hereinafter referred to as “the Act”) and how the Stamp Duty (Remission) Order 2021 [P.U.(A) 428/2021] applies.

1. Service Agreement Instruments
   
   The terms “perkhidmatan” or “service” are not defined in the Act, however, the generally meaning which is “work done for a customer” is adopted. Service agreements, or commonly referred to as service contracts, cover any type of service, including:
   
   (1) construction services;
   (2) maintenance services;
   (3) security services;
   (4) consultancy services; and
   (5) advisory services.
   
   The term “Awarding Authority” means the Ruler of a State, the Government of Malaysia, any State or a local authority that awards the undertaking. A service agreement instrument is an agreement executed:
   
   

   (1)	by a principal service provider with a person other than an Awarding Authority;
   (2)	by a sub-service provider with the principal service provider, where the principal service provider has made an undertaking with an Awarding Authority; or
   (3)	between a principal service provider and an Awarding Authority.

   
   Where the obligation to pay duty falls on the Ruler of a State, the Government of Malaysia or any State, the instrument is exempt from stamp duty under Paragraph 1 of the General Exemptions under Section 35 of the First Schedule of the Act. Where the obligation falls on a local authority, the instrument is exempt under the Stamp Duty (Exemption) (No.16) Order 1986 [P.U.(A) 174/1986]. The submission of an instrument to the Collector for an endorsement that it is exempt from duty must be made in accordance with Subsection 37(2) of the Act.
   
   
2. Imposition of Duty
   
   A service agreement instrument is a security instrument, even though payment for the services rendered is subject to certain conditions before it can be claimed. The word “security” in the Act does not carry the meaning commonly understood in financial activities, which refers to collateral, charges or property-based guarantees. It refers instead to an obligation to pay money created by the instrument and covers any instrument that serves as a guarantee for the payment of money, whether in relation to an existing debt or one that may be owed in future, including mortgages, charges and similar guarantee instruments.
   
   Security instruments are generally subject to duty under sub-subitem 22(1)(a) of the First Schedule of the Act at RM5.00 for every RM1,000 or part thereof on the awarded contract value. Service agreement instruments are therefore dutiable under sub-subitem 22(1)(a), and the contract value or service consideration subject to duty includes the amount of Sales and Service Tax (“SST”) imposed on it.
   
   The Order grants a remission specifically for service agreement instruments, under which the duty payable under sub-subitem 22(1)(a) that exceeds 0.1% of any sum or sums of money in relation to a dutiable service agreement instrument is remitted. Accordingly, service agreement instruments executed from 28 December 2018 are subject to stamp duty as follows.
   
   

   (1)	Agreement between a principal service provider and a person other than an Awarding Authority When a principal service provider enters into an agreement with a person other than an Awarding Authority, the agreement is the principal instrument for the undertaking. (a) the baseline duty is assessed under sub-subitem 22(1)(a) of the First Schedule of the Act at RM5.00 for every RM1,000 or part thereof on the total contract value, including any applicable SST. (b) under the Order, the duty payable is capped at 0.1% of the total contract value, and any portion of the calculated duty exceeding this cap is remitted. (c) the party receiving the service is liable to pay the duty under Item 2 of the Third Schedule of the Act.
   (2)	Agreement between a sub-service provider and a principal service provider who has an undertaking with an Awarding Authority When a principal service provider enters into an agreement directly with an Awarding Authority, that agreement is exempt from duty as described in Section 1 above, and the agreement between the principal service provider and its sub-service provider becomes the first dutiable agreement for the undertaking. (a) the agreement with the sub-service provider is assessed under sub-subitem 22(1)(a) of the First Schedule of the Act read together with the Order, which caps the duty payable at 0.1% of the subcontract value. (b) the principal service provider, as the party receiving the service from the sub-service provider, is liable to pay the duty under Item 2 of the Third Schedule of the Act.
   (3)	Agreements with further sub-service providers The 0.1% ad valorem rate is imposed at one tier only, being the agreement described in item (1) or item (2) above. When the principal service provider in item (1), or the sub-service provider in item (2), awards the undertaking to a further sub-service provider, the agreement at that lower tier is dutiable as follows. (a) the duty is calculated under sub-subitem 22(1)(a) of the First Schedule of the Act at RM5.00 for every RM1,000 or part thereof. (b) the duty calculated that exceeds RM50.00 is remitted under the Order, so the duty payable is capped at RM50.00. (c) the awarding party, as the party receiving the service, is liable to pay the duty under Item 2 of the Third Schedule of the Act.
   (4)	Low-value agreements at subsequent tiers (duty at actual rate) When the value of an agreement at a subsequent tier is relatively low, the duty calculated may fall below the RM50.00 threshold, which changes how remission applies. (a) the duty is calculated under sub-subitem 22(1)(a) of the First Schedule of the Act at the actual rate of RM5.00 for every RM1,000 or part thereof. (b) the duty payer does not qualify for remission under subparagraph 2(3) of the Order because the duty payable is less than RM50.00, so the full amount calculated is payable. (c) the party receiving the service is liable to pay the duty under Item 2 of the Third Schedule of the Act.
   (5)	Low-value first-tier agreements (minimum duty of RM10.00) When a first-tier service agreement is of low value, the 0.1% calculation may produce a duty amount below the statutory minimum. (a) the agreement remains eligible for remission under the Order because it is a first-tier service agreement. (b) where the duty at 0.1% is less than RM10.00, the duty payable is the minimum of RM10.00 under section 36CB of the Act. (c) the party receiving the service is liable to pay the duty under Item 2 of the Third Schedule of the Act.

   
   
3. Instruments Not Subject to the Order
   
   The Order does not apply to the following service agreement instruments.
   
   

   (1)	Actual payment amount cannot be determined Duty under sub-subitem 22(1)(a) does not apply because the actual total payment cannot be determined, and a fixed duty of RM10.00 is charged under Item 4 of the First Schedule of the Act, payable by the party drawing, making or executing the instrument under subsection 33(a) of the Act read together with Item 1 of the Third Schedule of the Act.
   (2)	Actual payment period cannot be determined Duty under sub-subitem 22(1)(a) does not apply because the actual total payment cannot be determined, and duty is instead charged under sub-subitem 22(1)(b) of the First Schedule of the Act at RM1.00 for every RM100.00 or part thereof, payable by the party receiving the service under Item 2 of the Third Schedule of the Act.

   
   
4. Conditions for the RM50.00 Cap
   
   To qualify for the duty on an agreement to be capped at RM50.00 with the remainder remitted under the Order, the agreement must clearly state the following:
   
   

   (1)	the names of the parties and the date of execution of the agreement between the principal service provider and a person other than an Awarding Authority, or between a sub-service provider and the principal service provider where the principal service provider has made an undertaking with an Awarding Authority;
   (2)	the subject matter of the agreement; and
   (3)	confirmation that the agreement referred to in (a) has been duly stamped at the rate described in item (1) or (2) of Section 2 above.

   
   

For further information, please visit the official website of the Inland Revenue Board of Malaysia at https://www.hasil.gov.my/en

KAIZEN Group, together with its associate firms in Malaysia, can help the clients to perform these compliances formalities so as to maintain the Malaysia company in good standing. Please call and talk to our professional accountants in Kaizen for further clarification.

Disclaimer All information in this article is only for the purpose of information sharing, instead of professional suggestion. Kaizen will not assume any responsibility for loss or damage.

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