On 16 March 2018, the Malaysian Inland Revenue Board (IRB) published Practice Note No. 1/2018, which describes the tax implications of income received by a non-Malaysian taxpayer from the provision of digital advertising.

The Notice briefly discusses whether such payments are subject to Malaysian income tax, such as trade income or withholding tax as royalty income or income under Section 4A (ii) of the Income Tax Act 1967 [Revenue under this section refers to technical advice, assistance or service fees in connection with the technical management or administration of scientific, industrial or commercial enterprises, undertakings, projects or programs].

The tax treatment would depend on whether the non-resident in Malaysia has a PE (where a tax treaty applies) or a business presence (if there is no contract). If the non-resident has neither a permanent establishment nor a business presence, the payments may be subject to withholding tax as either royalty income or services income under Section 4A(ii). If the non-resident has a permanent establishment or office in Malaysia, the payments are Malaysian business income taxed in accordance with Section 4 (a).

The Note explains that the main criteria that determine whether the payment would be considered a “royalty” or Section 4A(ii) income to the nonresident. Royalty income-If the payment is for the purchase or use of (for example) an application (App) by the payor to create their own advertisement campaign. Section 4A(ii) income-If the payment is merely a provision of service by the nonresident and does not involve the purchase or use of Apps, since the payor solely relies on the service provider to deal with all aspects of digital advertising.