Malaysia caught up with the global trend of taxing cross-border supplies of digital services by introducing a 6% service tax on imported digital services (SToDS), starting January 1, 2020. That said, unlike similar goods and services tax (GST) or value-added tax (VAT) regimes in other countries, the Malaysian SToDS regime imposes the tax on both individual and business consumers in Malaysia, which took most Malaysian businesses by surprise.
Business raised various concerns regarding the implications of the widening of the service tax net to capture cross-border supplies of digital services and the Malaysian government has since introduced measures to refine the SToDS regime in response to the concerns raised.
Preventing Double Taxation
Separate from this new SToDS regime, service tax is also imposed on imported taxable services under the pre-existing business-to-business (B2B) regime that came into force on January 1, 2019. Under the B2B regime, Malaysian businesses which acquire imported taxable services are required to account for 6% service tax on such taxable services via a reverse charge mechanism.
Given that the definition of “consumer” under the new SToDS regime is sufficiently wide to capture both individuals and businesses, there were concerns that Malaysian businesses could be subject to double taxation on the same service where the service falls within the scope of “digital services” under the SToDS regime and “taxable services” under the B2B regime.
To prevent such double taxation, Malaysia introduced a reverse charge exemption for imported taxable services. With this, Malaysian businesses can be exempted from the obligation to reverse charge service tax on imported taxable services if the Malaysian business had been charged service tax by a foreign service provider (FSP) on the same service. This would mean that imported digital services would only be subject to service tax once where the conditions to the exemption are satisfied, and there should be no double taxation on the same service even if the imported digital service also falls within the scope of “taxable services” under the B2B regime.
Refund Mechanism for Local Service Providers
One of the concerns commonly raised by the industry is the cascading effect of the Malaysian service tax regime. Unlike the previous Malaysian GST which was abolished in 2018, and the VAT regimes in many other countries, Malaysia’s service tax regime does not provide an input tax credit mechanism, resulting in the service tax becoming a cost to Malaysian businesses and ultimately a burden to the end consumers.
In response to these concerns, the Royal Malaysian Customs Department (Customs) announced a special refund for local service providers who have paid service tax to an FSP. Under this refund mechanism, a local service provider who has paid service tax to an FSP on imported digital services can claim a refund by offsetting the amount of service tax paid to the FSP against the amount of service tax that the local service provider collects from customers in respect of the service provided by the local service provider. This is on the condition that the service provided by the local service provider must be the same as the imported digital service acquired from the FSP.
The Customs’ announcement on this refund mechanism was well received by businesses in Malaysia as this would reduce the service tax costs borne by local service providers who import a digital service from an FSP and sell the same service to their customers in Malaysia, thereby preventing the cascading effect of service tax along the supply chains.
Exemptions for Online Distance Learning Services and Online Newspapers, Journals and Periodicals
When the government first announced its proposal to introduce the SToDS in Malaysia, it was often said that the purpose of the SToDS was to level the playing field between local and foreign suppliers, as well as between offline and online service providers. This was reflected in the rather wide definition of “digital services” in the law.
The Malaysian government had however decided to exempt certain services that may fall within the definition of “digital services,” in order to encourage the consumption of these services in Malaysia. For example, the Minister of Finance (Minister) has prescribed that online distance learning services are exempted from service tax with effect from January 1, 2020. This exemption covers online distance learning services provided as part of preschool, primary, secondary or tertiary education as recognized by the relevant authority in the relevant country.
In addition to this, the Minister also prescribed that online newspapers, journals and periodicals are exempted from service tax, and this exemption includes printed digital versions of online newspapers, journals and periodicals which fall within the prescribed customs tariff codes.
When the SToDS came into force in January 2020, no intra-group relief was available under the SToDS regime. As a result, FSPs were required to charge service tax even on digital services that were provided to their related companies in Malaysia. This was in contrast to the pre-existing service tax on local taxable services and service tax on imported taxable services regimes, which provided for intra-group reliefs.
The Malaysian government recently introduced a similar intra-group relief under the SToDS regime, with effect from May 14, 2020. Under the SToDS intra-group relief, where an FSP provides digital services to a Malaysian company that is considered to be within the FSP’s group of companies, such digital services shall not be subject to service tax, on the condition that the FSP does not also provide the same digital service to another person in Malaysia outside of the FSP’s group of companies. However, some FSPs face difficulties in satisfying this condition, resulting in the group’s having to bear the service tax cost.
Collecting Information on “Consumers”
FSPs are required to charge service tax on any digital service provided to a “consumer” in Malaysia. The legislation provides that a “consumer” in Malaysia is any person who fulfills any two of the following three proxies:
- makes payment for digital services using a credit or debit facility provided by any financial institution or company in Malaysia;
- acquires digital services using an IP address registered in Malaysia or an international mobile phone country code assigned to Malaysia; or
- resides in Malaysia.
Customs recently clarified in its latest Guide on Digital Services that, in determining whether a person is considered a “consumer” in Malaysia, the FSP must obtain or maintain at least two pieces of non-conflicting information that support the fact that the person is a “consumer” in Malaysia for the purpose of charging service tax. As such, FSPs may need to reconfigure their internal systems in order to comply with this new requirement to obtain at least two pieces of non-conflicting information.
Malaysia’s efforts in fine-tuning the SToDS regime have been well received by business. Having said that, some aspects of the regime may still be unclear to FSPs, and there remain some challenges within the SToDS regime. As such, FSPs are encouraged to keep abreast of the updates and developments surrounding the regime and to consider the SToDS legislation, rules and policies carefully, to ensure that they may benefit from the various measures introduced for tax efficiency and take necessary steps to ensure compliance with SToDS requirements and obligations. It is also possible to seek clarification from Customs on the areas of uncertainty and to highlight issues faced by FSPs in the implementation of the SToDS.
Reproduced with permission from Copyright 2020 The Bureau of National Affairs, Inc. (800-372-1033) www.bloombergindustry.com.