Grasping the Service Tax Amidst Digitalisation
Published on 14 Jan 2020
The start of 2020 saw the introduction of Malaysia’s very own digital service tax (DST) which will see a 6% service tax imposed on digital service providers (DSPs). DSPs, in the likes of Netflix, Spotify and Steam, are popular among Malaysians just as they are globally. However, unlike Australia, Singapore, Russia and South Korea to name a few, before 2020 none of these digital services paid a tax to the Malaysian government.
Unsurprisingly, the Malaysian government saw huge potential for public revenue, subsequently leading to the passing of an amendment to the Service Tax Bill by the Dewan Rakyat (the Malaysian Parliament’s Lower House) on 8th April 2019. With this amendment, Malaysia stands to generate billions of ringgits in revenue[1] and gather more than RM2.4 billion a year from digital services.[2]
The introduction of the DST is not without its confusion. Both consumers and businesses alike are uncertain of how the full extent of the tax would affect their transactions. To be taxable, how one qualifies as a consumer of digital services needs to be defined. As such, they need to meet any two of the following criteria:[3]
- Pay for digital services using credit or debit facility provided by any financial institution or company in Malaysia;
- Acquire digital services using an internet protocol (IP) address registered in Malaysia, or an international mobile phone country code assigned to Malaysia; and/or
- Reside in Malaysia (i.e. billing address and home address based in Malaysia, and recipient’s country selection).
One is considered a foreign service provider (FRP) if they are either a business or an individual outside Malaysia that provides digital services to consumers or is an online platform that makes transactions on behalf of the overseas service provider and issues invoices or any other document under their name.
FRPs must be registered when they exceed the total value of digital services worth RM500,000 a year to consumers based in Malaysia. Otherwise, they may face a maximum fine of RM50,000, or a maximum of 3 years’ imprisonment, or both when you commit an offence.[4] FRPs must pay a penalty rate if they fail to pay any DST due within the given period.[5]
Malaysian-made services are excluded from this ruling[6] due to local taxation laws, import duty and sales tax. However, DST payments from foreign bank accounts are acceptable and overpaid service tax on digital services are refundable.
For digital service subscriptions, particularly those lasting a year or more, purchases made before 1st January 2020 are not taxable. However, monthly and annual subscriptions purchased from 1st January 2020 will begin seeing a slight increase in cost due to the DST.[7]
What’s After Service Tax on Digital Services (SToDS)?
The road to an effective digital tax system would take time for full maturity, particularly with diverse tax regimes across the globe. In the United States (US), where most of these digital service companies come from, is the lack of a uniformed digital tax regime as different states are free to enact their own tax regulations.
There are also several events taking place elsewhere, seeing further escalations in cost to consumers of digital services. Looming on the horizon is the US-EU digital trade war[8] and the China-OECD trade divide.[9] In Australia, interim DSTs could affect their international trade and investment laws.[10] There are also concerns of double taxation, which can be mitigated through a reduction in corporate income tax (CIT) or value-added tax (VAT). To resolve tax base erosion and profit shifting, there is a need to revise transfer pricing rules and adjust permanent establishment.[11] The VAT for business to consumer (B2C) and customer to consumer (C2C) transactions requires reform as well.[12]
Yet, the system is far from foolproof. Questions surround the use of VPN which could prevent a user’s location from being traced, in this case, allowing users in Malaysia to not be recognised as consumers of a digital product within the country—avoiding the tax for foreign digital services altogether. IP addresses could be confused, causing digital advertisements to “pop up” in unintended destinations of advertising.[13] Foreign online companies might increase their services price, similarly compensating the tax when businesses took the opportunity to increase prices when the now-discontinued GST was introduced in Malaysia in 2016.[14] For example, if Netflix were to increase its subscription costs, consumers would re-consider subscribing thus causing a decrease in subscriptions. Another big issue is the piracy of digital products (i.e. movies, games and songs).
Only time will tell if FRPs will pass on DST cost to consumers or simply absorb them. Should cost be passed on, a 6% addition to a product, be it a Netflix monthly subscription (a basic plan of RM33 could see an addition of RM1.98) or an annual Microsoft Office 365 subscription (a Personal version starts at RM269 could see an addition of RM16.14) would be a slight increase in disposal income. Such a tax may even the playing field for local-based DSPs, which are already paying the service tax.
However, foreign services without a viable local alternative could play a monopolistic role, becoming unaffected by such changes in taxes and confidently passing on the cost to their customers who have nowhere else to turn to (digital music providers in the likes of Spotify and Apple Music may possess such an advantage). Malaysian consumers have proven to be the most adaptable. If all else fails, there is still the local radio and other less legitimate means of obtaining a desired digital service. Even Spotify can be used for free should the user not mind enduring the ads, which to be fair, is a reasonable exchange.
If managed correctly, a legal means of consumption is possible should foreign digital services offer their products at prices which are viable to consumers, perhaps protecting their existing customer base by absorbing DST cost for the year. Ultimately, most of these services are things we do not really need. Consumers have a choice whether to buy or otherwise.
The DST’s recent implementation in Malaysia is part of a relatively new phenomenon, matching trends of other governments attempting to tax digital service platforms. Only the test of time will determine if present mechanisms are sufficient or if gaps were to emerge. Policymakers need to pay close attention to its developments in the coming months if Malaysia’s own DST is having any effect towards its consumers and businesses alike.
[1] Mahalingam, E. (2017). Taxing the digital economy. The Star Online.
[2] Saieed, Z. (2019). Digital tax can rake in RM2.4bil a year. The Stars Online.
[3] Parliament of Malaysia (2019). Service tax (amendment) bill 2019 [PDF file]. Retrieved from https://www.parlimen.gov.my/files/en/billindex/pdf//D.R%206_2019%20-%20eng%201.pdf
[4] Federal Government Gazette (2019). Laws of Malaysia act A1597: Service tax (amendment) act 2019 [PDF file]. Retrieved from http://www.federalgazette.agc.gov.my/outputaktap/20190709_A1597_BI_Act%20A1597%20BI.pdf
[5] Baker Tilly (2019). Updates on indirect tax – sales tax and service tax (issue no. 3/2019) [Webpage].
[6] Brohier, M. (2019). How much do you know about the digital tax coming in 2020? [Webpage].
[7] Royal Malaysian Customs Department (2019). Guide on digital services [PDF file]. Retrieved from https://mysst.customs.gov.my/assets/document/Industry%20Guides/GI/Guide%20on%20Digital%20Service.pdf
[8] Beebe, J. (2019). Recent developments on the EU’s digital tax proposal. Baker Institute Report, 1, 1-10; Senate Joint Economic Committee (Republicans) (2018). The EU’s new digital trade war? [Webpage].
[9] Trefler, D. (2019). The China-OECD trade divide: Building bridges. China Economic Journal, 12(2), 195-207, doi:10.1080/17538963.2019.1603644
[10] Mitchell, A. D., Voon, T., & Hepburn, J. (2019). Taxing tech: Risks of an Australian digital services tax under international economic law. Melbourne Journal of International Law, Forthcoming, 1-32. doi:10.2139/ssrn.3347655
[11] Olvert M., & Spengel, C. (2017). International Taxation in the Digital Economy: Challenge Accepted? World Tax Journal, 9(1), 3-45.
[12] Terada-Hagiwara, A., Gonzales, K., & Wang, J. (2019). Taxation challenges in a digital economy—the case of the People’s Republic of China. ADB Briefs, 108, 1-8. doi:10.22617/BRF190151-2
[13] Kennedy, J. (2019). Digital services taxes: A bad idea whose time should never come. Information Technology & Innovation Foundation.
[14] Khidhir, S. (2020). Will Malaysians stick to Netflix and Spotify? The Asean Post. Retrieved from https://theaseanpost.com/article/will-malaysians-stick-netflix-and-spotify
