Ensuring Compliance with IRBM Requirements for Payments to Agents, Dealers and Distributors

It is common for businesses to leverage the strengths of third-party resources along the supply chain to ensure that their products effectively reach customers. These resources include agencies, dealerships and distributorships (ADD Group). Since 2012, a series of new legislation has been introduced under the Income Tax Act 1967 (the Act) to ensure the ADD Group complies with the respective provisions of the Act. Through these new provisions and guidelines issued by the Inland Revenue Board of Malaysia (IRBM), various measures have been implemented to address non-compliance risks, such as under-reporting or non-reporting of income by the ADD Group. Notably, these measures impact taxpayers who are making payments or providing remuneration to the ADD Group (the Principals), rather than imposing stricter compliance on the ADD Group themselves.  

Who are agents, dealers and distributors?

The Act does not explicitly define the terms “agent,” “dealer,” or “distributor”. These terms are generally understood in their commercial sense. Briefly, an agent is a person authorised to act on behalf of another person or business (the Principal), who typically facilitates transactions, manages sales or handles tasks such as procurement or marketing for his Principal. A dealer, on the other hand, purchases goods from a manufacturer or wholesaler (the Principal) and resells them. He often does it without the need to hold inventory or directly represent the principal, but functions independently in reselling the goods. A distributor generally buys products from a manufacturer or supplier (the Principal) in bulk and resells them to retailers or end consumers. He usually has autonomy in determining pricing and terms of sale within the set specific framework determined by the supplier.

Tax Compliance Journey for Principals who engage ADDs

a. 2012 – Introduction of Form CP58 under Section 83A

Prior to 2012, there were no specific requirements set on the reporting format to be adhered to by the Principal for payments to his ADD Group. In practice, the Principal may issue an annual statement or other statement stating the monetary and non-monetary incentives given to his ADD, merely to facilitate tax declaration by the ADD to the IRBM. Examples of monetary incentives are commissions, bonuses, incentives, subsidies, etc. Non-monetary incentives provided include benefits relating to cars, houses, travel packages, etc. 

Section 83A of the Act was introduced on 1 January 2012 which requires every company to prepare and provide to each of its ADD a statement containing particulars of payments in monetary or non-monetary form via the prescribed form, CP58 not later than 31 March of the following year, where the total amount of incentives, allowances and bonuses received by the ADD exceeds RM5,000 in a calendar year. 

Section 83A(4) of the Income Tax Act 1967 (“the Act”) defines the terms “agent” ,”dealer” or “distributor” to mean “any person who is authorised by a company to act as its agent, dealer or distributor, and who receives payment (whether in monetary form or otherwise) from the company arising from sales, transactions or schemes carried out by him as an agent, dealer or distributor”.

The original copy of the Form CP58 (hardcopy or softcopy) must be retained by the Principal for a period of seven (7) years from the end of the calendar year in which the incentive was paid to the ADDs for future examination by the IRBM. If the Principal fails to prepare the Form CP58 for its ADDs, it shall be guilty of an offence under Section 120(1)(b) of the Act and shall, on conviction, be liable to a fine of not less than RM200 and not more than RM20,000 or to imprisonment for a term not exceeding six months or to both.

b. 2022 – Introduction of Withholding Tax of 2% (WHT) under Section 107D

Despite the reporting requirements introduced under Section 83A in 2012, the IRBM further introduced a 2% WHT under Section 107D in 2022 i.e. monetary payments to ADDs are subject to WHT on the amounts received.

The Principal is the party who is compelled to observe Section 107D, and not the ADD themselves. This is so because the Principal holds the control over the distribution of cash incentives to the ADDs. Therefore, the Principal shall need to identify those ADDs affected by Section 107D, deduct withholding tax from the monetary payments, and remit the withholding tax deducted to the IRBM within the stipulated timeline.

However, not all ADDs are affected by Section 107D because it depends on them meeting two criteria. Once the criteria are met, the Principal shall be required to observe the withholding tax provisions on the affected ADDs.

Criteria 1: An ADD represents a tax resident individual

The definition of ADD adopted under Section 107D(6) is slightly different from that defined under Section 83A(4). Section 107D(6) reads as follows:

“agent”, “dealer” or “distributor” means any individual resident who is authorised by a company to act as its agent, dealer or distributor, and who receives payments, whether in monetary form or otherwise, from the company arising from sales, transactions or schemes carried out by him as its agent, dealer or distributor.

The emphasis is on ADDs who receive incentives from the Principal in their capacity as an individual while being a Malaysian tax resident. In this regard, an “individual” may refer to a business owner who operates as a sole proprietorship, or a partner who operates through a conventional partnership. Payment made to a Limited Liability Partnership (LLP) does not fall within the scope of Section 107D(6).

Criteria 2: An ADD earns more than RM100,000 in the immediate preceding year

According to Section 107D(2), the withholding tax of 2% will only be applicable if the total sums received by ADDs in cash and in-kind exceed RM100,000 in the immediate preceding year. Therefore, the Principal has to assess the total remuneration received in the immediate preceding year for each of its resident individual ADDs on a yearly basis, when determining the applicability of the withholding tax of 2%.

Nonetheless, the Principal who deducted the WHT of 2% from the affected ADDs would be required to remit the sum to the IRBM not later than the last day of the following month after paying or crediting the cash payment to the ADDs.

Examples of determination of affected ADDs under Section 107D

Please refer to the illustrations below on whether each of the ADD below would be subject to the WHT under Section 107D for the two consecutive calendar years of 2024 and 2025:

From the above examples:

• For year 2024, only En Ahmad is affected by Section 107D (receipts above RM100,000 in 2023).
• For year 2025, only Madam Chan is affected by Section 107D (receipts above RM100,000 in 2024)

Although En Ahmad is subject to Section 107D in 2024 (as his incentive exceeded the threshold of RM100,000 in 2023), he will be re-assessed in 2025 on whether Section 107D is applicable in 2025. Since he only earns monetary and non-monetary incentives of RM90,000 in 2024, which is below the set threshold of RM100,000, he will no longer be subject to Section 107D in 2025.

Calculations and submissions of WHT

Based on the above illustration, assuming the RM90,000 for En Ahmad in 2024 is wholly in cash, the WHT of 2% under Section 107D of the Act is to be computed as follows:

The WHT of 2% deducted must be remitted to the IRBM not later than the last day of the following month after paying or crediting the commission payment to the resident individual ADDs. Please see some examples in the table below:

Please note that the Principal must submit the Form CP107D – Pin 2/2022 (in pdf format) and centre Appendix CP107D(2) (in excel format) via email to the relevant IRBM payment centres before remitting the WHT. A copy of the email should be presented at the IRBM’s payment centre for verification and processing when making the WHT payment. The relevant details of the email addresses and payment centre locations are shown in the table below:

Consequences for Non-Compliance

If the Principal fails to comply with Section 107D, Section 39(1)(s) of the Act prohibits tax deduction of the ADD incentive payments in the Principal’s tax return, unless the Principal is able to make good to the IRBM the withholding tax that it had short paid. 

On the other hand, if the Principal deducted the WHT but failed to pay the withholding tax to the IRBM within the stipulated deadline, a penalty of 10% of the late payment will be imposed. The unpaid WHT and the penalty shall be a debt due to the government.

What are the responsibilities of ADDs?

On the flip side of the coin, the ADDs would need to ensure they report their income received from their Principals appropriately. They are also required to report the WHT deducted under Section 107D of the Act based on the Form 58 furnished by the Principals, in their personal tax returns, i.e. (Form e-B/BE).

The withholding tax deducted is not a final tax of the individual resident ADDs. This means that the tax deducted under Section 107D by the Principals, may be utilised for set off against the final tax computed in the Forms B/BE, pursuant to Section 107D(4) of the Act.

c. 2024 – Introduction of Self-Billed E-Invoice Requirements

E-invoicing had made headlines in the Malaysian tax landscape since its announcement on 7 October 2022. This new tax development was enacted under Section 82C of the Act which had been introduced for mandatory implementation by businesses in the country with phased implementation dates on 1 August 2024 (Phase 1), 1 January 2025 (Phase 2) and 1 July 2025 (Phase 3). The IRBM had also released several detailed guidelines relating to e-invoice implementation since 21 July 2023.

In particular, the IRBM’s E-Invoicing framework has prescribed a list of circumstances under which a buyer in a commercial transaction has to issue a self-billed e-Invoice to the seller. One of the categories stated in the IRBM’s E-Invoice Specific Guidelines (Version 3.1) issued on 4 October 2024 is the situation when the sale is concluded through the efforts of an ADD engaged by the Principal (i.e. seller).

Under normal circumstances, the seller is the party to issue an e-invoice to a buyer. However, for self-billed e-invoices, the buyer will assume the role of the seller, i.e. to be the issuer of an e-invoice and to submit the same for the IRBM’s validation. In an arrangement involving the Principal and ADD, upon concluding a sale or transaction, the ADD will be entitled for a remuneration from the Principal, whether in monetary form or otherwise. For e-invoice purposes, this provision of service by the ADD to the Principal requires the Principal (being the buyer of the services) to issue a self-billed e-invoice to the ADD (being the seller of the services).

It is understood from the IRBM’s various references that the self-billed e-invoice for the seller is to be relied upon for the purposes of proof of expense for tax purposes. This means that where the Principal fails to issue a self-billed e-invoice to the ADD, the Principal may not be able to claim a tax deduction on the payments to the ADD. Since this is alarming, the IRBM is likely going to issue new provisions in the Act to legislate the matters on tax deductibility in the absence of an e-invoice in order to enforce the e-invoicing implementation in the country.

Conclusion

Over the years, the IRBM has implemented several tax compliance measures aimed at addressing tax leakages due to non-reporting or under-reporting of income by ADDs. Pursuant to these tax measures, the Principals of the ADDs are required to comply with the new tax rules because they control crucial information regarding payouts to ADDs. As such, Principals engaging ADDs in their business arrangements should be mindful of the tax requirements and potential tax liabilities they may be exposed to.

In addition to preparing annual Form CP58 for ADDs affected by Section 83A, the Principals must also comply with Section 107D whenever payments are made to individual resident ADDs. Identifying the affected ADDs is the first step in complying with Section 107D, as only ADDs who received income exceeding RM100,000 in the previous year are subject to WHT in the current year. Failing this, the Principals will be required to bear the WHT not deducted from the ADDs, and they may be denied the deduction of the relevant expenses. In addition, late payment of WHT carries a penalty of 10% on the unpaid amount.

In the era of e-invoicing, Principals will also need to issue self-billed e-invoices to their ADDs to claim tax deduction for the incentives paid to ADDs. The tax obligations placed on Principals are significant, and it is crucial that they have the resources to manage these requirements to avoid costs associated with non-compliance of the tax rules.

If you have any questions or require assistance with any of the issues mentioned, it is advisable to consult a professional for clarification.

This article was first published in the Accountants Today by MIA.