What It Costs to Miss a Withholding Tax Deduction

RM5,000 of missed withholding tax does not cost RM5,000. It costs RM5,500 in tax, RM12,000 in lost deduction, and a penalty that stays on the file after you have paid everything else. The arithmetic is worth doing once, properly.

The three separate hits

They come from three different provisions and behave differently.

One — the 10 per cent increase. Each charging section carries its own subsection (2): ss.107A(2), 109(2), 109B(2) and 109F(2) all provide that the amount you failed to pay “shall be increased by a sum equal to ten per cent”, and that the total is a debt due to the Government payable forthwith. It is not a s.113 penalty, though each section lets the Director General remit it for good cause.

Two — disallowance of the whole expense. Section 39(1) disallows the underlying payment entirely, routed by section:

Payment	Disallowance
Interest or royalty under s.109	s.39(1)(f)
Contract payment under s.107A	s.39(1)(i)
Special classes of income under s.109B, and 4(f) income under s.109F	s.39(1)(j)

You lose the deduction for the fee, not for the tax. Public Ruling 10/2019 para 14.2 puts it flatly: although the expense is incurred under s.33(1), none of it is deductible while the withholding tax is unpaid.

Three — the s.113(2) penalty. Proviso (ii) to each of those paragraphs provides that paying late “shall not prejudice the imposition of penalty under subsection 113(2)” where a deduction was claimed in the return. Section 113(2) allows a penalty equal to the tax undercharged for an incorrect return.

The arithmetic, on LHDN’s own example

Public Ruling 10/2019 Example 18. A resident company pays RM50,000 to an Indian service provider for services performed in Malaysia, and withholds nothing. It files its YA2017 return showing chargeable income of RM1,000,000 and tax of RM240,000, having claimed the RM50,000 as a deduction. An audit follows.

	RM
Chargeable income as filed	1,000,000
Tax payable at 24%	240,000
Add back: fees for services disallowed under s.39(1)(j)	50,000
Chargeable income after audit	1,050,000
Tax charged at 24%	252,000
Tax undercharged	12,000
s.113(2) penalty, illustrated at 100%	12,000
Additional tax payable	24,000

Separately, the withholding tax of RM5,000 is increased by RM500 under s.109B(2), giving a debt of RM5,500 recoverable under s.106(1).

Total exposure on a RM50,000 invoice: RM29,500 — against RM5,000 of tax that should have been deducted at source. Just under six times.

What paying later does, and does not, fix

Example 19 in the same Ruling runs the sequel. The company pays the RM5,500 on 15 December 2018.

The deduction comes back. Chargeable income returns to RM1,000,000, tax to RM240,000, and a reduced assessment is issued. But the Ruling is explicit: because an incorrect return was filed on 31 July 2018, the s.113(2) penalty will be maintained.

That is the asymmetry to remember. The 10 per cent increase can be remitted for good cause. The disallowance reverses on payment. The penalty for having claimed a deduction you were not entitled to does not, because the wrong was the return, not the arrears — and LHDN’s withholding tax page confirms this applies whether the return was filed on time or late.

The trap on unpaid invoices

Where the withholding tax is not yet due because no payment or crediting has been made to the non-resident on or before the return due date, the deduction is not allowable at all — regardless of whether any withholding tax has been paid. Accruing a foreign service fee at year end and claiming it before you have paid the vendor puts you outside s.39(1)(j) by a different door.

The remedy is s.131A: a payer who has filed and paid may apply in writing for relief where the assessment is excessive on that ground, within one year after the end of the year the payment is made. LHDN’s example — royalty and withholding tax paid on 30 October 2024 for a YA2023 expense — must be applied for before 31 December 2025.

Common mistakes

• Calling the 10 per cent a s.113 penalty. It is not. It lives in the charging section, and conflating the two hides the fact that they stack.
• Assuming paying the arrears closes the file. It restores the deduction. It does not withdraw a s.113(2) penalty already imposed on a filed return.
• Budgeting the exposure as tax plus 10 per cent. The disallowance is usually the larger number, because it is computed on the whole expense at the corporate rate, not on the withholding tax.
• Waiting for the audit before self-correcting. The s.113(2) risk attaches to the return you already filed, and each further year adds to it.
• Forgetting the s.131A one-year clock on the not-yet-due scenario.

What’s next

If you are working through a backlog, sort the payments by section first — the disallowance paragraph and the form both follow from it. Start with withholding-tax-rates, then cp37-forms for the remittance mechanics.