What You May Want to Know About Malaysia’s New Digital Service Tax
April 12, 2019 By Edika Amin
On 8 April 2019, the Malaysian parliament passed the Service Tax Act (Amendment) Bill 2019 which expands the scope of the Services Tax Act. The amendment allows the Bill to apply extraterritorially and thus capturing digital services provided by overseas service providers to Malaysian consumers. It is essential to note that the digital service tax is not a new tax but merely an extension to Malaysia’s existing Services Tax Act.
Rationale for Amendment
This amendment to impose taxon foreign service providers is aimed to create a level playing field. The government’s reasoning was that is unfair that only local digital service providers were required to pay tax but foreign providers were exempted. The intention is also to make platform operators responsible for charging and levying the tax on digital services provided to consumers.
Key contents of Amendment
- Tax rate of 6% starting 1 Jan 2020 with the registration threshold set at RM500,000, annually.
The Bill provides clear definition of the following terms:
- Definition of foreign service provider; Subsection 2(1e): a foreign service provider is a person outside Malaysia providing digital service to a consumer, and includes any person operating an online platform for buying and selling goods or providing services (whether or not such person provides any digital service).
- Definition of digital service Subsection 2(1f): digital service is defined by service delivered or subscribed over the Internet and other electronic network and which cannot be obtained without the use of information technology and where the delivery of the service is essentially automated.
- Definition of consumer (customer) is defined in Section 2 (3e)
- The payment is made using a credit or debit facility provided by any Malaysian Company or financial institution;
- The service is acquired using an IP address registered in Malaysia or an international mobile phone country code assigned to Malaysia; and
- The customer resides in Malaysia.
Where any two of (a) – (c) are true, then the customer will be considered a consumer and tax will apply on the sale of a digital service to him/her.
- There are penalties for tax defaulters which includes a fine of up to RM50,000 and/or imprisonment of up to three years upon conviction.
Given that this Digital Service Tax is an indirect tax, it is perceived as a less controversial method as compared to a ‘new direct tax’. In addition, many countries have either taken or will be implementing a similar approach. This includes Russia, Norway and neighboring country Singapore. Doing so in Malaysia simply levels the playing field between foreign and Malaysian companies, as local digital firms are already subject to SST. The tax would however still increase the cost of digital goods and services in Malaysia which will be borne by the consumers. However, economists have opined that this will only cause a minimal impact given the low tax rate.
What remains to be seen at this juncture is how the government will to get the foreign provider to register for the tax. Potentially it may be difficult for the authorities to enforce the tax on businesses with no physical presence in Malaysia. While we expect that the majority of businesses will take the approach of ‘doing the right thing’ it should be noted that penalties do apply for failure to register. Moving forward, the government may wish to explore methods to ‘incentivize’ the foreign providers to register. For instance, when the tax on digital services was first proposed under the GST regime, the former Barisan Nasional Government indicated that access to the websites of businesses failing to comply can be temporarily blocked in Malaysia. This issue however, should be tread carefully.
Effective Date and Administrative Requirements
- The effective date is confirmed to be 1 January 2020.
- Service providers will be required to register for service tax as ‘foreign registered persons’.
- The Bill requires that foreign service providers are to be registered 3 months prior to the effective date. This would mean that registration must be completed prior to 1 October 2019.
- Registration will be required for those businesses that meet a turnover threshold of RM500,000.
- A foreign registered person will be required to issue invoices showing prescribed particulars which are yet to be defined. There will also be a requirement to retain records for 7 years.