Malaysia - Digital Economy – Is Our Tax System Smart Enough?
Legal News & Analysis - Asia Pacific - Malaysia - Tax
2 January, 2020
In this article, Yeoh Yu Xian provides an overview of the Service Tax (Amendment) Act 2019.
The advancement of information technology and the increased usage of the internet have led to the boom of digital based services around the world over the last two decades. Online shopping, for instance, has begun to overshadow that at physical stores. As the world moves toward a global marketplace, e-commerce is an inevitable trend as it is a convenient and effective way for businesses to expand.
Tax challenges in the digital economy
The digital transformation of the economy has a wide range of implications for taxation as it will impact tax administration and tax policy at both domestic and international levels.
It is known that some of the oldest documents in existence are tax returns. The point is that without a robust tax system that is progressive, dynamic and in line with international standards, it may be difficult to keep up with the rapid growth of the digital economy.
According to the Organisation for Economic Co-operation and Development’s (“OECD”) report — “Addressing the Tax Challenges of the Digital Economy”1, there are certain challenges in relation to taxing the digital economy. It was recognised in that report that digitalisation and some of the business models present challenges for international taxation.
Ensuring that tax systems are ready to meet the changes and challenges brought about by the digital transformation, as well as to leverage upon its opportunities and provide protection from potential risks, would be a critical challenge for tax authorities all over the world. The OECD will provide an update on tax and digitalisation that will be delivered to the G20 in 20202.
Digital service tax
In light of the digital transformation of the economy, the Malaysian Government has introduced a digital service tax of 6% on foreign digital service providers which will take effect from 1 January 2020. This is aimed at creating a level playing field in the digital sector.
The Service Tax (Amendment) Bill 2019 was passed by Parliament earlier this year to impose tax on foreign registered persons providing digital services to consumers in the country. This is in line with the practice in other countries which have already implemented similar digital taxes.
The Deputy Finance Minister Datuk Amiruddin Hamzah has stated that the new digital service tax to be imposed on foreign registered digital service providers is not a new tax and it is unfair that only local digital service providers have to pay the tax. As such, the new digital service tax merely extends the scope of service tax to include services providers operating in other countries3.
Who is a foreign service provider (“FSP”)?
Pursuant to the Service Tax (Amendment) Act 20194, a “foreign service provider” means:
“any person who is outside Malaysia providing any digital service to a consumer and includes any person who is outside Malaysia operating an online platform for buying and selling goods or providing services (whether or not such person provides any digital services) and who makes transactions for provision of digital services on behalf of any person.”
Who is a consumer?
“Consumer”5 means any person who fulfils any two of the following:
- makes payment for digital services using credit or debit facility provided by any financial institution or company in Malaysia;
- acquires digital services using an internet protocol address registered in Malaysia or an international mobile phone country code assigned to Malaysia;
- resides in Malaysia.
In “Guide On: Digital Services” (“the Guide”)6 published by the Royal Malaysian Customs Department, it was stated that in determining whether a consumer is residing in Malaysia, foreign service providers may consider the information or a declaration from the consumer below:
- the billing address of the consumer is in Malaysia;
- the home address of the consumer is in Malaysia;
- recipient’s country selection.
The cross-border transfer of data and the personal data protection laws in the relevant jurisdictions may be issues which need to be addressed. It is also unclear as to how such information is to be provided, and whether the foreign digital service provider is expected to verify the information provided, and what measures are to be taken if incorrect information is provided to the service provider.
What is digital service?
Pursuant to the Service Tax (Amendment) Act 2019, “digital service” is defined as:
“any service that is delivered or subscribed over the internet or other electronic network and which cannot be obtained without the use of information technology and where the delivery of the service is essentially automated.”
In the Guide, digital services are stated as including online licensing of software, streaming services, online advertising services, online cloud storage.
This would potentially include services provided by Netflix, Spotify, Google, to name a few.
Implementation of digital tax in Malaysia
Should the value of the digital services provided by a foreign service provider to consumers in Malaysia exceed the threshold of RM500,000 over a period of 12 months or less, such foreign service providers would be required to be registered under section 56B of the Service Tax (Amendment) Act 20197.
The grey area in this issue is the question of how the tax authority will enforce compliance and audit foreign digital service providers that have no presence in Malaysia. There is also the difficulty of bringing legal action against foreign companies which do not have a presence in Malaysia.
Penalty for failing to register
There are penal consequences for any foreign service provider who contravenes the requirement to be registered. Penalties will also be imposed upon the foreign digital service provider for late or non-filing of the digital services return, submission of incorrect returns, late or non-payment of service tax on digital services and failure to keep records, amongst others.
Level playing field for local digital service providers
As it currently stands, taxable services provided by service providers in Malaysia are subject to service tax. Local digital service providers will no doubt be pleased that there will now be a level playing field as foreign service providers will also be subject to the Service Tax Act 2018.
It has been reported that the amount collected from digital service tax could be more than RM2.4 billion a year if all foreign digital service providers register in Malaysia8. The success of the implementation of the digital tax and the Government’s intention to widen the tax base will depend on how many foreign service providers register in the country
Although the Service Tax (Amendment) Act 2019 has introduced a new provision into the Service Tax Act 2018 to provide that the Act and its subsidiary legislation shall apply both within and outside Malaysia as well as to any foreign service provider of whatever nationality or citizenship beyond the geographical limits of Malaysia, there may well be practical difficulties in enforcing the digital service tax if foreign service providers do not register in the country.
We have to see the number of foreign service providers who will comply with Malaysia’s digital service tax in 2020.
For further information, please contact:
Yu Xian Yeoh, Shearn Delamore & Co