Malaysia’s new Sales and Services Tax (SST) system may extend to foreign-supplied digital services

Malaysia looks set to become the second South-East Asian state to extends its indirect tax system to cover the supply of digital services from non-resident businesses. Moves are likely in early November. In February 2018 Singapore announced that such digital services would be subjected to its GST.

Oct 18, 2018

Malaysia looks set to become the latest tax jurisdiction to seek a levelling of the playing field between traditional and digital businesses by amending their new Sales and Services Tax (SST) system to tax foreign-supplied digital services.

It is now expected that Malaysia will announce the rule change to tax digital services in its November 2 budget. Reports from Malaysia state the overriding reasoning for such a move is, as has been the case in numerous jurisdictions worldwide, to balance the level of competition between domestic providers and non-resident businesses. Currently, supplies by non-resident digital businesses to Malaysia-based customers are not subject to the new SST.

In doing so Malaysia will become the second South-East Asian state to extends its indirect tax system to cover such digital services. In February 2018 Singapore announced that cross-border digital services would be subjected to its Goods and Services Tax (GST). It is envisaged that the rules in Singapore will change on January 1, 2020.

Thailand is also contemplating a change in how digital services provided by non-residents are taxed. Back in July 2018, Thailand's cabinet approved a draft legislation on "collecting a 7% VAT from foreign vendors and e-commerce platforms buying and selling in Thailand".

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Malaysia digital tax: some background

Malaysia is looking into the possibility of introducing a digital tax in its 2019 budget on November 2. The country's new Deputy Finance Minister Datuk Amiruddin Hamzah indicated the possible move at the launch of a new World Bank report titled 'Malaysia's Digital Economy: A New Driver of Development'.

At the launch, Amiruddin Hamzah stated:  “This will definitely be a matter that we will look into deeply. We will come out with a new mechanism, but we are still studying it and we will impose something for them. If we put this matter (digital tax) aside, I think the nation will be losing revenue.”

On September 1, 2018, Malaysia reintroduced its Sales and Services Tax (SST) at a rate of 6% for services and 10% for the sale of goods. The SST replaced the country's previous Goods and Services Tax (GST) system which had been zero-rated in June 2018 after Malaysia's national elections the previous month.

In announcing the reintroduction of SST the Malaysian Finance Minister Lim Guan Eng stated that the Inland Revenue Board needs to work closely with international bodies (such as the OECD) in order to address international tax issues relating to the digital and sharing economies. He said: "The Malaysian tax authority must stand guard against any loophole manipulated through global tax planning by these multinationals.”

A brief history of Malaysia digital tax plans

Prior to the reintroduction of the SST system in mid-2018, Malaysia was investigating the possibility of taxing digital services provided by foreign businesses to domestic customers. Back in September 2017 the then Royal Malaysian Customs Department director-general Datuk Seri Subromaniam Tholasy told reporters after a GST conference in Malaysia that:

“We are amending a few of the tax laws, especially with regard to the GST to collect taxes from foreign companies that offer digital services in Malaysia. Taxes from the digital economy... we can easily collect a couple of billions of ringgit (MYR). It runs into several billion. Nobody knows how big the monster is out there. Once we amend the law and look into the details we would know for sure.”

Subromaniam added that the biggest loss in the digital economy was in business-to-consumer (B2C) sales:

“When the business provides services directly to consumers and the business which is providing the service is overseas, it gets direct payment and the services are not taxed. This also creates discrimination – the local players get taxed but the foreign players are not. This is what we’re trying to correct and once the law is amended, it will create a level playing field. Once the amendment is done, we will have a legal basis to register them and tax the services.”

Malaysia: a beacon of economic growth in the ASEAN area

Today, Malaysia is home to 31 million people, but in 1985 it was half that at 15.5 million. The country has blossomed as a beacon of economic growth in the ASEAN area. This growth is continuing with Q2 2017 seeing GDP growth of 5.8%. This was Malaysia’s fastest growth rate in more than two years.

This was in large part due to a new surge in consumer spending. These consumers are also becoming increasingly connected due to a rise in mobile phone ownership and usage.

According to Statista Malaysia was home to 18 million mobile phone internet users in 2016 with that number expected to exceed 21.5 million by 2022, an increase of almost 20%. The digital economy currently accounts for 18% of the Malaysian economy and, as is the case elsewhere, is expected to grow rapidly.

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