All we need to know about digital tax


Click to view the full image. Bernama Infographics

KUALA LUMPUR: With one and a half months left before the new Service Tax on Digital Services kicks in starting Jan 1, 2020, Malaysians generally are still in the dark about what falls under this tax net.

As popular platforms such as Spotify, Netflix and Steam have been named to be among the companies that will be slapped with the tax under the new tax fraction, the question is whether consumers need to bear the tax, or it will be absorbed by the providers, or passed on to them (consumers).

The Royal Malaysian Customs Department (RMCD) has published a guideline, ironing out what falls under the digital tax scope.

“Service tax shall be charged and levied on any digital service provided by a foreign-registered person (FRP) to any consumer in Malaysia. Digital service has the meaning assigned to it under Section 2 of the Service Tax Act 2018 (STA). The rate is six per cent,” says RMCD.

What is needed to be understood is that the six-per cent rate is not necessarily on the total purchases, but on the service charged by the technology companies in providing the services to Malaysians.

Below is the list of services that the RMCD has indicated would fall under the tax net. The list is not exhaustive.

(i) Software, applications and video games (e.g. online licensing of software, updates and ad-ons website filters, firewalls, and provision of mobile applications);

(ii) Music, e-book and films (e.g. provision of music, live streaming services, including subscription-based media / membership);

(iii) Advertisement and online platforms (e.g. offering online advertising space on intangible media platform, and offering platform to trade products or services);

(iv) Search engines and social networks (e.g. customised search-engine services);

(v) Database and hosting (e.g. website hosting, online data warehousing, file-sharing and cloud storage services);

(vi) Internet-Based Telecommunication (e.g. Cloud-PABX and VOIP Phone);

(vii) Online training (e.g. provision of distance teaching, e-learning, online courses, and webinar), and;

(viii) Others (e.g. Subscription of online newspapers and journals, provision of other digital content like images, text, and information and payment processing services).

From the listed services, the government is eyeing to increase tax revenue by RM2.4 billion a year, and the RMCD has opened the registration of foreign service providers (FSP) since Oct 1, 2019.


How does tax collection works?

The FSP, which sells a digital service to consumers in Malaysia for a period of 12 months or less exceeding the threshold of RM500,000, is required to register with the RMCD.

As for Malaysian consumers, they are ascertained if they meet any two of the following three conditions, namely:

* those who make payments using a credit or debit facility by any financial institution or company established in Malaysia;

* those using a Malaysian Internet protocol (IP), and;

* those using a Malaysian mobile country code or residing in Malaysia.


According to KPMG executive director Ng Sue Lynn, this list shows the breakdown of the tax collection framework:

>Business to Consumer (B2C) (See Graphic 1 as attached)

In a typical B2C scenario, the FSP shall charge six per cent to the established Malaysian consumer as he/she acquired a digital service from the foreign company. This is the direct case scenario of tax implementation on Netflix, Spotify and Steam users.


>Business to Business (B2B)

In a B2B scenario, it depends on the business and contractual arrangement between the companies. (See Graphic 2)


>Extending the transaction further beyond the Malaysian business. (See Graphic 3)


>For online platforms (those providing the platform, marketing and promotion for the services) in a transaction where the foreign online platform transacts with the FSP. (See graphic 4)


>On the other hand, a foreign online platform that makes transactions on behalf of the overseas service provider and issues invoice or any other document under their name, will be regarded as the FSP. (See Graphic 5)


“It is important to note that the six-per cent service tax is on services and not on goods. Hence, the amount is not as significant as many thought it to be. However, the challenge is when the elements of services are embedded into the prices of the goods,” said Ng.


Widening tax base for service tax

The step to include digital services into the tax net is what is conducted globally and is viewed positively by the World Bank.

World Bank lead economist for Malaysia Richard Record, in a briefing, said under the current economic situation, the country needs to diversify its sources of revenue by widening the tax base.

He said the country is moving in the right direction, and even ahead of many other countries in levelling the playing field between service providers that are incorporated in Malaysia, and those that are not.

Malaysia is among the earliest countries to implement digital tax next year, followed by Singapore, while other emerging nations such as Mexico and Turkey are also in the pursuit of implementing it.


Impact on digital landscape

With the government viewed as being keen to push digital transformation as espoused in the 2020 Budget, players in the digital landscape have voiced their concern over double taxation from overlapping the current withholding tax in the digital tax implementation.

The National ICT Association of Malaysia (Pikom) had previously voiced their concerns by seeking clarification from the government on whether the industry would be subjected to digital tax, withholding tax or both.

Pikom chairman Ganesh Kumar Bangah said the industry, particularly cloud services and online advertising, would be affected if they were to be subjected to the implementation of digital tax, as the tax represents among the largest cost components to digital companies.

“However, it is unclear if these applications would also need to pay withholding taxes in addition to the digital tax.

“If these applications attract both taxes, then total taxes of 16 per cent would be levied on some of the largest cost components of our digital companies, making our local industry uncompetitive,” he said.

There are also rising concern that such tax could slow down the growth of digital adaptation among Malaysians.

Meanwhile, Malaysia Fintech Association president Ridzuan Aziz said the service tax on digital services would cover companies adopting the B2C business model.

“However, it would be a challenge to collect taxes from global tech company like Netflix, Facebook and Google.

“In this scenario, the tax is most likely to be borne by the end-users, namely the consumers,” he said.

Asked if it would affect the e-wallet industry, with FSP like Alipay and Grab Pay coming into the picture, he said there would be no impact.

“However, for cases involving payment gateway like Paypal, (it) would be tricky,” he said.


Consumers’ views

Going over the list provided by RMCD, digital tax would include a wide range of online services, exceeding the pubic expectation.

The younger generation, especially those below 35, is the biggest consumers of digital services, mainly for applications that involve entertainment such as Netflix, Spotify, Steam, e-books, as well as online learning.

There have been calls on the government to reduce the percentage of the digital tax, but in order to create a level playing field between local technology providers and foreign players, it is important to have a standard rate between the two.

However, from the tax implementation side, it is still unclear on how the tax would affect subscription billings.

Despite assurance that the impact on consumers would be minimal as the tax would only be on the service charge imposed by the service providers, the consumers are concerned on how it would affect their billings starting next year.

A Netflix representative, when asked about the digital tax implementation, said the online streaming company had yet to receive any guidelines on the matter and had yet to decide on it.

Audio streaming platform Spotify, when asked through its online query, said so far it had yet to get updates on the matter.

Several online-based subscription newsletters and applications also said they had yet to get any instructions on the digital tax.

As how it would affect consumers is still on the blurry side as it is still uncertain whether the service provider would absorb the 6.0 cent tax or it would be borne by the consumers.

Maybe a little more clarity from the authorities would help enlighten the consumers. — Bernama